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Update: Regulation of electricity lines businesses

Media Release

Issued 30 May 2002-03 / 167

Update: Regulation of electricity lines businesses

The Commerce Commission invites submissions on a discussion paper, Resetting the Price Path Threshold, relating to the price path threshold for electricity lines businesses. The Commission’s work on regulation of electricity lines businesses is under Part 4A of the Commerce Act.

As part of its regulatory regime for electricity lines businesses, the Commission announced on 31 March its decision to adopt a price path threshold and a quality threshold. The price path threshold would apply for an initial period through until 31 March 2004 (30 June 2004 in the case of Transpower), and then be reset going forward.

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

Discussion paper on resetting the price path threshold
The release of today’s discussion paper is the first step of the work to reset the price path threshold.

The discussion paper draws on work undertaken to date by the Commission and other parties, and considers options for resetting the parameters of the “CPI-X” price path threshold. The two broad options for resetting the price path threshold are:

- a “comparative” option: where the X-factor of the CPI-X price path would be set based on industry-wide improvements in productivity, as well as on the price and quality performance of an electricity lines business benchmarked against other lines businesses; and
- a “partial building blocks” option: where the X-factor would similarly be set based on industry-wide improvements in productivity, as well as the realignment of prices to costs (including the costs of capital) and a trade-off between price and quality going forward.

The Commission’s preliminary view is that, for distribution businesses, the comparative option is preferred, because, consistent with the intent of thresholds, it does not require detailed analysis of the costs of individual lines businesses. There are, however, a number of implementation issues associated with this option that need to be satisfactorily resolved. Input from interested parties will be important to help do this.

The partial building blocks option is considered a fallback approach which, like the comparative option, can also meet the statutory objectives of Part 4A.

For Transpower, the Commission’s preliminary view is that the partial building blocks option is preferred. The comparative option is not preferred for Transpower because of the absence of relevant New Zealand benchmarks.

Written submissions on the discussion paper are invited by 30 June 2003. Further process information related to this work is contained in the paper.

Gazette notice
This week the Commission released a final draft of the Gazette notice, which, once published, will set the thresholds up to 31 March 2004.

The Commission received helpful drafting suggestions from interested parties on an earlier draft of the Gazette notice, which have resulted in some changes. Interested parties are invited to make further comments before the notice is published. The deadline for comments is 9am 4 June 2003.

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; held a conference and invited cross-submissions. The Commission’s decisions on the thresholds were issued on 2 May 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–

(a) are limited in their ability to extract excessive profits; and

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

(c) 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 Relevant media releases include:

- 2003-03/150 – Electricity Lines Businesses: Commission releases thresholds decision paper
(2 May 2003)

- 2003-03/132 – Electricity Lines Businesses: Commission decides on thresholds
(31 March 2003)

- 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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