Regulation talk hits Transpower's credit

A second international credit agency in as many days has warned of the risks of regulating the energy sector, sparking fears that the cost of borrowing money to pay for vital grid upgrades could increase.

Just a day after Standard & Poor's put state-owned national grid operator Transpower on a negative credit watch, Fitch Ratings has warned of regulatory uncertainty posing a "major credit concern" for the utilities sector.

With major capital expenditure planned across the power sector in the next few years, ratings downgrades would mean more expensive debt for power companies and lines businesses, many of which are publicly owned.

Transpower is planning to spend $3.4 billion upgrading the national power grid, paid for partly by borrowing. The cost of loans will increase if the world's credit rating agencies downgrade their view of the state-owned enterprise.

Fitch Ratings yesterday warned that regulatory uncertainty was now a major credit concern for the entire New Zealand utility sector.

Carolyn Martin, regional head of Fitch's energy and utilities team, said the industry faced a number of challenges. Last year it warned of greater regulatory uncertainty, with growing political pressure to limit tariff rises.

"From a credit perspective, the standoff between Transpower and the regulators is prolonging concerns for the New Zealand electricity sector."

Underinvestment in transmission could have dire effects and tended to occur for two main reasons - bottlenecks in the approval process and uncertainty in recovering costs and earning an adequate return on investment.

S&P said the Transpower move also reflected "heightened uncertainty and lack of transparency" in the regulatory regime. Comments by the Commerce Commission had cast serious doubt on Transpower's ability to levy its new charges that would be enough to "protect its credit profile" should it continue with the grid upgrade plan.

But Transpower did have "headroom" to weather some short-term weakening of its credit profile. If uncertainty about price regulation continued though, there was risk.

Transpower spokesman Chris Roberts said the S&P credit watch change had not come as a surprise, because it had already raised concerns about regulatory uncertainty.

"Any action like this will have some impact on the cost of our funds," he said. Such ratings were assessed by the world's financial institutions and did influence their negotiations with borrowers like Transpower.

While the SOE was not now in the market for new debt, it would be later this year.

The impact of the S&P move would be significant if the negative credit watch was followed by an actual credit downgrade.

Roberts pointed out that the national grid upgrade was to be paid for by a mixture of new debt, higher charges to customers and a "dividend holiday" - where its Government shareholder had been told to expect no dividend or a greatly reduced one over the next five years.

The threat of price controls

Why is the Commerce Commission getting involved?

Lines companies such as Vector, Powerco and state-owned Transpower are monopolies, so are regulated to stop abuse of this power.

What is it investigating?

Most attention is on "thresholds" regulation. Lines companies must meet pricing and quality thresholds if they wish to avoid price control. Transpower has openly breached the price threshold, saying it needs to lift its prices to pay for an urgent upgrade of the national power grid.

What happens next?

The Commerce Commission has said it wants to impose price control on Transpower, with a final decision due at the end of next month.

Which other regulations are irritating the energy sector?

There is the Commerce Commission inquiry into whether the big five power companies - Meridian, Genesis, Contact, Mighty River and TrustPower - are acting in a truly competitive fashion. Then there is the Electricity Commission, which says it is concerned there may not be enough "downward pressure" on power prices through the wholesale market.