Lines Businesses: Commission recommendations
Issued 22 April 2005 2004-05/ 120
Electricity Lines Businesses: Commission recommends best practice for asset management plans & consumer engagement
The Commerce Commission today released a report that presents best practice recommendations for the preparation of asset management plans by electricity distribution businesses, and reviews the 2004 plans prepared by those businesses. In addition, the report recommends best practice ways for those businesses to engage with electricity consumers concerning the trade-offs between distribution prices and service quality, as well as reviewing current practices.
Commission Chair Paula Rebstock stressed that sound asset management planning is an integral part of ensuring that distribution businesses improve efficiency and provide services at a quality that reflects consumer demands.
“Two-way communication with consumers on service levels and line charges should be a key element of that planning process,” said Ms Rebstock. “In addition, the public disclosure of asset management plans contributes to the transparency of distribution business decisions and performance—an important consideration given that those businesses are monopolies.”
The purpose of the report is to recommend best practice for preparing asset management plans and engaging with consumers in the future. Based on the report’s best practice recommendations, the Commission proposes enhancing the current requirements for the preparation of asset management plans, and introducing guidelines for consumer engagement, to take effect from next year.
“In the future, distribution businesses identified as falling short of best practice will be expected to develop more effective processes for understanding and responding to consumer preferences,” Ms Rebstock said.
The Commission is seeking feedback on the report from interested parties. Submissions on the report are invited by Friday, 3 June 2005.
The report was prepared for the Commission by Parsons Brinckerhoff Associates in conjunction with Saunders Unsworth Ltd., and is entitled: Electricity Distribution Business Asset Management Plans and Consumer Engagement: Best Practice Recommendations, April 2005. The report can be found on the Commission’s website, www.comcom.govt.nz.
Part 4A of the Commerce Act 1986 (the Act), which commenced on 8 August 2001, establishes a regulatory regime for large electricity lines businesses (distribution businesses and Transpower). Under Part 4A, the Commission must develop an information disclosure regime requiring lines businesses to disclose information concerning their business. The Commission issued its initial information disclosure requirements on 31 March 2004. These requirements—including the provisions relating to the preparation of asset management plans—largely replicated the now-revoked Electricity (Information Disclosure) Regulations 1999 administered by the Ministry of Economic Development. On 23 December 2004, the Commission initiated a full review of the disclosure requirements, beginning from first principles.
The purpose of the information disclosure regime, as set out in section 57T of the Act, is to promote the efficient operation of markets directly related to electricity distribution and transmission services by ensuring that lines businesses make publicly available reliable and timely information about the operation and behaviour of those businesses, so that a wide range of people are informed about such factors as profits, costs, asset values, price (including terms and conditions of supply), quality, security, and reliability of supply of those businesses.
Disclosed information may include, without limitation, plans and forecasts (such as those presented in asset management plans), financial and non-financial performance measures, financial statements, asset values and valuation reports, prices and pricing methodologies, contracts, transactions with related parties, as well as policies and methodologies in these or other areas. The Commission is required to publish a summary and analysis of the information disclosed.
Part 4A also establishes a targeted control regime for lines businesses. The Commission is required, among other things, to set thresholds and assess the performance of lines businesses against those thresholds. The Commission has set a price path threshold and a quality threshold. The quality threshold has two primary assessment criteria. The first requires no material deterioration in quality, and the second requires lines businesses to meaningfully engage with consumers to determine their demand for service quality. If one or more of the thresholds are breached by a lines business, the Commission could further examine the business through a post-breach inquiry and, if warranted, control its prices, revenue or quality.
The purpose of the targeted control regime, as set out in section 57E of the Act, is to promote the efficient operation of markets directly related to electricity distribution and transmission services through targeted control for the long-term benefit of consumers, by ensuring that suppliers—
(a) are limited in their ability to extract excessive profits; and
(b) face strong incentives to improve efficiency and provide services at a quality that reflects consumer demands; and
(c) share the benefits of efficiency gains with consumers, including through lower prices.
Commission media releases can be viewed on its web site www.comcom.govt.nz.