Media Releases

Commission begins industry and consumer engagement on IMs review

16 June 2015

The Commerce Commission has released its first paper for industry and consumers as part of the review of input methodologies announced last week.

Input methodologies are the rules and processes that underpin the regulation of electricity lines, gas pipelines, and specified airport services.

One of the questions raised in the paper is whether any changes should be made to the way risks and rewards are shared between suppliers and consumers of regulated services.  In particular, the Commission is seeking views on what the implications of emerging technologies in the energy sector (such as solar photovoltaics and electric vehicles) might have on the regulation of electricity lines services.

The Commission also intends to build on its recent reviews of the effectiveness of the airports information disclosure regime by seeking views on how to better assess airport profitability over time.

Commerce Commission Chair Dr Mark Berry said the paper is the first step in developing a clear problem definition for the review.  Firm proposals for change will be developed later in the process.

“We would encourage all industry and consumer stakeholders to actively engage in this problem definition phase, as quality evidence and information from the sector stakeholders will be vital to a successful review,” Dr Berry said.

Prior to receiving formal written submissions the Commission will hold a forum for stakeholders on 29 and 30 July 2015 to hear directly from suppliers and consumers on the main topics for the review.  The forum also aims to help parties develop their submissions by allowing them to test their views and explore alternative perspectives.

A copy of the problem definition paper can be found on the Input methodologies review page.

Read last week’s media release announcing the review.

Background

What are the Input Methodologies (IMs)?

The IMs are a range of 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.

What is the purpose of the IMs?

As section 52R of the Act stipulates, the purpose of the IMs is to promote certainty for suppliers and consumers of regulated goods and services in relation to the rules, requirements and processes applying to regulation. 

What do the IMs cover and how are they implemented?

The IMs cover matters such as the valuation of assets, the cost of capital, the treatment of taxation, and the allocation of costs. They are implemented through different regulatory instruments, such as determinations on the maximum prices suppliers of regulated goods and services can charge or the information they must disclose.

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 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.

Why is the Commission reviewing the IMs earlier?

Most of the IMs currently in force were first published in December 2010. Our proposal is to start the review now, with an indicative completion date of December 2016. That would be one year earlier than the seven years contemplated in the Act.

Our intention to complete the review in December 2016 would enable consumers and suppliers to benefit from any IM changes through:

  • the May 2017 reset of the default price-quality paths for gas pipeline businesses
  • the expected July 2017 price setting events by Auckland and Christchurch airports, with Wellington airport to follow in early 2019
  • the November 2019 resets of the price-quality paths for electricity distributors and Transpower.

We have consulted on the timing for the review and stakeholders broadly agree with our proposal to start the review now.

However, we want the issues to drive the process of the IM review. We will re-assess our indicative December 2016 completion date if it becomes evident at the early stages of the review that the issues merit a longer or shorter process to reach a satisfactory solution.

What is the Capex IM and why is it out of scope of the IM review?

The Transpower Capital Expenditure Input Methodology (Capex IM) sets out the rules and requirements relating to Transpower’s capital expenditure proposals. We consider it appropriate to defer the review of the Capex IM. The Capex IM was originally determined in January 2012, separately from the other IMs, has recently been amended, and does not substantially drive decisions in relation to the other IMs.

What is the forum and how does it differ from a formal Commission conference?

The intention is for the forum to allow open discussion and exchange of information between all parties. It will assist stakeholders identify and define potential problems with the IMs, and inform their submissions to our Invitation to contribute to problem definition (invitation paper). This will happen before submissions are made on the invitation paper.

The forum is different from a conference (as referenced in section 52V of the Act). This contrasts with a conference where Commissioners lead the questioning of submissions (and are typically held after submissions are made). Commissioners will attend the forum but principally as observers. Commission staff will participate in the forum.