The Commerce Commission ("Commission") has re-determined the input methodologies applicable to default price-quality regulations for non-exempt electricity distribution businesses, gas distribution businesses, and gas transmission businesses under Part 4 of the Commerce Act 1986. The re-determined input methodologies are:
- Electricity Distribution Services Input Methodologies Determination 2012, [2012] NZCC 26
- Gas Distribution Services Input Methodologies Services Determination 2012, [2012] NZCC 27
- Gas Transmission Services Input Methodologies Determination 2012, [2012] NZCC 28
The re-determinations have been made to specify input methodologies for cost allocation, asset valuation, and the treatment of taxation as applicable to default price-quality paths, as required by the High Court.
To specify the cost allocation, asset valuation, and the treatment of taxation as applicable to default price quality paths, we have adopted an approach consistent with the corresponding input methodologies for customised price-quality path proposals and information disclosure regulation that were published in the New Zealand Gazette, 20 January 2011, No. 5, page 96. Using these as a starting point, we have made simplified assumptions to specify the new input methodologies to meet the low-cost intent of default price-quality paths.
In summary:
The input methodologies set out how we must assess aspects of the building block costs in any year necessary to assess the current and projected profitability of each supplier. Consequently, we have specified the input methodologies in a way that ensures that:
(a) the calculations can apply to any relevant disclosure year (including part years);
(b) the tax calculation is appropriate from any revenue starting point; and
(c) the approach is flexible enough to deal with any subsequent decision on how the timing of items affects our assessment of present values (as determined during a section 53P consultation process).
We have also specified a "base year" to clarify that, in assessing the current profitability of each supplier, certain information will be sourced from the same disclosure year. In particular, the "initial" information on cost allocation, asset valuation, and the treatment of taxation will all be sourced from the same base year.
The cost allocation approaches for forecast operating costs and forecast asset values are consistent with those for cost forecasts for customised price-quality paths. The approach is as follows:
(a) Operating cost forecasts must be consistent with the allocation of operating costs calculated under the cost allocation input methodologies for information disclosure for the base year. In practice, the base year operating costs will be obtained from information already disclosed, if available, or from a section 53ZD notice otherwise.
(b) forecast value of commissioned assets can be included in the value of the Regulatory Asset Base (RAB), but only to the extent that the value would be included in the RAB consistent with the application of the cost allocation input methodologies for information disclosure.
The total value of assets in the base year will be calculated by suppliers in accordance with the input methodologies for information disclosure regulation. For each subsequent disclosure year, the value of assets from the base year will be rolled forward to reflect the aggregate value of assets forecast to be commissioned, plus aggregate revaluations, but less aggregate depreciation and forecast disposals. The approach to each component affecting the roll forward is summarised below.
(a) Assets forecast to be commissioned and disposed of will be valued using a CPI-indexed historic cost valuation approach consistent with assets already in the RAB.
(b) Revaluations will be calculated by multiplying the aggregate opening value of assets by the forecast change in CPI in each year of the regulatory period.
(c) The aggregate value of depreciation will be calculated in each year of the projection period on a straight-line basis using a different average asset lifetime assumption for existing and additional assets.
(d) Lost and found assets will be assumed to be nil.
Any revaluations will be treated as income for the purposes of assessing profitability. This is consistent with the equivalent input methodologies for asset valuation that are applicable to customised price-quality path proposals, and information disclosure regulation.
The treatment of taxation as applicable to default price-quality paths is based on the customised price-quality path input methodologies with some simplified assumptions to meet the low-cost intent of default price-quality paths. These assumptions are set out below:
(a) Regulatory tax allowance is calculated by applying a tax formula consistent with that used for customised price-quality path input methodologies, and reliant on an income/revenue value to be determined by the Commission during the consultation process for starting prices, ie, under section 53P(2).
(b) Tax depreciation is to be calculated using an average diminishing value rate applied to aggregated values.
(c) Tax losses are those already disclosed for the base year, if available, or in responses to a section 53ZD notice otherwise.
(d) Discretionary discounts and customer rebates for tax purposes will be set to nil.
Further details of this approach are available in our reasons paper for the re-determination. The overall approach and reasons for the existing input methodologies for cost allocation, asset valuation, and treatment of taxation (which we have simplified for default price-quality paths) are set out in Chapters 3 to 5 of the December 2010 Input Methodologies Reasons Paper.
The re-determined input methodologies also amend the cost of capital input methodology that applies to default
price-quality paths. The amendment sets out how a term credit spread differential allowance must be estimated. This amendment aligns the calculation of term credit spread differential allowances with the amount determined in accordance with the information disclosure input methodologies, using simplified assumptions for each disclosure year during the regulatory period.
Copies of the re-determinations and reasons paper, and further information on the specification of input methodologies applicable to default price-quality paths, are available on the Commission's website at
www.comcom.govt.nz/additional-input-methodologies-for-electricity-and-gas-dpps/
Dated at Wellington this 11th day of October 2012.
COMMERCE COMMISSION.