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Vector proposes settlement

Issued 13 October 2006/058

Vector proposes settlement and agrees to rebalance prices

Vector has proposed to rebalance its power prices from 1 April next year and comply with the Commerce Commission's price path threshold for the remainder of the current five-year regulatory period.

The voluntary move forms part of an administrative settlement offer presented to the Commission last month. An administrative settlement is an alternative to regulatory control being imposed.

The Commission announced its intention to declare control of Vector in August 2006 after finding the company was overcharging many industrial and commercial customers. Vector was also undercharging other customers, particularly Auckland residential consumers who are the beneficiaries of the Auckland Energy Consumer Trust, Vector's principal shareholder.

"The Commission's preliminary view is that Vector's offer is, in principle, consistent with the objectives of the regulatory regime," said Commerce Commission Chair, Paula Rebstock.

"Vector's decision to comply with the price path threshold and to rebalance its tariffs underscores the effectiveness of the current regulatory regime in delivering long-term benefits for consumers," Ms Rebstock said.

"Workable solutions for both consumers and businesses can be achieved without the Commission necessarily having to impose control."

Vector's offer involves rebalancing its charges to different customer groups over the next two years, so the prices paid by consumers will reflect the costs of supplying them. The distribution component of consumers' power bills will go down in many cases, but in some instances it will increase. Vector's distribution charges comprise around 20% - 40% of the average power bill.

The Commission will release details of Vector's administrative settlement offer in November, so that interested parties can provide their views.

The timeframe for submissions on the Commission's existing Intention to Declare Control will be extended to allow consultation on the proposed settlement offer. This will enable interested parties to also provide their views on the offer in light of the Commission's earlier Intention.

If, after taking into account the views of interested parties, the Commission does not accept Vector's offer, then the Commission will still need to decide whether or not to declare control.

If the Commission's preliminary view on Vector's offer is confirmed and it is subsequently accepted, then the Commission will be able to close its post-breach inquiry into Vector's threshold breaches in 2004.

Background

Vector. Vector supplies electricity consumers in the Auckland, Wellington and Northern regions. The company is listed on the New Zealand Stock Exchange. 75.1% of Vector is owned by the Auckland Electricity Consumer Trust. The Trust's beneficiaries are Auckland electricity consumers who are Vector's customers.

Electricity distribution services. New Zealand's electricity industry has five parts: generation, wholesaling, transmission, distribution and retailing. Distribution services take electricity from the national grid and distribute it to homes and businesses. Vector's electricity distribution charges comprise around 20 to 40% of the average power bill.

The regime. The Commerce Commission administers regulation of 28 electricity distribution companies and Transpower under Part 4A of the Commerce Act. The companies are regulated because they face limited competition, and without regulation could charge too much for their services and earn excessive profits.

The companies are regulated by having thresholds set for them that govern the quality of services they deliver and/or how much they can raise their prices by each year. The price thresholds are linked to the Consumer Price Index rate of inflation with the current five-year regulatory period lasting from 1 April 2004 to 31 March 2009.

The thresholds are a screening mechanism the Commission uses to identify distribution businesses whose performance may warrant further examination, and, if necessary, control of their prices, revenues and/or service standards.
Control.

If companies breach price or quality thresholds set for them, the Commission can consider imposing control on their electricity services. However, it must first seek the views of interested parties on its intention to do so.

If the Commission makes a declaration of control it can then set rules-termed an 'authorisation'-governing the prices, revenue and/or quality of those controlled services for up to five years.

While the company may face penalties if it does not comply with those rules, the operation of the company will continue to be undertaken by its management and Board of Directors as normal. Control is not intended to compensate consumers for any past overcharging but to put in place constraints on the controlled business's future performance.
Intention to declare control of Vector.

Since the targeted control regime was initiated in 2001, the Commission has published its intention to declare control three times: of Unison Networks' electricity distribution services in September 2005, of Transpower's transmission services in December 2005, and of Vector's distribution services in August 2006.

Administrative settlement. As an alternative to control being imposed, the company can reach an administrative settlement with the Commission. This usually involves the Commission and the company agreeing to pricing levels and quality measures for a period of up to five years. The result is that prices and quality are maintained at levels the Commission considers appropriate for the long term interests of consumers, without the need to impose control, which can be intrusive and costly.

ENDS


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