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Regulator's draft view trims returns for network monopolies

Regulator's draft view on monopoly networks would be $33M a year win for consumers

By Pattrick Smellie

July 22 (BusinessDesk) - Electricity and gas consumers will be about $33 million a year better off if a draft decision by the Commerce Commission to reduce the returns allowable to monopoly electricity and gas network owners and national grid operator Transpower is upheld, although the impact at the household level will be tiny.

The commission released a draft decision on the long-running battle over the appropriate weighted average cost of capital for electricity and gas distributors, proposing to reset allowable WACC from the so-called "75th percentile" to the 67th percentile, following a High Court decision last year that questioned whether the 75th percentile estimate level gave electricity and gas distributors the ability to earn excessive profits.

Today's draft decision is expected to disappoint listed network companies such as Vector, Powerco and Horizon, but was welcomed immediately by the executive director of the Major Electricity Users Group, Ralph Matthes.

"At that the 67th percentile, that's just over $30 million a year, which is $150 million over five years that we've avoided," he told BusinessDesk after a presentation by the commission's deputy chair, Sue Begg, on the draft decision. "That's a pretty good win."

But Vector said the decision "constrains" the Auckland-based electricity and gas network operator to invest in maintaining and upgrading its assets.

"Current technology advances greatly increase risk and uncertainty in network investments, which should be increasing the allowable return on assets or WACC percentile, not reducing it," the company said in a statement.

However, investors appeared to have anticipated the reduction. The Vector share price rose slightly, by 0.4 percent to $2.56, when trading opened on the New Zealand stock exchange this morning.

The commission's price settings are binding for five years at a time, with new "price-quality paths" to be locked in at the end of this year.

Submissions on the latest draft decision are sought by Aug. 29 for a final decision by Oct. 31.

The draft excludes considering the WACC to apply to airports and does not affect network charges from Christchurch electricity network owner, Orion, which has its own regulated pricing to reflect the damage done and repairs required by the Canterbury earthquakes to the city's electricity infrastructure.

Vector said the draft decision "reduces the investment returns from the network and, when added to other approaches by the commission, places further pressure on our ability to invest in network sustainability and growth."

"The correct balance between lower prices for consumers and a suitable return on investment in the network is critical to maintaining the long-term, security of supply that is essential for Auckland’s growth and success."

However, the commission was responding to the outcome of a High Court merits review, in which Justice Denis Clifford questioned the commission's use of the 75th percentile for regulated price-setting and tentatively proposed the 50th percentile as more appropriate.

The commission's decision effectively plumps for the upper end of the range between the 50th and 75th percentiles, having concluded on examining further evidence that returns for network companies were unduly high if set at the 75th percentile.

The proposed amendment will reduce electricity distributors' WACC - a proxy for the rate of return the companies are allowed to earn on their asset base - from 6.82 percent to 6.57 percent.

It estimates that, if implemented, the reduced percentile will reduce revenue for local monopoly electricity networks' by around $16.7 million annually, for Transpower by around $11.6 million and for gas businesses by about $4.5 million.

Averaged across all consumers, the reduction is minor, at around $10 a year, and would be considerably less for householders, Begg said.


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