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Over-regulation a factor in US, UK blackouts

Over-regulation a factor in US, UK blackouts

The Chief Executive of Powerco, Steven Boulton, today said New Zealand must learn from recent blackouts in the US and the UK that onerous regulation which commercially straight-jackets electricity network companies will lead to network failure.

Mr Boulton said countries that had taken the easy regulatory option of capturing the sunk capital of network firms were now realising some of the unintended but perverse consequences of squeezing money from the sector.

"The lesson from the US and UK blackouts is that heavy regulation will end up costing that nation more than it saves.

"New Zealand's electricity network was largely rolled out in the 1960's and 1970's and is fast reaching the end of its useful life. Man first walked on the moon when large chunks of investments were made in the sector.

"Unless there is encouragement to make major upgrades and new investments in the electricity network to meet increasing demands and to support infrastructure demand as we move from the machinery age to the digital age, New Zealand will inevitable suffer similar kinds of failures and blackouts," Mr Boulton said

Time Magazine reported this week that in the US "no one was requiring the utilities to upgrade the grid, and utilities were worried that if they did it voluntarily, they might not be allowed to charge enough to make their money back."

In the UK, Professor Ian Fells, an adviser to the British Government and the World Energy Council, said electricity prices had been driven down so much that energy companies were not making profits to invest back into the system.

Mr Boulton said that in the intrusive overseas regimes the only safety valves for companies was to reduce maintenance and capital replacement programs. The effect was a destabilising of the supply network capability.

"Firms use these safety valves as their revenues have been squeezed by regulators largely on the basis of theoretical analysis. A costly way to learn that theory and practice are not happy partners."

"From 10-15 years of overseas experience one lesson seems clear - we can choose to head down the path of regulation or we can choose to encourage infrastructure investment and maintenance - but we can't have both," Mr Boulton said.

He said the US and UK blackouts had been low probability events but carried an extremely high cost.

"Every business that needs a reliable electricity supply will know the commercial consequences of a sudden and sustained blackout. Non-economic and safety related costs and consequences will be incalculable.

"The blackouts raise the issue of the cost/benefit relationship with regulation. Overseas countries have been exposed to these risky scenarios following 10-15 years of intrusive regulation. New Zealand is in the process of introducing regulatory regimes in both the electricity and gas sectors.

"I implore our Government and regulators to take a careful and close look at the causal factors that have led to these scenarios overseas.

"We will either make the smart play and introduce a regulatory scheme that errs on the side of encouraging investment or we will simply follow the lead from overseas - which is where we seem to be heading without having completed the necessary analysis to look at investment requirements set by the commercial investors who could be attracted to the lines sector," he said.

The Commerce Commission in New Zealand is currently working out how to establish a price setting regime which could end up being similar to those that analysts in the US and UK are saying caused the blackouts. Much of the discussion papers produced thus far reference the regulatory schemes from overseas - or at least utilize the same principles.

New Zealand lines companies are feverishly working to provide the Commission with the necessary information to avoid the overseas debacles. The importance of providing companies with sufficient capital investment and maintenance incentives is becoming critical as well as the need for regulatory certainty - the investment community will demand this to provide low cost capital.

Lines companies remain hopeful that the Commission will take heed of overseas experience and the input of the business community to avoid New Zealand having the same catastrophes.

Mr Boulton said the irony was that New Zealand currently enjoys among the lowest electricity lines charges in the OECD, and these prices have reduced by 12.6 per cent over the last six years.

"New Zealand consumers are enjoying world class performance from electricity lines companies but this cannot continue if companies are disincentivised from maintaining and investing in their assets, and receiving commercial returns on fairly valued asset bases.

"Regulation will always take a theoretical perspective and err on the side of forcing prices down - we simply cannot afford the consequences of taking such short term regulatory views when companies have to make asset investment decisions where assets last 30-40 years. The balance is missing when regulators can take a 1 to 5 year pricing decision but companies have to make long-term investments.

"We cannot afford to ignore the stark lessons we have recently seen abroad," he said. We remain confident that given the right information and a national economic interest perspective from the Commerce Commission that we will end up with a regulatory environment that encourages investment in much needed national infrastructure.

Powerco is a publicly listed company, listing on the NZSE in December 2000 and on the NZSE40 index on December 2, 2002. Powerco is New Zealand's second largest electricity lines company, with 290,000 electricity consumer connections in the North Island and the largest gas distribution company with 100,000 consumer connections.

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