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

2. 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

3. 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

4. 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)

5. 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

6. 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

7. 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?

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Compliance

17. 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

18. 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

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

20. 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

21. 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

22. Sue Begg
Deputy Chair