Contact's profits rise but so do prices

Contact Energy's Wellington customers can expect their power bills to go up by as much as 1.4 per cent even as the firm's profit margins have widened.

In a letter to customers this week the Wellington-based electricity generator and retailer said it was forced to hike power bills by an average of 1.4 per cent for households and 1.3 per cent for small and medium business due to higher network costs.

Contact's net profits rose 29 per cent to $88 million in the six months to December 31.

The company is blaming the price rise on higher costs to use the national power grid and local power lines. But consumers do not appear to have received the benefit of falling wholesale power prices.

Electricity prices have been in the spotlight of late as other retailers have passed on lines network cost increases to customers even as wholesale prices fell.

Energy analyst Molly Melhuish said it is a clear case of the big retailers acting in an informal cartel-like manner, which allows them to charge whatever they like under the Electricity Authority's light touch regime.

The power regulator disputes this. EA head Carl Hansen said since the establishment of the EA in late 2010, significant work has been done to lower the barriers to entry in the retail space.

Mr Hansen said he was satisfied with the level of competition.

Meanwhile, Contact said the pass-through costs stem from the Commerce Commission ordering power distribution firm Wellington Electricity Lines to lift its prices by 2.8 per cent, and national grid operator Transpower to lift its prices by 10 per cent.

The cost of wholesale electricity declined steadily over the last six months as brimming South Island hydro lakes and surplus generation capacity released a glut of power into the market even as demand was falling.

Contact's own financial figures reflect this, with the firm's retail business paying $289 million for electricity purchases in the six months ending December 31, about 26 per cent or $99m lower than the previous year.

A Contact spokesperson said retail prices were largely fixed because they need to allow for the risk of rapidly fluctuating wholesale prices, and also to provide power bill consistency.

"Today, for example, we're seeing wholesale electricity prices in the region of $200 per mega-watt hour as national hydro lake storage levels fall, tightening supply," he said. "If these prices were passed through to residential customers in real time, their electricity bill would significantly increase."

The recent price hikes come after Contact announced it would be reducing its 1100-strong workforce by 10 per cent over the next 18 months now that it has reached the end of a $2 billion capital investment phase.

Other price movements seen recently include Energy Online, with the retail subsidiary owned by state-owned power firm Genesis informing some customers this week it was raising daily electricity charges by as much as 41 per cent and variable rates by as much 31 per cent.

Mighty River Power raised retail prices by 2 per cent over the last six months of 2012 while its power purchasing costs dropped by 22 per cent over the same period.

Fairfax Media