The Commerce Commission has today announced draft decisions to allow increased revenue limits for national grid owner Transpower and local lines companies to help pay for necessary investment in the country’s electricity network.
Increased investment is required to provide a reliable network with future needs in mind. Commissioner Vhari McWha says the Commission is conscious that this will ultimately increase electricity bills, but delaying investment will lead to even higher prices down the track.
“To help, we are proposing that some revenue is recovered more slowly to soften initial price rises for consumers,” Ms McWha says.
The Commission is seeking feedback on its draft decisions which, if finalised, would mean approximately $15 extra per month on the average residential customer’s electricity bill for the first year of the regulatory period, from 1 April 2025 (see detailed breakdown of costs ). Without the Commission’s proposal to slow revenue recovery, consumers could be looking at price increases of around $25 per month.
Ms McWha says the Commission’s fundamental role is to promote consumers’ interests over the long-term and to help ensure they get value for money for the services they receive. Maintenance and improvements to the electricity network now will help keep the lights on in the future.
“As an essential service for all Kiwis, the affordability of electricity is important. We’re conscious that for consumers to get the electricity network they need, more investment is required. That’s why we’re proposing to increase the amount of revenue Transpower and local lines companies can earn.
“However, we haven’t allowed for all of the expenditure that they forecast. We’ve taken the additional step of spreading the recovery of revenue by Transpower and local lines companies over a longer period to soften the impact of initial price increases on consumers,” Ms McWha says.
The proposed increase reflects the higher costs companies are facing, including the cost of borrowing, cost of materials and inflationary pressures since the last revenue review in 2019. It also recognises that assets built last century – many in the 1960s and 1970s – need to be maintained and replaced. Electricity networks also need to grow and adapt to meet population growth and new demands, such as the increasing electrification of transport and industrial process heat.
“It is important that we focus on long term investment in essential infrastructure. Putting it off will lead to even higher prices down the track and could lead to less resilience, more power outages and a network that’s not able to keep up with demand growth,” Ms McWha says.
Transpower draft decisions
The Commission is proposing to set Transpower’s maximum allowable revenues at a total of $5.8 billion for the next five years. This represents an increase of 43% compared to the previous five years. However, the Commission’s proposed revenue smoothing means annual increases are capped at 15% in each of the first two years and 5% for the remaining three years of the regulatory period.
As part of its bespoke individual price-quality path, Transpower must submit a detailed proposal to the Commission and have this proposal assessed by an independent expert.
In its proposal, Transpower stated its work programme was largely driven by the need to replace and renew the assets that form the backbone of New Zealand’s grid.
“Having reviewed Transpower’s proposal, and considered the advice of the independent expert, we are satisfied that Transpower’s proposed expenditure in general is underpinned by robust asset management practices and a demonstrable need,” Ms McWha says.
However, Ms McWha notes concerns that Transpower may not be able to recruit the workforce needed to deliver its work programme due to workforce shortages and a high demand for specialist talent.
“We are therefore proposing an adjustment to Transpower’s expenditure allowance to account for this risk. We are also including a mechanism that allows Transpower to access those funds if it can meet recruitment targets,” Ms McWha says.
Local lines companies draft decisions
For local lines companies subject to revenue limits, the Commission is proposing to set the maximum allowable revenues at a total of $12 billion. This represents an increase of 50% compared to the previous five years. However, revenue smoothing means increases are approximately 24% on average for the first year, before rising gradually over time.
Ms McWha says costs have increased for local lines companies and there is a greater investment need, and this is why the Commission is proposing higher revenue limits. However, the picture differs by region, and significant uncertainty remains about how growth will unfold.
“For this reason, the Commission considers it appropriate to allow less expenditure than these businesses forecast. The limits also reflect a question mark over whether the industry can collectively deliver such a large step change in investment in the coming period as they forecast,” Ms McWha says.
Whilst the Commission does not think it is in consumers’ interests to allow all of the expenditure in the forecasts, Ms McWha adds that the Commission’s regulatory framework affords a degree of flexibility that allows local lines companies to come back to the Commission at a later date when there is more certainty about what investment is required and when.
“Some companies have forecast that they require an increase in investment that is as much as three times higher than their historical spend. The regulatory regime has a bespoke process to consider these large step changes in investment. This customised process is designed to give greater confidence through more detailed information, greater scrutiny, and an independent expert review,” Ms Mc Wha says.
The Commission is also proposing a new allowance to incentivise local lines companies to develop and trial new solutions that could help lower costs for consumers over the longer-term.
Ms McWha concludes that the businesses must think about how investment can be efficient and reduce the cost burden for consumers, including through long-term planning and innovation.
Consultation on the proposed revenue limits and minimum quality of service for the next five-year regulatory period takes place across June and July before final decisions are made in November with new prices to take effect from 1 April 2025.
Background
Bill impacts
The transmission and distribution components of the average consumer bill are around 10.5% and 27% respectively. Although the Commission does not determine the amount consumers are ultimately charged, the revenue limits we set will impact the final bill.
This means that from 1 April 2025, the transmission and distribution component of electricity bills will increase. On average, the distribution and transmission component of an electricity bill is estimated to increase by $15 per month ($180 annually) per household, exclusive of GST, at a national level. Monthly bills will then increase by an average of $5 every year for the remaining four years of the regulatory period.
The increases to a household’s electricity bill will be different depending on where they live. In the first year, some regions will see average increases of $10 per month, while others will see average increases of $20 per month.
The Commission sets revenue limits that affect the transmission and distribution components of the average consumer bill. However, the ultimate prices consumers pay are determined by retailers factoring in local lines companies’ charges, which are determined in accordance with the Electricity Authority’s pricing principles.
Businesses also sometimes choose to recover a lower amount of revenue than the maximum allowed under the regulatory regime. Decisions to under recover revenue should only be made where the local lines company is satisfied that they can still sufficiently invest in their network to maintain service quality.
