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Opposition proposals threaten 'Telecom-style' shake-up

AMP Capital Investors (New Zealand) has yet to establish its response to the opposition political parties' plans to overhaul the electricity market, but says it could destroy shareholder value in the way Labour did to Telecom in 2006.

The Labour and Green parties last week unveiled plans to introduce a central buying agent and regulator for wholesale electricity if it wins next year's election, spooking power company investors and prompting the government to put out an update on the risks to its initial public offer of state-owned Mighty River Power.

The fund manager is "still forming views" on the proposal and hasn't decided "what role we're going to take in the process," head of equities Guy Elliffe told reporters at a briefing in Wellington.

"We do regard this very seriously. It's important we have a very important, high-level and rational debate about a complex issue," he says.

The share price in Contact Energy has dropped 6.3 percent to $5.36 and TrustPower has fallen 6.9 percent to $7.26 since the announcement, which Mr Elliffe says was probably a reasonable indication as to how market analysts are trying to work out the present value of those changes.

"If you look at the actual quantum of the changes in value of the listed companies, it is pretty material," he says.

The potential intervention, which would probably take more than a full electoral term to come into effect, could have as great an impact as that enforced on Telecom in 2006, when Labour's communications minister David Cunliffe forced the phone company to offer equal access to its underlying copper lines in a bid to encourage more broadband investment.

That intervention saw Telecom's share price sink 26 percent from the start of May 2006 when the announcement was made to the end of June, when the phone company split up its wholesale and retail operations.

"In terms of potential risk if the policies were enforced, the Telecom analogy is not a bad one," Mr Elliffe says.

He questioned whether any drop in retail prices would be sustainable as demand for electricity draws in line with supply.

"Will prices be lower under the revised system? I think initially the answer's clear: yes. But on a longer term basis, to me it's far less clear. The argument revolves around the efficiency of the investment signals the new system will provide."

(BusinessDesk)

Comments and questions
10

Are Shearer & Norman correctly authorised under FMA laws to offer financial advice to the entire country?

Can they be held liable for the resulting financial losses NZ Inc has incurred as a result of their deliberately timed advice?

Who cares Solidarity!

I imagine all those who have KiwiSaver and have had their net wealth evaporating by these treasonous, Stalinist vandals. Then there's iwi and the millions they've collective lost as a result also, then all the institutional / corporate investors looking for politically stable countries to invest in...

Over $1Bn plus and counting of collective wealth has been erased by L&G in a spiteful, cynical attempt at trying to usurp the government's initiatives and abilities to manage infrastructure by partially selling a minority stake in an ageing, depreciating asset so those funds can be reinvested into things like new hospitals and schools for Christchurch.

Ambition is great - but when ambition turns into self-centred greed and spite, sacrificing all of NZ and everyone else in her for political self-advancement - well, that's treason upon the state in my books and should be dealt with accordingly.

Cry me a mighty river. Anyone who invests in a utility provider which exercises a de facto monopoly position (eg Telecom) or one which is part of a vertically integrated cartel has to be aware that regulatory regimes can and do change -- and that if there has been a historic trend of high profitability built on gouging the consumer, that might come to a screeching halt. See this graph and tell me what terms free-market apologists might use to explain how this is "working" for New Zealand: http://thestandard.org.nz/wp-content/uploads/2013/04/real-electricity-price.jpg [data from IEA 2012 July OECD library]

The privatisation carousel's been going round for over 25 years and all the free market has done for the public interest in this country looks like rent seeking. The Labour-Green announcement is a signal that the music might stop and everyone who thought a ride on the painted ponies was a bargain might think twice.

Phil, you nailed it man!

Correct

I would like to see the evidence that the electricity sector is "gouging" the public. Residential prices have risen more than commercial or industrial prices since the early 1980s, but they needed to, as up to that time they were artificially low, based on politically set prices to buy votes, completely unrelated to the true cost of generating peak prices, which residential consumers were responsible for, as they turned on their lights and appliances at 6pm every night as they got home from work, calling on generating capacity that was on stand by, earning nothing all day, waiting for them to get home.

As Bill English. He never denied it. So he's telling the truth for once.

Any reasonable benchmarking exercise comparing pricing in the NZ electricity system to that in overseas electricity systems will show that retail electricity prices are unreasonably high in NZ - particularly considering the large lower cost hydro and renewable base in NZ.

Private, profit-seeking electric utilities overseas that build and operate nuclear and coal-fired power plans - the most expensive generating plants in the world to build and operate - can set retail prices far lower than those in NZ, where the build and operate costs of mainly renewable generators are much lower. Yes, that's evidence that NZ retail electricity prices are far too high.

Sensible overseas electricity systems overseas are run according to some notion of "least-cost" principles. Electricity is an "intermediate" good - not of use by itself, but an essential input to making other goods and services. Assuming reliability of supply and a couple of other criteria, the less an economy pays for electricity, or any other intermediate good, the better off that economy is.

In NZ, the approach to electricity is always first and foremost about investors in and producers of electricity. Rarely do consumers receive any serious attention.

Electricity prices? Or the transmission charges? The latter are the ones going through the roof.