1. Default price-quality paths for electricity distributors from 1 April 2015 to 31 March 2020 28 November 2014 Sue Begg Commerce Commission

2. Introduction 2 Today we publish the default-price quality paths for 16 electricity distributors for the 2015-2020 period These new paths apply from 1 April 2015 until 31 March 2020

3. Outline 3 This presentation will cover the following features of today’s decision Starting-price adjustments Quality standards Changes in response to submissions Other improvements to the existing regime Impact on consumer bills

4. Distributors subject to this reset 4 Orion New Zealand are subject to a customised price-quality path until 2019 12 community-owned distributors are exempt from price-quality regulation Alpine EnergyNetwork Tasman Aurora EnergyOtagoNet CentralinesPowerco Eastland NetworkThe Lines Company Electricity AshburtonTop Energy Electricity InvercargillUnison Horizon EnergyVector Lines Nelson Electricity Wellington Electricity

5. Summary of price changes 5 Distributor Revenue for FY 2015/16 Price limit change 1 April 2015 Annual rate of change for FYs 2016/17 to 2019/20 Alpine Energy$ 30.5 million12.49% CPI+11% pa Aurora Energy$ 57 million-4.30% CPI+0% Centralines$ 10 million8.85% CPI+7% pa Eastland$ 23 million6.65% CPI+3%pa Electricity Ashburton$ 33 million5.73% CPI+0% Electricity Invercargill$ 14 million-2.78% CPI+0% Horizon Energy$ 22 million6.76% CPI+0% Nelson Electricity$ 7 million-8.95% CPI+0% Network Tasman$ 28 million-13.97% CPI+0% OtagoNet$ 25 million-6.92% CPI+0% Powerco$ 250 million0.16% CPI+0% The Lines Company$ 35 million-7.20% CPI+0% Top Energy$ 34 million8.29% CPI+7%pa Unison$ 100 million-0.06% CPI+0% Vector$ 395 million0.80% CPI+0% Wellington Electricity$ 99 million-13.66% CPI+0% Industry wide$1.1 billion-1.07% CPI+0.61%

6. Timeline of process 6 6 Sep 2013Process paper published 20 Sep 2013IRIS issues paper published 29 Nov 2013Preliminary financial model published 11 Dec 2013IM merits appeal judgment handed down 21 Mar 2014Issues paper published 4 Jul 2014Draft reasons paper and models published 18 Jul 2014Draft determination and IM amendments published 20 Oct 2014Revised determination and IM amendments published 31 Oct 2014Final WACC percentile decision released YesterdayInput methodology amendments determined TodayDefault price-quality path determined

7. Material published 7 Default price-quality pathInput methodology amendments Published today (28 Nov 2014)Published yesterday (27 Nov 2014) Price-quality path determinationAmendments for default price-quality paths Four accompanying reasons papers (main policy, quality, forecasting, compliance) Incremental Rolling Incentive Scheme (IRIS) amendments (including for Transpower) Expert reports on productivity and econometrics Accompanying reasons papers for each set of amendments Final versions of all modelsIRIS models All material available at: comcom.govt.nz/regulated-industries/electricity comcom.govt.nz/regulated-industries/electricity

8. Starting price adjustments 8 We have chosen to set starting prices based on the current and projected profitability of each distributor This approach brings distributors’ prices back in line with their forecast costs and forecast revenue growth Forecasts make use of distributors’ disclosed information as well as reliable external indicators The next slide illustrates why we are not rolling over prices

9. Impact of rolling over prices 9 Forecast revenues minus forecast costs, over the entire 2015-2020 regulatory period. Costs exceed revenuesRevenues exceed costs If prices were rolled over, revenues would be out of line with costs

10. Starting price adjustments 10 Percentage change in price caps, 2014/15 to 2015/16, excluding claw-back and with no alternative rates of change. Increase from draft: +0.2%

11. Claw-back 11 Distributor situation Effect on price changes Number of EDBs Distributor no longer receiving temporary increase 9 Distributor no longer facing temporary decrease 2 Distributor still to receive temporary increase 4 Claw-back not applied 1 Claw-back is a legacy issue caused by an over- or under-recovery in the period prior to our reset of prices in 2012

12. Price changes including the impact of claw-back 12 Percentage change in price caps, 2014/15 to 2015/16, including claw-back, but with no alternative rates of change.

