Infratil wants state power assets sold

By Phil Boeyen, ShareChat Business News Editor

Tuesday 18th September 2001

The government is being called on to divest or separate more state-owner power generation assets to improve competition in the electricity market.

Utilities investor Infratil (NZSE: IFT) says the state should also sell its retail electricity businesses in the wake of this year's dry winter.

In a newsletter to shareholders Infratil reviews the recent power crisis and outlines its stance on possible changes to the market.

Although the company approves of the way the government handled the crisis by calling for energy conservation, it says the industry structure has many problems.

Spokesperson, Dr Bruce Harker, says the New Zealand market needs all the pro-competitive, pro-liquidity structural reform possible.

"The New Zealand market falls short of a competitive model as there are only a small number of generators and it is a small market.

"In a market like New Zealand's, generators will plan to supply their contract obligations and price up the surplus to improve what they can earn on the spot market, also encouraging customers to pay more for contracts."

Mr Harker says in a dry year with low levels of contracts - as just occurred - the pricing up of uncontracted generation means hydro levels fall further and prices have to rise further before the plant generates fully.

"Generation interests now completely dominate the sector. With the primary purpose of generation companies being to build new power stations this can hardly be the best structure for the promotion of energy efficiency or innovative retail pricing.

"The real question is, do generators really want to see this form of price signalling develop? We suspect generators would rather encourage consumption and build power stations than have consumers respond."

Infratil says the industry needs to reduce its vertical integration, with the government selling its retail electricity businesses to improve contract liquidity and spur retail innovation.

It also wants further divestment or separation of SOE generation assets to improve competitiveness in the all contracts market, and says cost hedging instruments should be urgently established.

"Together these measures would move the industry forward and ensure net benefits from the market reforms and create a more stable investment climate for the private sector," the company says.

The company says in the short-term its investment in TrustPower is likely to benefit from a period of lower retail market competitive intensity and rising retail prices while over the longer term the value lies with its hydro and renewable energy wind developments.

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