ETS: Windfall Profits to Power Companies Confirmed

Friday, May 28, 2010

Speech to North Shore Grey Power Annual General Meeting, Northcote, Auckland, 1:00pm Friday, May 28 2010

Key Points

1. Electricity and petrol to rise on 1 July. Windfall profits to government generators. Government still denying these profits.

2. The extra costs are not compensated for in Budget 2010.
The ETS will take at least half of your tax cuts and superannuation increase.

3. Over $2 billion of emissions credits to be allocated to foresters, most of whom did not expect them at the time their trees were planted.

4. We can meet our Kyoto obligations without paying $2 billion to foresters.

5. Government is running a campaign of mis-information. Contact the Prime Minister and the National cabinet to express your concerns.

Ladies and Gentlemen, thank you for the opportunity to address your AGM this afternoon.

Before updating you on National’s Emissions Trading Scheme may I briefly raise two other issues.

Firstly, some of you may recall that I addressed North Shore Grey Power in December 2007 during my campaign against Labour’s Electoral Finance Act. While that was very much a personal campaign, independent of any political party, I subsequently was elected an ACT MP at the last election and I am please to report that both National and ACT have now repealed the Electoral Finance Act.

Secondly, I am well aware that some of you will have incurred losses through the collapse of various finance companies. Since being elected I have led a campaign in Parliament to address some of the issues that contributed to those losses and I was successful in securing first Labour and Maori Party support, and then National‘s support for a Commerce Committee inquiry into Finance company collapses.

I have also publicly announced my support of Liane Dalziel’s Private Members Bill to get better compensation for those who lost through ING/ANZ.

I would like to turn now to the Emissions Trading Scheme. On July 1 this year, the effect of National’s ETS will be extended throughout the whole economy. The Treasury forecast that electricity will increase by five percent and petrol by four cents per litre. There will be another round of identical increases from January 1 2013 making a combined 10 percent increase in electricity and eight cents a litre in petrol.

The Reserve Bank estimates that the overall effect on inflation this year will be 0.4 percent as a direct consequence of the ETS.

National argue that they have modified Labour’s ETS, which is true. Under Labour, we would already have had a 10 percent increase in electricity from the beginning of this year. So while National argues that a 5percent increase is not as bad as a 10 percent one, ACT asks why we should have any increase at all.

The ETS operates by imposing a cost, or tax, on emissions of carbon dioxide given off from the burning of coal and gas to produce electricity. It will drive up the cost of producing electricity from these sources. However, because of the way our electricity market works, all generators will get the benefit of being able to charge the higher wholesale price of electricity. Generators will be able to increase their price whether they incur the carbon cost or not and will make windfall profits as a result. The government doesn’t want you to know this but I assure you it is true and that is why I am telling you.

In April of this year I was invited to speak to the Annual General Meeting of the Grey Power Federation in Christchurch. I think most members of the audience were both surprised and shocked by what they heard.

My predictions then of windfall profits have come to fruition. Just this week Mercury Energy and Contact Energy have announced power increases of 3.3 percent and 3.2 percent from July 1, purely on account of the ETS.

While Contact’s situation is different because it has a higher proportion of gas fired generation, Mercury Energy’s parent company, the government owned Mighty River Power generates most of its electricity from hydro power stations and geothermal power stations. It will incur relatively little carbon emissions cost.

Despite the fact that Mighty River Power incurs little carbon emissions cost, it gets the benefit of the higher wholesale price and realises it by increasing it’s prices to you, through its subsidiary Mercury Energy.

ACT forecasts that the total windfall gains to the government from its three generators – Mighty River Power, Genesis Energy and Meridian – will be in excess of $150 million per annum from July 1. Worse still, the government does not want to acknowledge to you the consumers that it is making these windfall profits. Regardless of whether these profits are returned as taxation, dividends or retained in the generating companies themselves, the government continues to downplay its gains from the ETS. It repeatedly says in Parliament that its revenue from the ETS will be around $350 million per annum, when it is likely to be well in excess of $500 million pa from July 1.

You may be surprised by this news, which is only just now being picked up by the wider news media, but ACT is the only party in Parliament that has been speaking out on this issue. Naturally the Labour Party who would have enforced a 10% power increase from 1 January, are silent.

You will be pleased to know however that there is growing awareness of this issue. Just today, the Wellington newspaper ‘The Dominion Post’ printed a critical editorial of Mercury Energy’s power price rise. It said:

“Its price increase is not a matter of the company passing on increased costs to its customers, but of the company taking advantage of changed circumstances to inflate it’s profit margins.”

