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ComCom takes issue with Vector on regulated rates of return

ComCom takes issue with Vector on regulated rates of return

By Pattrick Smellie

Nov. 30 (BusinessDesk) - The Commerce Commission says Auckland electricity network monopoly Vector is wrong to claim it is being subjected to regulated costs of capital higher than its Australian counterparts.

Vector has repeatedly made the argument in its protracted argument with the competition regulator, saying Vector faces greater business risks than Australian networks and should be reflected in a higher weighted average cost of capital when regulated prices are being set.

Instead, Vector says it faces an 8.77 percent WACC while Australian peers face WACC's of between 9.4 percent and 9.95 percent.

However, the commission's deputy chair, Sue Begg, says in slides prepared for an analysts' briefing in Wellington today that this is not a "like for like" comparison because Vector is not taking into account investor taxes, "notably dividend imputation."

As a result, Australian network WACC's are in a range of 8.66 percent and 9.17 percent, falling to a range of between 7.08 percent and 7.49 percent on a post-tax basis, well below the 8.77 percent applying to Vector.

The comments were part of the commission's confirmation of final default price-quality path pricing for 16 electricity distributors, which have been delayed by challenges to the commission's methodology by Vector, which must cut its charges by 10 percent as a result of the commission's ruling.

The decisions make only minor changes to the draft decisions already announced in August, and confirm the commission's view that Vector would be "over-recovering" $121.6 million a year without the price changes.

Vector is also amongst a large group of monopoly operators including ports and airlines seeking a merits review in the High Court of the way the commission has set its final pricing. If successful, that could see today's confirmed price paths being reopened.

Vector earlier this month lost a final appeal to the Supreme Court over the process the commission adopted to set the price paths.

The NZX-listed company's chief executive Simon Mackenzie said today's decision was "as expected".

"Today's decision requires a reduction in our electricity distribution prices by an average of 10 percent in 2013, with a further price adjustment in 2014."

Mackenzie said the regime created "perverse incentives" which made Vector a "victim of its own success" for lowering its costs and improving operational efficiencies.

"Our focus remains on the merits appeal process, which is well under way, with a decision expected in the first half of next year," he said.

The only changes of significance in today's announcements are a decision, at the request of four community-owned lines companies to limit allowable increases in their tariffs to no more than 10 percent in one year, for fear that higher increases would be difficult for customers to afford.

The affected lines companies are Alpine Energy, Centralines, The Lines Company, and Top Energy.

Network charges make up around one-third of the cost of electricity, so price rises and falls will not translate into electricity price cuts or increases for consumers of the same size.

Vector shares rose 1.1 percent in early trading on the NZX, to $2.67.


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