Commerce Commission progresses default price-quality paths for gas pipeline services

The Commerce Commission today announced it is seeking feedback on its draft decisions on the first default price-quality paths for gas pipeline services regulated under Part 4 of the Commerce Act 1986.

The Commission proposes the initial gas price-quality paths should apply from 1 July 2012, and beset by ‘rolling over’ existing prices. Once the Commission has determined a starting price input methodology as required by a recent High Court judgment, it will consider whether the price-quality paths should be reset based on the profitability of each gas supplier.

“When complete, the price-quality paths will apply to the majority of gas pipeline services in New Zealand. This represents an important step forward in implementing Part 4 of the Commerce Act for gas businesses,” said Commerce Commission deputy chair, Sue Begg.

The proposed price-quality paths also set a quality standard for the gas pipeline businesses. The standard proposed for gas distribution businesses, is that 80% of emergencies must be responded to within 60 minutes. For gas transmission and distribution businesses, 100% of emergencies must be responded to within three hours.

The draft determinations and draft reasons paper for the price-quality paths are on the Commission’s website at http://www.comcom.govt.nz/2012-default-price-quality-path/

The Commission welcomes submissions on any aspect of these documents. Submissions are due by 5pm, 19 December 2011. Cross-submissions are due by 5pm, 20 January 2012.

All submissions/cross-submissions should be sent to: regulation.branch@comcom.govt.nz

 

Background

Part 4 Purpose

Under Part 4 of the Commerce Act 1986, the majority of suppliers of gas pipeline services in New Zealand are subject to price-quality regulation, referred to as price-quality paths. They apply to the gas pipeline services of GasNet Limited, Powerco Limited, Maui Development Limited and the gaspipeline businesses of Vector Limited. The price-quality paths do not apply to producers, shippersor retailers of gas in New Zealand.

A price-quality path sets the maximum average price, or total allowable revenue, that suppliers of gas pipeline services can charge. It also defines the standards for quality of services that these businesses must meet.

The purpose of Part 4 is to promote the long-term benefits of consumers. The Act provides that the Commission should do this by promoting outcomes that are consistent with outcomes produced in competitive markets, such that suppliers of regulated services have incentives to innovate and invest, improve efficiency and provide services at a quality that consumers demand; share with consumers the benefits of efficiency gains in the supply of those services through lower prices; and are limited in their ability to extract excessive profits.

Input Methodologies

The Commission published input methodologies determinations for gas pipeline businesses in December 2010. Input methodologies apply to default/customised price-quality regulation.

The Commission is bound by these input methodologies when setting the respective componentsof a price-quality path. These input methodologies can be found at http://www.comcom.govt.nz/input-methodologies-2/

Quality Standards

The Commission has defined a quality standard that gas pipeline businesses must meet. This quality standard works in conjunction with requirements of other agencies and existing mechanisms that seek to ensure the robustness of the gas pipeline network.

Other regulatory tools being developed by the Commission include new information disclosure requirements. These will replace the Gas Information Disclosure Regulations 1997, and will enable interested people to assess whether the purpose of Part 4 is being met. The Commission intends to consult on its new information disclosure requirements in December this year.

The safe supply of gas

Q: What is the Commission’s role in ensuring the safe supply of gas in New Zealand?

A: Ensuring network safety and quality for consumers of gas pipeline services is not just a role for the Commission. A number of existing mechanisms contribute to the provision of a safe and reliable supply of gas in New Zealand. In setting a quality standard under the price-quality path we have sought to complement, rather than duplicate, existing arrangements.

We note there is currently a lack of historical data on the quality of gas pipeline services in New Zealand. The revised information disclosure requirements will require greater disclosure of quality information. They will also enable interested parties to better understand how gas pipeline assetsare managed, the proposed levels of investment (including maintenance and replacementspending), the risks of asset failure, and how such risks are managed.

Q: What was the Commission’s role in the recent Maui Pipeline Leak?

A: The Gas Governance (Critical Contingency Management) Regulations 2008 govern the curtailment and restoration of gas supplies in the event of a major incident involving the supply of gas through pipelines. The Gas Industry Company has oversight over these regulations.

A review of the Maui pipeline leak is currently being undertaken by various parties including the Critical Contingency Operator and the Ministry of Economic Development. The Commission awaits the outcome of the review.

The information disclosure requirements being developed by the Commission are more rigorous than the existing requirements. We expect that, in the future, they will better enable people to understand how assets are being managed, proposed investment (including maintenance andreplacement spending), the risks of asset failure and how such risks are managed.