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Vector signals Commerce Commission challenge on rates of return

Friday 22nd October 2010

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The country’s largest listed network utility company, Vector, is getting set to test new rights under the Commerce Act to challenge the Commerce Commission’s emerging view about appropriate regulated rates of return for monopolies.

The Commission released its final draft of the so-called “input methodologies” for determining rates of return for regulated monopolies just ahead of Vector’s annual meeting in Auckland. Regulated earnings represent 60% of Vector’s revenue, derived from Auckland isthmus electricity and gas network ownership, with more to come if it’s chosen for the government-funded ultra-fast broadband roll-out.

“Regulation remains the major value driver for our gas and electricity distribution businesses,” chief executive Simon Mackenzie told shareholders. “The National Government has identified infrastructure as a cornerstone of economic growth, and the right regulatory regime is necessary to support the Government’s policy goals of higher economic growth and closing the gap with Australia.

“On a simple comparison basis”, Vector believes the Commission’s proposed allowable return on investment is “at least 1% below Australia, where you would expect New Zealand to be higher.”

“Anyone would recognise this as unusual and at odds with the Government’s objectives.”

Vector held the “strong view that it does not meet the legislative intent and purpose requirements of the Commerce Act.”

Final submissions on the proposed regime are due on two deadline dates: Nov. 12 and 19, with final determination by Dec. 31.

“The changes to the Commerce Act that we advocated for have changed the game,” Mackenzie said, referring to rights of appeal and merits review, won after heavy Vector lobbying of the previous government. “We now have options to challenge the Commerce Commission’s decisions, and we will consider the full range of options available to us as we continue this process.”

The first step is a merits review, which Vector must invoke within 20 days.

“There is still a long way to go in the process, and we expect to continue to incur further costs,” Mackenzie said. “Given the influence of regulation on our business, we owe it to all stakeholders to pursue the best possible outcome.”

However, the issue at stake was the relative scarcity of global capital, investors’ expectations of higher returns, and Vector’s need to tap international investment markets because of New Zealand’s relatively small capital markets.

“For a company like Vector that may invest more than $2.5 billion in its electricity and gas network businesses over the next decade as well as relying heavily on overseas lenders for funding, the draft regulation is an incomplete and inappropriate package,” Mackenzie said.

He also made a pitch for new regulatory incentives to assist the economics of underground trenching for gas pipes, power lines and UFB cable.

This will be a huge area of potential growth for Vector if and when it becomes a partner in the UFB roll-out initiative, decisions on which are due within weeks from Crown Fibre Holdings, the state-owned company conducting urban UFB roll-out negotiations.

“We’d like to have the option of being able to invest more in New Zealand, give customers greater choice (especially in matters such as undergrounding), but the current environment is not conducive,” he said.

Chairman Michael Stiassny told shareholders that three month operational data released to the NZX today confirmed the company was “on track to reach the target for 2011 full year earnings.”

The Vector share price remained at $2.37 today.

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