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Cautious Welcome For Valuation Review

Cautious Welcome For Valuation Review

Powerco, today welcomed some aspects of the Commerce Commission’s approach to electricity lines business valuation, as outlined in a Discussion Paper released by the Commission this morning.

Powerco Chief Executive, Steven Boulton, said he was particularly pleased to see that the Commission had seriously taken account of Powerco’s submissions that the valuation and price control workstreams be integrated.

“We have argued that given the interdependence of these matters, and the integrated nature of the industry itself, keeping the valuation and price control workstreams separate was inappropriate. We’re pleased that the Commission has accepted this argument and integrated them,” Mr Boulton said.

Mr Boulton said Powerco agreed with a number of other matters raised in the Discussion Paper.

“Given the importance of these decisions to the sector, to consumers and to other stakeholders, we support the Commission’s decision to take a considered and deliberate approach to this matter. To this end, we believe they are wise not to identify one recommended option at this stage. We also welcome their decision to consult more and to take more time over the process.

“We also agree with the Commission’s decision to take an industry specific approach to asset valuation, and their view that this does not automatically link to other decisions such as the recent airport and telecommunications valuation announcements.

Mr Boulton said Powerco did not agree with the Commission’s preference for a cost-based approach to determining the regulatory asset base.

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“The trouble with these continuous regulatory reviews is that they’re driven by theoretical concepts that have very little to do with running a real business, with real commercial and consumer issues, that are faced daily by businesses operating in the real world.

“In our view, the cost-based approach overlooks other asset-related investments that make up value of a utility business. In our business, we’re talking about such things as property easements, detailed data and information about each asset, IT infrastructure systems, customer data and related information, valid contracts with customers, intellectual property and so on.

“The present theoretical cost-based approach is seriously deficient in these areas, yet the investments are substantial in value, because of their linkage to the physical assets.

“Without these related investments, the assets of an entity in the distribution sector are nothing more than timber, concrete, steel, copper and aluminum.

“Who could run an electricity lines business that consisted of just poles and wires? You would have no contracted customers to earn revenue, no knowledge of asset condition, no asset related information to plan your capital and operating expenditure, no legal right to have your assets on property, no information about customers from which to provide service, and certainly no systems or information with which to plan your investments or restore supply in emergency conditions.

“ODV relates to the physical assets of a business. It is inconceivable that anyone could justify valuing a business on its physical assets alone. This is why you see companies pay more than the ODV when they purchase assets, because the ODV valuation method on its own simply doesn’t represent the full value of the business. Companies buy total businesses – not just timber, concrete and steel etc. ODV is nothing more than a bricks and mortar approach.”

Mr Boulton said he was pleased to see that the Commerce Commission recognised that regulatory controls carried a cost for consumers.

“Powerco has long argued that any regulatory mechanism put in place needs to ensure it delivers real benefit to consumers in the long term, without creating unnecessary costs. It is pleasing to see the Commission’s intention to adopt cost effectiveness as an evaluation criteria for any regulatory regime, particularly given that the costs of overseas regimes are clearly prohibitive.

“In the electricity lines sector, New Zealand is already performing at or near international best practice.

“Powerco has a strong history of maintaining stable prices and quality power supply for consumers. In real terms, our average residential line charges have decreased by approximately 10% in the past five years. During this same period the retailers’ charges for energy have increased by up to 55% in some areas. Yet the retail part of the sector is under no pressure of regulation at all. New Zealand is virtually the only in the world that has not regulated the electricity energy retail sector.

“Powerco remains committed to a balanced stakeholder approach. Continuing to provide stable prices and service to consumers, operating efficiently and delivering fair returns for our shareholders remains Powerco’s primary focus.”

Powerco intends to put forward a robust, detailed, and economically sustainable proposal to the Commerce Commission on asset valuation. This approach will clearly support an asset valuation methodology that reflects total business value – not just a theoretical ODV approach or the simplistic but deficient cost based approach as indicated in the Commerce Commission’s discussion paper.

Powerco is New Zealand’s third largest electricity and gas utility with around 205,000 customer connections. Powerco has networks in Taranaki, Wanganui, Manawatu, Wairarapa and Wellington with an asset base approaching $875m.

Following the purchase of UNL assets, Powerco will serve around 400,000 consumers, with electricity networks extending to the Tauranga and Thames-Coromandel, Eastern and Southern Waikato regions, and gas networks extending to Wellington, Hawkes Bay, Horowhenua and Manawatu.

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