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Electricity Distribution Update On Thresholds

Electricity Distribution Businesses: Update on the Commission's Threshold Assessments

The Commerce Commission has completed its initial review of the second self assessments of the performance of all 28 electricity distribution businesses against the price path and quality thresholds set by the Commission under Part 4A of the Commerce Act. Six businesses have been found to have complied with the thresholds, six have been found in breach, and the Commission is requesting further information from the remaining 16 businesses to complete its assessments.

To comply with the price path threshold at the second assessment date (31 March 2004), each distribution business must not have increased its average prices, net of certain costs, since the date at which it was first assessed (6 September 2003).

To comply with the quality threshold, each distribution business must have demonstrated no material deterioration in reliability of supply over the previous 12 months, and that it has meaningfully engaged with consumers to determine their demand for service quality.

For the second assessment, the six distribution businesses the Commission has found to comply with the price path threshold and with the reliability component of the quality threshold are: Counties Power Limited, Electricity Ashburton Limited, Horizon Energy Distribution Limited, Nelson Electricity Limited, Network Tasman Limited and Northpower Limited.

Commission Chair Paula Rebstock said that while six businesses have been identified to date as having breached the thresholds, no further action by the Commission is necessary due to the nature of the breaches. Ms Rebstock emphasised that breaching a threshold is not necessarily indicative of poor performance. “The thresholds are simply a trigger for the Commission to identify distribution businesses whose performance may warrant further investigation. Control of prices, revenues and/or quality will only be imposed by the Commission if this is clearly in the long term interests of consumers.”

The six businesses found in breach of the thresholds are Electricity Invercargill Limited (which breached the price path threshold and the reliability component of the quality threshold), Aurora Energy Limited, Mainpower New Zealand Limited, Top Energy Limited, and WEL Networks Limited (which all breached the price path threshold only), and Scanpower Limited (which breached just the quality threshold).

“The price path threshold breaches are attributable to differences between budgeted and actual transmission costs, and are not symptomatic of pricing behaviour detrimental to consumers. The quality threshold breaches were found to be caused by ‘extreme’ events that resulted in uncharacteristic drops in reliability, such as severe storms,” said Ms Rebstock.

“Consequently, although we will be closely monitoring the prices and reliability of the six businesses that breached the thresholds going forward, the Commission does not consider it would be in the long term interests of consumers to take further action at this stage,” she said.

“Most distribution businesses appear to appreciate the importance of keeping downward pressure on prices, while maintaining reliability of supply.”

Ms Rebstock also noted that the Commission was still reviewing all 28 self assessments to evaluate the ways in which the businesses communicate with consumers concerning the trade-offs between price and service quality, with a view to developing possible best practice criteria.

“Distribution businesses identified as falling short of best practice will be expected, over time, to develop more effective processes for understanding and responding to consumer preferences,” Ms Rebstock said.

Update on the First Assessment The Commission has also progressed its review of the self assessments at the first assessment date (6 September 2003). Mainpower New Zealand Limited, Powerco Limited and Westpower Limited have been found to comply, whereas The Lines Company Limited breached the price path threshold. The Commission will not take further action in this case, because the breach was caused by timing differences between movements in The Lines Company’s transmission costs and movements in the company’s average prices. The Commission is requesting further information from the remaining four distribution businesses.

Media contact: Media wishing to speak to Paula Rebstock, please contact:
Jackie Maitland, Communications Manager
Phone work (04) 924 3708, mobile 029 924 3708 Commission media releases can be viewed on its website

Background Part 4A of the Commerce Act 1986, which commenced on 8 August 2001, establishes a targeted control regime for large electricity lines businesses (distribution businesses and Transpower). The purpose of the targeted control regime, as set out in section 57E of the 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.

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 warranted, control their prices, revenue or quality. Following extensive industry consultation, the Commission first set thresholds on 6 June 2003 by a notice in the New Zealand Gazette.

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