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Commission invites discussion on related party transactions

12 April 2017

The Commerce Commission is considering how transactions between energy networks and related businesses should be regulated and has today released a paper seeking feedback on how it should approach this topic.

Related party transaction provisions apply to regulated electricity distributors, gas distributors and gas transmission companies. The provisions govern how these regulated entities use related parties to undertake or contribute to the delivery of regulated services.  For example, this would include where regulated businesses contract out maintenance or payroll services to a subsidiary business. These costs are ultimately included in the total revenue that a regulated business is allowed to recover from consumers through price-quality regulation.

The Commission’s review of the related party transactions regime forms part of the Input Methodologies Review. It is focused on understanding the impact of the current rules for transactions between regulated suppliers and related parties.

In particular, the Commission wants to understand whether there are inappropriate opportunities under the current rules for regulated businesses to pay more for the services they get from related parties than they would from an independent supplier in order to increase their overall combined profits.

The Commission also wants to understand the extent to which suppliers may be incentivised to use related parties to provide services to their business when that may not be the most efficient option available. 

Deputy Chair Sue Begg said the Commission would like to hear from energy network businesses and their existing suppliers, as well as from independent suppliers of outsourced services.

“The paper released today provides an overview of the Commission’s initial findings on the problems it has identified and some potential solutions for resolving them,” Ms Begg said.

“We are interested in hearing from anyone who seeks to provide services to regulated energy network businesses, including contracting services, corporate services and communication services which may be relevant to our review of the regime. We welcome the expertise of gas and electricity suppliers in working through the problems we have identified.”

The paper and related information can be found here.

Submissions are due on 10 May 2017.  The draft decision outlining potential amendments to the regime is likely to be published in August 2017.

Background

What are the Input Methodologies (IMs)?

The 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 an input and only one part of the regulatory regime. Benefits are delivered to consumers through the application of the IMs through price-quality regulation or information disclosure regulation.

What is the IM review?

The IMs under review were determined in December 2010 for specified airport services, gas pipelines and electricity distribution and transmission.

The IM review is the opportunity to assess whether there are any necessary changes to the IMs to more effectively promote the long term benefit of consumers. We do this review in consultation with all stakeholders.

The Commerce Act requires the Commission to review each IM within seven years of its date of publication and, after that, at intervals of no more than seven years. We issued the final decisions on the IM review in December 2016, but we made a decision to separate out the following areas from the final decisions on the IM review, the remaining areas are:

  • the Transpower Incremental Rolling Incentive Scheme (IRIS)
  • the CPP information requirements for gas
  • related party transactions provisions.