Labour-Greens policy far down the list of MRP’s biggest worries, says Woodward

Wellington institutional broking firm Woodward Partners ranks the risks to MightyRiverPower of the Labour and Green parties’ new electricity policy as moderate, and far lower than many other risks the company faces.

A research report from Woodward analyst Nick Lewis ranks the Labour-Greens policy 10th in a list of 16 risks faced by the state-owned power company, 49 percent of which will be privatised in a share float next month.

Ranked by a combination of likelihood and potential to affect MRP dividends, Woodward still ranks MRP’s top risk as drought preventing electricity generation on its string of Waikato River dams, a risk already well identified.

Ranked second is the unknown but potentially severe impact on MRP’s profitability of Electricity Authority proposals to radically reorder the way costs of the national grid – the state-owned monopoly Transpower which owns national transmission lines – are allocated among generators and consumers.

The MRP prospectus identifies this as a potential annual increase in costs of $65 million a year, with potential impacts on the cost of retail activities.

“There is uncertainty around the timing, quantum, and other potentially adverse conditions of the pending new transmission pricing,” says the Woodward report. “The first version (published late last year) was met with widespread, vigorous opposition from the industry.”

The government-mandated regulator, the Electricity Authority, is pushing the changes, which would spread the costs of transmission more evenly nationwide, instead of falling disproportionately on South Island generators.

A three day, closed door conference is scheduled next month to try and find a way forward.

The Woodward report makes no calculation for the impact of the Labour-Greens policy on MRP’s profits, but considers “the likelihood of occurrence to be low”, in part because the policy would be complex to implement and likely to face court challenges.

In a report issued on Contact Energy today, research house Morningstar suggests the Labour-Greens policy would make it “challenging if not impossible to calculate a fair return for thermal plants due to the complexities of varying utilisation rates under different hydrology and associated take-or-pay contracting arrangements.”

“Determining the appropriate regulatory asset base for calculating returns will be the biggest bone of contention between power companies and the regular, considering the plethora of power plants with differing fuel types and age profiles.”

However, the proposed regime to give a “fair rate of return” to generators on the historic cost of their assets could see MRP and state-owned Meridian Energy take “a bigger dip” in asset value losses because their hydro assets are relatively old.

Morningstar continues to rate Contact a “hold”, but has taken its regulatory risk profile from medium to high because of the Labour-Greens policy. It maintains a target share price for Contact of $5.50. Contact shares have traded on the NZX today at $5.33.

The Woodward report says the new transmission charging regime scores nine out of nine for potential to happen and to have an impact on dividends, with the third ranked risk, increased retail competition, rating 6/9.

The Labour-Greens policy rates 3/9, below the risk that a price for water used in hydro-electric generation is established, which ranks 4/9, the same as the potential closure of the Tiwai Point aluminium smelter.

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