Energy Regulation – EDB CEOs’ Meeting Commerce Commission (19 June 2012)

1. Energy Regulation – EDB CEOs’ Meeting Commerce Commission (19 June 2012)

2. Overview • What we are trying to achieve in regulatory area • Progress in implementing Part 4 of Commerce Act • Focus over next year • Specifying input methodologies for default price paths • Price path resets • Information disclosure • Compliance • Other issues

3. What we are trying to achieve • Regulation is better targeted and more effective • Our decisions promote statutory objectives • Suppliers act in line with regulatory obligations • Use disclosed information to better understand role of regulation and performance of regulated businesses • Engagement strategy • Consultation, number of EDBs, ENA

4. Part 4: Good progress

5. JR litigation has caused delays • Delays caused by two judicial reviews • Price reset input methodology and process challenges • Objective of challenge to cross-sector process? • Parties have right to bring judicial reviews but... • Delayed EDB, gas resets and merits reviews (by a year) • Significant costs – money and resources • Distraction from other matters, delayed certainty

6. Court of Appeal has clarified role of certainty for investment incentives • Input methodologies and Part 4’s purpose statement promote incentives for investment by promoting certainty about regulatory rules • But Court of Appeal has confirmed that: • Certainty is relative rather than absolute and may take time to achieve • Considerable uncertainty in competitive markets • Part 4 is intended to promote certainty and incentives for investment over time

7. Merits reviews • Merits reviews – expected as part of the regime • Some uncertainty expected till merits reviews resolved • September to December this year (and beyond?) • Both regulated businesses and consumers appealing • Benefits of accountability – but high cost • Costs diminish over time?

8. Focus over next year

9. Additional input methodologiesfor DPP • Specify asset valuation, cost allocation, taxation for DPP • Consistent with existing ID and CPP IMs • Simplified for use in DPP • WACC - term credit spread differential • Allow for forecast periods • Consultation timeframe • Submissions 6 July, cross submissions 17 July

10. Price-quality path resets • If reset based on current and future profitability • Intend to rely on information disclosure for current profitability (or s53ZD information request) • Simplified building blocks for forecast periods (where required) for future profitability • Expect to release paper in August

11. Information disclosure • In-principle decisions • Update paper and revised draft determinations will be released soon for technical consultation • Approach to information disclosure • Have built on existing information disclosure • Ensure sufficient information available to interested persons to assess whether purpose of Part 4 being met • Final decisions will better explain use of ID information

12. Information disclosure: some key changes from existing requirements • Changes to reflect Purpose Statement and contain costs • Improved information on businesses and networks, assets, expenditure, quality, more disaggregation • Consistent formats for data – easier to do analysis • Changes to AMP requirements • Disclosure in years 1 and 4 of regulatory period with AMP updates in intermediate years • Asset management maturity assessment tool

13. Information disclosure (process) New ways of working – technical reference groups • Direct input from technical experts very valuable • Constructive and effective approach – use in future Feedback on draft determinations and reasons paper • Constructive and practical suggestions • Assisted us in balancing the purpose of ID with the needs and concerns of suppliers

14. Information disclosure(stakeholder survey) • Stakeholder survey just completed • Appreciate responses from 24 EDBs (10 boards) • Stakeholders’ understanding of regime and of benefits of targeted regulation • Understanding of business and market performance • Feedback on our performance • We will use results of survey to improve performance

15. Information disclosure(summary and analysis) Summary and analysis • Currently developing a report that will summarise performance of EDBs • Will allow EDBs to check EDB-specific data used before publishing • Will develop approach over time

16. Compliance

17. Compliance • Compliance strategy (preliminary thinking) • Cost effective compliance to achieve statutory objective • Encouragevoluntary compliance • Help suppliers understand obligations • Information and guidance to enable compliance • Detect and respond proportionately to non compliance • Administrative, financial, criminal penalties

18. DPP quality breaches • Commission’s response • Breaches dealt with on case by case basis • Informed by circumstances, supporting evidence, mitigating factors, previous non-compliance • Appropriateness of quality standards – CPP? • Degree of harm • Proportionate response

19. Other issues - quality • Quality – Commission supports ENA initiatives • Improve measures • Possible integration with price path • Extreme events - major event days (some EDBs)

20. Other issues – catastrophic events • Self insurance for catastrophic events • Need to define allocation of risk between shareholders and customers, current and future customers • Allowance for self insurance – what assurance that money available when needed? • Recover costs after event – but customers facing high costs • Resilience

21. Conclusions • Substantial progress on Part 4 despite delays caused by litigation • Reset of price paths and finalisation of information disclosure major remaining tasks • Resolution of merits reviews • Summary and analysis, stakeholder engagement

22. Sue Begg • Deputy Chair • 04 924 3610 • sue.begg@comcom.govt.nz