Commission sets thresholds for next five years

Electricity Lines Businesses: Commerce Commission sets thresholds for next five years

The Commerce Commission today set thresholds as part of the targeted control regime relating to large electricity distribution businesses. These thresholds apply for a five year regulatory period beginning tomorrow, 1 April 2004.

Commission Chair Paula Rebstock said this is an important milestone in the regulatory regime for electricity lines businesses, which the Commission is required to develop 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, of their prices, revenues or quality standards,” added Ms Rebstock.

The Commission announced on 23 December 2003 its final decisions on the thresholds that would apply from 1 April 2004. Since then, the Commission has been developing, with helpful input from interested parties, the legal text of the Gazette notice used today to set the thresholds.

Ms Rebstock said both the price path and the quality thresholds first set by the Commission for electricity distribution businesses in June last year, and which apply until today, have been retained. However, new criteria and parameters apply.

“The purpose of the price path threshold is to provide incentives for distribution businesses to improve efficiency, share the benefits of efficiency gains with consumers over the long term (including through lower prices in real terms), and be limited in their ability to extract excessive profits,” said Ms Rebstock.

“The purpose of the quality threshold is to provide incentives for lines businesses to not allow their reliability to fall as a means of reducing costs in response to the price path threshold, and to supply electricity distribution services at a quality demanded by consumers.”

The Commission’s decisions related to the thresholds are set out in a decision paper, Regulation of Electricity Lines Businesses, Targeted Control Regime, Threshold Decisions (Regulatory Period Beginning 2004), re-issued today. This paper was originally released on 23 December 2003 and has been re-released, as previously announced by the Commission, and updated to reflect the technical changes made as a result of the Gazette notice drafting process.

Transpower

The thresholds currently applying to Transpower New Zealand Limited remain until 30 June 2004. Transpower’s thresholds do not need to be reset until that date. However, the Commission’s decision paper indicates that the Commission intends to reset Transpower’s thresholds for a period of one year only from 1 July 2004. The shorter regulatory period for Transpower is primarily due to uncertainties regarding the approach the Electricity Commission will take with respect to Transpower’s investment programme.

The Gazette notice used to set the thresholds—the Commerce Act (Electricity Distribution Thresholds) Notice 2004—and the associated decision paper, can be found on the Commission’s website, www.comcom.govt.nz.

Media contact: Media wishing to speak to Paula Rebstock, please contact: Gail Marshall, Communications Adviser Phone work (04) 924 3709, mobile 029 924 3709

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

Background and Further Detail

Part 4A of the Commerce Act 1986, which commenced on 8 August 2001, establishes, inter alia, a targeted control regime for the regulation of large electricity lines businesses (distribution businesses and Transpower).

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.

As part of the targeted control regime, the Commission is required 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 initial 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 thresholds 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. After taking into account submissions on this Discussion Paper from interested parties, the Commission issued its draft decisions on the thresholds to apply from 2004. Interested parties also had the opportunity to make submissions on those draft decisions, to present their submissions at a public conference held by the Commission from 3‑6 November 2003, and

The Commission issued its final decisions on 23 December 2003. At that time, the Commission indicated that the paper would be re-issued along with the finalised notice published in the New Zealand Gazette used to set the thresholds, updated to reflect any changes in technical detail. Subsequently, the Commission decided to publish the thresholds for distribution businesses and Transpower in two separate Gazette notices, given that the start dates and lengths of the regulatory periods are different for Transpower than for other lines businesses.

On 11 February 2004, the Commission issued drafts of two Gazette notices—namely the Commerce Act (Electricity Distribution Thresholds) Notice 2004 and the Commerce Act (Transpower Thresholds) Notice 2004—and invited written submissions from interested parties on the technical details of the drafts, to ensure that the notices give effect to the Commission’s threshold decisions. Submissions were due by 1 March 2004.

The price path threshold set by the Commission is a ‘CPI-X’ price path threshold, where the ‘X’ represents the expected annual reduction in lines business average prices, in real terms.

The X for each distribution business is the sum of three component factors:

1. the first, equal to +1%, has been assigned in common to all distribution businesses, based on an analysis of average distribution business productivity growth from 1996 to 2003.

2. the second, equal to +1%, 0% or -1%, has been assigned to three groups of distribution businesses, based on an analysis of their relative productivity performance from 1999 to 2003.

3. the third, also equal to +1%, 0% or -1%, has been assigned to three groups of businesses based on their relative profitability performance over the past four years.

Distribution businesses with below-average productivity, or with more scope to reduce prices, receive a higher X. The better performing businesses, or those which have been consistently maintaining low prices, face a lower X.

Of the 28 distribution businesses, nine have been assigned an X of 2%. Assuming that the consumer price index (CPI) stays at its current level of about 1.5%, these businesses are expected to reduce their average prices by around 0.5% per annum.

Nine distribution businesses have been assigned an X of 1%, seven businesses have been assigned an X of zero, and the remaining three have been assigned an X of -1%. The latter three businesses exhibit both comparatively higher productivity and comparatively lower prices, relative to costs.

The X in Transpower’s price path threshold will be set to 1%, the same as for average-performing distribution businesses. The Commerce Act (Transpower Thresholds) Notice 2004 will be published by 30 June 2004.

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