Lines companies face new curbs on excess profits

By CHRIS DANIELS

A new concept for regulating New Zealand's electricity lines companies has been unveiled by the Commerce Commission.

The 30 lines companies, such as United Networks and Vector, are often accused by consumers and power retailers of making monopolistic profits, because they face no competition in their exclusive areas.

State-owned enterprise Transpower, which owns and runs the national grid, is also about to fall under the commission's new regulatory concept unveiled in a discussion document yesterday.

The three state-owned electricity companies, together with Transpower, yesterday tabled in Parliament their half-year results to the end of last year. All were in profit, with Government coffers receiving $106.4 million in combined interim dividends.

The commission's discussion paper outlined a system it thinks will allow companies the freedom to run their businesses and be efficient, but discourage excess profit-taking.

Though not yet official policy, yesterday's publication shows the commission has decided against blanket price controls or widespread regulation.

It prefers a system of thresholds, under which companies that operate within stated guidelines will be left alone.

The commission hopes such a targeted system will catch wrongdoers, but provide enough incentive for investment and innovation in what it describes as a critical part of the electricity grid.

Chairman John Belgrave said it was important that lines companies were able to keep some of the rewards of running their businesses well.

"If companies become more efficient, then in principle the company is entitled to some of the rewards, as is the consumer. The trick will be to get that judgment right," he said.

Four options have been presented by the commission for discussion. They involve combinations of these thresholds:

* An "efficiency threshold" would mean the prices charged by the lines companies could not exceed an industry-wide "price path" determined by the commission.

This would be reset by the commission at regular intervals and be based on the existing prices of each business. The companies also would be required to take part in a benchmarking exercise every few years.

"A business would breach the efficiency threshold if its price exceeds the price path and is shown to be inefficient in the benchmarking study."

* A "profit threshold", which means if a lines company's return on investment exceeded the weighted average cost of capital plus a margin, it would have to show the commission that the excess came from efficiency gains or some risky investments.

* A "sharing threshold", meaning that when the commission sets a new price path every few years it would require the lines companies to gradually share any excess profits with consumers. The "sharing factor" would be specific for each business and could be an improvement in quality and/or a decrease in price.

* A "quality threshold" would allow the commission to work out whether a lines business had provided goods or services at a quality that "reflects consumer preferences". Surveys of consumers would be used to gauge whether the businesses were trying to provide what they want.

Option one proposes the setting of the efficiency and quality thresholds only; option two proposes the setting of the efficiency, sharing and quality thresholds only; and option three proposes the setting of all thresholds (efficiency, profit, sharing and quality thresholds).

The fourth option proposes the setting of all thresholds (efficiency, profit, sharing and quality). But the efficiency threshold would be limited to benchmarking, meaning it would not include the price path system.

Sanctions available to the commission would include price caps.

The deadline for written submissions on the discussion paper is May 17. A public conference on the proposals is planned for July.

The discussion document does not cover the Commerce Commission's investigation into the methods used by lines companies to value assets, which is being run separately.