The Commerce Commission (“Commission”) has amended the input methodologies applicable to electricity lines services and gas pipeline services under Part 4 of the Commerce Act 1986.

The amended input methodologies are:

• Electricity Distribution Services Input Methodologies Determination 2012 [2012] NZCC 26*
• Transpower Input Methodologies Determination [2012] NZCC 17†
• Gas Distribution Services Input Methodologies Determination 2012 [2012] NZCC 27*
• Gas Transmission Services Input Methodologies Determination 2012 [2012] NZCC 28*.

The amendment is set out in the Electricity Lines Services and Gas Pipeline Services Input Methodologies Determination Amendment (WACC percentile for price-quality regulation) 2014 [2014] NZCC 27, and will apply to price-quality path regulation for electricity lines services and gas pipeline services.

The Commission has changed the percentile that applies in determining estimates of the weighted average cost of capital that will apply for price-quality regulation for electricity lines services and gas pipeline services.

The weighted average cost of capital percentile that applies to price-quality regulation of electricity lines services and gas pipelines services has been changed from the 75th percentile to the 67th percentile.

This change follows the Commission’s review of the appropriate weighted average cost of capital percentile for electricity lines services and gas pipeline services.

The review was initiated following the High Court’s comments on the lack of sufficient evidential basis for the current weighted average cost of capital percentile (see Wellington International Airport Ltd & Ors v Commerce Commission [2013] NZHC [December 2013]).

Significant new analytical and empirical evidence (including market-based evidence) is now available that was not available to the Commission at the time the previous weighted average cost of capital percentile was set in December 2010, or to the Court at the time of the proceedings referred to above.

Having considered the available evidence and the submissions received on the draft input methodologies, the Commission has determined that the 67th percentile should be used for the price-quality regulation of electricity lines services and gas pipeline services. In the Commission’s view, it is appropriate to use a weighted average cost of capital significantly above the mid-point estimate. This is because the potential costs of under-investment arising from a weighted average cost of capital that is too low are likely to outweigh the harm to consumers (including any over-investment) arising from a weighted average cost of capital that is too high.

The Commission considers that the evidence collected supports a weighted average cost of capital for price-quality path regulation between the 60th percentile and the 75th percentile that previously applied under the input methodologies.

The Commission’s determination is that the 67th percentile estimate of the weighted average cost of capital is appropriate for price-quality regulation. In the Commission’s view, a percentile around the middle of the reasonable range the Commission has defined (from the 60th to the 75th percentile) appropriately balances the relative costs to consumers of under- and over-investment, in light of the overall purpose of Part 4, which is to promote the long-term benefit of consumers of regulated services.

Copies of the amendment determination and reasons paper are available on the Commission’s website at

www.comcom.govt.nz/further-work-on-wacc/

Dated at Wellington this 30th day of October 2014.

COMMERCE COMMISSION.

*New Zealand Gazette, 11 October 2012, No. 124, page 3552
^†New Zealand Gazette, 12 July 2012, No. 84, page 2288