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Opinion: Electricity investment uncertainty after mixed messages

By Michael Daly of NZPA

Friday 11th August 2006

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On Monday the Government cheered the electricity industry with what appeared to be a clear lead about the importance of improving the country's power infrastructure.

But within two days the Commerce Commission had let in a chill wind as it revealed it was eyeing the introduction of price controls on the country's biggest lines company, Vector.

The astounding timing of the two announcements led to plenty of head shaking and warnings that infrastructure projects were in jeopardy.

On Monday, shareholders celebrated the new government policy that regulation of Vector seemed off the agenda by pushing Vector shares up nearly 10% to $2.65. But that, and more, was wiped off after the commission decision.

"What on earth is going on, is all you can say," said Alan Jenkins, chief executive of the Electricity Networks Association, which represents 24 electricity distributors.

Energy Minister David Parker and Commerce Minister Lianne Dalziel, who made Monday's policy statement, gave no clue about what was going on, saying it would be inappropriate to comment as the commission was independent.

On Monday, there had been no such reluctance with the ministers saying the new policy would encourage investment in infrastructure.

"It follows record electricity demand on the grid, a significant transmission outage in Auckland and delays in decisions on Transpower's proposed new line into Auckland," they said.

The new policy designed to encourage investment said one way to achieve that was by having regulated rates of return that were commercially realistic.

Another was by having regulatory stability, transparency and certainty giving businesses the confidence to make long-life investments.

Commission chairwoman Paula Rebstock said full regard was given to the new policy statement before publishing its intention to declare control of Vector's electricity distribution services.

But Vector chief executive Mark Franklin doubted that, saying if it had been the case there would have been extensive discussions.

"There have been none. The commission only had one full day after the Government issued the statement to take it into account. That is not adequate."

And he warned that investment decisions Vector had put on its board's agenda after the Government's announcement were in "serious jeopardy" because of the uncertainty created by the commission's actions.

He identified one of the jeopardised projects as a large gas pipeline through the middle of Auckland that could supply a power station planned for the Kaipara Harbour.

But Rebstock was not buying that argument.

If consumers did not have fair and efficient prices they would make inappropriate decisions about how much energy to use and where to use it, she said.

Vector itself would also not be able to make appropriate investment decisions.

Being able to earn a 54% return from some large commercial customers meant Vector, which supplied a third of the country's line services, did not have to invest to improve its return, she said.

"It really skews the investment incentives for Vector. But probably more importantly they're providing services to companies that compete in competitive markets who cannot pass their costs on," she said.

"Infrastructure is absolutely critical to the competitiveness of the New Zealand economy and what we are seeing here is a gross abuse of market power against large sections of the productive sector."

The Electricity Networks Association's Jenkins said commission's move on Vector created uncertainty about investment.

"It's enormously disruptive," he said.

"This has really come out of the blue. I would have thought it would have made a lot of sense to have a very frank discussion with the industry, well in advance of the intention to declare control," Jenkins said.

"It just seemed completely the sort of surprise shot that businesses don't need."

The commission's action appeared to indicate an increasing focus on the mechanics of how companies handled their businesses within price thresholds set by the commission.

"Until some principles are made clear on that it's enormously hard for anyone to make big decisions on investment or anything else," he said.

"The big factor in it all is the uncertainty. If they (lines companies) know what they're going to be allowed to have they can invest with confidence."

Jenkins pointed out that the statement accompanying the Government's announcement on Monday was headed "Government improves the investment regime for transmission and distribution".

"Just like that there seemed to be a collective sigh of relief, and people felt we can make some clear decisions without the risk of the unknown from the regulatory regime," Jenkins said.

Among those risks was a review of price and quality thresholds set by the commission in 2009. Monday's statement appeared to indicate lines companies would get early warning of what was involved and it would not be a threat, he said.

Having that followed two days later by the Vector announcement was enormously confusing.

"I think it's the worst of it, the timing issue. What on earth is going on, is all you can say," Jenkins said.

"If you're sitting here and you see the commission saying, `we don't like how much Vector's earning' and you know that the reset's coming, you've got an awful lot to worry about before you sink any serious money in your business."

The commission has two main complaints about Vector -- that it is overcharging some customers and undercharging others, and it is making excessive profits.

The commission estimated Vector, which is to release its annual results on Monday, will earn excessive profits of between $13m and $75m in each of the next two years.

For Vector to return profits to normal, the commission estimated the company needed to reduce charges between 2% and 11% for each of those years.

The commission reckoned Auckland residential customers were giving Vector a 1.3% return on investment as at the start of April 2005 against 43.6% from some large businesses.

Vector's overall target return was 8.4%, after tax, broken down into 7.4% from residential customers and 10% from industrial and commercial consumers.

The commission said a reasonable return would be around 7.35%.

Vector said it rejected the suggestion it was earning excessive revenues, and that its overall rate of return for its electricity lines business in the year to March 2007 was forecast to be 8.2%.

The company also said it was on track to meet a commission target of correcting pricing differentials by 2009, having started on a programme to do so two years ago.

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