Effect of Changes in Regulatory Quality on Electricity Lines Investment and Reliability in New Zealand

Abstract

Various studies indicate a negative relationship between investment on the one hand and regulation reduced regulatory quality and increased regulatory uncertainty on the other. Shifts to a proportional representation form of government or to incentive regulation are specifically argued to reduce investment. Boyle and Guthrie (2003) however predict an ambiguous relationship between investment and uncertainty. Electricity lines (i.e. distribution) companies in New Zealand have experienced multiple regulatory innovations over 1990-2005 all of which could be predicted to reduce investment and thereby service reliability rates. We find however that investment and reliability rates have in fact increased over this period contrary to this prediction. Part of this increase in investment rates is explicable in terms of rising demand and electricity prices and declining capital goods prices. Yet we find a positive structural break for investment in 1995 and for reliability in 2000. We interpret these results as indicating that considerable investment uncertainty relating to wider electricity sector reforms and particularly to distribution sector reforms over 1989-1995 resulted in lines companies deferring investment in this period. With the final removal of franchise areas on 1 April 1994 the nature and extent of lines company competition became apparent resolving the preceding investment uncertainty. Any adverse impacts of subsequent regulatory innovations on otherwise increased investment and reliability rates were not identified by our analysis. We leave it to future research to demonstrate the deferral of lines company investment over the late 1980s and early 1990s.