The default price-quality path applies to most electricity distributors in New Zealand.
This type of path is intended to influence the behaviour of the 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.
What makes up a default price-quality path?
The main components of a default price-quality path (DPP) are:
the maximum prices/revenues that are allowed at the start of the regulatory period (ie, starting prices)
the annual rate at which all the businesses' maximum allowed prices can increase (ie, rate of change) – this is expressed in the form of 'CPI-X', meaning prices are restricted from increasing each year by more than the rate of inflation less a certain number of percentage points (termed an 'X-factor')
the minimum service quality standards that must be met.
We must also reset the components of a DPP before it expires to create a new path for the next regulatory period. A DPP reset is an opportunity to determine appropriate price and quality controls for the future to promote the objectives of the Part 4 regulatory regime.