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Tighter requirements proposed for related party transactions for gas pipeline and electricity lines companies

30 August 2017

The Commerce Commission has released its draft decision to improve the rules governing related party transactions for electricity lines and gas pipeline businesses. 

The rules are designed to ensure customers do not end up paying higher prices for electricity and gas because the lines or pipeline businesses get a related party to carry out services, such as network maintenance or tree trimming, rather than using an independent contractor. 

“While the Commission seeks to limit the ability of regulated businesses to make excessive profits, it cannot regulate the profits made by their related businesses. As a result, regulated businesses may be incentivised to give work to their related parties, even if an independent contractor could offer a better price or service,” Commission Deputy Chair Sue Begg said.

“We are concerned that this behaviour may result in customers paying more than they should for their electricity and gas.”

Ms Begg acknowledged it can sometimes be more efficient for a related party to provide services, but noted that the total volume and value of related party transactions involving electricity lines businesses is growing. 

“Some electricity lines companies make extensive use of their related businesses, with 11 spending more than 65% of their total costs on related party services. We want to ensure customers aren’t harmed by this trend.”

Under current legislation, the Commission cannot require electricity and gas businesses to competitively tender work out. However, the draft decision proposes to tighten up the requirements applying when businesses use related parties to provide services, including that: 

  • lines and pipeline businesses demonstrate how cost-effective their related party arrangements are by requiring that each transaction is valued as if it had the terms of an arm’s-length independent transaction 
  • auditors test whether transactions are valued on that arm’s-length basis
  • lines and pipeline businesses which use related parties disclose their procurement policies and processes and directors certify these have been applied in practice
  • where a business has more than 65% of its operating or capital expenditure provided by a related party, the business must order and publicly release an independent report that assesses whether the terms of their transactions are consistent with competitive transactions.

“We welcome feedback on whether our proposed changes go far enough to reduce the potential for harm to consumers from regulated businesses paying their related parties more than they would if the services were delivered by an independent supplier.” 

The draft decision paper can be found on our website.

Download the infographic showing how much each electricity lines company spends on related party transactions here

Submissions close on 27 September 2017. A final decision will be published in December.

Background

The Input Methodologies (IMs) are the upfront rules, requirements, and processes that apply to utility 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. IMs are only one part of the regulatory regime, with benefits delivered to consumers through the application of the IMs through price-quality regulation and information disclosure.

In 2015 the Commission commenced a review of the IMs to ensure long-term benefit for consumers in sectors where there is no competition. Related party transactions are the final area to be reviewed.