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Regulator reshapes Orion’s quake cost clawback pricing

The Commerce Commission has trimmed planned price hikes sought next year by Orion New Zealand to allow the Christchurch electricity lines company to recover earthquake rebuilding costs, but has eased up on subsequent increases over the next four years.

The competition regulator will let Orion increase prices by up to 8.4 percent from April next year, resulting in an average monthly increase of $4.80 for a typical household, it said in a statement. The lines company can make further annual increases at the rate of inflation plus one percentage point until 2019.

The final determination would see a lower hike in 2014 than the 9.2 percent increase proposed in its draft decision in August, though slightly higher in later years, when it proposed increases at the rate of inflation. Both determinations were short of Orion's proposal to hike prices 15 percent, or $8.50 a month, in year one, with subsequent annual increase of inflation plus 1.2 percent until 2019.

The decision means Orion will recover $34.8 million in additional costs it incurred from the quakes that devastated the country's second-biggest city in 2010 and 2011, more than the $28.6 million flagged in the draft proposal, but still less than half the $86.3 million the lines company was pitching for.

"Our main concern with Orion's proposal is that we consider Orion has proposed to do too much, too soon. We consider the extent and timing of the proposed expenditure has not been adequately justified," the report said.

"Also, we do not consider that consumers should pay higher prices to compensate Orion for the lower than expected revenues it received after the earthquake and before the price-quality path could be reset," it said.

Because Orion's proposals raised alarms at the regulator over the projected rate of expenditure, the commission undertook its own assessment. As a result, the regulator agreed an increase was needed, but not to the extent sought by Orion.

Thousands of Christchurch residents lost power during the spate of earthquakes, costing Orion $20 million in extra operating costs and forcing it to signal significantly increased debt levels in coming years.

Still, the lines company remained profitable in the year ended March 31, with earnings down 9.9 percent to $49 million, and it paid $32 million in dividends, down from $34 million in the 2012 financial year.

The regulator rejected a submission by Orion shareholder Christchurch City Holdings, the council's investment arm, that investors had a right to a reasonable return, saying "no investor has such a 'right' to a reasonable rate of return in a workably competitive market."

"In particular, an undiversified investor has no such right to expect consumers to compensate it for the impact on its returns of not diversifying," the commission said in its report.

The lines company, owned by the Christchurch and Selwyn councils, applied to the commission in February to increase its prices and reduce its quality targets.