Powerco challenges regulatory direction and costs

Powerco challenges regulatory direction and costs

Powerco Chairman Barry Upson today expressed concern about policies in the areas of regulation and infrastructure investment.

In his speech at the Powerco Annual Meeting held in Wellington today, Mr Upson said that although Powerco had once again achieved a strong result for the year, Government policies were an increasing burdening on businesses and threatening their ability to deliver value to consumers.

“Business is being burdened with obligations and costs that weaken incentives for investment, innovation and growth,” Mr Upson said. Whilst the Government’s intentions to deliver value to consumers are understood the policy design and implementation is creating the opposite effect.

He cited the current process to regulate the prices of electricity lines businesses as an area where investment and innovation were at risk.

“Investment in all forms of energy infrastructure is vital for the Government to meet its national economic growth targets. Lines companies must retain adequate funds to maintain, replace, make technological improvements and meet new growth demands on their networks.

“A number of overseas regulatory regimes have now realised that their short-term focus on consumer benefit has had material consequences on the level of investment required to maintain and grow these networks. The overseas regimes have become a costly burden for consumers with the short-term focus on small benefits at the expense of dwindling capital reinvestment in the assets by the lines companies. In some overseas locations the Government now has to offer cash contributions to companies, funded by taxpayers, to make the investment in infrastructure as the regulations have frightened companies away from making new connections. New Zealand will head in the same direction unless policies and regulations take a balanced perspective”.

Mr Upson said he was heartened that the Commerce Commission has realised during the hearings into the lines company price control inquiry that an incorrect interpretation of the Commerce Act could have serious consequences on long-term investment decisions for the electricity network infrastructure, so vital for the economic wellbeing of the nation.

“Powerco is confident that the Commission will find the appropriate balance between investment and consumer needs, which will become the basis for the new regulations.

Mr Upson said, however, that Powerco had serious concerns that the Commerce Commission’s price control inquiry would not be subject to any cost / benefit test, and would not be referred to Cabinet for approval. “Powerco contends that the likely price benefit to an average domestic consumer (if passed on by the retailers) will not exceed 30 cents per consumer per month. We argue that that the costs of developing these regulations and their implementation are grossly out of line with the likely benefit. In fact Powerco’s regulatory costs alone will be more than the benefit that will be received by consumers.

“Despite this, the Government will not be able to challenge any decisions made by the Commerce Commission with regard to the price control process. Unlike the recent airports decision where recommendations were made to Cabinet, the Commission can implement electricity lines regulation without any reference to the Minister of Commerce.

“This seems remarkable given around $8billion worth of infrastructure investment is involved in this sector.”

Mr Upson said that despite contending with arduous regulatory activity, Powerco had made a number of great achievements in the past year. “The Company has doubled in size but, at the same time, there has been no loss of focus on customers and energy users, on people who work in the business, or on the communities of which Powerco is very much a part.

“A major success was the acquisition of UNL assets, and subsequent management of the integration of those assets into our business within a very short three-month period.

“I am also proud to announce that we have once again held the average electricity line charge steady for residential consumers over the financial year ended 31 March 2003. This means that over the past six years, Powerco actually reduced the average residential line charge by around 18% in real terms.

Mr Upson also reconfirmed Powerco’s profit forecast for 2004 financial year of $53.6m, and dividend of 16 cents per share.

“The Company recorded a strong audited annual result for the 12 months to 31 March 2003, posting a profit after tax of $38.1 million, from total revenue of $229.3 million. This profit was up 4.9% on the forecast issued to the market in October 2002.

“An unimputed final dividend of 8 cents per share, was paid on 20 June 2003 to all shareholders on the Company’s register at 5.00pm on Friday 6 June 2003, which brought the total dividend for the year ended 31 March 2003 to 14 cents per share,” Mr Upson said.

“In the first quarter of the this year, while revenues were slightly slight down because of the energy crisis and strong energy conservation messages across New Zealand and the effects of unseasonably warmer weather, Powerco controlled its operational costs well, which has enabled the Board to reconfirm its forecast for the current year. Powerco’s achieved an un-audited net operating profit after tax of $13.1million for the first quarter.”

Mr Upson said that the result represents another solid performance by the Company

“I congratulate Powerco management and staff on another successful year. The Board looks forward to the Company’s further consolidation of assets and business along with further growth through the construction of gas networks in Tasmania due to commence in August this year,” said Mr Upson.

Powerco is New Zealand’s largest gas and electricity distributor in terms of network length, owning some 30,000 kilometres of electricity lines and gas mains; and is the largest gas distributor and second largest electricity distributor in terms of total consumer connections. Powerco has approximately 295,000 electricity consumer connections and 106,000 gas consumer connections. Its electricity networks are in Tauranga, Thames, Coromandel, Eastern and Southern Waikato, Taranaki, Wanganui, Rangitikei, Manawatu and the Wairarapa. Its gas pipeline networks are in Taranaki, Hutt Valley, Porirua, Wellington, Horowhenua, Manawatu and Hawkes Bay. Powerco listed on the NZX in December 2000 and was included in the NZSE40 index on December 2002.

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