The economist who can’t see what he doesn’t want to fix
- Grant McLachlan
- 2 days ago
- 17 min read
Oliver Hartwich says breaking up the gentailers won’t cut your power bill. He’s right — but for the wrong reasons. The real solution is one his funders would never allow him to propose.
Let us begin with a disclosure that Oliver Hartwich did not make fully enough in his Herald column this week. He noted, in passing, that several gentailers are members of The New Zealand Initiative, the think tank he runs. He did not mention that the Initiative is substantially funded by membership subscriptions paid by precisely the companies whose market structure he was defending. When you are paid by the electricity oligopoly to produce public policy commentary, and then produce public policy commentary defending the electricity oligopoly, the least you can do is put that in your opening paragraph — not your third.
That said, Hartwich is not entirely wrong. Splitting the generators from their retail arms — the proposal New Zealand First put on the table at its State of the Nation address — would not, by itself, fix New Zealand’s electricity bills. On that narrow technical point, he is correct. But his column is a masterpiece of selective analysis: precisely identifying one bad solution in order to avoid discussing the good ones.
He has diagnosed the right symptom, prescribed the wrong medicine, and carefully avoided mentioning the cure.
Contents
The Telecom analogy: Right lesson, wrong direction
The vertical integration defence: Protecting shareholders, not consumers
Similar prices are not evidence of competition
The government created this mess. Unravelling it is complicated.
The overseas examples: What happens when governments get this wrong
The solution: Public ownership, institutional capital, and optimal pricing
The Telecom analogy: Right lesson, wrong direction
Hartwich dismisses the Telecom/Chorus comparison by pointing out that the fibre network is a natural monopoly — one set of cables, one address — whereas electricity generation is not. Multiple generators compete on the spot market; the transmission grid is already separately owned by Transpower; local lines were split from generation back in 1998. He is correct that you cannot apply the same structural logic.
But here is what Hartwich does not tell you: the 1998 electricity reforms — the very reforms he is implicitly defending — were themselves an act of ideological vandalism dressed up as economics. The Electricity Corporation of New Zealand, ECNZ, was a single integrated generator that operated on a merit order dispatch model, producing power at average cost and reinvesting profits in new generation. It was not broken. It was broken up — by the same Rogernomics consensus Hartwich’s intellectual tradition still largely endorses — and replaced with a competitive market that has, over the subsequent twenty-seven years, produced structurally high prices, underinvestment in baseload generation, and four vertically integrated oligopolists who benefit from exactly the scarcity they are incentivised to maintain.
The Telecom comparison teaches the opposite lesson to the one Hartwich draws. It does not tell us to split the gentailers into smaller pieces. It tells us that regulated public infrastructure — owned by the public, operated in the public interest — works. Chorus is a regulated monopoly. It does not compete. It serves. That is why broadband improved.
The lesson of Chorus is not separation. It is regulated public ownership. And that is precisely what Hartwich cannot say.
The vertical integration defence: Protecting shareholders, not consumers
Hartwich’s most substantive argument is the vertical integration defence. The farmer-baker analogy. Gentailers absorb their own price shocks: when wholesale prices spike, the generation side earns more while the retail side pays more, and the two balance out. Split them, and standalone retailers would need expensive financial contracts to manage price risk — costs passed to households.
This is a real economic phenomenon. It is also irrelevant to the question of whether households are overpaying, because it confuses risk management with price level. Vertical integration protects the gentailer from volatility. It does not reduce the underlying price. When New Zealand gets a wet year and the hydro lakes fill and electricity could be produced for next to nothing, that windfall does not flow to consumers — it flows to shareholders as profit. When dry-year scarcity drives the spot price above $300 per megawatt-hour, it is consumers who ultimately pay, whatever hedging arrangements the gentailer has in place with itself.
I have been documenting this for over twelve years. The combined earnings before interest, tax, depreciation and amortisation — EBITDAF — of the four gentailers reached $2.7 billion in the 2024 financial year. $2.7 billion. In a country where almost a third of households face energy hardship. The vertical integration model does not moderate prices. It moderates shareholder risk while extracting consumer surplus at scale.
The vertical integration argument is the gentailers’ alibi, dressed up as economic theory.
Similar prices are not evidence of competition
Hartwich argues that the similarity of retail prices across the four major gentailers is evidence of competition, not oligopoly. In a competitive market, prices converge. If one company could profitably undercut, it would.
