More on NZ Power versus Pharmac

Promoters of NZ Power say it will use a power buying model similar to how Pharmac purchases drugs. From a Green email:

The centrepiece of our plan is a new Pharmac-style agency named NZ Power that will drive a hard bargain with the electricity generators and directly pass on the savings to you, the customer.

Just like Pharmac bargains to get you cheaper medicine, NZ Power will secure us cheaper power.

As a big company, Tiwai Point has been able to directly negotiate cheap power from Meridian for years. NZ Power will act in the same way for your household.

On The Nation on Saturday Green energy spokesperson Gareth Hughes sounded less certain but still promoted the Pharmac comparison.

We wouldn’t jump to a regulation first approach, we’d prefer a Pharmac style approach.  The bulk purchasing and long term negotiating contract strategy works for like the Tiwai Smelter.  We think that is going to help drive down prices.  Obviously this is a discussion document, we’re looking for feedback from New Zealanders, experts, energy companies.

Someone with some expertise in the health sector has provided some feedback, National MP Michael Woodhouse. He posted on Facebook

Matt McCarten’s comparison of the Labour/ Green electricity policy with the Pharmac model is flawed in so many ways, three of which are:

  1. Pharmac is the end purchaser, not the consumer;
  2. Pharmac doesn’t force an average wholesale price on the market, it tries to get the best deal on drugs but its purchasing power is still limited;
  3. There isn’t a large distribution cost as with electricity which is the big driver of electricity cost inflation.

I asked Woodhouse if he could elaborate and he has added these comments:

- The products Pharmac purchase are highly variable products from high cost patent drugs to lower value generics. There is choice to the degree that Pharmac can choose not to buy, choose to buy alternatives or lower cost generics. Contrast this to electricity, which is a homogenous commodity.

– Pharmac aren’t actually a purchaser, they are a purchasing agent. The purchasers are the 21 or so DHBs, so the single purchaser comparison doesn’t hold.

– Pharmac are largely an importing agent, whereas a state power purchaser gobbles up domestic supply.

– DHBs and patients are free to purchase drugs directly from suppliers if Pharmac doesn’t. Unclear whether electricity customers would be free to do so.

– 25% of electricity supply is transmission which will in all likelihood will fall outside the state purchaser’s reach, or at best be difficult to control viz price. Drugs have efficient low cost channels.

The Pharmac model can be used as a partial template for NZ Power, but claims that NZ Power will “secure us cheaper power” because Pharmac works on keeping some drug prices down deserve further scrutiny.

2 Comments

  1. if the electricity are being sold off at 49% each – what kind of reaction would shareholders give to the demands of a Pharmac-style body? I know Pharmac has had problems with overseas companies accusation of “diminishing” profits by Pharmac’s use of “price control”.

    I like the idea – but a little iffy as to whether it would work.

  2. PS I wonder if Robert Muldoon will hark from the grave – “We need Price Control on almost everything people!”

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