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The circle turns ­ regulations proposed again for utilities

By Peter V O'Brien

Friday 7th July 2000

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Share prices for utilities have held ground reasonably well after inquiries into the companies' activities. A draft report of the inquiry into the telecommunications industry was released last week, two weeks after the electricity inquiry report.

Telecom's price was the exception, falling steadily from last year's high of $9.66 as investment analysts revised their profit predictions downward and investors assessed the effects of competition on the company.

The group issued a statement to the Stock Exchange after release of the draft telecommunications inquiry report.

It said the company welcomed the emphasis on commercial resolution of industry issues.

Government and industry relations general manager Bruce Parkes said Telecom agreed with some aspects of the draft report but did not support others, particularly a draft recommendation in favour of establishing an electronic communications commissioner.

Mr Parkes said the proposal would be a "major step backward" for the industry and for customers who, in the current environment, could look forward to an "exciting future" of innovation in technologies and services.

He said overseas experience indicated that once a regulator was set up there was a strong tendency for industry players to stop focusing so much on customers and on finding commercial solutions when issues arose between them.

They tended to concentrate on arguing in front of the regulator, with customers "relegated to the sidelines."

Telecom looked forward to making another submission to the inquiry panel on the basis of a full analysis of the draft proposals and their likely impact on the industry.

Mr Parkes said there was plenty of evidence to show the current environment was generally working well for participants and for their customers. A strong focus on commercial negotiation and industry-wide principles on interconnection were the best way forward in telecommunications.

Some other interested parties will probably disagree with those views and make their disagreement known to the inquiry.

The report from the inquiry into the electricity industry recommended the establishment of an industry ombudsman to handle complaints from consumers and that the Commerce Commission develop a system for price control.

The system would be used to deal with particular companies if necessary but the report was generally in favour of the industry regulating itself.

The proposed regulation of the industry is nothing new. The Electricity Industry Reform Act-imposed split of line and business and energy retailing operations, including any generation interests, was supposed to produce lower power prices, as noted here on January 28.

Former energy minister Max Bradford attempted to get some form of price control but the act's intentions were unrealised. Mr Bradford's attempts failed because the then government could not produce a package acceptable to other political parties.

The problems facing power companies after introduction of the requirement to split businesses were summed up at the end of 1998 in the context of South Eastern Utilities' wholly owned subsidiary Wairarapa Electricity's decision to sell its lines and contracting business to Powerco, after earlier selling its retailing and generation business to Electricorp.

South Eastern said it was universally accepted that, without the economies of scale afforded by integrated line and energy company status which the act had forcibly removed, smaller energy companies lacked the critical mass to survive in the new energy environment.

The splits of the companies' various businesses showed up in profit results as the industry adjusted to the new regime. Things seem to have settled down.

Horizon Energy Distribution was the latest listed energy company to issue a report, in its case for the year ended March. Net profit was $5.96 million, compared with a loss of $5.93 million in the previous year.

Chairman Colin Holmes said the result was close to the directors' forecasts and reflected the more certain income stream achievable through the operation of a lines company where results were not subject to the volatile fluctuations of wholesale electricity prices.

Horizon earlier sold its retail and generation business to Todd Energy and Pacific Hydro. The latest profit included one-off interest revenue of $2.5 million on the proceeds of the sale of those businesses.

Horizon, formerly Bay of Plenty Electricity, had an abnormal loss of $1.59 million in 1999 arising from the sale. It revalued its generation assets in 1996 to reflect more accurately their value then, but electricity price expectations had since fallen and that was reflected in the price received for the generation assets.

Horizon's share price last week was an example of how the companies' sharemarket status has held up.

It was $7.25, well above the year's low of $6 but still about 10% under the high of $7.95.

United Networks was priced at $6.11, compared with the year's high and low of $6.30 and $5.60.

Trustpower was $3. The 2000 high was $5.08 and the low $2.65.

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