Commission releases final decisions on review of rules for regulated electricity, gas and airport services

The Commerce Commission has today released its final decisions on its review of input methodologies (IMs) – the rules, requirements and processes that apply to the sectors it regulates under Part 4 of the Commerce Act.

Deputy Chair Sue Begg said the IMs had held up well on review and the Commission’s approach to make a small number of targeted changes had been well supported.

“We signalled early on that not a lot of change was needed to most of the IMs. Stakeholder feedback has been consistent with this view, with the majority of submissions focussing on the key areas where changes would have the most impact in improving the current framework,” Ms Begg said.

“Our focus has been to prioritise the issues that best promote the long-term benefit for consumers, including, where possible, reducing compliance costs and complexity for the sectors we regulate, and in our view we have achieved this. We have engaged with stakeholders in a range of ways, including holding a two-day problem definition forum, to ensure that we properly understood their perspectives on any potential problems with the IMs. We have been grateful for the breadth of stakeholder response we have received throughout the process, and the depth of thinking and analysis in those responses.

“We particularly want to thank stakeholders for their constructive engagement on key topics including the impact of emerging technologies, notably in the electricity sector, and around the complex issues involved in cost of capital and cost allocation rules.

“There have been a range of views on the impacts new technologies will have in the energy sector and this is an ongoing conversation, with the Ministry of Business, Innovation and Employment now taking the lead on this topic from a policy perspective. We have maintained our draft decision to allow lines companies to apply to recover the cost of assets more quickly, which will help to manage any uncertainty the sector faces in the short term without imposing additional costs on consumers. We have also tightened the cost allocation rules to better ensure consumers will share in efficiency gains from suppliers providing regulated and unregulated services together.”

There have been a small number of cost of capital adjustments stemming from submissions on the Commission’s draft decision released in June. In particular, the allowed rate of return has been adjusted upwards (compared to our draft decision) for gas pipeline businesses following submissions regarding the level of risk businesses in that sector face. This still represents a reduction in rate of return relative to the pre-review IMs for gas pipelines.

The package of final decision papers, amended determinations and a summary paper outlining the key changes the Commission has made for emerging technology, electricity lines services, gas pipeline services, specified airport services and the cost of capital can be found on the Commission website.

The Commission will publish these decisions in the New Zealand Gazette on 22 December 2016.

Background

What are the Input Methodologies (IMs)?

The IMs are the upfront rules, requirements and processes that apply to 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.

The influence of the IM review on the price and quality of service consumers receive will not be seen until the next price setting events apply the updated IMs. These are in:

• 2017 for gas pipeline businesses and Christchurch and Auckland airports
• 2019 for Wellington Airport
• 2020 for electricity distributors and Transpower.

The review of Transpower’s capital expenditure IM, which was first set in 2012, will be reviewed in 2017.

What are the next steps for the IM review?

The decisions package published today presents decisions on all IMs within the scope of the review except for three areas where we have not yet reached decisions:

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

We anticipate the following process steps for these areas: