Shares drop after Commerce Commission suggests company should cut gas transmission charges by 25 per cent

Vector was punished on the sharemarket yesterday after the Commerce Commission proposed it should cut gas transmission charges by 25 per cent.

Shares fell more than 5 per cent to $2.75, more than the wider market decline of 0.1 per cent.

The company says the price cut could discourage investment in crucial infrastructure and adds to the regulatory uncertainty hanging over the company.

Chief executive Simon Mackenzie said the new pricing was based on "fundamentally flawed" theories about capital and operation expenditure.


"We can't reconcile that in one week we can have the Minister of Energy [Phil Heatley] come out discussing the Maui pipeline outage and how critical infrastructure is and investment is, and the next week have the Commerce Commission not only using fundamentally flawed methodologies, but, in addition, taking an approach which would fundamentally reduce capex and opex."

Mackenzie said the commission had made use of methodology used in Britain that was not relevant to this country.

"There's a vastly different gas industry in the UK - they're trying to wean themselves off gas but in New Zealand the Government's saying we should invest and continue to invest in gas."

The commission said its revised draft decision proposing the first "default price-quality paths" for gas pipeline services would set the maximum prices gas pipeline businesses were allowed to charge from July 1 next year.

Vector's distribution prices for its Auckland network would be cut by 16 per cent, while GasNet would face a 2 per cent distribution cut and the Maui development would enjoy a 2 per cent transmission increase.

Vector's bulk transmission charges would be cut by 25 per cent. For customers of Vector, the reduced distribution charge would amount to a $4.60 cut to the monthly bill for the 143,602 residential gas users in Northland, Greater Auckland, Waikato, Bay of Plenty, Rotorua, Taupo, Gisborne and Kapiti. Powerco's users would face a 60c increase and those of GasNet in Wanganui would enjoy a $1.10 decline.

Transmission charges apply to big pipelines to supply large users, while distribution charges apply to the network of smaller pipes to smaller users via the distribution system.

Commission deputy chairwoman Sue Begg said the decision would mean price regulation for the first time for some businesses.

"We are now bringing the prices these businesses can charge their customers more into line with the costs of providing those services."

Begg said that while the reductions for Vector were "substantial" the commission did not expect this to limit its ability to invest in or maintain its network.

Mackenzie said any price cuts would be welcomed by consumers but questioned whether they were in their long-term interests.

"There might be some short-term pain but is that at the expense of turning off investment and telling consumers that it's uneconomic to supply gas distribution and so you're going to have to switch to electricity or something else?" he said.

"If you look at the commentary of market analysts and the rating agencies, it reinforces that the uncertain regulatory environment continues and it has wider implications for the capital markets."

The company would prepare a submission in response to the decision and was also appealing against an earlier commission ruling affecting several utility companies on pricing.

Price controls
* Price-quality paths are set by the Commerce Commission and cover price-regulated businesses such as Vector.
* They set the maximum average price or total allowable revenue that the businesses can charge.
* They also set standards for the quality of services that each business must meet.

- Additional reporting: BusinessDesk