Commerce Commission consults on its draft decision to accept an administrative settlement offer from Transpower

LAWFUEL – The Legal Newswire – The Commerce Commission is proposing to accept an administrative settlement offer from Transpower, instead of placing Transpower’s transmission services under regulatory control.

The Commission is today releasing for consultation its draft decision paper outlining its preliminary view that it should not declare control of Transpower’s transmission assets, and that it should accept Transpower’s offer of administrative settlement.

In 2003 and 2004 Transpower breached its price path thresholds. In November 2005 Transpower announced a 19.1% price increase to take effect from April 2006. It also forecast that it would require price increases of 13% on average for the next five years.

In December 2005, the Commission published an intention to declare control of Transpower’s transmission services under Part 4A of the Commerce Act 1986. Transpower’s board subsequently approached the Commerce Commission with an offer to enter into an administrative settlement and agreed to suspend and rebate the 19.1% price increase pending the outcome of the Commission’s investigation.

If, following consultation, the Commission decides to accept Transpower’s administrative settlement offer, this will result in:

§ The 19.1% price increase, which was later reduced to 12.2%, being further reduced to 10.2% (subject to the Commission’s final decision). However, as the full 19% increase originally announced by Transpower has been rebated, the revenue that the new price increase results in will be applied to Transpower’s Economic Valuation Accounts. These are accounts designed to ensure that, over time, Transpower does not over or under recover revenue from customers.

§ The increase of 13% for 2007/2008 which was reduced to 2.7%, being revised up to 8.1%. This increase will also be applied to the Economic Valuation Accounts (subject to the Commission’s final decision).

§ For the years 2009 to 2011, Transpower will determine its annual revenue requirement against the method specified in the settlement offer.

“Our preliminary view is that Transpower’s settlement offer is consistent with the long-term interests of consumers and with the objectives of the regulatory regime. The offer will provide the appropriate incentives for Transpower to continue to efficiently invest in the transmission grid whilst limiting Transpower’s ability to extract excess profits. This offer is preferable to control”, Commerce Commission Chair Paula Rebstock said.

This offer means that Transpower has substantially reduced its originally announced price increases. These prices more closely reflect appropriate levels of recovery on the necessary investments Transpower is making in the national grid”, said Ms Rebstock.

Ms Rebstock said that this administrative settlement offer involves a significant change to the form of regulatory oversight of Transpower; in that Transpower’s price path threshold would be replaced with three new thresholds. These thresholds would be a new transmission (revenue requirement) threshold, a new transmission (non Part F) capital expenditure threshold, and a new system operator threshold.

The purpose of these three thresholds is to provide clear principles and limits that Transpower is required to adhere to when setting its revenue requirement, said Ms Rebstock.

Submissions on the proposed settlement can be made by Friday 9 November 2007. Cross submissions are due on 30 November 2007. After the Commission has considered the views of interested parties, it will release its final decision. At this stage, the Commission anticipates its final decision will be released before Christmas.

The draft decision is available on the Commission’s website

http://www.comcom.govt.nz/IndustryRegulation/Electricity/ElectricityLinesBusinesses/TargetedControl/transpowerintentiontodeclarecontrol.aspx

Background

In response to breaches of its price path thresholds at both the first and second assessments (2003 and 2004), and following Transpower New Zealand Limited’s November 2005 announcement of its decision to increase prices by 19.1%, on 22 December 2005 (and on average by 13% over the next five years) the Commerce Commission published in the New Zealand Gazette its intention to make a declaration of control under Part 4A of the Commerce Act 1986, in respect of transmission services supplied by Transpower.

In March 2006, Transpower’s board indicated a preference to resolve the Commission’s post-breach inquiry with an administrative settlement. In response, the Commission indicated that it would be prepared to delay its decision on whether to declare control, only if Transpower were to suspend the announced 19% price increase which was to become effective on 1April 2006.

On 27 March 2006, Transpower formally agreed to suspend the 19% price increase, and established a rebating system that backdated increases to the date the increase was initiated (1 April 2006). This did not cancel the increase, but suspended it pending the outcome of the Commission’s investigation. The Commission accepted this interim measure and announced on 31 March 2006 its decision to postpone publishing its final determination pending settlement discussions.

