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Price-quality path decision for electricity distribution

Price-quality path decision for electricity distribution businesses released

The Commerce Commission today released its decision to amend the determination setting out the default price-quality path (DPP) applying to electricity distribution businesses (EDBs) for the period 2010-2015. The DPP comprises a price path that places an upper limit on the aggregate prices that EDBs may charge, and also the quality standards that EDBs must meet in supplying electricity lines services to customers.

The amendment modifies the formulae used by the Commission to assess whether an EDB has complied with its price path by including a ‘revenue differential term’. The primary reason for this amendment is to ensure that the assessment formulae is not affected by the prices an EDB has charged previously within the regulatory period.

“The revenue differential term provides flexibility for EDBs to set prices within the limits of their price path as they consider appropriate,” said Brent Alderton, Commerce Commission General Manager, Regulation.

“Where an EDB prices above or below their price path in any given year, the revenue differential term automatically adjusts the EDB’s allowed revenues back to the level of the price path. This decision was supported by all businesses that took part in the consultation,” said Mr Alderton.

The 2010-2015 Electricity Distribution Default Price-Quality Path Refinements Decision and Amendments can be accessed on the Commission’s website at Background

Suppliers of electricity lines services are regulated under Part 4 of the Commerce Act 1986 (the Act). Electricity distribution businesses provide electricity lines services between Transpower and end-users. All electricity distribution businesses, except for those exempt on the basis of consumer ownership as defined in section 54D of the Act, must comply with the default price-quality path set by the Commission.

The purpose of regulation under Part 4 of the Act is to promote the long-term benefit of consumers in regulated markets, by promoting outcomes that are consistent with outcomes produced in competitive markets. These outcomes are such that suppliers of regulated services have incentives to innovate and invest, improve efficiency and provide services at a quality that reflects consumer demands, share efficiency gains with consumers, including through lower prices, and are limited in their ability to extract excessive profits.

The 2010-2015 default price-quality path which took effect in April 2010, sets the price path for each supplier. Suppliers are required to demonstrate compliance with their price path by way of specified compliance assessment formulae. The formulae were specified so that a supplier’s maximum aggregate prices in a given year are derived using the prices it charged in a previous period. The Commission’s decision to include a revenue differential term in the relevant formulae ensures that a supplier’s compliance assessment with its price path is independent of its previous pricing decisions within the regulatory period.


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