Vector cool about $500m 'gamble'

By BRIAN FALLOW economics editor

Vector Energy chief executive Dr Patrick Strange is relaxed about the regulatory risk associated with Vector's takeover of UnitedNetworks.

On the face of it Vector is gambling about $500 million of Aucklanders' money in acquiring electricity and gas lines, when it cannot be certain on what basis it will be allowed to charge for the use of those assets.

The Commerce Commission is investigating the appropriate methodology for valuing electricity networks.

The current method starts from replacement rather than historic cost. Critics such as economists Simon Terry Associates say this entrenches windfall valuation gains and allows the networks' owners to earn ongoing returns on capital they never invested, to the tune of more than $200 million a year industry-wide.

The commission, in a recent related decision on airport landing charges, opted for historic cost rather than current cost valuation, though the commissioners split 3:2 on the question.

Valuation issues also form part of the Ministry of Economic Development's review of the gas industry, expected to be released in a few weeks.

Strange said both Vector and UnitedNetworks had had a lot of input into the regulatory inquiries. "We are pretty close to it and have formed a view."

Vector had had to satisfy all of its stakeholders, including its owner the Auckland Electricity Consumer Trust, its bankers, and ratings agency Standard & Poor's.

The commission has also been given the task of deciding what should trigger price control of a lines company and how a controlled price path should be determined.

Vector argues that any thresholds for control should be based on comparative performance in the things that matter to consumers - price and service.

"We will always be accountable to our customers first, and customers will drive the regulatory regime," Strange said.

Vector did not sense any groundswell of dissatisfaction from its customers, he said.

It cut its line charges 10 per cent in April.

They had already been falling in real terms since 1997. "We have the lowest charges of the urban lines companies."

The Business Herald understands that Vector's deal with Aquila, UnitedNetworks' Kansas City-based 70 per cent shareholder which has agreed to sell to Vector, does not give it any comeback if the regulatory environment changes for the worse, from network owners' point of view.

In that case, Simon Terry said, "Vector appears to taking all the risk on a large amount of money. It is betting it will be allowed to keep past windfall profits on valuation and also to take the gains from those revaluations forward into the future."

Strange said, "With all due respect to Simon, he has been running that argument for years, including before the Electricity inquiry, and has yet to get it accepted."