Price reductions signalled in DPP and IPP draft decisions
Published13 Jun 2019
Recently we published our draft decisions on the price-quality paths that will apply to Transpower and local lines companies (also known as electricity distribution businesses, or EDBs).
One of the key goals of our DPP reset is to provide a stable regulatory platform within a changing industry context, while making incremental improvements to the way we regulate price and quality.
To promote the stability of the Part 4 regime, we have generally retained our approach where it remains fit for purpose. This includes proposing revenue allowances based on current and projected profitability and setting quality standards with reference to historical levels of performance.
With regard to pricing for the 15 EDBs that will be on the DPP from 1 April next year, we have realigned revenue to better reflect their costs. This means a reduction in revenue for most EDBs next year, largely driven by the lower cost of capital we have calculated, which has dropped from 7.19% to 5.13% and will result in reduced financing costs. The final cost of capital will be calculated in October.
At the same time, we have allowed for a 5% increase in total capital expenditure, which reflects the need to continue investing in this critical infrastructure.
We also recognise that substantial changes are occurring in the electricity sector. In part, this is driven by an increasing focus on decarbonisation and by the increasing affordability of technologies that provide both distributors and consumers with new opportunities. However, we recognise that there is uncertainty as to the extent, timing, and impact of these changes.
As such, we have proposed changes to the DPP settings that we think will better promote the long-term benefit of consumers. These include encouraging EDBs to innovate on ‘non-wire’ alternatives and refining our approach to major interruptions.
While ‘no material deterioration’ remains the starting point for our approach to quality, we also acknowledge the need for distributors to make trade-offs about the level of quality they deliver, and the cost incurred in doing so. This consideration drives many of the changes we are proposing to the quality incentive scheme, including separating planned and unplanned outage standards.
For the full details see our DPP draft decision here.
With regard to Transpower, we want to acknowledge the work it put into to its IPP proposal. Utilising an independent verifier to scrutinise its application was beneficial and this was reflected in our draft decision. Overall, we are proposing to allow 97% of the expenditure Transpower sought.
Under our draft decision Transpower would be allowed total revenues of $4.27b over the five-years starting 1 April 2020, a reduction of over $460m compared to its revenue of $4.73b under its current regulatory period. This would mean a 9.4% decrease in revenue next year, followed by relatively flat revenues through to 2025. The reduction in allowed total revenues reflects lower financing costs that Transpower will incur. Quality of service will remain largely unchanged although we want to see an improvement in asset management and customer engagement to support the expected increase in expenditure Transpower has signalled it will need from 2025 onwards to replace a large amount of its overhead wires. We agree that it needs to properly prepare for this workload and we will be setting some extra reporting requirements to help us keep track of its progress.
As part of this, Transpower will be required to engage an independent expert to undertake a mid-period review of asset management and customer consultation processes.
For further details on Transpower’s price-quality path reset, read our draft decision here.