Community-owned electricity networks face technology risk

Community-owned electricity networks at major risk from new technology, says English

By Pattrick Smellie and Suze Metherell

July 23 (BusinessDesk) - Communities that believe their locally owned electricity networks will remain as valuable as they are today risk discovering they are not worth nearly as much when new electricity technologies start replacing traditional methods of distribution, Finance Minister Bill English says.

His comments came as the chair of the Commerce Commission, Mark Berry, said the commission will look hard at emerging electricity generation technologies that could reduce and perhaps replace existing networks as part of its review of the regime that controls pricing by regulated monopolies.

"Community-owned monopoly lines companies now represent significant commercial risk and that’s not quite how they see their role," said English. Emerging technologies had the capacity to destroy community wealth, where network companies remained community-owned. New Zealand has some 29 regional electricity network operators, the majority owned at least in part by community trusts and local governments.

"These entities are believed by their communities to be the holders of significant community wealth," English said in his opening speech to the commission's annual Competition Matters conference. "Now the risk to that value is high. The government knows about this, because we own a whole lot of assets whose value is being destroyed by competition and technology. That’s slightly unfortunate, but we own a rail company, a mail company, free to air broadcasters – it’s not hard to imagine before too long they’re going to be relics of a bygone age.

Berry told the conference there would need to be consideration of "the impact on network businesses we regulate through things such as solar photovoltaics, battery technology, electric vehicles and smart grids", which "could potentially be significant."

"While the uptake of these technologies is small, it is growing quickly," said Berry. "We do not yet have a clear understanding of all the specific challenges and issues that may result from a future environment, but it is clear there will be challenges for regulated networks as well as for generators and retailers (of electricity)."

"We need to strike an appropriate balance between making changes to the regime that are needed to keep the regime relevant whilst maintaining regulatory predictability."

The commission intends to complete its statutory review of the methodology for determining the input prices used to calculate regulated rates of return for network monopolies by the end of next year, a year earlier than required. The reviews are required at least every seven years and the last one became mired in court challenges that were resolved only late last year.

One of the prime movers in the objections to the outcomes of the last review was Vector, the Auckland electricity and gas network owner, which continues to argue that current regulatory settings do not allow sufficient return on investment in capital-hungry network assets to ensure sufficient reliability and modernisation. The advent of economically viable off-grid options such as home-mounted solar electricity production backed up by batteries, and consumers' expectation of being able to sell excess electricity back into the national grid can be expected to add to those pressures for existing regional electricity network owners and the national electricity grid owner, Transpower.

"The questions that are arising include what the risks are around stranded assets, how these risks need to be balanced between businesses and consumers and what, if any, mechanisms can be set up to accommodate rapid change," said Berry. "No foreign regulatory body has attempted - yet - to resolve these challenges."

The commission would engage not only with existing industry players but with those producing the emerging technologies as it considers the issues.

Also covered by the review are input pricing methodologies for gas networks, ports and airports.

The conference will also hear presentations on emerging regulatory issues relating to competition between unregulated mobile and regulated fixed-line telecommunications networks.

(BusinessDesk)

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