Vector loses key elements of challenge to Commerce Commission pricing

Thursday 12th December 2013

An attempt led by Auckland monopoly network Vector to overturn the way the Commerce Commission sets prices for its services has failed in almost all respects, following a merits review challenge to the High Court.

The long-awaited, 661 page decision from Justice Denis Clifford rejected arguments mounted by Vector and supported by fellow electricity lines company Powerco and a phalanx of other monopoly operators, including ports and airports, that the competition authority was unreasonably restricting their profitability.

A summary of the massive judgment, which drew on close to 50,000 pages of written and transcribed evidence, says that "whilst the court did not agree with a number of elements of the commission's reasoning processes, it has - with two exceptions - dismissed all the appeals."

The commission welcomed the decision, describing the two areas where it had lost as "relatively minor points out of at least 58 challenges" to the input methodologies it applied in 2010 to govern monopoly network service prices for a seven year period.

Vector chief executive Simon Mackenzie said the court "did not believe the alternative approaches proposed by Vector and six other infrastructure companies passed what appears to be an exceptionally high hurdle that the court considers must be achieved before the commission's approach could be overturned.

"While the overall outcome is disappointing the judgment is extensive and we will take time to consider the implications of the decision before commenting further," he said.

Vector had particularly sought to be allowed higher rates of return on its regulated assets, as well as alternative approaches to valuing the assets on which those returns would be calculated, arguing it faced a tougher regime than Australian counterparts, despite operating in a smaller market.

However, Justice Clifford was required in his merits review - a process created in part in response to lobbying by Vector - to decide whether alternative input methodologies (IM's) to the commission's would have led to a "materially better" outcome.

"As regards the regulatory valuation of existing, specialised assets, the court concluded that the asset valuation IM's would not be materially better if, as proposed by supplier appellants, they required the commission to adopt current, replacement-cost valuations."

That conclusion was based on its concerns about possible revaluation gains that would arise from such an approach, which could inflate returns on the regulated assets, and a finding that "evidence was not produced to suggest they would provide less than normal returns."

On regulated cost of capital, the court concluded the commission's approach "provides acceptable regulatory rates of return whereas the increase rates of return proposed by suppliers would be too high" and would not therefore meet the test of being "materially better."

The international credit rating agency Standard & Poors put Vector's BBB+ credit rating on negative credit watch late last month after it signalled New Zealand's regulatory regime is less stable and a higher risk than in other nations.

The hearings took 12 weeks earlier this year, at times involving as many as 32 lawyers, and including up to six Queen's Counsel. Vector did not dispute a claim by Wellington lawyer Stephen Franks at a seminar in October that it had spent as much as $17 million in a single year on litigation, most of related to the merits review.

BusinessDesk.co.nz

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