Commission To Accept Settlement Offer
Commission To Accept Settlement Offer
The Commerce Commission has announced today its decision to accept Transpower's administrative settlement offer instead of placing Transpower's transmission services under regulatory control.
Commerce Commission Chair Paula Rebstock said "This administrative settlement provides significant benefits to consumers through lower prices. Under the settlement the 19.1% price increase announced by Transpower in 2006 has been reduced to 10.2%. Transpower's estimated average price increase for 2007/08 has been reduced from 13% to 8.1%, and in 2008/09 from 13% to 6.3%."
This settlement, as compared with the previously announced price increases, represents a saving to consumers over the three years to 2008/09 of approximately $240 million; whilst ensuring Transpower undertakes the investments necessary to maintain the national grid," said Ms Rebstock. Furthermore, the Commission anticipates that further efficiencies will be achieved in the next two years under the settlement.
"This is an excellent outcome for consumers as Transpower will undertake the necessary investments in the national grid whilst charging prices significantly lower than it announced before the Commission's intervention," Ms Rebstock said.
Transpower's existing price path threshold will be replaced with three new thresholds. "These new thresholds provide clear principles and limits for Transpower to adhere to when setting its annual revenue requirement which will ensure that price changes are justified," said Ms Rebstock. For the years 2010 and 2011, Transpower will determine its annual revenue requirement against the method specified in the settlement offer. "As well as more appropriate pricing, Transpower now has strong incentives to invest and make further efficiency improvements by outperforming its thresholds. This is consistent with the objectives of the regulatory regime." Transpower's existing quality threshold will continue to apply.
Further reviews to improve operational efficiency will place downward pressure on costs. Likewise, significantly more expenditure is now subject to Electricity Commission scrutiny. Transpower's customers can now be assured that prices are appropriate as, under the settlement, investments will be subject to a greater level of scrutiny. "This means that consumers will not pay for inefficient spending or unnecessary investments," said Ms Rebstock.
The Commission will consult on the wording of the Thresholds Notice to ensure it is consistent with the intent of the final decision and the terms of the settlement. Submissions on the proposed threshold notice can be made to the Commerce Commission by 5pm Monday 19 May 2008. After the Commission has considered the views of interested parties, it will Gazette the new thresholds applicable to Transpower.
The document that sets out the Commission's reasons for its decision not to control Transpower's transmission services is available on the Commission's website www.comcom.govt.nz under Industry Regulation - Electricity -Electricity Lines Businesses Targeted Control -Transpower Post-Breach Inquiry - Final decision not to declare control.
"The Commission acknowledges that the Transpower Board and management have worked positively with the Commission to achieve an outcome that is consistent with the objectives of the Purpose Statement as set out in s 57E of the Commerce Act. In this regard, the settlement safeguards the long-term interests of consumers and ensures Transpower can meet its obligations to invest in and maintain the national grid," said Ms Rebstock.
Background
Transpower
Transpower is the
State Owned Enterprise that owns and operates the national
grid. As a natural monopoly, Transpower is regulated by the
Commerce Commission and the Electricity Commission. The
company has 45 customers, made up of 35 electricity lines
businesses and 10 directly connected industrial
plants.
Control
If companies breach price or quality
thresholds set for them, the Commission can consider
imposing control on their electricity services. If the
Commission makes a declaration of control it can then set
rulestermed an "authorisation"governing the prices, revenue
and/or quality of those controlled services for up to five
years. While the company may face penalties if it does not
comply with those rules, the operation of the company will
continue to be undertaken by its management and Board of
Directors as normal. Control is not intended to compensate
consumers for any past overcharging but to put in place
constraints on the controlled business's future
performance.
Administrative settlement
As an
alternative to control being imposed, a company may reach an
administrative settlement with the Commission. This usually
involves the Commission and the company agreeing to pricing
levels and quality measures for a period of up to five
years. The result is that prices and quality are maintained
at levels the Commission considers appropriate for the long
term interests of consumers, without the need to impose
control, which can be intrusive and costly.
Thresholds.
