Vector reverses moves

The Commerce Commission says its investigation has led to a backdown by New Zealand’s largest electricity distribution business Vector on moves that could have cost its customers millions of dollars over coming decades.

Deputy chair Sue Begg says the commission’s investigation began in 2020 and subsequent engagement with Vector Limited prompted the reversal of its regulatory treatment of sale and leaseback transactions, which had resulted in a $300 million asset revaluation.

This revaluation would have enabled the company to significantly increase charges to consumers, without providing any service improvements or infrastructure investment, she explains.

The Commerce Commission has issued a formal warning to Vector.

 “This should send a strong message to all regulated suppliers that we will act to protect consumers from price increases that can’t be justified,” says Begg.

In March 2020, Vector entered into the transactions involving two of its wholly owned subsidiaries, selling its CBD tunnel and a portfolio of substation land and building assets, then leasing those assets back from its subsidiary companies. In the commission’s view, Vector’s approach to valuing those transactions was inconsistent with regulatory rules under the Commerce Act 1986.

Vector has now reversed its regulatory treatment of the transactions that would have increased its Regulatory Asset Base (RAB) by about $300 million. This would have allowed Vector to earn significantly greater revenues from its electricity consumers over the estimated 30 to 40-year duration of the leases, the commission adds.

“It is a good outcome for consumers that Vector has reversed its regulatory treatment of its transactions, which has removed the potential impact of higher costs on their electricity bills,” says Begg.

“We acknowledge Vector’s co-operation with our investigation and its constructive approach towards engagement.

“We strongly encourage regulated suppliers to engage with the commission when planning transactions that could significantly affect their RAB or consumer pricing.”

The commission first identified the increased RAB in its review of Vector’s information disclosure in October 2020 and initiated an investigation in December that year, with subsequent engagement over 2021 and 2022 that included referencing the potential for court action to prevent consumer harm – from interim pricing changes – and to address what the commission alleges was the incorrect regulatory treatment of the transactions.

The commission’s warning letter to Vector can be found here.

As a regulated supplier, Vector must comply with the commission’s regulations on its revenues, service standards and information disclosures.

Vector explains ComCom’s warning letter

Vector says the Commerce Commission’s warning letter relates to a regulation interpretation issue.

The letter discusses the regulatory treatment of a number of transactions relating to land and buildings owned by Vector in Auckland.

Vector undertook these transactions to separate its land and buildings into separate subsidiaries to enable these to be commercialised and to create opportunities for future capital raisings.

As seen by other recent transactions in the market, it is increasingly common for infrastructure providers to place greater focus on actively commercialising their property and infrastructure portfolios, it says.

Another example is the announcement of the sale by 2degrees of its tower assets to Connexa for $1.08 billion. Connexa is the tower company spun out from Spark’s sale of its own towers earlier in 2022.

Vector took extensive external legal and accounting advice on these transactions to ensure regulations were being correctly applied prior to filing disclosures.

Vector also proactively brought the transactions to the attention of the Commerce Commission before the annual disclosures were filed.

However, after publication of the disclosures, the commission notified Vector that it considered the regulatory reporting of the transactions by Vector was not correct.

Neither the original regulatory disclosure of the transactions, nor the reversal of these, has had any impact on prices for customers, Vector says.

“We worked hard to resolve this matter of interpretation with the commission including proactively sharing expert legal and accounting advice,” says Vector chief executive Simon Mackenzie.  

“We will always consider options to enable us to continue to fund the investments we need to make to meet the challenges of increased demand brought about by the growth of Auckland and the response to climate change, while creating a cleaner energy system that is reliable and affordable for our customers.”