Last week saw two significant legal developments for electricity distribution businesses (EDBs) - the Commerce Commission (Commission) started consultation on the default price-quality path (DPP) for the next regulatory period, and the Electricity Authority (Authority) published an open letter about its expectations for distribution pricing.

Default price-quality path consultation

The Commission is consulting on its draft DPP decisions for the five-year regulatory period starting on 1 April 2025 (DPP4).^[1] The DPP will apply to all non-exempt EDBs not subject to a customised price-quality path in DPP4.

The Commission is seeking submissions on its proposals by 12 July and cross-submissions by 2 August 2024. The Commission will make its final decisions by 29 November 2024.

We think most EDBs will be pleased, or at least content, with where the Commission’s draft decisions have landed. While the proposed capex and opex allowances are short of EDBs’ asset management plan forecasts for DPP4, they are significant increases on the allowances for the current regulatory period (DPP3). Across all EDBs, capex is up 35% and opex is up 19% in real terms, making for an overall increase of 28%. Behind these increases are increases in inflation and (most significantly) EDBs’ weighted average cost of capital, and the twin drivers of increasing demand from electrification and the need to bolster the resiliency of aging networks, including in response to climate change.

Along with the increased allowances proposed by the Commission, the EDB input methodologies^[2] (which were reviewed in 2023) contain reopeners and a new large customer contract mechanism, which give EDBs flexibility to respond to unanticipated events and large customer-driven investments. In addition, and as signalled in the EDB input methodologies, the Commission has proposed a new innovation and non-traditional solutions allowance, which will be available on application and capped at 0.6% of an EDB’s allowed revenue over DPP4. There remains the ability for an EDB to apply for a customised price path if the EDB’s circumstances cannot be accommodated within the DPP.

The Commission is mindful of price shock for consumers and has therefore proposed limiting the increase in distribution revenue^[3] between the last year of DPP3 and the first year of DPP4 to an average of 24% in nominal terms.

The Commission has also proposed:

• Retaining the incremental rolling incentive scheme (IRIS) mechanism that applies in DPP3, with equal (and increased) incentive rates for capex and opex to encourage efficient substitution between expenditure types; and
• Continuing with the quality standards that apply in DPP3, which are based on average duration and frequency of consumer interruptions (SAIDI and SAIFI); and
• Continuing with the quality incentive scheme that applies in DPP3 with minor refinements.

The Commission has published a detailed reasons paper, a suite of supporting information, and a draft of the DPP determination. EDBs should review the documents to see how the DPP will apply to them and consider making a submission.

Distribution pricing open letter

In May we published a legal update on the Authority’s work on distribution pricing.

Last week the Authority published an open letter to EDBs about the Authority’s new areas of focus for distribution pricing. The new areas of focus are in addition to those the Authority notified in 2022^[4] and will factor into the Authority’s scorecard assessments of EDBs’ prices from 2025.

The new areas of focus are as follows:

• Transparent revenue allocation
  The Authority expects EDBs to be transparent about their cost allocation methods and subsidy-free range calculations in their pricing methodologies. The subsidy-free range is between the incremental cost and stand-alone cost of supplying a customer. This range will be very wide for most customers.

• Assignment of all ICPs to time-varying distribution tariffs
  The Authority expects each EDB to transition all ICPs on its network to time varying distribution tariffs, subject to very limited exceptions, such as a lack of suitable smart meters.

• Peak rates being based on a measure of long-run marginal cost
  With EDBs (and the Commission) forecasting significant capital expenditure over the next 10 years, the Authority wants to encourage distribution prices that are cost-reflective and signal the marginal impact an additional unit of energy has on network costs. This translates to peak prices at times of anticipated network congestion, set with reference to the long-run marginal cost of network capacity.
  The Authority’s preference is for day/night tariffs to be phased out and replaced by more targeted peak/off-peak tariffs. However, the Authority acknowledges this may not be possible for all networks.

• Reducing off-peak and controlled rates
  The Authority expects standard residential customer tariffs to move toward zero for off-peak and controlled load, with the intended effect of encouraging energy use at times when the network has excess capacity. However, the Authority acknowledges some EDBs may have network issues that may make this difficult.

• Asset Management Plan reporting on readiness for increased electrification
  The Authority has asked EDBs to report on any actions taken to address decarbonisation trends first reported in their 2021 asset management plans, and the findings from or results of those actions. This information is intended to assist the Authority’s project looking at EDB responses to increased electrification. To reduce EDBs’ costs, the Authority is only requesting existing information - EDBs do not have to collect any new data or write any new reports to respond to the Authority’s request. The Authority has requested this information by the end of August.
  
  This is more of a straight information request than an area of focus that might play into the Authority’s scorecard assessments of distribution pricing. Although drafted in mandatory terms, the request does not appear to have been issued using the Authority’s information gathering power under section 46 of the Electricity Industry Act 2010, and on that basis is non-binding. That said, the Authority could easily make the request binding if it were minded to. We expect most/all EDBs will provide the information voluntarily. EDBs should thoroughly review the information they intend to provide to ensure no legally privileged information is included and any commercially sensitive information is identified clearly (or withheld). Once the information is in the Authority’s hands the Authority may be required to disclose it if requested under the Official Information Act 1982.

Get in touch

If you would like to learn more about anything discussed in this article, how it could affect you or assistance in preparing a submission, please get in touch with one of our experts.

Thanks to Sam Chaytor-Waddy for helping to write this update.