Energy Insight - May 2010Bright sparks needed |
Standard and Poor’s comments on the credit rating of electricity generating SOEs have further muddied the waters in relation to the Government’s package of electricity reforms announced at the end of last year. For those that missed them, S&P has raised questions about what effect the reforms might have on the balance sheet strength of the various SOEs once the actual and virtual asset swaps are completed.
On the face of it that seems simple enough but what is not clear is whether rating agencies have an underlying concern about the Government’s actions and the ability of the SOEs to operate effectively on the playing field with which they are now faced.
One thing guaranteed to make ratings agencies, or anyone else for that matter, nervous is unilateral action by governments in markets which are supposed to be competitive. It is particularly unsettling when such action is not part of a clear policy direction and is designed to deal with a specific perceived problem. Creating a competitive market as part of a clear agenda to privatise the state-owned participants, for example, is different to, say, regulating retail tariffs. Unfortunately the most recent Government reforms seem to be viewed in the latter category of intervention and raise the obvious question of “What might they do next?”
Investors and lenders refer to this as sovereign risk and factor it into their investment decisions, either as a higher required rate of return or by choosing not to invest at all. The first reaction creates a higher cost of capital to market participants and the latter a more serious problem of reduced liquidity.
The intervention approach also raises questions as to whether the interventions made will actually work. If they don’t the answer is inevitably more intervention to try to fix the problems created by the original action, particularly if the participants find innovative ways around the intent of the interventions and the law of unintended consequences takes over.
In the case of the current reforms, the Government has reallocated a number of actual generation assets and required capacity swaps to create further virtual asset swaps. This was done in the name of increasing competition but given that it only applies to the Government-owned part of the industry, how effective it will eventually be is open to question.
The real worry is that more intervention will be needed to solve this or other problems, and investors and operators will be faced with an uncertain investment environment at the very time when new investment in the electricity sector is desperately needed.
What is really lacking in New Zealand is a clear policy for the electricity industry. Ownership is stuck half way between Government and private investors, and our current market structure is not seen by stakeholding Ministers as delivering the required level of competition. What rating agencies are signalling is that it is these wider problems which need attention, not the more immediate symptoms.
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