Power proposal shocks market

Last updated 12:17 19/04/2013

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Listed electricity companies Contact Energy and TrustPower continued to take a beating in the stock market today, as investors sold out of the sector in the wake of yesterday's Labour and Greens power announcement.

Contact's share price dropped 5.7 per cent to $5.20 this morning, having closed over four per cent lower yesterday.

Infratil-controlled electricity firm TrustPower shed 3.6 per cent on top of yesterday's 3 per cent decline to recently trade at $7.29.

The private sector reacted with shock to the Opposition parties' plan to dismantle the electricity market, saying it could derail the Mighty River Power float and damage the country's reputation.

A business group called it "economic vandalism" but one independent energy analyst believes it could bring an end to the ever-spiralling cost of electricity.

The plan, if the Opposition parties' are elected, would implement a centrally planned electricity system, with the government dictating power prices and profit levels.

That potentially could hit sector revenues by $700 million, but the upside for consumers would be savings from $230m to $330m.

Philip Anderson, an energy analyst at Devon Funds, said the single-buyer system would serve as an investment disincentive, with firms loath to spend on new generation capacity for fear of not being able to recover their costs.

"This is a bigger risk than Tiwai on these companies' earnings. The cost base of these companies won't change if you pay a different amount, and it would have to fall on the bottom line."

The announcement comes as mum-and-dad investors are in the process of assessing Mighty River Power's investment statements. The retail bid closes on May 3.

BusinessNZ chief executive Phil O'Reilly labelled the proposal "economic vandalism" that would destroy a functioning market.

"Inserting an army of bureaucrats between power generators and retailers would destroy price signals, so prices would not reflect the cost of generation," he said.

"In that situation, the taxpayer would continue to pay ever-higher subsidies of the electricity system."

Critics also warned the regulatory landscape sea change could resonate further afield than just the energy sector, and dent international confidence in New Zealand and its capital markets.

"This is a very appealing solution and will appeal to political constituents, but it isn't necessarily in New Zealand's best interests," said Ewan Gebbie, head of the Energy Management Association and longtime sector commentator.

"We all know the problem and we want it to go away, but this is not the solution."

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But industry consultant and longtime critic of the current regulatory model, Bryan Leyland, believes the system could potentially work without derailing the state-owned-asset process.

He said a single-buyer system would wipe out windfall profits for the power firms. But, by locking in prices for the long term and removing volatility, it would create stable returns model that would support the partial listing of Mighty River Power, Genesis Energy and Meridian Energy.

"Electricity would become a boring business," Leyland said. "Any business that provides something that's so essential to the welfare of the country should be a boring business."

At this stage, the exact details on the proposal are still thin on the ground, making it hard to assess the tradeoffs particularly on elements such as the Government's dividend earnings streams.

One analyst said the outlook was further clouded by an element of political gamesmanship.

- BusinessDay.co.nz


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