This argument has a name in the industrial organisation literature: tacit collusion. Four firms controlling the bulk of both generation and retail in a market where the product is homogeneous, storage is impossible, demand is inelastic, and entry barriers are enormous do not need to coordinate explicitly to maintain parallel pricing. They just need to understand that competitive pricing would trigger a response that leaves everyone worse off. The market produces prices well above the competitive level without a single phone call being made.
The fact that Powerswitch has existed for years and that the Electricity Authority has now launched a second comparison tool called Billy, and that yet too few households switch — which Hartwich himself acknowledges — tells you everything. If genuine competition were producing the lowest possible prices, you would not need comparison tools. The prices would already be low.
They are not low. Consumer NZ estimates they are approximately 60 per cent higher in real terms than at the time of reform, in a country that produces over 80 per cent of its electricity from renewable sources whose marginal cost of production is close to zero.
When you own renewable hydro that cost $0 to build this morning and costs almost nothing to run, and you are charging consumers forty cents a unit, the market is not working.
What Hartwich will not say
The column ends with a call for consumer switching. This is the punchline that every NZ Initiative paper on electricity eventually reaches. Not structural reform. Not ownership change. Not pricing regulation. Consumer switching.
The fundamental pricing architecture of New Zealand’s electricity market was set in 1998 and has never been corrected. It is a spot market, dominated by four firms who are simultaneously the major producers and major retailers, in which the marginal price-setter is almost always a thermal plant — burning coal or gas — even in years of abundant hydro. Switching retailer does not change any of this. It rearranges deck chairs.
What Hartwich will not say — what no commentator funded by the gentailers can say — is that the structure itself must change. That the returns being generated by these four companies represent a transfer from every household and business in New Zealand to a comparatively small group of shareholders. And that the solution is not competition between four oligopolists but the elimination of the oligopoly entirely.
The government created this mess. Unravelling it is complicated.
It is important to be honest about something before proposing solutions. The current electricity market was created by the Crown. The Electricity Industry Reform Act 1998 deliberately broke up ECNZ into three competing state-owned enterprises, privatised Contact Energy, and mandated the separation of generation, retail, and distribution businesses. The Fourth National Government, advised by Treasury economists steeped in the theoretical models of perfectly competitive markets, made a series of structural decisions that have proven, over twenty-seven years, to have been — in the words of Victoria University of Wellington law academic Daniel Kalderimis writing in 2000 — “a staggering mistake” based on “inconclusive evidence, inadequate research, and major logical leaps.”
The Crown did not merely create these companies. It part-privatised three of them in 2012, selling minority stakes to the public through the NZX. It invited retail and institutional investors — including hundreds of thousands of ordinary New Zealanders through KiwiSaver funds — to build their savings on the back of the market structure it had created. Those investors did exactly what they were expected to do. They bought shares. They collected dividends. They built wealth from an asset base that was, in every material sense, underwritten by the Crown’s own regulatory framework.
The government built the machine. The government priced the shares. The government sold the shares to the public. Now the government wants to fix the machine. The difficulty is that the machine is still running, and people are still inside it.
Unravelling what the Crown created in 1998 is not a simple matter of political will. It touches multiple layers of domestic law, share market regulation, and international treaty obligations simultaneously:
The Electricity Industry Reform Act 1998 itself would need to be repealed or substantially replaced.
The Electricity Industry Act 2010, which established the Electricity Authority and the current regulatory framework, would need amendment.
The Commerce Act 1986, in its current form, lacks the tools to adequately address oligopoly pricing in essential services.
The NZX Listing Rules and Takeovers Code govern how shares in listed companies can be acquired.
The Public Works Act 1981, which provides the Crown’s primary compulsory acquisition mechanism, applies to land — not company shares.
And above all of this sit New Zealand’s international trade and investment treaty obligations, including the CPTPP and the UK-NZ Free Trade Agreement, which require that any expropriation of foreign-held investments be lawful, non-discriminatory, and accompanied by prompt, adequate, and effective compensation at market value.
None of this makes reform impossible. It makes reform complicated. And complexity, handled carelessly, produces catastrophe.
The overseas examples: What happens when governments get this wrong
The international record of energy sector nationalisation is instructive, and not only for its successes. The cautionary tales deserve close examination before New Zealand proceeds.
When Venezuelan President Hugo Chávez announced a sweeping nationalisation of the oil and gas sector in 2007, the legal consequences were immediate and severe. ExxonMobil received an ICSID arbitral award of US$1.6 billion against Venezuela for the seizure of its assets. ConocoPhillips — which had structured its Venezuelan investments through a Dutch holding company specifically to gain treaty protection — received an award of US$8.7 billion. Neither award has been fully paid. Venezuela is still, as of 2025, battling enforcement proceedings in multiple jurisdictions. The country’s electricity sector, nationalised in the same wave, now suffers chronic blackouts, underinvestment, and equipment failure. The nationalisation that was supposed to benefit Venezuelans destroyed the industry’s capacity to function.
