Regulatory curbs limit excessive profits from lines companies

The regulator sets price-quality paths to limit revenue for 17 distributors and requires all 29 of the country's lines companies.

The Commerce Commission is hailing the success of revenue limits in curbing excessive profits at electricity lines companies, although Auckland's Vector and Wellington Electricity were among five distribution firms showing a material deterioration in network reliability.

Returns for the 16 companies subject to price-quality regulation ranged from 5.33% for The Lines Company to 8.37% for Network Tasman between 2012 and 2015, with the majority falling within one%age point of the regulator's expectations and the remainder below those predictions, commission deputy chairwoman Sue Begg said in a statement. Vector, the country's biggest lines company, generated an internal rate of return of 7.04% in the period and the Commerce Commission estimates profit would have been about $110 million more had the revenue limits not been in place.

"Given lines companies are natural monopolies it's important that consumers can be confident that the revenue limits we set are working as intended," Ms Begg said. "This report helps reassure consumers that lines companies' returns are appropriate and infrastructure investment is continuing to be made."

The regulator sets price-quality paths to limit revenue for 17 distributors and requires all 29 of the country's lines companies to publicly disclose information such as asset management plans, pricing methodologies and financial and network data. The profitability report spanning 2012 to 2015 excludes Orion New Zealand, which was granted a customised path to help rebuild its network after the Canterbury earthquakes in 2010 and 2011.

Today's report shows the 16 companies increased capital expenditure by $97 million over the period, nearly 18% more than historic levels, though the regulator couldn't determine the quality of asset management with the largest variances from forecasts coming from the smaller distributors.

"We have not found any evidence to suggest the revenue limits created barriers to investment in the network," the report said. "However, we have stopped short of assessing whether the increased expenditure was efficient."

The profitability report found the majority of lines companies fell within the limits of reliability averages between 2010 and 2015, with the biggest exceptions being South Canterbury's Alpine Energy and Wellington Electricity.

It also showed five companies – Aurora Energy, Eastland Network, Electricity Invercargill, Wellington Electricity and Vector – had a material deterioration in network reliability between April 1, 2010, and March 31, 2015, and didn't meet the 'two out of three years' quality standard, which allows for poor performance in one year.

The regulator has issued warnings to Aurora, Eastland and Electricity Invercargill, and may take stronger responses to Aurora and Eastland for future breaches after its engineering advisers raised concerns about those two firms' asset management.

The commission is also about to complete a review of Wellington Electricity's two breaches and is considering the findings of the Electricity Authority's probe into a fire at Penrose substation that contributed to Vector's non-compliance in 2015.

"The asset management practices employed by these two distributors have added significance given that together they serve around 34% of electricity consumers in New Zealand," the report said.


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