Power consumers may face shock over retail prices

Sunday Star-Times

MORE FOR POWER: As the government seeks higher returns from state-owned power generators a report from investment bank Goldman Sachs JBWere suggests their retail prices may be too low.

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As the government seeks higher returns from state-owned power generators a report from investment bank Goldman Sachs JBWere suggests their retail prices may be too low.

The report by energy analyst Matt Henry indicates only Contact Energy and Trustpower recover long run marginal costs from their retail customers, but as costs rise in the future, even they won't make money.

Prime Minister John Key said last Monday that he expected better results from the SOEs after a series of poor half-year results. The generators should take a "good hard look at their businesses", he said, and come up with ways "to deliver better profits without whacking the poor old homeowner and business owner with higher power prices".

SOE chairmen have been summoned to a meeting with government ministers next month to explain their profit-boosting proposals.

The SOEs have declined to discuss their options publicly, but their scope for boosting profits, without raising prices, could be limited.

Henry's analysis, dated March 13 this year, focuses on benchmarking power company returns against the long run marginal cost of generation, which it estimates at $90MW/h based on combined cycle gas turbine costs. Wind power, which he regards as a more accurate basis for measuring cost, comes out at $105MW/h. At $90MW/h, he says, "only CEN and TPW recover LRMC on their retail customer base. At $105MW/h no retailers recover LRMC".

As a result, "We do not believe that in general the NZ electricity industry's pricing is excessive relative to LRMC."

Analysis of power company returns by the Sunday Star-Times suggests some SOEs may be more nervous about the forthcoming grilling than others.

Over the past six years, state-owned Meridian has paid dividends of $1.79 billion, more than double the $860 million payout made by NZX-listed Contact Energy to its private sector shareholders.

State-owned Genesis paid out the least, at $105.7m. The biggest proportion of profit paid out in dividends was by Meridian, with an average payout ratio of 149%, while the smallest came from Genesis on 23%.

All the SOEs invested more in fixed assets over the period than Contact, with Meridian again top of the pile, but it also carried the biggest debt.

Meridian chairman Wayne Boyd may therefore be more confident about his position than his colleagues at Genesis and Mighty River Power.

Trustpower spokesman Graeme Purches said the SOEs had been disguising inadequate returns by not revaluing their assets, which made their return on asset measures look artificially good. He said Trustpower had analysed one of the SOEs three years ago and found that "if the government were to give away the entire retail business of the SOE, the government would be $60m a year better off. That speaks volumes".

- © Fairfax NZ News