Pursuant to section 52W of Part 4 of the Commerce
Act 1986 ("the Act"), the Commerce Commission
("the Commission") gives the following notice.
On 31 January 2012, the Commission made the Transpower Capital Expenditure Input Methodologies Determination ("the Determination") as required by section 54S of the Act.
The Determination sets out a capital expenditure input methodology that specifies the process for Transpower to submit, and the Commission to approve, Transpower’s capital expenditure proposals.
The Determination comes into force on the day following the date of publication of this notice.
Nature of the Input Methodology and the Goods or Services to Which it Applies
The Determination applies to the supply by Transpower of "electricity lines services", as defined in section 54C of the Act, under Transpower’s individual price-quality path determined in accordance with Part 4, subpart 7 of the Act.
In summary:
(a) Capital expenditure must be classified as either base capital expenditure ("Base capex") or major capital expenditure ("Major capex").
(b) The Determination will apply to all capital expenditure intended to enter Transpower’s Regulatory Asset Base (RAB), including both
Base and Major capex.
(c) Transpower must consult with interested parties on Major capex projects, which must be assessed and approved by the Commission on a project-by-project basis using the requirements set out in the Transpower capital expenditure input methodology ("Capex IM").
(d) Transpower cannot substitute any Major capex between individual Major capex projects or to
Base capex.
(e) Base capex must be approved in advance of each regulatory period.
(f) Transpower may substitute Base capex between years and across categories.
(h) An incentive regime will apply to both Base capex and Major capex.
(i) Transpower must publish an integrated transmission plan that explains Transpower’s view about the long-term development of the grid.
(j) Transpower must consider transmission alternatives in its development of all Major capex proposals.
(b) The Capex IM will not usually apply to capital expenditure relating to either new investment contracts or the System Operator Service Provider Agreement.
Reasons for Determining the Input Methodologies
The reasons for determining the capital expenditure input methodology are set out in detail in the Transpower Capital Expenditure Input Methodology Reasons Paper, 27 January 2012.
The key reasons for the input methodology are:
(a) The difference in nature, timing and magnitude of base and major capital expenditure is such that a different approval process is appropriate.
(b) Given the importance of the RAB in determining Transpower’s revenues, all capital expenditure entering the regulatory asset base should be
subject to the requirements of the Capex IM.
(c) Transpower must consider the trade-off between transmission alternatives and capital expenditure because making use of transmission alternatives may be an economically efficient decision where it avoids or defers expenditure on transmission investment.
(d) Allowing substitution of expenditure within one Major capex project to another would distort
the effectiveness of the approval process and the incentives that are applied on a project specific basis.
(e) Incentive mechanisms will encourage downward pressure on costs, as well as consideration of
non-transmission solutions.
(f) Requiring Transpower to provide an integrated transmission plan will help stakeholders assess
Base capex and Major capex proposals. The purpose of the integrated transmission plan is to explain Transpower’s view of the long-term operation and development of the grid.
(g) The Commission will not interpose itself between Transpower and its contract counterparties by requiring the revenue associated with New Investment Contracts to be subject to an individual price-quality path, provided certain conditions are met around workable competition.
Methodology 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
www.comcom.govt.nz/transpower-input-methodologies/
or for purchase at a reasonable price at the Commerce Commission, 44 The Terrace, Wellington.
Dated at Wellington this 9th day of February 2012.
COMMERCE COMMISSION.
Explanatory Note
The Electricity Industry Act 2010 introduced section 54S
to the Commerce Act 1986 ("the Act"), which requires the Commission to determine an input methodology for capital expenditure proposals made by Transpower New Zealand Limited ("Transpower"). 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 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.
The electricity lines services provided by Transpower are regulated under an individual price-quality path, which applies from 1 April 2011. The Commission’s determination in December 2010 that set the price-quality path was required to include reference to the input methodologies that Transpower is required to apply. This included provision for an input methodology for capital expenditure approvals that would be determined and applied to Major capital expenditure projects during the first regulatory period.
The Act requires the Commission to set an input methodology for Transpower’s capital expenditure proposals that includes:
(a) requirements of Transpower with respect to information and consultation;
(b) the criteria the Commission will use in evaluating the proposals; and
(c) the timeframes and processes for the Commission to evaluate the proposals, and any consequences for not meeting those timeframes.
The new capital expenditure input methodology replaces the existing approval process for capital expenditure, which currently follows the Electricity Governance Rules 2003.
The Capex IM Determination provides an integrated approach to the development and approval of Transpower’s investment in the national grid. It is a methodology for reviewing and approving Transpower’s capital expenditure proposals. New incentive mechanisms will provide Transpower with an incentive to invest and to deliver improved performance in terms of outputs and cost efficiency.
The approval procedures and incentive mechanisms applying to Major capital expenditure proposals by Transpower apply from the date of commencement of the Capex IM Determination. Under the Act, Transpower’s individual price-quality path may not be changed except
in accordance with the Act and the Commerce Act (Transpower Input Methodologies) Determination 2010. The procedures and incentives applying to minor capital expenditure projects may therefore only apply with effect from the next regulatory period commencing on 1 April 2015.