Vector warns regulator over likely breach of electricity service quality agreement

Vector, the Auckland gas and electricity distribution monopoly, is in discussions with the Commerce Commission over a likely breach of its service quality agreement on its network for the second year in a row.

The winter of 2014 was the stormiest on record with the highest ever sustained wind speeds lasting for long periods and that, coupled with the October fire at Transpower's Penrose substation, which cut power to around 85,000 Auckland businesses and households, had an impact on network reliability.

The measure, known as SAIDI, stood at 116.9 minutes for the nine-month regulatory period from Apr.1 2014, compared to 105.1 minutes in the prior regulatory year.

"As a result we are likely to breach the service quality requirement that we do not exceed the threshold two out of every three years. We have had early discussion with the regulator over this likely breach," said chief executive Simon Mackenzie.

In its 2014 compliance statement, Vector said it had breached the service quality measure because of high winds and a one-off failure of a circuit breaker at its Hepburn Road grid exit point, which saw 47,000 West Auckland householders blacked out for several hours.

It said the network was designed to withstand typical wind speeds, but a significant number of outages associated with wind speed were due to vegetation debris hitting the lines. Although the system could be designed to get around this issue, past customer surveys have shown most customers weren't prepared to pay for improved reliability by designing the network to withstand "abnormal" events, it said.

The Commerce Commission said Vector was required to provide a 2015 compliance statement within 50 days of Mar.31 and it would then investigate what action should be taken over any likely breach. Its powers under the Commerce Act include fines, compensation, and injunctions. Last year it reached settlements with Horizon Energy and Wellington Electricity for price breaches which will see them lower their prices this year to match the breached amount, while Orion Energy escaped penalty.

Mackenzie said the company was also expecting a government-ordered review of the Penrose substation outage to be completed in the second quarter of this year.

Vector posted a 17 percent drop in first-half profit as a gain in sales was offset by regulated price reductions, mark-to-market losses on derivatives and increased borrowing costs. Profit fell to $87.3 million in the six months ended Dec. 31, from $104.6 million a year earlier, the company said in a statement. Sales rose 4.4 percent to $687 million.

Forsyth Barr energy analyst Andrew Harvey-Green said it was a good, solid result and slightly better than expected, given the regulatory price cuts.

Vector kept its full-year guidance unchanged at $588 million, on an adjusted earnings before interest, tax, depreciation and amortisation basis, up 1.3 percent from 2014, even while affirming that the Commerce Commission's decision to cut the allowable rate of return on capital for regulated network monopolies would dent earnings and force the company to review its spending plans. The company also kept its first-half dividend unchanged at 7.5 cents.

Unregulated Ebitda from gas wholesaling, metering and Vector Communications, rose almost 11 percent to $81 million in the first half while regulated Ebitda fell 4.2 percent to $257.9 million, with price reductions imposed by the commission eroding earnings by about $24 million, the company said.

Mackenzie said the company would look to allocate more capital into its unregulated activities, which include smart metering, solar power and battery storage and telecommunications infrastructure.

Vector said its metering business is "positioned to grow strongly" with 884,453 smart meters now installed, up 48 per cent on the previous year, including more than 139,000 smart meters acquired with the Arc Innovations purchase from Meridian Energy. It is now contracted to install more than 1 million smart meters and is also trialing smart gas meters in the North Island.

Vector has for some time been eyeing up opportunities to expand its smart metering business into Australia, where there has now been the necessary regulatory progress to allow a New Zealand-style retailer-led smart electricity meter rollout. More than two million smart meters haven been installed in Victoria but its mandated approach added around A$100 per annum to household electricity bills, according to the Australian Productivity Commission.

Harvey-Green said Vector had the capability to go into Australia and do well there but success depended on doing deals with electricity retailers, and AGL has said it is planning a DIY approach.

Mackenzie said it would be another 12 months before Vector expected to have clarity on the intentions of the Australian power retailers but there was potential for the company to install "well north of" 1.5 million meters on the eastern seaboard, making the market a significantly larger opportunity than any available in New Zealand.

(BusinessDesk)