Commission seeks help on electricity line valuation

By CHRIS DANIELS

The Commerce Commission has set out its timetable for the electricity lines business to come under a formal regime of Government control.

In a discussion paper released yesterday, the commission for the first time brought together two strands of its investigation into regulating the electricity lines sector - the controversial issue of how assets are valued and a new "threshold" method of discouraging monopolist impulses.

In outlining the pros and cons of the different methods of valuing powerlines, the commission has not come down in favour of one option it wants to use, but has asked for submissions on which it should endorse.

Powerlines companies, as natural monopolies, have been accused of overvaluing assets, and so making excessive profits appear as reasonable returns on investment.

Peter Alsop, manager of network performance at the commission, said that one valuation method would eventually have to be settled on, whether it be historic or replacement valuation.

Opponents of the industry practice of valuing monopoly assets on a replacement, or Optimised Deprival Value (ODV) basis, rather than historic cost, include economist Simon Terry.

He says using the ODV method allows network owners to earn high returns on money never invested and has estimated these returns at more than $200 million a year.

ODV opponents took heart from a Commerce Commission decision in August to opt for historic cost valuation when looking at airport landing charges.

In a split decision, the commission found that Auckland Airport had been unfairly earning $4 million a year from landing charges levied on airlines.

Alsop yesterday said that the airport decision should not be seen as any indication that the commission was favouring a historical basis for valuing a monopoly's assets.

"The commission notes that consistency in asset valuation or the approach to asset valuation across sectors is generally a good principle, though there may be a legitimate reason, either statutory or industry specific reasons, that may lead you to take a different approach," he said.

It is possible the commission may decide that lines companies can base an "opening valuation" on the ODV method, but use a historic system on an ongoing basis.

ODV has been used in the electricity industry since 1991 and all the lines companies have been required to undertake and disclose periodic ODV valuations of their system fixed assets.

This is part of a Government-ordered information disclosure regime, designed to highlight whether the lines companies are making excessive profits.

The fact that all lines companies had used ODV since 1994 for the disclosure requirements "may have validated that approach for pricing purposes in the minds of some parties", says yesterday's discussion paper.

The commission has also been given the task of deciding what should trigger price control of a lines company and how it can protect customers from price gouging, while allowing companies to earn the benefit of cutting costs and making technological innovations.

The lines company soon to become the largest, once it has bought neighbouring UnitedNetworks, Auckland-based Vector, has already signalled its opposition to a threshold system of regulation.

Its chief executive, Patrick Strange, has previously criticised any system based solely on business inputs, such as its cost of capital.

He argues that any thresholds for control should be based on comparative performance in the things that matter to consumers, namely price and service.

Customers should drive any regulatory regime and there was no real groundswell of dissatisfaction among them, says Strange.

The thresholds - relating to excess profits, customer satisfaction, efficiency and the sharing of gains - are designed to allow businesses to operate relatively unfettered.

The commission will release its decisions on how to design the thresholds and what it feels is the best valuation methodology by the end of December.