Issued 4 April 2002 / 031
Commerce Commission Approves The Asset Valuations Of 28 Electricity Lines Companies
The Commerce Commission has completed its statutory requirement to complete a comprehensive audit of the asset
valuations of the 29 electricity lines companies and Transpower. All but two lines companies have had their valuation
reports approved by the Commission.
Chair, John Belgrave, said the Commission¡¦s task was to ensure that electricity lines companies applied the Ministry of
Economic Development¡¦s Optimised Deprival Valuation (ODV) Handbook in a rigorous and accurate way. Lines companies and
Transpower were required under the Commerce Act to publish valuation reports approved by the Commission by 31 March
2002.
¡§The Commission¡¦s overall view is that the ODV Handbook has generally been applied well by electricity lines
companies, although the audit prompted some improvement. The audit resulted in the total ODV valuation of all lines
companies whose reports have been approved by the Commission being reduced by 1% off the pre-audit level, which amounts
to approximately $45 million,¡¨ said Mr Belgrave.
Mr Belgrave also said the Commission appreciated the cooperative approach taken by lines companies throughout the audit
process.
¡§While many of the original valuation reports submitted to the Commission were not approved, companies worked quickly
and constructively with the Commission in preparing their revised valuation reports,¡¨ said Mr Belgrave.
Mr Belgrave explained: ¡§Asset valuations are central to monitoring the economic performance of electricity lines
companies. The ODV audit has provided the Commission with valuable insights that will feed into its other statutory work
on reviewing asset valuation methodologies, information disclosure and the development of a price control regime.¡¨
The Commission¡¦s materiality threshold for the audit was 3%. In order for the Commission to approve a valuation report
taking the materiality threshold into account:
ć each inconsistency with the ODV Handbook had to be non-material, i.e. have a variance (positive or negative) from the
appropriate value of less than 3% of the company¡¦s ODV valuation; and
ć all inconsistencies with the ODV Handbook taken in aggregate had to be non-material, i.e. have a variance of less
than 3% of the company¡¦s ODV valuation.
Key results from the 28 valuation reports approved by the Commission were:
ć five companies made a material reduction in their pre-audit ODV valuation (a reduction of more than 3% of the
pre-audit level), and three companies (including Transpower) increased their ODV valuations, as a result of the ODV
Handbook being applied more rigorously and accurately;
ć the remaining 20 companies made non-material reductions in their pre-audit ODV valuations or made no change;
ć the total ODV of the lines companies (excluding Transpower) was reduced by approximately $45 million of the pre-audit
level, or 1%;
ć one lines company, The Power Company Limited, reduced its ODV valuation by approximately $22 million (13%) as a
result of the audit; and
ć Transpower increased its ODV valuation by approximately $13 million (0.7%) as a result of the audit.
The two lines companies whose reports have not been approved by the Commission are Westport-based Buller Electricity
Limited and Gisborne-based Eastland Network Limited.
The Commission has invited both companies to further explain their valuation reports and compliance with the ODV
Handbook. ¡§We need to know why they consider their valuation reports comply with the ODV Handbook or why compliance
with the ODV Handbook is not possible,¡¨ commented Mr Belgrave.
The Commission has been assisted by its consultant, Parsons Brinckerhoff Associates, who has considerable experience in
the application of the ODV methodology. Parsons Brinckerhoff Associates is now preparing a closing report for the
Commission drawing insights from the audit process, which will be published when completed. The report will be a useful
input to the other work the Commission is required to undertake under Part 4A of the Commerce Act.
Background
ODV is an acronym for Optimised Deprival Value, which is the valuation methodology electricity lines companies are
required to use in valuing their system fixed assets. The rules pertaining to ODV valuations of electricity lines
business system fixed assets are incorporated in the current edition of the ODV Handbook, issued by the Ministry of
Economic Development.
Under Part 4A of the Commerce Act, the Commission was required to carry out a comprehensive audit of the valuation of
the line business system fixed assets of large electricity line owners. The aim of the comprehensive audits was to
ensure valuations reflected a rigorous and accurate application of the ODV method, as set out in the fourth edition of
the ODV Handbook.
Under the Commerce Act, lines companies were required to publicly disclose, by 31 March 2002, a valuation report
approved by the Commission, including publishing the results of the Commission¡¦s audit as it applies to their company
on the Internet.
The Commission¡¦s process for the audit was set out in the Asset Recalibration Document released on 28 September 2001
(available on www.comcom.govt.nz). The audit was a two-step process: an initial assessment of reports by the Commission
in late January (and approval of reports where appropriate); and a further opportunity for companies to undertake
additional work and submit a revised valuation report (considered by the Commission in late March).
Initial valuation reports were considered by the Commission in late January 2002, at which time eight reports were
approved. The remaining 21 lines companies then had an opportunity, in consultation with the Commission, to submit
revised valuation reports, which have been the focus of the Commission¡¦s latest decisions.
The Commission indicated in February it was in the process of auditing Transpower¡¦s valuation report to a different
timetable to the other electricity lines companies. The Commission has since completed that audit and approved
Transpower¡¦s valuation report.
Ends