Labour-Greens power policy hits Contact Energy share price

Thursday 18th April 2013

The share price of the country's largest listed electricity generator-retailer, Contact Energy, has taken a 3 percent knock immediately following the joint announcement by the Labour and Green parties of a radical rewind from electricity reforms of the last 25 years.

If sustained, that indicates the Labour-Green policy is the latest of a string of political decisions and commercial circumstances that can be expected to drive down the issue price of shares in the partial privatisation of MightyRiverPower.

"The risk premium for investment in New Zealand would go through the roof," said one investment banker, who declined to be named.

The closely coordinated Opposition party announcements come three weeks ahead of the book-building on May 7 and 8, when institutional investors will help set the price for MRP shares after registration closes for retail investors.

The MRP float is expected to yield between $1.6 billion and $1.9 billion for taxpayers, but a string of decisions since the decision to partially privatise are contributing to downward pressure on the issue price.

These are provisions requiring the government to remain controlling shareholder of MRP with 51 percent of the shares, removing any price premium for a controlling stake; restrictions preventing any shareholder from holding more than 10 percent of MRP's shares, making individual shareholder influence virtually impossible; little or no growth in demand for electricity in the last five years; and the threat of a supply over-hang, should the Tiwai Pt smelter close.

The tumble is roughly the same as hit Contact shares just before Easter, when its competitor Meridian Energy announced it thought it "unlikely" that a new contract could be signed to supply the smelter, which its owner, Rio Tinto, has sought to renegotiate.

Contact shares were trading at $5.75 prior to the announcement, but slumped to a low of $5.55 within an hour of the announcement, which promises a return to a single electricity buying agency, central planner and regulator, to be called NZ Power.

The company was scrambling to issue a statement in response and appears likely to seek directors' views on policies that Labour and the Greens say would reduce annual profits in the electricity sector by around $500 million to $700 million.

Lobbyist Business New Zealand described the proposals as "economic vandalism", while Economic Development Minister Steven Joyce told Parliament during Question Time that it amounted to a "back to the 70's" policy which would lead to higher prices, power black-outs, and higher costs to taxpayers.

"A state-controlled sector as envisaged by Labour would drive out private investment," said BusinessNZ head Phil O'Reilly. "Why would the private sector invest in generators when the state can determine the prices they can charge, while subsidising state-owned competitors?

"The private sector power companies would have to seriously consider their future in the market. Those who have invested heavily would basically find their profits confiscated."

Labour and the Greens argue that unless the government steps back into the electricity market, generator-retailers will continue to make what they say are "super-profits."

BusinessDesk.co.nz

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