Draft plans for regulation of lines companies under fire

By CHRIS DANIELS

Planned regulation of monopoly electricity lines companies has come under fire, with one industry analyst saying they may lead to a proliferation of consultants, lawyers and litigation.

The Commerce Commission has released its draft decisions on a "threshold" method of regulating the lines companies, which was supposed to mean only those that breached particular thresholds came under investigation and possible price control.

However, a lines company would breach the "price path threshold" if, on average, its prices were to rise in any year by more than CPI inflation less an efficiency factor (X).

"The Commission is minded to set an X of about 5 per cent, in common for all lines businesses," the draft said.

Lines companies will also be marked on trends in reliability performance and an excess profit threshold, against which they will be assessed in five years.

The commission describes its draft decisions as "targeted control" of the sector, but will have to defend its plan to apply a common CPI minus X formula to all 29 companies.

It appears that the same level of price cuts will be expected from companies regardless of whether they are large, small, urban or rural.

ABN Amro head of research James Miller said companies least affected by the plans would be those that already had high prices and bloated cost structures.

Highly efficient companies that had stripped out many of the costs would be badly affected, as would many of the trust-owned companies that operate on a break-even basis. These publicly owned companies keep their prices down as low as possible rather than making a profit.

Even the small lines firms would need to employ full-time people to monitor their performance against the commission's thresholds. A proliferation of lawyers and consultants may be a result of such an approach.

Miller said a positive aspect of the plans was the endorsement of lines companies using the optimised deprival value method (ODV) to value assets. This method, rather than using historic cost valuation, has however been criticised as allowing lines companies to charge excessive prices, based as they are on assets valued by their replacement cost.

The Commerce Commission's plans come at a difficult time for New Zealand's largest lines company, the Auckland-based Vector.

Patrick Strange, who has been chief executive since the company's founding in 1999, has lost his job and will not be replaced until February.

New chief executive Australian Mark Franklin has not worked in the New Zealand electricity business since the early 1990s.

A spokeswoman for Vector said the company was studying the Commerce Commission's plans and was not yet in a position to comment.

Vector management may regret the decision to cut prices to 235,000 of its customers by 11 per cent.

Strange has previously criticised any system based solely on business inputs, such as its cost of capital.

He has argued that thresholds for control should be based on comparative performance in things that matter to consumers, price and service.

* Submissions on the plans are due by the end of February. A conference will be in March, with final details gazetted at the end of that month.