Regulatory decisions should favour investment

Regulatory decisions should favour ongoing investment, not short-term price focus.

Powerco Chief Executive Steven Boulton today said the seemingly endless focus on regulation and imposition of business compliance costs in New Zealand runs the danger of killing off much-needed infrastructure investment.

Ongoing infrastructure investments in the core electricity, gas and transport sector is pivotal to building the foundation for our economic growth. Yet we are now seeing the result of a regulatory environment that continues to produce regulations that simply focus on short-term price and popular outcomes, but with no reference to needed investments.

Mr Boulton told the second Annual Utilities and Infrastructure Conference that New Zealand's small size and limited resources meant it needed to align its regulatory regimes more in favour of long-term infrastructure investment.

This investment then provides the fundamental foundation for leveraging and stimulating the broader business development, which in turn would provide the basis for the Government focus on economic growth.

"The only way to upgrade multi-billion dollar networks for electricity infrastructure will be with funding from the broader financial community, through a combination of both equity and debt capital markets," he said.

"To attract that funding away from other international markets, New Zealand needs a regulatory regime which is certain, stable, long-term focussed and rewarding."

Mr Boulton said that one part of Government was trying to achieve 'stretch' economic outcomes with an understandable and laudable focus on growth, yet on the other hand the strong regulatory supporters in their midst were setting about the development of a regulatory policy which disincentivises ongoing investment.

"It seems we are lost in the swamp of regulatory illusion - an illusion that in the short term will produce a scenario of "being in control" but in the long term will only succeed in killing off asset investment."

He said if this illusion becomes reality, New Zealand will have the most expensive and invasive regulatory environment, and at the same time an asset infrastructure that is strangled for funds - a double whammy, where consumers will be the ultimate losers.

"We're trying to replicate regulatory regimes in Europe and elsewhere that cost tens of millions of dollars to operate in order to bring about 'theoretically competitive' markets in a country which can sometimes only sustain single operators in some regional markets."

Mr Boulton said the regulatory costs being imposed on New Zealanders had accelerated markedly in the past two to three years. In some parts of the lines sector alone we have seen regulatory, related business compliance, and utility rating costs increase by more than 20 fold in three years.

At the same rate of increase, these regulatory costs will soon equate to a large percentage of a lines company's direct maintenance costs - an almost unprecedented cost imposition.

Mr Boulton said consumers will ultimately pay for these hidden costs. At the present time consumers are not seeing these hidden taxes.

"The burden that regulatory creep is placing on lines companies has no quantified public benefit - in fact no national economic cost / benefit test or regulatory assessment was ever applied before the regulatory regime was designed," he said.

Mr Boulton said it was interesting that a recent paper from New Zealand Treasury[1] highlights the importance of 'quality regulation' and the need to conduct regulatory impact assessments, which includes identifying the problem in the first instance.

He said a better use of scarce financial resources would be to invest in improving the networks to meet customers' growing needs for digital-age electricity supply rather than focus on regulation.

"We can have either the world's leading regulatory design or we can have ongoing investment in electricity infrastructure. But we can't have both," said Mr Boulton.

"Somebody must make the hard call - which of the two is more important for the good of New Zealanders and our economy - regulation or investment?" he said.

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