Published in the National Business Review of 27 July 2007

Powerco, New Zealand second largest electricity lines company, is seeking changes to the regulation of natural monopolies to give more certain returns to investors.

The company says the present system discourages investment, and that the Commerce Commission focuses too much on customers' interests in prices and not enough on their interests in security of supply through adequate investment in infrastructure.

Powerco commissioned international advsiors, CASE Associates to prepare a submission to the government's review of regulation of utility industries and Parts 4 and 4A of the Commerce Act.

The report prepared by Dr Pinar Bagci, a Kiwi now working internationally, advocates a change from the current system of ex post regulation to an ex ante regime.

The changes would see electricity lines businesses like Powerco trade off the rate of return on capital for greater certainty of a return.

"At present, the Commerce Commission sets up an average price as a benchmark, and says to the ELBs that if you change more then we may inquire into the business. That's an ex post regime, Dr Bagci said.

"But in New Zealand the problem is that no one knows what will happen if the Commerce Commission does decide to inquire. There is uncertainty because there are no rules, and uncertainty deters investment.

"Under an ex ante regime the Commerce Commission would commit to follow a set of principles, criteria and processes in regulating electricity lines businesses.

For example, it might license a monopoly provider in a geographical area, but to require it to negotiate agreements with customers on service obligations like reliability, maintenance, and tariffs

Powerco spokesperson Caroline Ramsey said Powerrco liked this approach. Although it might be "cosy' for the company it reduced the risk of uncertain returns and therefore the company was prepared to accept a lower rate of return.

This was driven by the need of Powerco's owner, the Babcock Brown Infrastructure Group to attract investment from long term investors like pension funds looking for safe, reliable and predictable returns.

Powerco's gas and electricity distribution networks are spread across the , central and lower areas of New Zealand's North Island.