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Unison to rebalance power prices

Media Release

27 September 2006/043

Unison to rebalance power prices in Hawke's Bay, Rotorua, Taupo

Unison Networks will voluntarily reduce its average prices from 1 December this year and will comply with the Commerce Commission's price path threshold for the remainder of the current five-year regulatory period.

The voluntary move forms part of an administrative settlement offer presented to the Commission earlier this month. It follows earlier price reductions to Rotorua and Taupo consumers in April this year.

An administrative settlement is an alternative to regulatory control being imposed. The Commission announced its intention to declare control of Unison in September 2005 after finding the company was earning significant excess profits, with the greatest impact on consumers in Rotorua and Taupo.

"The Commission has reviewed Unison's settlement offer and considers that it forms a suitable basis for consultation with interested parties," said Commerce Commission Chair, Paula Rebstock.

"The Commission's preliminary view is that Unison's offer should be accepted. We commend Unison for acting swiftly to address the inefficiencies it has identified in its current pricing structure.

"Unison's decision to comply with the price path threshold and to rebalance its tariffs underscores the effectiveness of the current regulatory regime in delivering long-term benefits for consumers,"
Ms Rebstock said.

"Workable solutions for both consumers and businesses can be achieved without the Commission necessarily having to impose control on an electricity lines company."

Unison's offer also involves rebalancing its charges to different customer groups, so the prices paid by consumers reflect the costs of supplying them. The rebalancing means that Unison's overall revenues and average charges will decrease. The distribution component of consumers' power bills will go down in many cases, but in some instances it will increase. Unison's distribution charges comprise around 20% - 40% of the average power bill.

Ms Rebstock noted that Unison's offer includes a commitment to undertake the level of expenditure needed to maintain network performance. The company would do this without breaching its price path threshold.

"The Commission is committed to ensuring there is efficient investment in electricity distribution networks to maintain and improve reliability of supply," Ms Rebstock said.

"Therefore, we have also reviewed Unison's 2006 asset management plan, the principal planning document underpinning Unison's efforts to improve efficiency and provide quality services."

Ms Rebstock said the review of the asset management plan showed that Unison's current practices for managing its maintenance and asset renewal budgets are in line with good industry practice. The Commission would continue to monitor Unison's asset management practices, as well as Unison's actual network expenditures compared to its projections, Ms Rebstock said.

The Commission will release details of Unison's administrative settlement offer in October, so that interested parties can provide their views. The consultation package will include the Commission's review of Unison's 2006 asset management plan.

If, after taking into account the views of interested parties, the Commission does not accept Unison's offer, then the Commission will still need to decide whether or not to declare control. If the Commission's preliminary view is confirmed and Unison's offer is accepted, then the Commission will be able to close its post-breach inquiry into all of Unison's past threshold breaches.

Background

Unison. Unison supplies electricity consumers in the Hawke's Bay, Rotorua and Taupo regions. The company is 100% owned by the Hawke's Bay Power Consumers' Trust, which acts on behalf of the consumers connected to Unison's network in Hawke's Bay.
Electricity distribution services. New Zealand's electricity industry has five parts: generation, wholesaling, transmission, distribution and retailing. Distribution services take electricity from the national grid and distribute it to homes and businesses. Unison'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 thresholds are linked to the Consumer Price Index rate of inflation with the current five-year regulatory period lasting from 1 April 2004 to 31 March 2009. 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.

Control. If companies breach price or quality thresholds set for them, the Commission can consider imposing control on their electricity services. However, it must first seek the views of interested parties on its intention to do so. 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.

Intention to declare control of Unison. Since the targeted control regime was initiated in 2001, the Commission has 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 of Vector's distribution services in August 2006.

In its intention to declare control of Unison, the Commission outlined its preliminary findings that Unison was earning significant excess profits, with the greatest impact on consumers in Rotorua and Taupo. On 1 April 2006, Unison reversed its most recent distribution price rises to Rotorua and Taupo consumers, with consumers saving, on average, about $40 per year in Rotorua and $46 in Taupo.

In response, the Commission delayed its decision whether to place Unison's electricity distribution services under control. This delay gave Unison time to prepare an administrative settlement offer for the Commission.

Administrative settlement. As an alternative to control being imposed, the company can reach an administrative settlement with the Commission. This usually involves the Commission and the company agreeing to pricing levels and quality measures for a period of up to five years. 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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