Gas retailers respond to distribution reductions
Issued 23 March 2006/109
Gas retailers respond to distribution price reductions
In August 2005 the Commission issued a Provisional Authorisation requiring the average price for the distribution component of gas prices to be reduced by at least 9% and 9.5% for Powerco and Vector respectively. The Commission sought a response from gas retailers as to how they proposed to pass on these savings to their customers.
The majority of gas retailers had passed on the reductions but advised that several factors affected their ability to pass on the reductions to all consumers at the same time. These included the need to comply with contractual terms in fixed-term contracts, set periods of notice and the need to amend billing systems. Where the implementation of price reductions has been delayed, some retailers have applied a retrospective adjustment (‘wash-up’) to achieve the full effect of a pass-through.
Auckland Gas Company informed the Commission that it intends using the reduction in distribution costs to offset their planned future residential price increases. The impact of this upon pricing is unclear. In the case of Nova Gas the approach to pricing upon contract rollover is also unclear.
Commerce Commission Chair Paula Rebstock expressed general satisfaction that most retailers had endeavoured to pass on the price reductions in a timely fashion but was concerned future price changes need to be communicated to customers transparently.
On 27 July 2005 the Minister of Energy announced the decision to impose control over the gas distribution services of Powerco and Vector. A Provisional Authorisation was subsequently issued on 27 August 2005 by the Commission pending a final authorisation being prepared. The Provisional Authorisation required that the average price for controlled services be reduced by at least 9% and 9.5% from 1 October 2005 for Powerco and Vector respectively.
Gas distribution companies have a direct contractual relationship with gas retailers rather than consumers. Accordingly, for the Provisional Authorisation to affect prices paid by consumers, gas retailers would need to ‘pass on’ the reduced distribution charge to their customers.
In a contestable market, the Commission considers that effective competition would see a transparent reduction in prices across retailers that matches the reduction in the distribution component of the price although the effect may be masked by the bundling of transmission, distribution and retail components of prices
The Final Authorisation is due later in 2006.