The Commerce Commission today released its consultation paper with a draft decision to amend the default price-quality path (DPP) applying to electricity distribution businesses (EDBs) for the period 2010-2015 by including a revenue differential term.

The intent of the DPP is to promote the long-term benefit of consumers. The objectives of the regulation are that suppliers have incentives to innovate and invest, improve efficiency and provide services at a quality that reflects consumer demands, share efficiency gains with consumers, including through lower prices, and are limited in their ability to extract excessive profits.

The revenue differential term, commonly referred to by the industry as a 'headroom' term, modifies the compliance assessment formula for the 2010-2015 DPP so that an EDB's price path cannot be affected by pricing behaviour within the regulatory period.

"One of the effects will be that the revenue differential term will return any EDBs breaching their price path back to the level of allowed revenues and allow any EDBs pricing below their price path to price back up to their price path," said Brent Alderton, Commerce Commission General Manager, Regulation.

The paper also includes the Commission's initial views on the effects of the forthcoming GST increase on the Consumer Price Index as used to index the 2010-2015 DPP, and potential changes to the 2010-2015 DPP to reflect the draft input methodologies, which the Commission is currently consulting on.

The 2010-2015 Electricity Distribution Default Price-Quality Path Refinements Discussion and Draft Decisions Paper can be accessed from the Commission's website at www.comcom.govt.nz/20102015defaultpricepath

Background

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.

Electricity distribution businesses provide electricity lines services between Transpower and end-users. All electricity distribution businesses, 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.

A default price-quality path (DPP) sets the maximum prices or revenues that suppliers can charge. It also defines the standards for quality of services that they must provide to their customers.  As an alternative to the default price-quality path, suppliers may apply to the Commission for a customised price-quality path that better reflects their specific circumstances.  

The 2010-2015 DPP, which took effect in April 2010, set the maximum allowable revenue for each supplier in the form of a compliance assessment formula. The formula is currently specified so that a supplier's maximum allowable revenue in a given year is derived using the prices it charged in a previous period.

Submissions on the 2010-2015 DPP observed that this specification would affect an EDB's allowable revenue if it priced below its price path creating 'headroom' (referred to by industry as the difference between actual and allowable revenue). The proposed draft decision on a revenue differential term modifies the formula to decouple the relationship between a supplier's maximum allowable revenue and the prices it charges during the regulatory period, addressing the effects of headroom on the price path.

Under the 2010-2015 DPP, suppliers are allowed to increase annual prices by an allowed rate of change. The allowed rate of change is equal to the annual change in the Consumer Price Index (CPI) as published by Statistics New Zealand.  

The Commission published its draft decisions on input methodologies for electricity distribution services on 18 June 2010 and the corresponding draft determinations on 2 July 2010.