Draft decision to reduce Wellington Electricity’s allowable revenue as it transitions to a default price-quality

The Commerce Commission has released a draft decision on how it proposes to move Wellington Electricity Lines Limited from a customised price-quality path (CPP) to a default price-quality path from 1 April 2021.

Wellington Electricity has been on a customised price-quality path since April 2018. This has enabled it to spend $31 million to improve its network’s resilience to a major earthquake. The CPP period is due to end on 31 March 2021.

“Wellington Electricity will soon complete its CPP earthquake readiness programme and is moving back to a default price-quality path,” Commission deputy chair Sue Begg said.

“The draft decision released today outlines two options for setting the revenue that Wellington Electricity can recover from consumers. We can either roll over prices from the CPP or set a new revenue allowance. We propose to set a new revenue allowance for the regulatory period from 1 April 2021, to better reflect Wellington Electricity’s expected future costs.

“Our proposal would see a 2.5% reduction in net allowable revenue for Wellington Electricity relative to the current year’s CPP value.

“This decision provides a relatively low-cost way of managing how Wellington Electricity transitions to the final four years of the 2020-2025 DPP, Ms Begg said.”

A copy of the draft decision is available on the Commerce Commission website. A final decision is expected by November 2020.

Changes to the line charges for electricity consumers in the Wellington region will be advised by Wellington Electricity prior to 1 April 2021, and we expect they will be reflected in consumers’ electricity bills from the same date.

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 is likely to be a more suitable option as it can be tailored to a lines company’s specific circumstances.

Wellington Electricity’s CPP

Wellington Electricity owns and manages the Wellington electricity network which connects to approximately 166,000 homes and businesses in the Wellington, Hutt Valley and Porirua regions. In March 2018, the Commission approved $31 million of spending to allow Wellington Electricity to improve its network’s resilience to a major earthquake.

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