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Transpower submission to Commerce Commission

Transpower submission to Commerce Commission – 28 Feb 2006

Transpower has responded to the Commerce Commission’s announcement of its Intention to Declare Control of Transpower, with a detailed rebuttal of the Commission’s reasoning and analysis.

On 22 December 2005 the Commerce Commission announced its Intention to Declare Control of Transpower. On 31 January 2006 the Commission’s reasons for making this declaration were published, with a submission period ending on 27 February 2006.

Yesterday Transpower made its submission to the Commerce Commission, which included independent submissions commissioned from seven individuals and organisations with expertise in specific regulatory and economic issues.

Chief Executive Dr Ralph Craven says it is Transpower’s view, based on the analysis contained in the submission, that the Commerce Commission could not be reasonably satisfied that Transpower’s behaviour warrants control, or that there are long term benefits that would result from the imposition of control.

“Therefore, in our view, control should not be imposed.”

The key points of Transpower’s submission are:

Transpower does not make excessive profits

* The pricing methodology that is used is explicitly designed to prevent this from happening
* The price increases which caused Transpower to breach the thresholds reflected necessary and efficient increases in expenditure from historically low levels

Thresholds provide a screening mechanism and were never intended as a form of control

* The thresholds were designed to perform a limited function as a screening mechanism only
* A breach of the thresholds per se is not indicative of excess profits
* The Commission appears to have assumed Transpower’s threshold breach is inappropriate without doing a full investigation of Transpower’s actual costs

The suggested benefits of control are overstated

* The Electricity Commission approval processes ensure that investments are efficient, timely and necessary – not price control
* Transpower is committed to operating within the Electricity Commission approval framework
* Capital expenditure associated with major grid upgrades will only be recovered where there is Electricity Commission approval for such projects
* While Transpower has sought to progress aspects of the North Island 400 kV project, it has done so with the concurrence of the Minister of Energy and the Electricity Commission
* Intervention by the Commerce Commission is likely to further confuse the regulatory arrangements governing transmission

The costs and consequences of control have not been recognised

* There is no basis for the Commission to assume that delaying investments will bring efficiency benefits
* The potential risks that go hand in hand with delay should also be taken into consideration. Delaying grid investments inherently carries with it serious risk to the provision of a secure and reliable electricity system
* Transpower’s credit rating may suffer further and cost of debt will rise, leading to higher prices for our customers

“Transpower has done its best, in the limited time available, to address all of the issues raised in the Commerce Commission’s draft report,” Dr Craven said.

“Transpower has done nothing wrong. It is true that Transpower has self-reported breaches of the Commerce Commission’s price path threshold. However, the threshold is intended to act as a screening mechanism - a breach is not by itself any indication of wrongdoing.

“Transpower firmly believes that it has acted as a reasonable and prudent grid owner and operator, and that its revenue requirements are fully justified.

“We have not overcharged in the past, we have not earned excessive profits, we are not attempting to pre-fund unapproved projects and we are not expecting today’s generation to pay for benefits that will only accrue to future generations. None of these allegations has any substance.

“Transpower considers that the Commerce Commission has not identified any legitimate concerns over our past prices, and that its forward looking analysis is founded on misunderstandings about key facts (in particular about the way Transpower sets its prices, and the way in which investment decisions are made by Transpower), which Transpower has now corrected.

“Accordingly, Transpower has submitted that the Commerce Commission cannot be satisfied that imposing control would be in the long-term interest of consumers and there is no valid basis for it to declare control,” Dr Craven said.

Transpower’s submission and the independent expert submissions can all be viewed at www.transpower.co.nz

ENDS

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