With New Zealand's electricity networks facing increasing demand, the Commerce Commission is consulting on how the framework for its upcoming price-quality decision considers the financing of necessary investment.

Driven by a combination of factors, including increased electrification as part of the decarbonisation of New Zealand’s energy mix and the need to ensure security of supply and resilience, the 16 regulated electricity lines companies are forecasting $8.4 billion (in constant 2024 dollars) of investment from 2025-2030. This would represent an increase of 30% above investment in recent years. The Commission is assessing those forecasts ahead of a draft decision on revenue allowances in May.

Commissioner Vhari McWha says this consultation is an opportunity to work through some of the concerns expressed by lines companies relating to attracting sufficient capital to finance their investments.

“Decisions about capital structure and ownership are for each electricity network business and its shareholders to make – in this paper, the Commission wants to test whether the default price-quality path presents any undue barriers to financing large-scale investment,” Ms McWha says.

Capital investment in electricity networks is paid for over time by consumers as they use the network. Ms McWha says the regulatory framework provides for the reasonable commercial returns necessary to underpin this type of investment.

“This position was recently confirmed in our 2023 review of the standing regulatory rules, or input methodologies. However, we recognise decisions made when setting the revenue path, such as to smooth revenue to avoid price shocks for consumers, may affect businesses’ financial management in some circumstances. We are consulting on whether these issues are significant and, if they are, how we can address them,” Ms McWha says.

Ms McWha adds that while the Commission is mindful of the impact delayed recovery of revenue can have on the financial positions of businesses, “the Commission expects businesses to consider other options before asking consumers to pay more upfront”.

The Commission is interested in hearing stakeholder views on the issues identified in its paper, which can be found on the Commerce Commission’s website. Submissions can be made by 5pm, on Friday, 15 March 2024 via infrastructure.regulation@comcom.govt.nz.

Background

The Commerce Commission regulates electricity distributors under the Commerce Act with the purpose of promoting the long-term benefit of consumers. All electricity distributors are subject to the Commission’s information disclosure requirements, which are designed to provide transparency on performance by requiring the public disclosure of key financial and network information. A subset of distributors (currently 16) are also subject to price-quality regulation, which caps the total revenue distributors can recover from their consumers whilst also requiring minimum standards for quality of service to be delivered.        

The current default price quality path for electricity distribution businesses (DPP3) is due to expire on 31 March 2025. The Commission will make a decision on the next default price-quality path to apply (DPP4) by 30 November this year, with a draft decision due to be released in May. The issues paper sets out the Commission's view of financeability and our proposed approach to financeability in DPP4.

The Commission works closely with the Electricity Authority who oversee regulation of the wholesale and retail electricity markets, and pricing arrangements for electricity distribution and transmission.

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