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Commission Focussed On Ensuring Consumers Benefit From Large-scale Investment In Electricity Lines

The Commerce Commission will have a close eye on ensuring that the growing investment in electricity lines maximises benefits to Kiwi consumers – as the sector goes into a period of investment that is likely to total in the tens of billions over the next decade.

In a consultation paper published today, the Commission is seeking views on the key issues it will consider in setting revenue limits and quality standards from 2025 through to the end of the decade for the majority of local lines companies, covering over 80% of all residential and business customers in Aotearoa New Zealand.

Commissioner Vhari McWha, says the general need for substantial investment by lines companies is clear.

“Networks will need to grow and adapt to meet new demands from the increasing electrification of transport and industrial process heat as well as connecting new local generation.

“At the same time, they will need to prepare for an expected increase in extreme weather events and keep up with regular upgrades of ageing assets.”

Ms McWha says the potential costs to consumers are significant and this means “it is more important than ever that we ensure the plans and investment decisions of lines companies are in the long-term interests of consumers.

“Decisions made by lines companies in the coming period will have an enduring impact on future electricity bills, so it is critical that proposed investment is prudent, efficient, and to the long-term benefit of consumers. This includes making best use of existing capacity and fully exploring options such as demand side management and batteries.”.

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This need for increased investment comes at a time when there are other upward pressures on electricity bills, including higher interest rates and inflation.

Ms McWha says the Commission is conscious of potential price shocks for consumers and can smooth when lines companies recover revenues over time to help soften the impact. However, she cautioned that, “consumers will ultimately need to pay for the services they receive and we are alive to concerns that pushing revenue out into the future could affect lines companies’ ability to pay for necessary investment.”

The Commission is seeking stakeholder feedback on the issues identified in its paper published today. The Commission will publish a draft decision for further consultation in May 2024, and will make a final decision in November 2024. A copy of the consultation paper can be found on the Commission’s website. Submissions close on Friday, 15 December 2023.

Background - Part 4 Regulation

Electricity is essential to the everyday lives of New Zealanders; powering everything from heating, cooking, and lighting, to transport, and communications. Under Part 4 of the Commerce Act 1986, lines companies supplying electricity from the national grid to homes and businesses across Aotearoa New Zealand are regulated as natural monopolies.

The Commission regulates these lines companies with two main regulatory tools. First, information disclosure applies to all lines companies. It requires them to publicly disclose information about their business, so that people can understand how well they and their networks are performing. Second, price-quality regulation applies to the 16 lines companies that are not considered to be consumer-owned under the Commerce Act. Price-quality regulation limits the revenue these businesses can recover from their consumers and sets minimum quality standards.

The current consultation is about the reset of the default price-quality path (DPP). The current DPP expires on 31 March 2025, and the Commission must reset the price-quality path by 30 November 2024 to apply from 1 April 2025. Each reset provides an opportunity to consider the amount of investment necessary to support reliable electricity networks, while ensuring that only reasonable costs are passed onto consumers. The Commission does not set the price consumers face in their electricity bills. Nor does the Commission determine each network’s specific investment choices. Instead, we regulate the revenue electricity lines companies can recover from consumers. The electricity distribution component is about 27% of the total consumer electricity bill.

In December 2023, the Commission will publish its final decisions of the Input Methodologies (IM) Review. IMs are the upfront rules, processes and requirements that underpin price-quality regulation. The revised IMs will be applied to the DPP reset to ensure it remains fit for purpose. They will also be applied to the upcoming reset for Transpower’s individual price-quality path, which will apply from April 2025 through to the end of the decade.

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