Gas price path decision out for consultation

Late last month we released our draft decisions on the default price-quality paths (DPP) for gas pipeline services.

These paths set the revenue and minimum quality standards that Vector, Powerco, GasNet and First Gas must comply with for the 5-year regulatory period beginning 1 October 2017.

Our draft decision would reduce maximum revenues for all regulated gas pipeline businesses (GPBs) by an estimated 18% or $42 million each year, compared with keeping the current revenue limits. We have also proposed limiting future price increases to no more than the rate of inflation for the 4 years from 2018.

From a consumer perspective, we have estimated that this would reduce household bills by approximately 8% in 2017/18 – which is based on how much the average household consumer pays for gas in Wellington and Auckland. Our proposed price reductions are likely to affect major industrial users and commercial users in different proportions.

This is, of course, a draft decision that is currently out for consultation. There will be some movement in the final prices that we set and corresponding adjustments, for example, to account for an updated cost of capital figure from 1 March, and further information provided by stakeholders.

A key driver of the proposed revenue reduction is a lower cost of capital than was used to set current price paths. The lower value reflects both changes in market conditions and to how we calculate the cost of capital. It contributes approximately $21 million to the reduction outlined in the draft decision and was largely in line with industry expectations.

The way we forecast expenditure for GPBs has also changed in that we have adjusted our approach to more clearly take into account their own expenditure forecasts. Overall, we approved 95% of the $350m of operating expenditure GPBs forecasted and 76% of the $410m of capital expenditure (capex) sought in this draft decision.

A significant portion of the capex that we have disallowed reflects the costs that First Gas forecasts will be needed to future-proof the transmission pipeline at White Cliffs in Taranaki. We believe the costs and risks involved with this particular project mean it is better suited to being assessed through a customised price path.

Submissions on our draft decision closed last week, with cross-submissions to be received by 24 March. We will make our final decision by 31 May 2017.

All the information on this project, including timelines and submissions (once published), can be found on our website.