Updated Rules for Gas Pipeline & Electricity Lines Companies

Updated Rules for Related Party Transactions for Gas Pipeline And Electricity Lines Companies

The Commerce Commission has released its final decision to update the rules around related party transactions for electricity lines and gas pipeline businesses.

Regulated electricity and gas businesses can choose to obtain services from a related party rather than competitively tender work out. As a result, regulated businesses may face incentives to give work, like network maintenance or tree trimming, to their unregulated related parties, even if an independent contractor could offer a better price or service.

“We acknowledge the use of related parties can be efficient. However, these rules are designed to increase transparency and ensure customers don’t end up paying more than they should for their electricity and gas,” Commission Deputy Chair Sue Begg said.

The new rules replace a prescriptive set of requirements with a principles-based approach. The new approach puts an onus on regulated businesses to show that the value of related party purchases and sales is consistent with arms-length transactions and is based on an objective and independent measure.

Independent auditors will also have to give their opinion on whether a regulated company’s related party transactions comply with the rules.

“Our decision improves transparency and updates the rules around related party transactions. Each year, regulated businesses will be required to disclose all related party relationships, procurement policies and processes, details on how they last tested the arm’s-length terms of transactions, policies that require the use of related parties for unregulated services and a map of anticipated network expenditure with related parties,” Ms Begg said.

“In response to submissions on our draft decision, we have introduced a threshold that limits the need for suppliers to make disclosures where they have a low level of related party spending. However, we have retained the more detailed reporting for those with high levels of related party spending. This ensures compliance costs are proportionate.”

“Related party transactions are one of the last and arguably most complex areas of our Input Methodologies review. We want to acknowledge stakeholders for their input into shaping these rules for the long term benefit of consumers.”

The Commission plans to provide guidance to individual regulated businesses during 2018 to help implement the rules.

An infographic showing how much each electricity lines company spends on related party transactions is available here.

The final decision can be found on our website.

Background

The Input Methodologies (IMs) are the upfront rules, requirements, and processes that apply to utility regulation in New Zealand. Under Part 4 of the Commerce Act, the Commission is required to set and apply IMs to regulated electricity lines services (distribution and transmission), gas pipelines (distribution and transmission) and specified airport services. IMs are only one part of the regulatory regime, with benefits delivered to consumers through the application of the IMs through price-quality regulation and information disclosure. In 2015 the Commission commenced a review of the IMs to ensure long-term benefit for consumers in sectors where there is no competition.

ENDS

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