The Commerce Commission has issued its draft decision on the maximum revenue Transpower can earn and the quality standards it must meet under its individual price-quality path (IPP) for the period 2020 – 2025.

Transpower owns and operates New Zealand’s national grid, transmitting electricity from where it is generated to local lines companies that distribute it to homes and businesses. It is subject to price-quality path regulation that sets the total revenue it can earn from consumers as well as the quality of service it must deliver.

Deputy Chair Sue Begg said the Commission proposed to allow Transpower to earn forecast revenue of $4.27 billion for the next five years, a reduction of 9.8% or over $460 million compared to its current five-year period.

“Transpower’s fall in projected revenue is largely due to the lower financing costs it will face, which we currently estimate will drop from 7.19% to 5.13% per year. Having reviewed its application, we also reduced the amount of money it sought for operating and capital spending by around $20 million a year,” Ms Begg said.

“Transpower’s forecast spending on its assets and operating costs is relatively flat over the next five years and the quality of services we expect it to deliver is largely unchanged during this period. However, we want to see improvements in its approach to asset management and its engagement with customers on how it chooses to spend its money.”

Ms Begg said it was important for everyone to see Transpower progressively making better risk-based decisions on its investments in the national grid.

“Transpower has signalled that it anticipates greater investment will be required from 2025 as it will need to replace a significant number of its overhead wires. We agree that it needs to properly prepare for this workload and we will be setting some extra reporting requirements to help us keep track of its progress.”

A copy of the Commission’s draft decision is available here. Submissions close on 27 June 2019.

Background

Transpower is a State-Owned Enterprise that owns and operates the national high voltage electricity transmission network. Transpower is also the system operator, responsible for managing the real-time coordination of the electricity market.

As it is the monopoly supplier of electricity transmission services, the revenue that Transpower is allowed to earn from its customers and the quality standards it must meet are regulated by the Commission under Part 4 of the Commerce Act 1986. The Electricity Authority estimates that transmission charges make up about 10% of a typical household electricity bill.

Price-quality regulation is designed to achieve similar outcomes to competitive markets so that consumers benefit in the long term. This includes making sure that monopoly suppliers are limited in their ability to earn excessive profits and have incentives to innovate and invest in their infrastructure and deliver services at a quality their consumers expect.

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