NEW ZEALAND GAZETTE, No. 84

12 JULY 2012

Commerce Commission

Commerce Act 1986

Commerce Act (Summary of Transpower Input Methodologies Determination) Notice 2012

Pursuant to Part 4 of the Commerce Act 1986 (“Act”), the Commerce Commission (“Commission”) gives the following notice.

Notice

1. Title—This notice is the Commerce Act (Summary of Transpower Input Methodologies Determination) Notice 2012.

2. Transpower input methodologies determination

2.1 On 29 June 2012, the Commission made the Commerce Act Transpower Input Methodologies Determination [2012] NZCC 17 (“Determination”).

2.2 The Determination sets out the input methodologies that apply to the supply of electricity lines services, as that term is defined in section 54C of the Act (“Electricity Lines Services”) by Transpower, as that term is defined in section 54B of the Act (“Transpower”) for the purpose of information disclosure regulation and individual price-quality regulation, as required by Part 4 of the Act.

2.3 In accordance with section 52W(2) of the Act, this notice is published as a brief description of the nature of each input methodology and the goods or services to which it applies. It includes the reasons for determining the methodologies and how the methodologies are publicly available.

2.4 The input methodologies in this determination are the same in all respects as the input methodologies in the 2010 Decision (as amended by the Commission’s Decision No. 737 and consolidated on 1 November 2011).

3. Nature of the input methodologies and the goods or services to which they apply

The following input methodologies apply to Electricity Lines Services that are supplied by Transpower:

(a) cost of capital (an approach to calculating a weighted average cost of capital by applying a specified methodology that includes certain fixed parameters, and an approach to calculating a term credit spread differential); and

(b) asset valuation (an approach to calculating the value of the initial regulatory asset base and how this is rolled forward over time, including rules regarding depreciation and revaluation of assets); and

(c) cost allocation (an approach which ensures that costs that have been allocated under any agreement in respect of the provision of system operator services are not also recoverable through the charges for other Electricity Lines Services that Transpower supplies); and

(d) treatment of taxation (a tax payable approach to calculating a tax allowance for regulatory purposes); and

(e) regulatory rules and processes relating to:

(i) specification of price (which includes that maximum revenues will be specified by a total revenue cap, and identifies any costs that can be passed through to prices);

(ii) incremental rolling incentive scheme (an approach that allows Transpower to retain efficiency gains in controllable operating expenditure across regulatory periods); and

(iii) reconsideration of an individual price-quality path (the circumstances in which an individual price-quality path may be reconsidered within a regulatory period).

4. Reasons for determining the input methodologies

4.1 The Commission was required to determine input methodologies that apply to Electricity Lines Services (including Electricity Lines Services that are supplied by Transpower) by no later than 31 December 2010 (pursuant to an extension granted by the Minister of Commerce under section 52U(2) of the Act).

4.2 The Commission determined the input methodologies that apply to Electricity Lines Services (including Electricity Lines Services that are supplied by Transpower) on 22 December 2010. That followed a process of extensive consultation with interested parties, including by holding workshops and a conference, through which the Commission considered it had obtained sufficient information to make its input methodologies determination.

4.3 In a judgment dated 22 December 2011 the High Court declared the Transpower cost of capital input methodology to be unlawful to the extent of the Commission’s decision as to leverage, and required that the Commission consult again on that matter.

4.4 The Commission undertook further consultation with interested parties on leverage in the cost of capital input methodology and has obtained sufficient information to make its input methodologies determination.

4.5 Having considered all submissions received from interested parties within set time frames throughout the consultation process, the Commission considers that the input methodologies that it has determined meet the purpose of input methodologies as set out in section 52R of the Act and meet the purpose of Part 4 of the Act, as set out in section 52A of the Act and that no materially better alternatives have been proposed during the consultation process. After further consultation on leverage the Commission made its determination. The input methodologies in the determination are the same in all respects as the input methodologies in the 2010 Decision (as amended by the Commission’s Decision No. 737 and consolidated on 1 November 2011).

4.6 More comprehensive detail of the background and analysis to support these reasons for determining the input methodologies is set out in the Input Methodologies (Transpower) Reasons Paper, 22 December 2010 and in the Input Methodologies (Transpower) Supplementary Reasons Paper for Leverage in Cost of Capital, 29 June 2012 (the “Reasons Papers”).