Both Vector chief executive Mark Franklin and Powerco chief executive Steven Boulton told the 2005 National Power Conference in Auckland last Friday that they faced a looming “wall of wire”.
Their companies are dealing with new Commerce Commission regulations that cover the rate of price increases allowed and quality of service and both said the new controls had arrived at exactly the wrong time.
As well as proposed electricity regulation, the commission last year told the companies they should have price controls imposed on their gas distribution businesses, after allegedly abusing their monopoly positions through “excess” charges.
However, the two bosses maintain gas is a discretionary fuel and that only a small percentage of people able to connect to a gas network have done so. Therefore, there is no monopoly power to be abused.
Franklin said New Zealand's current low energy prices were not sustainable, as more infrastructure needed to be built, and that recent regulation had come at a "critical time in the investment cycle". Financial backers of projects were always wary of the possible impacts of any new regulations.
Boulton said the new regulations did not reflect the fact that New Zealand lines companies were already on an "uphill climb" - large amounts of capital expenditure were needed over the next few years just to keep up with the replacement of aging assets.
"This is no time to be requiring companies to reduce their prices and cut costs. New Zealand expenditures are insufficient to maintain supply reliability in the long term.
“Rates of return allowed for regulated assets have simply been too low to justify new investment. Even maintaining the existing assets in good working order has proved difficult as regulated operating and capital allowances have been continuously reduced in the name of ‘efficiency gains’,” Boulton said.
Price path thresholds - the methods used by the commission to regulate prices - locked in the low levels of expenditure just as new load growth brought extra costs, he added.
Cost savings and price reductions already brought in by the electricity lines companies had not flowed through to customers, as power retailers continued to increase their prices.
Both bosses also spoke of problems attracting and retaining skilled lines workers, many of whom were being offered NZ$10,000 sign-on bonuses, with pay rises of between 25-50% to go work in the UK, US, Australia or Ireland.
Boulton also said Powerco was raising NZ$100 million through a bonds issue, aimed at New Zealand retail and institutional investors.
Interest on the five-year, unsecured bonds is intended to be the higher of 7.6% per annum and the aggregate of a margin of 0.8% per annum. The money raised will be used to "repurchase" bonds issued by the company earlier, now held by Brisbane-based Prime Infrastructure, which took over New Plymouth-headquartered Powerco in late 2004. Following the “repurchase” those capital bonds would be cancelled.
Powerco, which delisted late last year, has applied to Standard & Poor's to have the bonds rated and hopes to register a prospectus by March 16, with the issue opening on March 21.
