Application of Telecom Regulatory Principles to Electricity Regulatory Regime

On 9 December 2011 the Commerce Commission released a process and issues paper relating to input methodologies to apply to the starting prices reset for the default price path applicable to electricity distribution companies.

The process implemented by the Commission follows the High Court decision in Vector (CIV 2011-485-536, 26 September 2011). In summary, Justice Clifford determined that the reset was required to be the subject of consultation.

The issues paper is precisely that. It is lengthy and runs to 58 pages.

On page 39 the following question appears:

“We are also interested in your view on what, if any, implications a recent Supreme Court judgment may have in determining the additional IMs.”

The case referred to is Vodafone v Telecom New Zealand Limited SC 4/2012 [17 November 2011]. Only a few submitters responded directly to this question. Without exception all said the decision involved a different regulatory regime (established under the Telecommunications Act) and was therefore inapplicable to the existing electricity regulatory regime.

It is certainly correct to say the decision relates to a different regulatory regime. However, the decision might have more implications for electricity line companies than appears at first sight.

While it is a different regime, in essence the assets involved are of a similar nature in an infrastructure sense. Moreover, the Supreme Court in the Vodafone v Telecom decision referred to and relied on the commentary of Professor David Johnson in the paper he published while at the University of Bath. The paper was entitled “Replacement Cost Asset Valuation and the Regulation of Energy Infrastructure Tariffs – Theory and Practice in Australia”.

From the title, it will be immediately apparent that the paper refers in particular to energy infrastructure regulation in Australia, and the commentary relates very much to electricity infrastructure assets, namely, the very asset to which the Commerce Act regulatory regime applies.

This raises the interesting prospect of the Commerce Commission adopting the valuation methodology applicable in the Vodafone v Telecom case, and determining in effect that a “historical cost” methodology is to apply to electricity infrastructure assets.

In such an event, one might expect the lines companies to appeal against input methodologies adopting this methodology. They are entitled, of course, to do so under section 52Z of the Commerce Act.

On the other hand, if the Commission does not adopt this methodology, major electricity users might appeal that input methodology as they are also entitled to do.

The Commissions appeal against the Vector decision was recently heard. This presents an opportunity for some of the mist surrounding the new regime to be lifted. However, regardless of the outcome of the appeal, the regulatory regime implemented under the amendments to the Commerce Act in 2008 was hailed as establishing more certainty for lines businesses and consumers alike. In light of the High Court’s decision in Vector, and the Supreme Court’s decision in Vodafone v Telecom, this may not be the reality.