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ComCom notes odd monopoly argument

  • March 31st, 2014

Today the Commerce Commission gave notice of intention to amend one element of the formula that limits the profits of energy distribution monopolies. This further step toward ending current regulatory generosity (that may be costing users up to $150m per year) could result in a partial change in November this year.

The major review will still occur in two years. The Commission has signalled that it could then consider a "split" or two tier WACC. It could allow a higher return on new assets, to incentivise investment, but restrict the return on sunk assets to the mid-point of the relevant comparator WACC range. At that time the suppliers will be arguing strenuously that:

"Investments in infrastructure tend to have long payback periods. Any business case for making such an investment tends to be very sensitive to the assumed long term return. The prospect of a significant reduction in that return can signficantly weaken the business case for new investment".

That was cited by the Commission today from a submission by Maui Development in support of the common sense recognition that the current situation, in which elimination of a substantial uplift in returns could occur now or in 5 years time, weakens any positive investment incentive intended by the uplift.

Yet most of the monopoly suppliers tried to persuade the Commission that a formula review was not needed because the intended positive incentives "would not be diminished" by the uncertainty about whether they would remain after 2020.

Perhaps they assume cynical toleration of any arguments to keep a privilege. But it is odd to use a ridiculous argument that will surely come back to bite you. In the comprehensive review they will be asked why they think a potential cut-off date for an uplift will adversely affect their investment intentions, when now they are avowing that it is immaterial.

As is its practice, MEUG will not over-cook the own goal argument. Throughout our involvment with this client we have been instructed that arguments should be made only where they are consistent with intellectual integrity in the price control regime over the long term. .

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