Orion decision helpful but challenges on electricity line charges remain

“The Commerce Commission decision today on the price path for Orion, the electricity line company serving Christchurch customers, will leave customers better off than the higher price path proposed by Orion, some good principles have been established, though a degree of leniency afforded Orion arguably was an unnecessary discretion” said Ralph Matthes, Executive Director of the Major Electricity Users’ Group (MEUG).

“MEUG is pleased that the decision affirms the basic principles of price control of monopolies, in particular that:

• Monopolists are not guaranteed a return then allowed to leave all risks with consumers;

• They must accept business risks that competitive businesses face;

• The special CPP regime is not a cost plus regime.

On the other hand we regret that the Commission chose to pass up the chance to make it clear that monopolies needn’t bother applying to shift risks back to consumers for which they’ve already been compensated in their high market rate of return on capital. We can understand the Commission not wanting to look harsh on Orion, but the money they want to recoup is coming from people and businesses already carrying the costs of rebuilding. Their lines company was handsomely paid for making the system resilient before the earthquake. Though MEUG is pleased that they got a knock back on their request the decision could still encourage lines monopolies to have a regulatory try on for future ‘catastrophes’.

However, the Commission’s reasoning probably confines this decision to its unique facts. Orion was not under the regime applying to the other lines companies. MEUG considers that there is enough in the reasoning to ensure that in future it will be harder for companies to try for this kind of double dipping.

Major Electricity Users’ Group 2

Orion CPP decision 29 November 2013

“This decision and other events affecting line charges will be the focus of intense interest over the next few months. First, the High Court decision due in December on the merit review of Input Methodologies could significantly alter typical household line charges. We have calculated the range of possibilities as at one end, an increase of several hundred dollars per year if the monopolists succeed with their appeals to a decrease of over a hundred dollars a year if MEUG’s own appeals are successful. Or the Court could uphold the Commission’s determinations and there would be no change at all.

“Second, retailers are due to reset their tariffs from 1st April 2014 to take into account increased transmission charges and a yet-to-be-determined change in distribution charges. The question is will any savings be passed on or will new retailer margins be added?

“Lessons taken from today’s Orion decision and next month’s High Court Merit Review decision should also inform us on how best to incentivise efficient practices by electricity line monopolies. We think there are opportunities to decrease future distribution charges. The challenge is to realise those savings and make sure they flow through to consumers” concluded Mr Matthes.

ends

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