This was somewhat ironic for ACT and myself because just yesterday the other major Fairfax newspaper, The Christchurch Press, ran an editorial criticising ACT for scaremongering and over-hyping this issue. I totally reject any allegation that ACT has tried to deliberately mislead New Zealanders on this issue. On the contrary, it has been the National Party which has been misleading New Zealanders and continues to do so to this very day.

Earlier this year the Prime Minister addressed your group on the upcoming budget and speculation that there would be an increase in the rate of GST. He of course was at pains to tell you that if the government decided to increase GST to 15 percent you would be fully compensated through tax cuts and superannuation increases for the GST rise. Since that time we have now had the budget and as expected GST has been increased and there has been compensation.

As an ACT MP whose Party has a Confidence and Supply Agreement with National I can tell you that there are many very good things in Budget 2010. All income tax rates have dropped and the top marginal rate of tax is no longer such a disincentive to working hard and getting on in life. As a result of the tax cuts, around 75 percent of New Zealanders will have a tax rate no greater than 17.5 percent.

In addition, there are further incentives to save with a reduction in the top PIE tax rate to 28 percent and a number of tax loopholes have been closed.

However when the Prime Minister’s visit to you earlier this year was publicised I was immediately suspicious as to whether or not the tax cuts would take into account the extra costs you will incur from the ETS. The Prime Minister was strangely quiet on that subject and I said so at your Federation AGM in April.

We now have the Budget and there will be increases in superannuation and all main benefits. However the budget says: “This will be sufficient to offset the estimated impact on prices due to the rise in GST.”

There you have it, Ladies and Gentlemen. You are being given just enough to be ‘sufficient’.

On page 7 the Budget quotes the example of a retired couple who receive New Zealand superannuation and I quote:

“A retired couple receive New Zealand Superannuation. They own their own home. Under Budget 2010 changes, they get a tax cut of $11.52 a week, plus an additional $10.12 increase in their New Zealand Super and pay $10.87 extra in GST to buy the same goods and services as before. Overall they are $10.77 a week, or $560.04 a year better off.”

What the budget didn’t say is that this retired couple will suffer extra costs on virtually everything they buy as a result of the government imposed cost on electricity, gas and petrol and its flow on effect throughout the whole economy.

ACT estimates that you can expect to lose around half of what the government purports to be giving you in the Budget. In other words, what Bill English has given you, Nick Smith is taking away.

So what is the solution?

ACT believes we are unnecessarily imposing additional costs on our citizens and businesses. None of our four major trading partners, Australia, China, the US and Japan, has an ETS. This puts us at a major disadvantage. We believe the government should be delaying the introduction of the ETS until our major trading partners catch up.

The government argues that already twenty nine countries have an ETS, but this is extremely misleading. This is an ETS for the whole of the European Union and over 80 percent of European exports are internal with only 20 percent being exported outside of Europe.

New Zealand on the other hand, clearly has 100 percent of its exports leaving our shores.

The European Union ETS also doesn’t include transport fuels such as petrol and if our scheme commences as scheduled on 1 July, make no mistake, we truly will be a world leader on climate change despite the Prime Ministers assurances prior to the last election that we would not be.

Finally, many people ask me where this money is to go. The government has announced it intends to allocate over $2 billion worth of emissions credits to foresters in the period to December 31, 2012. Of these, $400 million will be allocated to forests planted prior to 1990 and $1.6 billion to forests planted in 1990 and beyond.

Under Kyoto, some of the pre-1990 foresters could suffer real loss if the Kyoto rules are not changed and may have a genuine claim for compensation.

However, the overwhelming bulk of the credits will be going to foresters who planted their trees in 1990 and beyond and most of these did so with no expectation of taxpayer subsidies.

ACT has run a nationwide campaign against the ETS and earlier this week I had three meetings in Southland. In Gore, the heart of Bill English’s electorate, residents were very concerned that they were going to have to pay more for their electricity, petrol and coal and that this money would be going as subsidies to the large amount of Japanese owned forests in Southland. They, and you, have every reason to be concerned.

You may hear Climate Change Minister Nick Smith argue that we will not meet our Kyoto obligations without an ETS. I believe this is also misleading as the ETS imposes a negative incentive on harvesting pre 1990 trees without replanting them. It would be very easy to leave this negative incentive in place until 31 December 2012, while we wait to see the outcome of international negotiations for a Kyoto replacement. We can do this without having to pay $1.6 billion.

Finally, while the government has said it has no intention of backing down. I believe public pressure can be brought to bear so that it does. We saw this with Tuhoe and the Urewera National Park.

If you are as concerned about this issue as ACT, I would urge you to contact the Prime Minister and tell him so. His email address is

In fact, I would urge you to email every member of the cabinet and better still, the entire National Party caucus. Their email addresses can be found at

Thank you very much Ladies and Gentlemen for the opportunity to speak to you today.