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Vector to return $13.9m to Auckland electricity consumers under settlement with Commerce Commission

7 July 2017

Electricity lines company Vector will return $13.9 million to Auckland electricity consumers after it accepted it had breached its regulated price path by recovering more revenue than it was entitled to in the 2014 and 2015 financial years.

Under a settlement reached with the Commerce Commission today, Vector has agreed to reduce the amount of revenue it recovers over two years starting in April 2018.

The breach arose when Vector restructured its residential tariffs in April 2013.  The Commission accepts Vector did not intend to breach its regulated price path at the time it restructured prices. However, by adopting an assumption regarding customer switching rates that the Commission considers was unrealistic, Vector collected more revenue than was allowed.

Vector restructured its prices for residential consumers into two main tariffs: low-user and standard user. The optimal tariff for an individual household depended on its annual consumption of electricity. Vector is not able to unilaterally switch consumers between tariffs. Instead, it fell to electricity retailers to identify and request Vector to switch consumers to the most appropriate tariffs under the restructured prices.

In setting prices for the two tariffs, Vector assumed that competition in the electricity retail market would ensure that virtually all residential customers would be switched to the most appropriate rate from the first day. However, at the end of the first year of the new price structure, 28% of Auckland households had still not been switched to the tariff that was appropriate for their circumstances and so were paying more than they needed to.

Commission Deputy Chair Sue Begg said Vector should not have assumed that users would all be immediately transferred by electricity retailers to the best rate.

“While Vector could not predict consumer switching with complete accuracy, its working assumption was unreasonable and led to a large number of households overpaying for their electricity.  While lines charges are only about 26% of a household’s electricity bill and the individual amounts overpaid are often small, the cumulative effect for Vector was many millions of dollars,” Ms Begg said.

“This settlement contributes to Vector refunding the commercial gain it made through its breaches, without the need for a costly and time-consuming court process. Vector’s repayment takes the form of holding residential prices flat for the next two years, which has the effect of consumers paying less and Vector earning less revenue than would be allowed under its price path.”

The case also highlights the need for consumers to check their electricity tariffs.

“An estimated 80,000 Auckland households could still be on a more expensive tariff for the lines component of their electricity bill. Energy retailers and consumers themselves should be checking that the low-user tariff option is being used where it can be, as it could save households up to $200 a year,” Ms Begg said.  

Background

Vector is the electricity distributor that delivers electricity to around 550,000 homes and businesses in the greater Auckland region. It is subject to price-quality regulation that sets the maximum revenue it may earn each year. The breach in this case occurred under the price path set in 2012.

Other electricity lines companies that have breached their price paths in recent years include Horizon and Wellington Electricity.

The settlement agreement with Vector can be viewed on the Default Price-Quality Path Enforcement Responses page.