X factor key in lines companies' price rule response

By CHRIS DANIELS energy writer

Smaller power lines companies are banding together to help the Commerce Commission listen to their concerns about proposed price regulations.

The commission is expected by the end of this month to release more details of its plans to keep the monopoly players from abusing their position by earning excess profits.

PricewaterhouseCoopers is helping some of New Zealand's smaller and medium-sized lines companies put together a response to the commission's draft publication of its intentions.

One of the biggest shocks to the companies was the commission's idea for a "price path threshold", restricting average price increases to CPI inflation, minus a factor X.

The X factor puts pressure on the companies to achieve efficiency gains.

At this stage, the commission says, it intends to set an X factor of around 5 per cent a year.

PricewaterhouseCoopers partner Craig Rice said it would probably be more difficult for small companies to bear the cost of this regulation and the additional disclosure required of the new rules.

A PricewaterhouseCoopers director, Lynne Taylor, said those companies doing the best could be more likely to come under price control.

"A potential perverse outcome of this regime is that those who are most efficient and therefore least able to achieve price reductions are likely to breach the threshold and therefore go through a price control investigation to prove that they are efficient," she said.

Rice said one of the suggestions made by lines companies that had been adopted by the commission was that breaches of the threshold should not automatically result in price control.

He said this ability to argue a case was similar to the "please explain" notices issued by the Stock Exchange - an official request made to listed companies to explain possible breaches of the rules.

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.

Submissions are due by the end of next month. A conference follows in March, and results will be out at the end of that month.