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Commerce Commission Approves Asset Valuations

Issued 4 April 2002 / 031

Commerce Commission Approves The Asset Valuations Of 28 Electricity Lines Companies

The Commerce Commission has completed its statutory requirement to complete a comprehensive audit of the asset valuations of the 29 electricity lines companies and Transpower. All but two lines companies have had their valuation reports approved by the Commission.

Chair, John Belgrave, said the Commission¡¦s task was to ensure that electricity lines companies applied the Ministry of Economic Development¡¦s Optimised Deprival Valuation (ODV) Handbook in a rigorous and accurate way. Lines companies and Transpower were required under the Commerce Act to publish valuation reports approved by the Commission by 31 March 2002.

¡§The Commission¡¦s overall view is that the ODV Handbook has generally been applied well by electricity lines companies, although the audit prompted some improvement. The audit resulted in the total ODV valuation of all lines companies whose reports have been approved by the Commission being reduced by 1% off the pre-audit level, which amounts to approximately $45 million,¡¨ said Mr Belgrave.

Mr Belgrave also said the Commission appreciated the cooperative approach taken by lines companies throughout the audit process.

¡§While many of the original valuation reports submitted to the Commission were not approved, companies worked quickly and constructively with the Commission in preparing their revised valuation reports,¡¨ said Mr Belgrave.

Mr Belgrave explained: ¡§Asset valuations are central to monitoring the economic performance of electricity lines companies. The ODV audit has provided the Commission with valuable insights that will feed into its other statutory work on reviewing asset valuation methodologies, information disclosure and the development of a price control regime.¡¨

The Commission¡¦s materiality threshold for the audit was 3%. In order for the Commission to approve a valuation report taking the materiality threshold into account:

ƒá each inconsistency with the ODV Handbook had to be non-material, i.e. have a variance (positive or negative) from the appropriate value of less than 3% of the company¡¦s ODV valuation; and
ƒá all inconsistencies with the ODV Handbook taken in aggregate had to be non-material, i.e. have a variance of less than 3% of the company¡¦s ODV valuation.

Key results from the 28 valuation reports approved by the Commission were:

ć five companies made a material reduction in their pre-audit ODV valuation (a reduction of more than 3% of the pre-audit level), and three companies (including Transpower) increased their ODV valuations, as a result of the ODV Handbook being applied more rigorously and accurately;
ć the remaining 20 companies made non-material reductions in their pre-audit ODV valuations or made no change;
ć the total ODV of the lines companies (excluding Transpower) was reduced by approximately $45 million of the pre-audit level, or 1%;
ć one lines company, The Power Company Limited, reduced its ODV valuation by approximately $22 million (13%) as a result of the audit; and
ć Transpower increased its ODV valuation by approximately $13 million (0.7%) as a result of the audit.

The two lines companies whose reports have not been approved by the Commission are Westport-based Buller Electricity Limited and Gisborne-based Eastland Network Limited.

The Commission has invited both companies to further explain their valuation reports and compliance with the ODV Handbook. ¡§We need to know why they consider their valuation reports comply with the ODV Handbook or why compliance with the ODV Handbook is not possible,¡¨ commented Mr Belgrave.

The Commission has been assisted by its consultant, Parsons Brinckerhoff Associates, who has considerable experience in the application of the ODV methodology. Parsons Brinckerhoff Associates is now preparing a closing report for the Commission drawing insights from the audit process, which will be published when completed. The report will be a useful input to the other work the Commission is required to undertake under Part 4A of the Commerce Act.

Background
ODV is an acronym for Optimised Deprival Value, which is the valuation methodology electricity lines companies are required to use in valuing their system fixed assets. The rules pertaining to ODV valuations of electricity lines business system fixed assets are incorporated in the current edition of the ODV Handbook, issued by the Ministry of Economic Development.

Under Part 4A of the Commerce Act, the Commission was required to carry out a comprehensive audit of the valuation of the line business system fixed assets of large electricity line owners. The aim of the comprehensive audits was to ensure valuations reflected a rigorous and accurate application of the ODV method, as set out in the fourth edition of the ODV Handbook.

Under the Commerce Act, lines companies were required to publicly disclose, by 31 March 2002, a valuation report approved by the Commission, including publishing the results of the Commission¡¦s audit as it applies to their company on the Internet.

The Commission¡¦s process for the audit was set out in the Asset Recalibration Document released on 28 September 2001 (available on www.comcom.govt.nz). The audit was a two-step process: an initial assessment of reports by the Commission in late January (and approval of reports where appropriate); and a further opportunity for companies to undertake additional work and submit a revised valuation report (considered by the Commission in late March).

Initial valuation reports were considered by the Commission in late January 2002, at which time eight reports were approved. The remaining 21 lines companies then had an opportunity, in consultation with the Commission, to submit revised valuation reports, which have been the focus of the Commission¡¦s latest decisions.

The Commission indicated in February it was in the process of auditing Transpower¡¦s valuation report to a different timetable to the other electricity lines companies. The Commission has since completed that audit and approved Transpower¡¦s valuation report.

Ends

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