California's sins echoed in NZ

By RICHARD BRADDELL utilities writer

International credit rating agency Standard & Poor's has slated New Zealand's electricity market, which it says has characteristics in common with problem-plagued California.

Californian energy companies have been bankrupted and supply disrupted as retailers have been prevented by law from passing on soaring wholesale power prices to their customers.

S&P said New Zealand's high spot prices were the correct response to supply constraints, but it was concerned that, in common with California, it was difficult to pass that price signal through to most consumers, even though no legislative barrier prevented it.

S&P associate Laurie Conheady said On Energy backed down from its attempt to raise residential prices after being faced with unacceptable customer losses to competitors who had sufficient generation of their own to meet the demand.

But although S&P supports the decision of On Energy's parent, NGC, to sell its electricity customers, it is maintaining NGC on negative credit watch until losses of around $300 million and the impact of financial restructuring are better understood. It expects forecasts from NGC next month.

But S&P said the retailers' woes could be reversed in future years with generators being the ones to suffer from an uncertain, thin and illiquid hedge market.

"We are concerned with the credit quality of all market participants," said Mr Conheady.

"Many of the issues underlying the electricity crisis in California can be identified in the New Zealand market, albeit to a lesser extent."

Although S&P had given no thought to how the market might be remedied, Mr Conheady said separation of retailing from generation would boost liquidity in the hedge market because retailers would be on an equal footing and generators would want to cover their exposures.

And because retailers would be under the same price pressures, they would be more likely to pass on appropriate price rises to consumers.

"Further concentration of the already reduced number of players is likely to result in the remaining private-sector participants being held captive by the actions of a predominantly public-owned industry," said S&P.

"In addition, further rationalisation is likely to lead to the development of discrete regional markets and the loss of many of the benefits from industry deregulation."

S&P also warned that networks continued to be affected by uncertainty over their possible regulation.

In a separate development yesterday, Energy Minister Pete Hodgson moved an amendment to the Electricity Industry Bill that would give national grid operator Transpower authority to recover charges, thus dealing with another S&P concern.

In June, Transpower lost a $70.6 million claim against Meridian.

Mr Hodgson said the outcome was that Transpower could not automatically recover charges from generators and lines companies that had not signed contracts. The accompanying implication was that Transpower had the right to disconnect non-payers.

"The importance of a secure national electricity supply means the Government obviously cannot tolerate operators and line networks being cut off from the national grid."