FAQs: New rules for connection pricing methodologies

A user should cover the costs they incur, so shouldn’t a new connection pay a 100% capital contribution and system growth charge?

Connection charges are part of the cost of obtaining distribution services, with new connections also paying monthly charges once connected.

On most distribution networks, new connections have historically paid less than 100% of their direct cost up-front, with the remainder of their connection costs rolled into the distributor’s cost base and recovered across all users through monthly charges. As long as connection charges are not too low, connection applicants are still paying their full connection cost over time, and contributing to shared costs.

If new connections have to pay a bigger share of costs up front and still pay the same monthly charges as existing customers, then they pay more in total than existing users. These higher costs will flow through to other activities, such as building new housing, expanding businesses, and electrifying transport and heating.

If higher costs stop or delay new connections, then there are fewer users to share the largely fixed and shared costs of the network – meaning higher costs for existing users.

More balanced pricing still ensures connection growth pays for its growth costs, while not making connection growth also pay a disproportionate share of other costs.

See section 5 of our Distribution connection pricing consultation paper for more details.

How should a distributor define the minimum scheme for pricing connections?

The minimum scheme should be defined with reference to the distributor’s connection and operating standards, which should reflect the distributor’s asset management policies and practices.

How should the minimum scheme be determined for a posted connection charge?

There are three key steps for distributors establishing a posted connection charge:

• determine the eligibility criteria – eg, single-phase residential connections within a certain distance of an existing overhead pole.
• consider the minimum scheme for a representative connection of that type (ie, the ‘notional’ minimum scheme). As with any minimum scheme, this is done with reference to the distributor’s connection and operation standards, which should reflect their asset management policies and practices.
• apply their connection pricing methodology to the notional minimum scheme to determine the level of the posted charge. The level of the posted charge should be published by the distributor, along with eligibility criteria and a standardised charge reconciliation.

Eligible connections pay the posted charge, without a need to develop quotes for each connection.

Setting posted connection charges is optional for distributors. They are most useful for higher-volume, smaller-value connections, such as ‘standard’ residential or small business connections.

See Example 1A of this guidance document.

What happens to rebates to a pioneer if they sell their asset?

A distributor can decide whether pioneer status applies to an applicant, the connection itself, or some other approach. A distributor is required to set out in their pioneer scheme policy whether, and in what circumstances, the status of a first pioneer or subsequent pioneer may transfer to a a new occupant or owner of that connection.

Note, the pioneer scheme requirements were clarified following the technical consultation on the Code drafting. The amendment clarified that distributors have discretion in their pioneer scheme policy to specify how eligibility is managed.

Why does the pioneer scheme not apply to connections that are priced using posted connection charges?

Posted connection charges are designed to be used for high-volume, low-value connections with relatively consistent costs. By definition, posted charges are consistent from one applicant to the next, so there is no position-in-queue dynamic to address through a pioneer scheme.

How is a real estate development defined?

We’ve defined real estate development in the Code to mean a development of land for the purpose of on-selling, including its development in one or more of the following ways:

(a) Subdivision

(b) the construction of commercial or industrial premises (or both)

(c) the construction of multiple new residential premises.

Note, the definition was refined following the technical consultation on the Code drafting.

Pioneer schemes don’t apply when the connection is for the construction of commercial or industrial premises. Does this mean pioneer schemes don’t apply to any commercial or industrial connections?

A real estate development is a development of land for the purpose of on-selling. Therefore, a distributor isn’t required to have a pioneer scheme to a commercial or industrial connection if the purpose is to on-sell the premises. If the purpose of the development is not to on-sell the premises, then the pioneer scheme requirements apply.

Note, the definition of a real estate development was refined following the technical consultation on the Code drafting.

Does the definition of real estate development capture multi premises buildings?

A multi premises building is only captured if the purpose of the development is to on-sell the premises.

Note, the definition of a real estate development was refined following technical consultation on the Code drafting.

Are embedded networks excluded from pioneer schemes?

Embedded network owners are not required to operate pioneer schemes.

An embedded network could be required to make pioneer scheme contributions when connecting to the primary network and could receive rebates as a pioneer in one of the primary network's pioneer schemes.

How does a pioneer scheme fee work and who pays it?

A pioneer scheme fee is deducted from a pioneer scheme contribution before rebates are paid to the pioneers. The pioneer scheme fee must only cover the reasonable costs of administering the pioneer scheme.

Why is the Authority using the mid-point vanilla weighted average cost of capital (WACC) in the incremental revenue calculation?

This approach is consistent with the input methodologies approach for dealing with the time-value of cashflows.

Why is the WACC adjusted for inflation?

Inflation is excluded from WACC and cashflows for consistency – ie, because cashflows are expressed in real terms without inflation added.

How is the WACC adjusted for inflation?

The adjustment to remove inflation is required to be consistent with inflation projections for the year ahead from the most recent Monetary Policy Statement published by the Reserve Bank of New Zealand. Our worked examples of distribution connection pricing guidance walks through the adjustment.

When can localised historical cost recovery be applied?

The Code accommodates localised historical cost recovery schemes, but doesn’t specify how they should operate. Our worked examples of distribution connection pricing guidance includes an illustrative example

How should recoverable costs be forecast in determining incremental revenue?

The estimate of incremental revenue is the sum of the incremental distribution revenue estimate and the incremental transmission revenue estimate. These are estimates of the revenue from lines services (excluding connection charges and connection fees) that the distributor receives over the connection’s revenue life.

‘Year one’ revenue from a connection may be estimated using a top-down approach (based on consumer group revenue) or a bottom-up approach (based on tariffs and tariff metrics). ‘Year-one’ revenue can then be adjusted for forecast changes in overall revenue paths (distribution and transmission), tariff structures, and connection demand.

Our worked examples of distribution connection pricing guidance shows how incremental revenue is estimated.