On Energy sells South Island customers, cancels price rises

By RICHARD BRADDELL utilities writer

On Energy, the electricity subsidiary of Natural Gas Corporation, has cancelled price rises averaging 14 per cent, scheduled for Sunday, after selling its South Island customer base to Meridian Energy.

The freeze also includes Waikato customers whose prices were to go up on July 15.

The agreement announced last night is conditional, and is expected to be finalised in the next eight to ten working days.

The sale of 116,000 mostly Christchurch customers reduces On Energy's 450,000 electricity customer base by a quarter.

NGC has swallowed a bitter pill, after it forecast losses of between $280 million and $310 million for the June year, triggered by wholesale prices four to five times higher.

Even so, the bulk of its losses relate to non-cash writedowns in the value of its customer base. A quarter of that relates to those sold to Meridian.

The price for the sale of South Island customers to Meridian has been disclosed.

But NGC's managing director, John Barton, said the deal, combined with some new trading hedges and $177 million in guarantees from NGC's 66 per cent owner Australian Gas Light, had enabled On Energy to cancel the price rises.

"I was very disappointed in having to raise prices," Mr Barton said.

On Energy is thought to have been racking up losses of $1 million a day because it entered the winter without hedge contracts to peg the price of its electricity supplies.

Now that the customer sale is completed and additional hedging is in place, On Energy is close to its target of 80 per cent cover, expected to be achieved through arrangements to be negotiated in coming days.

Mr Barton rejected the widespread view that On Energy had brought losses on itself by going into the winter without sufficient hedge contracts in place.

Instead, he blamed market failure, saying it could not cope with dry years because the generators who might offer hedges looked after their own retail exposure first and left "net retailers" like On Energy to fight it out.

Had On Energy bought all the hedges it had been offered, it would still have lost money.

Mr Barton said high spot market prices had resulted in a value transfer from the retail part of the industry to generation of $540 million, or $360 million more than might have been expected. The solution was either the separation or ring-fencing of the generators from their retail businesses.

Although NGC has been hit hard by its electricity business problems, that has not affected the other two-thirds of its operations.

"We will have a strong balance sheet. We have a terrific set of assets in our gas business and we will come out of this thing better balanced than we were and with stronger earnings potential," Mr Barton said.