Commission releases final decision on Transpower’s price-quality path

The Commerce Commission has issued its final decisions on the individual price-quality path for Transpower for the period 2015-2020.

The price-quality path sets out the maximum revenue that Transpower is allowed to earn as well as the minimum quality standards it must meet. The decision takes effect from 1 April 2015.

Commerce Commission Deputy Chair Sue Begg said Transpower’s maximum revenue for the five year period has been set at $4.658 billion.

“The final decision will allow Transpower to increase its total revenues from its current level by just over two percent during the next five years. The effect of changes to transmission charges on a typical consumer bill is therefore expected to be minor over this period,” Ms Begg said.

The total revenue figure reflects the change in the weighted average cost of capital (WACC) used for regulated business announced by the Commission in October. The overall impact of the change in WACC (including changes in interest rates) on Transpower’s total revenue is a reduction of approximately $328 million compared to previous revenue estimates.

“Investment in our national grid is crucial and the Commission is confident this decision balances Transpower’s need to maintain network reliability and security of supply without imposing excessive costs on consumers,” said Ms Begg. 

The final decision on the individual price-quality path for Transpower can be found on the project page.

Background

Individual price-quality regulation

Since April 2011, Transpower has been regulated under Part 4 of the Commerce Act 1986 by way of individual price-quality regulation. Under individual price-quality regulation, the Commission sets the maximum revenues that Transpower is allowed to earn from its customers and the quality standards it is required to meet for each year of a regulatory period.

A regulatory control period (RCP) typically lasts for five years. The first regulatory period (RCP1) under the Act ran from April 2011 to 31 March 2015. The second regulatory period (RCP2) will run from 1 April 2015 to 31 March 2020.

Price-quality path regulation is designed to mimic the outcomes of competitive markets so that consumers benefit in the long term. This includes making sure suppliers have incentives to innovate and invest in their infrastructure, and to deliver services efficiently and reliably at a quality that consumers expect, while limiting businesses’ ability to earn excessive profits.

Transpower's maximum allowable revenues are based on operating and base capital expenditure approved by the Commission before the start of the regulatory period, as well as the allowed rate of return on the existing asset base, and the additional capital expenditure approved during the regulatory period for major capital projects. Transpower also has a range of incentives mechanisms which encourage efficiency by providing Transpower the opportunity to earn additional revenue.

The Commission decision provides for operating and base capital expenditure of $1.29 billion and $1.13 billion respectively for Transpower.

The Electricity Authority estimates that transmission charges make up about 7.4% of a typical household electricity bill.

Key changes from the 12 September draft determination to the final determination

The final determination revises Transpower’s asset health measure targets to correct errors in Transpower’s original calculations that informed the Commission’s 29 August decisions. These would have unfairly disadvantaged Transpower.

It also incorporates decisions the Commission is required to make in respect of output adjustments for Transpower’s performance in RCP1 that will be rolled into RCP2. Lastly, it gives effect to changes to regulatory rules, including the introduction of an approval mechanism for large ‘listed projects’ for which timing is uncertain.

In addition to the changes in the cost of capital, the application of cash flow timing factors, which recognise the time value of when revenues are actually received and costs are actually paid, has further reduced the forecast maximum allowable revenue by approximately $85m.