Energy Regulation – EDB CEOs’ Meeting Commerce Commission (19 June 2012)

Overview What we are trying to achieve in regulatory area Progress in implementing Part 4 of Commerce Act Focus over next year Specifying input methodologies for default price paths Price path resets Information disclosure Compliance Other issues

What we are trying to achieve Regulation is better targeted and more effective Our decisions promote statutory objectives Suppliers act in line with regulatory obligations Use disclosed information to better understand role of regulation and performance of regulated businesses Engagement strategy Consultation, number of EDBs, ENA

Part 4: Good progress 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 DPPs for gas and electricity services (June 2012)

JR litigation has caused delays Delays caused by two judicial reviews Price reset input methodology and process challenges Objective of challenge to cross-sector process? Parties have right to bring judicial reviews but... Delayed EDB, gas resets and merits reviews (by a year) Significant costs – money and resources Distraction from other matters, delayed certainty

Court of Appeal has clarified role of certainty for investment incentives Input methodologies and Part 4’s purpose statement promote incentives for investment by promoting certainty about regulatory rules But Court of Appeal has confirmed that: Certainty is relative rather than absolute and may take time to achieve Considerable uncertainty in competitive markets Part 4 is intended to promote certainty and incentives for investment over time

Merits reviews Merits reviews – expected as part of the regime Some uncertainty expected till merits reviews resolved September to December this year (and beyond?) Both regulated businesses and consumers appealing Benefits of accountability – but high cost Costs diminish over time?

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

Additional input methodologies for DPP Specify asset valuation, cost allocation, taxation for DPP Consistent with existing ID and CPP IMs Simplified for use in DPP WACC - term credit spread differential Allow for forecast periods Consultation timeframe Submissions 6 July, cross submissions 17 July

Price-quality path resets If reset based on current and future profitability Intend to rely on information disclosure for current profitability (or s53ZD information request) Simplified building blocks for forecast periods (where required) for future profitability Expect to release paper in August

Information disclosure In-principle decisions Update paper and revised draft determinations will be released soon for technical consultation Approach to information disclosure Have built on existing information disclosure Ensure sufficient information available to interested persons to assess whether purpose of Part 4 being met Final decisions will better explain use of ID information

Information disclosure: some key changes from existing requirements Changes to reflect Purpose Statement and contain costs Improved information on businesses and networks, assets, expenditure, quality, more disaggregation Consistent formats for data – easier to do analysis Changes to AMP requirements Disclosure in years 1 and 4 of regulatory period with AMP updates in intermediate years Asset management maturity assessment tool

Information disclosure (process) New ways of working – technical reference groups Direct input from technical experts very valuable Constructive and effective approach – use in future Feedback on draft determinations and reasons paper Constructive and practical suggestions Assisted us in balancing the purpose of ID with the needs and concerns of suppliers

Information disclosure (stakeholder survey) Stakeholder survey just completed Appreciate responses from 24 EDBs (10 boards) Stakeholders’ understanding of regime and of benefits of targeted regulation Understanding of business and market performance Feedback on our performance We will use results of survey to improve performance

Information disclosure (summary and analysis) Currently developing a report that will summarise performance of EDBs Will allow EDBs to check EDB-specific data used before publishing Will develop approach over time

Compliance

Compliance Compliance strategy (preliminary thinking) Cost effective compliance to achieve statutory objective Encourage voluntary compliance Help suppliers understand obligations Information and guidance to enable compliance Detect and respond proportionately to non compliance Administrative, financial, criminal penalties

DPP quality breaches Commission’s response Breaches dealt with on case by case basis Informed by circumstances, supporting evidence, mitigating factors, previous non-compliance Appropriateness of quality standards – CPP? Degree of harm Proportionate response

Other issues - quality Quality – Commission supports ENA initiatives Improve measures Possible integration with price path Extreme events - major event days (some EDBs)

Other issues – catastrophic events Self insurance for catastrophic events Need to define allocation of risk between shareholders and customers, current and future customers Allowance for self insurance – what assurance that money available when needed? Recover costs after event – but customers facing high costs Resilience

Conclusions Substantial progress on Part 4 despite delays caused by litigation Reset of price paths and finalisation of information disclosure major remaining tasks Resolution of merits reviews Summary and analysis, stakeholder engagement

Sue Begg Deputy Chair 04 924 3610 sue.begg@comcom.govt.nz