Key Points:

Historic underinvestment in the electricity transmission system has been identified by Fitch Ratings as one part of a broadly negative outlook for the power and utilities sector this year.

Credit risk factors for companies in the sector also include adverse regulatory determinations and tighter economic conditions.

The catch-up spending required to upgrade the national transmission system - which suffered a failure at an Auckland substation last week - would result in the deterioration in the credit profile of Transpower, Fitch said.

Underinvestment in transmission projects had credit implications across all industries.

Transpower has said it will spend $3.8 billion over the next five years to help meet a backlog of work stretching back nearly 20 years.

The approval of a number of pending transmission network projects, particularly the inter-island transmission link, would reduce uncertainty and regulatory risk, Fitch said.

The agency said a number of regulatory decisions in 2008 would result in a deterioration of credit metrics of regulated businesses, including Vector, Powerco and Transpower but regulatory uncertainty and risks have reduced for 2009 and beyond.

Fitch Ratings analyst Sajal Kishore said the Commerce Amendment Act would have a positive impact on the credit quality of regulated utilities in the long term.

"That is definitely a long-term positive and will reduce a lot of the interventionist actions of the Commerce Commission of the past. We see that going away and that's definitely a plus for the regulated businesses."

The report says utilities, particularly those with regulated revenues, were viewed as a safe haven for both debt and equity investment in times of market turmoil.

Lenders and investors in power and utilities companies continued to demonstrate their appetite for refinancing of these companies and equity investment in 2008.

"Fitch expects the NZ power and utility companies to remain relatively well placed to manage their refinance risk and liquidity in 2009, albeit at a higher cost."

While the ban on construction of new thermal plants had been lifted the development and growth in the number of gas-fired power plants over the longer term would remain constrained by limited indigenous sources of gas.

By 2015, the county faced the prospect of a gap between demand for gas and supply. That would require imports to be considered of either LNG or CNG.

"Such imports are likely to be significantly more expensive than gas from existing fields, and will expose NZ to higher and more volatile international oil and gas prices," Fitch said.

* Credit risk factors

Regulatory risks.

Investment in transmission projects.

Legislative changes.

Refinance risk and liquidity issues.

Declining gas reserves.