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Process takes account of investment incentives

Media Release

Issued 15 August 2006/022

Commission process takes account of investment incentives

“The public can be assured that providing for appropriate investment is a key part of the regulatory regime enforced by the Commerce Commission,” Commerce Commission Chair Paula Rebstock said today.

“The regime not only allows for appropriate investment, it in fact requires that appropriate investment is made to ensure security and quality of supply,” Ms Rebstock said.

Ms Rebstock said the Commerce Commission has issued its reasons for its intention to declare control of Vector, and is now in the consultation phase where all parties, including Vector, can put their views to the Commission.

As an alternative to control being imposed, a company can propose an administrative settlement to the Commission. This usually involves the Commission and the company agreeing to pricing levels and quality measures. The result is that prices and quality are maintained at levels the Commission considers appropriate for the long term interests of consumers, without the need to impose control, which can be intrusive and costly.

“The Commission remains open to reaching an administrative settlement with Vector,” Ms Rebstock said.

“Should Vector make an administrative settlement offer that the Commission finds is consistent with Part 4A of the Commerce Act, there would be a full consultation process on the proposed settlement with all interested parties,” Ms Rebstock said.

“The processes with regard to either control or administrative settlement will be transparent,” Ms Rebstock said, “and the Commission will have regard to all submissions it receives, and to the Government Policy Statement issued on 7 August.”

Ms Rebstock said the formal consultation process was the appropriate place for the issues to be discussed and the Commission was unlikely to make further comment on the matter outside of that process.

After receiving a request from Vector for an extension of the consultation timeframe, the Commission has extended the deadline for submissions to 2 October.

Background

Vector. Vector is listed on the New Zealand Stock Exchange. 75.1% of Vector is owned by the Auckland Electricity Consumer Trust. The Trust’s beneficiaries are Auckland electricity consumers who are Vector’s customers. The remaining 24.9% of Vector’s shares are publicly traded on the Stock Exchange.

Electricity distribution services. New Zealand’s electricity industry has four parts: generation, transmission, distribution and retail. Distribution services take electricity from the national grid and distribute it to homes and businesses. Vector’s electricity distribution charges comprise around 20 to 40% of the average power bill.

The regime. The Commerce Commission administers regulation of 28 electricity distribution companies and Transpower under Part 4A of the Commerce Act. The companies are regulated because they face limited competition, and without regulation could charge too much for their services and earn excess profits.
The companies are regulated by having thresholds set for them that govern the quality of services they deliver and/or how much they can raise their prices by each year. The price path thresholds are linked to the Consumer Price Index rate of inflation. The thresholds are a screening mechanism the Commission uses to identify distribution businesses whose performance may warrant further examination, and, if necessary, control of their prices, revenues and/or service standards.
The purpose statement of the targeted control regime contained in s 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 may prioritise which identified lines businesses it will investigate further, under s 57K of the Act. Section 57K(2) provides that the Commission must have regard to the s57E purpose, and may also have regard to any other factors that it considers relevant, including (without limitation) all, any, or none of the following:

(a) the size of the business;
(b) the recent performance of the business, including prices charged and the extent of any excess profits:
(c) the quality of the information provided to the Commission:
(d) the extent to which businesses have breached the thresholds set by the Commission.

Intention to declare control. Since the targeted control regime was implemented in 2001, the Commission published its intention to declare control three times: of Unison Networks’ electricity distribution services in September 2005, of Transpower’s transmission services in December 2005, and now of Vector’s electricity distribution services. The Commission is now considering administrative settlement offers from both Unison and Transpower. If agreed, these administrative settlements would remove the need for control to be imposed.

Control. If companies breach price or quality thresholds set for them, the Commission can consider imposing control on their electricity services. If the Commission makes a declaration of control it can then set rules—termed an "authorisation"—governing the prices, revenue and/or quality of those controlled services for up to five years. While the company may face penalties if it does not comply with those rules, the operation of the company will continue to be undertaken by its management and Board of Directors as normal. Control is not intended to compensate consumers for any past overcharging but to put in place constraints on the controlled business’s future performance.

Administrative settlement. As an alternative to control being imposed, a company can propose an administrative settlement to the Commission. This usually involves the Commission and the company agreeing to pricing levels and quality measures. The result is that prices and quality are maintained at levels the Commission considers appropriate for the long term interests of consumers, without the need to impose control, which can be intrusive and costly.

ENDS

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