Gas controls could see consumers charges drop by up to 18.5 per cent

Picture / Derek Flynn

Price control on gas firms Vector and Powerco could cut charges for consumers by up to 18.5 per cent, the Commerce Commission says.

The commission today issued its final report on gas control, which was sparked by complaints that gas charges were excessive and operators were abusing their monopoly positions.

The commission said direct control should be imposed on Auckland-based Vector and Taranaki-based Powerco.

Commission chairwoman Paula Rebstock did not recommend direct control on NGC Transmission (NGCT), NGC Distribution (NGCD), Nova Gas, Wanganui Gas, and Maui Development.

"The commission's inquiry found that Vector and Powerco each have substantial market power and are earning excess returns above their cost of capital to an extent that the commission is satisfied that it should recommend direct control," Ms Rebstock said.

If direct control were imposed on Vector and Powerco, they would, respectively, achieve benefits of $6.9 million and $3.7m a year.

"These benefits equate to average distribution charge reductions of 18.5 per cent and 12.2 per cent for consumers on the Vector and Powerco networks," Ms Rebstock said in a statement.

Vector has about 73,000 customers, while Powerco has about 107,000.

The report was presented to Energy Minister Pete Hodgson earlier this week, who today said he would consider it and comments from stakeholders carefully.

Mr Hodgson would make a final recommendation on the report's findings in the middle of next year.

Meanwhile, the report found that NGCT, NGCD, and Wanganui also earned significant excess returns, respectively $2.4m, $1.6m and $155,000.

The commission recommended regulatory constraints on those businesses, and Maui Development, should be strengthened.

It "suggested" Mr Hodgson consider imposing a regime comparable to targeted control, which was already applicable to electricity lines businesses.

"The commission's view is that a targeted control regime has the potential to offer a more favourable trade-off between cost and the benefits of regulatory intervention that a regime under the... control provisions of the (Commerce) Act, based on the commission's experience with electricity lines businesses," Ms Rebstock said.

"If the minister were to introduce an alternative mechanism such as a targeted control regime, there may be benefits in having all gas businesses, including Vector and Powerco, under the same regime," she said.

Direct pricing control came at a high cost when compared to other regulatory options, she said, also recommending that Mr Hodgson strengthen the gas industry disclosure regime.

In the report, the commission said gas transmission systems had characteristics of natural monopoly, and entry into that market might be possible where there were capacity constraints.

It said there were limited regions -- north Taranaki and Huntly -- where competition was possible between gas transmission networks.

The distribution network also had natural monopoly features, but there was limited potential for new players to enter the market, the commission found.

"Where there is a bypass network, the commission considers that there is strong evidence of vigorous competition, which has had a major impact on distribution prices," it said.

The commission found that while, in general, "there is workable or effective competition in bypass markets, competition is limited elsewhere".

The commission said benefits of price control in the gas sector included excess returns being reduced, more efficient productivity and allocation of gas, and continued or improved availability of services.

However, likely costs of control included direct costs, which would be in addition to those of the current regulatory regime.

Indirect costs included reductions in service quality, the loss of excess returns, deterred new investment, and productive inefficiencies.

"Control would move towards but would not exactly replicate the competitive price," the report said.

"As a result, only a proportion of the potential allocative efficiency gains would be secured under the control scenario; the rest would be unrecoverable," it said.

Spokesmen for Vector, Powerco and NGC said their respective firms had yet to formulate an informed view on the commission's report and would comment later in the day.

- NZPA