The Commerce Commission has reached another significant milestone in the development of input methodologies for regulated industries under Part 4 of the Commerce Act. It has today released a paper setting out its draft decisions and reasons on the input methodologies to be applied to electricity distribution businesses (EDBs).

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, or proposed regulation, of goods or services under Part 4.

They key draft reasons the Commission has announced in relation to input methodologies for electricity distribution businesses are:

  • In most circumstances, EDBs should apply an accounting-based approach to cost allocation, based on causal or proxy-based allocators.   Alternative approaches are provided for where the approach is unlikely to be cost effective or it is likely to lead to investments in unregulated services being unduly deterred.    
  • The initial Regulatory Asset Base value for each EDB should be the value of assets provided in the EDB's 2009 disclosure under the Electricity Information Disclosure Requirements (ie, at 31 March 2009), with some adjustments.
  • EDBs must revalue their Regulatory Asset Base annually using CPI-indexation.  
  • Depreciable assets must be depreciated on a straightâ€'line basis in most circumstances.  
  • An EDB's tax obligations must be estimated using a 'deferred tax' approach, modified for NPV-equivalence with a tax payable approach.
  • The Commission will produce and publish vanilla and post-tax cost of capital estimates of a five-year term for EDBs on an annual basis using the Simplified Brennan-Lally model.  
  • The pricing methodologies input methodology is consistent with the pricing principles adopted by the Electricity Commission for distribution pricing, with some minor modifications.  
  • The input methodology determination will include rules and processes on how price-quality regulation is expected to operate.  

 "The input methodologies work will, in the long-term, provide greater certainty for regulated businesses. In that context, today's release of these draft decisions and reasons is another important milestone in the establishment of the new regime under Part 4," said Commerce Commission Chair Dr Mark Berry.

Submissions on the draft decisions are due by 6 August 2010.

The paper Input Methodologies (Electricity Distribution Services) Draft Reasons Paper can be found at www.comcom.govt.nz/input-methodologies/

Background

The Commission released an update on the process to determine input methodologies on 13 May 2010.   The Commission will consult on its draft decisions for input methodologies between now and August 2010.   The Commission is required to finalise its Input Methodologies Determinations by 31 December 2010.

In May 2010 the Commission released the first of its input methodologies draft reasons papers, relating to airport services.