This form of regulation applies to three gas distribution businesses (GDBs) and one gas transmission business (GTB) across New Zealand:
Gas distribution businesses
- Powerco Limited
- Vector Limited
- First Gas Limited
Gas transmission business
- First Gas Limited
Why regulate price and quality?
As suppliers of gas pipeline services, GDBs and GTBs are in a market where there is little or no competition, and little prospect of future competition.
Price-quality regulation is designed to ensure that GDBs and GTBs have similar incentives and pressures to suppliers operating in competitive markets to innovate, invest and improve their efficiency. It also aims to limit the ability of suppliers to earn excessive profits, while also ensuring that consumer demands on service quality are met.
What are the features of default/customised price-quality regulation?
Default/customised price-quality regulation has several main features:
- price-quality paths for all suppliers are set by the Commission in a relatively low-cost way
- a 'default path' that applies to all regulated suppliers for a regulatory period that is between four and five years
- individual suppliers have the opportunity during the regulatory period to apply to the Commission for an alternative or 'customised' price-quality path to better meet the particular circumstances of the individual supplier
- GDBs and GTBs may incur penalties for breaches of price-quality paths as set out in Part 6 of the Act.
What makes up a default price-quality path?
The main components of a default price quality path (DPP) are:
- the maximum prices/revenues that are allowed at the start of the regulatory period (ie starting prices)
- the annual rate at which all GDB's and GTB's maximum allowed prices can increase (ie rate of change) — this is expressed in the form of 'CPI-X', meaning prices are restricted from increasing each year by more than the rate of inflation less a certain number of percentage points (termed an 'X-factor')
- the minimum service quality standards that must be met.
The Commission must also reset the components of a DPP before it expires to create a new path for the next regulatory period. A DPP reset is an opportunity to determine appropriate price and quality controls for the future to ensure the objectives of the Part 4 regulatory regime are being promoted.
What makes up a customised price-quality path?
A customised price-quality path (CPP) has the same essential components as a DPP. However, a CPP differs from a DPP because the Commission can consider the specific circumstances of a supplier to set a path that better suits the supplier's needs.
The rules and processes for customised price-quality path proposals, including the requirements for a proposal and the criteria the Commission must follow when evaluating a proposal are set out in the input methodology determination applying to GDBs and GTBs.
Following the expiry of its CPP, a supplier will transition back onto the DPP, although it still retains the option of making another CPP proposal at a later date.