On 31 August 2007 the Commission received an offer of administrative settlement from Transpower (Revised Offer). This followed a long period of discussion between the Commission and Transpower regarding an appropriate offer, and analysis by the Commission of information provided by Transpower. This also followed three previous offers (11 August 2006, 6 October 2006, and 31 May 2007) which the Commission did not consider were acceptable for consultation. The Commission has analysed Transpower’s latest offer and summarised its content and implications within its Draft Decision paper.

Transpower has offered that its price path threshold be replaced with three alternate thresholds to apply for four years to 30 June 2011, and that the price increases announced for April 2006 and subsequent years, be reduced. The three new thresholds are:

§ a new transmission (revenue requirement) threshold;

§a new transmission (non-Part F) capital expenditure threshold; and

§ a new system operator services threshold.

The purpose of the three thresholds is to provide clear principles and limits that Transpower is required to adhere to in order to determine its revenue requirements; capital requirements; and adherence to the terms of the relevant systems operator services agreement.

A fourth threshold would maintain the current quality threshold set out in the Commerce Act (Transpower Thresholds) Notice 2007.

The implication of Transpower’s proposal on overall prices is that for:

a)2006/07, the 19% price increase announced in 2005 is reduced to a 10.2% increase, subject to final approval by the Commerce Commission pending the outcome of this consultation process. As the full 19% was rebated, the revenue that this price increase generates will be applied against the Economic Valuation Accounts (EV) to form part of the balance as at 30 June 2007;

b)2007/08, the 13% price increase forecast in 2005 is reduced to an 8.1% increase. This too is subject to final approval by the Commerce Commission pending the outcome of this consultation process. The gains arising from this price increase will be applied against the EV Accounts to form part of the balance as at 30 June 2008. The EV Accounts are designed to ensure that over time Transpower does not over or under recover revenue from customers.

c)2009 to 2011, Transpower will determine its annual revenue requirement, constrained by the various building block components as outlined in the settlement offer. This includes using:

§ a base operating expenditure of $199.61million indexed at CPI-0 each year;

§ WACC at 7.8%;

§ an adjustment for under or over-recovery using the EV Account mechanism;

§ requirement that only approved assets, once commissioned, can be entered into the asset base using depreciated historic cost; and

§ tax calculated using the tax payable approach (with the addition of an interest tax shield).

Transpower is the State Owned Enterprise that owns and operates the national grid. As a natural monopoly, Transpower is regulated by the Commerce Commission. The company has 45 customers, 35 electricity lines businesses and 10 directly connected industrial plants.

Administrative settlement. As an alternative to control being imposed, a company may reach an administrative settlement with the Commission. This usually involves the Commission and the company agreeing to pricing levels and quality measures for a period of up to five years. The result is that prices and quality are maintained at levels the Commission considers appropriate for the long term interests of consumers, without the need to impose control, which can be intrusive and costly.

Control. If companies breach price or quality thresholds set for them, the Commission can consider imposing control on their electricity services. If the Commission makes a declaration of control it can then set rules—termed an “authorisation”—governing the prices, revenue and/or quality of those controlled services for up to five years. While the company may face penalties if it does not comply with those rules, the operation of the company will continue to be undertaken by its management and Board of Directors as normal. Control is not intended to compensate consumers for any past overcharging but to put in place constraints on the controlled business’s future performance.

Media contact: Allanah Kalafatelis, Communications Manager
Phone work (04) 924 3708, mobile 021 225 4417

Felicity Connell, Senior Communications Adviser
Phone work (04) 924 3709, mobile 021 225 4454

Commission media releases can be viewed on its web site www.comcom.govt.nz

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Felicity Connell
Senior Communications Adviser
Commerce Commission

Level 6, 44-52 The Terrace
P O Box 2351
Wellington, New Zealand
Direct dial: 64 4 924 3709
Mob: 021 225 4454
Ph: 64 4 924 3600
Fax: 04 924 3700
[email protected]
www.comcom.govt.nz

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