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Commission To Accept Settlement Offer

Commission To Accept Settlement Offer

The Commerce Commission has announced today its decision to accept Transpower's administrative settlement offer instead of placing Transpower's transmission services under regulatory control.

Commerce Commission Chair Paula Rebstock said "This administrative settlement provides significant benefits to consumers through lower prices. Under the settlement the 19.1% price increase announced by Transpower in 2006 has been reduced to 10.2%. Transpower's estimated average price increase for 2007/08 has been reduced from 13% to 8.1%, and in 2008/09 from 13% to 6.3%."

This settlement, as compared with the previously announced price increases, represents a saving to consumers over the three years to 2008/09 of approximately $240 million; whilst ensuring Transpower undertakes the investments necessary to maintain the national grid," said Ms Rebstock. Furthermore, the Commission anticipates that further efficiencies will be achieved in the next two years under the settlement.

"This is an excellent outcome for consumers as Transpower will undertake the necessary investments in the national grid whilst charging prices significantly lower than it announced before the Commission's intervention," Ms Rebstock said.

Transpower's existing price path threshold will be replaced with three new thresholds. "These new thresholds provide clear principles and limits for Transpower to adhere to when setting its annual revenue requirement which will ensure that price changes are justified," said Ms Rebstock. For the years 2010 and 2011, Transpower will determine its annual revenue requirement against the method specified in the settlement offer. "As well as more appropriate pricing, Transpower now has strong incentives to invest and make further efficiency improvements by outperforming its thresholds. This is consistent with the objectives of the regulatory regime." Transpower's existing quality threshold will continue to apply.

Further reviews to improve operational efficiency will place downward pressure on costs. Likewise, significantly more expenditure is now subject to Electricity Commission scrutiny. Transpower's customers can now be assured that prices are appropriate as, under the settlement, investments will be subject to a greater level of scrutiny. "This means that consumers will not pay for inefficient spending or unnecessary investments," said Ms Rebstock.

The Commission will consult on the wording of the Thresholds Notice to ensure it is consistent with the intent of the final decision and the terms of the settlement. Submissions on the proposed threshold notice can be made to the Commerce Commission by 5pm Monday 19 May 2008. After the Commission has considered the views of interested parties, it will Gazette the new thresholds applicable to Transpower.

The document that sets out the Commission's reasons for its decision not to control Transpower's transmission services is available on the Commission's website under Industry Regulation - Electricity -Electricity Lines Businesses Targeted Control -Transpower Post-Breach Inquiry - Final decision not to declare control.

"The Commission acknowledges that the Transpower Board and management have worked positively with the Commission to achieve an outcome that is consistent with the objectives of the Purpose Statement as set out in s 57E of the Commerce Act. In this regard, the settlement safeguards the long-term interests of consumers and ensures Transpower can meet its obligations to invest in and maintain the national grid," said Ms Rebstock.

Transpower is the State Owned Enterprise that owns and operates the national grid. As a natural monopoly, Transpower is regulated by the Commerce Commission and the Electricity Commission. The company has 45 customers, made up of 35 electricity lines businesses and 10 directly connected industrial plants.

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 rulestermed 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 may 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.
Thresholds. The Commission is required under section 57G of the Act to set thresholds for the declaration of control. The thresholds that were in place for Transpower included a price and quality threshold, set annually. Each of the electricity distribution businesses, including Transpower, are required to provide an annual compliance statement which sets out whether or not they have complied with the thresholds set by the Commission. In the event that a business breaches its threshold, the Commission will determine whether or not to declare control of some or all of its services.

New Zealand's electricity industry has four main parts: generation, transmission, distribution, and retail. The Commerce Commission regulates the prices charged by transmission company Transpower, and by the 28 electricity distribution companies. The Commission does not regulate the prices charged by generation or retail companies.

In response to breaches of its price path thresholds at both the first and second assessments (2003 and 2004), and following Transpower New Zealand Limited's November 2005 announcement of its decision to increase prices by 19.1%, on 22 December 2005 (and on average by 13% over the next five years) the Commerce Commission published in the New Zealand Gazette its intention to make a declaration of control under Part 4A of the Commerce Act 1986, in respect of transmission services supplied by Transpower.
In March 2006, Transpower's Board indicated its preference to resolve the Commission's post-breach inquiry by offering an administrative settlement. In response, the Commission indicated that it would be prepared to delay its decision on whether to declare control, only if Transpower were to suspend the announced 19% price increase which was to become effective on 1April 2006.

On 27 March 2006, Transpower formally agreed to suspend the 19% price increase, and established a rebating system that backdated increases to the date the increase was initiated (1 April 2006). This did not cancel the increase, but suspended it pending the outcome of the Commission's investigation. The Commission accepted this interim measure and on 31 March 2006 announced its decision to postpone publishing its final determination pending settlement discussions.

On 31 August 2007, the Commission received an offer of administrative settlement from Transpower (Revised Offer). This followed a long period of discussion between the Commission and Transpower regarding an appropriate offer, and analysis by the Commission of information provided by Transpower. This also followed three previous offers (11 August 2006, 6 October 2006, and 31 May 2007), which the Commission did not consider were acceptable for consultation.

The Commission analysed Transpower's 31 August 2007 offer and published its preliminary view that it should accept the offer instead of placing Transpower's transmission services under regulatory control.

Having reviewed the submissions received on its draft decision, the Commission considered it necessary to negotiate some additional changes to the offer. Transpower agreed to make these changes, and the Commission has accepted a revised offer incorporating the changes.

The revised offer, received on 11 April 2008, provides that its price path threshold be replaced with three alternate thresholds to apply for until 30 June 2011, and that the price increases announced for April 2006 and subsequent years, be reduced. The three new thresholds are:
- a new transmission (revenue requirement) threshold;
- a new transmission (non-Part F) capital expenditure threshold; and
- a new system operator services threshold.

The purpose of the three thresholds is to provide clear principles and limits that Transpower is required to adhere to in order to determine its revenue requirements; capital requirements; and adherence to the terms of the relevant systems operator services agreement.

A fourth threshold will maintain the current quality threshold set out in the Commerce Act (Transpower Thresholds) Notice 2007.

The implication of Transpower's proposal on overall prices is that for:
a) 2006/07, the 19% price increase announced in 2005 is reduced to a 10.2% increase. As the full 19% was rebated, the revenue that this price increase generates will be applied against the Economic Valuation (EV) Accounts to form part of the balance as at 30 June 2007;
b) 2007/08, the average 13% price increase forecast in 2005 is reduced to an 8.1% increase. The gains arising from this price increase will be applied against the EV Accounts to form part of the balance as at 30 June 2008. The EV Accounts are designed to ensure that over time Transpower does not over or under recover revenue from customers.
c) 2009 to 2011, Transpower will determine its annual revenue requirement, constrained by the various building block components as outlined in the settlement offer. This includes using:
- a base operating expenditure of $199.61million indexed at Consumers Price Index-0 (CPI-0) each year;
- a Weighted Average Cost Of Capital (WACC) at 7.8%;
- an adjustment for under or over-recovery using the EV Account mechanism;
- a requirement that only approved assets, once commissioned, can be entered into the asset base using depreciated historic cost; and
- tax calculated using the tax payable approach (with the addition of an interest tax shield).


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