Commission proposes adjustments to prices for electricity distribution services

The Commerce Commission has issued a draft decision to reset regulatory controls for 16
electricity distribution businesses from 2012-2015. The proposed reset would implement new
regulatory rules and processes—called input methodologies—set by the Commission in December
2010, and result in price adjustments.

The price adjustments proposed by the reset will allow some businesses the opportunity to earn
more so that they can achieve a reasonable return in the next three years, and to ensure that other
businesses reduce their prices if they would otherwise have earned excess returns.

“The approach we have taken aims to ensure there is an appropriate balance between providing
incentives for businesses to invest in their networks, and ensuring that consumers are being charged
prices that are more aligned with the cost of the services they receive,” said Dr John Hamill,
General Manager of the Commission’s Regulation Branch.

The approach to resetting prices proposed in this draft decision has been applied consistently across
all businesses, but now uses objective information specific to each business in place of industry
wide assumptions. If the proposed prices do not suit a business’s particular circumstances, that
business can apply for a customised approach.

The proposed adjustments vary in size between a 20 per cent increase and 10 per cent decrease.
Those businesses with increases include smaller regional businesses, and those businesses receiving
decreases include the three largest businesses. 

“Although the effect of a final price reset is likely to flow through to electricity consumers, actual
changes in price may be different to those indicated by the draft decision. This is because
businesses are free to adjust their prices across their networks to meet the Commission’s control on
average prices, and charges relating to electricity distribution are only part of retail charges to
consumers,” said Dr Hamill.

This draft decision on price resets marks the final consultation stage of an extensive process that
started in February 2010. There is now a seven week period for submissions on the draft decision.
A final decision will be made by 20 October 2011 and any changes arising from a reset of prices
will apply from 1 April 2012.

Due to the Canterbury earthquakes, the draft decision does not apply to Orion New Zealand
Limited. Separate discussions between Orion, the Commission and central Government are taking
place to tailor appropriate regulatory arrangements.

You can read the Commission’s report, 2010-15 Default Price-Quality Path for Electricity
Distribution Businesses – Reset of Starting Prices, CPI Adjustment and Other Amendments
Draft Decisions Paper, July 2011, at www.comcom.govt.nz 

Businesses covered by this decision
• Alpine Energy Limited
• Aurora Energy Limited
• Centralines Limited
• Eastland Networks Limited
• Electricity Ashburton Limited
• Electricity Invercargill Limited
• Horizon Energy Limited
• The Lines Company Limited
• Network Tasman Limited
• Nelson Electricity Limited
• OtagoNet Joint Venture
• Powerco Limited
• Top Energy Limited
• Unison Networks Limited
• Vector Limited
• Wellington Electricity Lines Limited

Under s 54D of the Commerce Act 1986 (the Act), ‘consumer-owned’ suppliers of electricity lines
services, are exempt from default/customised price-quality regulation, as their consumers have
direct input into the performance of the business. These consumer-owned businesses are still
required to publicly disclose information on their performance under the Commerce Act but are not
subject to the proposed reset. 

Reset of the default price-quality path
The 2010-15 default price-quality path (2010-15 DPP) was first set using the prices that applied at
the end of the previous regulatory period. This allowed the Commission to hold off from making
adjustments to prices until input methodologies were set that could inform the Commission’s
decisions. The Commission consulted on this approach when it first set the 2010-15 DPP.
This situation of a mid period reset of prices is unusual, as input methodologies would normally be
available when setting prices, and a default price-quality path cannot normally be reset mid period.
However, the Part 4 regulatory regime established under the Act is new, and the Act recognised the
need to set a DPP while input methodologies were being developed. In recognition of this unusual
situation, the Act allows for the 2010-15 DPP to be reset to take account of input methodologies
when they are published.

Price-quality regulation for electricity distribution
Under Part 4 of the Act, all suppliers of electricity distribution services must be subject to either a
default price-quality path (DPP) or a customised price-quality path (CPP). The only exceptions to
this are businesses exempt on the basis of consumer ownership as discussed above.
A DPP is a generic form of regulation applied to all businesses at the start of a regulatory period.
Under a DPP, each business is set a ‘starting price’ which is allowed to increase broadly in line
with inflation over the regulatory period. As well as an inflationary increase, an adjustment based
on the expected productivity of the industry as a whole is also factored into the annual rate of
adjustment.

Every five years (or four years if the Commission decides so up front), the DPP is reset to keep the
balance between the needs of businesses and consumers right. Where a business considers the DPP
does not suit their particular circumstances, they can apply for a CPP. A CPP has the same key
components as a DPP but uses information more specific to the business.