Bullets fly over gas-pipe profits

Paula Rebstock

A battle royal between gas pipeline companies and Government regulators has begun, with the Commerce Commission accusing the companies of earning tens of millions of dollars by abusing their monopolies.

It says that from 1997 to 2008, Vector will reap monopoly profits of $76.9 million from its gas pipes and Powerco will gain just over $50 million.

Energy Minister Pete Hodgson will embark on a round of consultation before deciding whether to impose price controls tougher than any in New Zealand industry.

If implemented, the Government would have to authorise every price charged by Vector and Powerco.

The threat of regulation may cast a pall over Vector's planned initial public offering (IPO) of shares next year, which could raise up to $650 million.

But gas accounts for only about 9 per cent of the annual revenue of $572 million for the company, which is owned by Auckland power users.

It is expected to be months before a clear picture emerges of the Government's response to the recommendations.

The commission's inquiry, launched by Hodgson nearly two years ago, found Vector and Powerco had substantial market power and were earning excess returns above their cost of capital.

NGC and Wanganui Gas were also found to have earned excess returns, but not enough to justify price control.

The commission said if direct controls were imposed on Vector, there would be a public benefit of $6.9 million a year. For Powerco, the figure would be $3.7 million.

The commission says this means distribution charge reductions of 18.5 per cent for Vector customers and 12.2 per cent for Powerco customers.

Talking of the reasons for price controls, commission chairwoman Paula Rebstock said: "If we had not found that there were considerable excess returns, the commission would not have recommended that controls be imposed.

"The recommendation with respect to Vector and Powerco certainly reflects our view that there have been significant excess profits made - that in the future should not be allowed," she said.

Vector and Powerco are privately furious at the commission's report.

They believe price controls would suppress incentives to become more efficient and cut costs, since the regulators would harshly judge a higher rate of return.

Vector says the prices it charges are lower than its rivals, so regulation and price control are not needed.

Regulation should be based on what it delivers to customers, not an analysis of its internal costs.

Chief executive Mark Franklin said the company was "concerned" and "puzzled" at the commission's findings. Benchmarking studies showed Vector was 20 per cent more efficient than other comparable companies internationally.

Commission analysts have decided that a reasonable rate of return for a monopoly business like the gas distribution side of Vector and Powerco would be 8 per cent, whereas Vector is earning 13.5.

If price controls were introduced, the average Vector gas customer could be better off by $155 a year if the savings were passed on.

Vector and Powerco also argue that they do not have monopolies, since natural gas is a "discretionary fuel", which can be substituted.

Commission findings

The Commerce Commission investigated the natural gas transmission and distribution companies and recommended price controls.

It has found that the monopolies of the two largest will earn excess profits over 10 years of $76.9 million (Vector) and $50 million (Powerco).

Vector says a high rate of return on its pipelines reflects efficiency, not a rip-off.

Both companies argue they don't have monopolies, since substitutes can replace natural gas.