The Commerce Commission has today released an update paper outlining its current views on how to set starting prices for electricity distribution businesses subject to default price-quality paths (DPP) under Part 4 of the Commerce Act.

The paper continues consultation on the DPP for electricity distribution businesses for 2010-15. It is also relevant to gas pipeline businesses.

The starting price is a fundamental component of a DPP. It sets a limit on a supplier's prices or revenues, and will normally be set for an individual business at the beginning of the DPP.

The Commission set the 2010-15 DPP for electricity distribution businesses in December 2009. When it set this first path (under Part 4) it rolled over existing prices. However, the Commerce Act provides that the Commission may reset the starting prices for the 2010-15 DPP if the application of input methodologies (set in December 2010) would have resulted in a significantly different price path being set.

"The Commission considers it has developed a robust approach to setting starting prices. We have taken into account the input methodologies, as well as submissions from interested parties," said Dr John Hamill, Commerce Commission General Manager, Regulation. "The next step is to complete the calculations required to make our draft decisions on the starting price adjustments."

Released with the paper is a model that illustrates how the starting price adjustment process might work. However, the model does not include the final data sets. It does not therefore provide the size of any actual starting price adjustments for the 2010-15 regulatory period.

The Commission issued information requests to electricity distribution businesses in March 2011. This information will be used to calculate any starting price adjustments that need to be made. The Commission has not issued an information request to Orion New Zealand Limited, due to the significance of the infrastructure damage in Christchurch following the February earthquake, and the challenges the company currently faces.

Suppliers who consider that the final starting price adjustments are unsuitable for their particular circumstances may apply to the Commission for a customised price-quality path.

The paper 2010-15 Default Price-Quality Path Starting Price Adjustments and Other Amendments Update Paper can be found at www.comcom.govt.nz/2010-2015-default-price-quality-path

Background

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

Decisions on starting prices assist in setting a price path where a supplier is expected to earn a normal rate of return over the regulatory period, while making efficient investment that meets customer demands. The decisions also factor in 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 and model include analysis of the proposed starting price adjustment approach. The analysis is based on data that is currently available to the Commission. The analysis will be updated when the regulated businesses supply the information requested by the Commission. The analysis in the update paper therefore 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 for the 2010-15 regulatory period.

Following consideration of submissions from interested parties, the Commission intends releasing its draft decisions in July this year, with final decisions on starting prices to take effect for non-exempt electricity distribution businesses in April 2012. Decisions on starting prices for gas pipeline businesses will be made and take effect by July 2012.

The Commission has already set a DPP for non-exempt electricity distribution businesses, which took effect from April 2010. However, the legislation allows the Commission to reset the starting prices for these businesses following 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 final decisions on input methodologies for electricity distribution services, and gas pipeline services respectively, in December 2010. The consultation paper sets out an approach for making starting price adjustments consistent with those decisions.

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).