Additional scrutiny of Transpower's price-quality path

Additional scrutiny ahead of Transpower's price-quality path application

An independent verifier has been appointed to scrutinise key components of Transpower’s proposal for its price-quality path for the 5 years from 2020 ahead of it being submitted to the Commerce Commission for approval.

As Transpower has a monopoly over the national electricity transmission grid, the Commission sets the maximum revenue it can earn from its customers and minimum standards of quality it must meet. This happens once every 5 years, with the next reset taking effect in 2020.

“Transpower has agreed to pilot using an independent verifier ahead of submitting its proposal. The verifier will be able to frontload work, testing the assumptions underpinning Transpower’s capital and operating expenditure and demand forecasts,” Commission Deputy Chair Sue Begg said.

“The use of a verifier should result in Transpower submitting a better quality and more robust proposal. This will help us focus our review of Transpower’s proposal on the areas which require greater scrutiny.”

The verifier Transpower has engaged is Synergies Economic Consulting, with GHD providing engineering support. Their report will accompany Transpower’s proposal to the Commission in December. The verifier will also attend meetings with the Commission to help inform its evaluation of the proposal.

“The use of an independent verifier worked well for Powerco’s recent application for a major network upgrade. There, the verifier’s scrutiny resulted in the electricity lines company reducing its capital and operating spending forecast by around 5%. This resulted in a better outcome for consumers who ultimately pay for the investment through their power bills,” Ms Begg said.

If the verification pilot is successful, the Commission expects to consult on whether it should be made mandatory for future Transpower price-quality resets.

The deed and terms of reference for the verifier are available on our website.

The Commission expects to release a process paper for the reset later this year and make its final decision on Transpower’s 2020-2025 price-quality path by the end of 2019. The reset will take effect from1 April 2020.

Background
Transpower
Transpower is a State-Owned Enterprise that owns and operates the national high voltage electricity transmission network. As a system operator, it also manages the real-time coordination of the electricity market. As a monopoly supplier of electricity transmission services, the revenue it is allowed to earn from its customers and quality standards it must meet are regulated under Part 4 of the Commerce Act. The Electricity Authority estimates that transmission charges make up about 10% of a typical household electricity bill.

Independent verifier
The verifier has a duty of care to the Commission (as well as to Transpower) to act as an independent expert and with reasonable care when carrying out its scrutiny.

Relationship to the Capex IM review
The Commission decided to pursue a verification pilot for Transpower’s RCP3 proposal as part of the Commission’s review of the rules relating to Transpower’s capital expenditure (as set out in the Transpower Capital Expenditure Input Methodology Determination). More information on that decision is available here.

Regulation of natural monopolies
Price-quality path regulation is designed to achieve similar outcomes to competitive markets so that consumers benefit in the long term. This includes making sure that monopoly suppliers are limited in their ability to earn excessive profits and have incentives to innovate and invest in their infrastructure and deliver services at a quality their consumers’ expect.

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