Lines companies, retailers clash in default price debate

Sunday, 6 October 2019, 3:22 pm
Article: NZ Energy and Environment Business Week

Lines companies, retailers clash as default price debate nears end

First published in Energy and Environment on September26 , 2019.

Electricity lines companies are suggesting changes are needed to the regulatory framework due to the impact of low-interest rates on calculations as the Commerce Commission releases its updated drafts for default price-quality paths.

To add to the mix the Electricity Retailers Association has been pointing the finger at lines companies as the main driver of power price rises. It is a move which has not impressed some in the distribution businesses. One described it to Energy and Environment as closer to political lobbying than a sensible input into the Commission’s deliberations, as the sector awaits the results of the Electricity Price Review now expected in November. The lines company executive said any analysis would show the largest profits being made and the largest dividends being paid out were by the major gentailers.

This week Vector told shareholders it would not give forecasts for next year or issue a dividend until the Commission guidance on pricing is finalised.

Chair Alison Paterson expressed ongoing concerns over the impact of low interest and inflation rates, which the Commission use to calculate a reduced the cost of capital for lines companies. Paterson said this would restrict ability to invest in upgrades and new technology.

The company wants non-indexing of assets to deliver more cash and changes to the weighted average cost of capital calculations.

The Commission has now released its updated draft models to take effect from April next year with submissions due by October 8 and cross submissions by October 15 with no lee way on deadlines.

The final DPP decision will be published on November 27.

In total for distributors on the DPP, proposed allowable revenues are lower overall than initially put forward. In the first year of the DPP3 regulatory period (2020/21), revenues are $28m or 2.7% lower than in the initial draft.

The Electricity Retailers Association said in its submission on the original draft that over the last ten years lines costs per kWh have increased by 24% above inflation, while non-lines costs per kWh have increased by only 3%.

“Rising prices in part reflect higher necessary capex for some EDBs. But increased costs for consumers can also reflect other factors that are contributing to inefficiencies, including regulatory settings.”

It said looking forward, further distribution price increases appear likely.

“There is little evidence of efficiency, productivity, and reliability improvements by EDBs as a whole under the current regulatory regime. Economic regulation should give monopolies incentives to innovate, invest and improve their efficiency. In reality, we have seen negative productivity growth, upward pressure on real prices for households, and reliability that is if anything declining on average.”

The Electricity Networks Association said in response to this: “Both ERANZ and several retailers have expressed strong views regarding the efficiency of EDBs and have cited price trend data from the MBIE quarterly survey of retail price as evidence of poor performance by EDBs over DPP2, and earlier.

“We do not consider that this sort of analysis is appropriate for a consultation regarding a draft decision on the revenue building blocks for DPP3. There are other forums and submission opportunities for these stakeholders to put forward advocacy positions – now is not the time.”

First published in Energy and Environment on September26 , 2019.

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