A body representing a group of New Zealand's major industries has released a report pointing to what it claims is a trend of escalating super profits at Meridian Energy, the electricity generation giant half owned by the Government.
Today the Major Energy Users Group, which represents 15 major industrial companies, Business New Zealand and a wood processing group, released an analysis of Meridian's profitability since 2002, commissioned from Wellington consultancy Ireland, Wallace & Associates.
Meridian, New Zealand's largest electricity company by generation, has responded by rubbishing the report and openly questioning the credibility of MEUG.
"The lack of transparency around the release isn't usual form for the business community, which leads us to question the report's credibility and the tactics behind its release today," Meridian's chief financial officer Mike Roan said.
The Government, however, welcomed the report and said it was interested in learning more about it.
The report asserts Meridian generated excess profits of $3.5 billion from 2002-2021. MEUG chairman John Harbord told the Herald that the trend was rising, with 56 per cent of the profits coming in the past five years, and more than a quarter in the past two.
In just over a month, the Electricity Authority will release its own assessment of the broader wholesale electricity market at a time when the sector faces increasing risk of government intervention and Harbord said the report aimed to add scrutiny to what MEUG sees as a deeply troubled market. It also comes a day ahead of Meridian's results announcement for the year to June 30, 2021, where it is expected to report a sharp fall in earnings compared to 2020.
"It's about restoring confidence in the wholesale market," Harbord said of the release, which was shared with Meridian and the Government this week.
"The wholesale market has been delivering very high prices for three years now and the forecast is for another four years," Harbord said, claiming some of its members have faced energy costs rising by up to four times over the period.
"When you triple or quadruple that cost in a business, regardless of its size, you can't absorb that indefinitely. We're talking about the livelihood of some of these businesses. Thousands of jobs in rural New Zealand."
While Harbord has been issuing repeated warnings that rising electricity prices are putting thousands of jobs at risk, he openly acknowledged the limitations of its report. Describing it as only a "piece of a jigsaw" he acknowledged it was possible the profits it highlighted reflected only a temporary blip.
"It is possible that given the nature of Meridian's business and its investment ... we might be in an eight to 10 year period" following which the company's profits would move to more closely matching its cost of capital.
The study, he said, made no presumption of why Meridian might be making so much in the way of profits and it was possible its assets were simply more efficient than its rivals.
"We're absolutely not accusing them of rent seeking, at all," Harbord said. "This could very well be a happy accident because of the nature of their assets."
Most of Meridian's assets - hydro stations in the lower South Island - have been operating for decades.
The company was formed out of the break-up of Electricity Corp and inherited both the vast Waitaki hydro system (part of which was taken off it and swapped for an energy option in the North Island by Genesis) and the huge Manapouri power station which the company has claimed is the most efficient station of its kind in the world.
While it has built several windfarms in recent years, the overwhelming bulk of its generation was built prior to the 1970s.
Floated in 2013 by the former National Government, at a time that the opposition Labour Party was promising fairly radical market reforms, its market capitalisation has risen from less than $4b at its initial public offering (IPO) to more than $13.5b today.
Regulation risks rising
If Labour was promising radical reform in 2014, by 2017 its policies had become far more mainstream, at least if its manifesto was to be believed.
Apart from the abrupt and unsignalled decision to redraw the rules on oil and gas exploration and setting aspirational goals on renewable electricity generation, Labour has done little to materially change day to day energy policy.
But as pressure builds market analysts have begun to increasingly see a real risk of change now.
Dysfunction in the wholesale market was thrown into stark relief when Transpower ordered some lines companies to shed load on a frigid evening earlier this month.
When the grid operator miscalculated how much demand had to be taken offline and the Waikato network took its command at face value, thousands of homes were without power over several hours, causing sudden alarm.
The Government's response arguably hyped the panic, but after initially implying events which led to the cuts were driven by commercial motives, ministers were forced to quickly walk back the statements.
Energy Minister Megan Woods, who has held the portfolio since Labour first took control of the Beehive, asked the EA to conduct a review of the functioning of the wholesale market in April. The EA has since claimed it announced the review, but it appeared to make little of it at the time. A spokeswoman said the chief executive of the regulator announced it verbally at an energy conference, with no official statement.
As the pressure on the industry has mounted, Woods repeatedly acknowledged there may be need for change, while the EA has been giving assurances to industry that its analysis of the wholesale market will be robust.
According to a short statement, Woods sees the MEUG report as notable.
"MEUG's analysis raises questions about whether the electricity wholesale market is operating as it should and I look forward to discussing it with them further and getting more advice about it," Woods said.
"The electricity system must be fit for purpose in terms of security of supply and it must also be fair to consumers – whether they be large industrial users or residential users."
Meridian finds itself at the centre of the focus in part because of its size. Depending on the hydrological conditions of any given year, it typically produces about a third of New Zealand's electricity, significantly more than its rivals.
The company has been increasingly strident in its comments, accusing small independent retailers Flick and Electric Kiwi of undermining the market structure because the companies' owners did not want to invest in generation.
Meridian released a report of its own by leading professional service firm PwC which it said showed its profits for most years in the past decade had been "largely flat but have exceeded the cost of capital by between 0 and 2 per cent".
Meridian said in a statement: "PwC's independent analysis on Meridian undermines MEUG's claims".
PwC's assessment of Meridian is only independent in the same context as MEUG's is - the report is paid for the electricity giant.
Meridian also said the analysis was in conflict with the electricity price review conducted by the Government in 2018 which did not find electricity companies were generating excessive profits.
"MEUG represents some sophisticated large commercial entities, who may or may not have hedged their exposures to the recent wholesale market highs. We appreciate this is a challenging time, however, there are more constructive ways to achieve a better outcome," Roan said.
"The conversation we all should be having is how we work together to support these large companies make the changes we all need to make, to transition to a zero-carbon future. We've been active with the MEUG members on this point, both on pricing and supporting them to transition away from fossil fuels. We continue to offer our support because we know that will not only deliver the best outcome for their businesses, but for the New Zealand economy overall."
Harbord said the report was simply to encourage debate. While MEUG is pointing to failings in the wholesale electricity market, it is not advocating for a particular reform, such as the calls to split electricity companies into either generators or retailers.
"The reason we're not for or against a particular solution is our analysis is just a piece of the jigsaw and not the whole picture. Without understanding the precise nature of the problem it's a bit premature to jump to the solution."