Between the lines: Electric shock in store for minister

While Energy Minister Pete Hodgson suns himself in Vanuatu, a couple of Wellington economists, Simon Terry and Geoff Bertram, have lobbed a grenade into his portfolio.

Their analysis challenges, subverts even, what has become de facto the basis on which electricity line companies set their charges.

Not to put too fine a point on it, they shine a light on a built-in ripoff in the system.

It is called ODV, the peculiarly New Zealand practice of valuing electricity networks based on replacement cost, rather than historic cost.

With a rate-of-return approach, however informal, to limiting the monopoly rents of line companies, the suggestion that the basis on which they are valued is dodgy is a pretty fundamental criticism, and needs to be taken most seriously.

The Terry and Bertram conclusions are based on an arduous process (undertaken pro bono publico) of distilling useful information from the stacks of public disclosures that have passed for a regulatory regime in recent years.

The Government's dilemma is that if it agrees with them and moves to remedy the situation, it risks laying itself open to the charge that it is fundamentally altering the rules of the game on the basis of which foreign investment has flowed into the sector, especially from UnitedNetworks' parent in Kansas City, Missouri.

Given a chasm of a current account deficit and the fact that international investors are inclined to look at the Government through squinty eyes at the moment, it may be reluctant to do anything about it.

So far, Mr Hodgson has kept his own counsel on what he will do about the recommendations of the Caygill inquiry, which reported last month.

He is expected to announce the Government's response early in August.

On line charges, the Caygill committee implicitly accepts the ODV methodology, in recommending that the Commerce Commission "undertake a once and only recalibration of ODVs by all distribution companies and Transpower, using a common and specific basis."

While that may bring some consistency to what is a notoriously elastic way of valuing line company assets, it would put a ratchet under a methodology which jurisdictions like the United States and Britain will not have a bar of.

The Caygill report also recommends that the pricing methodology for the national grid and at least for trust-owned line companies be the responsibility of an industry-elected board, with the commission's price control powers essentially a backstop.

Given that we are talking about natural monopolies here, that is taking self-regulation and light-handedness too far.

The lack of any regime for regulating the monopoly side of the industry (accounting for half the residential consumer's bill) was a glaring omission from Max Bradford's otherwise pretty creditable electricity reforms.

It would be a shame if this Government ducks the issue too.