Vector chiefs rip into electricity regulators

Thursday 18th October 2012

The chairman and chief executive of Vector have both slammed the performance of its two regulators: the Commerce Commission and the Electricity Authority.

Chairman Michael Stiassny used the network operator's annual meeting in Auckland to accuse the commission, which administers competition policy, of imposing price cuts on Vector using a flawed methodology that risks undermining investment in critical public infrastructure.

"Price cuts as the commission is suggesting, if sustained over the long term, threaten continued investment in our network and therefore the infrastructure to support growth in Auckland and the broader economy," said Stiassny.

His comments come after the recent conclusion of hearings for two critical elements in a tangle of legal reviews and appeals in the High and Supreme courts.

Vector, with support from airport, port and transmission companies, is fighting two key elements of the commission's approach to network price regulation: input methodologies and default price paths, based on average costs of capital Vector says are too low and will encourage under-investment.

"Vector's cost of capital should be higher than comparable Australian companies, which face lower risks," said Stiassny, but the commission suggested Vector should face a weighted average cost of capital of 8.77 percent, when Australian peers were regulated at between 9.4 percent and 9.95 percent.

"But the commission dismisses our arguments."

Meanwhile, chief executive Simon Mackenzie expressed concerns about the Electricity Authority's draft decision last week to smear the cost of the national grid more evenly across both electricity generators and retailers in a major departure from arguments that had raged for 18 years.

"The authority simply does not know if consumers will be better or worse off financially under its proposals," said Mackenzie. "We are concerned these changes could lead to higher prices. At present it is not clear by how much" and would depend on a competitive wholesale electricity market.

"If competition is not strong enough, generators may simply pass these costs on to consumers in the form of higher prices instead of paying their share."

Vector would expect to pass on such increases in its own charges, Mackenzie said.

The EA published base case expectation of a net present value gain from its proposals of $173 million, while proposals from a divided group of industry representatives only barely backed reforms calculated to be worth $49 million in NPV terms.

Stiassny listed among the Commerce Commission's failings was not recognising "the disciplines imposed by Vector's unique mixed-ownership structure." Its majority shareholder, the Auckland Council-owned Auckland Electricity Consumers Trust, is "elected by our customers and therefore highly sensitive to their concerns."

BusinessDesk.co.nz

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