• Customer backlash feared.
• Contact’s message not getting through.
• Grid still a major concern.

Contact Energy got a sharp reality check last week when it announced a 10% price hike for retail customers in the South Island and Wellington, and attempted to increase its Directors’ fees. Anecdotal evidence suggests many Contact customers have already voted with their feet and switched power companies as a result of the retail price increases. And the anger of shareholders at last Thursday’s AGM forced Contact to back down on increasing base Directors’ fees, although it approved an increase in the fee pool from $770,000 to $1.5m. It all added up to a public relations disaster for Contact. Even PM Helen Clark weighed into the debate about the Directors’ fees, accusing the power company of greed and extortion.

But the media backlash overshadowed the serious message from Contact CEO David Baldwin about the lack of investment in NZ’s electricity grid, which he cited as a key reason for the retail price increase. Baldwin says low hydro lake levels during winter, and transmission constraints between the North and South Islands, pushed up wholesale power prices. In particular, the unexpected removal of pole one of the HVDC last November has highlighted the increasing reliance of the South Island on North Island electricity generation. Baldwin notes there has been a fundamental shift in the NZ energy market during the last 10 years, with South Island demand growing faster than the North Island’s but nearly all new generation built during that period in the North Island.

He says the inability of the grid to adequately support the South Island has led to higher wholesale prices in the south, which will be reflected in retail tariffs until the HVDC is replaced around 2012 and other transmission constraints are addressed. Baldwin notes between May and August, South Island retailers paid about 26c/unit for electricity supplied across the Cook Strait cable. This was about $150m more than they would have otherwise paid if there were no transmission constraints. If these increased costs had been fully charged to customers, they would have been paying double their normal rate, or 40c/kWh.

Baldwin notes South Island wholesale prices in May rose significantly above those in the North Island and, with the exception of a few weeks in July, remained so throughout the winter. Although prices were lower in August, the price difference between the two islands continued, with the South Island wholesale price being around 10c/unit more than the North.

Contact Chairman Grant King says electricity market conditions have improved over the last month, with inflows into the southern hydro lakes increasing and transmission constraints easing. But due to the extended drought in the South Island and transmission constraints experienced, Contact’s performance in the first quarter of the financial year was well below expectations. As a result the company does not expect to outperform its 2008 financial year result.

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