Wolak calls Labour/Green power policy a sham

This should be the major political story of the week. Business Day reports:

The American academic whose work underpins the Labour Party’s electricity policy says New Zealand’s existing market arrangements are starting to work better and should be improved further.

In a wide-ranging interview with BusinessDesk, Professor Frank Wolak of Stanford University described the Labour-Greens NZ Power single buyer policy as “a sham that might make me feel a bit better”, but was the wrong weapon to attack “runaway” retail electricity tariffs, which he says are the real problem in current market arrangements.

Now again, Wolak’s work lies at the heart of Labour’s policy. The quote him time and time again on what is wrong with the current system. For him to call their policy a sham is a disaster for them. The reality is that the only people who can be found to say that their policy will work are people they pay to say that, or some retired academic who thinks no one should earn more than three times the minimum or living wage.

Wolak was in Wellington this week as a guest of the Institute for the Study of Competition and Regulation at Victoria University and caused a stir at a heavily attended Minter Ellison talk on Wednesday evening.

In that talk, he made it clear he did not calculate the $4.3 billion figure which critics say are proof of excessive power company profits and a consumer “rip-off”.

“That certainly attracted a lot of attention, most of it unwarranted,” he said.

Wolak says the NZ Power policy, which would unpick a 25-year-old experiment in electricity market design in favour of a centrally planned model, “may not even solve the problem, which is runaway retail prices.”

So what does he recommend?

Wolak urged more competitive reform in electricity generation and retailing and far tougher regulation of the monopoly parts of the system: the Transpower national grid and local electricity distribution networks.

“It may look good, but it’s got lots of challenges,” said Wolak of the Labour-Greens policy. “You’re throwing the entire baby out just to get rid of the bathwater and you’re going to start over, as if you have all these problems.

“My argument is that some of the changes since 2009 are pushing in the right direction,” 

So the guy whose work has been used by Labour and Greens to justify their nationalisation policy has said their policy is a “sham” and that the post 2009 changes made by National are pushing in the right direction.

I call that game, set and match.

“You want to be extremely cautious. Make incremental change at best,” the experienced Californian market regulator and globally sought-after electricity markets expert says.

And Labour/Greens are proposing the most radical change in 30+ years.

However, Wolak believes moving to a cost-based, single buyer model could be a disaster.

“If what they are going to try and do is say ‘we are recovering costs and allowing you a fair return’, then oh my god, it’s just a can of worms that you wouldn’t believe that’s going to get opened,” Wolak said of Labour’s plan to calculate rates at every power station in the country on a cost-plus return basis.

“They are going about it in a kind of bass-ackwards (sic) way and saying ‘we’re going to say what each guy’s price can be in terms of generators selling’. That’s just a nightmare.”

He’s also called their proposed pricing model a disaster!

“What’s simplest is to say we’re going to make this thing as competitive as possible.”

Exactly. I want more competition. Labour and Greens propose ending competition with generators, and scrapping the supply market.

Wolak is no fan of New Zealand’s vertically integrated industry, where electricity companies own both generation plant and retail businesses – a reform Parker described in a statement as “a patently necessary step.”

So again he is at fundamental odds with the Labour/Greens policy – despite his work being claimed as the reasons for it.

“But the single buyer can’t say no, they are just buying on behalf of existing inelastic demand. If you’ve got no ability to say no, you’ve got nothing,” he said. “Single buyer is just a sham. It might me feel a bit better, and it probably creates a new administrative office for the government, which costs money, but it doesn’t do anything for you.”

Again, this should be a major political news story in all media. The significance of Wolak’s damnation of Labour/Greens policy can not be under over-stated.