Notice Type
Authorities/Other Agencies of State
Notice Title

Commerce Act (Summary of Electricity Distribution Services Input Methodologies Determination) Notice 2011

Pursuant to Part 4 of the Commerce Act 1986 ("Act"), the Commerce Commission ("Commission") gives the following notice.
N o t i c e
1. Title-This notice is the Commerce Act (Summary of Electricity Distribution Services Input Methodologies Determination) Notice 2011.
2. Electricity distribution services input methodologies determination
2.1 On 22 December 2010, the Commission made the Commerce Act (Electricity Distribution Services Input Methodologies) Determination 2010 ("Determination").
2.2 The Determination sets out the input methodologies that apply to the supply of electricity distribution services, as that term is defined in the Determination ("Electricity Distribution Services") for the purpose of information disclosure regulation and default/customised price-quality regulation, as required by Part 4 of the Act.
2.3 In accordance with section 52W(2) of the Act, this notice is published as a brief description of the nature of each input methodology and the goods or services to which it applies. It includes the reasons for determining the methodologies and how the methodologies are publicly available.
3. Nature of the input methodologies and the goods or services to which they apply
The following input methodologies apply to Electricity Distribution Services:
(a) Cost of capital (an approach to calculating a weighted average cost of capital by applying a specified methodology that includes certain fixed parameters, and an approach to calculating a term credit spread differential); and
(b) asset valuation (an approach to calculating the value of the initial regulatory asset base and how this is rolled forward over time, including rules regarding depreciation and revaluation of assets); and
(c) cost allocation (three complementary approaches to allocating costs that are "not directly attributable" between each type of regulated service, and between the regulated and unregulated services (in aggregate)); and
(d) treatment of taxation (a modified deferred tax approach to calculating a tax allowance for regulatory purposes); and
(e) regulatory processes and rules relating to:
(i) specification of price (which includes that maximum prices or revenues will be specified by a weighted average price cap, and identifies any costs that can be passed through to prices); and
(ii) amalgamations (which specifies how certain amalgamations between regulated suppliers will be treated under price-quality regulation); and
(iii) incremental rolling incentive scheme (an approach that allows regulated suppliers to retain efficiency gains in controllable operating expenditure across regulatory periods); and
(iv) reconsideration of a default price-quality path (the circumstances in which a default price-quality path may be reconsidered within a regulatory period); and
(v) catastrophic events and reconsideration of a customised price-quality path (the circumstances in which a customised price-quality path may be reconsidered within a regulatory period); and
(f) matters relating to proposals by a regulated supplier for a customised price-quality path, including:
(i) requirements that must be met by the regulated supplier, including the scope and specificity of information required (such as information regarding quality, price, expenditure and the application of the input methodologies referred to above); the extent of independent verification, audit and certification; and the extent of consultation and agreement with consumers; and
(ii) the criteria that the Commission will use to evaluate any proposal.
4. Reasons for determining the input methodologies
4.1 The Commission was required to determine input methodologies that apply to electricity lines services (which include Electricity Distribution Services) by no later than 31 December 2010 (pursuant to an extension granted by the Minister of Commerce under section 52U(2) of the Act).
4.2 The Commission has undertaken a process of extensive consultation with interested parties, including by holding workshops and a conference, and has obtained sufficient information to make its input methodologies determination.
4.3 Having considered all submissions received from interested parties within set time frames throughout the consultation process, the Commission considers that the input methodologies that it has determined meet the purpose of input methodologies, as set out in section 52R of the Act and meet the purpose of Part 4 of the Act, as set out in section 52A of the Act, and that no materially better alternatives have been proposed during the consultation process.
4.4 More comprehensive detail of the background and analysis to support these reasons for determining the input methodologies is set out in the Input Methodologies (Electricity Distribution and Gas Pipeline Services) Reasons Paper, 22 December 2010 ("Reasons Paper").
5. How the Determination is publicly available
Copies of the Determination and the Reasons Paper are available for inspection free of charge at the Commission (during ordinary office hours), on the Commission's website at, or for purchase at a reasonable price at the Commission, 44 The Terrace, Wellington.
Dated at Wellington this 20th day of January 2011.
Explanatory Note
The Commerce Amendment Act 2008 introduced changes to the Commerce Act 1986 ("Act"), including a requirement
for the Commerce Commission ("Commission") to determine up-front input methodologies that apply to regulated services, to the extent applicable to the type of regulation under consideration.
The purpose of input methodologies is to promote certainty for suppliers and consumers in relation to the rules, requirements, and processes applying to the regulation, or proposed regulation, of goods or services under Part 4 of the Act.
The purpose of Part 4, as set out in section 52A of the Act, is to promote the long-term benefit of consumers in markets where there is little or no competition and little or no likelihood of a substantial increase in competition, by promoting outcomes that are consistent with outcomes produced in competitive markets such that suppliers of regulated goods or services:
(a) have incentives to innovate and invest, including in replacement, upgraded, and new assets; and
(b) have incentives to improve efficiency and provide services at a quality that reflects consumer demands; and
(c) share with consumers the benefits of efficiency gains in the supply of the regulated goods or services, including through lower prices; and
(d) are limited in their ability to extract excessive profits.
In accordance with section 54G(2) of the Act, suppliers of electricity lines services that are "consumer-owned" (as that term is defined in section 54D of the Act) are subject only to information disclosure regulation and hence, under section 53F of the Act, they are not required to apply the cost of capital input methodology that is referred to in this notice. The Commission may, however, use that input methodology to monitor and analyse information and suppliers may be required to disclose information about the methodologies for evaluating or determining the cost of capital that they do in fact use.