Report details profitability of electricity lines companies

New report details profitability of electricity lines companies

The Commerce Commission has today released a new report detailing the profitability of the 16 electricity distributors subject to price-quality regulation in New Zealand between 2012 and 2015.

Commission Deputy Chair Sue Begg said the analysis shows the revenue limits were effective at limiting excessive profits, while investment in the electricity distribution network also increased.

“Given lines companies are natural monopolies it’s important that consumers can be confident that the revenue limits we set are working as intended. This report helps to reassure consumers that lines companies’ returns are appropriate and infrastructure investment is continuing to be made,” Ms Begg said.

“Overall, returns ranged from 5.33% to 8.37% across the three-year period and the majority of distributors were within one percentage point of where we expected them to be. The remainder earned less than we expected, notably The Lines Company and Centralines.

“We have also found that electricity distributors invested more than in the past. Across the 16 distributors, capital expenditure increased by nearly 18% compared to historic levels, which is equivalent to just under $100 million over the three years.”

The Commission’s analysis is based on information that distributors are required to publish under information disclosure regulation.

The full report and an infographic (for download*) outlining the returns and investment levels of each distributor by region can be found on our website.

Background
As the economic regulator of electricity lines companies in New Zealand, the Commission is responsible for:

• setting price-quality paths that limit revenues of the 17 distributors subject to price-quality regulation;

• setting requirements for the 29 distributors to disclose information about their performance; and

• publishing summary and analysis of that information to promote a greater understanding of the performance of distributors

We require the 29 main electricity distributors in New Zealand to publicly disclose a range of information, such as asset management plans, pricing methodologies and financial and network data.

Of those 29 distributors, 17 are currently subject to price-quality regulation. One of the 17, Orion New Zealand, applied for and was provided with a customised price-quality path that addressed their change in circumstances after the Canterbury earthquakes.

The report focuses on the remaining 16 distributors in particular because the Commission is able to compare the performance of each distributor against the assumptions relied on when the revenue limits were set.

Consumer-owned distributors have ownership arrangements in which profits are returned directly to almost all consumers in the form of rebates.

There are 12 such electricity distributors:
Buller Electricity Northpower
Counties Power Scanpower
Electra The Power Company
Mainpower New Zealand Waipa Networks
Marlborough Lines WEL Networks
Network Waitaki Westpower

The 2012 adjustments
We set revenue limits for regulated electricity distributors in 2010 for a five-year period under the price-quality path. These limits were then adjusted in 2012 following the determination of input methodologies in 2010. The adjustment resulted in a reduction in revenue earned by Vector ($110m) and an increase for most other distributors to allow revenue consistent with their expected costs.

Lower than expected returns
Six lines companies were more than one percentage point below their expected returns for the three-year period from 2012 – 2015. These companies were Horizon Energy (-1.06), Aurora Energy (-1.14), Eastland (-1.5), Top Energy (-1.87), Centralines (-2.21) and The Lines Company (-2.33). The primary variances behind these returns are detailed on page 26 of the report, but include: intentionally pricing beneath the limit and higher than forecast operating or capital expenditure.

Investment and asset management
For this report we have chosen to focus on profitability. We have not assessed whether increased expenditure was associated with improved asset management. We will be undertaking targeted analysis of the asset management of distributors in the future.

ENDS

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