Watchdog on guard despite cost-cutting by power companies

By CHRIS DANIELS

New Zealand's monopoly power lines companies have been cutting costs and reducing prices, but Commerce Commission regulation is coming regardless.

The price and cost-cutting has been revealed by accountancy firm PricewaterhouseCoopers, which each year publishes a compendium of all the information lines companies legally have to disclose.

Its latest compendium, published this week, shows that in the year ended March 31, 2002, network tariffs dropped by an average of 0.5 per cent, but the median price had dropped by 8.3 per cent. The larger median drop reflects big price cuts by a small number of companies.

Total direct and indirect costs incurred by the companies running their networks dropped by around 2 per cent.

Over the past six years, the median revenue from lines charges has dropped 12.6 per cent, and their costs have dropped by 37 per cent, most of this coming after 1997. Network reliability has also increased, with one measurement of interruption frequency dropping 28 per cent.

The figures raise interesting questions for competition regulator the Commerce Commission, which is about to impose thresholds on lines companies, requiring they reduce prices by either 1 per cent, 3 per cent or 5 per cent a year, once inflation has been taken into account.

All the trends shown, says PricewaterhouseCoopers, as well as last year's median return on investment of 4.2 per cent, show that on average the industry has made "considerable gains in efficiency without generating excessive profits through excessive prices under the light-handed disclosure regime".

The commission says companies that have been performing poorly would face a higher percentage figure by which they have to reduce their prices.

PricewaterhouseCoopers partner Craig Rice said it was not clear exactly which company would have either the 1 per cent, 3 per cent or 5 per cent factor applied to them.

He said he expected most of the industry would fall into the 3 per cent category, with a small number in the 1 per cent and 5 per cent categories.

Rice said the commission appeared to be giving itself a lot of discretion in the way it was planning to treat the lines companies, referring to a table it published last week on how it planned to assign the 1 per cent, 3 per cent or 5 per cent limits.

"You could be relatively inefficient and/or have high prices and/or be generating excessive profits," said Rice.

The use of "and/or" meant the commission could put an inefficient company under price control, despite the fact that it might charge very low prices to its consumers.

A maximum imposition of a 5 per cent annual price reduction after inflation could be applied to either an inefficient company, or one with high prices, or one earning a high profit.

Rice said the commission appeared to be giving itself "a complete open ability to put whoever they want into whatever category".

According to the latest compendium, Northland's Top Energy has the highest costs per kilowatt hour of electricity, while Buller Electricity on the South Island's West Coast had the highest costs per network connection.

When measuring return on investment, the highest return of 14 per cent was earned by Nelson Electricity. UnitedNetworks, then New Zealand's largest lines company, but now part of Vector and Powerco, had the second highest, with a 13 per cent return on investment.

A "profit path threshold", devised by the Commerce Commission to stop excess profits being earned, would ensnare one-third of all lines companies if it had been in place last year.

The commission proposes to let lines businesses earn returns of 6-8 per cent before they would breach a profit threshold. Ten of New Zealand's 29 companies would have breached the threshold as they earned returns of more than 8 per cent.

* Submissions on the plans are being accepted by the commission until the end of February.

It will then hold a conference between March 10 and March 14 before setting the thresholds which, it hopes, will come into force from April 1 this year.