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No Surprises In Gas Pipeline Pricing Inquiry

Wednesday 6 November 2002

No Surprises In Gas Pipeline Pricing Inquiry: Powerco

The announcement of a Commerce Commission inquiry into gas pipeline pricing should come as no surprise to the industry, Powerco Chief Executive Steven Boulton said.

Mr. Boulton was commenting on the announcement, which as part of a wider policy package for the sector, followed a review and public consultation undertaken last year.

Mr. Boulton said Powerco had factored the likely effects of possible gas regulatory changes into much of its analysis and decision-making, including its latest acquisitions. Powerco’s view on the possible gas regulatory changes was that it would have no material impact on the forecasts announced in the recent Investment Statement and Prospectus.

He said that the company had already been involved in some aspects of the consultation process. “Whilst we are not surprised with the announcement, or the content, we continue to disagree with the basic theoretical arguments, assumptions and beliefs that sit behind the position taken with the announcements,” Mr. Boulton said.

“We will be providing direct, constructive and evidence-driven feedback to the various participants about the fundamental flaws with this current approach.

“Economic theories, assumptions and beliefs do not build gas networks, and it is clear that encouragement should be provided to companies to grow consumers’ access to gas connections – not have brickwalls built.

“Intrusive regulation, however, is not something we believe is the right outcome nor a likely outcome of a gas inquiry, considering the fact that domestic consumers account for around 2.5 % of total gas consumption.

Most gas consumption is not supplied through distribution networks. On the contrary, generators and major industries are the large users of gas, and these users directly negotiate their own prices and contracts. The Government has recognised the problems of transmission access and supply do not lie with distribution networks.

Regulation of distribution companies would have an unnecessary impact on consumers particularly given that gas is an elective energy option where less than one in eight New Zealand consumers currently have access to both electricity and gas. This clearly suggests that regulation should be more concerned about encouraging additional investment than regulating existing assets.

Mr. Boulton said that last year, when Australian consulting firm ACIL released its review of the sector, Powerco commented that some fine-tuning of the gas industry was desirable, but that intrusive regulation was not the answer.

“We still believe that intrusive regulation would be like using a sledgehammer to crack a walnut, “ Mr. Boulton said.

“Even international regulators are starting to agree. Powerco has been visited by both international regulators and government officials investigating which regimes operate most effectively, and they are looking to New Zealand’s current regime as an example to follow,” he said.

“Gas is an alternative fuel of choice for domestic consumers and therefore must be, and is, competitively priced to compete with electricity, Mr Boulton said.
Powerco’s own practices are an example of how the current regime acts in the best interests of consumers. For example Powerco:

- Already uses the ODV methodology to value its gas assets.
- Already practices an open access regime on all its distribution pipelines and has Use of System agreements in place.
- Has successful operating procedures for handling consumer switching, and systems to handle consumer complaints, and is a member of the Electricity Complaints Commission.
- Is contributing at the highest level to the industry initiative to establish a sector-wide gas self-governance regime.
- Is already operating at international best practice levels.

An international benchmarking survey conducted by independent consultants in June 2001, Powerco’s performance was measured against other distributors in New Zealand and Australia. Amongst other outcomes, it found that Powerco was the best performer of the group in network costs, consumer service levels and reliability.

“The industry is already performing competitively, successfully and reliability, and New Zealand should not fall into the trap of believing that intrusive regulation is the answer to all ills,” Mr. Boulton said.


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