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Vector depreciation bid rejected in ComCom DPP reset

Wednesday 29th May 2019

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Vector, the country’s biggest electricity distributor, has had its request to accelerate depreciation on its network assets turned down by the Commerce Commission.

The company had sought a higher depreciation rate on its network assets to reflect the increased risk it sees to them as more firms and households invest in solar and batteries to reduce their demand from the grid.

But the Commerce Commission, in a draft decision today, says it's not inclined to exercise the new discretion it has under its input methodologies – the rules it uses for policing the returns of monopoly lines companies and gas pipeline operators.

The regulator says it’s not sure that Vector has met the requirements for accelerated depreciation.

“Secondly, based on the material before us, our provisional judgement is that the long-term benefit of consumers is better served by retaining the standard depreciation treatment for Vector’s assets, rather than granting an acceleration,” the commission says in its 378-page draft decision.

Every five years the commission sets performance targets for the electricity distributors it polices to ensure they earn a fair return on their assets without discouraging maintenance and investment in their networks, or encouraging over-building.

It uses a combination of the individual firms’ growth forecasts and prevailing interest rates to set their maximum revenue.

The draft default price paths proposed today apply to 15 firms, given that Powerco and Wellington Electricity are operating on separate, customised plans the commission approved in 2018.

Today’s DPPs will see revenue across the sector fall to $1.03 billion in the year ended April 2021, about $50 million less than is expected in the current year.

Most of that is due to the impact falling interest rates are having on the sector’s cost of capital. The commission’s decision assumes a weighted average cost of capital for the sector of 5.13 percent from the 7.19 percent used for the current five-year regulatory period.

Commission deputy chair Sue Begg said most consumers should expect an initial reduction in lines charges next year, although the impact varies from firm to firm and across regions.

But overall revenue requirements rise during the remainder of the period reflecting ongoing investments that are being made. Revenue is projected to rise to almost $1.15 billion in the year ending April 2025, with the total revenue required during the five years being about 6 percent higher than the preceding regulatory period.

“Our draft decision allows for increased investment in the network, with lines companies forecasting more than $2 billion will be spent on renewing ageing assets and meeting the energy needs of growing communities over the next five years,” Begg said.

The range of outcomes today reflects the vastly different challenges networks face around the country. While most are facing some solar-build in their areas, some in the upper North Island are also facing strong population growth, while growth in some provincial centres is static.

Vector sought an increased depreciation rate arguing it couldn’t avoid spending given Auckland’s unique and massive growth rate. The company spent about $94 million replacing and renewing assets in 2018, up from $85 million the year before, and expected that to go through $100 million during the coming five-year regulatory period.

And it says a lot of that spending can’t be avoided, given the need to maintain reliable power supply and keep up with a population expected to increase 36 percent to 1.9 million by 2025. It has to install long-lived transformers and poles – the latter last 60 years – not knowing if it will get to recover their cost over that lifetime.

Today’s draft decision will see Vector’s 2021 allowable revenue fall by 3 percent from the current year.

Dunedin-based Aurora Energy has been cleared to raise its charges to about $72 million in the year ending April 2021, about 9 percent higher than the year before. Whakatane-based Horizon gets a 7 percent increase and Network Tasman gets a 5 percent increase.

Dunedin City Council-owned Aurora is ramping up its spending to cope with growth in Central Otago and after decades of under-spending saw it breach its performance standards and be significantly restructured.

Begg noted the “significant” spending needed on the Aurora network and the price increases that would result for customers.

“We have taken steps to limit the extent of these prior to Aurora Energy applying for a customised price-quality path in May 2020.”

The biggest potential reductions are a 34 percent cut for Waipukurau-based Centralines and 18 percent reductions for Nelson Electricity and The Lines Company based in Te Kuiti.

The commission noted that Centralines’ current revenues include a deferred recovery from earlier in the regulatory period, while its operating spending and asset base growth have also been lower than previously forecast.

The Lines Company experienced much higher revenue growth than previously forecast, while seeing only modest growth in its asset base and operating spending. Nelson Electricity has experienced both declining operating expenditure and a reduced asset base, the commission noted.

The commission is receiving submissions on its proposals until July 18 and aims to make a final decision in November.


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