Financeability of electricity distribution services
Date published 02 Apr 2024, 09:00 am
The Commerce Commission consulted on how it will assess the financials of electricity distribution businesses in the default price-quality path.
Consultation overview
The Commerce Commission sought feedback on how it will assess electricity distribution business’ (EDB’s) financials in the default price-quality path reset. It has proposed to carry out a ‘sense check’ to understand the extent to which issues may be relevant to the reset, and to inform how they might take EDB’s financials into account in decision making.
The consultation is part of a wider regulatory reset of the default 'price-quality path'. The current default price-quality path will expire on 31 March 2025. In November 2023 the Commission published an issues paper seeking views on the key issues for the next regulatory period. We submitted our feedback to that paper in December 2023.
Default price-quality paths for electricity distribution businesses
Submissions on this consultation closed on 15 March 2024.
Our recommendations
- We reiterate the view we expressed in our previous submission that a strong focus on controlling costs is essential in this price-quality reset, particularly given concerns about energy hardship. We consider strong incentives for EDBs to control costs are appropriate to help ensure consumers’ bills are kept to a minimum.
- We agree with the Commerce Commission that it is not the regulator's role to accelerate revenue recovery from EDBs’ existing customers to provide funds for investments.
- As the consultation paper notes, the commission may take financeability into account where relevant to its decisions, but only to the extent that doing so would assist in promoting the Part 4 purpose of the Commerce Act – that is, promoting the long-term benefit of consumers (not the short-term financial interests of individual lines companies).
- We consider EDBs’ concerns about financeability may be overstated. In general, we agree with the commission that investment in regulated monopoly companies “involves ‘patient capital’ and attracts investors that have long horizons for recouping their investment (generally over the expected physical lives of the long-lived assets)”.
- We consider the ‘financeability sense check’ approach to be appropriate.
- We note that financeability can be affected by factors outside the regulator’s control, such as poor management by the company or decisions regarding dividend payments. Consumers should not be expected to bear the costs of problems caused by an EDB’s bad business decisions.