Vector acknowledges over and undercharging

Energy network company Vector, under threat of price controls, acknowledges it does overcharge some customers and undercharge others.

But Vector chief executive Mark Franklin today said the problem was a historical anomaly being addressed in a four-year programme.

That programme started two years ago, and by the beginning of 2009 all customer classes across regions would be paying similar prices.

Return on investment would continue to vary slightly, with a difference of up to 1.5 per cent between domestic and other users, reflecting a risk premium to commercial and industrial users.

The Commerce Commission said yesterday it had published its intention to declare control of Vector's electricity distribution services.

Vector was overcharging industrial and commercial customers across its networks, the commission said.

The company was also undercharging some residential customers, particularly Auckland residential consumers who were beneficiaries of the Auckland Energy Consumer Trust, which owns 75.1 per cent of Vector.

It also considered that, based on a preliminary estimate, during the next two years Vector would earn between $13 million and $75 million in excess revenue each year.

To bring its returns to a normal level, the commission estimated Vector would need to reduce its charges between two per cent and 11 per cent for each of the next two years.

As an example of the different rates of return being earned by Vector, the commission said the company would earn a 54.4 per cent rate of return on investment from one group of business customers, while it earned only a 4.6 per cent rate of return from Auckland residential customers.

Commission chairwoman Paula Rebstock said Vector was aware of the imbalances across its customer classes and had had ample opportunity to improve the situation.

"Instead, during the time that Vector has been aware of the imbalances, the situation has deteriorated further for many groups of consumers," she said.

Vector was in discussions with the commission about an administrative settlement, which was an alternative to control.

Today Mr Franklin told National Radio that Vector had been open about the fact some customers were overcharged and others undercharged.

He traced the problem back to Vector's purchase of company United Networks four years ago.

"We realised at that stage there were a number of anomalies in the pricing structures of both companies, and we took a conscious decision at the time to address all those," he said.

"We also made a conscious decision to do it over a four-year period, so that all customer classes, particularly domestic customers, wouldn't have a price shock."

Mr Franklin acknowledged a 29 per cent return on investment from small industrial users in Wellington, an example provided by the commission yesterday, was not fair.

But he said that for the commission to say Vector was earning excessive revenues was "just absurd".

Under the price path assigned to Vector by the commission two years ago, Vector had recovered $8 million less than the commission's methodology allowed, he said.

Mr Franklin said yesterday that plans Vector had made this week after a positive Government announcement were now "in serious jeopardy".

Today he said those plans included one for a large gas pipeline project through the middle of Auckland that could supply a power station on the Kaipara Harbour.

Energy analyst Chris Stone, of McDouall Stuart, said if price controls were imposed, the resulting loss in earnings could shave as much as $600m off Vector's market capitalisation which is currently $2.6 billion.

Mr Stone said today's regulatory move was an embarrassment for the Government, and had major ramifications for the entire business sector.

It signalled a regulatory position which was "more heavy handed than we've seen in 20 years".

New Zealand's investment in all kinds of infrastructure was poor.

"So the real question is, are we going to see an adverse impact on the investment of infrastructure as a result of this move, and the answer is almost certainly, yes."

Shares in Vector fell 27c to $2.38 after the news, more than erasing Tuesday's 24c gain.

Ms Rebstock acknowledged that after Vector was found to be breaching commission thresholds, it had taken care to ensure it did not breach the price path assigned by the commission.

Vector's breach was small but when the commission looked into the company's behaviour it discovered "huge" discrepancies in the rates of return the company was earning from various customer classes, she said.

Also its overall rate of return was excessive.

The commission had allowed a period of 1-1/2 years to pass where it accepted Vector would make corrections, Ms Rebstock said.

But when Vector came back with information about what was happening the commission found that in a number of cases the rates of return had moved in the wrong direction.

All the pricing behaviour could not be explained by the purchase of United Networks, Ms Rebstock said.

Looking just at Auckland, which had nothing to do with United Networks, in 2005 Vector was earning a rate of return of 1.9 per cent on residential customers.

At the same time it was overcharging large commercial and small industrial customers in the Auckland network, earning rates of return above 15 per cent.

She also said she did not buy suggestions by the company it could have to put off major infrastructure investments because of the commission's action.

"What is at stake is not incentives to invest. What is happening here is Vector has got a very short term focus in a pricing strategy that favours their customers who also happen to be their majority shareholder," Ms Rebstock said.

"And they're doing that really at the cost and expense of the rest of their customers, primarily in Wellington and on the North Shore, and to a very large degree business customers."

The commission was happy to continue talking to Vector while the process of moving towards control was under way, she said.

But if an administrative settlement was to be reached, as an alternative to control, it would have to bind Vector and allow all other parties an opportunity to have their say.

- NZPA