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Principles or model approaches to distribution pricing

In early 2009 the Electricity Commission commenced a project to develop pricing principles or model approaches for distributors (the project).

Background

The objectives of the project were:

  • an initial preference for a voluntary approach which the distributors can be evaluated and monitored against;
  • distribution pricing that ensures line losses and constraints are managed;
  • market entry by retailers is facilitated and competition is enhanced by standardising and simplifying tariff structures and contractual arrangements (if required);
  • barriers to demand-side participation are removed (if required);
  • any consequential changes in rural line charges are consistent with changes in urban line charges; and
  • the impact of the low fixed charge requirement is addressed.

The last substantive work on distribution pricing was undertaken by the Pricing Approaches Working Group (PAWG). The Commission used the final PAWG paper as a starting point for the project as it received support from industry participants at the time.

In February and April 2009, the Commission engaged distributors through the Electricity Networks Association (ENA) to better understand changes in pricing since the PAWG report was published.

The Commission asked distributors to report on how their pricing methodologies may have changed since 2005, and in particular the steps they had taken in implementing part or all of the PAWG recommendations.

Consultation - June/July 2009

On 5 June 2009 the Commission published a paper on a draft proposed model approach to distribution pricing for consultation. The Commission received 27 submissions.

Workshop - June 2009

As part of the consultation on a draft proposed model approach to distribution pricing, the Commission held a workshop on 17 June 2009 in Wellington to give interested parties an opportunity to present their initial views and to interact with the Commission.

Workshop agenda and presentations are available from the workshop webpage.

Summary of Submissions and Discussion Paper - October 2009

The Commission completed an assessment of the submissions received and comments made at the 17 June 2009 workshop.

The assessment led to a reconsideration of the degree of prescription contained in the Commission's proposed approach. The Commission formed a preliminary view that:

  • a principles-based approach should be adopted;
  • guidelines (methodological requirements) should be provided to assist stakeholders with interpreting and implementing the proposed pricing principles.

In October 2009 the Commission invited interested parties to provide feedback on the draft pricing principles and methodological requirements by 30 October 2009.

The Commission received 18 submissions.

Workshop - October 2009

To assist in forming a final view on the proposed approach to distribution pricing, the Commission held a workshop for industry participants and other interested stakeholders on 12 October 2009 in Wellington.

This workshop had the following objectives:

  1. understanding retailers' concerns as to the aspects of distribution pricing that can be a barrier to retail competition;
  2. identifying what aspects of distribution pricing may be relatively easily standardised, including confirming common terminology and definitions for distribution access and pricing, as well as the basis for a common tariff format across distributors (including standardisation of customer categories);
  3. seeking feedback from stakeholders on revised draft pricing principles and methodological requirements; and
  4. discussing the merits, or otherwise, of a more or less mandatory approach.

As part of the preparation and facilitation of the workshop, the Commission approached a retailer (Mercury Energy - Nigel Williams) and a distributor (Orion - Rob Jamieson) to consider what matters could be discussed and progressed under item (2) above. Interested parties were encouraged to contact the representatives mentioned above with suggestions as to what could be standardised by mutual agreement between retailers and distributors.

The Commission factored in appropriate material provided or discussed at the workshop into its final approach.

The following presentations were made at the workshop:

Distribution pricing administrative issues working group - October/November 2009

A distribution pricing working group was formed to discuss a number of administrative issues relating to the interface between retailers and distributors.

The role of the working group was to focus on issues discussed at the morning session of the 12 October 2009 workshop, including:

  • wash-ups;
  • unnecessary complexity;
  • unaccounted-for electricity; and
  • common terminology.

The group met on 9 and 27 November 2009. The group reached agreement on several matters and made recommendations to the Commission. The group's recommendations are recorded in the minutes of the meetings.

Consultation - December 2009

Following consideration of the submissions received on the October 2009 draft pricing principles and methodological requirements paper, an updated set of pricing principles and information disclosure guidelines were prepared (“Distribution Pricing Principles and Information Disclosure Guidelines paper”). The Commission has, following suggestions by stakeholders the Commission:

  • clarified and simplified the pricing principles; and
  • developed information disclosure guidelines, aligning them more closely with the Commerce Commission requirements.

Fifteen submissions were received.

Distribution Pricing Principles and Information Disclosure Guidelines - March 2010

On 1 March 2010, following consideration of the three previous consultations, the final paper on pricing principles and information disclosure guidelines was released.

The paper finalised the draft pricing principles and information disclosure guidelines. The paper is designed to assist distributors in respect of the disclosure of information on their distribution pricing methodologies, and any subsequent review of the distributors' conformity with the pricing principles.

Consultation on Criteria for assessing alignment against the Information Disclosure Guidelines and Pricing Principles - September 2011

The Authority has not proposed full standardisation of distribution tariff structures in its recent consultation paper - MUoSA Consultation 11 August 2011. A prescriptive approach was not pursued because of the lack of any clear benefits versus the costs.

However, while there were no proposals for full standardisation of tariff structures, it was noted that the Authority would continue to address the efficiency of distribution tariff structures through the distribution pricing principles project.

The Authority's work in this area builds on the earlier work undertaken by the Electricity Commission. In March 2010 the Electricity Commission published a set of Pricing Principles and Information Disclosure Guidelines (pricing principles and guidelines). The pricing principles and guidelines were designed to facilitate distributors developing more efficient and pro-competitive pricing structures, and making information available to stakeholders to assess whether distributors are doing so.

The Authority has completed its first review of the degree of alignment with the guidelines and the extent to which distributors have considered the principles. This review has resulted in a consultation paper that further refines the guidelines and sets out initial criteria for assessing alignment with the pricing principles.

The Authority is keen to consult with interested parties on:

  • the criteria in Appendix A of the consultation paper which provide further guidance on the application of the information disclosure guidelines); and
  • the initial criteria for assessing alignment with the pricing principles set out in 3.4.6 of the consultation paper.

An additional purpose is to bring to the attention of distributors and other interested parties the results of the initial review of the alignment of a sample group with the guidelines undertaken by Concept Consulting Group Limited on behalf of the Authority. This report is attached as Appendix B of the consultation paper.

Decision-making and economic framework for distribution pricing methodology review - May 2012 

The Authority published a decision-making and economic framework consultation paper in May 2012 to seek industry and consumer feedback on the Authority's proposed decision-making and economic framework for distribution pricing. The purpose of developing an economic framework for distribution pricing is to establish a framework for ensuring efficient allocation in distribution pricing, and to align with the Authority's approach for transmission pricing.

After considering the 16 submissions and three cross-submissions  to the May 2012 consultation paper, the Authority decided to confirm the decision-making and economic framework
The Authority published a summary of submissions and a decisions and reasons paper outlining its decision to confirm the decision-making and economic framework for distribution pricing.

Distribution pricing: alignment review – April 2013

The Authority has appointed Castalia to assist with a review of distributors’ pricing methodologies. The review will provide information about:

(a) the information that is disclosed by each distributor about its pricing methodology
(b) the extent to which each distributor’s methodology aligns with the principles
(c) whether a distributor’s pricing approaches and methods are efficient or inefficient, given a particular set of network circumstances.

The Authority will use the review outcomes to assess whether the voluntary pricing principles are resulting in distributors using efficient and pro-competitive pricing structures or whether alternative arrangements are needed to achieve efficient pricing methodologies. The Authority’s decisions about distribution pricing and the principles and guidelines will be informed by the statutory objective and the economic framework.

The Authority intends to publish the findings of the review for each distributor, most likely in late-2013.

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