Commission releases approach for setting starting prices for gas pipeline businesses

The Commerce Commission today released a discussion paper outlining our proposed approach to the setting of starting prices for gas pipeline businesses subject to default price-quality paths (DPPs) under Part 4 of the Commerce Act 1986.

The starting price is a fundamental component of a DPP. It sets a limit on a supplier’s prices or revenues.

In April 2011, we released a discussion paper on the Initial DPP for Gas Pipeline Businesses (April Discussion Paper). The April Discussion Paper set out our views on a number of components of the Initial DPP, however it did not cover the setting of starting prices. Today’s paper addresses the approach the Commission proposes to adopt for considering starting prices.

To better promote the purpose of Part 4 the Commission proposes establishing starting prices that are based on the current and future profitability of each supplier. We set out in our paper the approach we intend to follow to do this.

The Commission is seeking feedback on the proposed approach as set out in today’s discussion paper by 28 September 2011. Cross submissions are due by 7 October 2011.

Submitters will have another chance to comment on any or all of the components of the DPP for gas pipeline businesses when the Commission releases its Draft Decisions in November 2011.

The paper Setting of Starting Prices for Gas Pipeline Businesses under the Initial Default Price-Quality Path – Discussion Paper can be found at - http://www.comcom.govt.nz/2012-default-price-quality-path


Background

Under s 55E(2) of the Commerce Act 1986, the Commission is required to set an Initial DPP for gas pipeline businesses under Part 4 of the Act.

Starting prices establish the initial upper limit placed on a supplier’s prices or revenues at the beginning of a regulatory period. These allow the Commission to assess the appropriate start point for the weighted average price cap or the total revenue cap for the regulatory period.

Decisions on starting prices assist in setting a price path where a supplier can be expected to earn a normal rate of return over the regulatory period, while making efficient investment that meets customer demands. Where a supplier considers that a DPP is unsuitable for its particular circumstances, it may apply to the Commission for a customised price-quality path.

The attached consultation paper sets out our proposed approach for setting starting prices for gas pipeline businesses under the Initial DPP.

The Commission intends to establish what the level of starting prices will be for each gas pipeline business in a Draft Determination paper which we plan to release in November 2011.

Services currently regulated under Part 4 of the Commerce Act 1986 are electricity lines services, gas pipeline services and specified airport services at Auckland, Wellington and Christchurch airports (which are subject to information disclosure regulation only).

Regulated gas pipeline businesses are:
Gas Transmission Businesses: Maui Development Limited and Vector Limited.
Gas Distribution Businesses: Powerco Limited, Vector Limited and Gasnet Limited.