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Intention to declare control of Vector Limited

9 August 2006/019

Intention to declare control of Vector Limited published

The Commerce Commission has published its intention to declare control of the electricity distribution services supplied by Vector Limited.

The Commission has found that Vector is overcharging industrial and commercial customers across its networks. Vector is also undercharging some residential customers, particularly the Auckland residential consumers who are the beneficiaries of Auckland Energy Consumer Trust, Vector's principal shareholder. By being undercharged, beneficiaries of the Trust are receiving an implicit dividend in addition to the normal shareholder dividend.

The Commission considers that the disparity between customer classes is inefficient and can not be justified. The Commission also found that Vector is earning excessive revenues overall.

Commerce Commission Chair Paula Rebstock says that the Commission's view is that:

* Vector is overcharging some customers and undercharging others. The company is making different rates of return from its 21 different customer classes and these differences can not be justified. For example, during the 2006/2007 year, Vector will earn a 54.4% rate of return on investment from one group of Northern business customers, while it earns only a 4.6% rate of return from Auckland residential customers.

* Vector is earning excess revenues. The Commission's preliminary estimate is that, during the next two years, Vector will earn between $13 million and $75 million in excess revenue per annum. To bring its returns to a normal level, the Commission estimates Vector would need to reduce its charges between 2% and 11% for each of the next two years. (Vector's distribution charges comprise around 20 to 40% of the customer's power bill.)

Ms Rebstock says that the Commission has given full regard to the Government Policy Statement issued on Monday.

"The Commission is committed to ensuring that there is effective investment in New Zealand's basic infrastructure and our regulatory approach takes full account of appropriate infrastructure investment incentives for lines businesses," says Ms Rebstock.

"The Commission considers that Vector's actions are not consistent with the purpose of Part 4A of the Commerce Act, nor with the objectives of the Government Policy Statement.

"Vector is focussing on the short term interests of particular classes of customers who are also beneficiaries of its major shareholder, the Auckland Electricity Consumers Trust. Such customers receive a direct dividend and an additional implicit dividend by being undercharged themselves.

"The Commission's view at this time is that a declaration of control would be in the long-term interest of consumers.

"Overcharging and undercharging are both inefficient - that is, they are harmful to the New Zealand economy," Ms Rebstock says.

"Vector is aware of the imbalances across its customer classes and has had ample opportunity to improve the situation. Instead, during the time that Vector has been aware of the imbalances, the situation has deteriorated further for many groups of consumers.

"Vector is not making sufficient progress in redressing the overcharging of some customers and reducing its excessive revenues, and as a result the Commission has moved to this intention to declare control.

"These are very serious issues," says Ms Rebstock. "Vector is only able to overcharge some customers and undercharge others by abusing its monopoly power."

Ms Rebstock said that Vector was in discussions with the Commission about an administrative settlement, which is an alternative to control. She said the release of the Commission's paper will assist Vector to focus on the long term interest of all its consumers, and will add transparency to the process of removing overcharging.


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