Distribution pricing

Targeted reform of distribution pricing

Upcoming Open Closed Decision
View submissions Submissions closed 30 August 2023
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Consultation

Distribution networks will have a crucial role to play in the transition to a low-emissions economy and in the rapid electrification of our economy. Billions of dollars of investment are needed to facilitate this change, with efficient distribution pricing at the forefront of ensuring this investment happens in the right places at the right time.

This consultation sought industry feedback on our proposals to reform distribution pricing. Our issues paper presented the following interventions:

  • Pricing that signals the cost of using the network at certain times of high demand
  • Pricing that does not distort the use of the network during off-peak periods
  • Efficient allocation of shared costs between consumer groups
  • Connection pricing that is both efficient and consistent
  • Retailer response to distribution pricing signals.

We would like to thank all those who made a submission and cross-submission (see below). We will carefully consider all submissions before making a decision on next steps.

Issues paper

Issues paper - Targeted reform of distribution pricing

Issues paper - Targeted reform of distribution pricing

Information session

We held an information session on our issues paper on 21 July 2023. If you were unable to attend, you can watch the recording or read the presentation slides below.

Presentation - Targeted reform of distribution pricing

Presentation - Targeted reform of distribution pricing

Distribution pricing reform forums

Distribution pricing forums - Presentation slides

Distribution pricing forums - Presentation slides

Presentation slides - Distribution pricing reform Forums

Questions and answers

Check out the following questions we've received on the issues paper.

Time-of-use tariffs

Q: Some electricity distribution businesses (EDBs) have had time-of-use (TOU) in place for several years now. Is there any evidence that that pricing structure is having the desired impact?

A: We have not undertaken specific analysis into the impact of the introduction of TOU tariffs in NZ.

We would observe that current approaches to tariff assignment and profiling (see, eg, para 8.18 of the Issues paper) may currently be reducing the impact of the introduction of TOU pricing by distributors.

Connection costs

Q: How do you think a just-right cost to connect can be calculated across all networks, without taking the connection complexity, location and upstream costs into account? What is a overly high contribution?

A: We have not proposed that connection costs or capital contributions would be set without taking into account complexity, location or upstream costs.

As noted in the issues paper, the Authority’s preferences for connection pricing are less definitive than for some other areas (as this is a relatively new area of focus for the Authority).

The Authority would prefer:

  • a balanced approach that incentives both access seekers and distributors to optimize costs, with a preference towards reducing allocations to access seekers where these are overly high (noting that such allocations should be subsidy-free)
  • more standardisation of connection pricing and greater transparency, such that charges are more predictable and the allocation of costs between access seekers and existing customers is clearer
  • flexibility for access seekers to balance cost vs. quality where relevant.

An ‘overly high’ connection cost is one which may deter efficient demand expansion. This can arise if costs allocated to access seekers are relatively high within the subsidy-free range.

Low fixed charge phase out

Q: In your paper, you say at paragraph 2.22: (c) the sector is following the phase-out path for the low fixed charge (LFC) regulations,23 – i.e., increasing fixed ($ per day) charges for low users and reducing (cents per kWh) usage charges.24. Can you advise what evidence you are using to justify your statement in 2.22 (c)?

A: The statement made in 2.22 (c) refers to the report prepared by Concept Consulting for ERANZ, which the MBIE web-page links to. Eg: “As the low-fixed charge (LFC) regulations start to be unwound, the increase in fixed charges is being counter-balanced by networks and retailers lowering their variable charges. We estimate that, on average, residential variable charges will be 2.6 c/kWh (excl. GST) lower from 1 April this year, and eventually approximately 8.4 c/kWh when the LFC regulations are completely unwound.” [page 1]

Modelling on vulnerable consumers

Q: Can you also advise what, if any, modelling the EA has done on the effects of the options you propose on domestic and small business consumers, particularly those who are vulnerable?

A: The Authority has not undertaken modelling on the effects of the options outlined in the Issues paper on domestic and small business consumers. However, we expect there could be an opportunity to carry out such analysis as part of the policy evaluation phase before we make any specific proposals for amendments to the Code. We would expect to publish any such analysis as part of our consultation on any Code amendment proposals.

