KEY POINTS:
Shares in gas network operator Vector fell to their lowest level in almost 10 months yesterday after the Commerce Commission said it may have to cut gas prices by 15 per cent.
The regulator is seeking submissions on the draft decision, which proposes rival Powerco cut prices by 42 per cent.
Vector shares had dropped 14c at one point during trading yesterday before ended the session down 10c at $2.37.
Regulators, such as the Commerce Commission, set limits on the charges monopoly service providers levy based on the assessed value of a company's assets, proposed investments and allowable returns.
The authority is due to make a final ruling on the charges in February and the decision will take effect on April 1.
"Consumers should expect prices and quality from monopoly businesses commensurate with what prices and quality would result if the market were competitive," commission chairwoman Paula Rebstock said.
"Powerco and Vector are still making significant excess returns in respect of the supply of the controlled services. These excess returns should be limited further."
Vector, New Zealand's largest electricity distributor, said the ruling affects only its gas network in Auckland, which accounts for 3.2 per cent of total sales.
The final ruling may have "significant changes" to the draft after the company provides more information to the regulator, said acting chief executive Simon Mackenzie. As part of the process of assessing the charges able to be levied for use of the distribution networks, the commission allowed both companies to revalue their assets.
That resulted in "substantial" revaluation gains which the regulator treated as income for the purpose of setting prices.
"Failure to treat revaluation gains as income would, in effect, disguise high returns as apparently low returns, therefore resulting in unwarranted windfall profits to the companies," the commission said.
The treatment of the revaluation gain as income was the most significant factor that contributed to the proposed price reduction, acting Powerco chief Nigel Barbour said.
Should the draft ruling be made final, Powerco's earnings before interest, tax, depreciation and amortisation would fall by 10 to 11 per cent, it said.
Babcock & Brown Infrastructure Group, Sydney-based owner of Powerco, said it doesn't expect the draft ruling, should it become final, to have a "material" effect on results for the year ending June 30, 2008. It still forecast shareholder dividends.
