Major electricity users back power company asset split

Tuesday 8th September 2009

The Major Electricity Users Group has done a complete about-face and is supporting proposals to force state-owned power companies to swap assets to create better inter-island retail competition and dry year hydro risk management.

Representing 20 of New Zealand's largest electricity users, MEUG initially opposed the asset swap concept, along with most of the electricity companies themselves, believing it to be unnecessarily complex and distracting.

The desired hedging behaviour could equally be achieved by contracts between Meridian Energy and Genesis Energy, the two state-owned power companies fingered as holding the key to better electricity market outcomes than current arrangements.

"It's pretty radical, but MEUG members think the structural option is the way to go," said its executive director, Ralph Matthes.

Meridian's main generation assets are the Waitaki and Manapouri hydro schemes in the South Island, where most of its retail customers are also based. Genesis's generation and retail portfolios are all in the North Island.

As a result, publicly listed Contact Energy has been the only large-scale electricity provider with significant generation and retail customer bases in both islands, to the detriment of retail competition and dry year hedging arrangements, according to the Electricity Market Review ordered by Energy Minister Gerry Brownlee.

Submissions on the review group's report are due with the Government by next Wednesday, September 16. The review proposed three options for SOE electricity assets:

Option 1: establish a new electricity SOE owning the coal and gas-firedd Huntly plant (currently Genesis) and Manapouri (currently Meridian) power stations
Option 2: transfer Huntly to the coal-mining SOE Solid Energy and give Manapouri to Genesis
Option 3: asset swap of Huntly and Manapouri between Genesis and Meridian, which would create significant new players in the north and south island generation markets.

Brownlee ruled out all but Option 3, and made it plain that asset swaps could be avoided if Meridian and Genesis wrote better risk management arrangements between them to guard against the impact on power prices of dry years when hydro lakes threaten to run dry.

However, Matthes says his peak consumers' body believes all three and possibly other break-up options should be on the table, and should include full cost-benefit analysis.

"We're giving a pale green light to the asset swap proposal," he said. MEUG had initially thought that hedge contracts could replicate the impact on Genesis and Meridian of swapping assets, but had since changed its mind.

"The structural change will create physically two new suppliers with a physical presence in both islands," said matthes. You can't achieve that with contracting. Genesis would be forced to enter the retail market in the South Island. Similarly, Meridian ... will have to compete in the North Island."

"Apart from Business New Zealand (a MEUG member), no one has said that's a bad idea."

The international credit rating agency, Standard & Poor's, said last month that if asset swaps went ahead, it was likely to lead to ratings downgrades for New Zealand electricity providers as such a large structural change would be accompanied by significant execution risks, as well as probably heightening competition and therefore limiting power company profitability.

Businesswire.co.nz

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