Commission warns EA Networks for $3.3 million price path contravention and accepts enforceable undertakings

The Commerce Commission has accepted enforceable undertakings from electricity lines company EA Networks for contravening its regulated price path by approximately $52,000 in the 2020 assessment period and issued a warning to EA Networks for contravening its regulated price path by approximately $3.3 million in the 2021 assessment period.

EA Networks is a part-consumer-owned electricity distribution business (EDB) in mid-Canterbury with approximately 19,900 consumers. As a regulated monopoly under the Commerce Act, EA Networks is subject to price-quality regulation through a default price-quality path (DPP). This sets a limit on the total revenue EA Networks can earn, which affects how much consumers pay for lines charges in their electricity bills.

Commissioner Elisabeth Welson said as part of its reporting obligations, EA Networks disclosed to the Commission that it had contravened its price path in the 2020 assessment period. Subsequently, the Commission identified an error in EA Networks’ pricing for the 2021 assessment period which led to the Commission finding EA Networks had also contravened the price path in the 2021 assessment period.

“The Commission decided to accept enforceable undertakings from EA Networks under which it would return its overcharge to consumers in respect of the 2020 price path contravention and to issue a warning in respect of the 2021 price path contravention” she said.

“As part of the enforceable undertaking EA Networks is required to report on the steps it has taken in response to a report by Deloitte into the causes of the 2020 contravention.”

Ms Welson said that the Commission’s investigations found EA Networks’ price-setting conduct in the 2020 and 2021 assessment periods to be careless, and the result of human error and insufficient controls.

“In making our enforcement decisions, we considered that EA Networks acted quickly and in consumers’ best interests to announce a refund of approximately $3.5 million in the 2021 assessment period. Also, in response to the 2020 contravention, EA Networks has now taken steps to prevent price-path contraventions occurring again in the future.

“These were key factors in our decision to issue a warning letter rather than seek a pecuniary penalty in respect of the 2021 price path contravention.

“Enforceable undertakings weren’t required for the 2021 contravention because EA Networks had already repaid consumers and undertakings are in place as a result of the 2020 breach.”

A copy of the enforceable undertakings for the 2020 price path contravention and warning letter for the 2021 price path contravention are available on the Commission’s case register.

Background

The current price-quality regulatory regime applying to EDBs took effect in 2009. The aim of the regime is to mimic the effects seen in competitive markets so regulated companies, such as EA Networks, are limited in their ability to earn excessive profits, as well as having incentives to innovate, invest, and provide services at a quality consumers expect.

For the 2020 assessment period, the default price-quality path for EA Networks was set by the DPP2 and applied to the regulatory period from 1 April 2015 to 31 March 2020. Under the DPP2, to contravene the price path, a non-exempt EDB’s notional revenue for the assessment period must have exceeded its allowable notional revenue for the assessment period.

For the 2021 assessment period, the default price-quality path for EA Networks was set by the DPP3 and applies to the regulatory period 1 April 2020 to 31 March 2025. Under the DPP3, to contravene the price path in the first assessment period of the regulatory period, a non-exempt EDB’s forecast revenue from prices for the assessment period must have exceeded its forecast allowable revenue for the assessment period.

The maximum financial penalty that can be imposed by a court on a non-exempt EDB for a contravention of its price-quality path is $5 million per act or omission, with any penalty payable to the Crown.

The Commission has the power to accept enforceable undertakings under section 74A of the Commerce Act 1986. If the supplier fails to comply with the enforceable undertakings, the Commission may enforce the undertakings in the High Court under section 74C.

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