The Commerce Commission currently has a number of electricity industry projects underway in relation to its requirements under the Commerce Act (the Act). In addition, it has commenced two investigations involving the electricity retail market and has commenced court action against an electricity supplier for an alleged breach of section 36 of the Act.

This document is to provide an update on all aspects of the Commission's work in the electricity sector, and includes confirmed programmes for public conferences plus details on when papers and discussion documents will be released.

Key elements of the Commission's current electricity work are:

  • a review of asset valuation methodologies that could be applied by lines businesses to value their system fixed assets;
  • consideration of an application for authorisation of the proposed Electricity Governance Board rules;
  • development of a price control regime for electricity lines businesses, including price control thresholds;
  • comprehensive audits of the valuations of the system fixed assets of lines businesses;
  • court action against Bay of Plenty Electricity Limited plus two investigations into alleged anti-competitive behaviour in the electricity sector.

Review of asset valuation methodologies

The Commerce Commission yesterday, Thursday 14 March, announced its intention to commence a review of asset valuation methodologies for electricity lines businesses, as required under subpart 4 of Part 4A of the Act.

Under the review, the Commission plans to consider the various valuation methodologies that could be used to value the capital assets of electricity lines businesses. It will also consider the costs and benefits of the current optimised deprival value (ODV) method compared to alternative valuation methodologies for regulatory purposes, including information disclosures and thresholds assessments.

Interested parties are invited to provide their initial views on the review as the Commission prepares its Discussion Paper. An Issues Paper on this matter is available on the Commission's website, Media Release 2002/023 Commission to review asset valuation methodologies.

The Commission aims to release the Discussion Paper, with preliminary conclusions, in the second quarter of 2002. Interested parties will then be invited to provide submissions. A public conference will also be held.

Electricity Governance Board Rules

The Commission is presently considering an application by the Electricity Governance Board Limited (EGBL) under section 58 of the Commerce Act 1986 for authorisation of a market arrangement that will restructure the basis under which electricity is traded in New Zealand.

The proposed arrangement combines various existing market arrangements and integrates a number of new arrangements into a single rulebook.

Initial submissions on the application have been received from a number of industry participants. These submissions, and the application, can be viewed on the Commission's website

The timetable for the EGBL authorisation process:

Date

Draft determination

Monday 15 April 2002

Submissions (including expert submissions)

Monday 6 May 2002

Conference

Wednesday 19 to Friday 21 June 2002

Price control regime

Under the Act, the Commission has the ability to impose price control on lines businesses. In order to decide whether control should be imposed, the Commission is required to set thresholds for assessing the performance of the businesses. The Commission intends to release a discussion paper within a week containing initial views on the thresholds and other parts of the regulatory regime. The Commission will seek written submissions on the matters in the discussion paper and then hold a conference to allow interested parties to make oral presentations to the Commission.

The Commission had originally indicated it would release the discussion document late in 2001. The delay in release of the paper was to have it peer reviewed by two independent economists, Stephen Littlechild and Stephen Gale. Crown Law have also reviewed the paper.

Comprehensive audit of valuations

The Commission is required by the Act to carry out comprehensive audits of the valuations of the line business system fixed assets of large electricity lines businesses, as contained in the valuation reports supplied to the Commission by the lines businesses. There are 30 large electricity lines businesses, comprising the 29 local electricity distributors and Transpower.

The purpose of the comprehensive audits is to ensure valuations reflect a rigorous and accurate application of the Optimised Deprival Value (ODV) method as set out in the Ministry of Economic Development's current ODV Handbook. The Commission is required, as soon as practicable after completing an audit, to notify the large lines businesses whether or not it will approve the valuation report. Every large electricity lines business must publicly disclose, by 31 March 2002, a valuation report that has been approved by the Commission.

Parsons Brinckerhoff Associates (PBA) is assisting the Commission to carry out the audits. Since October last year, PBA and Commission staff have visited all 30 large electricity lines businesses to complete the necessary audit fieldwork. At this time, the Commission has approved the valuation reports of eight lines businesses, and is continuing to work with the remaining 22. If the Commission has not approved the valuation report of a lines business by 22 March 2002, the Commission may revise the report.

The Commission has appreciated the cooperation of lines businesses in the audit process to date. The audit exercise has provided the Commission with insights into the application of the ODV methodology, which will be a useful input into the review of methodologies.

Court action and investigations into anti-competitive behaviour

The Commission has commenced court action against Bay of Plenty Electricity Limited alleging that the company has breached section 36 of the Commerce Act by refusing to enter into metering services agreements and grant meter access to other electricity retailers wishing to enter the electricity retail market in the Bay of Plenty region. The Commission alleges that Bay of Plenty Electricity has been refusing access since 1999 and continues to do so. The Commission's action has been filed in the Wellington High Court.

The Commission is investigating whether the sale of customers by On Energy (the subsidiary of Natural Gas Corporation) to Meridian Energy and Genesis Power in 2001 constituted a breach of section 47 of the Commerce Act. Section 47 prohibits the acquisition of assets or shares if this would have, or be likely to have, the effect of substantially lessening competition in a market. In addition, the investigation is looking at whether the withdrawal from the market of On Energy was a result of inappropriate use of market power by Meridian and/or Genesis.

The Commission is also investigating the recent swapping of customers between First Electric, a subsidiary of Mighty River Power, and TrustPower. This investigation is at an early stage.

Media contact: Director of Business Competition Branch Geoff Thorn

Phone work (04) 498 0958, mobile 021 661 104

Communications Manager Jackie Maitland Phone work (04) 498 0920, mobile (025) 249 3407