Power of competition key to swap

Gerry Brownlee takes issue with Meridian Energy's objections to the Government's proposals to transfer its Tekapo A and B hydro-power stations to Genesis Energy.

I was interested to read an article in the Otago Daily Times (3.2.10) with the headline, "Power price rise if sale is enforced".

The article outlines a series of objections Meridian Energy has to the Government's proposal to transfer its Tekapo A and B hydro-power stations to Genesis Energy (both are state-owned companies).

Meridian's views should be set against the backdrop of the last eight years, in which electricity prices rose by 74% for residential consumers, while the consumer price index rose by only 28%.

As well as this steep price path, New Zealanders have been asked to save power during winter four times in the last decade.

This Government refuses to accept, even if Meridian does, that this is as good as it gets for New Zealanders.

We can and must do better.

It is worth recounting the process the Government has gone through in putting its electricity reform proposals together.

Last April, in the wake of the Commerce Commission report which found electricity companies have substantial amounts of market power, the Government appointed a group of six electricity sector experts.

We asked them to thoroughly investigate the way electricity is generated and sold in New Zealand, and recommend solutions to the insecure power supply and the steep price path of the last few years.

The expert panel found prices to residential consumers have risen faster than is justified.

It found competition between electricity retailers is weak outside the main centres.

This is particularly the case in the South Island.

The expert panel then recommended a series of reforms to address these problems.

The Government has listened to the experts and has adopted the bulk of these recommendations.

One of the key aims of the reforms is to improve competition between electricity retailers.

It is competition that places pressure on companies to keep prices as low as possible.

Many people don't know they could save hundreds of dollars a year by switching power companies.

One way to improve competition is to give Genesis Energy control of the Tekapo A and B stations.

This makes it more likely Genesis will retail in the South Island, thus increasing competition.

Genesis will also be forced to give electricity from its North Island power stations to Meridian so Meridian can retail in the North Island, which assists North Island consumers.

It is to be expected Meridian is opposed to this idea.

However, some other commentary about the proposal has been ill-informed and misleading.

Let me deal with some of the concerns around the asset-swap proposal.

Meridian says there will be an increased risk of spill,as well as efficiency loss, on the river.

However, Meridian and Genesis will be expected to enter into a water management agreement to ensure both parties can operate effectively.

An arrangement similar to this proposal already exists in the North Island involving Mighty River Power and Genesis, with respect to the management of Lake Taupo.

Then there is the claim the transfer of the Tekapo A and B stations worsens Meridian's dry-year risk.

However, after the reforms Meridian will still be New Zealand's largest generator and control 50% of New Zealand's hydro storage.

One of the key aims of the reforms is to encourage generators to cover dry-year risk through inter-generator contracts and hedges.

The reluctance of Meridian and Genesis to enter into such contracts over the last decade has been a direct contributor to New Zealand's periodic winter supply crises.

Meridian also says the proposal may mean it needs to refinance $US400 million in debt (at a potential cost of $69 million in penalties, plus $13 million).

But Meridian itself says its early analysis indicates this will not be the case.

If this does prove to be an issue, it will need to be taken into account in the valuation of assets to be transferred to Genesis.

There should be no net change to the Crown's balance sheet.

Meridian says the asset-swap proposal will negatively affect its value.

That ignores the fact that if the Government wished to enhance Meridian's value, it would be seeking to reduce competition, rather than increase it.

With less competition, Meridian could charge higher prices and make larger profits.

The Government, instead, has opted to maximise competition for the benefit of consumers.

I have never claimed the Government reforms will lower power prices.

We still need to pay for the cost of new electricity generation, which is more expensive than in the past.

What we are trying to do is flatten out the price path of the last few years, so increases in power prices are not as big as they have been.

It is a sorry spectacle when the country's largest generator feels the need to publicly deny the advice of electricity sector experts and insist the way it operates its assets, paid for and owned by taxpayers, is as good as it gets.

The challenge for Meridian is to work constructively with the Government to make sure the reforms are effective in delivering for consumers.

• Gerry Brownlee is Minister of Energy and Resources