ComCom confirms reduced rates of return for network monopolies

Thursday 30th October 2014

The Commerce Commission has confirmed it is reducing the allowable rate of return on capital for regulated electricity and gas network monopolies in a move that Auckland network owner Vector says will place "further pressure on our ability to invest in network growth."

The decision concludes a long-running stoush between the competition regulator and network companies, led by Vector, that included the first judicial "merits review" under the Commerce Act, which recommended a cut the weighted average cost of capital from the 75th to the 67th percentile.

The WACC is used in the price-quality path and information disclosure regimes that apply to electricity lines and gas pipeline businesses, with the new benchmark to apply from April next year for electricity lines businesses and from 2017 for gas network businesses.

“By reducing the margin we allow regulated businesses to earn on their cost of capital, we expect consumers to save about $45 million per year across both electricity lines and gas pipeline services,” said deputy chair Sue Begg. “Regulated businesses subject to price-quality paths will see their rate of return reduce by about 24–28 basis points per annum.

“We have responded to the High Court’s judgment. We have consulted extensively, and been able to consider a wide range of evidence and expert opinions,” Begg said. “A WACC margin at this reduced level more appropriately promotes the long-term benefits for consumers, both residential and business.”

However, the commission has revised its draft decision by proposing that the profitability of electricity lines and gas pipeline businesses is assessed against the existing 25th to 75th percentile WACC range, as well as the 67th percentile point estimate, with submissions due by Nov. 14 and a final decision due by year's end.

"Current technology advances greatly increase risk and uncertainty in network investments, which should be increasing the allowable return on assets or WACC percentile, not reducing it," said Vector in a statement to the NZX. "The correct balance between lower prices for consumers and a suitable return on new investment in the network is critical to Auckland’s growth and success.

The Commission had exercised "considerable discretion in deciding on the 67th percentile in light of two of its independent expert advisers recommending the status quo or higher percentiles."

BusinessDesk.co.nz

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