Gas profits too big - commission

By CHRIS DANIELS energy writer

NGC, Vector and Powerco have been earning excess profits on their monopoly gas pipeline business and should be subjected to Government price controls, says the Commerce Commission.

In a bombshell draft report on the gas pipeline business issued yesterday, the commission says price control would bring benefits of millions of dollars every year.

It said NGC had made excess returns of $11.5 million a year on average.

Vector had made an average of $7.4 million a year too much on the pipes it bought from US energy company UnitedNetworks, and New Plymouth lines company Powerco had made an average of $6.6 million a year in excess profits.

Shares in NGC, which is two thirds owned by Australian energy company AGL, slumped after the report was issued, closing yesterday down 7.5 per cent at $2.45.

Powerco fared slightly better - its shares finished at $2.11, down just over 4 per cent.

"I think it is really important to note this is only a preliminary finding," said Commerce Commission chair Paula Rebstock.

"The commission goes into the next round of submissions and conference with a completely open mind."

In the first round of submissions, NGC argued that people had a choice of fuels and that if gas was too expensive, they would use electricity.

The commission has not accepted this argument, saying the ability to switch does provide some constraint, but "falls short of the constraint which suppliers face in competitive markets".

The last time the commission recommended price controls was in 2002, when it said Auckland International Airport was making excess monopoly profits.

Then-Commerce Minister Lianne Dalziel decided not to do so, saying controls would cause more harm than good to the economy.

Powerco chief executive Steven Boulton said the company was looking forward to taking part in the process and providing information from overseas examples.

Any regulations should be based on encouraging more investment in new gas pipelines.

The more any party applied a regulatory regime, the less inclined anyone was to invest money into laying gas pipelines.

Vector chief executive Mark Franklin said the commission's preliminary view was surprising.

The company was still digesting the report and would be making no further comment.

All three of the main participants in the Commerce Commission's recommendation - NGC, Powerco and Vector - have recently been in talks.

NGC and Powerco are considering a full merger.

Vector, owned by a trust elected by electricity users in Auckland City, Manukau City and Papakura, has refused to say what it has been talking to NGC about.

The possibility of Government-imposed price control is likely to have a negative effect on the plans of the New Plymouth District Council and the Taranaki Energy Trust to sell their joint 49.95 per cent stake in Powerco.

Expressions of interest have already been gathered from 20 potential buyers, and a short list is now being drawn up.

Buying the half stake carries with it the obligation to make a full takeover offer for the company, which has a $663 million market capitalisation.

Written submissions of the draft report are due by July 2, and the commission will hold a conference on the issue later that month. A round of cross-submissions follows, after which a final report will go to the energy minister by November 1.

EXCESS PROFIT

Average annual excess returns from gas pipelines:

NGC $11.5 million

Vector $7.4 million

Powerco $6.6 million

Wanganui Gas $719,000

Source: Commerce Commission