Vector loses key elements of challenge to Commerce Commission pricing

Simon Mackenzie
Vector 12-month price history (NZX.com)

An attempt led by Auckland monopoly network Vector [NZX: VCT] to overturn the way the Commerce Commission sets prices for its services has failed in almost all respects, following a merits review challenge to the High Court.

The long-awaited, 661 page decision from Justice Denis Clifford rejected arguments mounted by Vector and supported by fellow electricity lines company Powerco and a phalanx of other monopoly operators, including ports and airports, that the competition authority was unreasonably restricting their profitability.

A summary of the massive judgment, which drew on close to 50,000 pages of written and transcribed evidence, says that "whilst the court did not agree with a number of elements of the commission's reasoning processes, it has - with two exceptions - dismissed all the appeals."

The commission welcomed the decision, describing the two areas where it had lost as "relatively minor points out of at least 58 challenges" to the input methodologies it applied in 2010 to govern monopoly network service prices for a seven year period.

Vector chief executive Simon Mackenzie said the court "did not believe the alternative approaches proposed by Vector and six other infrastructure companies passed what appears to be an exceptionally high hurdle that the court considers must be achieved before the commission's approach could be overturned.

"While the overall outcome is disappointing the judgment is extensive and we will take time to consider the implications of the decision before commenting further," he said.

Vector had particularly sought to be allowed higher rates of return on its regulated assets, as well as alternative approaches to valuing the assets on which those returns would be calculated, arguing it faced a tougher regime than Australian counterparts, despite operating in a smaller market.

However, Justice Clifford was required in his merits review - a process created in part in response to lobbying by Vector - to decide whether alternative input methodologies (IM's) to the commission's would have led to a "materially better" outcome.

"As regards the regulatory valuation of existing, specialised assets, the court concluded that the asset valuation IM's would not be materially better if, as proposed by supplier appellants, they required the commission to adopt current, replacement-cost valuations."

That conclusion was based on its concerns about possible revaluation gains that would arise from such an approach, which could inflate returns on the regulated assets, and a finding that "evidence was not produced to suggest they would provide less than normal returns."

On regulated cost of capital, the court concluded the commission's approach "provides acceptable regulatory rates of return whereas the increase rates of return proposed by suppliers would be too high" and would not therefore meet the test of being "materially better."

The international credit rating agency Standard & Poors put Vector's BBB+ credit rating on negative credit watch late last month after it signalled New Zealand's regulatory regime is less stable and a higher risk than in other nations.

The hearings took 12 weeks earlier this year, at times involving as many as 32 lawyers, and including up to six Queen's Counsel. Vector did not dispute a claim by Wellington lawyer Stephen Franks at a seminar in October that it had spent as much as $17 million in a single year on litigation, most of related to the merits review.

(BusinessDesk)

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7 Comments & Questions

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Com Com is showing himself to be totally anti shareholders particularly small retail shareholders. He expects small investors to put their hard earned money at risk not only of the market in general but of him by way of regulating them out of any return on their investment.
Take a totally unbalanced approach to all and every issue.Time to scrape Com Com. Market being destroyed by this individual.

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So ComCom is wrong, the court is wrong. Time to perhaps realize you are wrong.

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I would have more respect for Vector if it put some effort into looking after the best interests of its consumers. In the upper South Island, all the lines companies cooperate to manage peak demand. They save their consumers millions of dollars even though there is no direct return to them because of serious flaws in the structure of the electricity regulations.

Vector seems to have abandoned peak demand control and, instead, have chosen to over build their system to meet the unrestricted peak demand. This, I am told, means that they make more money.

Now they want an even higher return on the capital that they have squandered against the interests of their consumers.

On top of that, they are now squandering even more money on a crazy solar power exercise that cannot make money. The losses will increase the burden on those consumers who cannot afford to install solar power. This, I am told, is driven by the chairman of the board who has no understanding of the electricity business. The one board member from the electricity industry previously cost New Zealand hundreds of millions of dollars because of his blind belief in distributed generation.

Vector have also purchased shares in a wind farm that at the time was a losing proposition. Since then, the shares have gone steadily downhill.

Both the Board and the Trust need a substantial overhaul.

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Thankyou for posting a comment that has information backing up your argument. The previous posts are just moaning investors that have invested in a badly run company. If its a badly run company, don't invest in it - they are abusing their monopoly with no fear of having to compete, so when their stupid decisions all go wrong the consumer pays. COMCOM has a meaningful role in making sure these monopoly infrastructure providers actually make an effort to perform as if they had competition. I'm sick of the squandering and then raising prices to fix their stupidity!

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For once I totally agree with Brian. The monopoly network providers now have the certainty they deserve with the HC decision. They should simply get on with administering the monopoly assets they have within the boundaries set by the Commission - including the rate of return they are allowed to make - in the best interests of consumers as well as their shareholders.

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I also agree with Brian. The monopoly networks are playing a silly game trying to present themselves as if they are any other commercial business that has significant risks, and so they should be entitled to let their returns run high. The Board now have a clear direction, they should be focusing on efficiency and service delivery. Perhaps if those board members are still unable to provide that equally clear direction to senior management, they should move along.

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Patrick
Congratulations on prompt coverage of a dispute that had (has if the monopolies appeal) more significance short term for consumers than the deeply stupid Labour Green nationalisation of the generation market.
But I did not claim Vector spent $17m in one year on litigation. Instead I challenged the Vector representative to clarify what the $17m did cover. It was the amount given at a shareholder's meeting for regulatory expenditure without being specific on key details.
The judgment is a very confident and solid piece of work. I commend it to analysts for more careful study than they've given previously to ComCom statements of material significance to share evaluation.

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