KEY POINTS:
When a regulator locks horns with a monopoly infrastructure company, as the Commerce Commission and Vector did last year, do you: A) Regard the regulator as the consumers' champion and cheer it on, or; B) Feel like a helpless bystander whose only role is to pay for whatever
the eventual outcome is?
If B is more likely, you may be attracted to an idea floated by Professor Stephen Littlechild at a recent policy forum hosted, as it happens, by Vector. Littlechild headed Britain's electricity regulator between 1989 and 1998.
The idea adopted in some North American jurisdictions is that prices should, if possible, be negotiated between utilities and their customers.
The Australian Competition and Consumer Commission's negotiation and arbitration model embodies a similar approach.
"There is a lot of scope for negotiating commercial outcomes, with a bit of guidance [from the regulator]," ACCC commissioner Ed Willett told the same gathering.
The proposition is that, where possible, the price of a service is agreed between those who provide it and those who have to pay for it.
Under this model the regulator is a back-stop - it has to approve the negotiated settlement and can step in if negotiations fail.
Littlechild said a regulator was likely to take a one-size-fits-all approach but a negotiated settlement should be more responsive to local user needs, more flexible and innovative.
"In Florida they achieved significant rate reductions."
Clearly the consumer side of the negotiation has to be truly representative, especially as different electricity consumer groups may have different interests.
"Everyone ought to know it is going on and be able to participate. All the main parties need to be represented," Littlechild said. "But so long as there is substantial agreement between the parties, regulators should take the view that that is a fair representation of the public interest."
One of the main bones of contention between the Commerce Commission and Vector was the relative treatment of different groups of its consumers.
The regulator felt the company was not moving fast enough to unwind inherited historical cross-subsidies between commercial and residential consumers or regions.
Perhaps if those interests had been fairly represented in a negotiated deal the commission would have been more relaxed.
On the other hand setting up a representative consumer body might just create another forum for dissension and delay.
The potential for delay at the beginning of the process would become more problematic still if additional delay became possible at the end. That could be the outcome if the review of the Commerce Act decided the regulator's decisions should be subject to merits review, or appeal to the courts over the substance of the decision and not just matters of law and process.
Another obvious potential difficulty is the disparity in information and expertise between a lines company and its customers.
For example a key element of any tariff setting is likely to concern what an appropriate weighted average cost of capital (WACC) is.
If an electricity distributor's profits stray too far from that in one direction it is likely to be collecting monopoly rents. Too far in the other direction is a recipe for underinvestment and the lights eventually going out.
But drilling down into the components of WACC, getting bogged down in discussions about asset betas and market risk premiums, would make sensible people clap their hands over their ears and run from the room.
It is likely the regulator would need to give the negotiating parties some guidance on what it would regard as a reasonable WACC.
In Canada, Littlechild said, a generic decision from the regulator on the cost of capital took a major issue of dissension off the table, allowing users and companies to concentrate on other things.
"There is still room for trading - better service perhaps for an extra 0.25 per cent on the cost of capital," Littlechild said.
An advantage of the negotiation model is that it makes trade-offs, whether between one group of consumers and another or between quality (reliability) and price, more transparent. But there is still the need to have somebody or some body to balance the interests of present and future consumers, especially for investments with an intergenerational lifespan.
Whether you look at the state of our roads or the state of Telecom's networks, the broader economic costs of short-term pennypinching in infrastructure investment are all too clear.
But equally the Commerce Commission has been a staunch defender of the principle that today's consumers should not pay for tomorrow's investment.
There is also an issue of scale. Arrangements that work for a US state or a Canadian province might not scale down to a region the size of Buller or Northland.
Most of New Zealand's line companies are owned by elected consumer trusts, a legacy of the days when distributing electricity was a function of local government.
Even Vector, though a public listed company, is majority-owned by a trust representing some of its consumers (an inherently problematic governance structure).
On the face of it, then, there would be a kind of absurdity in having a negotiation between a lines company owned by a consumer trust and another body representing the same consumers.
"Is it necessary to regulate the trust-owned ones?" Littlechild asked. "Even the largest network [Vector] is the size of the smallest one in the UK."
Alternatively, a robust model for negotiated settlements between lines companies and consumer representatives might pave the way for consolidation of the sector.
It would be hard to argue there is no avoidable duplication in having 24 lines companies.
Consolidation is not necessarily a recipe for privatisation. There was a period when all the local savings banks, save ASB, merged to from Trust Bank, which was collectively owned by local trusts in proportion to their size.
Lines companies no longer have much direct interaction with end consumers, except perhaps when storms bring the lines down. Even though distribution lines charges make up about 30 per cent of a residential consumer's bill, the bill gets presented by electricity retailers, not lines companies.
Although plenty of fish-hooks are apparent, a structure that compels lines companies to negotiate prices with consumers, rather than doing what they think the regulator will let them get away with, is worth considering.
