The Commerce Commission has amended the input methodologies applicable to customised 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 amended 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 amendment is set out in Electricity and Gas Input Methodology Determination Amendments (No. 2) 2012, NZCC 34, and has been made to specify more accurate assumptions for the modelling of cash flows for customised price-quality paths.
In summary, our decisions on the forecast cash flow timing assumptions for customised price-quality paths are:
Revenue-forecast even monthly revenues to be recognised as being received on the 20th day of each following month. Suppliers generally expect to receive revenue from electricity distribution services or gas pipeline services on the 20th day of the month following supply. This is the industry standard, and late payment generally attracts additional fees or interest. Assuming that revenues are received evenly throughout the year on this basis is equivalent to assuming that forecast aggregate revenues are received slightly later than mid-year on average. While there is some seasonality of accrued revenue, this is somewhat offset by the timing effect of when revenues are actually received. We expect that any forecast seasonality of revenues would not materially detract from this assumption.
Operating expenditure-to be recognised as occurring evenly during the year. Operating expenditure is generally incurred on standard commercial terms, ie, the 20th day of the following month; and other expenses are often paid somewhat earlier, such as salaries and wages. Assuming that forecast operating expenditure is paid on this basis evenly throughout the year, then treating the aggregate operating expenditure as being paid mid-year is a reasonable approximation of the timing of operating expenditure.
Commissioned assets-to be recognised at commissioning date. The CPP input methodologies provide for commissioned assets to be recognised according to their forecast commissioning dates. In conjunction with the works under construction allowance provided for in the input methodologies, in our view this provides a reasonable reflection of the actual timing of forecast capital project payments. To the extent this does not take into account cash payments that occur after the commissioning date, it would be to the benefit of regulated suppliers. The calculation of the notional deductible interest for the purposes of the tax building block continues to adopt the relevant forecast commissioning dates. There has been no change to that treatment.
Disposed assets-to be recognised at disposal date. Consistent with the original CPP input methodologies treatment of forecast disposed assets, the value of disposed assets is not modelled as a cash flow. The cost of capital building block has been amended to remove the value of disposed assets from the forecast cost of capital in the year of disposal. The calculation of the notional deductible interest for the purposes of the tax building block continues to adopt the relevant forecast disposal dates. There has been no change to that treatment.
Tax-to be recognised as occurring evenly during the year. Corporate tax is required to be paid on the provisional and terminal tax dates, which average out to later than mid-year. A mid-year timing assumption for the forecast tax amount is likely to be closer to actual cash flow timing than the end of year assumption originally implicit in the CPP building blocks formula.
Other regulatory income-to be recognised as being received evenly during the year. An assumption that suppliers receive other regulatory income evenly during the year is consistent with a cash flow timing assumption that other regulatory income is received, in aggregate, at mid-year. As other regulatory income could generally
expect to represent a relatively small proportion of overall income, we consider that there should not be any material difference between these different timing assumptions. However, a mid-year assumption is consistent with general revenue and operating expenditure, and in the interests of consistency these should be aligned.
Term credit spread differential allowance-to be recognised as occurring evenly during the year. The costs of issuing debt generally occur in relation to the issue dates of the particular debt instruments, however an assumption that those costs occur, on average, evenly throughout the year is consistent with an expectation that an efficient firm would arrange its debt financing obligations to match its overall net cash flows. A mid-year timing assumption is consistent with this and would have the additional benefit of reflecting the calculation of the notional interest deduction for tax purposes on a mid-year basis.
The timing of depreciation and revaluations has not been reconsidered, since these are non-cash items in the context of the relevant CPP building blocks formulae.
Copies of the amendment determination and reasons paper are available on the Commission's website at
http://www.comcom.govt.nz/amendments-and-clarifications/
29 November 2012.
COMMERCE COMMISSION.