Commission to begin input methodologies review

10 June 2015

Commission issues notice of intention to begin input methodologies review

The Commerce Commission has today issued its notice of intention to begin the review of input methodologies under Part 4 of the Commerce Act.

Input methodologies are the rules, requirements and processes that apply to the Commission and the sectors it regulates. They were determined for specified airport services, gas pipelines and electricity distribution and transmission in December 2010.

The Commission is required to review each input methodology no later than seven years after publication.

Commission Chair Dr Mark Berry said affected stakeholders had been consulted on the Commission’s proposal to begin the review early.

“We intend to review all the input methodologies first set in 2010 and are aiming to complete this work by December 2016. Our intent to finish this work early has the benefit of giving the affected sectors greater predictability and certainty in their planning,” Dr Berry said.

“This review provides an opportunity to reduce compliance costs and regulatory complexity. The next step in this process will be to define any problems with the input methodologies, which will give us a much clearer picture of what the review should focus on and allow us to confirm our approach. We look forward to working closely with our stakeholders throughout this process.”

The Commission expects to issue a paper inviting interested parties to contribute to problem definition later this month, before hosting a forum on 29 and 30 July in Wellington to discuss the problems this review needs to address. The Commission will reassess the indicative December 2016 completion date after this first problem definition phase.

Further information on the input methodologies review can be found on the Commission’s website.

Background
What are the Input Methodologies (IMs)?
The IMs are a range of upfront rules, requirements and processes that apply to regulation in New Zealand. Under Part 4 of the Commerce Act, the Commission is required to set and apply IMs to regulated electricity lines services (distribution and transmission), gas pipelines (distribution and transmission) and specified airport services.

What is the purpose of the IMs?
As section 52R of the Act stipulates, the purpose of the IMs is to promote certainty for suppliers and consumers of regulated goods and services in relation to the rules, requirements and processes applying to regulation.

What do the IMs cover and how are they implemented?
The IMs cover matters such as the valuation of assets, the cost of capital, the treatment of taxation, and the allocation of costs. They are implemented through different regulatory instruments, such as determinations on the maximum prices suppliers of regulated goods and services can charge or the information they must disclose.

What is the IM review?
The IM review is the opportunity to assess whether there are any necessary changes to the IMs to more effectively promote the long term benefit of consumers. We do this in consultation with all stakeholders. The Commerce Act requires the Commission to review each IM within seven years of its date of publication and, after that, at intervals of no more than seven years.

Why is the Commission reviewing the IMs earlier?
Most of the IMs currently in force were first published in December 2010. Our proposal is to start the review now, with an indicative completion date of December 2016. That would be one year earlier than the seven years contemplated in the Act.

Our intention to complete the review in December 2016 would enable consumers and suppliers to benefit from any IM changes through:

• The May 2017 reset of the default price-quality paths for gas pipeline businesses
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• The expected July 2017 price setting events by Auckland and Christchurch airports, with Wellington airport to follow in early 2019
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• The November 2019 resets of the price-quality paths for electricity distributors and Transpower.
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We have consulted on the timing for the review. Stakeholders broadly agree with our proposal to start the review now.

However, we want the issues to drive the process of the IM review. We will re-assess our indicative December 2016 completion date if it becomes evident at the early stages of the review that the issues merit a longer or shorter process to reach a satisfactory solution.

What is the Capex IM and why is it out of scope of the IM review?
The Transpower Capital Expenditure Input Methodology (Capex IM). We consider it appropriate to defer the review of the Capex IM. The Capex IM was originally determined in January 2012, separately from the other IMs, has recently been amended, and does not substantially drive decisions in relation to the other IMs.

What is the forum and how does it differ from a formal Commission conference?
The intention is for the forum to allow open discussion and exchange of information between all parties. It will assist stakeholders identify and define potential problems with the IMs, and inform their submissions to our Invitation to contribute to problem definition (invitation paper). This will happen before submissions are made on the invitation paper.

The forum is different from a conference (as referenced in section 52V of the Act). This contrasts with a conference where Commissioners lead the questioning of submissions (and are typically held after submissions are made). Commissioners may attend the forum but principally as observers. Commission staff will participate in the forum.

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