Balance struck between keeping electricity costs low for customers and ensuring adequate investment

The Commerce Commission has released its final decision on the default price-quality paths (DPPs) which apply to 15 of New Zealand’s regulated electricity lines companies for the period 2020-2025.

The price-quality paths set out the maximum revenue the monopoly lines companies are allowed to earn from their customers and the minimum quality standards they must meet, measured in terms of power outages on their networks. Electricity distribution costs make up about a quarter of an average residential consumer’s monthly bill.

Deputy Chair Sue Begg said the final decision strikes a balance between the need to minimise electricity distribution costs for consumers, while ensuring a stable regulatory regime where lines companies have incentives to invest in their networks to maintain reliability and meet the long-term needs of their customers.

“For most customers, this reset will result in an initial reduction in distribution charges in April next year. This reduction is largely due to lines companies having access to cheaper finance due to low interest rates. Charges will then increase in line with inflation over the remaining four years,” Ms Begg said.

“For lines companies we have allowed for increased investment in their networks, with companies forecasting more than $2 billion will be spent on renewing ageing poles and wires and powering growing communities over the next five years.”

“We have also provided an innovation allowance of up to $6 million over the next five years for lines companies regulated under the DPP to invest in new practices and technologies as New Zealand moves to electrify the economy and reduce its carbon footprint. Lines companies have always been allowed to innovate under our regime, but this allowance provides an added incentive.”

The Commission has kept reliability standards broadly the same. This means lines companies will need to ensure customers do not experience any more power outages than they currently do.

Ms Begg said the Commission recognises the concern from some lines companies about the effect a lower cost of capital is having on their allowable revenue. However, the Commission is confident its decision still provides appropriate revenue to allow adequate investment in their networks. The decision at this time not to investigate amendments to the cost of capital rules, which had been proposed by some lines companies, took account of the need for certainty in key aspects of the regulatory regime as well as whether there were any exceptional circumstances justifying the inclusion of these proposals in our review.

The DPP comes into effect on 1 April 2020 when changes in revenues will flow through to prices for consumers. The impact of the price-quality path reset varies across lines companies and regions. Graphs showing the impact of the reset on individual lines companies’ revenues and consumer bills can be found here.

A copy of the final decision is available on our website.

A map of all local lines companies broken down by region and the type of regulation they are subject to can also be found on our website.

Background

Under the Commerce Act, the Commission regulates monopoly infrastructure providers, including most local lines companies, to ensure they deliver strong and sustainable services for the long-term benefit of consumers.

The Commission’s price-quality regulation sets rules about how much the lines companies can earn from their customers and the minimum reliability standards they must deliver. The companies must also publicly disclose information about their financial and physical performance of their networks to increase transparency. Community-owned lines companies are exempt from price-quality regulation.

The Commission only sets the maximum overall revenue these companies can earn each year and does not control what lines companies charge individual consumers or what electricity retailers charge their customers. We expect that electricity retailers will be transparent on the extent to which changes in distribution changes are reflected in a consumer’s bill, consistent with the Electricity Authority’s Guidelines for communications about price changes. The Electricity Authority’s guidelines can be found here.

Default price-quality paths compared to customised price-quality paths

DPPs are intended to be a relatively low-cost regulatory option and are not designed to meet the exact needs of every lines company. Where more significant infrastructure investment might be needed, a customised price-quality path (CPP) is likely to be a more suitable option as it can be tailored to a lines company’s specific circumstances. Powerco and Wellington Electricity are currently on CPPs.

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