Chairman's Report
We have achieved success through a forward focus, appropriate planning and execution of our plans -
a strategy we will continue.
Overview
Marlborough Lines has had another good year. Overall we increased shareholder value, increased discounts to customers, undertook substantial capital expenditure and an independent survey determined that 94.5% of customers were satisfied with the Company's performance.
Our Group surplus of $9.076m after tax was a 32.9% reduction on the previous year, however as detailed in the Review and Discussion of Financial Statements of this report, the reduction is a reflection of a much lesser level of non-taxable vested asset income (2008 - $6.587m, 2009 - $3.416m) which, in effect, distorted last year's accounts with a greater amount of customer work being undertaken.
Importantly, in March the Commerce Commission vindicated the Company's past breaches of the Commission's price threshold with its decision to cease investigations into the Company's pricing.
However we're not resting on our laurels. Within Marlborough Lines we have an ongoing desire for continuous improvement and a clear vision for our future.
Regulation
Electricity distribution assets typically have lives in the vicinity of 50 years. Short term expediency in a business of our kind would not only be short-sighted but wrong. There must always be investment for the future.
For this reason Marlborough Lines has breached the price paths set by the Commerce Commission for the past five years. But we did not do so in a cavalier way. Our dialogue with the Commission has been continuous and we have respected the Commission's legislative obligations.
In Marlborough we were faced with a rapidly growing economy, particularly in the viticulture sector which required our investment to meet increased electricity demand. The winery load alone has increased by a factor of eight in the last nine years. To meet this load we had to invest in both our reticulation and substations. Failure to do so would have restricted supply to a very significant industry.
Against this background the Commerce Commission - in accord with Government legislation - established a price path based on an arbitrary snapshot in time. A CPI-x regime was applied to the prices prevailing at August 2001, without any consideration as to the appropriateness of the level of the prices or the need for increased capital expenditure within the network.
Notwithstanding the imposition of the price path regime the Commission consistently advised that it was a screening mechanism and that post-investigation, justifiable breaches would be permitted. But what a convoluted process!
Over the initial five year regulatory period which ended on 31 March this year, the Company submitted three successive offers of administrative settlement without receiving a substantive response from the Commission. It was not until 25 March 2009, that the Commission advised it had ceased investigating Marlborough Lines for price breaches up to 2008.
While we were pleased with the Commission's determination, the process was certainly neither efficient nor conducive to investment.
It was bizarre that the affect of the Government and the Commerce Commission regulation should act as an impediment to investment for not only the good of Marlborough but of New Zealand.
Fortunately, late in 2008, the then-Government addressed the situation and altered the legislation so that from 1 April 2010, the Marlborough network will not be subject to the price path constraints of the Commission - only to disclosure to the Commission. This is a sensible outcome. But there needs to be careful regard to the costs of disclosure. By way of example; the disclosure information required by the Commission for the year ended 31 March 2008, was not released by the Commission until October 2008, and the date by which the disclosure had to be undertaken was 10 April 2009. The fact that the Company also had to retrospectively collate information going back to the financial year ended 2005, contributed to the absurdity of the situation. The reality is that such historical information is of little real value to our customers. Hence there needs to be careful regard to the costs of disclosure. In our view the whole regulatory regime pertaining to network companies, needs to be put on trial for its life and the cost/benefits of regulation properly considered. Bandaging is not a cure when surgery is required.
Curtailment of investment and the imposition of costs for no quantifiable benefit, is at odds with New Zealand's best interests. Over the last five regulatory periods compliance issues have cost Marlborough Lines in excess of $1.8m; the equivalent cost of 60 kilometres of new line or of a zone substation, both of which would be of direct benefit to electricity customers. Discounts to customers could also have been greater.
While I have made the above comments in relation to the Company's Marlborough network, the same also applies to the Company's investment networks in Nelson and Otago.
Future Regulation
Marlborough Lines has made numerous submissions to the Government, the Commerce Commission and to the Electricity Commission in recent years and will continue to do so in the interests of the Company, its shareholder and customers. Essentially our view is that regulation should not impede investment for growth.
Government Policy
The change in Government following the 2008 election has brought with it a pledge to review what appears to be systemic problems in the electricity industry and the Government has appointed a special committee to review all aspects of the wholesale electricity market. It would be in the interests of the network industry and the customers it serves if this review is also able to comment on distribution businesses.
The Future - sustainability
The Marlborough Lines Group has excellent assets, relatively low levels of debt, dedicated staff and a supportive shareholder. These are good foundations on which to build.
We will continue to be proactive in pursuing opportunities for growth because it is our view that we can add further value to the Company through aggregation. That has been demonstrated by our investment in Otago and Nelson. The continuation of the status quo is not a realistic choice.
The greatest challenge in the future will be to build a business equally able to embrace environmental, technical and social change. We believe that the capital expenditure we are presently undertaking - together with our investment in quality programmes and staff development - will enable this company to do that and prosper through changes.
Directorate
Mr Howard Stone retired at the Annual General Meeting (AGM) in September 2008 and was subsequently reappointed by the Directors, however he resigned because of ill health on 28 January 2009. It is with regret I record that Howard passed away in April 2009.
At this year's AGM, Messrs Des Ashton and Ken Forrest retire according to the rotation rules of the Constitution and both are available for reappointment.
Acknowledgment
The Marlborough Lines Group has achieved with the combined efforts of my fellow Directors, our Managing Director and staff, all of whom deserve recognition. I am also pleased to acknowledge the support of our shareholder the Marlborough Electric Power Trust, and our customers, all of whom it has been a pleasure to serve.
D W R (David) Dew
Chairman
