Vector heads to court over monopoly earnings

Simon MacKenzie , CEO of Vector. Photo / Paul Estcourt

Vector head Simon Mackenzie Vector is going to court for a merits review of Commerce Commission's decisions, announced just before Christmas, which govern what returns monopolies, like electricity lines companies and gas networks, can earn.

Vector chief executive Simon Mackenzie said the commission's formula for determining the weighted average cost of capital (WACC) and the asset base to which that rate applied would result in returns 50 to 100 basis points lower than those allowed by the Australian regulator.

The lines companies argue that that would make it hard to attract the capital they need to invest in their networks.

The commission said it had tested its cost of capital methodology to ensure it was reasonable and commercially realistic, providing sufficient returns to incentivise investment and innovation, while limiting the companies' ability to extract excessive profits.

"In particular, the commission has tested its estimate against independent estimates of the cost of capital in New Zealand, against regulatory decisions especially in the United Kingdom and Australia, and against historic and expected returns for the New Zealand market."

But Mackenzie does not believe the commission has got the balance between consumer and investor interests right.

The Herald understands some of the other lines companies will also appeal, daunting legal costs notwithstanding.

As this is the first merits review, a process permitted by a change to the Commerce Act in 2008, there is little basis for guessing how long it might take.

But Mackenzie stressed the cost of ongoing regulatory uncertainty for a company like Vector which has to compete for capital internationally.

Whether from ratings agencies or in the feedback on international roadshows when the company was raising debt, regulatory uncertainty was a constant theme, he said.

In the meantime, the commission's decision stands. It was too soon to say what that would mean for Vector's pricing, earnings or capital expenditure plans, Mackenzie said. Further pieces of the regulatory jigsaw are needed - a default pricing path and a starting point adjustment.

About 40 per cent of residential consumers' power bills reflects the cost of getting the energy to them, split between the local lines businesses like Vector (the larger share) and Transpower's national grid.

The issue of what would be an appropriate WACC is arcane and complex - entire academic careers are devoted to it - and it is not a science.

The most an exercise like the extensive consultations the commission has engaged in over the past couple of years can establish is a range of plausible or defensible values for WACC.

Within that range it had to make a judgment call about how much weight to give to the two risks, excess profits on the one hand and under-investment on the other.