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Electricity Lines Businesses

Electricity Lines Businesses: Commission decides on thresholds

The Commerce Commission today announced decisions on the thresholds to apply as part of its regulatory regime for electricity lines businesses. This work is required under Part 4A of the Commerce Act.

The thresholds are a screening mechanism to identify electricity lines businesses whose performance may require further investigation and, if required, control by the Commission.

“The Commission has decided to adopt a price path threshold and a quality threshold” said Commission Chair, John Belgrave.

“The focus on price and quality will ensure that electricity lines businesses are limited in their ability to extract excessive profits, face strong incentives to improve efficiency, provide services at a quality that reflects consumer demands and share the benefits of efficiency gains with consumers, including through lower prices. This, in essence, is the purpose of the legislation.”

More specifically, the two thresholds, which apply to all electricity lines businesses (including Transpower), are as follows:

a price path threshold of the form ‘CPI – X’, requiring:

no increase in average prices since the legislation was enacted (8 August 2001) to 31 March 2004; and

from 1 April 2004 (1 July 2004 in the case of Transpower), ongoing real price reductions at a rate yet to be determined. The Commission will reset the price path threshold to apply from this date, with the intention that it be set for five years.

a quality threshold, requiring no material deterioration in system reliability, as well as demonstration of meaningful engagement with end consumers to ensure services are being provided at a quality that reflects consumer demands.

“The Commission, having conducted a comprehensive process of consultation, including recently on the Commission’s draft decisions, has decided that the above two thresholds will underpin the achievement of the purpose of the targeted control regime.”

Having considered submissions from interested parties, the Commission has decided a profit threshold, assessed at the end of five years (as was proposed in the Commission’s draft decisions), may not be the best means to achieve the purpose of the targeted control regime, as it could deter investment and innovation.

The Commission will release a paper detailing its threshold decisions as soon as possible.

Attached is further detail on the threshold decisions. Following that attachment is further detail on Part 4A of the Commerce Act, and the Commission’s work in this area.

Media contact: John Belgrave, Chair (04) 924 3601, mobile 021 650 045

Jackie Maitland, Communications Manager Phone work (04) 924 3708, mobile 029 924 3708

