Networks baulk at profit cap

By CHRIS DANIELS energy writer

Power line companies are mustering their forces against the Commerce Commission's regulation proposals, demanding it drop "rogue" plans to limit their profits or risk underinvestment and deteriorating networks.

Along with a requirement that the 28 lines companies reduce prices by a prescribed amount every year, the commission wants to restrict profits earned over the next five years.

It plans to allow a return on investment of between 6 per cent and 8 per cent - what is described as their "weighted average cost of capital".

PricewaterhouseCoopers investment banking partner Craig Rice, who is helping a group of 19 lines companies put together a submission to the commission, said there was no support for the profit threshold - a "rogue third measure".

"The group still thinks it comes back to the fundamental question: are you paying a fair price and are the lights staying on?

"If someone is clever enough to make an 8.5 per cent profit whilst obeying those two things, then the thinking is, that's OK."

The commission will try to convince the sector that its profit threshold is not a profit cap and will be held in reserve to provide it with flexibility to regulate if other methods have failed.

Lines companies say that if they have successfully kept under the other thresholds, namely reducing prices and improving service, then there is no need to put a limit on profits.

A cap on profits offers little or no scope for the industry to create value - companies say no one would want to invest in a business that can, by regulation, earn no more than its cost of capital.

If customers are paying a fair price and the lights are staying on, then the industry believes its monopoly position is not being abused.

By only allowing a return on investment no more than the cost of capital, the companies say, the commission is removing any reward for innovation.

They claim the accompanying underinvestment in lines infrastructure would lead to physical deterioration of the network.

Electricity Networks Association spokesman Alan Jenkins said the imposition of a profit threshold on top of the price and quality controls was "overkill".

He said there had not been enough time to make adequate submissions, nor was there enough certainty about what future limits might be put on profits.

This made it very difficult to take any investment risk at all.

Ratings agency Standard & Poor's says the regulatory plans weaken the credit quality of New Zealand lines companies.

The agency, which currently rates state-owned Transpower, Vector and Powerco, said the commission's options would "weaken the business and financial profile of the aforementioned companies".

Uncertainties over parameters to be used in the regulations made it unclear if this would also mean lower credit ratings.