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Commission releases draft decisions on implementat

Electricity Lines Businesses: Commission releases draft decisions on implementation detail

The Commerce Commission today released a paper setting out draft decisions on implementation detail for its regulatory regime for electricity lines businesses.

The paper discusses implementation of the thresholds that the Commission would use to determine whether individual electricity lines businesses should be investigated and, if necessary, controlled. This work is required under Part 4A of the Commerce Act.

In December 2002, the Commission released its draft decisions on the high-level design of the thresholds. Today’s paper provides greater detail on the implementation of those thresholds.

Proposed implementation details covered in the paper include:

the level of X for the price path threshold, which the Commission considers should range from 1-5%. To better target the regime, the Commission intends to apply three different levels of X (e.g. 1, 3 and 5%) to different groups of electricity lines businesses. Under this approach, those lines businesses that have been performing relatively poorly would face a higher X (e.g. 5%), requiring greater price reductions (than other lines businesses) to avoid breaching the threshold. The better performing lines businesses would face a lower X but, importantly, still be required to make efficiency improvements each year to avoid breaching the threshold. The different levels of X would apply to the annual assessments over the next five years. There would still be an initial assessment as at 30 June 2003 to ensure the purpose of the regime is not defeated by price increases since the legislation was passed;

in assessing the price path threshold, an adjustment process for prices charged by consumer trusts to accommodate, for example, rebates and line rental holidays. Sharing gains with consumers in such ways is legitimate, as long as they are appropriately incorporated into the threshold so that all electricity lines businesses are treated consistently;

use of statistical trend analysis for the quality threshold. This threshold would be assessed annually and would be breached if electricity lines businesses’ reduced their quality level or reduced the rate of quality improvement. Consumers expect better quality over time, so it is important this threshold requires electricity lines businesses to continually improve their quality of service; and

the level of the weighted average cost of capital (WACC) to apply in the profit threshold, which the Commission considers should range from 6-8%. The profit threshold would be assessed at the end of 5 years. For electricity lines businesses that choose ODV as their valuation method, the level of WACC will, in effect, be increased by a small margin (e.g. 0.15%) to account for optimisation risk (i.e. assets being removed (optimised out) from a business’s asset base before the cost has been fully recovered). This margin is necessary to preserve incentives for efficient investment. Use of historic cost does not entail optimisation risk so the margin is not required for lines businesses that choose that valuation method.

Both draft decisions papers (high-level design and implementation detail), as well as a report on WACC prepared by Dr Martin Lally, are available from: (select Electricity Lines Businesses).

Interested parties are invited to make written submissions by 28 February 2003. The Commission will publish written submissions on its website, and hold a conference between 10 and 14 March 2003. The Commission intends to set the thresholds as soon as possible thereafter to apply from 1 April 2003 to 31 March 2008 (1 July to 30 June in the case of Transpower).

Background Targeted control regime

Part 4A of the Commerce Act 1986, which commenced on 8 August 2001, establishes the regulatory regime for large electricity lines business. The Commission released a Discussion Paper on 21 March 2002 and held a public conference for interested parties to make their views known in mid-July 2002. The Commission is required, inter alia, to set thresholds and assess the performance of electricity lines businesses against those thresholds. Those businesses that breach the thresholds could then be investigated by the Commission to determine whether they should be placed under control. The Commission can control any component of prices, revenues or quality standards. The Commission released draft decisions on the high-level design of the thresholds on 23 December 2002. The paper released today provides greater detail on the implementation of those thresholds.

Review of asset valuation methodologies

Part 4A of the Commerce Act requires the Commission to carry out a review of asset valuation methodologies (the review) for electricity lines businesses as soon as practicable. The Commission released an Issues Paper on 14 March 2002, a Discussion Paper on 1 October 2002, and held a public conference (25-28 November 2002) for interested parties to make their views known. The Commission’s paper released on 23 December 2002 set out its draft decisions on the outcomes of the review. Given the interrelationship between asset valuation and the threshold and control regime, the outcome of the Commission's review of valuation methodologies will be released at the same time as the final decision on the targeted control regime.

Commission media releases can be viewed on its web site Relevant media releases include:

2002/22 – Commission to review electricity lines valuation methodologies: Issues Paper attached (14 March 2002)

2002/25 – Commerce Commission releases discussion paper on control of electricity lines businesses (21 March 2002)

2002/31 – Commerce Commission approves the asset valuations of 28 electricity lines companies (4 April 2002)

2002/45 – Update: Regulation of electricity lines businesses (2 October 2002)

2002/96 – Electricity Lines Businesses: Commission releases first of two draft decision papers (23 December 2002)

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