Vector: Change would hurt power supply

JAMES WEIR
Last updated 10:32 22/07/2014

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The government's monopoly watchdog says its draft decision on allowable returns for power and gas lines companies would cut consumers' bills by about $33 million a year and "constrain excessive profits".

But Auckland-based electricity lines company Vector says by cutting the allowable returns on its assets, the Commerce Commission's draft decision would put more pressure on Vector's ability to invest in the lines network.

Grid company Transpower and about 28 lines companies, including the likes of Vector and Orion, have their charges regulated, while power retailers' prices are not controlled. Cost-of-capital calculations are used to set permitted revenues for monopoly companies such as state-owned national grid operator Transpower and local lines companies.

The Commerce Commission today put out its draft decision on the weighted average cost of capital (WACC). The WACC is used in the price-quality path and information disclosure regimes that apply to various regulated businesses.

The draft decision proposes reducing the WACC used to determine price-quality paths for electricity lines and gas pipeline services. The WACC used will be the estimate at the 67th percentile of the WACC range rather than the current 75th.

The proposal is now open to submissions, with the Commission's final decision due in October. The final decision will affect the prices electricity lines businesses can charge from April next year, and from 2017 for gas pipeline businesses.

"The proposed change in the WACC percentile would reduce consumer bills by about $33m per year across both electricity lines and gas pipeline services, without compromising efficient investment or service quality," said Commerce Commission Deputy Chair Sue Begg.

 "At the same time, regulated businesses subject to price-quality paths would see their rate of return reduce by about 24 - 28 basis points per annum. The decision aims to strike the right balance to ensure on-going investment while constraining excessive profits."

Vector said that would cut their allowable return on assets.

"All previous investment decisions have been based on the returns we would expect from a 75th percentile. A WACC setting at the 75th percentile is a position long-held by the Commission," Vector said.

The draft decision would cut 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," Vector said.

 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."

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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.

The Commission's work on WACC was in response to the High Court judgment last year that questioned the WACC estimate. The Court considered that the use of the 75th percentile was insufficiently supported by evidence, and might be at odds with the Part 4 objective to limit the ability of regulated suppliers to earn excessive profits.

"Our draft decision today takes account of evidence not available at the time the WACC input methodology was originally set, back in December 2010," said Begg. "The decision also builds on additional expert views that were commissioned to help inform our decision. These reports are all available on our website, and the public can express their views on these as part of their submissions."

The Commission's draft decision also proposes that, under information disclosure regulation, the 33rd to 67th percentile WACC range is used to assess the profitability of electricity lines and gas pipeline businesses.

- BusinessDay

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