Commerce Commission releases draft decisions on Input Methodologies for gas pipeline businesses

The Commerce Commission has today published the third in a series of papers important to the development of input methodologies for regulated industries under Part 4 of the Commerce Act. It has released a paper setting out its draft decisions and reasons on the input methodologies to be applied to suppliers of gas pipeline services—ie, gas pipeline businesses (GPBs).

The purpose of input methodologies is to promote certainty for suppliers and consumers in relation to the rules, requirements and processes applying to the regulation, or proposed regulation, of goods or services under Part 4.

The key draft decisions the Commission has announced in relation to input methodologies for gas pipeline businesses are:

•  In most circumstances, GPBs should apply an accounting-based approach to cost allocation, based on causal or proxy-based allocators. Alternative approaches are provided for where the approach is unlikely to be cost effective or it is likely to lead to investments in unregulated services being unduly deterred.
•  The initial Regulatory Asset Base value for each GPB should be the 2009 value of assets provided in accordance with the most recent regulatory requirements applying to the GPB, with some adjustments.
•  GPBs must revalue their Regulatory Asset Base annually using CPI-indexation.
•  Depreciable assets must be depreciated on a straight line basis in most circumstances.
•  Maui Development Ltd’s tax obligations must be estimated using a tax payable approach. For all other GPBs, their tax obligations must be estimated using a ‘deferred tax’ approach, modified for NPV-equivalence with a tax payable approach.
•  The Commission will produce and publish vanilla and post-tax cost of capital estimates of a five-year term for GPBs on an annual basis using the Simplified Brennan-Lally model.
•  The pricing methodologies input methodology is consistent with the pricing principles in the Gas Authorisation, with some minor modifications.
•  The input methodology determination will include rules and processes on how price-quality regulation is expected to operate.

“The Commission is making steady progress through a raft of work to determine the input methodologies which will, in the long-term, provide greater certainty for regulated businesses. Today’s release of these draft decisions and reasons is another important step towards the establishment of the new regime under Part 4,” said Commerce Commission Chair Dr Mark Berry.

Submissions on the draft decisions are due by 6 August 2010.
The paper Input Methodologies (Gas Pipeline Services) Draft Reasons Paper can be found at www.comcom.govt.nz/input-methodologies/

Background
The Commission released an update on the process to determine input methodologies on 13 May 2010. The Commission will consult on its draft decisions for input methodologies between now and August 2010. The Commission is required to finalise its Input Methodologies Determinations by 31 December 2010.

In May 2010 the Commission released the first of its input methodologies draft reasons papers, relating to airport services.

On 18 June 2010 the Commission released the second of its input methodologies draft reasons papers, relating to electricity distribution businesses.