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Vector forced to cut gas prices

Thursday 28 Feb 2013 11:32 a.m.

Competition regulator the Commerce Commission has confirmed that gas distribution network owner Vector will have to cut its prices by 18 percent.

The commission's final determination on pricing for gas pipeline services also tells Vector to cut its wholesale gas transmission charges by 29.5 percent.

Vector is challenging the methodology used by the regulator in the High Court with support from a range of monopoly service providers such as electricity, port, and airport operators who believe the commission is using the wrong inputs to determine regulated pricing.

Vector chief executive Simon Mackenzie told journalists on Thursday that the reduced pricing, while contested, was a tribute to Vector's operational efficiencies.

Mr Mackenzie said it was a "paradox of regulation" that if a regulated company managed its costs well and improved its profitability within the limits of its mandated pricing, it could effectively suffer a penalty by being required to cut its prices further.

Vector is objecting particularly to a "massive swing" in the assumed cost of capital being used by the commission to determine pricing. While the reductions reflected lower international interest rates, risk premiums were rising.

The new price reductions hit Vector hardest. Other gas distributors face decreases of between two percent and four percent.

"Although substantial price reductions are necessary for Vector, we do not expect this to limit its ability to maintain and invest in its network," the commission's deputy chair, Sue Begg, said in a statement.

At its half year result announcement last week, Vector warned earnings in the second half of the current financial year would suffer as cuts to network pricing took effect.

The company achieved a 10.8 percent lift in tax-paid earnings to $118 million in the six months to December 31.

Vector shares were unchanged in early trading on Thursday morning on the NZX, at $2.84.

NZN

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