Vector profits hang on court ruling

JASON KRUPP
Last updated 05:00 01/03/2013

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Vector is laying future profit margins on a bet it will win a challenge to the Commerce Commission's monopolistic price scheme, which is currently working its way through the High Court.

The Auckland electricity and gas monopoly was yesterday ordered by the regulator to slash gas distribution and transmission prices by 18 per cent and 29.5 per cent, respectively.

The announcement comes just three months after a similar review of electricity distributors saw the Commerce Commission order the firm to lower fees it charges to link households to the national grid by 10.1 per cent.

The firm's merits review challenge has been heard in the High Court, with a ruling expected before the end of the year.

The new electricity prices come into effect as of April 1, while the gas charges could be implemented either from July or be deferred to October, when Vector's pricing year starts.

That should leave the firm's earnings largely unaffected in the second half of the financial year, according to Forsyth Barr analyst Andrew Harvey-Green, but 2014 operating earnings are forecast to fall by 1.4 per cent to $578 million.

About half of Vector's revenues are generated by its electricity distribution business, followed by a 28 per cent contribution from its gas distribution, 14 per cent from gas transportation, and 7 per cent from smart meters.

At the heart of the dispute between Vector and the regulator is the cost of capital level used in the Brennan-Lally CAPM model, which New Zealand uses to calculate returns on monopoly infrastructure.

"We continue to await the merits review decision, which will potentially see changes to the starting price adjustments," Harvey-Green said. "Nevertheless, the starting price adjustments will take effect. Any changes brought about by the merits review will result in prices being amended retrospectively by applying claw back provisions."

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- Fairfax Media

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