The Commerce Commission has today released its draft decisions paper on the default price-quality paths to apply to electricity distribution businesses from 1 April 2010. This is the fourth paper released for consultation by the Commission as part of a process to reset the default price-quality paths that currently apply to electricity distribution businesses under Part 4 of the Commerce Act 1986.

Part 4 of the Commerce Act regulates suppliers of electricity lines services, including the 29 electricity distribution businesses currently providing distribution services between Transpower and end users in New Zealand. All 29 businesses, except for those exempt on the basis of consumer ownership, have been subject to a default price-quality path since 1 April 2009. Under the Commerce Act, this initial path must be reset to specify the price paths and quality standards that will apply from 1 April 2010.

"These draft decisions propose allowing businesses to increase prices by inflation whilst ensuring that the current quality of supply to consumers will at least be maintained," said Brent Alderton, Commerce Commission's Network Performance Branch Acting Director.

"Setting the price path this way is intended to provide businesses with incentives for efficiency gains. The Commission may look to revisit price levels after the input methodology determinations scheduled for June 2010. The Commission's approach to setting quality standards is intended to improve certainty for businesses by taking into account extreme events, such as severe storms," said Mr Alderton.

The paper can be found on the Commission's website www.comcom.govt.nz under 2010-2015 Default Price Path.

Submissions on the draft decisions paper are due by 11am, 12 October 2009. Cross-submissions are due by 1pm, 26 October 2009.

Submissions and cross-submissions should be sent to npb@comcom.govt.nz

Background

Under Part 4, the suppliers of electricity lines services in New Zealand are subject to price/quality regulation referred to as price-quality paths. A price-quality path sets the maximum average price that suppliers of electricity lines services can charge. It also defines the standards for quality of services that they must provide to their customers.

In October 2008, the Commerce Amendment Act introduced significant changes to the regulation of suppliers of electricity lines services. 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; and provide services at a quality that consumers demand, share with consumers the benefits of efficiency gains in the supply of those services through lower prices; and are limited in their 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. The Commission is required to make determinations on input methodologies by 30 June 2010.

All 29 electricity distribution businesses in New Zealand, except for those exempt on the basis of consumer ownership as defined in section 54D of the Act, must comply with the default price-quality path set by the Commission. As an alternative to default price-quality paths, suppliers may apply to the Commission for a customised price-quality path that better reflects their specific circumstances. The Commission has previously released three papers as part of the consultation process:

 § Regulatory Provisions of the Commerce Act 1986 - Discussion Paper (Provisions Paper), published on 19 December 2008;

 § Reset of Default Price-quality Path for Electricity Distribution Businesses - Process and Issues Paper (Process Paper) published on 30 March 2009;

 § Reset of Default Price-quality Path for Electricity Distribution Businesses - Discussion Paper, (Discussion Paper) published on 19 June 2009. This paper was accompanied by two research reports from Economic Insights:

- Asset Valuation and Productivity-based Regulation taking account of Sunk Costs and Financial Capital Maintenance; and

- The Theory of Network Regulation in the Presence of Sunk Costs.

The Commission has also released a paper on its interpretation of the criteria for exemption from price-quality regulation. The paper can be found on the Commission's website www.comcom.govt.nz under Regulated Industries/Electricity/Electricity Default Price Quality Path/Treatment of Consumer-owned Electricity Distribution Businesses