X-factor to control power line pricing

By CHRIS DANIELS energy writer

Power lines companies, nervously waiting for details of how their sector will be regulated, have been given a glimpse of what awaits them come April next year.

Competition regulators at the Commerce Commission have released a draft decision on the methods they will employ to encourage price reductions in the monopoly industry.

Companies such as Vector, Powerco and Orion have been negotiating with the commission for the past few years, trying to get a regulatory regime that would satisfy concerns about the potential for monopoly price-gouging without stifling investment.

Prices will be judged against a "CPI minus X" formula, which would see the lines companies cutting their prices every year, after inflation has been taken into account.

The "X" in the formula represents the expected annual reduction in lines business average prices, in real terms. The thresholds will be imposed from April 1.

But there is no guarantee that the power retailers, which send out the bills, will pass on these savings to consumers.

The commission says it will divide all the lines companies into three groups, with each group given a different "X-factor".

Those companies with below-average productivity, or with more scope to reduce their prices, will be given a higher X.

Other better-performing lines companies, or those which have been "consistently maintaining low prices", would be assigned a lower X.

Part of the X-factor assigned to each group will be worked out by the average productivity growth of the lines companies in the past seven years, which the commission says is 2.6 per cent a year.

This number will change once the commission works out what the companies' current productivity gains are.

Then it will add an extra component depending on which of the three groups the company is in - an extra 1 per cent, zero, or minus 1 per cent.

Final allocation of X-factors may happen before the end of this year, after further submissions from the lines companies and a conference next month.