Commerce Commission submissions archives
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2009
Summary
In this submission we:
- noted that the Commission still had to consider submissions on its earlier draft decisions paper and consequently much of the detail in the draft determination could change
- endeavoured to address the current form of the determination and suggested changes required to reflect our earlier submission
- answered the Commission’s specific questions in relation to defined terms, transmission charges and pass through costs, allowable notional revenue, price restructuring notification requirements, quality standards assessment, compliance standard requirements and annual and multi year assessments.
Summary
In this submission we:
- were pleased to see the Commission’s broad recognition of the paramount importance of the s 52A purpose statement
- continued to hold the view that there was good reason to begin the new regulatory period with an up-to-date 2010 ODV that was then rolled forward using an indexed historic cost (IHC) approach, since this would best reflect the costs faced by a hypothetical new entrant (HNE) in a workably competitive market
- supported a principles-based ODV handbook and an approach that permitted the use of independent valuers to assess the replacement value of assets based on local conditions – as opposed to striving for national consistency merely to allow greater comparability in the context of the information disclosure regime
- considered that a coherent regulatory package based on the HNE principle would be properly supported by an up-to-date ODV roll forward using an IHC approach, a tax expense approach (which would be simple to implement and consistent with a low cost DPP) and a cost allocation methodology based on ACAM – such a regulatory design, when taken as a whole, in our view would best deliver against the` workable competition standard` and the criteria in s 52A
- disagreed with a number of the contentions put forward by several of the Commission’s experts at the input methodologies conference, and sought to highlight those matters throughout our cross-submissio
- included a report prepared for us by NERA Economic Consulting on asset values in workably competitive markets.
Summary
In this submission we:
- agreed with the majority of the paper’s 22 draft decisions, either in total or in part, and commented on each of the draft decisions
- agreed in principle with the proposal to use the actual prices posted by each EDB as at 31 March 2010 as the starting prices
- noted that if the 31 March 2010 prices were used as starting prices, then EDBs whose prices are currently set below their existing price paths would lose that ‘headroom’
- expressed our concerns about negative effects of the ‘downwards price ratchet’ that would result from the paper’s proposals
- considered that a forecast approach to CPI would be superior to the proposed alternative six-month lagged approach
- agreed in principle with the draft decision to annually update base quantities in the notional revenue formula under a DPP, dispensing with the use of a fixed reference year, however we considered that there were some definitional problems with the specification of the price path assessment formula (Formula 7)
- accepted that annual quantity updates might help facilitate tariff changes, however we considered that those updates would not resolve the problem of demonstrating price path compliance, at least not where entirely new quantities were devised
- did not consider that the proposed approach to pass-through of costs would of itself remove the risk of non-compliance
- agreed that the X factor should be set at 0%, and supported the Commission’s approach to consider a wide range of inputs when it makes this decision rather than adopt a single mechanistic approach.
Summary
In this submission we:
- noted that the Commission should take maximum advantage of the time available to consult and develop its requirements, and not determine new information disclosure requirements until after the applicable input methodologies have been finalised and draft determinations issued
- submitted that developing relevant and useful performance indicators and information disclosure requirements is a complex exercise and we would welcome the opportunity to work with the Commission on these issues in a workshop environment
- recommended that the Commission should limit the information disclosure requirements to no more than that necessary to meet the purpose of the control regime – requiring repeated disclosure of the same information but in subtly different formats is unnecessary and does not fulfil the purpose of Part 4
- provided detailed answers to the Commission’s specific questions
- endorsed the ENA’s recommendations in relation to the consultation paper.
Summary
In this submission we:
- noted that the Commission had put considerable effort into producing the recent default price-quality discussion paper (DPP paper), the information disclosure discussion paper (IDP) and this input methodology paper
- concluded that while the Commission had produced a significant amount of work, it remained extremely difficult to see just how the reforms would all fit together – considerable uncertainty remained in relation to detail
- recommended that to the extent possible, the Commission should slow down its current process and take advantage of legislative provisions which provide opportunity to spend an additional six months to develop input methodologies
- did not respond to any of the 298 questions posed by the Commission, as many details of the input methodologies were uncertain – in our view, the Commission had not yet set out various evaluation criteria relating to the customised price path applications and the practical application of the input methodologies
- submitted in detail on significant issues raised in the paper and commented on specific chapters.
