The Commerce Commission has today released three key discussion documents relating to regulation under Part 4 of the Commerce Act. This represents a significant step forward in the implementation of the Part 4 requirements of the Commerce Act. In addition, the Commission has released its revised draft guidelines on the Commission's approach to estimating the cost of capital. These four documents are being released at the same time because they are interrelated.

Part 4 of the Commerce Act regulates suppliers of electricity lines services, including Transpower New Zealand Limited, gas pipeline services and certain services supplied at Auckland, Wellington and Christchurch airports.

The input methodologies discussion paper outlines the Commission's preliminary views on the key building blocks of the Part 4 regime including the cost of capital, the valuation of assets, the allocation of common costs and the treatment of taxation. As the Commission's cost of capital guidelines provide the framework for the input methodologies associated with the cost of capital, these revised draft guidelines are being released at the same time as the discussion papers.

The discussion paper on the reset of default price-quality paths for suppliers of electricity lines services (other than Transpower) sets out the Commission's preliminary views on how the default price-quality paths that apply to these suppliers (other than consumer-owned suppliers) should be reset. The reset will apply from 1 April 2010.

The Transpower process and recommendation discussion paper outlines the Commission's preliminary views on the options for price-quality regulation of Transpower.

"The Commission welcomes submissions on all of these discussion papers," said Dr Mark Berry, Commerce Commission Chair. "The Commission recognises that the timeframes for providing submissions on this work are tight, however, the deadlines are driven by the requirements of the Commerce Act, particularly the need to publish a summary of the determination containing the default price-quality paths by December 2009."

"The Commission will be increasing its engagement with the regulated sectors and consumers over the next 12 months to ensure that a wide range of views are captured in the consultation process," said Dr Berry.

A conference on input methodologies is planned for September 2009. In addition, the Commission intends to hold workshops on specific issues.

The three discussion papers, the revised draft guidelines on the cost of capital, and associated independent consultant reports can be downloaded from the Commerce Commission's website under Pan-Industry Projects.

Submissions on the reset of default price-quality path for electricity distribution businesses are due by 17 July 2009.

Submissions on the input methodologies discussion paper are due by 31 July 2009.

Submissions on the Transpower process and recommendations discussion paper are due by 31 July 2009.

Submissions should be sent to npb@comcom.govt.nz.

Background

In October 2008, Part 4 of the Commerce Amendment Act introduced significant changes to the regulation of suppliers of electricity lines services, gas pipeline services and specified airport services at Auckland, Wellington and Christchurch airports. These services are subject to regulation as they are supplied in markets where there is little or no competition, and little or no likelihood of a substantial increase in competition.

The purpose of these changes to Part 4 is to promote the long-term benefits of consumers. The changes are intended to ensure that suppliers of regulated services have incentives to innovate and invest, have incentives to improve efficiency at a quality that consumers demand, share the benefits of efficiency through lower prices and have a limited ability to extract excessive profits.

The Commerce Commission is required to make decisions on a number of key elements of the regime. These are: input methodologies, price-quality paths and information disclosure requirements.

Input methodologies will provide increased certainty for regulated services on critical matters such as the cost of capital, the valuation of assets, the allocation of common costs and the treatment of taxation. In addition, the input methodologies will provide certainty on matters such as pricing methodologies and regulatory processes and rules. The Commission is required to make determinations on input methodologies by 30 June 2010.

Suppliers of electricity lines services, except for those that are consumer owned, and gas pipeline services will be subject to price/quality regulation referred to as price-quality paths. The regulated suppliers can either comply with the default price-quality path set by the Commission or apply to the Commission for a more intensive customised price-quality path that better reflects their specific circumstances.

Before the expiry of the administrative settlement between Transpower and the Commission on 30 June 2011, the Commission is required to recommend to the Minister of Commerce the type of price-quality regulation that should apply to Transpower.

All regulated services will be subject to information disclosure regulation. This will ensure that sufficient information is available to interested persons to assess whether the purpose of Part 4 is being met. The Commission is required to specify how information disclosure regulation applies to suppliers of specified airport services no later than 1 July 2010.