Commerce Commission accepts settlement proposal from Vector

The Commerce Commission today announced its acceptance of the settlement proposal put forward by Vector as an alternative to regulatory control being imposed in respect of its electricity distribution business.

In August 2006, the Commission announced its intention to declare control over the electricity distribution services of Vector after it reached the view that Vector's pricing strategy was inefficient and not cost-reflective. Some consumer groups were being significantly overcharged while others, including Auckland residential consumers, were being undercharged. In response to that intention, the Commission received an administrative settlement proposal from Vector in October 2006. This proposal was updated in January 2007.

Following consultation with interested parties on Vector's proposal, the Commission has now concluded that Vector's settlement proposal is consistent with the objectives of the regulatory regime.

"The Commission considers that Vector's administrative settlement addresses the concerns identified by the Commission, but with significantly lower compliance costs than would be the case if regulatory control was imposed. Vector has initiated rebalancing in its pricing strategy so that consumer groups that were being significantly overcharged have seen their prices reduce. This tariff rebalancing programme will be completed by March 2009," said Commerce Commission Chair Paula Rebstock.

"The Vector settlement proposal also explicitly acknowledges that Vector will continue to invest in its distribution networks to maintain a secure, reliable and safe electricity supply," Ms Rebstock said.

Vector's proposal involves the company rebalancing its line charges within its existing price path threshold to different regions and consumer groups so that the prices paid by consumers better reflect underlying costs, demands and service quality. The rebalancing will eliminate cross-subsidies between consumer groups. The removal of cross-subsidies means that the distribution component of some consumers' power bills has reduced while for others it has increased. Vector's distribution charges comprise around 20% – 40% of the average power bill.

Acceptance of Vector's proposal means that the Commission can close its post-breach inquiry into Vector's price-path threshold breaches.

"The Commission acknowledges that the Vector Board and management have worked positively with the Commission to achieve this outcome," said Ms Rebstock.

The Decision is available on the Commerce Commission's website www.comcom.govt.nz under IndustryRegulation/Electricity/ElectricityLinesBusinesses/TargetedControl/vectorintentiontodeclarecontrol

Background
Vector. Vector supplies electricity to consumers in the Auckland, Wellington and Northern regions. The company is listed on the New Zealand Stock Exchange. 75.1% of Vector is owned by the Auckland Electricity Consumer Trust. The Trust's beneficiaries are Auckland electricity consumers who are Vector's customers. Vector is New Zealand's largest energy infrastructure company with a considerable portfolio of assets, including a gas distribution network which is the subject of control under Part 5 of the Commerce Act. The Commission released details of its draft decision on the Authorisation in October 2007 and is in the process of determining the Final Authorisation for Vector's gas distribution business.
Electricity distribution services. Electricity generated in New Zealand is transmitted through Transpower's national grid and, most often, local distribution networks before being sold to final consumers by retailers. Distributors such as Vector own and maintain their own distribution networks and charge for the use of that network – Vector's electricity distribution charges comprise around 20 to 40% of the average power bill.
The regime. The Commerce Commission administers regulation of 28 electricity distribution companies and Transpower under Part 4A of the Commerce Act. The companies are regulated because they face limited competition, and without regulation could charge too much for their services and earn excessive profits. The companies are regulated by means of thresholds that govern the quality of services they deliver and/or how much they can raise their prices by each year. The price thresholds are linked to the Consumer Price Index rate of inflation with the current five-year regulatory period lasting from 1 April 2004 to 31 March 2009. The thresholds are a screening mechanism the Commission uses to identify distribution businesses whose performance may warrant further examination, and, if necessary, control of their prices, revenues and/or service standards.
The objective of the regime is to promote the efficient electricity distribution and transmission markets for the long-term benefit of consumers so that suppliers are limited in their ability to extract excessive profits, face strong incentives to improve efficiency and provide services at a quality that reflects consumer demands, and share the benefits of efficiency gains with consumers, including through lower prices.
Control. If electricity distribution or transmission businesses breach their price and/or quality thresholds, the Commission can inquire into that breach before considering the option of imposing control. However, it must first seek the views of interested parties on its intention to do so. If the Commission makes a declaration of control it can then set rules – termed an 'authorisation' –governing the prices, revenue and/or quality of those controlled services for up to five years.
Intention to declare control. Since the targeted control regime was initiated in 2001, the Commission has published an intention to declare control three times: of Unison Networks' electricity distribution services in September 2005, of Transpower's transmission services in December 2005, and of Vector's distribution services in August 2006. Administrative settlements were agreed with Unison in May 2007 and with Transpower in May 2008.