Government to regulate gas pipe pricing

Vector, on the brink of a share float and partial privatisation, has been hit with news that its gas pipelines business will be subject to Government price control in less than four weeks.

So-called "monopoly profits" of nearly $7 million a year are now in jeopardy, after Energy Minister Trevor Mallard agreed with the Commerce Commission to impose price controls on Vector and Powerco.

It is the first time the Government has moved to impose price control under Part Five of the Commerce Act and Mallard's action so close to an election is raising eyebrows.

Such control will be placed on Vector's gas pipelines business from August 25 - just one day before its newly listed shares are due to start trading on the NZX.

Last year, the commission said Vector would reap monopoly profits of $76.9 million from its gas pipes between 1997 and 2008, and Powerco would gain just over $50 million.

It said that 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.

Vector chief executive Mark Franklin said the decision was "a really weird thing to do" and the timing of Mallard's announcement was "interesting", since the commission's plans were being challenged by judicial review.

The imposition of price controls would not have a big impact, since it was an "incremental part of one of our small businesses, which is the gas business in Auckland".

A lot of investors liked to put their money into regulated businesses, while others were seeking to get away from it.

"It doesn't change our strategy," Franklin said. "We've always said we will have a good mix between regulated and non-regulated [business]."

Revenue from Vector's gas business accounted for $45.3 million of total operating revenue of $572 million in the June 2004 year.

Commission chairwoman Paula Rebstock said she was pleased the Government had accepted the recommendations.

"Moving to control Vector and Powerco means the companies will no longer be able to take advantage of their market power," she said. "There will be benefits for consumers, with the potential for significant price drops."

She said analysis suggested a saving to consumers on distribution charges of 18.5 per cent for Vector customers and 12.2 per cent for Powerco.

Vector and Powerco did not like the idea their gas pipelines business should be regulated. While grudgingly accepting some need for regulation of the electricity lines, they said gas was an entirely discretionary fuel that consumers could easily substitute with electricity.

Gas "penetration" levels into homes and businesses were low, so encouragement should be given to signing up new customers. One way of coping with the security of supply problems caused by the rising demand for electricity was for more people to switch to natural gas.

But the commission found that gas pipeline prices were only subject to "limited competitive pressures" and that Vector and Powerco were charging excessive prices.

In control

Vector and Powerco will be subject to price control on their gas pipes business from August 25.

The Commerce Commission will give a provisional price authorisation, but will then start working on a more permanent regulation of prices.

The Government says a "threshold" style of regulation will then be introduced for all the pipeline companies.

Control of Vector and Powerco's gas pipelines will eventually be covered by this regime.

Price reductions from these two are inevitable, but there is no guarantee the gas retailers will pass on the savings to consumers.