Shake-Up for Meridian Energy

Thursday 18th June 2009

Meridian Energy is being forced to face bloated internal costs as it reviews its core operations.

Under pressure to meet government expectations of better commercial returns, the worst-performing of the three electricity SOE's began the review quietly late last year, using PriceWaterhouseCoopers as consultants.

"There is no pre-determined outcome," communications director Alan Seay said yesterday, confirming what he described as a strategic review similar to others taken throughout the life of the SOE, and represented best management practice.

Industry observers say Meridian struggles with both economies of scale and a legacy of high cost structures.

At around 12% national market share, Meridian's 180,000-plus customers are a very small base over which to smear the total cost to serve: a critical retail metric.

Meridian's CTS is calculated by competitors and industry analysts to be above $300 per customer, around twice the figure achieved by listed company peers such as Contact Energy and TrustPower.

Seay confirmed that CTS was part of the review. The company has previously announced investment in upgraded customer management systems as part of a retail transformation project, named Phoenix.

"There is a timetable, but this is an early part of an exercise that will need more than a year," Seay said.

Crown Company Monitoring and Advisory Unit figures show Meridian to be one of the lowest geared and worst performing SOE's in the Government's stable of corporate assets.

In the 2007/08 financial year, Meridian achieved a 3% return on equity, compared with similarly unspectactular returns of 5.6% and 7.3% for MightyRiverPower and Genesis Energy respectively.

"The Government is signalling what it wants for its SOE's," Seay said.

SOE Minister Simon Power gave a strong directive to SOE chairs earlier this year to focus on improved commercial performance for the Crown.

Not included in the review are Meridian's subsidiary operations: smart meter innovator Arc Innovations; home energy solutions service RightHouse; Spanish micro-generation play WhisperTech; and Powershop, Meridian's newly launched pre-pay, on-line sub-brand.

The Meridian review coincides with the Ministerial review of wholesale electricity market arrangements, following last month's publication of the so-called Wolak report for the Commerce Commission on the use of market power in electricity trading.

Among proposals being given serious consideration is a portfolio shake-up for the electricity SOE's , in line with structural remedies suggested for the New Zealand market by the report's author, Stanford University energy markets professor and Californian market regulator, Professor Frank Wolak.

Wolak suggested that if more generators than just Contact Energy owned power stations in the North and South Islands, national wholesale market dynamics would be more competitive. On top of this, he recommended giving hydro-dominated generators like Meridian some North Island thermal plant.

While public comment on the review is not forthcoming, among options being tossed around is understood to be Meridian swapping one of its hydro schemes in return for the Huntly power station, currently owned by Genesis Energy, which is attempting to have the ageing coal and gas-fired plant declared reserve generation.

Businesswire.co.nz

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