Residual profiles

Q: Can you clarify how a deemed or residual profile is required when an EDB is billing off a fixed c per kWh or off time periods that metering will need to support?

A: A deemed or residual profile should not be required for provision of data by retailers to distributors – where there is a functioning smart meter – for either uniform tariffs (fixed c/kWh) or non-uniform (time-varying/TOU) tariffs.

Our understanding is that many retailers are billed on the basis of deemed or residual profiles, even where properties have smart meters installed. This approach significantly mutes the impact of the consumers’ usage pattern on a retailer’s input costs and so weakens retailers’ incentives to respond efficiently to distribution prices.

Where a TOU tariff is being applied by the distributor and there is a functioning smart meter, the Authority would prefer to see distributors charge retailers based on the actual consumption of retailers’ consumers, for the time periods specified in the tariff.

Jurisdictional basis for regulation

Q: The consultation paper flags the options of retail price regulation to "prohibit or mandate certain retail pricing options" or by "mandating pass-through of distribution prices by retailers". Could you please clarify the jurisdictional basis that would allow the Authority to adopt such regulation, and how it sits with the Commerce Commission's Part 4 Commerce Act responsibilities?

A: The Authority has a broad power under section 32 of the Electricity Industry Act 2010 to make Code that is consistent with the Authority’s statutory objectives and that is necessary or desirable to promote any of the matters in section 32(1) of the Act (including competition in the electricity industry, the reliable supply of electricity to consumers, the efficient operation of the electricity industry).

The Authority cannot purport to do or regulate anything that the Commerce Commission is authorised or required to do or regulate under Part 4 of the Commerce Act 1986, except certain matters set out in section 32(4) of the Act (section 32(2)(b) of the Act).

However, under Part 4 of the Commerce Act, the Commerce Commission’s current role in the electricity industry is only to regulate electricity lines services as defined under s 54C of the Commerce Act, which does not include the electricity retail market. The Authority is therefore not constrained by section 32(2)(b) of the Act to regulate retailers if the requirements of section 32 are met.

Consumer protection objective

Q: Footnote 10 states what the new Consumer Protection objective is (though incorrectly references section 15(3) as 15(2)), but the consultation paper is silent on whether the EA considers the objective applies to distribution pricing (and if not, why not?). Could you please clarify.

A: Consumers are at the front and centre of the Authority’s work. Consumers are referenced in both our main objective and in the additional objective.

As you are aware, an additional objective was introduced from 31 December 2022, to protect the interests of domestic consumers and small business consumers in relation to the supply of electricity to those consumers. The additional objective applies only to the Authority’s activities in relation to the dealings of industry participants with domestic consumers and small business consumers.

The explanatory note of the Bill that resulted in the inclusion of the additional objective provided the following commentary: “The additional objective is not intended to affect the Authority’s functions relating to how industry participants deal with other industry participants (eg, trading conduct and information exchange), how prices are determined (eg, wholesale and retail electricity prices), or how costs are allocated between industry participants (eg, costs of transmission and ancillary services).”

So, the Authority’s work on distribution pricing is being progressed under its main objective: to promote competition in, reliable supply by, and the efficient operation of, the electricity industry for the long-term benefit of consumers.

We want distribution pricing to support the transition to a low-emissions economy at least cost to consumers and provide the right signals to consumers as they consider their own power use and respond.

With projections of over $20 billion of distribution-related investment in each of the next three decades, cost-reflective prices will have an important role to play in helping direct users toward low-cost network use and investment choices – potentially saving consumers substantial sums.

Notwithstanding that the work is being progressed as above, the Authority will be considering the effects of any proposed regulatory changes on consumers, which includes on small consumers, as part of its work on distribution pricing. We would welcome stakeholders’ views to inform our thinking on further work to consider the consumer impacts of any proposed changes in regulatory settings for distribution pricing.

Cross-submissions

Submissions

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