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Commerce Commission Seeks Views On Vector Offer

The Commerce Commission is seeking the views of interested parties on the voluntary offer put forward by Vector as an alternative to regulatory control being imposed.

In response to its earlier intention to make a declaration of control in respect of the electricity distribution services supplied by Vector, the Commission received an administrative settlement offer from Vector in October 2006 (which was updated in January 2007). An administrative settlement is an alternative to regulatory control being imposed.

The Commission has reached the preliminary view that the voluntary offer is consistent with the objectives of the regulatory regime.

The key concern identified by the Commission in 2006 was that Vector's pricing strategy was inefficient and did not reflect Vector's costs in supplying its consumer groups. As a result, some consumer groups were being significantly overcharged while others were being undercharged, including Auckland residential consumers.

Therefore, the Commission reached the view that Vector's pricing strategy was inconsistent with the objectives of the targeted control regime.

Vector's offer involves the company rebalancing its line charges over the next fifteen months to different regions and consumer groups subject to its existing price path threshold so that the prices paid by consumers better reflect underlying costs, demands and service quality. The rebalancing will eliminate cross-subsidies between consumers groups. The removal of cross-subsidies means that the distribution component of some power bills will reduce while some will increase. Vector's distribution charges comprise around 20% - 40% of the average power bill.

"The Commission's initial view is that Vector's administrative settlement achieves many of the potential benefits of control, but with significantly lower compliance costs. Since it made its offer, Vector has reduced prices to those consumer groups that were being significantly overcharged. Acceptance of the offer would allow Vector to complete its tariff rebalancing programme by March 2009 and ensure efficiencies are realised in its pricing strategy," says Commerce Commission Chair, Paula Rebstock.

"The offer preserves Vector's investment incentives to maintain a secure, reliable and safe electricity supply in its distribution networks. Any efficiency gains made over that period would be retained by Vector but the increased benefits to consumers would be shared when the thresholds are reset in 2009," Ms Rebstock says.

The Commission now seeks the views of interested parties before making its decision whether or not to accept Vector's offer or to declare control. If the Commission accepts Vector's offer, then the Commission will be able to close its post-breach inquiry into Vector's price-path threshold breaches.

Together with the Draft Decision released today, the Commission is releasing details of Vector's administrative settlement offer, so that interested parties can provide their views. Submissions will be required by the close of business 11 February, 2008.

The Draft Decision is available on the Commerce Commission's website www.comcom.govt.nz under IndustryRegulation/Electricity/ElectricityLinesBusinesses/TargetedControl/vectorintentiontodeclarecontrol

Vector. Vector supplies electricity to 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. Vector is New Zealand's largest energy infrastructure company with a considerable portfolio of assets, including a gas distribution network which is the subject of control under Part 5 of the Commerce Act. The Commission released details of its draft decision on the Authorisation in October 2007 and is now considering responses to that consultation.

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.

The objective of the regime is to promote the efficient electricity distribution and transmission markets for the long-term benefit of consumers so that suppliers are limited in their ability to extract excessive profits, face strong incentives to improve efficiency and provide services at a quality that reflects consumer demands, and share the benefits of efficiency gains with consumers, including through lower prices.

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 rulestermed an 'authorisation'governing the prices, revenue and/or quality of those controlled services for up to five years.

Intention to declare control. 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.


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