Update on First Threshold Assessment

Electricity Lines Businesses: Update on the Commission's First Threshold Assessments

The Commerce Commission today announced it has identified five electricity distribution businesses in breach of the initial price path threshold set by the Commission last June. One further distribution businesses has been found to comply with the threshold.

The price path threshold applies to 29 electricity lines businesses, including Transpower. In essence, a lines business is deemed to have breached the price path threshold, at the first assessment, if its average price net of certain costs is found to have increased over the period from August 2001 to September 2003. For distribution businesses, the costs that are netted out include the transmission charges they pay to Transpower.

The five businesses in breach of the price path threshold are Electricity Invercargill, Network Waitaki, OtagoNet, The Power Company, and Waipa Networks. The Commission has cleared Waipukurau-based Centralines.

Commission Chair Paula Rebstock said the Commission will not make a declaration of control in respect of the services supplied by the five distribution businesses. She explained that, in three cases, the businesses have breached because, although they have not increased their prices for some time, they have not reduced their prices in line with budgeted decreases in transmission costs.

"In resetting the thresholds to apply to distribution business for the five year regulatory period that begins tomorrow (April 1), the Commission conducted a comparative analysis of distribution business performance", said Ms Rebstock.

"That analysis found that those three businesses exhibit relatively low profitability and/or relatively high productivity, when compared with their peers."

"Consequently, although the Commission will be closely monitoring the pricing behaviour of the three businesses going forward, the Commission does not consider it would be in the long-term interests of consumers to take further action at this stage."

In the other two cases, The Power Company and Waipa Networks, the breach is attributable to timing differences between movements in their transmission costs and movements in their average prices. Before Christmas, the Commission identified two businesses, Nelson Electricity and Top Energy, as having breached the price path threshold for the same reasons, and likewise decided that no further action was warranted. At the same time, the Commission identified 12 of the 29 lines businesses as having complied with the initial price path threshold: Alpine Energy, Aurora Energy, Counties Power, Eastland Network, Electricity Ashburton, Horizon Energy Distribution, Network Tasman, Northpower, Orion, Scanpower, Vector and WEL Networks.

Nine businesses are still being assessed by the Commission. The Commission has sought further information from these businesses and expects to make further announcements soon.

In due course, the Commission will publish the reasons for its decisions in respect of lines businesses that are found to have breached the price path threshold, and for which the Commission has determined not to declare control.

Once it has completed its assessments of all 29 lines businesses, the Commission will issue a report explaining how the assessments were undertaken, and summarising their results.

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 two thresholds-a price path threshold and a quality threshold-by publishing a notice in the New Zealand Gazette. These initial thresholds apply until 31 March 2004 for distribution businesses, and 30 June 2004 for Transpower. All lines businesses were first assessed against the price path threshold as at 6 September 2003. The second assessments against the price path threshold are as at 31 March 2004 (30 June 2004 for Transpower). Lines businesses are assessed against the quality thresholds as at 31 March 2004 (30 June for Transpower).

As part of its decisions on the June 2003 thresholds, the Commission announced it would reset the thresholds to apply from 1 April 2004 for distribution businesses and from 1 July 2004 for Transpower. The Commission has now made decisions on the thresholds to apply from 2004. The thresholds for distribution businesses were published in the Gazette on 31 March 2004, and those for Transpower will be published by 30 June 2004.

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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