Commerce Commission proposes default price-quality paths for gas pipeline services

The Commerce Commission has today released its revised draft decision proposing the first default price-quality paths for gas pipeline services. Once finalised, these paths will set the maximum prices that gas pipeline businesses are allowed to charge customers for their services from 1 July 2013.

The affected gas transmission businesses are Vector Limited and Maui Development Limited. The affected gas distribution businesses are Vector Limited, Powerco Limited and Gasnet Limited.

Under the proposal, some businesses will be required to charge less for their services while some will be able to charge more. The proposed adjustments to average prices for individual businesses at the start of the regulatory period in 2013 vary in size from a reduction of 25% for Vector’s transmission business to an increase of 5% for Powerco’s distribution business. Following the initial price adjustment, the Commission proposes limiting price increases to no more than the rate of inflation for the remainder of the regulatory period to 2017. An estimate of the potential effect of the proposal on residential customers’ gas bills is attached.

“This is the first time that some of these businesses have been subject to price-quality regulation. We are now bringing the prices these businesses can charge their customers more into line with the costs of providing those services,” said Sue Begg, Commerce Commission Deputy Chair.

The default price-quality path must be set in a relatively low cost way. Most of the cost estimates for the regulatory period, including the cost of capital, are based on the input methodologies that the Commission set following more than two years of consultation with interested parties. To set the path in a low cost way, the Commission does not scrutinise the proposed investments or operating expenditure of the businesses in detail.

Where a business expects a significant increase in investment or operating expenditure during the regulatory period compared to what they have spent in the past (as is the case for Maui Development Limited and Vector Limited) then the business is able to apply for a customised price-quality path.

“Although substantial price reductions are necessary for Vector, we do not expect this to limit its ability to invest in or maintain its network. All of the gas businesses have the option of applying for a different price-quality path that is customised to the needs of their business,” said Ms Begg. “For the default paths we have provided for increases in proposed investments of up to 20% above what a business has spent historically. We have set a cap at a 20% increase because the investments are not subject to scrutiny. However, even if we used Vector’s own investment forecast for transmission, the proposed price reduction would still be 23%.”

Parties are able to make submissions on the revised draft decision until 7 December 2012, and cross-submissions are due 21 December 2012. Submissions can be emailed to: regulation.branch@comcom.govt.nz

The Commission expects to reach a final decision on the default price-quality paths by 28 February 2013. Changes resulting from the default price-quality path would apply to suppliers of gas pipeline services from 1 July 2013.

The revised draft decision on the initial default price-quality paths for gas pipeline services can be found at: http://www.comcom.govt.nz/initial-default-price-quality-path/