Draft decision on local electricity lines revenue

29 May 2019
Release No. 149

Commission releases draft decision on local electricity lines revenue

The Commerce Commission has issued its draft decision on the default price-quality paths (DPPs) it is proposing to apply to 15 regulated electricity lines companies for the period 2020 – 2025.

Price-quality paths set out the maximum revenue that regulated lines companies are allowed to earn from their consumers as well as the minimum quality standards they must meet – measured in terms of outages and interruptions on their networks.

Deputy Chair Sue Begg said the stability of the DPP regime was helping to promote long term investment in critical energy infrastructure that reflected the needs and expectations of consumers.

“Our draft decision allows for increased investment in the network, with lines companies forecasting more than $2 billion will be spent on renewing ageing assets and meeting the energy needs of growing communities over the next five years,” Ms Begg said.

“At the same time the majority of consumers can expect an initial reduction in price, as we have realigned revenues with costs. This means that the total revenue lines companies can earn for the year starting 1 April 2020 would reduce by $50 million compared to the previous year. This reduction is largely due to the lower cost of capital available in the market,” Ms Begg said.

Following the reduction in revenue in 2020, charges would increase in line with inflation through to 2025.

“The impact of our proposed decisions would vary across companies and regions, with Dunedin-based Aurora Energy in particular needing significant investment in its network. This would result in price increases for its consumers from 1 April, though we have taken steps to limit the extent of these prior to Aurora Energy applying for a customised price-quality path in May 2020.”

Graphs detailing the total allowable revenue and the impact of the draft decision on individual local lines companies for the year starting 1 April 2020 can be seen here.

In terms of how it measures the quality of lines companies’ services, the Commission has retained ‘no material deterioration’ as the starting point for setting quality standards from the previous DPP. This means lines companies should deliver a similar level of reliability as in the past, but with some allowance for change in response to changing circumstances.

A copy of the draft decision is available here.

Submissions close on 18 July 2019. The final DPP decision is due by 30 November 2019.

Background

Lines company regulation
Lines companies (also known as Electricity Distribution Businesses or EDBs) are regulated under Part 4 of the Commerce Act 1986. Part 4 provides for regulation in markets in which there is little or no competition, and little or no likelihood of a substantial increase in competition.

We apply Part 4 regulation to EDBs by setting price-quality paths that limit the revenues EDBs can collect and establish minimum standards of quality that EDBs must meet in supplying electricity to their consumers. We also set requirements for the public disclosure of information relating to the EDBs financial performance and the physical performance of its network (also known as ‘information disclosure’).

EDBs that are deemed ‘consumer-owned’ under Part 4 are subject only to information disclosure regulation.

We only set the maximum revenue lines companies can earn each year. We do not control what EDBs charge individual consumers, nor do we tell electricity retailers what they can and cannot charge their customers.

CPPs
DPPs are intended to be a relatively low-cost regulatory option and are not designed to meet the exact needs of every lines company. Where more significant infrastructure investment might be needed then a customised price path (CPP) is likely to be a more suitable option.

The new default price-paths will apply to EDBs for a period of 4-5 years unless they apply to the Commission for a customised price-quality path (or CPP). CPPs are an option available to EDBs under the Act, which allows for greater tailoring to an EDB’s particular circumstances.

Currently, there are two EDBs on CPPs that will not be subject to the new DPPs when they commence on 1 April 2020. These are Powerco and Wellington Electricity, which are on CPPs from 2018-2023 and 2018-2021 respectively.

A map of all local lines companies broken down by region can be found on our website.

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