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When things went wrong in Auckland, they went very wrong indeed.
It was a hot summer in normally mild New Zealand. In Auckland, the countrys largest city, temperatures soared in the 30s every day.
As a result, the burden on the electricity system steadily rose, as air conditioning systems worked around the clock to cool the city.
Temperatures in the country’s biggest river, the Waikato, rose so much that the water used to cool the turbines at the Huntly power station could not be harnessed without overheating the river. Faced with the shutdown of Huntly, Auckland and all power users in the north of the country were vulnerable.
On February 9, the day it was announced the national power system was struggling with the summer heat, Mercury Energy, the biggest and richest of the local electricity utilities, said one of its main cables supplying central Auckland had developed a fault.
It was the second big cable to fail. The other had gone down on January 20, causing a 20 minute cut to about 8,000 central city businesses and apartments.
Mercury said it was working on repairs to both cables. But locating and fixing the fault could take two to three weeks. In the meantime, inner city power users were warned to reduce consumption or face blackouts.
Despite sweltering temperatures people responded and reduced peak loads by 10 per cent.
But worse was to come. A third cable failed mid-afternoon on February 19. People were trapped in lifts. Shops were plunged into darkness. Hospitals had to cancel all but urgent surgery as they switched to generators.
When the lights went out in Auckland, 60,000 workers, 40,000 students, 20,000 daily visitors and 6,000 downtown residents were left in the dark for 66 days!
The next day, a fourth cable failed and that was it. Office workers, shop clerks and students were forced to cope with candles, flashlights and portable generators. Corporate bosses packed up and left the city. Demand for cellular telephones shot up as fast as calls for Mercury bosses’ heads to roll.
It was 66 days before service was restored. But the questions about Mercury Energy and the impact of commercialization on public services, had just begun. And given the anger of Auckland residents, the answers cant be ignored.
When profits replace service to
consumers as the utilities goal
Until the recent blackouts, most of the news coverage about Mercury Energy had been over its hostile takeover bid on its immediate neighbour, Power New Zealand.
There were occasional reports about how much money Mercury was making and the fact its charges and those of Power NZ, which was privatized in 1993, were much higher than they should be. Smaller rural companies with many fewer customers spread over large areas were giving better deals than either of the big city companies.
But when the corporate headquarters in New Zealands largest city were plunged into darkness for two months, more questions began to be asked about Mercury. Who owned it? Who ran it? Who should be called to account?
The answers to those questions raised many more about the so-called reforms of New Zealand’s electricity sector and other utility services over the past ten years.
In the late 1980s the national government owned the Electricity Corporation, which controlled about 95 per cent of all generation as well as the national high voltage transmission system.
At that time there were nearly 50 local power utilities that acted as public monopolies, buying electricity from ECNZ and selling it through their own networks to customers in their area.
The utilities were set up under special legislation. In most cases, their boards were directly elected. Some, particularly in the cities, were electricity departments of the local municipality, accountable to city councils.
In 1990, the Labour government sacked the power boards and appointed a smaller number of directors chosen for their business backgrounds. It had been decided to put the boards on a more commercial footing.
The state power company, like the local utilities, was seen by critics as grossly overstaffed and users of gold-plated technology.
Then in 1992, a new government, led by the more conservative National Party, passed the Energy Companies Act that corporatized the power boards, making them competing companies with a prime objective of making money. The franchise areas were done away with. In theory the utilities could pick off each others’ customers by offering cheaper power and they were no longer required to supply everyone in their franchise area.
But the question of ownership was touchy. The minister of energy wanted to sell the lot. He, along with his advisors and big business, saw no need for the national or local governments to be making and selling power.
But the public saw things differently. Too many state assets had been sold off since the 1980s by governments with no mandate to do so.
The minister wanted all local utilities and municipal electricity departments to give their shares away to either customers or voters. When he couldn’t get support to force privatization by that route, the legislation was modified to give local communities the choice.
