Likely service quality agreement breach for Vector

File photo / Greg Bowker

Vector, the Auckland gas and electricity distribution monopoly, is in discussions with the Commerce Commission over a likely breach of its service quality agreement on its network for the second year in a row.

The winter of 2014 was the stormiest on record with the highest ever sustained wind speeds lasting for long periods and that, coupled with the October fire at Transpower's Penrose substation, which cut power to around 85,000 Auckland businesses and households, had an impact on network reliability.

The measure, known as SAIDI, stood at 116.9 minutes for the nine-month regulatory period from April 1 2014, compared to 105.1 minutes in the prior regulatory year.

"As a result we are likely to breach the service quality requirement that we do not exceed the threshold two out of every three years. We have had early discussion with the regulator over this likely breach," said chief executive Simon Mackenzie.

In its 2014 compliance statement, Vector said it had breached the service quality measure because of high winds and a one-off failure of a circuit breaker at its Hepburn Road grid exit point, which saw 47,000 West Auckland householders blacked out for several hours.

The Commerce Commission said Vector was required to provide a 2015 compliance statement within 50 days of March 31 and it would then investigate what action should be taken over any likely breach. Its powers under the Commerce Act include fines, compensation, and injunctions. Last year it reached settlements with Horizon Energy and Wellington Electricity for price breaches which will see them lower their prices this year to match the breached amount, while Orion Energy escaped penalty.

Mackenzie said the company was also expecting a government-ordered review of the Penrose substation outage to be completed in the second quarter of this year.

Vector posted a 17 per cent drop in first-half profit as a gain in sales was offset by regulated price reductions, mark-to-market losses on derivatives and increased borrowing costs. Profit fell to $87.3 million in the six months ended December 31, from $104.6 million a year earlier, the company said in a statement. Sales rose 4.4 per cent to $687 million.

Forsyth Barr energy analyst Andrew Harvey-Green said it was a solid result and slightly better than expected, given regulatory price cuts.

Vector kept its full-year guidance unchanged at $588 million, on an adjusted earnings before interest, tax, depreciation and amortisation basis, up 1.3 per cent from 2014, even while affirming that the Commerce Commission's decision to cut the allowable rate of return on capital for regulated network monopolies would dent earnings and force the company to review its spending plans. The company also kept its first-half dividend unchanged at 7.5c.

Unregulated ebitda from gas wholesaling, metering and Vector Communications rose almost 11 per cent to $81 million in the first half while regulated ebitda fell 4.2 per cent to $257.9 million, with price reductions imposed by the commission eroding earnings by about $24 million, the company said.

Mackenzie said the company would look to allocate more capital into its unregulated activities, which include smart metering, solar power and battery storage and telecommunications infrastructure.

Vector said its metering business is "positioned to grow strongly" with 884,453 smart meters now installed, up 48 per cent on the previous year, including more than 139,000 smart meters acquired with the Arc Innovations purchase from Meridian Energy. It is now contracted to install more than a million smart meters.

Vector has for some time been eyeing up opportunities to expand its smart metering business into Australia, where there has now been the necessary regulatory progress to allow a New Zealand-style retailer-led smart electricity meter rollout. BusinessDesk