Energy Regulation – NZCID Meeting Commerce Commission

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

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

What we are trying to achieve 3 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

Part 4: Good progress 4 Price-Quality Paths Information Disclosure Input Methodologies (IMs) Default price-quality path for electricity distribution businesses (Nov 2009) Determination for specified airport services (Dec 2010) Determinations for all regulated services (Dec 2010) Individual price-quality path for Transpower (December 2010), updated path in 2011 Draft determinations for gas pipeline services and electricity distribution services (Jan 2012) Capex IM for Transpower (Jan 2012) Draft additional IMs for gas and electricity services (June 2012)

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

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)

Part 4: Focus for 2012/13 7 TASK TIMING Merits reviews of Input Methodologies Till end of December Set additional Input Methodologies 30 September 2012 Reset starting prices for EDBs if appropriate 30 November 2012 Information Disclosure requirements for EDBs, GPBs and Transpower August 2012 (EDBs and GPBs) January 2013 (Transpower) Set gas distribution and gas transmission DPP No later than October 2013 Review information disclosure for airports Three reports, starting with WIAL Approach to compliance and enforcement June 2012 Customised price-quality paths As required (Orion?) Evaluating Transpower capital expenditure proposals As required Summary and analysis of EDB performance Ongoing Engagement programme for Part 4

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

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

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)

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

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