Transpower proposes new prices

4 December 2006/070

Transpower proposes new prices

Transpower has told the Commerce Commission that it is advising customers today of its proposed prices for 2006/07 and 2007/08. The Commerce Commission accepts that Transpower needs to notify customers now. Transpower’s pricing year starts on 1 April, and the company is required to advise customers of prices at least three months in advance.

Transpower proposes to raise prices on 1 April 2007 by an average of 15.2% over the March 2006 level. This comprises a 12.2% increase backdated until 1 April 2006, compounded with a 2.7% increase to apply from 1 April 2007.

Transpower had originally announced that it would raise prices by 19% in 2006/07, and forecast an average 13% price increase over each of the four subsequent years, starting from 2007/08. The Commerce Commission believed these rises were not justified, and in December 2005 announced its intention to declare control of Transpower’s transmission services. In March 2006,

Transpower announced it was seeking an administrative settlement with the Commission as an alternative to regulatory control being imposed. At that time, Transpower agreed to provide its customers with a credit equivalent to the planned price increases, effectively cancelling the 19% increase. (Transpower has decided to continue that credit for the entire pricing year, through until 31 March 2007. Electricity lines businesses, or in some cases retailers, have been holding that credit. In April 2007 the electricity lines businesses and retailers will pass the credit back to electricity users.)

The prices announced by Transpower today mean that, instead of the 19% rise, Transpower customers will now face a 12.2% increase for the 2006/07 year. However, customers will not feel this increase immediately as it will be recovered by Transpower through adjustments to future prices via Transpower’s Economic Valuation Accounts. These accounts are designed to ensure that over time Transpower does not over or under recover of revenue from customers. In 1 April 2007, customers will feel for the first time the 12.2% increase from 2006/07, plus the 2.7% increase for 2007/08, a total increase of 15.2%.

“Transpower and the Commission are still in talks over a possible administrative settlement, but the Commission accepts that Transpower needs to announce its prices now,” says Commerce Commission Chair Paula Rebstock. “While discussions continue on a possible administrative settlement, the Commission’s preliminary view is that these are appropriate prices for these two years.”

Any final decision on prices would be subject to consultation on an administrative settlement, or any other regulatory outcome, Ms Rebstock says. “There will be a high level of transparency in these processes to assure the public and interested parties that the end result is in the best long term interests of consumers.” Ms Rebstock said that Transpower was working with the Commission to resolve matters in a way consistent with the purpose of the regulatory regime. “The Commission remains optimistic that an administrative settlement can be reached,” Ms Rebstock says. “These price rises are substantially less than those originally announced by Transpower,” says Ms Rebstock.

“That underscores the value of the regulatory oversight provided under the Commerce Act.” Ms Rebstock said that the Commission would take no further action if lines businesses breach their price path thresholds solely as a result of responding appropriately to the 19% increase announced by Transpower. Background Transpower. 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. Reasons for intention to declare control. The Commerce Commission announced its intention to declare control of Transpower on 22 December 2005 because it considered there to be evidence that: Transpower’s approach to the Electricity Commission investment approval processes was likely to result in investment outcomes inconsistent with the objectives of the regulatory regime; Transpower’s planned price increases would have allowed it to recover the cost of investments that have not yet been approved or made; and the planned timing of Transpower’s price increases was not consistent with the company’s forecast capital expenditure.

The regime. The Commerce Commission administers regulation of 28 electricity distribution companies and Transpower under Part 4A of the Commerce Act. The companies are regulated because they face limited competition, and without regulation could charge too much for their services and earn excess profits. The companies are regulated by having thresholds set for them that govern the quality of services they deliver and / or how much they can raise their prices by each year. The price thresholds are linked to the Consumer Price Index rate of inflation. Since the targeted thresholds regime was implemented in 2001, the Commission published its intention to declare control three times, of Unison Networks’ electricity distribution services in September 2005, of Transpower’s transmission services in December 2005, and of Vector’s electricity distribution services in August 2006.

In all three instances the Commission is now in the process of considering administrative settlements that, if agreed, would remove the need for control to be imposed. 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. 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. Media contact: Kate Camp, Communications Manager Phone work (04) 924 3708, mobile 0275 24 3708 Commission media releases can be viewed on its web site www.comcom.govt.nz

ENDS

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