Commission Proposes Changes For Gas Networks In Response To Expected Long-term Decline In Gas Use

The Commerce Commission is seeking views on its draft decision on the revenues that the country’s four gas pipeline businesses will be able to earn over the next four years and the quality standards they must meet.

Under Part 4 of the Commerce Act, the Commission must reset the default price-quality path that applies to each business by the end of May to take effect from 1 October 2022 when the current price-quality path ends.

Associate Commissioner Vhari McWha said that the draft decision comes ahead of the release of the Government’s Emissions Reduction Plan (ERP) in May, which is part of the Government’s stated goal of 100% renewable electricity by 2030 and net zero emissions by 2050.

“The reset of the price-quality path this year brings unique challenges in the context of climate change and the transition to a low carbon economy,” she said. “Demand for natural gas is now expected to reduce over time which may create challenges for pipeline businesses to recover the costs of their investments.

“A key feature of our draft decision is to bring some of that cost recovery forward to manage this transition and to avoid a sharper potential increase in consumer bills later. Our proposed decision means that gas pipeline businesses should continue to invest to deliver a safe and reliable supply over the short-term until the long-term future of natural gas use in New Zealand becomes clearer.”

There are around 300,000 individual connections to the regulated gas distribution networks, all in the North Island. The majority are residential consumers but also include commercial and industrial consumers. There are also a small number of industrial users that take gas directly from transmission networks.

Ms McWha said the impact on household gas bills of bringing revenues forward would be an increase of about 4.5%, when averaged across all household consumers, in each year of the regulatory period. For a typical annual household gas bill of about $1,275, this would be an increase of around $55 per year in each of the four years of the regulatory period.

The figures do not include the impact of changes in other components of consumer bills, like the price of wholesale gas. The impact on individual households, as well as commercial and major industrial users, will depend on their particular circumstances and arrangement with natural gas suppliers.

“We have considered the impact on consumers in determining how much revenue should be brought forward and balanced this against the need for businesses to invest in the networks to continue to provide the services at a level that consumers demand," she said. “We recognise that this will have an impact on some of New Zealand’s most vulnerable users of natural piped gas and have limited the size of the increase with that in mind.”

Bringing revenues forward does not affect the total revenue that gas pipeline businesses can earn from their networks over the life of the assets – and therefore the total amount that consumers pay. It would, however, allow them to recover that revenue sooner. With the number of customers on gas networks expected to fall, this would also allow costs to be frontloaded over a larger customer pool, reducing per customer costs.

The Commission proposes to set the price-quality path for four years, which is the shortest period allowed by the Act, instead of the normal five. The current price-quality path has been in place since 1 October 2017.

“We hope to have a clearer view of the longer-term future of natural gas in four years, including the impact of further government announcements, changes in technology and consumer preferences for energy sources, and whether pipelines can potentially be repurposed for low or no carbon gases like hydrogen,” Ms McWha said.

“We will also soon start consulting with the energy sector on the review of the rules and processes that underpin our regulatory settings, known as the input methodologies. Our decisions in that review will also impact the next reset in four years’ time.”

Four gas pipeline businesses are subject to price-quality regulation. First Gas, GasNet, Powerco and Vector are all gas distribution businesses that transport natural gas to commercial and industrial users as well as residential consumers. First Gas also has a gas transmission business that provides gas to large users of natural gas such as big industrial plants, electricity generators and the gas distribution businesses.

The draft decision is on the Commission’s website. Submissions are due by 10 March 2022.

Background

The Commerce Commission sets a price-quality path for all gas pipelines businesses in New Zealand as part of regulation under Part 4 of the Commerce Act.

The price-quality paths are intended to influence the pricing behaviour of these businesses by setting the maximum average price or total allowable revenue that they can charge. They also set standards for the quality of services that each business must meet.

The main components of a price-quality path are:

• the maximum prices/revenues that are allowed at the start of the regulatory period (i.e. starting prices)
• the annual rate of change at which each gas distribution and transmission businesses' maximum allowed prices can change relative to inflation referred to as the 'X-factor' as it is expressed in the form of CPI-X
• the minimum service quality standards that must be met.

The Commission is required to determine a new price quality path for gas pipeline businesses by the end of May 2022. The new path will be in effect from 1 October 2022 and will expire on 30 September 2026. The current path took effect on 1 October 2017 and expires on 30 September 2022.

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