Lines firms brace for a shock

By DANIEL RIORDAN

Electricity network companies, whose charges account for about half the average residential power bill, are on alert following a Commerce Commission finding that could force them to lower their prices.

The commission ruled in a preliminary report last week that Auckland International Airport had overvalued its assets and was generating too high a return on them. The consumer watchdog recommended Government price controls.

Crucially, the commission veered from the ODV (optimised deprival valuation) method generally used to measure utilities' assets. These values are the basis for judging whether the prices those utilities charge - in the frequent absence of fully competitive markets - are fair.

Lloyd Morrison, head of the investment manager for major utility investor Infratil, called the airport report "an arbitrary about-face" and said such a decision would have major repercussions for utility companies in non-contestable markets.

ODV values electricity networks on replacement cost, rather than historic cost, which is frequently lower. That historic costs method was one of several the commission used in its airport study.

Energy Minister Pete Hodgson last year asked the commission to examine whether ODV was the best way to value assets of electricity lines companies and decide if they were charging exorbitant prices and generating excessive profits.

Auckland Airport managing director John Goulter, who disputes the commission's methodology, was not commenting yesterday, but it is understood several listed companies have shared their concerns with the airport and plan to approach the commission.

Mr Morrison said that after a decade of use, ODV had become widely accepted in the utility sector by auditors and valuers.

"I wonder, when the Government is trying to work towards providing a stable environment ... why have an about-face in that area?"

Infratil has sizeable stakes in Wellington International Airport, Port of Tauranga, electricity network company Powerco, TrustPower and Natural Gas Corp.

He said it would "not necessarily" be the case that moving away from ODV would lead to lower asset valuations - as in Auckland Airport's case - and ultimately force utilities to lower prices to their users.

Powerco chief executive Steven Boulton cautioned that any move from ODV to historic costs would create problems.

He said few of the 30-odd players left in the sector had records going back far enough to meet any historic costs regime.

New Plymouth-based Powerco, the third-largest utility network, had been formed from the amalgamation of eight or nine separate power companies dating from the days of publicly-owned power boards, which did not keep commercial records.

It was hard to say if resorting to historic costs would raise or lower asset valuations against ODV, said Mr Boulton.

But there were real risks investors could be penalised.

"Investors have bought shares in companies like Powerco on the basis of real and actual decisions that have been made with real forecasts. If you go down the historic costs path, you're retrospectively penalising the organisation."

But commission director (business competition) Geoff Thorn cautioned against other sectors reading too much into the airport report.

"There's a whole range of factors why historic costs was more appropriate for airports. We took opportunity costs for land, historic costs for certain assets, we took a different costs methodology for other assets. You can't draw any conclusions from what we had in the airports' report."

He said it was likely to be next year at the earliest before the commission's work on the electricity sector was finished.