1

Energy Regulation – EDB CEOs’ Meeting Commerce Commission (19 June 2012)

2Overview

• What we are trying to achieve in regulatory area

• Progress in implementing Part 4 of Commerce Act

• Focus over next yearo Specifying input methodologies for default price paths

o Price path resets

o Information disclosure

• Compliance

• Other issues

3What we are trying to achieve

Regulation is better targeted and more effective

• Our decisions promote statutory objectives

• Suppliers act in line with regulatory obligations

• Use disclosed information to better understand role of regulation and performance of regulated businesses

• Engagement strategy

o Consultation, number of EDBs, ENA

4

Price-Quality Paths Information Disclosure Input Methodologies (IMs)

• Default price-quality path for electricity distribution businesses (Nov 2009)

• Determination for specified airport services (Dec 2010)

• Determinations for all regulated services (Dec 2010)

• Individual price-quality path for Transpower (December 2010), updated path in 2011

• Draft determinations for gas pipeline services and electricity distribution services (Jan 2012)

• Capex IM for Transpower (Jan 2012)

• Draft additional IMs for DPPs for gas and electricity services (June 2012)

Part 4: Good progress

5JR litigation has caused delays

Delays caused by two judicial reviews

•Price reset input methodology and process challenges

•Objective of challenge to cross-sector process?

Parties have right to bring judicial reviews but...

• Delayed EDB, gas resets and merits reviews (by a year)

• Significant costs – money and resources

• Distraction from other matters, delayed certainty

6Court of Appeal has clarified role of certainty for investment incentives

• Input methodologies and Part 4’s purpose statement promote incentives for investment by promoting certainty about regulatory rules

• But Court of Appeal has confirmed that:o Certainty is relative rather than absolute and may take time

to achieve

o Considerable uncertainty in competitive markets

o Part 4 is intended to promote certainty and incentives for investment over time

7Merits reviews

Merits reviews – expected as part of the regime

• Some uncertainty expected till merits reviews resolved

• September to December this year (and beyond?)

• Both regulated businesses and consumers appealing

• Benefits of accountability – but high costo Costs diminish over time?

8Focus over next year

TASK TIMING

Merits reviews of Input Methodologies Till end of December (and beyond?)

Set additional Input Methodologies 30 September 2012

Reset starting prices for EDBs if appropriate 30 November 2012

Set gas distribution and gas transmission DPP No later than October 2013

Information Disclosure requirements for EDBs, GPBs and Transpower

August 2012 (EDBs and GPBs) January 2013 (Transpower)

Review whether ID for airports achieving Part 4 Purpose Three reports, starting with WIAL

Approach to compliance and enforcement Ongoing

Customised price-quality paths As required

Evaluating Transpower capital expenditure proposals As required

Summary and analysis of EDB performance Ongoing

Engagement programme for Part 4 Ongoing

9Additional input methodologiesfor DPP

Specify asset valuation, cost allocation, taxation for DPP

• Consistent with existing ID and CPP IMs

• Simplified for use in DPP

WACC - term credit spread differential

• Allow for forecast periods

Consultation timeframe

• Submissions 6 July, cross submissions 17 July

10Price-quality path resets

If reset based on current and future profitability

• Intend to rely on information disclosure for current profitability (or s53ZD information request)

• Simplified building blocks for forecast periods (where required) for future profitability

Expect to release paper in August

11Information disclosure

In-principle decisions

• Update paper and revised draft determinations will be released soon for technical consultation

Approach to information disclosure

• Have built on existing information disclosure

• Ensure sufficient information available to interested persons to assess whether purpose of Part 4 being met

• Final decisions will better explain use of ID information

12Information disclosure: some key changes from existing requirements

Changes to reflect Purpose Statement and contain costs

•Improved information on businesses and networks, assets, expenditure, quality, more disaggregation

•Consistent formats for data – easier to do analysis

•Changes to AMP requirements

o Disclosure in years 1 and 4 of regulatory period with AMP updates in intermediate years

o Asset management maturity assessment tool

13Information disclosure (process)

New ways of working – technical reference groups

• Direct input from technical experts very valuable

• Constructive and effective approach – use in future

Feedback on draft determinations and reasons paper

• Constructive and practical suggestions

• Assisted us in balancing the purpose of ID with the needs and concerns of suppliers

14Information disclosure(stakeholder survey)

Stakeholder survey just completed

• Appreciate responses from 24 EDBs (10 boards)

• Stakeholders’ understanding of regime and of benefits of targeted regulation

• Understanding of business and market performance

• Feedback on our performance

We will use results of survey to improve performance

15Information disclosure(summary and analysis)

Summary and analysis

•Currently developing a report that will summarise performance of EDBs

•Will allow EDBs to check EDB-specific data used before publishing

•Will develop approach over time

16Compliance

17Compliance

Compliance strategy (preliminary thinking)

• Cost effective compliance to achieve statutory objective

• Encourage voluntary complianceo Help suppliers understand obligations

o Information and guidance to enable compliance

• Detect and respond proportionately to non complianceo Administrative, financial, criminal penalties

18DPP quality breaches

Commission’s response

• Breaches dealt with on case by case basis

• Informed by circumstances, supporting evidence, mitigating factors, previous non-compliance

• Appropriateness of quality standards – CPP?

• Degree of harm

• Proportionate response

19Other issues - quality

Quality – Commission supports ENA initiatives

• Improve measures

• Possible integration with price path

• Extreme events - major event days (some EDBs)

20Other issues – catastrophic events

Self insurance for catastrophic events

• Need to define allocation of risk between shareholders and customers, current and future customers

• Allowance for self insurance – what assurance that money available when needed?

• Recover costs after event – but customers facing high costs

Resilience

21Conclusions

• Substantial progress on Part 4 despite delays caused by litigation

• Reset of price paths and finalisation of information disclosure major remaining tasks

• Resolution of merits reviews

• Summary and analysis, stakeholder engagement

22

Sue Begg

Deputy Chair

04 924 3610

sue.begg@comcom.govt.nz