New power incentive lacking

The taxpayer will have to foot most of the bill for new power stations because Government policy is discouraging private investment in the industry, a report says.

It says the Government is undermining profitability across the sector by not driving the state-owned power companies hard enough and by its moves to ensure dry year generation capacity.

Despite the state-owned generator-retailers Meridian, Genesis and Mighty River posting record profits and increasing retail prices by up to 15 per cent in the last year, the report's authors say the companies are operating under weaker commercial imperatives than their privately owned rivals.

"The Government may be willing to accept a lower expected return from its investment than would be acceptable to a commercially focused investor," they say.

The report, Investment in the New Zealand Electricity Industry, by University of Auckland economists Alastair Marsden, Russell Poskitt and John Small, suggests the returns on equity in the industry are not enough to encourage private investment in new power plants.

It says New Zealand's five main generator-retailers' aggregate earnings at $2.9 billion for 1999-2004 were only two-thirds of their $4.4 billion cost of capital.

But when capital appreciation of assets and net gains on asset sales were factored in, the companies returned about $2 billion to their investors over the period, say the authors.

The report, commissioned by private power company TrustPower and its cornerstone shareholder, US power giant Alliant, also suggests that Government intervention to ensure construction of reserve generation would potentially drive down wholesale prices.

At present wholesale prices, "the commercial incentives to invest in new generation are marginal for the lowest cost options".

New investment was also hampered by uncertainty over gas supplies.

However, the authors do not believe there should be further privatisation of the industry.

"There are serious weaknesses that would not be solved by privatisation and which are more easily addressed while assets are publicly owned."

-NZPA