Fact sheet – Draft default price-quality path for electricity distributors

The Commerce Commission has published a paper that outlines and explains the default price-quality paths we propose to put in place for 16 electricity distributors for the period from 1 April 2015 to 31 March 2020.

This fact sheet provides some background to the default price-quality path regulatory scheme, and the Commission’s approach to setting the default price-quality path.

Part 4 of the Commerce Act 1986

The Commerce Act 1986 is one of the primary pieces of legislation for economic regulation in New Zealand. Under Part 4 of the Act, the Commission has responsibility for regulating the price and quality of goods or services in markets where there is little or no competition, by promoting outcomes that are consistent with the outcomes produced in competitive markets.

As part of this, the Commission regulates electricity distributors. All electricity distributors are subject to ‘information disclosure’ regulation, which requires distributors to publically disclose certain information about their businesses. Additionally, 17 businesses – those that don’t meet the 'consumer-owned' exemption criteria – are also subject to price-quality regulation.

Electricity distributors subject to price-quality regulation

  • Alpine Energy
  • Aurora Energy
  • Centralines
  • Eastland
  • Electricity Ashburton
  • Electricity Invercargill
  • Horizon Energy
  • Nelson Electricity
  • Network Tasman
  • OtagoNet
  • Orion*
  • Powerco
  • The Lines Company
  • Top Energy
  • Unison
  • Vector
  • Wellington Electricity

*Orion is subject to price-quality path regulation, but is currently on a customised price quality path put in place in 2013 following the Canterbury earthquakes. On 1 April 2019, Orion New Zealand is scheduled to transition to the default price-quality path that is generally applicable to other distributors.

Electricity distributors NOT subject to price-quality regulation

  • Buller Electricity
  • Counties Power
  • Electra
  • Mainpower
  • Marlborough Lines
  • Network Waitaki
  • Northpower
  • Scanpower
  • The Power Company
  • Waipa Networks
  • WEL Networks
  • Westpower

 

See the map for the areas that different distributors serve.

Transpower, who are responsible for electricity transmission, are not an electricity distributor, and are subject to a separate individual price-quality path set by the Commission.

Default/customised price-quality regulation

The purpose of default/customised price-quality regulation is to provide a relatively low cost way of setting price-quality paths for electricity distributors, while allowing the opportunity for individual distributors to have alternative price-quality paths that better meet their particular circumstances. The way we set price-quality paths is set in advance by our ‘input methodologies’ (these are discussed in detail below).

Price-quality paths work by specifying:

  • Limits on the prices distributors may charge
  • The quality standards distributors must meet
  • A five year regulatory period which the price-quality path applies for.

Price limits

The Commission specifies prices limits that apply to average prices distributors charge across all consumers. They are composed of a ‘starting price’ which applies at the start of a regulatory period, and a ‘rate of change’ which applies for every subsequent year of the period.

They do not apply to the prices charged to individual consumers or groups of consumers, and therefore are unlikely directly translate into corresponding changes in prices consumers pay.

The price limits are structured to provide distributors with an incentive to focus on the costs that they can control. Costs that they have little or no control over are treated separately. The price limits we set in advance take into account only the costs that distributors’ can control. The other costs – which the Commission calls ‘pass through’ and ‘recoverable’ costs – can be passed on to consumers. Examples of this are local authority rates, or Transpower transmission charges.

Quality standards

The Commission also sets quality of service standards which distributors must meet. We use the frequency and duration of power outages to measure the quality of service, and set the quality target distributors must meet based on a ten-year average of their performance.

For the current regulatory period (1 April 2010 to 31 March 2015) the quality system is a pass/fail regime, where the Commission can take enforcement action against distributors who consistently breach the quality targets. In the 2015 reset, we are proposing to introduce a regime that links quality to the revenue distributors receive, with automatic penalties or rewards based on performance.

Process to date

2010 Prices set based on previous Part 4A regime
2010 Input methodologies set
2012 Prices reset based on input methodologies
2013 Orion customised price-quality path set
2013 High Court IM merits review
2014 Process and issues paper, draft model released

Additional amounts due to distributors to compensate for shortfall in revenue

The Commission has the ability to manage potential price shocks to consumers by setting price caps on any increases. Due to limits on the price increases to reduce price shocks following the 2012 price reset and the short period of time remaining after that reset (two years), some distributors have still not fully recovered their costs form the last regulatory period. These costs have been spread across each year of the upcoming regulatory period.

Input methodologies

Input methodologies are a range of upfront regulatory rules, processes and requirements. These cover matters such as the valuation of assets, the treatment of taxation, the allocation of costs, the specification of price, and the cost of capital. Part 4 of the Commerce Act regulates suppliers of electricity lines services and gas pipeline services, and specified airport services supplied by Auckland, Wellington and Christchurch airports.

Related Commission work

  • Incremental rolling incentive scheme (IRIS)
  • Input methodology amendments
  • Weighted average cost of capital review
  • High Court direction on re-openers
  • Customised price-quality paths

Process from here to the final decision

18 July 2014 Release of draft determination
22 July 2014 Draft decision on cost of capital
25 July 2014 Q&A session on models
2 August 2014 Information gathering request (s53ZD)
15 August 2014 Deadline for submissions of the draft decision
29 August 2014 Deadline for cross-submissions on the draft decision
Late 2014 High Court direction on price-path reopeners
10 October 2014 Release of revised draft determination
28 November 2014 Release of the final decisions
1 April 2015 New price-quality path takes effect

More information

For a more detailed account of the process we follow to set the default price-quality path, please see Low cost forecasting approaches for default price-quality paths, or the executive summary and Chapter 2 of the main policy document.