Liquidity test to trigger protection for minnow power suppliers

Power retailers seeking relief from lines charges under Electricity Authority's new scheme. Photo / 123RF

Power retailers seeking relief from lines charges under the Electricity Authority's new protection scheme will have to demonstrate a 25 percent increase in their overdue billings compared with pre-covid levels.

To qualify firms must have been solvent at Dec. 31, but now face "liquidity issues" within the next six months due to the virus outbreak and fallout from it. They must also expect to be able to pay their debts in 12 months' time.

The new measures, which require the country's six largest lines companies to defer two months of charges to qualifying retailers, come into effect tomorrow under an urgent rule change by the Electricity Authority. The provision is available for nine months.

The regulator surprised many in the industry when it announced the scheme earlier this month citing the potential risk that "multiple" failures among smaller retailers would pose to decades of work encouraging competition and promoting choice for consumers into the industry.

The authority believes job losses and business closures resulting from the covid-19 response could see "tens of millions" of dollars worth of power bills defaulted on. Most of that risk will be carried by the major generator-retailers, which still dominate the industry.

The debt deferral scheme, to be managed by KPMG, is not open to listed companies or their subsidiaries. Nor will firms qualify if they have access to loans or other capital to address the liquidity problem arising from the virus.

New Zealand has more than 50 retail power brands, ranging from the largest of the listed companies, including Genesis Energy and Contact Energy, down to small start-ups. Some are owned or part-owned by network companies.

Retailers sell their power on the lines of 27 network companies, most of which have some form of community or council ownership. The six largest distributors by customer base are Vector, Powerco, Orion, Wellington Electricity, Unison and WEL.

Network companies were shocked by the EA's move, which was taken following discussions with the Commerce Commission, which polices their returns.

In a letter to those power distributors, EA chief executive James Stevenson-Wallace said the authority had to act quickly as May 20 is next date for settling obligations to the wholesale electricity market.

Far from being a "free hit" for retailers, he said the scheme is time-limited and targeted, with firms having to pay up to $7,500 in application costs.

Stevenson-Wallace said the authority is trying to protect electricity retailer competition and not the shareholders of small retailers – some of which may have flawed business models.

"We understand individual retailers can and do fail and expect there will be retailer exit subsequent to the covid-19 lockdown period," he said in the four-page letter.

"What we are concerned about is not individual failures, but rather a material collective failure, potentially with a contagion effect, of multiple retailers, which would reverse decades of progress to establish robust retail competition.

"Failure of numerous retailers who were otherwise financially sound would have a material impact on competition, and on future entry. That's why we have taken the measure we have."