Warren Kyd: Trust will fight for Vector

The Auckland Energy Consumer Trust cannot sit on the bench in the conflict between the Commerce Commission and Vector. There is too much at stake for the almost 300,000 Aucklanders whose interests we have a duty to protect.

The trust is deeply concerned over the highly misleading suggestions from the commission chair, Paula Rebstock, that Vector is favouring the interests of trust beneficiaries at the expense of others.

She is suggesting that Vector is overcharging its customers in other areas and non-residential customers in Auckland so that it can under-charge or subsidise Auckland residential users, and implying that it is doing this under pressure from the trust. None of this is correct.

Vector's price structure is a product of historical or "legacy" factors and is quite independent of the fact that the trust is 75.1 per cent owner of the company. Vector inherited different price structures in Wellington and north of Auckland when it bought these networks from United Networks in 2002. The commission is aware of these realities but seems to be ignoring them.

The commission seems not to understand the significance of the trust's conduct in this issue. Vector has been voluntarily rebalancing its rates of return among its various customer groups to remove these differentials for two years now and is halfway through what is to be a four-year process.

The trust has supported Vector's decision, even though it means price increases for our beneficiaries. Again, the commission is aware of this.

The four-year phase-in was designed by Vector to cushion customers against price shocks by smoothing the adjustment through four roughly equal instalments, two of which have already come into effect.

The trust supported a phased approach because the cumulative effect of the increases on the average Auckland household at completion is expected to be around $165 a year, and the trust is aware that many home budgets are already under pressure.

The trust also strongly disputes the commission's claim that Vector will earn between $13 million and $75 million in excess revenues over the next two years. The overall rate of return for its electricity lines business this financial year is projected to be 8.2 per cent, which is scarcely excessive.

Vector has recovered a net $8 million less in the first two years of the current threshold regime than is permissible under the commission's rules. (The thresholds set the maximum amounts lines companies can raise their prices by each year.)

The trust's more serious concern is that the commission seems intent on forcing a rate of return on Vector which is not viable and will threaten security of supply.

We are all entitled to expect that when we click the switch the lights will come on. But maintaining reliability of services requires infrastructural investment, and utilities providers will not invest unless they can justify that investment commercially.

The trustees know the Government understands this. Last Monday it came down with two policy statements aiming to encourage investment. Whether the Commission grasps this is unclear.

Paula Rebstock insists she gave "full regard" to the Government's policy intentions, but she gave herself little time to absorb their meaning before coming out with her own statement less than 48 hours later.

The chilling effect of her heavy-handed intervention is already painfully evident. Vector chairman Michael Stiassny confirmed at the company's annual results presentation on Monday that Vector would now not be pursuing a planned $400 million in new investments and that a further $250 million "business as usual" investment was under review. This is not good news for Auckland.

The trust deplores the commission's action and will be doing everything in our power to persuade the commission to rethink its position.

We strongly support Vector, not least because the threshold breaches the commission is using to bash it over the head are historical. They relate to the 2003-04 year, were minor and technical in nature, and were driven by factors beyond Vector's reasonable control. Vector has not been in breach of the commission's price path threshold since.

The trust is surprised and disappointed by the commission's threats of price control given the progress which was being made consensually, and given that Paula Rebstock, as recently as last month in a speech to the New Zealand Energy Summit, reconfirmed 2009 as the deadline for compliance. Vector is confident it can meet that target.

The trust does not lightly criticise the commission because we recognise the importance of its consumer protection role. But we recognise also that the consumer's long-term interests are not served by creating an environment which is hostile to investment, and we fear that may be the case here.

The trust will use every resource to persuade the commission to negotiate a settlement with Vector which, to quote the Government statement of August 7, offers a "commercially realistic" rate of return "taking full account of the long-term risks to consumers of under-investment in basic infrastructure."

The Commission is required under Part 4A of the Commerce Act to enter consultations before imposing price control. Submissions close on September 4. The trust will be tendering a submission which we will post on our website.

* Warren Kyd is chairman of the Auckland Energy Consumer Trust.