The Commerce Commission has today published a notice of intention to start a review of the rules and processes that underpin its regulation of the energy and airports sectors under Part 4 of the Commerce Act.

These input methodologies must be reviewed at least every seven years and guide the Commission’s regulation of businesses in these sectors. Within the scope of the review are rules affecting natural gas pipeline businesses, local electricity lines companies, Transpower as the operator of the national electricity grid, and the major airports in Auckland, Wellington and Christchurch. 

Associate Commissioner Vhari McWha said that the forthcoming review offered an important opportunity to reflect on the impact of climate change and decarbonisation as well as the ongoing impact of COVID-19.

“A key part of the review will be working closely with industry and other government agencies to understand the issues as a whole and the role that our regulatory settings can play in helping regulated entities deliver the right outcomes for Aotearoa New Zealand,” she said.

“Our rules may need to be more flexible to help keep up with the pace of change, but we’ll need to balance this flexibility with the benefits of certainty that input methodologies are designed to provide to regulated parties as well as other stakeholders.”

The input methodologies specify such things as how assets are valued and the process for setting the rate of return that price-quality regulated businesses can earn on those assets, which in turn affects the amount that consumers pay for the services. They also contain rules on when price-quality paths can be reconsidered, how costs are allocated between regulated and non-regulated activities, the treatment of certain costs including tax costs, and on the calculation of incentives to promote efficient operating and capital expenditure. 

Preparations for the review began when the Commission issued an open letter in April last year calling for views from the energy and airports sectors about the emerging issues they are facing and how changes to the input methodologies and other regulatory settings might help. In December 2021 the Commission drilled down into the impact of climate change and decarbonisation on the electricity sector in an online workshop. A summary of the workshop has been published on the Commission’s website along with submissions on the workshop and the open letter. 

The Commission plans to complete the input methodologies review by December 2023 and will provide further updates on its process once the initial stages of the review process are completed. The Commission will call for submissions on a process and approach paper early in the second quarter of 2022 as well as publish a draft framework for its decision making. The first stage of the review includes the problem definition phase.

“Stakeholder input is vital during this first problem definition phase,” Ms McWha said. “It will shape the entire process and promote confidence that the rules and processes that underlie our regulation remain fit for purpose." 

“At the end of this phase, we expect to have a much clearer picture of any problems that the review should focus on, based on the challenges and opportunities for each sector. All parties should then be in a much better position to begin to identify and evaluate potential solutions to those problems as we move into the next phase of the review. This will also allow us to further develop our processes for the remainder of the review.”

The updated input methodologies will be used for the next reset of the default price-quality paths for electricity distribution businesses in 2025 and for natural gas pipelines from 2026 onwards. They will also feed into information disclosure requirements for all businesses regulated under Part 4 of the Commerce Act. 

The Commission is also due to start a targeted review of the information that electricity lines companies are required to publicly disclose about performance and a range of other key areas under Part 4 of the Commerce Act. This is to ensure that the information disclosure requirements are capturing and reporting on the information consumers and other sector stakeholders need to understand supplier performance, including in light of the decarbonisation of the economy.

The input methodologies review and other related work comes after He Pou a Rangi (the Climate Change Commission) published its final advice to government and is starting ahead of the Government’s response to that advice in the form of the first Emissions Reduction Plan that is due in May. The staged approach to this work, however, means that we will be well placed to understand and take any implications of the plan into account.