13. Price changes including all aspects of the decision 13 Percentage change in price caps, 2014/15 to 2015/16, including claw-back and with alternative rates of change. Annual rate of change for FYs 2016/17 to 2019/20 Alpine CPI +11% Centralines CPI +7% Eastland CPI +3% Top Energy CPI +7% All others CPI +0%

14. Quality standards 14 In addition to price limits, the price-quality path also sets quality of service standards which distributors must meet Based on the frequency and duration of outages (SAIFI and SAIDI) Standard set based on ten years of historic performance Allowance made for major events such as storms (normalisation) Enforcement action may be taken when distributors breach standards in two years out of three Complemented by a new quality incentive scheme

15. Changes in response to submissions 15 Policy Revenue growthCapexOpex Energy intensity Non-residential elasticity Capex capInitial level Partial productivity Final -0.8% pa0.5120% Average of 2013 & 2014 -0.25% pa Draft 0.00% pa0.73 110% or 120% 20130.00% pa

16. Change to the WACC 16 Change to WACC percentile Draft decision Final decision 75 th percentile 7.60% Draft WACC 7.43% 67 th percentile 7.35%7.19% Final WACC Change in WACC parameters Draft decision Final decision Risk-free rate 4.21%4.09% Debt premium 1.80%1.65% Both the WACC percentile, and the underlying parameters we use to set the WACC have changed since the draft decision

17. Changes from draft to final 17 Impact of parameter change from draft to final on national average 2015 to 2016 price cap change, before claw-back and alternative rates of change

18. Improvements to the existing regime 18 Alongside refinements to our forecasting approach, the determination introduces several other significant enhancements to the regime These changes improve the incentives distributors face to: manage costs maintain and improve quality undertake energy efficiency and demand side management initiatives

19. Better incentives to manage costs 19 An amendment to the input methodologies introduces an improved Incremental Rolling Incentive Scheme (IRIS) Puts in place an incentive to control expenditure that has a constant strength in each year of the regulatory period Applies to both operating costs and capital costs Distributors will no longer be exposed to the full cost of responding to external events that have a temporary impact on expenditure Removes opportunities to increase future revenue by inflating costs in a particular year

20. Quality incentive scheme 20 We are introducing a revenue-linked quality incentive which complements the current pass/fail quality standard Automatic financial rewards and penalties Parameters set conservatively for the 2015-2020 period o Reward/penalty set at up to 1% of MAR o Targets based on historic performance Developed with input from the ENA quality working group As this is a new mechanism it is likely to be refined in future

21. Energy efficiency incentives 21 The determination provides improved incentives for distributors to undertake energy efficiency and demand side management initiatives Compensates distributors for revenue foregone as a result of energy efficiency or demand-side management initiatives Aligns the treatment of investments in new technology with shorter asset lives, with treatment of assets with longer lives Consistent with our obligations under s 54Q of the Act

22. Dealing with uncertainty 22 The High Court has determined amendments to the input methodologies that allow reconsideration of the price-quality path following a catastrophic event or other change event In addition, we are introducing a recoverable cost to allow for prudent expenditures between the event and when prices are reset We have improved our approach to pass-through and recoverable costs to enable distributors to fully recover these amounts

23. Impact on consumers 23 The next slide presents these price changes in consumer bills terms It is important to bear in mind that these figures are indicative at best The price-cap we set is an average across all customers Distributors can choose how to structure their tariffs Based on an average residential consumer (8000 kWh/year) Distributors may not price up to their cap Distribution is only 23.2% of an average bill

24. Estimated change in monthly consumer bills 24 Estimated one-off average change in an average monthly consumer bill, between 2014/15 to 2015/16.

25. Impact of the Transpower IPP 25 In addition to today’s electricity distribution price-quality path reset, the Commission has also reset Transpower’s individual price-quality path Transmission charges are about 7.4% of an average consumer bill Transmission charges will decrease modestly on average across the country once the individual price-quality path reset takes effect Charges for specific regions may change as a result of proposed changes in Transpower’s pricing methodologies

26. Summary 26 We are resetting prices to take account of forecast costs and forecast revenues We have refined our forecasting methods since the draft decision following input from stakeholders The determination improves several incentive mechanisms At a national level consumer prices are essentially flat

27. Any questions? 27

28. Contact us 28 Call:0800 943 600 Write:Contact Centre, PO Box 2351, Wellington 6140 Email:regulation.branch@comcom.govt.nz Website:comcom.govt.nz/regulated-industries