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Average gas bills to drop under final revenue reset

31 May 2017

The Commerce Commission has released its final decisions on the default price-quality paths (DPP) for gas pipeline services. These paths set the revenues and minimum quality standards that the four gas distributors and one gas transmission business must comply with for the five-year regulatory period beginning 1 October 2017.

The Commission has decided that the maximum revenues regulated gas pipeline businesses (GPBs) can recover from users of gas pipeline services will decrease by around 13% or $33 million a year compared with current revenue allowances. The Commission estimates that the pass through of this price reset will reduce average household consumer bills for gas consumption by approximately 6% in 2017/18. The exact price impact will vary for consumers across different regions.

The Commission considers that, with these allowed revenues, GPBs will be able to maintain the quality and reliability of the services they provide.  

Deputy Chair Sue Begg said that while the primary driver for the reduced revenue limits was a lower cost of capital, the Commission had also focused on setting price paths that were more tailored to each GPBs’ particular circumstances.

“By basing our assessment on the businesses’ own asset management plans we have been able to better ensure that the maximum revenues set meet their individual investment needs and operating costs. This means we are in a better position to ensure consumers are charged prices that are aligned with the reasonable cost of the services they receive,” Ms Begg said.

“Following our draft decisions in February, we received further evidence from the GPBs regarding their forecast costs. We have increased our expenditure allowances for Vector’s distribution business and First Gas’ distribution and transmission businesses compared with our draft decisions. The most significant change has been our acceptance of additional investment by First Gas to maintain the integrity and resilience of its transmission network.”

As noted in the draft decisions, the Commission has not included the expenditure that First Gas forecasts will be needed to future-proof the transmission pipeline at White Cliffs in Taranaki. It is anticipated this project will be addressed separately under a customised price-quality path.

In its final decisions the Commission confirmed its draft decision to introduce a new quality standard for gas transmission businesses focused on maintaining the reliability of the current network. The quality standard requires First Gas to maintain an uninterrupted gas transmission service at all times. This reflects that, while rare, interruptions in gas transmission can have a large impact when they occur.

The final decision and an infographic detailing the revenue changes for each GPB by region can be found on the Commission’s website.

Background

What are price-quality paths?

Price-quality paths are a form of regulation applied to certain businesses that are regulated under Part 4 of the Commerce Act. They are intended to influence the behaviour of those businesses by setting the maximum average price or total allowable revenue that the businesses can charge. They also set standards for the quality of services that each business must meet. This ensures that businesses do not have incentives to reduce quality to maximise profits under their price-quality path.

Which gas companies does the Commission set price-quality paths for?

We set price paths for the distribution businesses of First Gas Limited, GasNet Limited, Powerco Limited and Vector Limited. Additionally, First Gas Limited has a gas transmission business comprising the Maui pipeline and the transmission assets formerly owned by Vector.

What is the impact of our Gas DPP decision on consumer bills?

This Gas DPP sets the maximum revenues that suppliers of gas pipeline distribution and transmission services are allowed to earn over the regulatory period. These regulated revenues are the prices that gas pipeline businesses charge to the users of pipeline services (including gas retailers) and that gas retailers want to recover, together with some unregulated costs, from household consumers through the prices they charge for gas consumption.    

Distribution and transmission costs contribute approximately 39% and 7% (excluding GST) respectively to household gas retail bills. We estimate that this price reset will reduce average household consumer bills by approximately 6% in 2017/18 if gas retailers pass the cost reductions on to consumers. These estimates are based on how much the average household consumer pays for gas in Wellington and Auckland (based on a consumption of 25 gigajoules per year). These price reductions are likely to affect consumers, including major industrial users and commercial users, in different proportions as actual prices will vary based on region, retailer, plans, and usage patterns.

What is the difference between transmission and distribution?

Gas transmission services transport gas to large users of natural gas such as big industrial plants, electricity generators, and the gas distribution businesses. Gas distribution services transport gas to smaller users (including household consumers) from the gas transmission pipelines.

What are input methodologies?

Input methodologies are the upfront rules, requirements, and processes of regulation set by the Commission which underpin Part 4 regulation in the Commerce Act. For example, input methodologies concern things such as the valuation of assets, the treatment of taxation, the allocation of costs, and the cost of capital. We are required to apply input methodologies when setting price-quality paths.

The input methodologies for gas pipelines were first determined in December 2010. In December 2016, we completed a statutory review of the majority of input methodologies, which we were required to do within seven years of setting them. Our decisions on the input methodologies review made some changes to the input methodologies for gas pipelines. We have applied the updated input methodologies in today’s decision on the gas default price-quality price paths.

For more information on input methodologies, including our decisions and reasons, visit: http://www.comcom.govt.nz/input-methodologies-2/.