Energy Regulation – NZCID Meeting Commerce Commission

1. Energy Regulation – NZCID Meeting Commerce Commission

2. Overview 1 • Our regulatory responsibilities • What we are trying to achieve • Progress in implementing Part 4 of Commerce Act • Focus over next year • Transpower regulation

3. Regulatory responsibilities 2 • Energy and airports (Part 4 of Commerce Act) • Default/customised price-quality paths EDBs, GDBs, GTBs • Individual price-quality path for Transpower • Information disclosure airports and energy businesses • Dairy (Dairy Industry Restructuring Act) • Adjudication • “Dry run” of farm gate milk price monitoring regime • Telecommunications

4. Regulation is better targeted Is regulation the right response (Part 4 inquiries)? What is right form of regulation (airports review)? Regulation is more effective Our decisions promote statutory objectives Suppliers act consistently with regulatory obligations Information disclosure – summary and analysis Stakeholder engagement What we are trying to achieve 3

5. Part 4: Good progress 4

6. Part 4: Input methodologies 5 • Set input methodologies upfront – to promote certainty • IMs are methodologies set by the Commission • WACC, value of regulatory asset base • Allocation of costs, treatment of tax, CPP, processes • Transpower capital expenditure • Must be applied in the Commission’s decisions and by suppliers • Subject to merits review (Court considers alternative proposals) • Won’t fully promote certainty until merits review completed

7. Part 4: Litigation has caused delays 6 • Delays caused by two judicial reviews • Price reset input methodology challenge and process challenge • Delayed EDB and gas price resets and merits reviews (by one year) • Merits reviews September – December this year • Merits reviews of input methodologies (expected) • Both regulated businesses and consumers appealing (nine parties)

8. Part 4: Focus for 2012/13 7

9. Transpower capex input methodology 8 • Single regulator with overview of all capex • Change supported by NZCID – is working well • Input methodology for Transpower’s capex • No merits review • IM spells out rules, processes, criteria for all capex • Capex classified as base or major capex • Incentive regime applies to both base and major capex • Transpower must publish integrated transmission plan

10. Transpower major capex 9 • Major capex process • Built on previous Electricity Commission processes • Approved on project-by-project basis • Stakeholder consultation important • Transpower applies investment test (cost benefit analysis) • Transpower propose, we approve or decline • Raised the threshold for “major”: $5m then $20m • Major capex proposals in train - $550 million

11. Transpower base capex 10 • Base capex approved and set ex ante for five years • Amount subject to ex ante approval will increase with higher major capex thresholds • No ex post review of prudency • Substitution within base capex allowed – but generally amount cannot be amended over regulatory period • Transpower’s business improvement initiatives • Safety performance, asset management improvements, long term network performance outputs (quality, grid health etc)

12. Conclusion 11 • Substantial progress on Part 4 despite delays caused by litigation • Reset of price paths and finalisation of information disclosure major tasks remaining • Resolution of merits reviews this year? • Over time promote certainty – positive for investment

13. 12 • NAME: Sue Begg • TITLE: Deputy Chair • TELEPHONE: 04 924 3610 • EMAIL: sue.begg@comcom.govt.nz Doc: 1381721