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Commerce Com proposals endanger infrastructure

Commerce Commission proposals endanger infrastructure

Implementation of the latest proposals from the Commerce Commission for the regulation of the electricity lines sector will jeopardise the industry’s ability to invest in and maintain the lines infrastructure, according to Powerco Chief Executive, Steven Boulton.

Powerco’s submission to the Commission argues that the proposals are unlawful, as they amount to universal price control.

Mr Boulton said that the combination of price, profit and quality thresholds in the proposed regulatory system design did not provide for proper sharing of benefits between shareholders and consumers.

“Lines companies will have no incentive to fund new customer connections. The proposals will also delay or stall funding of investment in much-needed distributed generation connections, at a time when more generation is desperately needed.”

Capital investment to replace ageing lines infrastructure is also at risk, as companies will be stretched to meet unrealistic targets, which seem to have been implemented with little or no reference to realistic sector performance, Mr Boulton said.

“The information provided in the draft proposal still does not identify excessive profits across the industry. The lines sector has demonstrated responsible price constraint over the last five years, with average price remaining flat. The lines sector has also delivered improved reliability during the same period.

“The regulatory proposal is a hybrid scheme, the likes of which is not in use anywhere else in the world,” Mr Boulton said.

“A meltdown of the electricity infrastructure will not be in the best interests of consumers and the economy. Maintaining investment in electricity infrastructure is essential for the Government’s growth targets. By seeking the short-term gain of lower prices, the infrastructure will be run-down in the long term,” Mr Boulton said

Powerco’s submission notes that contrary to popular belief, the gains from the proposed regime for residential consumers will be minimal or non-existent. At the current rate of inflation the average benefit for consumers in the fifth year of the regime is only $2.50 per month.

“In addition, no cost benefit analysis has been conducted to determine whether the cost of the proposed regulatory regime will be less than this benefit. Powerco is encouraging a Regulatory Impact Study to be undertaken to ensure a balanced stakeholder approach, which meets the Governments economic targets.”

A report last month by PricewaterhouseCoopers noted that New Zealand lines companies have reduced their charges by a median of 12.6 per cent, in real terms, over the last six years and over the same period security of supply has improved.

"New Zealand’s lines charges are among the lowest in the world - despite low customer densities and pressures to maintain similar urban and rural line charges. Lines companies are confused as to why they are being singled out for heavy regulation."

The following are further key points from Powerco’s submission:

The Commerce Commission’s proposals do not acknowledge that the starting point for New Zealand electricity lines prices is lower than that in other countries, and has improved at an equivalent rate;

The regime will cause most companies to be in breach of the price threshold because of increased uncontrollable costs such as council rates, regulatory and insurance costs being imposed;

There are no incentives for investment or efficiency improvement. Indeed, the Commission has developed the concept of controlling excessive profit to overwhelm all else, at the absolute expense of creating incentives (let alone the “strong incentives” mandated by the legislation) for companies to perform well;

There will be capital flight from the sector (a fact already backed up by market reaction to the proposed regime). There are no overseas investors remaining in the sector. Yet encouraging overseas investment remains fundamental to the growth of the national economy.

Powerco will be providing a written submission to the Commerce Commission on its Decision Paper of 31 January 2003. Submissions are due on 28 February, and a conference will hear oral submissions on the matter from 10 March.

Powerco is New Zealand’s second largest lines company and the largest gas distribution company, based in the North Island, with more than 390,000 consumer connections and more than 30,000 kilometres of electricity lines and gas mains.

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