ComCom allows ‘necessary investment’ in electricity networks

The Commerce Commission (ComCom) has 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, it says.

Commissioner Vhari McWha says the commission is conscious this will ultimately increase electricity bills, but that 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,” says McWha.

The commission is seeking feedback on its draft decisions which, if finalised, would mean about $15 extra a month on the average residential customer’s electricity bill for the first year of the regulatory period, from April 1, 2025.

Without the commission’s proposal to slow revenue recovery, consumers could be looking at price increases of around $25 per month.

Maintenance and improvements to the electricity network now will help keep the lights on in the future, she says.

“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,” says McWha.

“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.”

The proposed increase reflects the higher costs companies face, including the cost of borrowing, cost of materials and inflationary pressures since the last revenue review in 2019, the commission says.

 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 transport electrification, the commission says.

It proposes setting Transpower’s maximum allowable revenues at $5.8 billion for the next five years.

This represents a 43% increase 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.

Transpower’s proposed expenditure in general is underpinned by robust asset management practices and a demonstrable need, says McWha.

However, she notes concerns that Transpower may not be able to recruit the workforce 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.”

For local lines companies subject to revenue limits, the commission proposes to set the maximum allowable revenues at $12 billion.

This represents a 50% increase compared to the previous five years. However, revenue smoothing means increases are about 24% on average for the first year, before rising gradually over time.

McWha says costs have increased for local lines companies and there is a greater investment need.

The picture differs by region, and significant uncertainty remains about how growth will unfold, she says.

“For this reason, the commission considers it appropriate to allow less expenditure than these businesses forecast,” says McWha.

“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.

“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.”

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.

McWha concludes 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 April 1, 2025.