Hodgson faces critical ratings

By CHRIS DANIELS

As Energy Minister Pete Hodgson ponders whether to wield his newly gifted regulatory stick over the electricity industry, ratings agency Standard and Poor's has served up a stinging critique of New Zealand's power market.

The credit agency has just published a review of the energy markets on both sides of the Tasman, criticising a few big players' domination of the New Zealand market, most state owned.

Its report comes as Mr Hodgson thinks about how to respond to submissions made to his "Winter Review" - looking into the events of the past winter.

The submissions cover views from across the political and economic spectrum, all from groups and industries with different ideas as to what caused the high power prices over winter.

New legislation that became law this winter gives Mr Hodgson unprecedented powers to impose price controls or otherwise regulate all parts of the electricity industry, from the generator, to lines companies and the retailers.

Over the next few weeks, Mr Hodgson will decide what, if anything, needs to be done as a result of the winter's events.

Standard and Poor's said there were some real problems in the New Zealand energy market.

It was " ... plagued by a concentration of power in a small number of participants, an illiquid and ineffective hedge market, and a heavy dependence on an unreliable fuel source". It says domination by Government owned companies could pose problems.

"The concern associated with such a market structure is the political pressure that can be brought to bear on the Government-owned enterprises to protect constituents from price volatility by artificially depressing wholesale market prices or setting retail prices at levels that do not reflect the true cost of electricity generation."

While there was nothing to suggest that the Government was likely to take such an action, "given the nature of politics and the number of market players beholden to the same shareholder, such action in the future by this or other Governments is possible".

The likely impact of more regulation posed more of a risk to the credit quality of private sector players, than for the SOEs, whose credit ratings factor-in a degree of Government support.