Issued Tuesday 23 December 2003

The Commerce Commission today released final decisions relating to the regulation of large electricity lines businesses (distribution businesses and Transpower). This work is part of the Commission's development of a regulatory regime for lines businesses, as required by Part 4A of the Commerce Act.

The decisions outline the thresholds for the declaration of control that will apply to lines businesses from 2004. The Commission has decided to retain the two existing thresholds:

. a price path threshold, representing the expected annual change in lines business average prices; and

. a quality threshold, comprising a reliability criterion and a consumer engagement criterion.

However, for the price path threshold, new parameters will apply.

"In combination, the thresholds will continue to place strong incentives on the industry to improve efficiency and to share the benefits of efficiency gains with consumers over the long term," said Commission Chair, Paula Rebstock.

"In making its decisions, the Commission has given careful consideration to ensuring that lines businesses will face incentives to invest in their networks and maintain quality of service, including reliability of supply."

"The Commission has allocated lines businesses to four groups, each of which is assigned a different price path. All businesses will retain incentives to make efficiency improvements each year to avoid breaching the thresholds, and the majority of lines businesses will be expected to reduce their prices in real terms."

Businesses with below-average productivity, or with relatively high prices, will face a steeper price path than more productive businesses, or those which have been consistently maintaining low prices. These better performing businesses will be able to retain relatively more of the benefits of any efficiency gains that they can make.

Three distribution businesses have been consistently maintaining lower prices while exhibiting higher productivity. These businesses will be able to gradually increase prices to more efficient and sustainable levels without breaching the price path threshold.

Distribution businesses will be assessed annually against the thresholds, over a regulatory period of five years beginning on 1 April 2004.

Transpower's thresholds will be set for a period of one year from 1 July 2004, primarily due to uncertainties regarding the approach the Electricity Commission will take with respect to Transpower's investment programme. For this one year period, Transpower's price path threshold will be set the same as for average-performing distribution businesses.

The Commission also released today a report prepared for the Commission by Meyrick and Associates, titled Regulation of Electricity Lines Businesses, Analysis of Lines Business Performance (1996-2003). The report presents the analysis of industry performance used to inform the Commission's decisions on allocating lines businesses to different groups.

The Commission's final decisions and Meyrick and Associates' report can be found on the Commission's website, www.comcom.govt.nz.

Media contact:

Media wishing to speak to Paula Rebstock, please contact:

Jackie Maitland, Communications Manager

Phone work (04) 924 3708, mobile 029 924 3708

Background and Further Detail

Part 4A of the Commerce Act 1986, which commenced on 8 August 2001, establishes, inter alia, a targeted control regime for the regulation of large electricity lines businesses (distribution businesses and Transpower).

The purpose of the targeted control regime, as set out in section 57E of the Commerce Act, is to promote the efficient operation of markets directly related to electricity distribution and transmission services through targeted control for the long-term benefit of consumers by ensuring that suppliers-

(a) are limited in their ability to extract excessive profits; and

(b) face strong incentives to improve efficiency and provide services at a quality that reflects consumer demands; and

(c) share the benefits of efficiency gains with consumers, including through lower prices.

As part of the targeted control regime, the Commission is required to set thresholds and assess the performance of electricity lines businesses against those thresholds. If one or more of the thresholds are breached by an electricity lines business, the Commission could further examine the business through a post-breach inquiry and, if required, control their prices, revenue or quality. In effect, the thresholds are a screening mechanism to identify electricity lines businesses whose performance may require further examination and, if required, control by the Commission.

On 6 June 2003, following extensive industry consultation, the Commission set the initial thresholds and published a notice in the New Zealand Gazette. As part of its decisions on the thresholds, the Commission announced it would reset the thresholds to apply from 1 April 2004 for distribution businesses and from 1 July 2004 for Transpower. The Discussion Paper, Resetting the Price Path Threshold (30 May 2003), outlined the Commission's preliminary views on the approach to be used for resetting the price path threshold. After taking into account submissions on this Discussion Paper from interested parties, the Commission issued its draft decisions on the thresholds to apply from 2004. Interested parties also had the opportunity to make submissions on those draft decisions, to present their submissions at a public conference held by the Commission from 3-6 November 2003, and to make cross-submissions following the conference.

The price path threshold set by the Commission in its final decisions is a 'CPI-X' price path threshold, where the 'X' represents the expected annual reduction in lines business average prices, in real terms.

The X for each distribution business is the sum of three component factors:

1. the first, equal to 1%, has been assigned in common to all distribution businesses, based on an analysis of average distribution business productivity growth from 1996 to 2003.

2. the second, equal to +1%, 0% or -1%, has been assigned to three groups of distribution businesses, based on an analysis of their relative productivity performance from 1999 to 2003.

3. the third, also equal to +1%, 0% or -1%, has been assigned to three groups of businesses based on their relative profitability performance over the past four years.

Distribution businesses with below-average productivity, or with more scope to reduce prices, receive a higher X. The better performing businesses, or those which have been consistently maintaining low prices, face a lower X.

Of the 28 distribution businesses, nine have been assigned an X of 2%. Assuming that the consumer price index (CPI) stays at its current level of about 1.5%, these businesses are expected to reduce their average prices by around 0.5% per annum from April next year.

Nine distribution businesses have been assigned an X of 1%, seven businesses have been assigned an X of zero, and the remaining three have been assigned an X of -1%. The latter three businesses exhibit both comparatively higher productivity and comparatively lower prices, relative to costs.

The X in Transpower's price path threshold will be set to 1%, the same as for average-performing distribution businesses.

Media contact:

Media wishing to speak to Paula Rebstock, please contact:

Jackie Maitland, Communications Manager

Phone work (04) 924 3708, mobile 029 924 3708