Orion New Zealand has publicly stated it may seek a customised price-quality path that takes into account the impact of the Canterbury earthquakes on its infrastructure. The Lines Company Limited has also told us it is considering a CPP. Based on their stated investment plans, some gas pipeline businesses may also be considering CPP proposals next year.
Deputy Chair Sue Begg said that the prospect of receiving the first ever proposal for a CPP was significant both for the Commission and the regulated industries involved. Under Part 4 of the Commerce Act, the Commission regulates goods and services in markets where competition is limited, including certain electricity and gas distribution and transmission businesses. Through regulation of these types of businesses we aim to ensure there is an appropriate balance between providing incentives for the businesses to invest in their regulated services, and ensuring that consumers and businesses are being charged prices that are better aligned with the cost of the services they receive.
One of the ways we regulate is by setting what are known as ‘price-quality paths’. These paths restrict the total revenue that certain regulated businesses can earn or the maximum average prices they can charge. The paths also set standards for the quality of services each business must deliver. This ensures that regulated businesses are not able to reduce quality to maximise profits.
Regulated electricity distribution, and gas distribution and transmission businesses start off on a default price-quality path (DPP). The DPP is set using a generic regulatory approach that applies to all these businesses. This provides a low-cost form of regulation, but means that the price-quality path may not fit the specific needs of each regulated business. If the DPP does not fit the particular circumstances of an individual business, it can apply for a CPP. Under a CPP, we evaluate the facts and set a price-quality path that better suits the needs of the individual business and its consumers.
“Having the option to apply for a CPP if the DPP does not fit the business’s unique circumstances is a major feature of price-quality regulation in New Zealand. Regulated businesses can consider whether a CPP is likely to be a better option for them, and the Commission will work to ensure the outcomes are in line with the purpose of Part 4,” said Ms Begg.
Electricity distribution businesses have specified timeframes within which to submit a CPP proposal. This helps the Commission prioritise any CPP proposals it receives and set a CPP to apply from the next pricing year. However, in the case of a catastrophic event, such as the Canterbury earthquakes, a regulated business can submit a proposal at any time up to 24 months following the event.
A critical part of the CPP proposal process is allowing consumers of these regulated businesses the opportunity to provide feedback on the price and quality changes a business is proposing.
“While consumers can provide their views to the Commission after a proposal has been submitted, the best time to give input is before it comes to us. We encourage consumers and their representative groups to get involved in the consultation rounds that the regulated business must hold,” said Ms Begg.
The Commission has just published a new fact sheet outlining how the CPP process works.
