Media Releases

Commission to fast track customised price path amendments

7 August 2015

The Commerce Commission has decided to fast track the consideration of amendments to certain rules relating to customised price-quality paths (CPPs), as part of the input methodologies review announced in June.

Electricity distributors and gas pipelines businesses are subject to price-quality regulation. Default price-quality paths limit the revenues these businesses can earn, or the maximum average prices they can charge. After the default path is set, they can apply to the Commission for a CPP that is tailored to their specific circumstances.

The Commission will fast track consideration of specific changes to how suppliers apply for and the Commission evaluates and determines CPPs.

Commission Chair Dr Mark Berry said the Commission was responding to requests from regulated businesses to complete this work ahead of the main review. The Commission will firstly consider specific amendments to add flexibility to the CPP requirements. Secondly, it will consider whether the cost of capital used should be aligned with that used for default paths.

“We plan to complete our consideration of the first limb of these amendments by early November 2015 and the second limb by the end of February next year, so that suppliers seeking to apply for a CPP in 2016 are not unnecessarily deterred,” Dr Berry said.

The fast track will not consider amendments to the underlying cost of capital input methodologies, which will be considered as part of the main review. The Commission explained details of the fast track at its Input Methodology Forum last month.

“We are committed to reducing the barriers suppliers say they face when considering whether to apply for a CPP, where it is to the long term benefit of consumers,” Dr Berry said.

“Suppliers have made it clear that they consider the difference between the cost of capital used for a CPP and a default path to be the single biggest impediment to applying for a CPP. Fast tracking this issue will provide certainty for suppliers that may be considering this option in 2016. 

“We will also consider a number of amendments aimed at simplifying the process and reducing the cost of making an application.”

Further information on the input methodologies review can be found here.

Background

Previous releases

This is the fourth media release from the Commission on the input methodologies review.

The first release was issued on 10 June 2015, and related to issuing the original Notice of Intention, and contains all the original background information.

The second release was issued on 16 June 2015, and notified that the Commission had released its first paper for industry and consumer consultation as part of the review of Input Methodologies. It also highlighted that the Commission will be holding a forum on 29-30 July 2015 to hear directly from suppliers and consumers on the main topics for the review.

The third release was issued on 3 July 2015, and notified that the Commission had made the decision to fast track the consideration of airport land valuation rules as part of the review.

What is a customised price-quality path?

Under Part 4 of the Commerce Act, 17 electricity distributors and 4 gas pipelines businesses are subject to price-quality regulation. Default price-quality paths set a cap on the maximum average prices a business may earn in each year of the regulatory period. They include quality standards to ensure businesses do not respond to the regulation by reducing investment in quality of the service. After the default price quality path has been set, a supplier may choose to propose an alternative, customised price-quality path.

A customised price-quality path is a path the Commission can set to better suit the specific needs of a regulated business and those of its consumers. For example, a business may need to invest more in its network than provided for under the default price-quality path or may have been affected by an event outside its control. Customised price‐quality paths are based on the Commission’s analysis of information specific to the business, and require in‐depth audit, verification, and evaluation of the information provided by the regulated business. Orion New Zealand Limited is currently the only supplier on a customised price-quality path.

How do input methodologies apply to customised price-quality paths?

The rules and processes for a customised price-quality path application, including the requirements for a proposal and the criteria we must consider when evaluating an application, are set out in input methodologies developed by the Commission. Input methodologies are rules, processes, requirements and evaluation criteria for services that are regulated under Part 4. The Commission is required to undertake a review of these input methodologies within seven years of setting them. The main review is currently scheduled to be completed in December 2016, however the Commission has decided to review some input methodologies on a fast tracked timeframe.