In 2013, the NZ Labour Party and the Green Party of Aotearoa New Zealand jointly announced a policy proposing intervention in the New Zealand electricity market. The core component of their proposal is to create a single buyer to purchase electricity from generators and to onsell electricity to retailers for sale to end consumers. By this means they hope to achieve electricity cost savings of around $300 per year for each of the nearly 1.7 million households in New Zealand, as well as for small business and industrial consumers.
In the fiscal impact statement for this policy that is included in the Labour policy documents, the base assumption is that electricity generators will suffer a collective revenue reduction of between $500 million and $700 million a year. We assume a $600 million average reduction.
Given this reduced revenue, the Crown will lose corporate income tax at 28%, or $168 million. That leaves $432 million of after-tax income reductions across the major generators. Following the sell-down, the Crown now owns half of their previous 75%, or 37.5% of the generators by value. Assuming that 67% (2/3) of the foregone revenue would have been paid out in dividends, with the rest retained for future investment, the dividend reduction for the Crown would be 2/3 of 37.5% (25%) of the $432 million, or $108 million. Our estimate of the total direct reduction in Crown revenue (fiscal cost) is therefore $276 million per year.
The Labour Party fiscal impact document assumes an even higher dividend reduction (mid-range $135 million) with no retained earnings, but their estimated fiscal impact is lower. That is because they claim that the Crown will benefit by around $238 million from wider economic impacts of the electricity price reductions to household and business consumers. However, they conveniently forget the potential wider economic effects of the loss of revenue to the other 62.5% owners of the electricity generators, who will suffer dividend reductions of around $180 million per year. Those owners might otherwise be able to invest that foregone income to produce more revenue for themselves and for the Crown over time. The generators will also lose around $144 million of earnings otherwise retained for investment. It is not credible that the savings to energy consumers will produce a substantially greater overall fiscal benefit.
Therefore, we set aside Labour's $90 million and the Green Party's $80 million estimate of the fiscal cost for implementing this policy in 2017/18, and apply our estimate of $276 million.