Commerce Commission Sets Gas Prices And Quality Standards

Media Release

Issued 28 February 2013

Release No. 63

Commerce Commission Sets Prices And Quality Standards For Gas Pipeline Services

The Commerce Commission has released its final decision on the first default price-quality paths for gas pipeline services.

These paths set the maximum prices and minimum standard of quality that gas pipeline businesses must comply with from 1 July this year. The affected businesses and their respective price adjustments are set out below. An estimate of the potential effect on residential customers’ gas bills is attached.

The overall price adjustments from 1 July 2013 are: a 2.0% increase for GasNet (distribution), a 4.0% increase for Powerco (distribution), an 18% reduction for Vector Limited (distribution), a 1.2% reduction for Maui Development Limited (transmission), and a 29.5% reduction for Vector Limited (transmission).

The Commission has limited future price increases to no more than the rate of inflation from 2014 through to 2017. Commerce Commission Deputy Chair Sue Begg said that in setting the price-quality paths, the Commission has aimed to achieve an appropriate balance between providing incentives for suppliers to invest in their infrastructure services, and ensuring that customers are charged prices that are better aligned with the cost of the services they receive.

“This is the first time that some of these businesses have been subject to price and quality regulation. We are bringing the prices these businesses can charge their customers more into line with the costs of providing those services,” said Ms Begg.

“Although substantial price reductions are necessary for Vector, we do not expect this to limit its ability to maintain and invest in its network. The default paths provide for increases in investment of up to 20% above what a business has spent historically,” she said.

Ms Begg said the gas pipeline companies could apply to the Commission for a customised pricequality path if the default price-quality paths did not meet their individual circumstances. “We’d expect that companies with a default price-quality path that didn’t meet their need for investment would come to the Commission for a customised price path as provided for by the legislation.”

Ms Begg noted that the input methodologies, which influence the default price-quality paths, are currently under challenge in the High Court. The outcome of this challenge could affect the price adjustments provided by the default price-quality paths.

The decision on the default price-quality paths for gas pipeline services can be found at: http://www.comcom.govt.nz/initial-default-price-quality-path/

Click here to read: Estimated_impact_on_customer_bills_from_gas_default_pricequality_paths.pdf

Background

What are price-quality paths?

Price-quality paths are a form of regulation applied to certain businesses that are regulated under Part 4 of the Commerce Act. They are intended to influence the behaviour of those businesses by setting the maximum average price or total allowable revenue that the businesses can charge.

They also set standards for the quality of services that each business must meet. This ensures that businesses do not have incentives to reduce quality to maximise profits under their price-quality path. For gas pipeline services, there are two types of price-quality paths that suppliers can have. All businesses start off on a ‘default’ path which is generic in nature to provide a low cost form of regulation. If the default path does not suit their particular circumstances however, a business can apply for a ‘customised’ price-quality path. Customised price-quality paths use more business specific information, and rely on more in-depth audit, verification, and evaluation processes. What’s the difference between transmission and distribution?

Gas transmission services transport gas to large users of natural gas such as big industrial plants, electricity generators and the gas distribution businesses. Gas distribution services transport gas to smaller users (including domestic consumers) from the gas transmission pipelines.

What are input methodologies?

Input methodologies are the upfront rules and processes of regulation set by the Commission which underpin Part 4 regulation in the Commerce Act. For example, input methodologies concern things such as the valuation of assets, the treatment of taxation, the allocation of costs, and the cost of capital.

To set price-quality paths (or any other form of Part 4 regulation), we are required to apply input methodologies where relevant. We first published input methodologies for gas pipeline businesses in December 2010. Since then we have re-determined these input methodologies in September 2012 to specify the existing methodologies for asset valuation, tax, and cost allocation as also applicable to default price-quality paths. We also made minor amendments to the input methodologies in February 2013.

For more information on input methodologies, including our reasons, visit http://www.comcom.govt.nz/input-methodologies-2/.

How have prices and quality been regulated previously?

These final default price-quality paths mark the first time that gas pipeline businesses have been subject to price-quality regulation under the Commerce Act (Part 4).

For Maui Development Limited and GasNet, it will be the first time they have been subject to any regulatory controls on their prices or quality. Powerco and Vector (certain services only) have been previously regulated under the 2008 Gas Authorisations. These Authorisations were the result of the 2004 Gas Control Inquiry and expired in July 2012.

For more information on the Gas Authorisations visit: http://www.comcom.govt.nz/vectorpowerco-authorisation/

ENDS

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