Over to higher powers

By Mark Reynolds

Young Contact executives rejoice to hear their futures lie in the laps of Californian masters

Fashionable Wellington restaurant Dockside was alive with laughter and good cheer this week as a group of young professionals celebrated what had apparently been a good day at the office.

The wine flowed freely as this group of executives from Contact Energy toasted the fact that Californian-based Edison Mission Energy had just bought a controlling 40 per cent stake in their company for $1.2 billion.

To most of us this would seem a strange thing to celebrate - the fact that control of the company you work for had just been sold and your job security was uncertain as a consequence.

But for staff at Contact, having the folks from Edison as their new bosses was a much better outcome than the alternative - Canadian company TransAlta taking the helm.

As one Contact staff member said: "We don't really know what the Edison people are going to be like to work with, but we have a fair idea what TransAlta would have been like.

"I think they would have taken over things and that would be the end of the type of business that we [Contact] have put together."

TransAlta is already active in the New Zealand energy market, with its Wellington-based subsidiary having built up a base of more than 500,000 customers nationally. If TransAlta had bought the key stake in Contact and eventually taken the company over, the combined group would have had more than 1 million of the country's 1.6 million energy customers, plus more than a third of the nation's electricity generation capacity.

"With Edison here it is going to be a much more competitive game. By all accounts they are a good strong operator with a lot of knowledge that we will be able to use," the Contact staff member said.

For its part, the Government was ecstatic that Edison won. The Government's reform of the electricity industry to fuel further competition and push down prices would arguably have turned to dust if TransAlta had won the bidding.

"We're very pleased with the outcome and we're very pleased to invite Edison to New Zealand," said the Treasurer, Bill Birch.

"We were captured by the involvement of the company in very competitive electricity markets and the focus of the company on competition - a good competitive outcome that we think will be good for the electricity market in New Zealand."

Edison Mission's executive vice-president, Robert Edgell, says the company is realistic enough to know that it will have to compete to get a return on its investment over time.

Edison Mission is a patient investor. It is a subsidiary of Edison International, a company founded in 1896 to provide electricity to the growing number of Los Angeles residents. The company still owns the LA business, among $US48 billion worth of assets held internationally.

Edison Mission controls about $US10 billion of those assets, including 55 power plants in the United States, Australia, Indonesia, Italy, the Philippines, Spain, Thailand, Turkey and the United Kingdom.

The parent group has been reinventing itself over the last couple of years to stay competitive in rapidly deregulating markets.

Just last year California allowed electricity customers to choose their provider, and for the first time Edison had to compete with rivals for business in its home market.

The Californian division of the company sold its fossil-fuelled generating plants and turned over administrative control of its transmission lines to an independent system operator to improve efficiency

It also moved to enter the telecommunications services market and was California's first electricity utility authorised to provide local telephone exchange services.

California Edison plans to offer wholesale, very high volume voice and data carrying capacity to communications companies. It will seek customers among providers of telephone and Internet services.

Mr Edgell would not speculate on Edison's potential to offer such services in New Zealand, but he noted there might be potential to swap information and possibly even investments between Contact and Edison companies.

He also said his company saw the executives of Contact as one of its key assets.

"Let me be clear on that. I have been, and my team have been, very impressed with the management of Contact and we have no intention of making material changes in that management."

By rights, Edison should not know the Contact management well, because the bidding process between potential investors and the New Zealand company was to have been strictly controlled, with no potential for any of the bidders to receive special or privileged information.

But Mr Edgell did have a chat with Contact's chief executive, Paul Anthony, during a briefing session set up by the Government's agent in the sales process, ABN AMRO Rothschild. The meeting was one of a series set up between Contact staff and potential bidders.

Neither Contact staff nor the potential bidders were supposed to use their names in the meeting, with codenames used for the bidding companies. (Edison was called Church Road while TransAlta was labelled Montana for the day.)

By all accounts, Edison's operating style will be to let the staff at Contact continue to run the $2.5 billion business - but it will want to assert some authority in the boardroom. That mirrors the company's modus operandi after the acquisition of assets like British hydro power company First Hydro.

Such overseas acquisitions helped lift Edison International's profits 24 per cent to US46c a share in the final quarter of last year. The annual profit was $US668 million.

But there were signs the company was struggling to make headway in its traditional United States markets, where legislative changes have lowered competitive barriers but capped the returns companies can earn on distribution, transmission and generation assets.

The final bidding for Contact came down to just Edison and Transalta, but earlier expressions of interest came from about a dozen big overseas energy companies, including Texas Utilities, Duke Energy, and Tractebel.

That comes on top of foreign investment that has already occurred in our electricity sector, including Kansas City-based Utilicorp which has controlling interest of Power New Zealand's power-line operations in Auckland, Tauranga and Wellington, and Idaho-based Alliant International's move on to the register of national power retailer TrustPower.

Even the wholesale electricity market is now owned by RMB Energy, a South African-controlled company with links to the DeBeers diamond empire.

The overseas interest is due to deregulation of New Zealand's energy market being widely regarded as five years ahead of what has occurred elsewhere in the world. Companies can come and get experience here that will be invaluable when their home markets fully deregulate.

Essentially what is happening in our electricity industry is similar to the investment onslaught that followed telecommunications deregulation a dozen years ago - though there are more energy assets available for purchase than there were telecommunications investments.

Even Alberta-based TransAlta, which is stinging from losing out on Contact, knows it will be worth its while to look for further investments here over time.

An obvious target for it is Meridian Energy, the South Island division of ECNZ - provided the Government decides to privatise.

"We were disappointed at missing out on Contact," said TransAlta spokesman Nigel Morris.

But TransAlta is confident that in time it will be its staff who are buying the drinks to celebrate another big takeover.

"We bid what we thought was a reasonable price and got outbid. But there are other options."