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Draft decision on Orion customised price-quality path

Media Release - Commerce Commission releases draft decision on Orion’s customised price-quality path proposal

Issued 14 August 2013

Release No. 10

The Commerce Commission has today released its draft decision on Orion’s customised price-quality path (CPP) proposal which takes into account Orion’s extraordinary circumstances following the Canterbury earthquakes in 2010 and 2011. 

The Commission has considered how the long-term benefit of consumers can be best met by assessing service reliability and costs. The draft decision sets a customised price-quality path lower than Orion sought which means its customers face smaller price increases over the five year regulatory period.  

The Commission proposes allowing Orion to increase prices by 9.2 percent from 2014 which will result in an average increase of approximately $5.20 per month to a typical household customer. Further annual increases at CPI will be allowed until 2019. These increases are lower than Orion sought in its proposal of 15 percent, or $8.50 per month to a typical household customer, and CPI plus 1.2 percent rises up until 2019.

“We understand Orion’s long-standing vision to return its network to its pre-earthquake reliability performance and build a more resilient network for the future benefit of its customers. However, this needs to be balanced against the size of the price increase those customers pay,” said Commerce Commission Deputy Chair Sue Begg.

“Put simply, we consider Orion’s customised pricing proposal to the Commission asks for ‘too much, too soon’. The Commission agrees Orion should be allowed to recover most of the additional operating and capital costs it incurred in the aftermath of the earthquakes. We have allowed Orion more income to cater for changes in demand and to recover future higher costs caused by the earthquakes, but the full level of expenditure Orion has sought is not supported with sufficient evidence in its proposal,” said Ms Begg.

Interested parties can review the draft decision and make submissions prior to the final determination by 29 November 2013. This determination would then take effect for Orion’s pricing for the year commencing 1 April 2014.

The Commission’s full report is available at www.comcom.govt.nz/orion-cpp

Background

Orion New Zealand Limited operates one of the largest electricity distribution networks in New Zealand, covering 8,000 square kilometres and providing electricity lines services to 190,000 homes. It is owned by Christchurch City Council (89.3%) and Selwyn District Council (10.7%). 

In markets where there is little or no competition, the Commerce Commission regulates the price and quality of goods and services to benefit consumers and build a more competitive and productive economy. Non-exempt suppliers of electricity lines services are subject to price-quality path regulation, under Part 4 of the Commerce Act 1986, and are subject to requirements to disclose information about their performance.

Price-quality path regulation is designed to mimic the effects seen in competitive markets so that consumers benefit in the long term. This includes making sure businesses have incentives to innovate and invest in their infrastructure, and to deliver services efficiently and reliably at a quality that consumers expect, while limiting businesses’ ability to earn excessive profits.

The Commission has reviewed Orion’s customised price-quality path proposal in relation to capital expenditure and operating expenditure and adjusted where it found this to be excessive.
Orion’s proposal includes a sum of $86 million to compensate it for the effects of the Canterbury earthquake prior to its new price-quality path being implemented, or ‘claw back’. The Commission has not allowed any claw back for lost revenue, but given the exceptional circumstances, agreed to Orion recovering some additional costs.

Further information in relation to Orion’s customised price-quality path proposal can be viewed at www.comcom.govt.nz/orion-cpp
 
Customised Price-Quality Proposal (CPP) Process
• The Commerce Commission received the proposal for a customised price-quality path (CPP) from Orion on 20 February 2013. This proposal is a result of Orion’s extraordinary circumstances following the Canterbury earthquakes in 2010 and 2011.
• The Commerce Commission invited interested persons to have their say on Orion’s CPP proposal, and received 19 submissions. Copies of the process paper, issues paper and submissions are published on the Commerce Commission website.
• On 7 June 2013 the Commerce Commission released two expert reports on insuring against catastrophic events, and allocating the risks for catastrophic events between suppliers and consumers for comment. These reports are also available on the website.
• This is a draft decision. Interested parties are invited to make written submissions by 20 September 2013 (with cross submissions due by 11 October). The submissions will be published on our website and the views expressed taken into account by the Commission.

The Commerce Commission expects to make a final determination of Orion’s price path by 29 November 2013. This determination would then take effect for Orion’s pricing for the year commencing 1 April 2014.

ENDS

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