Efficiency thresholds remain important for lines businesses

The Commerce Commission recently published a discussion paper on re-setting the efficiency thresholds of its targeted control regime for large electricity lines businesses for the 2009 to 2014 period. In this article senior associate David Blacktop outlines why the commission's current price/quality path thresholds reset remains important for electricity lines business (and potentially for other sectors as well), despite the announced changes to the price control regime for the electricity lines business.

Current regime

The Commerce Commission is responsible for determining whether to control the services provided by New Zealand's 29 electricity lines businesses under Part 4A of the Commerce Act. The commission has set price and quality thresholds to identify those businesses that are candidates for control. The commission uses a CPI-X price path threshold which is set for a five year period. This allows a lines company to increase its prices by an amount equal to CPI-X each year, with each firm being allocated an X value. The Supreme Court has recently affirmed this approach.

The current five year regulatory term expires on 31 March 2009. The commission has commenced consultation on price and quality path thresholds that will apply for the 2009 to 2014 period. In setting out its consultation process, the commission commented that "While no preliminary decision has been made on the form of thresholds, the commission is of the view that the current broad structure should form the initial basis for the new regime".

Proposed legislative changes

This reset process takes place with the Government's announced amendments to the price control regime for the electricity lines business ready to be introduced to Parliament. Minister of Commerce Hon Lianne Dalziel has indicated as recently as last week that she intends to introduce the Commerce (Regulated Goods and Services) Bill into the House mid-March 2008, and in her view there is potential for this bill to be passed prior to the election.

These changes repeal the existing regime and replace it with a new regime under which the Commerce Commission will have a broader range of control options. A key change is that lines businesses would be subject to a default/customised price path regime. Under this new regime the commission would set:

• a default price-quality path (like the current thresholds); but

• provide an ex-ante, time-bound opportunity for a firm to seek a customised path (e.g., where it needs to make a step-change in investment to maintain quality standards required by consumers).

This change has been introduced because lines companies have been concerned about the lack of investment certainty the current regime provides. Investment requires a return, however gaining that return can cause companies to breach their price path thresholds. Under the current regime, this requires lines companies to effectively make decisions and then justify those investment decisions to the commission.

The customised regime will provide an opportunity for firms to seek pre-approval and certainty for investments.

Default path still important

The practical reality is that the default path will continue to apply to most businesses and businesses will compete to get their customised case considered by the commission. The Government's intention is that the initial default path will be the price path thresholds, meaning that the current review retains a vitally important role for lines companies.

More broadly, as it will become the first default path under the new regime, it is likely to also be relevant for other sectors that may be subject to a default regime in the future. The commission is likely to call on its intellectual capital and learning from the electricity regime in determining a customised path for any other sector.

Process for reset

The commission published a discussion paper (Discussion Paper on the Threshold Reset 2009) and is currently considering submissions on this paper. It intends to issue and consult on a Methodology Paper in May/June 2008. It is intended that this will be followed by a Draft Decision Paper in late September 2008 and a Final Decision Paper in December 2008.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.