Media Releases

Cost of capital amendments no longer on fast track under IMs review

9 October 2015

The Commerce Commission has decided not to progress fast tracking potential changes concerning the cost of capital for customised price-quality paths (CPPs) as part of the input methodologies (IMs) review. Those changes will now be considered as part of the main review scheduled for completion in December 2016.

In response to requests from regulated electricity distribution and gas pipeline businesses, in August the Commission announced it would fast track two limbs of work related to the CPP IMs ahead of the main review. Considering whether the weighted average cost of capital (WACC) used for CPPs should be aligned with that used for default price-quality paths was to be the second limb of that work.

Commission Chair Dr Mark Berry said the decision not to progress fast tracking this piece of work reflected a change in circumstances for regulated businesses, which reduced the urgency to complete it early.

“We have kept in close contact with regulated businesses as we progress this review and we no longer expect to receive any CPP applications in 2016.  As a result, there is no longer a pressing need to consider this WACC alignment issue early and the most efficient approach now is to consider it in conjunction with other WACC work as part of the main review,” Dr Berry said.

“We are still aiming to release our draft decisions for the input methodologies review in mid-2016, which will give suppliers an early indication of our views should they consider applying for a CPP in 2017. We will continue to work closely with these suppliers as needed.”

The Commission will continue fast tracking the first limb of CPP IMs amendments that focus on introducing flexibility for suppliers in respect of the information requirements in preparing for applications. This work is at an advanced stage, with consultation on the draft decision complete and a final decision scheduled for 9 November.

Background

What is a customised price-quality path?

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, while setting minimum quality standards that must be maintained. After the default path is set, they can apply to the Commission for a CPP that is tailored to their specific circumstances.

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 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.

Previous releases

This is the sixth media release from the Commission on the input methodologies review. All previous releases can be found here.