Lower interest rates are expected to have a significant impact on regulatory pricing issues facing electricity and gas distributor Vector.

The company announces its interim result tomorrow. Forsyth Barr expects a reported profit of $287.8 million, up 217%. But the increase is due to nearly $200 million from the gain from the sale of the Wellington electricity network and profits prior to settlement.

Forsyth Barr is expecting revenue of $587.5 million, down 3.6% over the previous corresponding period, while ebitda (earnings before interest, tax, depreciation and amortisation) is forecast to be up 3.6% at $292.4 million on the back of higher Auckland electricity prices and corporate cost savings.

As usual most interest will be centred on the outlook for the coming six months.

One issue in particular is what impact lower interest rates will have on the amount of return on its investments Vector is allowed under Commerce Commission regulation.

The commission targets a return based on Vector’s WACC (weighted average cost of capital).

Interest rates are a key driver of WACC and with the official cash rate dropping from 8.25% to 3.5% over the past year there is a risk of a significant electricity price set at the end of the year, Forsyth Barr says in a research note: “Until the regulatory uncertainty has eased, we believe that Vector is a relatively risky investment.

“Increasing competition in the gas wholesale market creates additional downside risk.”

Shareholders will be seeking more clarity on the regulatory issues and also will have an eye on Vector’s broadband rollout.