Commerce Commission releases draft input methodologies

The Commerce Commission today released draft input methodologies for electricity distribution services and gas pipeline services.

The draft input methodologies concern the valuation of assets, allocation of costs and treatment of taxation. The Commission has already specified these input methodologies for customised price-quality path proposals and information disclosure regulation. Today’s draft input methodologies also specify these for default price-quality paths.

Input methodologies are the upfront rules, processes and requirements for services regulated under Part 4 of the Commerce Act.

The Commission was directed to determine these input methodologies by the High Court following an appeal by Vector Limited in September 2011. At that time, the High Court also directed the Commission to determine a stand-alone starting price adjustment input methodology; however, on 1 June 2012 the Court of Appeal decided that this was not required.

The Commission will finalise the draft input methodologies by 30 September 2012. In the meantime, submissions are welcomed on the draft input methodologies and the Commission’s draft reasons by 6 July 2012, and cross-submissions by 17 July 2012. These documents are available at www.comcom.govt.nz/additional-input-methodologies-for-electricity-and-gas-dpps

There are two upcoming processes for default price-quality paths in which the final input methodologies could be applied: setting the initial default price-quality path for suppliers of gas pipeline services, and a potential one-off reset of the default price-quality path for electricity distribution services. The Commission will consult on these processes separately.

Background

What is price-quality regulation?
Under Part 4 of the Commerce Act, all suppliers of electricity distribution services and gas pipeline services are subject to either a default price-quality path (DPP) or a customised price-quality path (CPP). The only exceptions to this are some electricity distribution businesses which are exempt on the basis of consumer ownership.

A DPP is a generic form of regulation applied to all businesses over a four to five year period (called a regulatory period). Under a DPP, each business is set a starting price which is allowed to increase broadly in line with inflation over the regulatory period. As well as an inflationary increase, an adjustment based on the expected productivity of the industry as a whole is also factored into the annual rate of adjustment.

At the end of each regulatory period the DPP is reset based on updated information. Where a business considers the DPP does not suit their particular circumstances, they can apply for a CPP. A CPP has the same key components as a DPP but uses information more specific to the business.

What are input methodologies?
Input methodologies are rules, requirements and processes that apply to regulation under Part 4 of the Commerce Act. The Commission determined input methodologies for the first time in December 2010. Establishing these rules, requirements and processes upfront is intended to promote certainty for regulated businesses and consumers. Examples of topics covered by input methodologies include the weighted average cost of capital, the valuation of assets, cost allocation, and treatment of tax. The Commission is required to consult with interested parties when developing input methodologies. You can read more on input methodologies at www.comcom.govt.nz/input-methodologies-2

Who will the final input methodologies apply to?
The final input methodologies will be used by the Commission when it sets or resets any default price-quality path for suppliers of electricity distribution services and gas pipeline services. Currently, there are 17 electricity distribution businesses and four gas pipeline businesses subject to default price-quality regulation in New Zealand. A list of these businesses can be found at http://www.comcom.govt.nz/electricity-default-price-quality-path/ and http://www.comcom.govt.nz/gas-default-price-quality-path/

What decision did the Commission appeal?
In Vector Limited v Commerce Commission on 26 September 2011 (CIV-2011-485-536), the High Court directed the Commission to determine a starting price adjustment input methodology and certain other input methodologies that apply to the default price quality path. The Commission appealed the part of the decision relating to the starting price adjustment input methodology. In Commerce Commission v Vector Limited on 1 June 2012 (CA7022011) the Court of Appeal allowed the Commission’s appeal, confirming that the Commission is not required to determine a starting price input methodology for electricity distribution and gas pipeline services.