Argentina’s 2012 renationalisation of YPF — seizing a 51 per cent stake from Spanish company Repsol — produced a settlement of US$5 billion paid in treasury bonds, years of diplomatic rupture with Spain and the European Union, and a chilling of foreign investment in Argentina that persists to this day. The Argentine government had argued that the nationalisation was in the national interest because YPF had underinvested in exploration. It may have been right. But the manner of execution — announced without warning, at below-market compensation, without due process — ensured that the legal and diplomatic costs consumed most of the supposed benefits.
Bolivia’s nationalisation of electricity assets under Evo Morales produced the Guaracachi and Rurelec v. Bolivia ICSID arbitration. Bolivia argued it was not required to pay compensation because the company was worth less than zero at the time of seizure. The tribunal rejected this argument and awarded approximately US$35 million to the claimant. Bolivia had to pay for an asset it contended had no value.
In the United Kingdom, Jeremy Corbyn’s 2019 Labour manifesto proposed nationalising electricity and water companies at “existing use value” rather than market value — explicitly discounting the “scarcity premium” and monopoly rents embedded in share prices. Legal opinion commissioned by the Labour Party concluded the discount was defensible in domestic law but exposed to challenge under European human rights instruments protecting property rights. The plan was never tested because Labour lost the 2019 election. Keir Starmer’s Labour government, elected in 2024, explicitly ruled out nationalising private energy companies, citing the financial complexity and legal risk of acquiring heavily regulated, heavily leveraged utilities at any price — let alone a discounted one.
The consistent lesson from every overseas example is the same: the manner matters as much as the intent. A legitimate public purpose, executed through a lawful and properly compensated process, is defensible. An ideologically motivated seizure at below-market value, announced without due process, produces years of expensive litigation that consumes the public benefit the nationalisation was supposed to deliver.
New Zealand is not Venezuela or Argentina. Its institutional foundations — an independent judiciary, a strong rule of law, a transparent regulatory system — mean it has both more to protect and more tools available. But those foundations also mean that a poorly designed acquisition would not simply be challenged. It would be stopped.
The solution: Public ownership, institutional capital, and optimal pricing
I have been arguing for a version of this solution since 2013. The architecture has been clear for years. The political will has been absent.
New Zealand’s electricity generators are, in economic terms, natural monopoly infrastructure operating behind a competitive facade. They require massive upfront capital, have very low marginal costs of production, serve an essential public need, and derive the majority of their profit not from operational efficiency but from controlling access to water in rivers the Crown owns. They are, in short, public assets already. The question is only who collects the rent.
The solution is consolidation, public acquisition, and a return to average-cost pricing. The New Zealand Superannuation Fund — forecast to exceed $100 billion in assets — and the Accident Compensation Corporation together represent exactly the patient, long-horizon institutional capital that essential infrastructure requires. Pension funds and sovereign wealth funds do not need to extract short-term profit maximisation from every asset they hold. They need stable, inflation-linked returns over decades. Electricity infrastructure, operating at average cost, delivers precisely that.
The NZ Super Fund and ACC should acquire full ownership of New Zealand’s four major electricity gentailers, consolidate them into a single integrated utility operating on the ECNZ model, and price electricity at average cost with all surplus reinvested in new generation and network maintenance. The combined elimination of retail marketing spend, dividend extraction, and hedge trading overhead releases more than sufficient margin to deliver a meaningful price reduction to consumers while still providing the regulated infrastructure return those funds require.
Marketing and brand advertising — eliminated. There is no retail competition to win. The combined marketing spend of the four gentailers runs to hundreds of millions annually. It produces no electricity and benefits no household.
Dividend extraction — reinvested. The approximately $1.35 billion per year currently paid to shareholders flows instead to NZ Super and ACC as infrastructure returns, and simultaneously funds the capital investment in new generation that consumers have been denied for thirty years.
Hedge trading and financial risk overhead — greatly reduced. The armies of traders, lawyers, and risk managers required to manage counterparty relationships between the retail and generation arms of the same company under the current model disappear when there is no counterparty.
New large-scale generation — funded. The Taupo Volcanic Zone contains geothermal resources that have been barely touched. New Zealand’s rivers contain untapped head that has never been converted to generation because scarcity, not abundance, is profitable under the current regime. A canal between Lake Hawea and Lake Dunstan, capturing a 148-metre hydraulic head and producing between 200 and 260 megawatts of continuous renewable generation, was the obvious project before the Lake Onslow pumped hydro scheme — a giant battery that generates nothing — was fast-tracked instead. Under public ownership, that calculus inverts entirely.