This set the scene for huge local battles over ownership. Against the wishes of the local community, eight power utilities including most of the largest were privatized by their government-appointed directors. More became privately-owned when councils could not resist the temptation to sell them off in order to raise revenues that in turn would allow them to avoid unpopular hikes in property taxes.
The notable exception was Mercury. The old Auckland Electric Power Board dwarfed all others, with more than 200,000 domestic and more than 30,000 commercial customers. There was fierce community opposition to the suggestion that their local utility be privatized.
So its directors developed a plan that would keep control of the company away from the real owners, the public, and eventually turn it over to the private sector. They decided that 25 per cent of the shares would be sold privately. The rest would be held by a consumer trust. The catch was the 25 per cent owner would appoint five out of the nine directors who ran the company.
There was a court challenge by local councils but to no avail. However repugnant the concept might seem, it complied with the law and the minister of energy approved it.
Mercury then set about making itself a dominant force in the New Zealand electricity industry.
A new chief executive was hired from Australia. Wayne Gilbert came fresh from a ferocious battle with the electricity workers of Queensland, where the state government decided it wanted to smash the unions and, with Gilbert at the helm of one of the main power companies, prevailed in the face of strikes and blackouts.
Aucklanders were more fascinated by Gilbert’s $375,000 annual salary than his background in new right business politics.
Gilbert brought the same approach to Mercury, setting in motion changes that some say lead to the recent crisis.
Dennis Hodgson, who worked with the now-defunct Communication and Energy Workers Union, has no doubts about what got the utility into trouble. Mercury, he says, behaved exactly like a private company, looking to minimize staff costs and reduce overhead.
Five years ago, the union had about 900 members employed by Mercury. Most of the staff was unionized. That began to change in 1994 when Wayne Gilbert took over.
In four short years, Mercurys profits increased fourfold, jobs were cut in half, assets doubled and debt increased seven times.
Hodgson says most people agreed the company was in need of restructuring. “It had an old hierarchical structure. But we were certainly bloody pissed off at the way Gilbert did it.
“He decided the company image was the be all and end all. Field staff who wore sleeveless T-shirts on the jobs were [laid off]. Also those who wore sun glasses. We’re talking about trench diggers out in the sun all day!”
Previously layoffs at Mercury had been selected from volunteers. Under Gilbert, the company decided who went. That caused ill will, especially when union activists were seen as being singled out for the chop.
At the same time Gilbert announced he wanted to introduce compulsory testing for drugs and alcohol.
“People got demoralized. They thought if they resisted some excuse would be found to sack them. They took the money and got out but the company lost the depth of its experience. Those who stayed kept their heads down, did their jobs and went home. No one wanted to raise [workload] problems or equipment issues and draw attention to themselves. They became a cowed workforce.”
The cost of the crisis is expected to total several hundred million dollars, a huge dent in the local and national economy.
When it was announced in April that the crisis was finally over after 66 days of blackouts and uncertainty, Mercury bosses expressed regret and apologized to customers, but the chief executive, Wayne Gilbert, has not offered to resign.
Gilbert has said it is up to the board to sack him if it wishes but he believes the company management did no wrong.
The response to the crisis from national politicians was predictable. The left-of-centre Labour and Alliance parties have called for a review of deregulation and privatization. The right wing of the conservative National Party claims that the crisis shows the privatization process hasnt gone far enough.
But everyone agrees that Mercury’s ownership structure a unique mix of public ownership with private control was not acceptable.
The government has initiated an inquiry to examine what went wrong and why.
Some point the blame squarely at Mercury management, claiming that they have neglected basic infrastructure and sacrificed maintenance jobs in their drive to takeover other power utilities.
Whatever the cause, it is clear that Mercury should focus less on efficiency and best practices and concentrate on the basics. Reliable public delivery of public services.
James Gardiner is the energy reporter for the New Zealand Herald, published in Auckland.