Our role in respect of the Lines Company

The Commission has received many complaints from consumers about the pricing methodology used by The Lines Company. The Lines Company owns and operates the electricity distribution network for the King Country region in the Central North Island. A number of the complaints received raise similar concerns.

The purpose of this document is to explain our role in relation to electricity distributors like The Lines Company, the issues we have considered and the actions we have taken. We have completed our consideration of the matters outlined and the Commission does not intend to revisit the decisions that have already been made.

Our role

Regulation of transmission and distribution services

Under the Commerce Act, the Commission limits the total revenue that can be made by some electricity distributors including The Lines Company.We also set minimum standards for quality or reliability.

We do not set rules for how electricity distributors set customer pricing or the methods they use to set pricing, although we require the pricing methodologies to be disclosed.

Misleading or deceptive conduct

Under the Fair Trading Act, we are not empowered to look at the merit of The Lines Company’s pricing methodology. Instead, as far as The Lines Company’s pricing practices are concerned, the key consideration under the Fair Trading Act is whether the disclosure of those practices is misleading or deceptive. We note that potentially misleading representations can be corrected by the business without it having to alter its services or pricing.

The role of the Electricity Authority

The Electricity Authority has established voluntary pricing principles for electricity distributors, which it assesses all electricity distributors against. The Electricity Authority also has the power to introduce compulsory pricing principles if it elects to do so.

The debate about The Lines Company’s pricing methodology

A large number of the issues relating to The Lines Company involve criticisms of the fairness of the pricing approach. In particular, it has been alleged that it is unfair to base pricing on the highest period of use each year (known as peak demand) rather than total volume of energy used. People often express their concern that they are charged based on their highest peak use for the whole year even in the summer months when they use much less electricity.

The Lines Company has elected to base its variable prices for residential consumers on their contribution to peak demand. In contrast, New Zealand’s other electricity distributors generally base their variable prices for residential consumers on the total amount of electricity they consume.

Basing prices on consumers’ contribution to peak demand is more cost reflective because electricity distributor’s costs (especially maintenance and investment to cover growth) are driven by the peak capacity they must supply. The total amount of electricity that is distributed over the year is less important. Pricing that is more cost reflective is generally more efficient, as long as consumers are able to respond to the price signals.

Our position on peak demand pricing and its implementation by The Lines Company

We have not undertaken summary and analysis of electricity distributor pricing methodologies because this has been undertaken by the Electricity Authority. However, we support the Electricity Authority’s view that a peak demand pricing approach is, in principle, consistent with efficient pricing for The Lines Company’s network.

Peak demand in itself does not breach the Fair Trading Act. The key consideration under the Fair Trading Act is whether The Lines Company’s description of that pricing methodology is misleading or deceptive.

Our actions in relation to The Lines Company

We have conducted a number of investigations under the Fair Trading Act in relation to alleged breaches of the Act by The Lines Company. In three instances we identified conduct that we thought risked breaching the Fair Trading Act. For these instances we issued a warning letter and compliance advice. Our responses were consistent with our enforcement response guidelines, which are applied to all Fair Trading Act investigations.

Historically, we have had some concerns about how The Lines Company’s described and disclosed its peak demand pricing to its customers. We warned The Lines Company in 2013, as we thought some of its disclosure had the potential to mislead customers. We investigated further complaints in 2014. Our investigation showed that The Lines Company had greatly improved its disclosure to customers following our 2013 warning, but still had some smaller areas for improvement.

Consistent with our role under Part 4 of the Commerce Act we continue to monitor The Line Company’s compliance with the Default Price-Quality Path (known as the DPP). To date we have not identified any breach under Part 4 through The Lines Company earning too much revenue or failing to meet quality/reliability standards since 2010.

Allegations considered

The majority of the complaints we have received have been complaints that the method of billing consumers and related activities (eg, load control) has not matched The Lines Company’s published disclosures and messages to consumers, which if true might be a contravention of the Fair Trading Act.

Specifically, the main complaints of misleading representation have been:

  • some price increases have been misrepresented
  • the 10% adjustment to time of use meter customers’ loads has been inadequately disclosed
  • when The Lines Company will undertake load control has been misrepresented
  • the methodology for calculating peak demand of temporary accommodation consumers has been misrepresented
  • some statements made by The Lines Company are not correct for temporary accommodation consumers
  • the use of both day and night data for opt back calculations is not adequately disclosed
  • ‘Switchit’ devices do not operate as described
  • eErrors and inappropriate assumptions may have been used to develop the profile, inconsistent with the pricing methodology.

Key findings – Fair Trading Act

Warning letter sent to The Lines Company in 2013

The warning letter sent to The Lines Company in 2013 explained that, in our opinion, The Lines Company had likely breached the Fair Trading Act. Specifically, the alleged breach was in relation to misrepresentation or lack of disclosure of the following:

  • the size of price rises for 2012 represented in letters to consumers
  • the adequacy of the disclosure of the 10% adjustment made to the peak demand of consumers with time of use meters
  • the reasons for load control (ie, whether load control was only used when the local network was constrained)
  • the application of the calculation methodology for temporary accommodation consumers.

Compliance advice letter sent to The Lines Company in 2014

The compliance advice letter sent to The Lines Company in 2014 explained that we thought that The Lines Company had possibly breached the Fair Trading Act. Specifically, the breach was in relation to insufficient disclosure to new consumers of the 10% adjustment made to the peak demand load of consumers with time of use meters. The Lines Company had responded to the previous warning letter by issuing letters to all consumers explaining the 10% adjustment, but this was not given to consumers who entered a contract with The Lines Company at a later date.

Some complaints did not warrant enforcement action

We have found that a number of complaints identified above have not warranted enforcement action. Common examples of reasons for complaints not warranting enforcement action included:

  • the allegation was incorret
  • no misleading representation was identified
  • the complaint traversed similar issues which had already been the subject of enforcement action and were not reinvestigated.

Some complaints were outside our scope

We have also received a large number of complaints that are outside our scope. Most of these complaints were from a small group of complainants. This includes whole complaints that are outside our scope as well as parts of complaints that cover multiple topics. The most common reason for complaints being outside our scope is that they are in relation to The Lines Company’s choice of pricing methodology, which we do not directly regulate.