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Commission releases draft decisions on review of rules for regulated electricity, gas and airport services

16 June 2016

The Commerce Commission has today released draft decisions for consultation on its review of input methodologies (IMs) – the rules, requirements and processes that apply to the sectors it regulates under Part 4 of the Commerce Act.

The IMs under review were determined in December 2010 for specified airport services, gas pipelines and electricity distribution and transmission. The Commission must review each IM no later than seven years after determination.

Deputy Chair Sue Begg said the Commission is proposing a small number of targeted changes in its draft decisions.

“Our view is not a lot of change is needed to the bulk of the IMs. Where we have proposed changes, we have focused on the areas where we can better promote the long-term benefit for consumers, while enhancing certainty and reducing compliance costs and complexity for the sectors we regulate,” Ms Begg said.

“Over the course of our review, we have heard a wide range of views on the changing landscape mainly due to technology. We consider the IMs are flexible enough to deal with foreseeable developments in new technologies, particularly in the electricity sector. We have the tools to respond to emerging developments and will continue to engage with the sector to ensure we are ready to make any changes that may be required to IMs in the future.”

The Commission considers that the available evidence does not suggest that new technology will result in significant numbers of consumers disconnecting from lines networks in the short term.

“In our view, the risk that electricity distributors will not be able to fully recover their historic capital investment is unlikely to be a significant concern in the next five to ten years, but it may be a bigger issue in the future. There is greater uncertainty around this issue now than there was in 2010, but there is no clear evidence to suggest the demand for electricity lines services is going to fall away in the medium term. We recognise that others hold different views on the pace of change and impact new technologies may bring, so it is a topic we are keen to explore further through submissions,” Ms Begg said.

As a precautionary measure to manage the increased uncertainty, the Commission is proposing to allow lines companies to apply to recover the cost of assets more quickly. This measure has been designed to ensure that consumers do not pay more over the life of the assets. The Commission is open to submissions on whether this measure should also be applied to gas distribution and transmission assets.

The Commission has reviewed the cost of capital methodology and decided that for the most part its approach should remain unchanged. However, it considers that the allowed rate of return for gas pipeline businesses should be reduced to match that of electricity businesses, as their risk profiles are similar. The Commission is also proposing to allow suppliers to carry over the cost of capital that applies to their default price-quality path when they apply for a customised price-quality path.

The Commission is seeking feedback on its cost of capital proposals and other key changes, including switching from a price cap to a revenue cap for electricity distributors, moving to a ‘pure’ revenue cap for gas transmission and adjustments relating to customised price quality paths. In particular, feedback is sought on the Electricity Authority’s differing perspective on the merits of a revenue cap.

“Reviewing the IMs is a significant undertaking and we recognise the importance of maintaining regulations that are stable, provide incentives to invest in long-lived infrastructure and deliver long-term benefits to New Zealanders. We have worked closely with our stakeholders throughout this process and would like to thank them for their valuable input to date,” Ms Begg said.

The package of draft decision papers and a summary paper outlining the key changes the Commission is proposing for emerging technology, electricity lines services, gas pipeline services, specified airport services and the cost of capital can be found online.

The full draft amended input methodologies determinations, the draft amended airports information disclosure determination and a report presenting the more detailed findings of the review so far will be published on 22 June. A separate paper relating to the implementation of the proposed changes to the input methodologies for the 2017 gas default price-quality path reset will be released on 28 June.

Submissions on the draft decisions, report on the review and gas paper close at 5pm on 28 July 2016. Cross-submissions must be received by 5pm on 11 August 2016.

Submissions on the draft amended determinations are due by 5pm on 11 August 2016.

Background

What are the Input Methodologies (IMs)?

The IMs are the upfront rules, requirements and processes that apply to regulation in New Zealand. Under Part 4 of the Commerce Act, the Commission is required to set and apply IMs to regulated electricity lines services (distribution and transmission), gas pipelines (distribution and transmission) and specified airport services.

IMs are an input and only one part of the regulatory regime. Benefits are delivered to consumers through the application of the IMs through price-quality regulation or information disclosure regulation.

What is the IM review?

The IM review is the opportunity to assess whether there are any necessary changes to the IMs to more effectively promote the long term benefit of consumers. We do this review in consultation with all stakeholders. The Commerce Act requires the Commission to review each IM within seven years of its date of publication and, after that, at intervals of no more than seven years.

The impact of the IMs review on the price and quality of service consumers receive will not be determined until the next price setting events apply the updated IMs. These are in: 

  • 2017 for gas pipeline businesses and Christchurch and Auckland airports
  • 2019 for Wellington Airport
  • 2020 for electricity distributors and Transpower

We aim to complete the IM review by December 2016. The review of Transpower’s capital expenditure IM, which was first set in 2012, will be reviewed in 2017.

What has the IM review process been to date?

On 27 February 2015, we issued an open letter seeking comment on the timing, approach and possible focus areas for the IM review.

Having reviewed feedback on that letter, we issued a notice of intention to commence the current IM review on 10 June 2015.

On 16 June 2015, we released an invitation to contribute to the problem definition for the IM review (problem definition paper). We held an industry forum in July to give interested parties an opportunity to develop and test their views on the problems for the review prior to making formal written submissions.

Over the past year, we have also held a number of other stakeholder workshops and meetings, and sought further submissions on targeted topics. This included seeking feedback on our emerging views on the form of control for electricity distributors and gas pipeline businesses, as well as on opportunities to improve the way the default price-quality path and customised price-quality path work together.

As part of the IM review to date, we have also published final decisions on specific amendments that were fast tracked as part of the review. These were amendments to the CPP requirements to provide more flexibility for gas and electricity distributors when applying for a customised price-quality path (November 2015) and amendments to the application of the airport land valuation rules (February 2016).