Summary
In this submission we:
- commented on the two companion papers to the Commission’s Reset of Default Price – Quality Path for Electricity Distribution Businesses discussion paper (the DPP paper) prepared by Economic Insights (EI) in June 2009
- summarised the substantial theoretical and practical shortcomings in the industry-wide total factor productivity (TFP) methodology proposed by EI for determining the industry-wide X-factor for the default price-quality path
- provided an overview of the mischaracterisations contained in the assessment of the merits of the different asset valuation approaches
- included a critique of the EI papers by Dr Jeff Makholm, Senior Vice President of NERA Economic Consulting, which highlighted the clear unsuitability of the proposed methodology for determining the X-factor
- concluded that there was very little merit in any of the material prepared by EI as it did not help to implement the new regime.
Summary
In this submission we:
- were encouraged by the tenor of the Commission’s approach to the DPP reset, and welcomed the Commission’s recognition of the importance of encouraging electricity distribution businesses (EDBs) to innovate, improve efficiency and invest in replacing and upgrading assets
- did not support all of the Commission’s proposals, as many of the proposals relied heavily on other materials released by the Commission which we had not yet had a chance to review
- noted that the potential impacts on EDBs of a significant number of the more critical proposals were difficult to predict, as they relied in many cases on the subsequent development of input methodologies
- supported some specific aspects of the paper
- commented in detail on four important issues – the opening regulatory asset base, starting prices and potential P0 adjustments, use of TFP to determine the rate of change, and quality standards
- provided detailed answers to the Commission’s specific questions.
Summary
In this submission we:
- broadly supported the three-stage default price-quality path (DPP) reset process set out in the paper
- expressed our concern, in particular, about the lack of guidance from the Commission on the input methodologies that will be relevant to the DPP reset
- considered that the Commission’s initial view on setting the X-factor (by long-run average productivity as measured by total factor productivity analysis) is appropriate
- encouraged the Commission to reconsider its preliminary view that international measures are inappropriate when setting the X-factor – given the serious short-comings in the New Zealand data it is difficult to imagine why the Commission would avoid international sources
- urged the Commission to consider the recessionary economic environment when setting the initial X-factor, and to err on the side of prudence when faced with uncertainty
- submitted that the Commission will need to address the significant risk associated with EDBs forecasting CPI movements when they set prices to meet the CPI-X requirements – a technical breach would be possible simply due to forecasting errors
- supported initial starting prices based on those that applied at the end of the preceding regulatory period
- were pleased that the Commission acknowledged EDBs’ concerns about technical breaches in relation to quality – we would be troubled by any arrangement which imposed penalties on EDBs for unavoidable or inconsequential breaches
- submitted that in exercising its judgment when setting the X-factor, the Commission should ensure that it does not provide any disincentive to invest in energy efficiency measures, i.e., ‘first do no harm’
- suggested a way to monitor and improve/reduce technical losses.
