NEW ZEALAND GAZETTE, No. 42

1 APRIL 2011

Breaches of the price path

• The 2009/10 assessment period is a transition from the targeted control regime in the repealed Part 4A to default price-quality regulation under Part 4 of the Act. Accordingly, the Commission is of the view that strong evidence of excessive profits (above-normal returns) in this period would need to exist to warrant an intention to declare control.

• In assessing non-exempt EDBs performance against the price path, the Commission considered the return on investment disclosed by each non-exempt EDBs that breached the price path under the Electricity Distribution Information Disclosure Requirements issued 31 March 2004 (consolidating all amendments to 31 October 2008), as well as the effect of applying the input methodologies determined by the Commission under the Commerce Act (Electricity Distribution Services Input Methodologies) Determination 2010, Decision No. 710, 22 December 2010.

• The analysis undertaken by the Commission suggests that most of those non-exempt EDBs that reported a breach of the price path (as listed in Table 1 above) would not have been found to have earned above-normal returns for the assessment period if the input methodologies had applied during the assessment period. The Commission notes further that the asset valuation input methodology allows businesses to make some adjustments to their asset values that may result in an increase in their regulatory asset bases. Such increases, if they are realised, may also mean that returns that appear to be above-normal under the thresholds applying at the time, might not be considered above-normal in the future.

• Given that the price levels that led to the breach could be considered reasonable under the price-quality path applying from 1 April 2010, the Commission considers there is likely to be little benefit in declaring control for these businesses. Price levels that are found to be too high under the default price-quality path applying from 1 April 2010 could be addressed through the starting price adjustment provisions allowed under Part 4. Although starting price adjustments do not correct any over-recovery in the 2009/10 year, it will ensure that such over-recovery does not continue into the future. Given that non-exempt EDBs are now subject to control under Part 4, the Commission does not consider there will be any benefits from declaring control of any non-exempt EDBs under the transitional provisions of the Act.

• Accordingly, the Commission has decided not to take further action with respect to the breaches of the price path during the 2009/10 assessment period by the following non-exempt EDBs:

  • Centralines Limited
  • Eastland Network Limited
  • Horizon Energy Distribution Limited
  • Nelson Electricity Limited
  • Orion New Zealand Limited
  • OtagoNet Joint Venture Limited
  • The Lines Company Limited
  • Top Energy Limited

Breaches of the quality path

• Given the year-on-year variability in actual performance, the Commission is of the view that it will only take further action where evidence of sustained deterioration in reliability is exhibited by non-exempt EDBs.

• In assessing quality breaches, the Commission has followed the process outlined in its Regulation of Electricity Lines Businesses Targeted Control Regime Assessment and Inquiry Guidelines, 19 October 2004. Its analysis did not find evidence of a sustained problem for five of the non-exempt EDBs that reported a breach of the quality standard as listed in Table 1 above.