Final decisions: electricity distributor price-quality paths

Commission releases final decisions on price-quality paths for electricity distributors

Media Release

Issued 28 November 2014
Release No. 53

Commission releases final decisions on price-quality paths for electricity distributors

The Commerce Commission has issued its final decisions on the default price-quality paths for 16 electricity distributors (lines companies) for the period 2015-2020.

The price-quality paths set out the maximum revenue that these electricity distributors are allowed to earn as well as the minimum quality standards they must meet. The decision will take effect from 1 April 2015 and applies until 31 March 2020.

Commerce Commission Deputy Chair Sue Begg said the final decision strikes the right balance between limiting the ability of suppliers to earn excessive profits and ensuring reliability of supply for consumers.

“The final pricing decisions are fairly close to those announced in the draft decision in July, which shows that the reset process is working as intended in providing a degree of predictability for distributors. This is important in ensuring distributors have the right incentives to innovate, invest and improve their efficiency for the benefit of New Zealand.”

While on average nationwide distribution prices will see a modest decrease of 1.1%, there is significant regional variation. The estimated impact on prices for the 2015/16 year for individual distributors varies from an increase of 12.5% through to a decrease of 14.0%. From 2016 through to 2020 most distributors will only be allowed to increase revenues by a rate equivalent to the Consumer Price Index (CPI), while a small number are entitled to larger increases to balance their costs.

As noted in the decision, the two largest increases (12.5% for Alpine Energy and 8.9% for Centralines) are a result of an under-recovery in the previous regulatory period. The Commission has placed caps on increases to allow this under recovery to be spread over the 2015-2020 period.

The final decisions reflect the reduction in the weighted average cost of capital (WACC) used for regulated business announced by the Commission in October.

“Today’s decision also features a refined quality incentive scheme that links performance to revenue and a new incentive for electricity distributors to improve energy efficiency by investing in new technology,” Ms Begg said.

The Commission only regulates the average prices distributors charge. Distributors have flexibility in how they set prices for different customers as long as they meet the average across their total business. The actual price changes for individual consumers may differ from the average change in prices the Commission has allowed.

The final decision on the default price-quality path for electricity distributors and a regionalised map detailing the changes can be found at www.comcom.govt.nz/default-price-quality-path-from-2015.

The Commission would like to thank those who submitted on the draft decision, as their contributions were valuable in shaping the final determination announced today.

Background

What is a default price-quality path?
Price-quality regulation is a type of regulation under Part 4 of the Commerce Act 1986 that applies to 17 electricity distribution businesses across New Zealand. Default price-quality paths set the following:
• the maximum prices/revenues that are allowed at the start of the regulatory period (ie starting prices)
• the annual rate at which all electricity distributors' maximum allowed prices can increase (ie rate of change) - this is expressed in the form of 'CPI-X', meaning prices are restricted from increasing each year by more than the rate of inflation less a certain number of percentage points (termed an 'X-factor')
• the minimum service quality standards that must be met.
Any distributor who believes the default price-quality path does not suit their current circumstances can apply for a customised price-quality path.
According to the latest information available from the Electricity Authority, distribution costs make up 23.2% of the average power bill.

Which electricity distribution businesses are covered by this final decision and what is the result for each?

Why are not all electricity distribution businesses covered by this final decision?
The final decision does not apply to Orion New Zealand Limited, which applied for and was provided with a customised price-quality path that addressed their change in circumstances after the Canterbury earthquakes. Electricity distribution businesses which are consumer-owned do not have default price-quality paths. This is because their consumers have input into their business to influence price and quality. There are 12 such electricity distributors:

How will the quality incentive scheme work?
In addition to price limits, the price-quality path sets quality of service standards that distributors must meet. These are based on the frequency and duration of outages, with standards set on ten years of historic performance. Major interruptions caused by natural events like storms are not counted. The Commission may take enforcement action when standards are breached in two years out of three. The new quality incentive scheme complements the standards through a reward/penalty system. Targets will be set based on historic performance and the financial reward for outperforming them is an increase of up to 1% in that distributor’s maximum allowable revenue (MAR). Similarly, the penalty for penalty for performing worse than the target will result in a reduction of up to 1% of MAR.

How are you incentivising distributors to make energy efficiency gains?
The Commission’s final determination provides improved incentives for distributors to undertake energy efficiency and demand-side management initiatives. Distributors will be compensated in the short-term when, as a result of investing in energy efficiency initiatives, they ultimately lose revenue due to decreased demand.

© Scoop Media