Summary
In this submission we:
- noted that the discussion paper contained relatively little substance and the analysis of regulatory options was mostly abstract and academic
- expressed our concerns at the wide scope of the discussion paper, the limited timeframe for submissions and the Commission’s failure to articulate a clear position on all material matters
- highlighted the full significance of the legislative change reflected in the new section 52A purpose statement – the additional express reference to innovation and investment incentives sends a clear signal that the Commission must focus more closely on these factors when making regulatory decisions
- noted that a consequence of the lack of recognition by the Commission of this shift in legislative priorities is continued uncertainty surrounding the balancing exercise implicit in the new purpose statement
- disagreed with the Commission’s view that the FCM concept and NPV=0 principle are central guiding regulatory principles with multiple points of application
- emphasised that the C1 factor employed by the Commission under the thresholds regime to ostensibly account for the relative productivity of EDBs can no longer be used to determine the default price/quality path (DPP) following the introduction of section 53P(10)
- noted that it is still unclear what input methodologies (if any) the Commission considers to be relevant to the reset of the DPP for EDBs, scheduled to occur on 1 April 2010 (the discussion paper is silent on this issue)
- submitted that as the discussion paper provides very little in the way of detailed proposals or options with respect to the critical input methodologies that will affect EDBs, more focussed consultation is required
- stated that the appropriate base for tax depreciation should be the regulatory asset value, with the benchmark tax depreciation allowance derived by reference to that value
- disagreed with the Commission’s assertion that the new Part 4 regime imposes a requirement for expanded information disclosure requirements, over and above the requirements which applied under section 57T(1)
- responded selectively to the extent possible on other key matters facing electricity distribution businesses (EDBs).
2008
Summary
In this submission we:
- supported the Commission’s intention to not require electricity distribution businesses (EDBs) to revalue their regulatory asset bases (RABs) using the optimised deprival valuation (ODV) methodology as at 31 March 2009
- outlined our reasons for supporting that intention.
Summary
In this submission we:
- considered that the Commission’s analysis of the settlement offers put forward by PowerCo and Vector did not materially address the companies’ arguments
- expressed our concerns about the Commission’s continued rejection of the 25 August 2005 optimised deprival values (ODV) as the appropriate opening asset valuations for the purposes of establishing regulated prices in the longer term
- stated that in our view, if the Commission persisted with its misplaced emphasis on setting RAB values that pre-dated control, it would not meet its statutory obligations under the Act
- reemphasised our view that the opening RAB values should be based on the relevant ODV valuations as at 25 August 2005, without any adjustment for ‘revaluation gains’ accruing prior to that date.
Summary
In this submission we:
- endorsed the Electricity Network Association’s (ENA) submission on the Commission’s revised electricity disclosure requirements
- raised our concerns and indicated our growing frustration with the Commission’s processes in relation to information disclosure
- considered it far more logical to defer further work on the information disclosure regime until it was clear whether or not the Commerce Amendment Bill would become legislation in the current parliamentary year
- outlined our concerns about the Commission’s proposed requirements to provide data that we currently do not collect, including our concern that data would be requested on the basis that it might be nice to have, rather than because it was needed for monitoring or control purposes
- commented in detail on the proposed disclosures, definitions and the handbook.
Summary
In this submission we:
- outlined our concerns about the proposed sequential release of draft guidelines and sector-specific input methodologies – each of these matters should be considered concurrently to make critical linkages
- suggested that if the Commission persists with a sequential approach, the consultation order should change
- highlighted the importance of allowing sufficient time to adequately consult.
Summary
In this submission we:
- expressed our concern about several contentions the Commission made in its draft TSO determination about the applicability of the hypothetical new entrant (HNE) standard to the valuation of energy network assets
- included a paper from NERA Economic Consulting, explaining that the crucial aspect of the HNE standard – its notional or hypothetical nature – had been misconstrued by the Commission in its revised draft determination.
Summary
In this submission we:
- noted that while the purpose of the consultation (to align various model contracts) could be useful, most of the relevant documents were ‘model’ agreements and any ‘alignments’ could vary in actual contracts compared to the various models
- outlined various issues in relation to ongoing development and retention of model contracts
- provided detailed responses to the Commission’s specific questions.
Summary
In this submission we:
Summary
In this submission we noted that:
- the current thresholds under Part 4A (expiring on 31 March 2009) should continue to apply until 31 March 2010, and should not be converted into enforceable control paths
- input methodologies should be introduced in two phases
- the purpose statement remained problematic
- appeal rights should attach to ‘final’ decisions, rather than to input methodologies
- the Commission should be required to consider more than four customised proposals in any given year, in certain circumstances.
