The Commerce Commission (CC) once again surprised the market by decreasing Vectors allowable pricing for its lines business in their latest draft decisions paper. Electricity distribution companies are undergoing a five-yearly regulatory review process whereby the CC decides an allowable return on capital and maximum lines prices are set accordingly. On Monday this week the CC effectively told Vector they would have to decrease their prices by around 9%, which changed from an 8% decrease in their previous draft.
Vector disputes this decision arguing that the 7.78% return on capital they are allowed is too low for the company to properly maintain and upgrade their lines network. Vector has appealed the CC’s decision along with a number of other electricity distribution companies. A Merit’s Review Committee will be established later this year or early next year to settle this dispute. Through this process it is possible that the final decision and pricing adjustment will not occur until as late as 2013.
While this outcome has disappointed investors, even with a 9% decrease in pricing Vector will offer an attractive dividend. Once there is certainty on the pricing path the current dividend payout of 70% could be increased as high as 90% which would give Vector a gross dividend yield of nearly 9.0% under the current CC decision.
William Curtayne