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Regulator brings back price control

By Graeme Hunt

Friday 21st March 2003

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The country's second-largest power distributor warned yesterday it would charge new industrial and commercial customers for access to its network and upgrades unless the Commerce Commission withdrew plans to peg its profits.

New Plymouth-based Powerco said it would impose the new charging regime from April 1 because it would be unable to carry the costs of industrial/commercial access and upgrades when its prices and profit margins were controlled.

The threat, the latest turn in Powerco's battle with the regulator, was issued by chief executive Steven Boulton, who accused the commission of applying unrealistic profit models to his business with the potential to derail it.

He said Powerco's share price ­ $1.27 yesterday ­ had slumped from $1.60 before Christmas after the commission made public its draft determination to curb Powerco's potential for profiteering. The commission made use of the controversial part 4(a) of the Commerce Act, passed last year to allow the regulator to impose "targeted price control" on monopolies it considered capable of profiteering.

Under the new law the commission does not have to produce evidence of profiteering, just evidence of the potential for profiteering where "incentives" exist that might lead to excessive profits.

It is due to produce its final determination on lines companies on March 31 and Powerco expects to be hit hard.

Once a small energy company made up mainly of former Taranaki power boards, Powerco is the country's largest gas distributor and became the second-largest electricity distributor last year when it doubled its customer base by acquiring Eastern Electricity and Central Gas from United Networks, giving it distribution across the central and southern North Island for the first time. It now has about 300,000 power customers and 100,000 gas customers but, in common with other lines companies, is banned from selling to customers directly ­ a result National's reform of the energy sector in 1999.

Mr Boulton said the commission's final determination on March 31 would be challenged by judicial review because its reasoning and theoretical profit models were flawed.

"There is no way we would be regulated overseas," he said, adding the commission was being driven by someone with a "fundamental view" on profiteering.

He said Powerco would not deny access to new customers and domestic customers would not have to pay for access.

"[Industrial and commercial customers] will have to pay the upgrade. We are not prepared to carry the capital cost when the commission tells us what our return will be."

Mr Boulton said New Zealand had among the cheapest industrial and residential power prices in the world and the largest component of the unit power price came from electricity retailers.

Indeed, since the split between lines and retail companies in 1999, the retail share of the unit power price across Powerco's networks had risen from 42% to 51% of the unit price while the lines company share had fallen from 46% to 38%.

Ratings agency Standard & Poor's added its concern that an "overly harsh" final determination from the Commerce Commission could result in rating downgrades, not just for Powerco but possibly also for Vector and Transpower New Zealand as well.

"Regulatory decisions have the potential to affect not only the credit quality of the companies affected but the attractiveness of the industry from an investment perspective," Standard & Poor's warned last month.

For Powerco there is an even more pressing problem closer to home. The company posted a tax-paid profit of nearly $33 million in 2002, resulting in a hefty dividend for its dominant shareholder (38.2%), New Plymouth District Council.

If the dividend was reduced by price control, deputy mayor Lynn Bublitz warned, New Plymouth citizens could face a rate increase.

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