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ComCom could deliver $750M to consumers after High Court win, says Franks

Friday 20th December 2013

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The Commerce Commission should act swiftly to capitalise on the High Court's findings in its favour on monopoly network pricing to deliver consumer benefits worth perhaps $750 million over the next six years, says Wellington barrister Stephen Franks.

"If the Commerce Commission picks up the baton thrown by the High Court, there could be a $150 million election year announcement of a reduction in cost to consumers," said Franks in blog comments on the High Court merits review of the commission's input methodologies for determining default price paths for monopoly networks. "From 2015 to 2020, it could save up to $750 million."

Franks represented the Major Electricity Users Group in the lengthy hearings that led eventually to Justice Denis Clifford's 661 page findings, which Franks says the government should be grateful for.

His comments coincide with a credit rating downgrade of gas and electricity network owner Vector, which led the charge on the merits review, arguing the commission's inputs for determining monopoly network pricing was flawed, would reduce necessary investment in essential industry networks, and penalises network owners for efficient operation.

International credit rating agency Standard & Poor's confirmed yesterday that it was dropping its rating on Vector to BBB from BBB+, still an investment grade rating.

While the agency has changed its rating criteria across the sector, Vector chief executive Simon Mackenzie said the drop also reflected a relative lack of regulatory certainty in New Zealand now perceived by international investors.

"To give an example of the significance of the changes, in future a BBB+ rating requires funds from operations to debt to be maintained at or above 15 percent, a 50 percent increase on the previous criteria," said Mackenzie in a statement. "Their assessment is that the New Zealand regime is less stable than other regimes internationally and they see it as a higher risk.

"The government's recent announcement that it intends to review regulatory arrangements under the Commerce Act, together with the Productivity Commission's work around regulatory best practice, is both timely and welcome," he said.

However, the rating change would have no immediate financial or customer impact, given the long dated duration of the company's debt portfolio.

In his commentary, Franks says the commission could face a "busy January" if it chooses to bring forward a review of the current input methodologies (IM's), as it is able to do, and that this could improve regulatory certainty.

"If they can't do it, they'll leave years of uncertainty for investors in the regulated suppliers," he says.

"If the commission does not bring forward a review of the current IM before the end of September next year, the monopoly suppliers will retain their current ability to extract excessive profits until 2020.

"The scheduled 2015 reset of their price-quality paths will apply the current, uncorrected IM for the full length of the paths till 2020, even though that current IM must be reviewed in two years' time.

"The commission now has nine months to avoid being blamed for the next six years' extraction of monopoly profits for which the High Court could see no justification."


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