Electricity distributors (local lines companies) charge their customers for the line function services the distributors provide. These charges are mostly paid by retailers trading on the relevant distribution network, who pass them through to consumers.

The Electricity Authority has traditionally taken a light-handed approach to regulating the prices distributors charge their demand-side customers.^[1] That looks set to change if the Authority’s recent Targeted Reform of Distribution Pricing issues paper is anything to go by.

What is being proposed?

Distribution networks will play an increasing role in the electrification and decarbonisation of the economy. The Authority wants to ensure distribution prices are cost-reflective and send the right signals to make this transition efficient. In that context, the Authority is seeking stakeholder views on if and how the Authority’s regulation of distribution prices should have more teeth.

The Authority “is concerned that progress toward more cost-reflective [distribution] pricing is not occurring as quickly or as comprehensively as the circumstances warrant”, and is proposing targeted reforms to address what the Authority sees as the most significant issues. The Authority is not proposing a comprehensive distribution pricing methodology, as exists for transmission.

The main issues with distribution prices, as the Authority sees them, are as follows:

• Distribution prices during peak periods, including rewards for flexibility, do not adequately signal the cost consequences of network usage at those times. There needs to be a better payoff for consumers avoiding peak periods and relieving congestion that way, rather than distributors relieving it with costly network upgrades. The Authority supports the increasing penetration of time-of-use pricing structures, but considers this a “stepping stone” only. The Authority wants to see “more dynamic or targeted price signals”. Not only will these price signals incentivise consumers to economise on their electricity consumption at the right times, they will also create the right conditions for new distributed energy resource markets to develop, such as forms of aggregated residential demand response beyond traditional ripple control of hot water systems.

• Off-peak usage charges are common but not cost-reflective because there is typically plenty of capacity in the network at those times. Consumers may be incentivised to economise when they don’t need to, which is inefficient. The Authority wants to see distributors recover their “residual” revenue by way of incentive-free fixed charges rather than off-peak usage charges. The phasing out of the Low Fixed Charge Regulations by April 2027 will make this change easier to achieve.

• Distributors’ target revenue is being allocated to consumer groups in the wrong way. For example, the Authority cites the 2019 Electricity Price Review finding that the network cost recovery burden is falling disproportionately on residential consumers versus business consumers, perhaps foreshadowing higher distribution prices for commercial and industrial consumers in future. The Authority thinks distributors are overusing accounting cost allocation approaches that don’t consider the extent to which some consumer groups may be subsidising others.

• There is a lack of standardisation and transparency for connection pricing (capital contributions) and some distributors may be adopting inefficient approaches by over or under-charging for new connections. In the case of over-charging, new consumers will be subsidising existing ones, and vice versa for under-charging. We think there is a risk here of future regulation removing some of the flexibility distributors and their larger customers currently have to negotiate different ways of paying and reimbursing the capital cost of new connections, and also pushing more distributor revenue into regulated price paths under Part 4 of the Commerce Act.

• A lack of retailer response to distribution pricing signals may be deterring distributors from progressing pricing reforms. There may soon be new regulation for retailer pricing despite retail electricity markets being competitive.

The Authority puts forward three broad options to address these problems:

• Strengthen and sharpen the current form of regulation by making the distribution pricing principles more specific and extending the scorecards.

• Prohibit or mandate specific approaches to distribution pricing (and possibly retailer pricing) in the Code.

• Give the Authority the power to “call in” aspects of a distributor’s pricing methodology. The Authority would have the ability to recommend changes to the methodology and, if not satisfied with the distributor’s response, to make changes itself.

The Authority appears to favour a combined approach - keep and beef up the current principles-based form of regulation and back it up with specific prohibitions and/or mandates in the Code plus an Authority call in power.

What now?

The Authority is seeking submissions on the issues paper by 9 August, and there will be an opportunity for cross-submissions until 24 August. In the meantime, stakeholders can register on the Authority’s website for an information session which the Authority intends to hold later in July.

If you would like any more information about the issues paper or help to draft a submission, please contact one of our experts.