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Commission Strengthens Regulatory Foundations To Support Future Infrastructure Investment

The Commerce Commission today released its final decisions on its Input Methodologies Review, updating the key regulatory rules for electricity lines, gas pipelines, and airports in New Zealand.

Commissioner Vhari McWha says the rules are fundamental to ensuring our airports and energy sector can make a fair return on investments, while consumers are not overcharged for these services.

They guide how assets are valued, costs are allocated, risks are shared between businesses and consumers, and how businesses are compensated for their investments.

“The Commission has made a small number of key changes to our regulatory settings to strengthen the foundations of our regulatory approach” Ms McWha says.

The review, which involved a two-year process of analysis and consultation, found that the Input Methodologies are generally robust and will provide an appropriate and stable platform to support investment and innovation.

“We need investment to ensure that critical energy and airport infrastructure provides consumers with the services they demand, including preparing for electrification of our economy and maintaining resilience to major weather events,” Ms McWha says.

“The rules are generally technical in nature but the purpose of the changes we have made is to promote the long-term benefit of consumers. The changes ensure the regulations provide the right degree of flexibility to address uncertainty about the timing and scale of investments that need to be made.”

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“Ensuring these investments are made at the right time is vitally important.”

Work on reset of electricity revenue controls underway 
The Commission is in the process of considering the investment plans of most electricity lines companies, and Transpower.

Next year, the Commission will apply the Input Methodologies to set total revenue allowances for each of these companies for the remainder of the decade. One important part of the approach to the price-quality path reset that is not set out in the Input Methodologies, is the way we forecast expenditure allowances. The Commission has the flexibility to adjust our approach to forecasting both operating expenditure and capital expenditure where appropriate.

“We will consult on the total revenue we will allow suppliers to recover for regulated services. However, consumers should expect that greater investment and higher interest rates will likely mean higher prices to enable the services they want and need,” Ms McWha says.

Background

What are the Input Methodologies?

The Input Methodologies (IMs) are the rules and processes that we set upfront to help provide certainty about how we will regulate specific services under Part 4 of the Commerce Act (Part 4) and promote the long-term benefit of consumers.

The IMs provide the foundation for the regulatory controls for infrastructure providers that face little or no competition. They are rules that apply to the Commission and suppliers. The Commission will apply them when making decisions regarding price-quality paths and information disclosure requirements.

The IMs are critical to ensuring our airports and energy sector can make a fair return on investments, while consumers are not overcharged for these services. They guide how assets are valued, costs are allocated, risks are shared between businesses and consumers, and how businesses are compensated for their investments.

Who do the Input Methodologies apply to?

The Input Methodologies apply to:

Electricity Distribution Businesses and Transpower*

Gas Pipeline Businesses (for both transmission and distribution)

Specified airport services (at Auckland, Wellington, and Christchurch international airports)

*Generation, retail, and pricing are overseen by the Electricity Authority

What is the purpose of the IM review?

The IM Review ensures that the methodologies remain fit for purpose, given changes in economic conditions and market practices. Well informed, clear, and robust rules help ensure our regulations promote the long-term benefit of consumers. We are statutorily required to review the IMs at least once every seven years.

How does the IM review relate to the Commission’s other work, including revenue settings?

The Commission is required to apply all relevant IMs when making its decisions. However, some aspects of our regime sit outside the IMs including how we set quality standards and the approach to forecasting expenditure as part of setting price-quality paths. The Commission can adjust its approach to these aspects from reset to reset, whilst the underlying IMs provide certainty about core components of the price-quality path, such as the cost of capital and how assets are valued. We are due to reset the price-quality paths for electricity lines companies and Transpower in 2024, and in 2026 for gas pipelines. The IMs also apply to pricing and profitability reviews for Auckland, Christchurch, and Wellington airports from 2024 onwards.

More information about the Input Methodologies Review is available from the Commerce Commission website.

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