Vector to cut gas distribution prices by 18 percent

Thursday 28th February 2013

Competition regulator the Commerce Commission has confirmed that gas distribution network owner Vector will have to cut its prices by 18 percent, and cut its wholesale gas transmission charges by 29.5 percent.

The final determinations are in line with earlier drafts, and remain the subject of a High Court merits appeal led by Vector and supported by a range of monopoly service providers such as electricity, port, and airport operators who believe the commission is using the wrong inputs to determine regulated pricing.

In the meantime, Vector chief executive Simon Mackenzie argued to journalists this morning that the reduced pricing, while contested, was a tribute to Vector's operational efficiencies.

Mackenzie said it was a "paradox of regulation" that if a regulated company managed its costs well and improved its profitability within the limits of its mandated pricing, it could effectively suffer a penalty by being required to cut its prices further.

Vector is objecting particularly to a "massive swing" in the assumed cost of capital being used by the commission to determine pricing. While the reductions reflected lower international interest rates, risk premiums were rising.

"If you look at recent decisions in the UK, in the low interest rate environment, the regulator has kept their weighted average cost of capital at the same level because of a need to adjust the market risk premium," Mackenzie told BusinessDesk.

The new price reductions hit Vector hardest. Other gas distributors face decreases of between 2 percent and 4 percent.

"Although substantial price reductions are necessary for Vector, we do not expect this to limit its ability to maintain and invest in its network," the commission's deputy chair, Sue Begg, said in a statement. "The default paths provide for increases in investment of up to 20 percent above what a business has spent historically."

Companies could also apply for a customised price path to replace the commission's default settings.

A decision from the merits review is expected in the second quarter of this year and could, depending on its outcome, lead to further adjustments to gas and electricity network pricing.

At its half year result announcement last week, Vector warned earnings in the second half of the current financial year would suffer as cuts to network pricing took effect. The company achieved a 10.8 percent lift in tax-paid earnings to $118 million in the six months to Dec 31.

Vector shares were unchanged in early trading this morning on the NZX, at $2.,84.

BusinessDesk.co.nz

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