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Proposal To Amend Powerco And Wellington Electricity’s Customised Price-quality Paths

The Commerce Commission is proposing to amend the 2018 customised price-quality paths (CPPs) for electricity lines companies Powerco and Wellington Electricity so their cost of capital is aligned with the rest of the country’s regulated electricity lines companies.

The weighted average cost of capital (WACC) decreased as part of the Commission’s September 2019 reset of the default price-quality path (DPP) for 17 electricity lines companies.

Aligning the cost of capital would decrease Powerco’s allowable revenue which it can recover from its consumers by approximately $150 million and Wellington Electricity’s by approximately $18 million, compared to the revenue projections used when the CPPs were set in 2018.

The ability to reconsider and amend a CPP following a WACC change was introduced as part of the Commission’s most recent review of the input methodologies (IMs), which are the rules, requirements and processes underpinning the regulatory regime.

“We consider that we should amend the CPPs to achieve the policy intent of our decisions from the IM review,” Commission deputy chair Sue Begg said.

“Our policy intent is to remove any perverse incentive for an electricity lines company to apply or not apply for a CPP because of a difference in the DPP and CPP WACC rate.

“This consultation paper sets out our proposed amendments to the CPPs to align the DPP WACC rate with the CPP WACC rate.”

The amendment is the first part of a three-part approach proposed in the Commission’s consultation paper. The overall aim of the approach is for the two companies’ allowable revenue to reflect the WACC change for the remaining period of the CPPs and following the companies’ transitions back to the DPP.

The Commission is only consulting on the first part of the proposed approach at this stage but intends to engage with stakeholders on the subsequent parts of the approach at a later point.

Stakeholders are invited to submit their views on the consultation paper by 5pm on Thursday 19 March 2020. Cross submissions are due by 5pm on Thursday 26 March 2020. Both can be emailed to regulation.branch@comcom.govt.nz. Please include ‘Reconsideration of CPPs – WACC change’ in the subject line.

The Commission intends to publish its final decision on the proposed amendment before 1 April 2020.

Background
Under Part 4 of the Commerce Act, the Commission regulates monopoly infrastructure providers, including most local lines companies, to ensure they deliver strong and sustainable services for the long-term benefit of consumers.

The Commission’s price-quality regulation sets rules about how much the lines companies can earn from their consumers and the minimum reliability standards they must deliver.

For most electricity lines companies this is done under a DPP which is a relatively low-cost regulatory option not designed to meet the exact needs of every lines company. Where more significant infrastructure investment might be needed, a CPP is likely to be a more suitable option as it can be tailored to a lines company’s specific circumstances.

Powerco’s CPP
In March 2018, the Commission approved $1.27 billion of spending to allow Powerco to undertake a major network upgrade to replace ageing parts of its network and respond to strong population growth.

Wellington Electricity’s CPP
In March 2018, the Commission approved $31 million of spending to allow Wellington Electricity to improve its network’s resilience to a major earthquake.

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