The Commerce Commission has today released a consultation paper on its proposed framework for making 'starting price adjustments' under a default price-quality path (DPP) applied to non-exempt electricity distribution businesses and to gas pipeline businesses.

The DPP is a new low-cost form of regulation with the intent of promoting the long-term benefit of consumers, and with specific regulatory objectives. Those objectives are that suppliers have incentives to innovate and invest, improve efficiency and provide services at a quality that reflects consumer demands, share efficiency gains with consumers, including through lower prices, and are limited in their ability to extract excessive profits. The Commission is required to set starting prices for each supplier at the beginning of a regulatory period to establish the cap on their prices or revenues.

The paper released today sets out the Commission's current views on a process for setting new starting prices as a basis for consultation with interested parties.

"The Commission is keen to engage constructively with all affected electricity distribution businesses and gas pipeline businesses, and encourages them, as well as other interested parties, to participate in the consultation process," said Brent Alderton, Commerce Commission General Manager, Regulation.

"To foster a well-informed and transparent consultation, we have included a purely illustrative example of how the starting price adjustment process might work."

The example uses data for a number of non-exempt electricity distribution businesses and is largely consistent with draft input methodologies, which are currently being consulted on and are subject to change. Similar analysis for gas transmission and distribution businesses has not been undertaken at this stage.

"We recognise that the regulated businesses may hold differing views on the appropriate process for starting price adjustments, and will consider these views once we have received feedback on the proposal. Suppliers who consider that the final starting price adjustments are unsuitable for their particular circumstances may propose a customised price path," said Mr Alderton.

The paper Starting Price Adjustments for Default Price-Quality Paths - Discussion Paper can be found at www.comcom.govt.nz/2012-default-price-quality-path

Background

Starting prices establish the initial upper limit placed on a supplier's prices or revenues at the beginning of a regulatory period. Starting prices and an allowed rate of change are two fundamental price path components of a DPP. The starting price adjustment process allows the Commerce Commission to assess whether the price or revenue cap at the end of the previous regulatory period is the appropriate start point for the next regulatory period.

Decisions on starting prices assist in allowing suppliers to earn a normal rate of return and facilitating efficient investment. The decisions also factor in considerations on whether suppliers are earning, or are likely to earn, excessive profits over the regulatory period, and the sharing of efficiency gains with consumers. Where a supplier considers that a DPP is unsuitable for its particular circumstances, it may apply to the Commission for a 'customised price-quality path'.

The paper includes an illustrative worked example setting out how the proposed starting price adjustment framework for DPPs might be applied. Given the preliminary nature of the starting price adjustments, this example should be regarded as purely illustrative. It does not reflect the size of any actual starting price adjustments the Commission might undertake for electricity distribution businesses. Among other things, the example is based on data that will require updating for the final starting price adjustments, and reflects draft input methodologies and a proposed starting price adjustment process that are both being consulted on and are therefore subject to change. Furthermore, due to limitations in available data, not all aspects of the draft input methodologies have been able to be reflected in the worked example.

Following consideration of submissions from interested parties, the Commission intends releasing its draft decisions on the process for starting price adjustments next year, with final decisions on starting prices to take effect for non-exempt electricity distribution businesses and for gas pipeline businesses in 2012.

The Commission has already set a DPP for non-exempt electricity distribution businesses, which took effect from April this year. However, the legislation allows the Commission to reset the starting prices for these businesses after it makes its final decisions on the input methodologies applying to electricity distribution businesses. The purpose of input methodologies is to promote certainty for suppliers and consumers in relation to the rules, requirements, and processes applying to the regulation of goods and services under Part 4 of the Commerce Act 1986.

The Commission published its draft decisions on input methodologies for electricity distribution services, and gas pipeline services respectively, on 18 and 21 June 2010 and the corresponding draft determinations on 2 July 2010. This paper sets out a framework for making starting price adjustments consistent with those draft decisions. The Commission's final decisions on input methodologies will be made by 31 December this year.

Services currently regulated under Part 4 of the Commerce Act 1986 are electricity lines services, gas pipeline services and specified airport services at Auckland, Wellington and Christchurch airports (which are subject to information disclosure regulation only).