Commission media releases can be viewed on its web site www.comcom.govt.nz


ATTACHMENT FURTHER DETAIL ON THE COMMISSION’S THRESHOLD DECISIONS

Overview of threshold decisions

In more detail than the media release, the two thresholds, which apply to all electricity lines businesses (including Transpower), are as follows: a price path threshold of the form ‘CPI – X’, requiring: no increase in average prices since the legislation was enacted (8 August 2001). Electricity lines businesses will be assessed as at three months after the thresholds are set (by notice in the Gazette) and as at 31 March 2004 (30 June 2004 for Transpower); and from 1 April 2004 (1 July 2004 in the case of Transpower), ongoing real price reductions at a rate yet to be determined. The Commission will reset the price path threshold to apply from this date, with the intention that it be set for five years. Electricity lines businesses will be assessed as at 31 March 2005 (30 June 2005 in the case of Transpower) and annually thereafter. The Commission’s preliminary view is that electricity lines businesses will be grouped and assigned a relevant X, taking into account factors such as expected growth in industry productivity and the efficiency of prices and costs. This approach will be refined through further work over the next six months (discussed below). a quality threshold, requiring no material deterioration in system reliability, as well as demonstration of meaningful engagement with end consumers (either directly or through retailers) to ensure services are being provided at a quality that reflects end consumer demands (or, in Transpower’s case, customer demands). This will be assessed as at
31 March 2004 (30 June 2004 in the case of Transpower) and each year thereafter. Price path threshold The methodology for resetting the price path threshold will be further developed over the next six months. There will also be further work on the levels of X to apply when the price path threshold is reset. There will be opportunity for interested parties to comment on the Commission’s work. At this time, the Commission expects this work will include consideration of the trade-off between price and quality, and examination of the options for robust normalisation of the performance of electricity lines businesses for key cost drivers (e.g. customer density). Given Transpower is the only transmission business, it will not be grouped with other electricity lines businesses. The level of X to apply to Transpower will be considered separately by the Commission, as part of the same process. The Commission proposed this type of approach in its draft decisions (31 January 2003) and foreshadowed the need for further consultation (Media Release 2002-03/118, 27 February 2003). In respect of the price path threshold, it is also noted: the following will be treated as cost pass-throughs: for distribution businesses, transmission charges; for Transpower, costs associated with its System Operator function, as well as charges arising from investments undertaken under Part F Section 2 of the
Electricity Governance Board (EGB) Handbook; and for all electricity lines businesses, local authority rates on network infrastructure. in respect of the assessment as at three months after the thresholds are set (by notice in the Gazette) and as at 31 March 2004 (30 June 2004 for Transpower) (constant nominal prices since the legislation was enacted): if electricity lines businesses’ prices are lower now than their level on 8 August 2001, any increase in prices will constitute a breach of the threshold, i.e. electricity lines businesses, having chosen to reduce their prices below that level, cannot increase them; and the Commission considered assessing this threshold as at 31 March 2004 only, but decided an early assessment – three months after the thresholds are set – was required. If electricity lines businesses have increased their prices since the legislation was passed, it is appropriate they are assessed to have breached this threshold sooner as opposed to later. in respect of it being reset to apply from 1 April 2004: the Commission intends this work will be completed by 31 October 2003. At this time, the Commission expects this process will involve written submissions on a discussion paper and draft decisions, as well as workshops with Commission staff; the Commission expects that those electricity lines businesses that have been performing relatively poorly would face a higher X, requiring greater price reductions and/or quality improvements (than other electricity lines businesses) to avoid breaching the threshold. The better performing electricity lines businesses would face a lower X but, importantly, still be required to make efficiency improvements each year to avoid breaching the threshold. in respect of Transpower, the Commission is further considering whether its prices under the price path threshold should exclude the economic value (EV) rebate component as at
1 July 2001 (i.e. whether prices subject to the price path threshold should be pre-rebate), and whether the EV account balance as at 30 June 2003 should be returned to Transpower’s customers within 3 years. The decision on this matter will be part of the Commission’s decision paper. Given the regime is designed to deliver benefits to consumers, the Commission considers they should gain the benefits of any reductions in electricity line charges. The Commission, during its consultation with interested parties, received allegations that electricity retailers were not passing on lower lines charges to end consumers. The Commission has written to the Ministers of Commerce, Energy and Consumer Affairs advising them of these allegations (available on the Commission’s website (www.comcom.govt.nz, select ‘Electricity lines businesses’). In light of the Government Policy Statement requiring the Electricity Governance Board to address this issue, the Commission wanted to draw the allegations received to the attention of relevant Ministers. Quality threshold For the assessment of the quality threshold with respect to distribution businesses, reliability will be assessed on the basis of standard interruption duration and frequency indices (“SAIDI” and “SAIFI”) in respect of all interruptions originating in the distribution network, whether planned or unplanned. The threshold would be breached if the reliability performance, as measured by either SAIDI or SAIFI, during that year exceeded the previous five-year average by more than a margin to be set by the Commission. In the case of Transpower, the assessment would be the same but based on the number of unplanned interruptions and customer interruptions calculated in system minutes. As previously indicated by the Commission, further work will be conducted on the quality threshold, as soon as practicable, to address any aspects of quality that should be monitored, but are not adequately addressed in the methodology for the resetting of the price path threshold. Profits Having considered submissions from interested parties, the Commission has decided a profit threshold, assessed at the end of five years (as was proposed in the Commission’s draft decisions), may not be the best means to achieve the purpose of the targeted control regime, as it could deter investment and innovation. The Commission’s preferred way to ensure electricity lines businesses are limited in their ability to extract excessive profits, which the purpose statement for the regime requires, is to consider the efficiency of prices and costs as part of the resetting of the price path threshold. If, however, the resetting of the price path threshold cannot be completed within the next six months, the Commission may need to consider, as per its draft decisions, implementing a profit threshold to apply from 1 April 2004. Next steps Electricity lines businesses will be required to provide information to the Commission to facilitate assessments against the thresholds by a date set out in the Gazette notice. If electricity lines businesses breach the threshold, the Commission will, in deciding what subsequent action to take, consider any relevant specific circumstances of such businesses. The Commission will release a paper detailing its threshold decisions as soon as possible. As part of that paper, the Commission intends to publish information related to the process of the investigation and control phases of the regulatory regime to give guidance related to those parts of the regime. The Commission will also, as soon as possible, publish information related to implementation detail of the investigation and control parts of the regulatory regime, including its views on WACC and asset valuation, to give guidance on what consequences might follow a breach of the thresholds. A Gazette notice publishing the price path and quality thresholds will also be available shortly for comment by interested parties. Invited comments will, over a short number of days, be limited to technical drafting points to ensure the notice gives best effect to the Commission’s decisions, and will not be a further opportunity to debate the thresholds. The thresholds will be set when this notice is published in the Gazette.

Background

Part 4A of the Commerce Act 1986, which commenced on 8 August 2001, establishes the regulatory regime for large electricity lines business. The Commission is required, inter alia, 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 investigate the business 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 investigation and, if required, control by the Commission.

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 released draft decisions on the high-level design of the thresholds on 23 December 2002 and draft decisions on implementation detail on 31 January 2003. The Commission sought submissions on its draft decisions and held a conference from 10-14 March 2003.

The purpose of the regime, as set out in s57E of Part 4A, 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–

are limited in their ability to extract excessive profits; and

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

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

Relevant media releases

Commission media releases, as well as relevant publications, can be viewed on its web site www.comcom.govt.nz. Relevant media releases include:

2003/118 – Electricity Lines Businesses: Commission confirms conference details (27 February 2003)

2003/104 – Electricity Lines Businesses: Commission releases draft decisions on implementation detail (31 January 2003)

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

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

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

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

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

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