Gas pipeline prices on watch

Energy sector watchers are nervously waiting to see how the Commerce Commission will impose its first price control regime on Vector and Powerco's gas pipelines business.

Vector, this country's largest energy network company, was told last week that Government price controls would be imposed just one day before its shares were due to start trading on the stock exchange.

Now attention is turning to how prices will be imposed and whether the commission will take heed of new "threshold" controls.

Vector, with Powerco, was found to have been earning excess returns on its pipelines business, prompting Energy Minister Trevor Mallard to endorse a call for price control.

Once they have been hit with price control, a whole new system of "threshold" regulation will also be introduced for all gas pipeline companies.

Energy investors have warned that too much regulation would mean a lack of reinvestment in crucial infrastructure, since returns on their money would be too low.

Commission chairwoman Paula Rebstock has tried to quash any fears over the imposition of controls.

"Our advice was that you should look for the least intrusive means possible," she said.

"We believe we can deal with the particular issues of Powerco and Vector under control but I think we can deal with that fairly quickly. As soon as we can, we need to move to a less intrusive form and the Government has provided us with a means to do that.

"You address the market power issues that you see but, as soon as you can, you start reducing the extent of the intervention that you are using and I think that's absolutely appropriate."

Thresholds regulation has two parts. The first is a "price path" where companies are given a formula that allows them to change prices according to the rate of inflation. The second lays down what sort of quality should be expected.

Vector chief executive Mark Franklin said the thresholds system of regulation for the powerlines business was not yet well established.

Vector and Powerco have launched a legal challenge against the commission, saying its analysis and recommendations were flawed.

Vector argues that the commission and the minister have been hasty in imposing a flawed system of regulation and that its introduction would have little effect on its bottom line.

"It's only an incremental part of one of our small businesses, which is the gas business in Auckland - so it's not a huge deal for us. The issue for me is the principle."

Mercury, the retail brand of the state-owned Mighty River Power, would not say if it would pass on any price cuts, saying it would instead make a decision once the details of any commission move were known.

The country's biggest gas retailer, Genesis, says it will pass on any price cuts imposed by the commission to its 116,000 customers.

A Contact spokesman said the retail gas sector was competitive, so it would expect prices to customers to drop if transmission charges fell.

But the cost of gas at the wellhead was increasing, which was putting upward pressure on prices.

Australian investment fund Babcock & Brown, as owner of Powerco, said it was difficult to quantify the impact of the Government's decision, but its initial assessment was of a $5.5 million impact on net revenues.