Pursuant to section 52W of the Commerce Act 1986 (the “Act”), the Commerce Commission (“Commission”) gives the following notice.

The Commission has amended the input methodologies applicable to electricity distribution businesses contained in the Electricity Distribution Services Input Methodologies Determination 2012 [2012] NZCC 26.

The amendments are set out in the Electricity Distribution Input Methodology Amendments Determination 2014 [2014] NZCC 31 (“Amendment”).

The Amendment comes into effect on the date of this notice.

The Amendment amends the input methodologies that apply to default and customised price-quality paths for electricity distribution businesses from 1 April 2015.

The Amendment relates to corrections to terms the Commission uses to set starting prices based on the current and project profitability of each electricity distribution business (“first type amendments”) and changes that affect other aspects of the default price-quality path (“second type amendments”).

The first type amendments:

1. reflect a mid-year cash-flow timing assumption in the relevant definitions of notional deductible interest for the treatment of taxation;
2. correct for the double deduction of the term credit spread differential allowance when calculating the regulatory tax allowance; and
3. correct the definition of amortisation of initial differences in asset values to take account of the changes in initial difference values that result from the age, sale and acquisition of relevant assets.

The second type amendments are primarily focused on pass-through and recoverable costs, and their treatment under the weighted average price cap. The Amendment limits the risk of under- and over-recovery of pass-through and recoverable costs.

In addition, the second type amendments make a number of changes in relation to recoverable costs, including to:

1. give effect to the quality incentive scheme the Commission will implement under section 53M(2) of the Act;
2. give effect to incentives for each electricity distribution business to undertake energy efficiency and demand side management initiatives;
3. provide a “wash-up” for forecast capital expenditure in the years prior to the setting of a default price-quality path determination;
4. provide a “wash-up” for additional expenditure related to transmission asset purchases in a regulatory period for transmission asset purchases that were forecast to be completed prior to a price reset, but which were not concluded;
5. provide for the recovery of prudent expenditure incurred because of a catastrophic event following reconsideration of a default price-quality path;
6. allow for the recovery of amounts relating to other reconsideration events, following a reconsideration of a default price-quality path or customised price-quality path, other than from a catastrophic event;
7. allow for recovery of levies or other charges or costs associated with the extended reserves regime administered by the Electricity Authority;
8. update the recoverable cost term for avoided transmission costs for distributed generation; and
9. allow for the one-off recovery of additional revenue for three electricity distribution business arising from the 2012 reset of the default price-quality path applicable to electricity distribution businesses.

The reason for the changes to the specification of price input methodologies introduced by the second type amendments is to limit the risk of under- or over-recovery of pass-through and recoverable costs.

The second type amendments also introduce several new recoverable costs that provide a number of incremental improvements.

The new recoverable costs:

1. include new incentive schemes intended to provide incentives for suppliers to maintain or improve their quality of supply, and to improve energy efficiency and demand-side management, including improving incentives to invest in new assets with an energy efficiency and demand-side management purpose;
2. allow the Commission to provide an adequate response to a reconsideration event (such as a catastrophic event) for electricity distribution businesses and consumers; and
3. allow the Commission to take into account developments being undertaken by the Electricity Authority that may impact certain recoverable costs.

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

www.comcom.govt.nz/regulated-industries/input-methodologies-2/amendments-and-clarifications/

and are available for inspection free of charge at the Commission (during ordinary office hours), or for purchase at a reasonable price at the Commission, 44 The Terrace, Wellington.

Dated at Wellington this 27th day of November 2014.

COMMERCE COMMISSION.