NZ markets face regulation risk: analyst
New Zealand’s financial markets face what analysts call “regulation risk” this year and beyond as the results of potentially far-reaching industry reviews come home to roost.
A raft of reviews are under way, covering telecommunications, petrol, dairy and banking. In aviation, the Commerce Commission completed its final report on pricing last year.
While regulation changes generally don’t cause much of an upset, there was always potential for them to do so, Josh Wilson, senior portfolio manager at NZ Funds said.
“Regulatory risk is front and centre for a number of our largest listed companies in 2019,” he said.
Wilson said it “feels like” there are an unusually high number of regulatory reviews in progress at present.
“The market expectation is for relatively benign conclusions to these reviews, but there is always the chance of a rogue decision, like we saw with Chorus earlier in the decade,” he said.
In 2013, Chorus’s share price was punished by investors, falling as low as $1.27 as the Government struggled with a legislative response to telecommunications commissioner Stephen Gale’s proposal to regulate price cuts. Through a protracted process, the commission backed away from enforcing as deep a cut as first proposed.
Here are some industry reviews currently under way.
TELECOMS
The pricing and terms on which Chorus delivers copper and fibre access services from 2020 has been the subject of a lengthy review.
Under the proposed new framework, Chorus’ recent fibre investment will be regulated in much the same way as other utility businesses, such as electricity lines and gas networks. The legislation has been passed and the Commerce Commission is now tasked with developing the rules which will determine what Chorus can charge for access to its fibre network.
The Commerce Commission is also undertaking a study of mobile phone markets in New Zealand.
Its purpose is to better understand how mobile markets are developing and performing and how the competitive landscape for mobile may evolve as technology changes. The commission expects to publish its preliminary findings in April.
POWER
The Ministry of Business Innovation and Employment review is looking at whether the electricity market delivers a fair and equitable price to consumers. The review released its first report late last year and expects to publish a preliminary options paper in February. The panel expects to deliver its final recommendations to the Minister of Energy Megan Woods by mid-2019. The review could have implications for the power companies, Meridian, Genesis, Contact, Mercury and Trust Power.
AIRPORTS
Last November the Commerce Commission released its final reports on Christchurch and Auckland airports’ pricing decisions for the period July 1 2017 to June 30 2022.
Deputy Chair Sue Begg said the commission’s view remained that the returns targeted by Christchurch Airport were generally acceptable, but that Auckland’s targeted returns were not fully justified. As it stands, the airports are not regulated and can set prices as they see fit, but must consult with substantial customers, like airlines, on charges and any major capital expenditure plans. Auckland International Airport said it would review the commission’s findings.
PETROL
The Commerce Commission is undertaking a retail fuel market study to establish whether Kiwis are paying a fair price at the pump. A final report from the commission is due by December 5 this year. Separately, the Government has launched an inquiry into the Auckland Fuel Supply Disruption that resulted from damage to Refining NZ’s pipeline in 2017.
DAIRY
The Ministry for Primary Industries’ final report to Government on Fonterra’s enabling legislation, DIRA, is due early this year. The DIRA legislation, which allowed the creation of Fonterra through a merger between the two dominate dairy cooperatives of the time and the New Zealand Dairy Board, has been under review since May.
BANKING
The Reserve Bank has been reviewing bank capital rules since early 2017, and is consulting on a proposal to raise the amount of capital that banks must hold. The deadline for feedback is late March and banks will be given five years to make the transition to the new regime, which could potentially have farreaching implications for the sector, which is dominated by Australia’s big four banks.