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Step forward on monopoly network pricing

Thursday 5th August 2010

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New rules for regulating the price charged by monopoly electricity and gas networks are a step closer with today's release of a Commerce Commission consultation paper on starting points for default price-quality paths (DPP's).

Default price paths are intended to give monopoly services incentives to invest in their networks in time to meet growing demand while limiting their ability to extract excess profits.

The commission is required to set starting prices for each supplier at the beginning of a regulatory period to establish the cap on their prices or revenues.

The consultation comes amid signs of growing frustration among would-be new entrants to the Auckland gas market over existing players' grip on capacity in the Vector-owned gas network. While the network has spare capacity most of the time, capacity is close to fully allocated against peak demand, prompting calls for new investment.

Vector, however, is reluctant to invest in new capacity without knowing it will be able to make a commercial, albeit regulated, return on new infrastructure, while gas market participants are reluctant to cede existing capacity entitlements for fear that they will be caught short at critical times themselves.

“The Commission is keen to engage constructively with all affected electricity distribution businesses and gas pipeline businesses and encourages them, as well as other interested parties, to participate in the consultation process,” said Brent Alderton, Commerce Commission general manager, regulation.

An illustrative example, based on electricity networks, of how the starting price adjustment process might work is included, consistent with draft input methodologies released in June, and which network companies fear makes too little allowance for higher borrowing costs created by the impact of the global financial crisis on banks' lending practices.

“We recognise that the regulated businesses may hold differing views on the appropriate process for starting price adjustments, and will consider these views once we have received feedback on the proposal," said Alderton.

"Suppliers who consider that the final starting price adjustments are unsuitable for their particular circumstances may propose a customised price path."

The commission has already set a DPP for non-exempt electricity distribution businesses, which took effect from April this year. However, the commission can reset starting prices after it makes its final decisions on input methodologies, drafts of which were released for the electricity and gas sectors in June and July.

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