"The commission accepts Vector did not intend to breach its regulated price path at the time it restructured prices," the statement said.
"However, by adopting an assumption regarding customer switching rates that the commission considers was unrealistic, Vector collected more revenue than was allowed."
Vector had assumed that in setting residential price tariffs based on electricity use that competition in the electricity retail market would ensure virtually all residential customers would be switched to the most appropriate rate
"However, at the end of the first year of the new price structure, 28 per cent of Auckland households had still not been switched to the tariff that was appropriate for their circumstances and so were paying more than they needed to," the commission said.
Commission deputy chairwoman Sue Begg said Vector should not have assumed that users would all be immediately transferred to the best rate by electricity retailers.
"While Vector could not predict consumer switching with complete accuracy, its working assumption was unreasonable and led to a large number of households overpaying for their electricity," she said.
"While lines charges are only about 26 per cent of a household's electricity bill and the individual amounts overpaid are often small, the cumulative effect for Vector was many millions of dollars."
Vector repayment would take the form of holding residential lines charges flat for the next two years, which would result in users paying less and Vector earning less revenue. The cost of power would continue to fluctuate.
Begg said the case also highlighted the need for consumers to check their electricity tariffs.
"An estimated 80,000 Auckland households could still be on a more expensive tariff for the lines component of their electricity bill. Energy retailers and consumers themselves should be checking that the low-user tariff option is being used where it can be, as it could save households up to $200 a year," she said.
Vector chief executive Simon Mackenzie said in a statement that the commission had accepted the company did not intend to breach its regulated price when it restructured.
"We acknowledge that in hindsight we got our assumption wrong. However, it does raise concerns about the genuine effectiveness of competition in the electricity retail market. It's disappointing that neither competition nor enforcement appears to be working to benefit customers," he said.
Vector acknowledged that as a result of the new tariff structure not being implemented as intended, the company did not comply with its regulated price path resulting in earning extra revenue as openly disclosed in its audited regulatory accounts.
"Fortunately, a substantial amount of the inadvertent gain has already been unwound when Vector transitioned to a new price path in 2015. Our focus is now on ensuring that the repayments we are making reach consumers via their retailers," Mackenzie said.
Vector considered the settlement it had reached with the commission to be "fair and reasonable".
Vector delivers electricity to about 550,000 homes and businesses in the greater Auckland region. It is subject to price-quality regulation that sets the maximum revenue it may earn each year.
