Rise of an Auckland electricity behemoth

Vector's chartered accountant Michael Stiassny (right), Vector CEO Mark Franklin (centre)and Vector CFO Peter Fredricson. Picture / Kenny Rodger

The history of Vector can be traced back to the introduction of electricity supply into Auckland homes and businesses at the dawn of the 1900s.

Graham Bush's Decently and in Order, the centennial history of the Auckland City Council, told of the city's electricity supply starting with the construction of small, council-owned power stations.

Electricity was initially used for street lighting and electric trams. The Auckland City Council opened a rubbish-burning generation plant at Freeman's Bay in 1908 and a more efficient coal-burning station at King's Wharf in 1913.

All Auckland's power was generated within the city.

By 1909, the council had signed up 195 electricity customers. Five years later, there were 2123.

At the opening of an Epsom substation in 1917, councillor A. J. Entrican rhapsodised about the promise of the future: "After the war ... electricity ... would be in every house, not only for lighting purposes but to move the household iron across the linen, to turn the mangle and even to rock the cradle."

On April 1, 1922, the new AEPB took over the council's power assets. It started off with 8000 customers and revenue of 210,000.

Vector Float

The Auckland Electric Power Board (AEPB) was set up as a separate local authority under its own act of Parliament.

The idea was that a central power board would best serve the interests of the greater Auckland area. It could levy rates and make bylaws.

Some things never change: just like today, voter apathy marked the inaugural AEPB election, with Bush's history of Auckland reporting a turnout of less than 18 per cent.

The AEPB retained generation assets but had fundamentally moved from being an electricity generator to a distributor by the 1930s.

The board developed the electricity supply system throughout the Auckland region over 70 years. The AEPB received electricity supplied by state generation bodies south of Auckland and distributed it to business and consumers through the Auckland area.

The recent reforms of the electricity distribution sector began in 1986 when the Labour Government agreed in principle to the deregulation of the electricity industry. The aims of the reform of the electricity distribution sector were:* To introduce a system enabling one distributor to compete with another for the supply of electricity to consumers.* To improve the overall efficiency of the sector.

In 1988, the Government set up an electricity taskforce which recommended the corporatisation of the distribution sector and the introduction of competition through the removal of area franchises.

The Government appointed five people with commercial expertise to each power board in July 1990. It was intended that these people would be the first directors of the successor electricity companies.

All the property, rights and liabilities of the AEPB were vested in Mercury Energy on October 1, 1993, with the intention of Government that it be fully privatised and listed on the stock exchange.

In 1998, National Government Energy Minister Max Bradford split the industry asunder, with the controversial move to ban any company that sold electricity from also owning a lines business.

The lines business is a natural monopoly, so the fear was that profits earned from this side of the business would be used to cross-subsidise the retail side. The idea was that lots of small retailers would compete for customers, buying their power from the wholesale electricity market.

Mercury decided to become a lines company, selling the name Mercury to the SOE, Mighty River Power. It became Vector.

This has not happened, with the whole electricity sector now dominated by five big "vertically integrated" companies - so-called because they generate all New Zealand's electricity and also sell it to customers.

The future

The Government has given Vector and all the lines companies permission to generate their own electricity, but they are not allowed to be power retailers. Vector says it does not want to get into generating electricity unless it can also sign up customers to buy it.

Without a retail arm, it would be too exposed to the risk of investing in a power station without any customers waiting to buy the electricity it produces.

Three of the big five energy companies: Meridian, Genesis and Mighty River Power, are state-owned enterprises and they all have big power generation plans under way.

Meridian is building wind farms, Genesis with a gas-fired power station at Huntly and Mighty River trying to convert the mothballed Marsden B oil-fired station to coal.

Vector's core business of electricity distribution is regulated, so it has tried to expand its business out into areas where it can make good profits without attracting the eagle eye of the Commerce Commission.

Buying NGC last year was an attempt to diversify the business away from the regulated power lines business.

Last year, the commission said Vector was abusing its monopoly position on local gas pipelines and recommended the Government impose price controls on it. Energy Minister Trevor Mallard is still deciding whether to go down this path.

Another way Vector could grow is by buying other, smaller lines companies. Almost all are owned by community trusts and, despite many years of predictions of consolidation, most are still fiercely independent. A need for huge new investment in ageing infrastructure may pose problems for many of these small lines companies over the next few years.