Commission recommends control of Powerco & Vector

Gas Control Inquiry: Commission recommends direct control of Powerco and Vector

In its gas control inquiry report, released by the Minister of Energy today, the Commerce Commission recommends that direct control under Part V of the Commerce Act should be imposed on gas distribution companies Vector Limited and Powerco Limited. The Commerce Commission does not recommend direct control for NGC Transmission Limited, NGC Distribution Limited, Wanganui Gas Limited, Maui Development Limited, Nova Gas Limited and the individual transmission pipelines located in the Taranaki area.

“The Commission’s inquiry found that Vector and Powerco each have substantial market power and are earning excess returns above their cost of capital to an extent that the Commission is satisfied that it should recommend direct control,” said Commission Chair Paula Rebstock.

The Commission’s report states that if direct control were imposed on Auckland-based Vector, it would achieve a net benefit of $6.9 million per annum. In the case of New Plymouth-based Powerco, direct control would achieve a net benefit of $3.7 million per annum. These net benefits equate to average distribution charge reductions of 18.5% and 12.2% for consumers on the Vector and Powerco networks. Vector and Powerco have approx 73,000 and 107,000 customers respectively.

Ms Rebstock said the Commission’s role was to consider whether competition was limited in markets in which gas services were supplied, and whether the introduction of direct control was in the interests of consumers. Having determined whether direct control “may” be imposed on the gas businesses, the Commission then considered three key matters in its assessment of each business in determining whether direct control “should” be introduced. Those matters included the net efficiency cost to the economy of reducing excess returns; the magnitude of the benefits; and the impact of a recommendation not to impose direct control.

NGC Transmission, NGC Distribution and Wanganui Gas also earned significant excess returns. In the case of NGC Transmission, direct control would achieve a net benefit of $2.4 million. In the case of NGC Distribution, a net benefit of $1.6 million, and for Wanganui Gas, a net benefit of $155,000. Although the Commission does not recommend direct control under Part V, the Commission considers that the regulatory constraints on those businesses, and also Maui Development Limited, should be strengthened and suggests the Minister consider imposing a regime comparable to the targeted control regime applicable to electricity lines businesses.

Ms Rebstock said the Minister has a wider discretion than the Commission to consider other matters including alternatives to control under Part V.

“The Commission’s view is that a targeted control regime has the potential to offer a more favourable trade-off between costs and benefits of regulatory intervention than a regime under the Part V control provisions of the Act, based on the Commission’s experience with electricity lines businesses.”

“If the Minister were to introduce an alternative mechanism such as a targeted control regime, there may be benefits in having all gas businesses, including Vector and Powerco, under the same regime. Direct control under Part V of the Commerce Act is high cost relative to other regulatory options.”

The Commission also notes the poor quality of business specific data available through the Gas Information Disclosure regime and has urged the Minister to consider strengthening that regime.

Ms Rebstock said there would also be substantial benefits from requiring businesses to disclose consistent and robust information through an enhanced information disclosure regime.

“During its inquiry, the Commission was particularly concerned about common cost allocations by the gas businesses, and as a result, the Commission adjusted the common costs of Powerco and Vector in the base case analysis. The Commission also had reservations as to the forecast information provided and revisions to historical figures were made in some cases.”

Background The Commerce Commission commenced its inquiry into gas pipelines services in April 2003 following a request from the Minister of Energy under the regulatory control provisions of the Commerce Act. The Minister requested the Commerce Commission to make recommendations on whether or not supply of gas pipeline (transmission and distribution) services should be controlled. The Minister has requested the Commission to complete the inquiry by 29 November 2004.

Under the Commerce Act, the Commission is required to consider two issues to determine whether control may be imposed: whether competition in the supply of gas pipeline services is limited or likely to be lessened; and whether control is necessary or desirable in the interests of acquirers or suppliers of gas pipeline services.

Having determined whether control “may” be imposed, the Commission was then asked to consider additional matters to determine whether control “should” be imposed. The additional matters include: the efficiency costs of achieving reductions in excess returns; the magnitude of the benefit of acquirers; and the impact of a recommendation not to control.

A copy of the Commission’s final report, including an Executive Summary, is available on the Ministry of Economic Development’s website, http://www.med.govt.nz/ers/gas/control-inquiry/

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