Regulatory Risks for Electricity Lines
Businesses
James Every-Palmer
Regulatory Risks for Electricity Lines Businesses
3 November 2011
Landscape
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Part 4
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Electricity Authority processes
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Consumer Law Reform Bill
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Consolidation?
Regulatory Risks for Electricity Lines Businesses
SLIDE 2
3 November 2011
Part 4
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Purposes: Include promoting investment and limiting excessive returns
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Financial Capital Maintenance (FCM) Model:
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Limit actual revenue to a "normal" return
Allowable revenue = (RAB x WACC) + Depreciation + Opex + Tax - Revaluation Gains
New RAB = Old RAB - Depreciation + Revaluation Gains + Capital additions - Capital disposals
Two main forms of regulation
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Information disclosure (ID)
Price path (DPP/CPP and IPP)
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Airports and exempt EDBs: ID
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Non-exempt EDBs and Gas transmission and distribution businesses: ID and
DPP/CPP
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Transpower: IPP
Regulatory Risks for Electricity Lines Businesses
SLIDE 3
3 November 2011
Jargon
ABAA
ABC
ACAM
AEMC
AER
AMPs
AVDA
AVnDA
BBAR
CAA
CAMSC
CAPM
CDA
CnDA
CPI
COS
CPP
DAC
DCF
DHC
DRC
EBIT
EBITDA
EBSS
ECM
DPP
EDBs
EIRA
ELBs
ESC
EV
FCM
FDC
FDC
GAAP
GDN
GDPCR
GPBs
GFC
GPS
HC
HP
IC
ICP
IDV
IFRS
IHC
IMs
IP
ID
IPP
IR
IRIS
IRR
LIBOR
LRMC
MAR
MEAs
MP
MPOC
MRP
NIC
NEM
NPV
NZS
OCDA
OCnDA
ODRC
ODV
OEM
OVABAA
PBR
PV
RAB
ROI
RPI-X
SAC
SAIDI
SAIFI
SCP
SBL
SPA
SRMC
SSNIP
TAMRP
TPM
TSO
VIX
VTC
WACC
Regulatory Risks for Electricity Lines Businesses
SLIDE 4
3 November 2011
Part 4 versus Part 4A
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Previous Part 4A:
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Review of Act:
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Commission setting rules "as it goes"
Too uncertain - not conducive to incentives to invest
Accountability limited to judicial review
Commission argued regime worked well
Government rejected this and decided reform required
Resulting reform: New Part 4 enacted in 2008:
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Purpose statement specifically includes incentives to invest
Commission required to set rules in advance for the first time (IMs)
Merits review of input methodologies
Regulatory Risks for Electricity Lines Businesses
SLIDE 5
3 November 2011
Part 4 - input methodologies
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Key regulatory rules - the "building blocks" for regulated prices
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Key part of Part 4 reforms
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Purpose is "to promote certainty for suppliers and consumers ..." (s 52R)
Certainty promotes investment (Part 4 purpose)
Merits appeals
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Alternative methodology that is "materially better" at meeting Part 4 purpose
and/or purpose of IMs can be substituted
Frozen record - appeal limited to "documentary information and reviews that
were before the Commission when it made its determination?
Regulatory Risks for Electricity Lines Businesses
SLIDE 6
3 November 2011
Where are we up to?
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IMs for ID and DPP/CPP:
– Set in December 2010
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DPP:
– Old Part 4A thresholds used to set 2010-2015 DPP
– Will be reset (with potential claw back) based on new IMs
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ID:
– ID Determination expected April 2012 and will apply from
2011/12 disclosure year
Regulatory Risks for Electricity Lines Businesses
SLIDE 7
3 November 2011
Legal challenges
1. DPP judicial review
2. "Record" judicial review
3. Merits review of IMs:
Parties involved: Commerce Commission, Vector, Wellington
Electricity, Powerco, MEUG, Transpower, AIAL, CIAL, WIAL and Air
NZ
Regulatory Risks for Electricity Lines Businesses
SLIDE 8
3 November 2011
1. DPP judicial review
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Default Price-path (DPP):
– "Starting prices" set every 5 years
– In other years, prices rolled over at CPI - X
– Low-cost "partial building blocks" - relatively unique
internationally and many ways of doing it
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Vector argued that the Commission had set an
incomplete set of IMs for DPP regulation
Regulatory Risks for Electricity Lines Businesses
SLIDE 9
3 November 2011
DPP judicial review (cont)
Input Methodologies
ID
DPP
Asset
valuation
Cost
Allocation
Tax
Cost of
capital
Rules &
processes
Yes
Yes
Yes
Yes
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Starting
Price
Adjustments
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-
-
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Yes
Yes
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Wide range of outcomes for Vector depending on method chosen: ±$150m per
5 year period
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Vector argued this level of uncertainty cannot have been intended:
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Defeat purpose of Part 4 reforms
Would mean no merits review of Commission's most important decisions
Commission acted ultra vires sections 52R (purpose of IMs), 52A (purpose of Part 4), 52T(2)
(suppliers able to reasonably estimate effects on their business, and Commission must set
out "how" IMs will be applied)
Regulatory Risks for Electricity Lines Businesses
SLIDE 10
3 November 2011
DPP judicial review (cont)
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Vector wins at High Court
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Clifford J relied on:
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The words of s 52T
The purpose of the Part 4 reforms
Importance of merits review
Relief:
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Vector Ltd v Commerce Commission, High Court, Wellington CIV-2011-485536, 26 September 2011, Clifford J
Commission has to set input methodologies for DPP starting prices
No existing input methodologies invalid
Requires new consultation process
Commission has appealed
Regulatory Risks for Electricity Lines Businesses
SLIDE 11
3 November 2011
DPP judicial review (cont)
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Consequences
– Non-exempt EDBs: new DPP IMs
– Exempt EDBs: no existing IMs invalid or amended
Regulatory Risks for Electricity Lines Businesses
SLIDE 12
3 November 2011
2. "Record" judicial review
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Suppliers understood that Commission running sector-specific
consultation process
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In its final decisions, Commission stated that it had considered all
material across sectors
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Important because fixed record means no opportunity to respond
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Decision pending
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Consequences: Merits review delayed
Regulatory Risks for Electricity Lines Businesses
SLIDE 13
3 November 2011
3. Merits review of IMs
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One judge and two lay members
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Appeals on foot for key input methodologies (eg, WACC, asset
valuation, cost allocation)
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On hold until process JR finally determined
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Existing IMs may be quashed (unlikely)
Alternatively, process JR will determine the record / separate tribunals
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Still faint hope of Q3 2012 hearing dates
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Consequences:
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Substitution of materially better IMs and / or further consultation by
Commission
Re-opening of price paths for non-exempt EDBs
Regulatory Risks for Electricity Lines Businesses
SLIDE 14
3 November 2011