Commerce Commission issues ODV Handbook

Electricity Lines Businesses:
Commerce Commission issues ODV Handbook

The Commerce Commission today issued its new Optimised Deprival Valuation (ODV) Handbook, which prescribes the methodology for valuing the system fixed assets of electricity lines businesses. This work is part of the Commission’s development of a regulatory regime for lines businesses under Part 4A of the Commerce Act

“Under the regulatory regime, the Commission is developing both an information disclosure regime, which this handbook forms an important part of, and a targeted control regime. The two regimes share the same overall purpose —to promote the efficient operation of markets directly related to electricity distribution and transmission services,” said Commission Chair Paula Rebstock.

“The information disclosure regime is intended to achieve this purpose by ensuring that lines businesses make publicly available reliable and timely information about their operation and behaviour.

“The ODV Handbook facilitates consistent comparisons of lines business asset valuations, as well as of financial performance measures based on those valuations.”

All lines businesses will be required to use the new ODV Handbook in complying with the information disclosure requirements for the disclosure year ending in 2004.

Asset valuations prepared using the Handbook will also be relevant to the targeted control regime.

“Although the updated asset valuations resulting from the application of the ODV Handbook will not affect the price path or quality thresholds that the Commission has already put in place, those valuations may be used during post-breach inquiries of lines businesses that have breached the thresholds, or in the event that the Commission imposes control on a lines business”, said Ms Rebstock.

“For instance, where asset valuations are relevant to a post-breach inquiry, the Commission would use the ODV valuations prepared under the new Handbook as the starting point for its inquiry. It could then take into account business-specific circumstances that may materially affect the valuation.”

Tomorrow the Commission will release a Companion Report to the ODV Handbook and a report prepared for the Commission by Parsons Brinckerhoff Associates, which address key issues raised by interested parties during consultation on the development of the Handbook.

The Commission’s information disclosure requirements, the ODV Handbook and the companion documents will be able to be found on the Commission’s website, http://www.comcom.govt.nz, select Electricity Lines Businesses.

Background

Part 4A of the Commerce Act 1986 (the Act), which commenced on 8 August 2001, establishes a regulatory regime for large electricity lines businesses (lines businesses). Under Part 4A, the Commission must develop an information disclosure regime requiring lines businesses (distribution businesses and Transpower) to disclose information concerning their business.

The purpose of the information disclosure regime, as set out in section 57T of the Act, is to promote the efficient operation of markets directly related to electricity distribution and transmission services by ensuring that lines businesses make publicly available reliable and timely information about the operation and behaviour of those businesses, so that a wide range of people are informed about such factors as profits, costs, asset values, price (including terms and conditions of supply), quality, security, and reliability of supply of those businesses.

Part 4A also establishes a targeted control regime for lines businesses. 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.

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.

On 12 September 2003, the Commission invited submissions on an Issues Paper relating to the development of a handbook for the valuation of lines business system fixed assets using the Optimised Deprival Valuation (ODV) methodology, which would be applicable to both the information disclosure and targeted control regimes. On 23 December 2003, the Commission released its draft ODV Handbook for consultation, along with its draft information disclosure requirements. The Commission’s information disclosure requirements were first issued on 31 March 2004.

The Commission held a conference on its draft ODV Handbook from 14-16 April 2004, to give interested parties the opportunity to present their submissions. Following the conference, the Commission invited cross-submissions, and on 9 July 2004 issued a revised draft of the ODV handbook for a final round of consultation. The finalised ODV Handbook was issued on 30 August 2004 and comes into effect on 31 August 2004.

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