The Commission is required under section 57G of the Act to
set thresholds for the declaration of control. The
thresholds that were in place for Transpower included a
price and quality threshold, set annually. Each of the
electricity distribution businesses, including Transpower,
are required to provide an annual compliance statement which
sets out whether or not they have complied with the
thresholds set by the Commission. In the event that a
business breaches its threshold, the Commission will
determine whether or not to declare control of some or all
of its services.
New Zealand's electricity industry has four main parts: generation, transmission, distribution, and retail. The Commerce Commission regulates the prices charged by transmission company Transpower, and by the 28 electricity distribution companies. The Commission does not regulate the prices charged by generation or retail companies.
Timeline
In response to breaches of its
price path thresholds at both the first and second
assessments (2003 and 2004), and following Transpower New
Zealand Limited's November 2005 announcement of its decision
to increase prices by 19.1%, on 22 December 2005 (and on
average by 13% over the next five years) the Commerce
Commission published in the New Zealand Gazette its
intention to make a declaration of control under Part 4A of
the Commerce Act 1986, in respect of transmission services
supplied by Transpower.
In March 2006, Transpower's Board
indicated its preference to resolve the Commission's
post-breach inquiry by offering an administrative
settlement. In response, the Commission indicated that it
would be prepared to delay its decision on whether to
declare control, only if Transpower were to suspend the
announced 19% price increase which was to become effective
on 1April 2006.
On 27 March 2006, Transpower formally agreed to suspend the 19% price increase, and established a rebating system that backdated increases to the date the increase was initiated (1 April 2006). This did not cancel the increase, but suspended it pending the outcome of the Commission's investigation. The Commission accepted this interim measure and on 31 March 2006 announced its decision to postpone publishing its final determination pending settlement discussions.
On 31 August 2007, the Commission received an offer of administrative settlement from Transpower (Revised Offer). This followed a long period of discussion between the Commission and Transpower regarding an appropriate offer, and analysis by the Commission of information provided by Transpower. This also followed three previous offers (11 August 2006, 6 October 2006, and 31 May 2007), which the Commission did not consider were acceptable for consultation.
The Commission analysed Transpower's 31 August 2007 offer and published its preliminary view that it should accept the offer instead of placing Transpower's transmission services under regulatory control.
Having reviewed the submissions received on its draft decision, the Commission considered it necessary to negotiate some additional changes to the offer. Transpower agreed to make these changes, and the Commission has accepted a revised offer incorporating the changes.
The
revised offer, received on 11 April 2008, provides that its
price path threshold be replaced with three alternate
thresholds to apply for until 30 June 2011, and that the
price increases announced for April 2006 and subsequent
years, be reduced. The three new thresholds are:
- a new
transmission (revenue requirement) threshold;
- a new
transmission (non-Part F) capital expenditure threshold;
and
- a new system operator services threshold.
The purpose of the three thresholds is to provide clear principles and limits that Transpower is required to adhere to in order to determine its revenue requirements; capital requirements; and adherence to the terms of the relevant systems operator services agreement.
A fourth threshold will maintain the current quality threshold set out in the Commerce Act (Transpower Thresholds) Notice 2007.
The
implication of Transpower's proposal on overall prices is
that for:
a) 2006/07, the 19% price increase announced in
2005 is reduced to a 10.2% increase. As the full 19% was
rebated, the revenue that this price increase generates will
be applied against the Economic Valuation (EV) Accounts to
form part of the balance as at 30 June 2007;
b) 2007/08,
the average 13% price increase forecast in 2005 is reduced
to an 8.1% increase. The gains arising from this price
increase will be applied against the EV Accounts to form
part of the balance as at 30 June 2008. The EV Accounts are
designed to ensure that over time Transpower does not over
or under recover revenue from customers.
c) 2009 to 2011,
Transpower will determine its annual revenue requirement,
constrained by the various building block components as
outlined in the settlement offer. This includes using:
-
a base operating expenditure of $199.61million indexed at
Consumers Price Index-0 (CPI-0) each year;
- a Weighted
Average Cost Of Capital (WACC) at 7.8%;
- an adjustment
for under or over-recovery using the EV Account
mechanism;
- a requirement that only approved assets,
once commissioned, can be entered into the asset base using
depreciated historic cost; and
- tax calculated using the
tax payable approach (with the addition of an interest tax
shield).
ends