Summary
In this submission we:
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emphasised that as the future regulatory framework for ELBs remained uncertain, our submission was prepared without a clear understanding of the regulatory regime within which the information disclosed would be employed
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noted that this lack of clarity limited the extent to which we could meaningfully comment on the relative merits of the proposed changes to the disclosure regime
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agreed with some aspects of the proposal, subject to a thorough understanding of the wider implications and clarification of the current uncertainties
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identified several areas of concern.
Summary
In this submission we:
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emphasised that the Commission must have regard to the prospect that the 2009 reset would establish a default price path that would operate under a legally binding control regime created by a revised Part 4/4A of the Commerce Act
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expressed our concerns that the Commission's proposals lacked clarity, detail and a robust methodology
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submitted that a partial building blocks approach was a necessary minimum of control (together with an appropriate adjustment to ensure all electricity lines businesses entered the new regime on an equal basis) and the application of a CPI-X price path (where X is common to all businesses)
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noted that the thresholds must be finalised and gazetted by the end of November 2008
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provided detailed comments and answers to questions asked by the Commission.
Summary
In this submission we:
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agreed that pricing principles were needed
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considered that pricing approaches were inherently linked to asset management planning
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raised some concerns about the Commission's proposed pricing principles and the prescriptive nature of the proposed disclosure requirements.
2007
Summary
In this submission we emphasised the following concerns:
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the Commission’s draft decision in relation to the establishment of appropriate opening values for the regulatory asset base (RAB) for PowerCo and Vector. These values should be based on the cost that would be faced by a hypothetical new entrant (HNE) of average efficiency as at 25 August 2005
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in its draft decision, the Commission took a quite different, and erroneous approach. Its treatment of ‘amortised revaluation gains’ would essentially deliver an outcome that was consistent with it having established 1 July 2002 and 31 March 2003 as the starting point for control (or t0) for Powerco and Vector, respectively
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the Commissions claim that its approach is consistent with the financial capital maintenance (FCM) concept. This is not the case.
Summary
In this submission we:
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disagreed with the Commission's proposed guidelines and approach for evaluating extreme events
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recommended that the Commission not proceed with the guidelines and instead develop guidelines as proposed by the Electricity Networks' Association.
Summary
In this submission we:
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suggested that the Commission consider extending the current threshold period to provide time for a more thorough review
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identified several concerms in relation to the proposed timetable for the reset.
2006
Summary
In this submission we:
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continued to support the Commission’s process that provides for an administrative settlement as an alternative to control
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submitted that the Commission has defined thresholds as much more than a ‘screening mechanism’, despite the Commission’s reference to the thresholds using this terminology
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emphasised that there is a need to allow some functional monopoly rents in order to provide incentives for efficient investment and innovation
- submitted that a robust consultation process in the lead up to the 2009 threshold reset is extremely important to improve the certainty and stability of the regulatory regime.
Summary
In this submission we:
- supported in general the Commission's approach outlined in the discussion paper
- particularly welcomed the Commission's support for incentive regulation approaches (rather than rate of return regulation) and its expressed intention to set the price control for natural gas services by reference to the cost of business, as determined under a 'building block' framework
- noted that some aspects of the Commission's proposal needed further development or clarification.
Summary
In this submission we:
- continued our emphasis on the 'averagely efficient new entrant test'
- asked the Commission to provide some guidance on the future of the ODV handbook (as it relates to Transpower's assets) as this would impact on the way transmission asset replacement costs would be valued in the future.
Summary
In this submission we:
- emphasised that the 'averagely efficient new entrant test' should be applied. In particular, returns should not be capped at the weighted average cost of capital (WACC), because WACC represents the return achieved by the averagely efficient new entrant - individual companies will achieve returns above or below WACC, depending on their efficiency
- commented in detail on aspects of the Commission's proposal.
Summary
In this submission we:
- generally supported the Commission's approach to determine the value of system fixed assets
- raised several concerns, including concerns about the high level of detail with which the Commission proposed to implement the roll-forward. We believed that the cost to provide some of the proposed detailed information would outweigh any benefits from the proposed disclosure.
Summary
In this submission we:
- commented on technical detail of proposed amendments to the distribution thresholds notice.
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