BUSINESS UNITS: Regulated Networks
REGULATED NETWORKS
Revenue for our Regulated Networks business increased 2.2% to $741.9 million from $726.2 million the year before. This was largely driven by an increase in capital contributions – up 25.2% to $61.2 million – reflecting continued connection growth and significant infrastructure development taking place across Auckland.
Excluding capital contributions, revenue was effectively flat, with growth in connections and gas volumes largely offset by declining electricity consumption. New electricity connections rose 7.2% to 9,138 from 8,526. New gas connections rose 5.8% to 3,515 from 3,323. Total connections to the electricity network stood at 555,100 at year end, up 0.9% from 550,053 a year ago. Total gas connections were 106,670, up 2.3% from 104,322 a year ago. Despite the increase in connections, volumes transported across the electricity network fell 0.5% to 8,332GWh from 8,372GWh due to ongoing declines in household electricity consumption and the partial closure of a large commercial customer. Auckland gas distribution network volumes were 14.3PJ, up 2.9% from 13.9PJ the previous year, due largely to connection growth. Adjusted EBITDA (which excludes capital contributions) fell 2.0% on the prior year to $361.2 million from $368.5 million on the back of flat revenue, higher maintenance costs and one-off items. Our Regulated Asset Base (RAB) now stands at $3.3 billion. The electricity RAB amounts to $2.9 billion and the Auckland gas distribution RAB is around $390 million. In May 2017, the Commerce Commission released its final decision on the default price-quality path for the gas distribution business. This decision is the primary reason average gas distribution prices will reduce by around 14% from 1 October 2017. The impact of this on next year’s EBITDA result is expected to be around $6 million. The main drivers of the decrease in our regulated revenue allowance in the Commerce Commission’s decision were lower interest rates, lower operating expenditure allowances, and tightening regulatory parameters with a move to P67 WACC (from P75) and a lower asset beta. In 2014-2015 the assumptions we made around customers being placed by their electricity retailer on the most suitable lines charge plan did not eventuate. As a result, we unintentionally earnt more than allowed by the Commerce Commission. We’ve been working extensively with the Commerce Commission to find the best solution for consumers, and we will return $13.9 million to Auckland consumers by reducing the amount of revenue we recover over two regulatory years, starting in April 2018. In FY18, Vector’s electricity revenues (and EBITDA) will be $0.9 million lower than they would otherwise have been, with the remainder of the reductions in revenues and EBITDA to be spread across FY19 and FY20. The $13.9 million to be returned to consumers includes accumulated interest of $3.8 million. Meanwhile assumptions made by the Commerce Commission in setting our regulated revenues also continue to prove challenging. In particular, errors in the Commerce Commission’s electricity growth forecasts have contributed to Vector under-recovering by more than $60 million over the past five years. Furthermore, the regulator’s persistent over-forecasting of revaluation rates has resulted in Vector missing out on additional revenue of over $130 million over the same period.
Andre Botha BEng, MEng, PG DipBus CHIEF NETWORKS OFFICER
The days of building network capacity around small windows of peak demand are coming to a close. We’re using integration to redesign that model.
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