The electricity industry as currently structured is a mechanism for redistributing wealth from consumers to shareholders. The ECNZ model was a mechanism for delivering cheap electricity to a productive economy. We broke the second and built the first. It is time to reverse the transaction.
The transition: A legally clean path to get there
The challenge is not whether reform is necessary. It is whether reform can be executed without triggering the kind of protracted, expensive litigation that consumed the benefits of overseas nationalisations and left industries worse off than before. The answer is yes — but only if the sequencing is correct and each step is pursued on its own genuine merits, independently of the steps that follow.
There is a critical legal distinction between two approaches. The first — announcing a discounted compulsory acquisition at below-market value — would violate New Zealand’s obligations under the CPTPP and the UK-NZ Free Trade Agreement, both of which require prompt, adequate, and effective compensation at market value for any nationalisation. It would produce years of ICSID arbitration and judicial review. The second — using legitimate regulatory reform to correct market failure, allowing the market to adjust, and then acquiring assets at the prevailing market price through voluntary and transparent means — is clean, is defensible, and achieves the same outcome. This is the path.
Step One: Enact the Commerce Act amendments.
The first and foundational step is to pass the Commerce Amendment Bill I have previously proposed in these pages. The Bill closes six critical gaps in New Zealand’s competition law that allow dominant firms in essential goods markets to engage in conduct that in comparable jurisdictions would attract criminal prosecution: the absence of a prohibition on excessive and unfair pricing by dominant firms; no prohibition on tacit collusion and concerted practices without formal agreement; no criminal liability for individuals who engage in cartel conduct; market investigation powers that produce recommendations but no enforceable remedies; inadequate merger control; and an enforcement funding floor that leaves the Commerce Commission structurally under-resourced to pursue major cases.
Critically, the Bill applies to all dominant firms in all essential goods markets — fuel, food, electricity, gas, water, and telecommunications. It is not targeted at electricity companies. It is general competition law reform in the public interest, identical in character to reforms that Australia, the United Kingdom, and Canada have implemented in the past decade. This broad, non-discriminatory character is legally important: international investment law distinguishes between general regulatory reform for public welfare — which does not constitute indirect expropriation — and measures targeted at specific foreign investors to deprive them of value. The Commerce Act amendments are the former.
Step Two: Commerce Commission market investigation into electricity.
Armed with new market investigation powers that carry genuine remedies, the Commerce Commission should be directed — or should initiate of its own accord — a full market study into the electricity generation and retail sector. The 2022 grocery market study established that the Foodstuffs/Woolworths duopoly was generating excess profits of approximately a million dollars a day and that competition was not working for consumers. The grocery duopoly’s excess profits, however, are modest compared to an electricity oligopoly generating $2.7 billion in EBITDAF annually from assets the public built and rivers the Crown owns.
The investigation should examine wholesale market pricing and dispatch behaviour, the relationship between wholesale prices and retail tariffs, the withholding of generation capacity during periods of scarcity, the marketing and overhead costs embedded in retail tariffs, the returns on equity compared to a regulated asset base model, and the long-term underinvestment in baseload generation relative to what a public interest operator would have delivered. It should do this independently, rigorously, and on the public record. It should take as long as it takes to do properly.
Step Three: Implement price controls or the credible threat thereof.
If the Commission’s findings confirm what the data already shows — that the electricity market is not functioning in consumers’ interests and that the existing regulatory tools are inadequate to correct it — the government should either implement electricity price controls directly or make credibly clear that it will do so if the industry does not itself correct its pricing. Either action will cause the gentailers’ share prices to fall, as markets reprice the assets to reflect the regulated return a price-controlled utility can earn rather than the scarcity premium an oligopoly can extract.
This is legitimate. It is how regulated markets work. Airlines, telecommunications companies, and lines businesses all operate under price or quality regulation that constrains their returns. Transpower’s revenues are set by the Commerce Commission. There is no principled distinction between regulating a transmission monopoly’s prices and regulating the prices of four companies that together control the generation and retail of an essential service in a market that, by the Commission’s own analysis, is not delivering competitive outcomes.
A fall in share price caused by legitimate regulatory reform is not expropriation. It is regulatory risk — the risk that every investor in a regulated industry accepts when they buy shares in that industry. International investment law is explicit on this point.
Step Four: NZ Super and ACC acquire shares at market value.
