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Vector warns on $80m hit from falling electricity consumption, CEO says

NZX-listed lines company issues warning.

Suze Metherell
Wed, 22 Oct 2014

Vector [NZX: VCT], the Auckland lines company, says falling electricity consumption will cost it up to $80 million because of the way it's regulated, according to chief executive Simon Mackenzie.

The lines company's electricity and gas distribution business is regulated by the Commerce Commission, and the regulator's forecasting doesn't recognise declining electricity consumption trends, Mackenzie told shareholders in Auckland. That has translated to a shortfall in revenue of about $25 million in the 2013 to 2015 regulatory cycle, and will cost it about $80 million over the period.

"The Commerce Commission does not recognise the trend we are seeing in falling per capita consumption," Mackenzie said, according to speech notes for the meeting. "As a result the actual volume of electricity transported across our network fell short of the regulator’s forecasts.

"These forecasting errors will cost Vector circa $80 million in the 2013 – 2015 regulatory period and weigh heavily on the returns we deliver to you our shareholders. We are strongly of the view that the Commission must correct these errors in terms of both past and current future resets."

Under the regulation, where electricity distributors operate with an effective monopoly, as Vector does in Auckland, they must provide the commission with an annual self-assessment against the price path, which is the total amount it can charge for its regulated services.

Earlier this year, the commission cut the amount Horizon Energy can earn in coming years as part of an out-of-court settlement with the lines company after it earned 3 percent, or $645,686 more than its regulated pricing allows. Last December the regulator reached a similar agreement with Wellington Electricity which had breached its price path by 0.1 percent, or $116,800, in the year ended March 2012.

The issue is part of a sector wide debate over how energy is priced and what costs are passed onto consumers. Tensions between energy distributors and retailers came to a head earlier this year when the Electricity Authority said it was "unacceptable" for energy retailers to blame other parts of the sector for price hikes. Both Genesis Energy and Contact Energy announced price increases from April this year to offset increased costs from higher transmission and distribution fees, which lines and distribution companies say exceed the additional costs imposed on consumers.

Vector's Mackenzie today updated shareholders about the recent Auckland power outage, which saw 85,000 Auckland households and businesses affected after a fire at the Penrose substation. While the cause was still being investigated jointly between national grid operator Transpower and Vector there would be no discussion of compensation, Mackenzie said. 

"As noted by the Prime Minister, this was a 'freak' accident. If customers require a platinum service they will have to pay for it," Mackenzie said. "The debate on this and other outages inevitably includes the cost consumers pay for energy balanced against the probability of outages."

Shares of Vector rose 0.8 percent to $2.67, and have gained 3.1 percent since the start of the year.


Suze Metherell
Wed, 22 Oct 2014
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Vector warns on $80m hit from falling electricity consumption, CEO says