Commission Releases Consultation Package

Commission Releases Consultation Package

The Commerce Commission today released its consultation package on an administrative settlement offer proposed by Unison Networks as an alternative to the imposition of regulatory control.

The package released today includes Unison's settlement offer, and the Commission's analysis of it.

As part of the settlement, Unison will voluntarily reduce its average electricity line charges from 1December this year and will comply with the Commission's existing price path threshold for the remainder of the current five-year regulatory period.

Unison will also rebalance its charges to customers in different regions. The Commission had found that Unison was earning significant excess profits, with the greatest impact on consumers in Taupo and Rotorua.

"The Commission's preliminary view is Unison's offer is consistent with the long-term interests of consumers, and with the objectives of the regulatory regime for electricity lines businesses," says Commerce Commission Chair Paula Rebstock.

"The settlement will limit Unison's ability to earn excessive profits," says Ms Rebstock.

"It will also ensure that the company has incentives to become more efficient, and that it shares those efficiency gains by delivering lower and more equitable pricing for consumers."

Complying with the price-path threshold will limit Unison's ability to earn excessive profits. The incentives to improve efficiency arise because the company can keep some of the additional profits it makes from efficiencies gained over the settlement period.

Ms Rebstock noted that Unison's offer includes a commitment to spend what is needed to maintain network performance. The company would do this without breaching its price-path threshold.

"The Commission is committed to ensuring there is efficient investment in electricity distribution networks to maintain and improve reliability of supply," Ms Rebstock said.

Unison's settlement offer also involves rebalancing its charges to different customer groups, so the prices paid by consumers reflect the costs of supplying them. The rebalancing means that Unison's overall revenues and average line charges will decrease. The distribution component of consumers' power bills will go down in many cases, but in some instances it will increase.

The Commission noted that the average price reductions Unison will make under the settlement are not as large as the potential price impacts of control presented in the Commission's intention to declare control in September 2005. Reasons for this difference are:
Unison has already made significant price reductions to Rotorua and Taupo consumers in April this year;
earlier revenue information provided by Unison to the Commission was incorrect;
Unison has since increased its capital and maintenance expenditure forecasts to maintain reliability of supply, and the Commission considers these increases are reasonable; and
prices acceptable under a comparatively low cost and less intrusive settlement arrangement should not be seen as indicative of the likely level of prices under control.

The consultation package has been released so that interested parties can provide their views. The package comprises the Commission's draft reasons for accepting Unison's offer and for not declaring control, the Commission's review of Unison's 2006 asset management plan, and a full copy of Unison's offer. Submissions are due by 29 November 2006.

If, after taking into account the views of interested parties, the Commission does not accept Unison's offer, then the Commission will still need to decide whether to declare control. If the Commission's preliminary view is confirmed and Unison's offer is accepted, then the Commission will be able to close its post-breach inquiry into all of Unison's past threshold breaches.

Background

Unison Networks. Unison supplies electricity consumers in the Hawke's Bay, Rotorua and Taupo regions. The company is 100% owned by the Hawke's Bay Power Consumers' Trust, which acts on behalf of the consumers connected to Unison's network in Hawke's Bay.
Electricity distribution services. New Zealand's electricity industry has five parts: generation, wholesaling, transmission, distribution and retailing. Distribution services take electricity from the national grid and distribute it to homes and businesses. Unison's electricity distribution charges comprise around 20 to 40% of the average power bill.
The regime. The Commerce Commission administers regulation of 28 electricity distribution companies and Transpower under Part 4A of the Commerce Act. The companies are regulated because they face limited competition, and without regulation could charge too much for their services and earn excess profits.
The companies are regulated by having thresholds set for them that govern the quality of services they deliver and/or how much they can raise their prices by each year. The price thresholds are linked to the Consumer Price Index rate of inflation with the current five-year regulatory period lasting from 1 April 2004 to 31 March 2009. The thresholds are a screening mechanism the Commission uses to identify distribution businesses whose performance may warrant further examination, and, if necessary, control of their prices, revenues and/or service standards.
Control. If companies breach price or quality thresholds set for them, the Commission can consider imposing control on their electricity services. However, it must first seek the views of interested parties on its intention to do so. If the Commission makes a declaration of control it can then set rulestermed an 'authorisation'governing the prices, revenue and/or quality of those controlled services for up to five years. While the company may face penalties if it does not comply with those rules, the operation of the company will continue to be undertaken by its management and Board of Directors as normal. Control is not intended to compensate consumers for any past overcharging but to put in place constraints on the controlled business's future performance.
Intention to declare control of Unison. Since the targeted control regime was initiated in 2001, the Commission has published its intention to declare control three times: of Unison Networks' electricity distribution services in September 2005, of Transpower's transmission services in December 2005, and of Vector's distribution services in August 2006.
In its intention to declare control of Unison, the Commission outlined its preliminary findings that Unison was earning significant excess profits, with the greatest impact on consumers in Rotorua and Taupo. On 1 April 2006, Unison reversed its most recent distribution price rises to Rotorua and Taupo consumers, with consumers saving, on average, about $40 per year in Rotorua and $46 in Taupo. In response, the Commission delayed its decision whether to place Unison's electricity distribution services under control. This delay gave Unison time to prepare an administrative settlement offer for the Commission.
Administrative settlement. As an alternative to control being imposed, the company can reach an administrative settlement with the Commission. This usually involves the Commission and the company agreeing to pricing levels and quality measures for a period of up to five years. The result is that prices and quality are maintained at levels the Commission considers appropriate for the long term interests of consumers, without the need to impose control, which can be intrusive and costly.

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