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Electricity distribution default price-quality path: Com Com

Commission issues draft decision on electricity distribution default price-quality path


The Commerce Commission today released its draft decision to reset the default price-quality path for 16 electricity distributors.

The proposed reset will adjust the prices electricity distributors are able to charge for their services from next year. Under the proposal, some electricity distributors will be required to charge less for their services while some will be able to charge more.

“The price adjustments proposed are the first under the new Part 4 regime and rebalance prices stemming back to 2001 under the previous regime. The approach we have taken aims to ensure there is an appropriate balance between providing incentives for suppliers to invest in their networks, and ensuring that consumers are being charged prices that are more aligned with the cost of the services they receive,” said Dr Mark Berry, Commerce Commission Chair.

The proposed adjustments for individual suppliers in the 2013/14 year vary in size from a reduction of 8% to an increase of 11% before inflation. For four of the small distributors, their proposed increases are larger. The Commission has an obligation to manage price-shocks resulting from price adjustments that might be experienced by electricity consumers, so has smoothed the impact of these larger changes by capping increases at 15% per year. The average change across the industry over the next two years is an increase of 1% before inflation.

The reason for the proposed reset is to apply new upfront rules, processes and regulatory requirements — called input methodologies— which have been used to determine the price adjustments.

“Although the effect of a final price reset is likely to flow through to electricity consumers, the actual change in any consumers’ bill is likely to be different to the size of the change indicated by the draft decision. This is because the Commission only regulates the average prices distributors charge, meaning distributors can set prices for any individual customer in a manner of ways to meet this average. The charges relating to electricity distribution are also only part of the total retail bill consumers’ receive – about 30%,” said Dr Berry. Example calculations of the changes consumers could experience in their electricity bill are attached.

This draft decision is based on the input methodologies the Commission has determined. It is important to note to that these input methodologies are currently under appeal and are to be heard by the High Court from September to December. Also, if the proposed prices do not suit an electricity distributors’ particular circumstances, it can apply for a customised price-path.

The draft decision does not reset the default price-quality path for Orion New Zealand Limited. In light of the Canterbury earthquakes, Orion is currently assessing whether or not to apply for a customised price-quality path. If Orion chooses not to apply for a customised path by early 2013, the Commission will review whether Orion’s default price-quality path should be reset.

The Commission intends to make a final decision on the reset of the default price-quality path by 30 November 2012. Changes resulting from the reset default price-quality path would apply to suppliers from 1 April 2013.

The Commission is seeking submissions from interested parties by 1 October 2012, and cross-submissions by 12 October 2012.

You can find a copy of the draft decision on the Commission’s website at http://www.comcom.govt.nz/additional-input-methodologies-for-electricity-and-gas-dpps/



Background

What is a default price-quality path?

A default price-quality path is a generic form of regulation that places a cap on prices and sets minimum standards for the quality of service provided to users. The default price-quality path usually applies for five years before it is reset to take account of new information on the performance of suppliers.

What are input methodologies?

Input methodologies are the upfront rules, processes and requirements for services regulated under Part 4 of the Commerce Act, and include default price-quality paths.

Which electricity distribution businesses are covered by this draft decision?

• Alpine Energy Limited
• Aurora Energy Limited
• Centralines Limited
• Eastland Networks Limited
• Electricity Ashburton Limited
• Electricity Invercargill Limited
• Horizon Energy Limited
• The Lines Company Limited
• Network Tasman Limited
• Nelson Electricity Limited
• OtagoNet Joint Venture
• Powerco Limited
• Top Energy Limited
• Unison Networks Limited
• Vector Limited
• Wellington Electricity Lines Limited

Why is the Commission resetting prices now?

The Commission is able to reset the default price-quality paths during the middle of the regulatory period if there is a material difference between the paths that came into effect in 2010, and the paths we would have set if the input methodologies for default price-quality paths had been available at that time.

The Commission previously proposed to reset the default price-quality paths in 2011, however due to a judicial review challenge from Vector, the High Court required the Commission to suspend the process until further input methodologies for the paths had been determined.

Which electricity distribution businesses are regulated under the Commerce Act?

Electricity distributors 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 the Act, must comply with the default price-quality path set by the Commission. Consumer-owned electricity distributors are exempt on the basis that their consumers have input into their business to influence price and quality.

What is the purpose of regulating electricity distribution businesses?

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. The outcomes are 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.

How we have revised our approach from the July 2011 draft decision?

Our previous draft decision to reset each supplier’s default price quality path, if implemented, would have resulted in input methodologies being applied on 1 April 2012. That draft decision was never finalised, however, because we were required by the High Court to re determine input methodologies before the reset could be made.

We have now revised our July 2011 Draft Decision by applying re-determined input methodologies for default price-quality paths; and in response to material received since the July 2011 Draft Decision was published.

Applying re-determined input methodologies results in revised estimates of each supplier’s costs when current and projected profitability is assessed. In July 2011, each supplier’s costs were calculated in a way that was consistent with the input methodologies for information disclosure regulation. This time we have applied re-determined input methodologies that are specific to default price-quality paths.


The potential impact of the revised draft decision on an average residential consumer’s monthly electricity bill for each distributor in 2013/14

Distributor Annual distribution line charge (as at May 2012) ($) Revised draft decision: Proposed adjustment in 2013/142 Expected $ change on the monthly power bill for a typical residential consumer in 2013/142,3
Alpine Energy1 506 15% 6.32
Aurora 513 6% 2.57
Centralines1 859 15% 10.74
Eastland 852 1% 0.71
Electricity Ashburton 453 11% 4.15
Electricity Invercargill 524 3% 1.31
Horizon Energy Distribution 877 -4% -2.92
Nelson Electricity 542 8% 3.61
Network Tasman 480 9% 3.60
OtagoNet1 1,254 11% 11.49
Powerco 646 2% 1.08
The Lines Company1 686 15% 8.58
Top Energy1 1,069 15% 13.36
Unison 646 10% 5.38
Vector 627 -8% -4.18
Wellington 497 -5% -2.07

Industry overall4 -0.12

Notes:
1. To limit price shocks for consumers, we have proposed alternative rates of change and/or capping any increases at no more than 15% before inflation for some distributors. Customers of these distributors are expected to face further price increases above the rate of inflation in 2014/15
2. The amount shown excludes inflation
3. This assumes that the change is evenly spread across the year
4. We have calculated this industry average by weighting the changes by the number of ICPs

Source:
This analysis is based on the latest available “Quarterly survey of domestic energy prices” published by the Ministry of Business, Innovation and Enterprise (MBIE).

The figures in the Quarterly Survey give an indication of what residential customers are paying for their electricity in different regions, based on standard assumptions about usage and metering.

All figures are calculated for a typical residential customer that uses 8000kwH a year.

For further details of MBIE’s methodology, please go to:
http://www.med.govt.nz/sectors-industries/energy/electricity/prices/electricity-tariff-surveys/quarterly-survey


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