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Commerce Commission draft decision on Transpower expenditure

Commerce Commission releases draft decision on Transpower’s expenditure allowances for 2015-2020

16 May 2014

The Commerce Commission has today released its draft decision on the allowances for operating and base capital expenditure that will be used to set Transpower’s price path for the period from 1 April 2015 to 31 March 2020. The price path sets the maximum revenues Transpower can recover from customers each year.

The Commission estimates this will allow Transpower to increase its total revenue broadly in line with inflation over the next regulatory period. The price path will be finalised later in the year when the cost of capital for the regulatory period will be set and other components of the path finalised.

The Commission has gone through a rigorous process to test Transpower’s expenditure proposal. As a result of this process it has reduced Transpower’s proposed operating expenditure allowance by 6.5% and the proposed capital expenditure allowance by 12.3%.

Commerce Commission Deputy Chair Ms Sue Begg said the allowances the Commission has proposed are reasonable for Transpower to deliver its work programme.

“Proposed reductions mostly concern work that was not well justified.”

“We have reached our views following a careful consideration of Transpower’s proposal, which included reviews by independent industry experts.”

The quality measures and incentive regime Transpower has proposed have been accepted by the Commission but more challenging targets for some of the measures have been set. Two sets of measures will be linked to revenue, meaning that Transpower will be rewarded, or penalised, depending on the quality of service it provides. The amount of revenue at risk is $10 million each year.

The Commission is seeking feedback on its draft decision and Transpower’s proposal by 27 June 2014, and expects to finalise its decision by 29 August 2014.

The Commission’s draft decision, consultant reports and Transpower’s proposal are available on the Commission’s website www.comcom.govt.nz/transpowers-price-quality-path-from-2015-to-2020

Background
Transpower New Zealand Limited is the owner and operator of the national grid. As system operator it also manages the real time coordination of the electricity market. Transpower is a State Owned Enterprise.

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.

Since April 2011, Transpower has been regulated under Part 4 of the Commerce Act 1986 by way of individual price-quality regulation. Under individual price-quality regulation, the Commission sets the maximum revenues that Transpower is allowed to earn from its customers and the quality standards it is required to meet for a regulatory period. A regulatory period typically lasts for five years.

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 suppliers 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.

Transpower's maximum allowable revenues are based on operating and base capital expenditure approved by the Commission before the start of the regulatory period, as well as the existing asset base, the allowed rate of return on assets, and the additional capital expenditure approved during the regulatory period for major capital projects. Transpower also has a range of incentives mechanisms which encourage efficiency by providing Transpower the opportunity to earn additional revenue.

Transpower is also regulated by way of information disclosure.

The individual price-quality path process
On 2 December 2013, Transpower proposed operating and base capital expenditure allowances, and grid output measures for 2015 - 2020. The expenditure allowances are used to calculate maximum revenues, while quality standards comprise a subset of grid output measures.

On 10 February we published an issues paper seeking submissions and cross-submissions on our initial view of the proposal. All papers, submissions and cross-submissions are published on the Commission’s website.

We expect to publish our final determination that sets out Transpower’s maximum revenues, quality standards and grid output measures by 31 October 2014. The determination will take effect from 1 April 2015.

ENDS

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