Once the market has adjusted to reflect the new regulatory environment — and this step must not be announced or even hinted at until after the regulatory framework has been independently established — the NZ Super Fund and ACC begin building positions in the four gentailers through normal on-market purchases at prevailing prices. No trading halt. No compulsory acquisition at a discount. No departure from standard Takeovers Code procedures.
The Crown already holds 51 per cent of Meridian Energy, Mercury NZ, and Genesis Energy. NZ Super and ACC acquiring further stakes is straightforward. Contact Energy is wholly publicly listed, but its shareholder register is dominated by domestic institutions and retail investors rather than foreign governments or treaty-protected entities. The practical ISDS exposure across all four companies is considerably more limited than the theoretical exposure.
Once the Crown, NZ Super, and ACC collectively reach 90 per cent in any of the four companies, the Takeovers Code squeeze-out provisions apply automatically: remaining minority shareholders are compulsorily acquired at the prevailing offer price, with the right to challenge before an independent expert. No legislation required. No CPTPP exposure. Full market value paid.
Step Five: Consolidation and immediate price reduction.
Once all four companies are under common public ownership, they are consolidated into a single integrated utility operating on the ECNZ model. Generation is dispatched in merit order. Prices are set at average cost. No economic profit is extracted from consumers. All surplus revenue above the regulated infrastructure return to NZ Super and ACC is reinvested in new generation and network maintenance.
Within six months of consolidation, retail electricity prices are reduced by a minimum of twenty per cent. This is achievable because the combined elimination of retail marketing spend, dividend extraction at scarcity-premium levels, and hedge trading overhead releases more than sufficient margin. The twenty per cent figure is conservative. Prices are then frozen at the new level for a minimum of five years, with the only permitted increases being those required to fund demonstrably necessary infrastructure approved by the Commerce Commission.
Step Six: Capital investment programme.
Over the five-year price freeze period, the consolidated utility commits to a capital programme funded from retained operating cash flow: expansion of geothermal generation in the Taupo Volcanic Zone by at least 500 megawatts; construction of the Hawea-Dunstan canal and powerhouse; and a comprehensive upgrade of distribution network infrastructure to accommodate the electrification of transport and industrial heat. These investments were never built under the current market because private participants had no incentive to produce cheap electricity when expensive electricity was more profitable. Under public ownership at average-cost pricing, cheap electricity is the entire point.
One critical legal discipline must be observed throughout this process: the Commerce Act amendments, the market investigation, the price controls, and the acquisition must each be pursued on their independent merits, with genuine temporal separation between the regulatory steps and the acquisition step. No minister, no Cabinet paper, and no government communication should ever link the regulatory reform to the acquisition as parts of a single coordinated strategy. International investment tribunals examining indirect expropriation look at the character and purpose of a sequence of measures — not merely their individual legality. The regulatory steps must be genuine public interest measures, because they are. The acquisition must be a separate decision, because it will be. Treat them as such, document them as such, and the legal exposure is minimal.
After five years, New Zealand would have lower electricity prices, a fully renewable grid under committed capital expansion, and two of its most important public funds holding the nation’s essential infrastructure as a stable long-term asset. The gentailers’ shareholders would have been bought out at a fair price. The market that was broken in 1998 would have been repaired.
Oliver Hartwich is right that splitting the gentailers into separate generation and retail companies would not fix your power bill. But the solution is not consumer switching and competition tools. It is public ownership, average-cost pricing, and the reinvestment of the electricity rent in the generation infrastructure this country has been denied for thirty years.
I have been saying this since 2013.
The maths has not changed. The political will has. New Zealand First has put structural reform on the table. The question is whether anyone in government has the courage to go further than the proposal Hartwich was commissioned to rebut.
Don't let the savings flow back into bricks
Cheaper power bills are a necessary reform, but not a sufficient one. There is a real risk that money freed from household electricity costs — combined with sharemarket investors spooked by the prospect of gentailer reform — flows straight back into the one asset class New Zealand has always treated as a guaranteed return: residential property. This country's addiction to property speculation is not an accident of culture. It is the predictable consequence of a tax system that rewards land-holding over productive investment, a planning regime captured by developer interests, and decades of policy that has left capital with nowhere more attractive to go. Dropping power bills without simultaneously addressing those structural incentives will not redirect investment toward productive enterprise. It will reprice the entry cost to the next speculative cycle.
The electricity market is one part of a larger economic dysfunction I have examined in detail in Seven steps to a productive economy. The reforms proposed in that column and in this one are not alternatives. They are chapters of the same book.
