Big brother clears way for baby powercos

By Richard Braddell

It has been a difficult year for Contact Energy. We know that because chairman Phil Pryke and chief executive Paul Anthony told us so yesterday.

The split of ECNZ into three more fragments hit spot electricity prices hard (although, according to Contact, in October they moved closer to the average of the previous two years).

And while the breakup of electricity supply companies into lines and energy trading businesses provided Contact with a great opportunity to diversify its customer base, that demanded the energy and time of its management to integrate nine culturally different businesses at the same time as they were distracted by the company's sale and public float.

Presumably none of the above are reasons why the newly privatised splinter of ECNZ has produced a result that has raced ahead of its prospectus forecasts.

There are several reasons why Contact has outperformed. The most obvious is that the prospectus was undoubtedly conservative, as is often the case.

Another is the quality of its management, most recently celebrated in a not entirely positive way by the controversial $2.5 million payout to Mr Anthony to keep him on board.

It could also be that necessity is the mother of invention. Contact has had a head start on its fellow baby ECNZs and, as Mr Anthony said yesterday, it knew only too well that it would have to change if it was to prosper in a market where it would be competing against three new generators.

Hence its aggressive move on retail energy companies late last year which made it the largest gas supplier and the second largest electricity retailer with a total of 485,000 customers. Not bad for a company that had only 100 customers two years ago.

It has also been working hard on efficiency with productivity up 55 per cent and costs down 50 per cent.

The company has also improved its risk management. A contingent $1.2 billion liability for take-or-pay gas has all but disappeared through matching on-supply arrangements with Methanex and Contact's own gas businesses among others.

And the business has the financial strength to continue to diversify its risk through suitable acquisitions in places like Australia where it has 17 per cent of a power generator in Queensland.

But it could be that the most important lesson from Contact's performance lies in what it says about the way major privatisations are managed.

In place of the headlong rush that characterised Telecom's in 1990, the privatisation of a part of ECNZ has given a solid model for the valuation of the remaining three companies, and a reason for them to sharpen their own performance to the benefit of consumers and the Government - if ever it decides they, too, should go.