Price-quality regulation is applied to certain businesses that are regulated under Part 4 of the Commerce Act.
The price-quality paths that are set under this form of regulation are intended to influence the behaviour of those businesses by limiting what they can recover from their consumers. Each business is constrained by either the maximum average prices that it can charge, or the total revenue it can recover from its consumers. The paths also set standards for the quality of service that each business must meet. This ensures that businesses do not have incentives to reduce quality to maximise profits under their price-quality path.
There are two types of price-quality paths relevant to electricity distributors. All businesses start on a ‘default’ path. We use relatively low cost approaches to set these paths for the 17 businesses that are price-quality regulated. If a default path does not suit the particular circumstances of a business however, it can apply for and propose its own ‘customised’ path. Customised paths use more business specific information, and rely on more in-depth audit, verification, and evaluation processes.