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Decisions For Resetting The Price Path Threshold

Media Release

Issued Friday 5 September 2003-04/029

Electricity Lines Businesses: Commission releases draft decisions for resetting the price path threshold

The Commerce Commission today released draft decisions relating to the regulation of large electricity lines businesses (distribution businesses and Transpower). This work is part of the Commission's continuing development of a regulatory regime for lines businesses, as required by Part 4A of the Commerce Act.

The draft decisions set out the Commission's proposals for resetting the "CPI-X" price path threshold to apply to lines businesses from 2004. The X represents the expected annual reduction in lines business average prices, in real terms.

"The proposed threshold would continue to place strong incentives on the industry to improve efficiency and to share the benefits of efficiency gains with consumers over the long term," said Acting Chair, Paula Rebstock. "In making its proposals, the Commission has given careful consideration to ensuring that lines businesses would still face incentives to maintain quality of service, including reliability of supply."

"The Commission proposes allocating distribution businesses to three groups, each of which would be assigned a different X. Distribution businesses with below-average productivity, or with more scope to reduce prices, would receive a higher X. The better performing businesses, or those which have been consistently maintaining low prices, would face a lower X. However, all businesses would retain incentives to make efficiency improvements each year to avoid breaching the threshold."

Distribution businesses would be assessed annually against the price path threshold, over a regulatory period of five years beginning on 1 April 2004.

The X for each distribution business would be the sum of two component factors:

1. the first based on average distribution business productivity growth from 1996 to 2003 and common to all distribution businesses. Analysis undertaken for the Commission indicates that average distribution productivity grew by as much as 2.6% per annum from 1996 to 2002, relative to the economy as a whole.

2. the second equal to +1%, 0% or -1%, and assigned to the three groups of distribution businesses. Businesses would be allocated to these groups following an analysis of their relative productivity and profitability performance from 1996 to 2003.

The Commission proposes resetting Transpower' price path threshold for a period of one year from 1 July 2004, primarily due to uncertainties associated with the role and functions of the new Electricity Commission. The X for Transpower would be set based only on Transpower's own productivity growth, over the period 1996 to 2003. Analysis undertaken for the Commission indicates that, relative to the economy as a whole, Transpower's productivity grew by around 1.7% per annum from 1996 to 2002.

The Commission also released today a report prepared for the Commission by Meyrick and Associates, titled Regulation of Electricity Lines Businesses, Resetting the Price Path Threshold - “ Comparative Option. The report presents the analysis of transmission and distribution industry performance from 1996 to 2002 described above.

The Commission's draft decisions and Meyrick and Associates' report can be found on the Commission's website, .

Interested parties are invited to make written submissions on the draft decisions and Meyrick and Associates' report by 6 October 2003. The Commission will hold a conference on its draft decisions during the week beginning Monday 20 October 2003.

Background Part 4A of the Commerce Act 1986, which commenced on 8 August 2001, establishes the regulatory regime for large electricity lines businesses (distribution businesses and Transpower). 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 examine the business through a post-breach inquiry 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 examination and, if required, control by the Commission.

On 6 June 2003, following extensive industry consultation, the Commission set the thresholds and published a notice in the New Zealand Gazette. As part of its decisions on the thresholds, the Commission announced it would reset the CPI­X price path threshold to apply from 1 April 2004 for distribution businesses and from 1 July 2004 for Transpower. The Discussion Paper, Resetting the Price Path Threshold (30 May 2003), outlined the Commission's preliminary views on the approach to be used for resetting the price path threshold.

The purpose of the targeted control regime, as set out in section 57E of the Commerce Act, 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.

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