Commerce Commission's influence over energy transition

Last week, the Commerce Commission (Commission) released an Issues Paper on Default price-quality paths for electricity distribution businesses (Issues Paper). The default price-quality path (DPP) regulates the maximum revenues and the required quality standards for certain electricity distribution businesses (EDBs). 16 EDBs are subject to the DPP, with a further 13 EDBs only subject to information disclosure regulation as they are deemed to be "consumer-owned" under the Commerce Act 1986. The new DPP (DPP4) must be set by 30 November 2024 and will apply over the next four or five years from 1 April 2025.

The Issues Paper recognises that DPP4 is being set in the context of a forecast large-scale energy transition to increased electrification and a heightened focus on network resilience in the face of climate change impacts. In addition to increased electricity demand, EDBs are expecting an increase in renewable generation being built within their network areas and a higher uptake of flexibility services to manage supply and demand over their networks.

The Issues Paper notes that this context, plus the usual need for repairs and replacement of existing network equipment, will require greater investment by EDBs than has been seen in previous DPP resets. However, the Commission has emphasised that the need for revenue to fund investment by EDBs must be balanced against the need to minimise any price shock for consumers.

A key challenge for the DPP4 reset is that although the overall direction for investment in distribution networks is clear, there remains significant uncertainty about the timing and extent of investment that will be required for distribution networks to support the energy transition. This challenge bites when setting capex and opex allowances, and the rules for allowing price paths to be "reopened" if unexpected expenditure is incurred, under DPP4.

The Commission has proposed to adapt its approach to capex allowances for DPP4 in response to feedback from EDBs that the energy transition means that past expenditure is no longer a good starting point for estimating future spending. While the Commission will continue to use EDBs' asset management plans (AMPs) as the starting point for determining capex allowances, it plans to subject them to greater scrutiny. In addition to undertaking its own high-level assessment of the AMPs, the Commission has engaged an external advisor to review and report on the reasonableness of EDBs' demand and expenditure forecasts. The Commission has signalled that it is concerned about the deliverability of the scale of work programmes included in AMPs given labour market and supply chain conditions. It is therefore apparent that the Commission will have significant influence over EDBs' ability to invest in their networks during the application of DPP4.

The Commission's proposal of a new "large connection contract" (LCC) mechanism in its draft decision for the 2023 electricity distribution Input Methodologies (IM) Review is intended to address the expenditure uncertainty associated with large new customer-initiated connections. This mechanism will allow connection assets created under LCCs to be excluded from EDBs' Regulatory Asset Bases, and the associated revenue to be excluded from revenue limits, where certain conditions are met.

The LCC mechanism, if included in the final IM determination, will need to be considered by the Commission in setting capex allowances under DPP4. The Commission has also observed that EDBs are forecasting greater use of capital contributions to fund expenditure (which are netted off any asset value entering the Regulatory Asset Base) and said that it is interested in views on how EDBs' capital contribution policies can be accommodated in capex forecasts for DPP4.

Finally, given the uncertainty and the expected increase in decarbonisation investment, the Commission is considering and seeking views on whether the regulatory period should be shortened from five years to four on the basis that a shorter regulatory period may be justified when there is a greater degree of uncertainty in forecasts.

Submissions on the Issues Paper are due 15 December 2023, with cross-submissions due on 26 January 2024. The Commission intends to release a draft DPP4 decision for consultation in May 2024, with the final decision due in November 2024.