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Airports Report Could Mean More Uncertainty

7 August 2002

Airports Report Could Mean More Uncertainty For Electricity Industry

The Commerce Commission’s final report on its investigation into the country’s three largest airports, which was released yesterday, Could create more uncertainty for the electricity lines industry. Warren Moyes, Chairman of the Electricity Networks Association, says that the industry would once again be thrown into turmoil if the government’s current asset valuation rules were discarded by the Commission in favour of the historic cost approach it is now applying to the airports.

Warren Moyes says the possibility of the current Commission work-streams on electricity also taking on the flavour of the Airports report is a daunting one for an industry that is only now emerging from the confusion created by the 1998 Electricity Industry Reform Act. “Despite intensive scrutiny, and a certain amount of bad publicity caused by the antics of others in the industry, the electricity lines business retains widespread community support. Lines companies have behaved responsibly through some 15 years of often disruptive reform, and have funded the requirement to change from non-profit power boards to profit-making businesses entirely through efficiency gains. Line charges have dropped, and the quality of supply is continually being lifted to meet new demands. The last thing we need now is to be required to employ yet another wave of consultants to turn our books upside down. We’d really like to be allowed to at last concentrate on our core business, which is meeting the demands of consumers for cheap and efficient power line services.”

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“We are heartened by the views of some commentators that the Commission will find the most sensible valuation for each network industry it administers, and that the adoption of historic cost for airports is not setting a precedent that will bind it. However, we are concerned about the effort now being made by lobbyists to revive the myth that lines companies have artificially inflated their asset values. Basically, the old, non-profit world of power boards in the main grossly understated the value of the electricity supply business, with large parts of networks often unrecorded in their books. Corporatisation in the early 1990s, and the government requirement to use its so-called Optimised Deprival Value rules, meant that these sleeping assets suddenly appeared. However, it did not mean that line charges leapt up as a result.”

Last year the Government amended the Commerce Act to require the Commission to review the way each electricity distributor had applied the Optimised Deprival Value rules, which are published by the Ministry of Economic Development. Each lines company has been required to value its assets on this basis since 1994, and to disclose movements in asset value resulting from new investments and from factors such as lines growing older or becoming redundant. The review took place earlier this year, and resulted in the Commission agreeing that all but two small distributors (who had special local problems to deal with) had valuations that met the legal requirements.

“The move to commercial values in the 1990s meant that line companies had a realistic base to borrow against to fund needed expansions and equipment upgrades” Warren Moyes says. “It also meant that it became reasonably simple to compare the performance of the various companies, regardless of what they may have paid for their assets.”

As well as being concerned at the possibility of further disruption and costs, the lines industry has to contend with the impact of any major shift in valuation policies on its ability to raise funds at favourable rates, at least in the short term. While the official Optimised Deprival Value takes no account of factors such as human resources and managerial efficiency, the prospect of a complete turnaround in the valuation rules would create new uncertainties for investors and for bankers.

Following on from its Airports work, the Commerce Commission is now undertaking two other electricity industry roles that were passed to it in last year’s reforms: reviewing the appropriateness of the Optimised Deprival Value rules compared with other options, and devising some sort of trigger mechanism so that a lines business that exceeds imposed guidelines will be considered for immediate price control.


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