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Commission settles with Horizon Energy

Commerce Commission settles with Horizon Energy for earning almost $650K more than allowed under regulation

The Commerce Commission has reached an out-of-court settlement with Horizon Energy Distribution Limited (Horizon Energy) for earning more than its price path allowed in 2011/12. For the year ended 31 March 2012, Horizon Energy exceeded its price path by $645,686 or 3%.

The price path restricts the amount of revenue an electricity distributor can earn in any given year and is determined under Part 4 of the Commerce Act.

Under the settlement agreement, Horizon Energy will have to reduce its future earnings. In 2015/16, Horizon Energy will reduce the amount it can earn by at least $727,934 to compensate for the amount it over charged in the 2011/12 year. This amount was calculated by taking into account the gain to Horizon Energy as a result of the breach, the benefit of having the use of this extra revenue for a number of years and the fact that Horizon Energy made attempts to remediate some of the breach.

“Horizon Energy’s breach was not intentional, and occurred as a result of variations between forecasts used to set prices and outcomes, and calculation errors” said Commerce Commission Deputy Chair Sue Begg. “The settlement was therefore designed to remove the amount Horizon Energy gained from exceeding its price path, rather than to penalise them.”

“We are currently consulting on changes to the price path regime that will reduce the risk of electricity distributors unintentionally exceeding their price paths in the future,” said Ms Begg.

“We are pleased that we were able to resolve this matter without having to take court proceedings,” said Ms Begg. “And we are pleased that Horizon Energy has reported compliance with the price path in 2012/13 and 2013/14.”

This is the second settlement agreement the Commission has reached with an electricity distributor for breaching its price path. The Commission reached a similar settlement with Wellington Electricity in December 2013, after it breached its price path by $116,757 for the year ended 31 March 2012.

The Commission has now resolved all reported breaches of price paths by electricity distribution companies.

Background
Horizon Energy is the electricity distributor that delivers electricity to around 25,500 homes and businesses in the Eastern Bay of Plenty.

Under Part 4 of the Commerce Act 1986, the Commission has a role in regulating the price and quality of goods and services in markets where there is little or no competition, and little or no likelihood of a substantial increase in competition. Through regulation we aim to get the right balance between, amongst other things, providing incentives for regulated businesses to invest, and ensuring that household and business consumers are charged prices that align with the cost of the goods or services they receive.

Part 4 of the Act provides that all suppliers of electricity distribution services are subject to default or customised price-quality regulation unless they are exempt. Horizon Energy is not exempt so is subject to a default price-quality path determination that sets a price path they must comply with. The price path limits the total amount that Horizon Energy may charge for regulated services.

Horizon Energy is required to provide the Commission with an annual self-assessment against the price path following each annual assessment period, called a compliance statement.

On 29 May 2012, Horizon Energy submitted its compliance statement for the assessment period beginning on 1 April 2011 and ending on 31 March 2012, stating that it breached its price path by $645,686 or 3% of allowable notional revenue.

The causes of the breach included factors associated with:
• the timing and forecasting of avoided transmission costs as a result of embedded generators operating on Horizon Energy’s network
• forecasting of local authority rates and regulatory levies
• forecasting of movements in quantities following a pricing restructure
• setting standard prices prior to finalising pricing for non-standard customers
• forecasting 2012 allowable notional revenue
• errors in calculating the forecast compliance position.

The Commission considers, and Horizon Energy has acknowledged, that the breach of its price path for the 2012 assessment period amounts to a contravention of a price-quality requirement applying to regulated goods or services as described in section 87(1)(a) of the Commerce Act.

In December 2013, the Commission reached a similar agreement with Wellington Electricity, which also breached its price path for the year ending 31 March 2012: www.comcom.govt.nz/regulated-industries/electricity/electricity-media-releases/detail/2013/commerce-commission-reaches-settlement-with-wellington-electricity-on-its-2012-price-path-breach.

The settlement agreement with Horizon Energy can be viewed at: www.comcom.govt.nz/default-price-quality-path-enforcement-responses.


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