Joe Hendren

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Tuesday, January 18, 2005

Fangs of corporate Draculas could push up power prices

'Market commentators' suggest Contact Energy should consider a substantial 'capital return' to shareholders. This should be seen for what it is : An attempt by overseas based shareholders to drain Contact of cash, a move bound to push up power prices in New Zealand.

To make matters worse, this capital return is to be funded by Contact taking on more debt.
"This may suit [Contact's] new majority shareholder Origin Energy of Australia which could clear a third of the debt ($1.65b) taken on to purchase Contact within a year and strengthen its own debt to equity ratios." (Press article, variant on Stuff)
Origin, now in control of the former SOE, would get Contact's own shareholders to pay for a substantial portion of the purchase price! And as this would funded by debt, Contact's New Zealand customers will pay through higher power prices. But to be fair to Origin, at present the public calls for a capital return are only coming from other institutional investors such as First NZ Capital. One hopes as the majority shareholder they reject the proposal as being against the long term interests of the company. Unless of course, they too are after a quick buck.
"First NZ Capital estimates Contact could take on up to $1.15 billion of debt - the "extreme scenario" - to pay out shareholders. Origin's share of that would be $589 million. That would double Contact net debt to total assets to 60 per cent from 27 per cent this year. Without a cash return, net debt to total assets would fall to 23 per cent by 2006, the investment bank says. First NZ Capital says $589 million would be almost enough for Origin to repay most of the "convertible undated preference shares" it issued to Deutsche Bank to partly fund the $1.65 billion purchase of 51.2 per cent of Contact from Edison Mission Energy last year. Deutsche holds $662 million worth of the instruments. Taking on more debt would reduce Contact's overall capital costs and be beneficial for all shareholders, First NZ Capital says."
But this would not be beneficial to consumers, and they wouldn't get a payout. The stuff article also reports:
"Contact is flush with cash but might not have big capital-hungry projects for another three to five years. It might need another $500 million gas-fired power station, provided it secures a long-term gas supply. The company will also require funding facilities for the importation of liquefied natural gas from about 2010."
Here lies another problem. Electricity is a capital and infrastructure heavy industry. There are not enough incentives under a privatised free market electricity system to build additional capacity before it is required, as this will lower prices. The electricity crises over the past few years were made worse by the lack such additional capacity. Nor are there enough incentives to conserve energy, as more 'sales' simply means more profits. Power users and shareholders have fundamentally different interests, and the latest plan to bloodsuck Contact of cash only demonstrates this once again.

Once shareholders have taken the cash, what will happen in a few years time when Contact suddenly needs more capacity? Thanks right, they will ask shareholders and the New Zealand public to pay for it again.

One option I have thought of is removing the state owned electricity enterprises from the State Owned Enterprises Act, as this would remove the requirement for Meridian and co to act like companies. Instead a non-profit model could apply whereby all revenues gained from electricity bills could be put back into capital redevelopment, encouraging conservation, carbon credits and lower prices. People might even be happier when they get their power bill knowing where the money is going. Faced with real competition Origin may be keen to sell out, allowing the government to merge its generators and retailers together, thereby creating more savings.

PS: Faced with a corporate vampire, say the word 'nationalisation' three times. They will make a quick retreat as good as garlic!

PPS: Lost a blog post last night due to computer apparently hanging. Just realised how I could have saved it - drat.

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