Big bills looming for lines networks

By CHRIS DANIELS energy writer

An investment crunch is looming for electricity lines companies as they face the cost of replacing equipment installed in the 1960s and 1970s, says an Australian energy economist.

Margaret Beardow is in New Zealand talking to the Commerce Commission as it works out its formula for inflation-based price regulation of the 28 local power lines companies.

Beardow - who has helped Powerco, New Zealand's second largest lines company - lobby the Commerce Commission, said new regulation could make it difficult to get the investment needed.

After analysing decades of data from New Zealand electricity networks, she said recent "productivity increases" reported by the networks came in part from a lack of investment in the physical infrastructure.

There was a big surge in investment in lines infrastructure between 1965 and 1975, said Beardow, but it "caved right down" afterwards.

"I don't want to exaggerate it to the state where it's all going to collapse," she said.

"It is just a simple phenomenon that if you put in a lot of assets 40 years ago, or 30 years ago, and they have got a 40-year life, then they're going to need replacing."

The Auckland CBD power crisis in 1998 showed what could happen if investment in the system was not maintained.

New investment could be easily provided by some price rises and some mergers between lines companies.

But if the Commerce Commission capped prices at existing levels, it could restrict the ability to raise the necessary money.

"It's like trying to put a lid on a boiling pot," she said. "Eventually the pressure will build up.

"You can always put it off, but the problem is that you can always put it off until one day like Auckland you don't have any lights."

There had been underspending, so any new regulation had to give flexibility to cope with the need for investment.

Mark Franklin, chief executive of Vector, New Zealand's largest lines company, said Beardow's predictions of a "bow wave" of large investment might be true for other lines companies, but it did not apply to Vector.

One of the points Vector was trying to make to the Commerce Commission was that not all lines companies should be treated the same.

Each network had different characteristics that affected its requirements for investment.

Transpower, the state-owned owner and operator of the national grid, did need a lot of investment in its system.

But it was something of a generalisation to say large-scale investment in new equipment was needed throughout the industry.

"The one thing we keep playing back to the Commerce Commission is growth, innovation, investment," Franklin said.

"Don't artificially constrain growth, don't limit investment by putting artificial things in place."

The executive director of the Electricity Networks Association, Alan Jenkins, said some lines companies needed to start replacing older equipment, some installed in the boom of the 1940s and 1950s.

"There has been a steady drive to maintain, but generally speaking, over the past 10 years the industry has been running hard to stand still."

Constant reform, particularly the enforced separation of lines companies from electricity retail, had diverted money and attention from the investment needed.

Successive governments "could not keep their hands off it".

Business confidence in the industry had been significantly eroded.

New valuation methods focused on building and planning for much shorter periods, he said.

The "planning life" for new investment had been cut to only a few years.

The controls

The Commerce Commission has imposed controls on electricity lines companies such as Vector and Powerco. Line charges make up about half of a residential customer's power bill.

The new rules are:

* A freeze on prices until April 1 next year.

* Price rises limited from then by a formula that ensures they fall in real terms every year.

* Price limits will vary from company to company.

* Lines companies' profits will not be regulated.

* Companies will have to meet reliability standards.

* Formulas for calculating the amount by which prices will fall are being negotiated between the Commission and the lines companies.