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Com Com determines Orion’s customised price-quality path

Commerce Commission determines Orion’s customised price-quality path

Issued 29 November 2013, Release No. 44

The Commerce Commission has determined Orion’s customised price-quality path for 2014-2019, which takes into account Orion’s circumstances following the Canterbury earthquakes in 2010 and 2011. 

In its final decision, the Commission has allowed Orion to increase prices by up to 8.4 percent from 1 April 2014, which will result in an average increase of approximately $4.80 per month to a typical household customer. Further annual increases at CPI plus one percent will be allowed until 2019. The quality standards require the reliability of supply to gradually improve over the period to 2019, towards pre-earthquake levels.

“This is a good outcome for both Orion and its consumers”, said Commerce Commission Deputy Chair Sue Begg. “The price path provides a level of forecast expenditure that allows Orion to invest in and operate its network for the long term benefit of its consumers”, said Ms Begg.

These price increases are lower than those Orion sought in its proposal of 15 percent, or $8.50 per month to a typical household customer, and CPI plus 1.2 percent increases up until 2019.

Orion’s proposal included a sum of $86.3 million to compensate it for the effects of the Canterbury earthquake prior to its new price-quality path being implemented. The Commission has not allowed Orion any compensation for lost revenue, but given the exceptional circumstances has agreed to Orion recovering $34.8 million in additional costs that it incurred following the earthquakes.

“We have gone through a rigorous process to assess Orion’s proposal”, said Ms Begg.  “This has included reviews by consultants with significant executive and engineering experience in the electricity lines industry.”

The customised price-quality path provides an allowance for operating and capital expenditure over the regulatory period. Although the allowance is less than Orion proposed, it is significantly higher than Orion has spent in the past.

“Now that the price-quality path is set, it is over to Orion to decide how much it spends and what projects it undertakes to manage its network. The amount Orion spends will affect the returns it earns”, said Ms Begg. Ms Begg noted that Orion has a financial incentive to achieve efficiencies because it can earn higher returns by spending less, but Orion must still meet the reliability limits the Commission has set.

This determination takes effect for Orion’s pricing for the year commencing 1 April 2014. The Commission’s full report is available at www.comcom.govt.nz/orion-cpp

Background
Orion New Zealand Limited operates one of the largest electricity distribution networks in New Zealand, covering 8,000 square kilometres and providing electricity lines services to 190,000 homes. It is owned by Christchurch City Council (89.3%) and Selwyn District Council (10.7%). 

In markets where there is little or no competition, the Commerce Commission regulates the price and quality of goods and services to benefit consumers and build a more competitive and productive economy. Non-exempt suppliers of electricity lines services are subject to price-quality path regulation, under Part 4 of the Commerce Act 1986, and are subject to requirements to disclose information about their performance.

Price-quality path regulation is designed to mimic the effects seen in competitive markets so that consumers benefit in the long term. This includes making sure businesses have incentives to innovate and invest in their infrastructure, and to deliver services efficiently and reliably at a quality that consumers expect, while limiting businesses’ ability to earn excessive
profits.

Further information in relation to Orion’s customised price-quality path proposal can be viewed at www.comcom.govt.nz/orion-cpp

Customised Price-Quality Proposal (CPP) Process

The Commerce Commission received the proposal for a customised price-quality path (CPP) from Orion on 20 February 2013. This proposal is a result of Orion’s extraordinary circumstances following the Canterbury earthquakes in 2010 and 2011.

The Commission announced its draft decision on 14 August 2013. All submissions, process papers, issues papers and expert reports are published on the Commerce Commission website.  

ENDS

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