SOE power profits 'at expense of consumers'

Dene Biddlecomb. Photo / Supplied

Big returns from state-owned power companies are down to soft regulation by successive governments - at the expense of consumers, says the head of a private-sector rival.

But while a consumer advocate agrees, she says new shareholders in partially privatised SOEs are likely to push harder for better returns, driving prices for domestic consumers higher.

A report by accounting firm Ernst & Young has shown state-owned energy companies earmarked for partial privatisation have outperformed most similar private-sector companies in their returns to their shareholders - in the SOEs' case, the Crown.

Dene Biddlecomb, managing director of fledgling electricity retailer Pulse Utilities, said the strong financial performance of Meridian Energy, Genesis Energy and Mighty River Power was due to regulation by governments which did not sufficiently restrain the companies' market power.

He said analysis by international expert Professor Frank Wolak found prices in New Zealand's wholesale electricity market from January 2001 to July 2007 delivered $4.3 billion more than would have been earned under competitive conditions.

"You've got that inflated profitability reflected in their enhanced returns over and above the weighted average cost of capital. Sure they've made money, but at the cost of predominantly the residential consumers."

Mr Biddlecomb believed changes to the electricity market put in place by then Energy and Resources Minister Gerry Brownlee, including a redistribution of power stations between Meridian Energy and Genesis and moves to make the wholesale market more accessible to small players like Pulse, would rein in the big companies' profits.

"The Government's being very canny. They're selling the SOEs at a very good time where they've had enhanced profitability due to an enhanced environment. ... It's going to be a lot tougher for them to make the money than they have done in the past."

Molly Melhuish of the Domestic Energy Users Group said it was too early to tell whether Mr Brownlee's reforms would increase competition and constrain price increases.

She said with the Government's holding in the SOE power companies to be reduced to 51 per cent, "the other shareholders are very likely to say you can't do that any more, no more self-restraint, so I can see them being tougher and more commercially aggressive".