Commission consults ahead of key decisions on gas pipeline services

The Commerce Commission today released a discussion paper calling for views from gas pipeline businesses and other interested parties on its approach to its periodic reset of default price-quality paths (DPPs) for gas pipelines.

DPPs set the maximum amount that gas pipeline businesses can charge their customers over each four or five-year regulatory period and the minimum quality standards they must deliver. The settings are designed to limit excessive profits while encouraging appropriate levels of investment to ensure safe and reliable natural gas supply for consumers.

Commerce Commission Deputy Chair Sue Begg said that the reset comes at an uncertain time for the sector in the context of climate change and the Government’s commitment to 100% renewable electricity by 2030 and net zero emissions by 2050.

“The Climate Change Commission’s (CCC) final advice to the Government outlined a decarbonisation pathway that will likely result in a decline in natural gas use,” she said.

“However, gas will continue to be an important energy source for many consumers in the near term. We are therefore looking at how we can reset the DPP in a way that will provide them with a measure of certainty about price and quality over the short-term while ensuring that gas pipeline businesses only recover their efficient costs.”

The four gas distribution businesses subject to price-quality regulation under Part 4 of the Commerce Act 1986 are First Gas, GasNet, Powerco and Vector. First Gas also has a gas transmission business that provides gas to large users of natural gas such as big industrial plants, electricity generators and the gas distribution businesses. The gas distribution businesses transport gas to smaller users, including domestic consumers.

The DPP must be reset by 31 May 2022 and will take effect from 1 October 2022. The Act allows the Commission to roll over starting prices from the end of the preceding regulatory period or base them on the current and projected profitability of the gas pipeline businesses.

Ms Begg said that the Commission usually takes the latter approach because the direction of sectors that it regulates are reasonably predictable, which allows future profitability to be reliably modelled.

“Given the significant uncertainty over the future direction of the sector amid the CCC’s recommendations, this may no longer be the case for the gas industry,” she said. “We are therefore considering whether a rollover will better promote the long-term benefit of consumers, which is a key purpose of Part 4 regulation. We are also interested in stakeholders’ views on other ways the reset can mitigate the ongoing uncertainty in the gas sector.”

Submissions close at 5pm on 25 August 2021. Instructions for submitters are in the process and issues paper on the Commission’s website.

Background

Price-quality paths are a form of regulation applied to certain businesses that are regulated under Part 4 of the Commerce Act 1986. They are intended to influence the behaviour of those businesses by setting the total allowable revenue that the businesses can charge. They also set standards for the quality of services that each business must meet. This ensures that businesses do not have incentives to reduce quality to maximise profits under their price-quality path.

For gas pipeline services, there are two types of price-quality paths that suppliers can have. All businesses start off on a ‘default’ path which is generic in nature to provide a low cost form of regulation. If the default path does not suit their particular circumstances, a business can apply for a ‘customised’ price-quality path (CPP). CPPs paths use more business specific information, and rely on more in-depth audit, verification, and evaluation processes.

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