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• 1. Preface
• 2. Business Accounting Separation and Allocation Methodology
  • Requirements of the Electricity (Information Disclosure) Regulations
  • Avoidable Cost Allocation Methodology for Line Businesses
  • Allocation of Specified Items
  • Avoidable Cost Allocation Methodology for Electricity Supply Businesses
  • Allocation of Specified Items
• Table 1: Allocation of Specific Items - Line Business
• Table 2: Allocation of Specific Items - Supply Business

Energy Markets Policy Group
Resources & Networks Branch
Ministry of Commerce
Wellington

xx xx 1998

This document was published by the Secretary of Commerce on xx xx 1998 for the purposes of the Electricity (Information Disclosure) Regulations 1994.

ISBN XX

Crown Copyright 199x

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright holder.

Resources & Networks Branch
Ministry of Commerce
Wellington
New Zealand

[date]

1. Preface

1.1 This Handbook sets out the business accounting separation and allocation methodology to be adopted by electricity companies in meeting the requirements of the Electricity (Information Disclosure) Regulations 1994.

1.2 This Handbook replaces the Handbook for the 1998/99 financial year, and is required to be applied from 1999/2000 onwards. The 1998/99 Handbook has been replaced to make the business accounting separation and allocation methodology compatible with the requirement for electricity companies to ownership separate their line and supply businesses, under the Electricity Industry Reform Act 1998.

1.3 The Handbook includes:

• a mandatory avoidable cost allocation methodology (ACAM) for allocating items amongst companies' business activities for disclosure purposes; and
• a list of items that companies are required to separately disclose in their financial statements.

1.4 These requirements are intended to provide a consistent and robust basis for assessing whether:

• natural monopoly line businesses are earning excessive profits and/or incurring excessive costs; and
• there are cross-subsidies from the line to the contestable supply businesses of unseparated electricity businesses.

Energy Markets Policy Group
Resources & Networks Branch
Ministry of Commerce
Wellington

xx xx 1998

2. Business Accounting Separation and Allocation Methodology

Requirements of the Electricity (Information Disclosure) Regulations

2.1 Regulation 6 of the Electricity (Information Disclosure) Regulations 1994 requires:

• Line companies to provide separate audited financial statements, for their line business, that is, conveyance of electricity, ownership of works for conveyance of electricity and provision of line function services (see paragraphs 2.2 to 2.7).
• Electricity supply companies, that are owned by settling or mirror trusts or where corporate separation pending full ownership separation had been adopted, to provide separate audited financial statements for their electricity supply business, that is, the generation and retailing of electricity (see paragraphs 2.8 to 2.12).
• Electricity line and supply companies to prepare these financial statements on the basis of the business accounting separation and allocation methodology specified in this Chapter.
  
  Financial statements for electricity line and supply companies' "other" activities are not required to be disclosed (such activities are labeled "other" in this Chapter).

Avoidable Cost Allocation Methodology for Line Businesses

2.2 The avoidable cost allocation methodology (ACAM) defines the line business as the "stand-alone" business and makes an assessment of the costs, revenues, assets and liabilities ("items") that would be avoided by the line company if it did not operate its "incremental" ("other") businesses. The components of the items that would not be avoided are allocated to the line business, and the components that would be avoided are allocated to the "other" business.

2.3 It is mandatory for line companies to apply ACAM in preparing the separate financial statements for their line businesses. ACAM consists of two mandatory principles:

Principle I

2.4 The line and "other" businesses are to be defined in such a way that:

1. the line business is confined solely to provision of natural monopoly electricity activities³;
2. all contestable (and potentially contestable) activities are provided by the "other" business.

Explanatory note: Defining the line and "other" businesses in this way may mean they provide each other with goods and services. Transfer payments are made for any goods and services the line and "other" businesses provide each other (refer to Regulation 20).

Principle II

2.5 The costs, revenues, assets, and liabilities ("items") are allocated to the line and "other" businesses in such a way that⁴:

• Those items (and components of the items) that would not be avoided if the line company did not operate the "other" business are allocated to the line business; and
• Those items (and components of the items) that would be avoided are allocated to the "other" business.

Explanatory note: Items that are directly attributable to one of the line or "other" businesses are allocated to that business. Items that are shared by the line and "other" businesses are allocated amongst those businesses, by:

1. direct allocation of any components of these items which are directly attributable to one of the businesses; and
2. for any components that are not directly attributable:
   1. assessing the proportions of these components which are avoidable and non-avoidable; and
   2. allocating these components amongst the businesses on the basis of those proportions (in a manner consistent with Principle I).

Exemption

2.6 If "other" activities account in aggregate for less than 5% of the line company's total assets and revenues, these may be accounted for in the line business or separately.

Explanatory note: Inclusion of "other" activities in these circumstances will have an insignificant impact on line business stand-alone financial statements.

Allocation of Specified Items

2.7 Table I specifies a list of items (which is not exhaustive) to be allocated amongst the line and "other" businesses. The table is to be interpreted in the following manner:

Avoidable Cost Allocation Methodology for Electricity Supply Businesses

2.8 It is mandatory for electricity supply companies to apply the avoidable cost allocation methodology (ACAM) in preparing the separate financial statements for their electricity supply businesses.

2.9 ACAM defines the electricity supply business as the "incremental" business, and "other" as the "stand-alone" business. ACAM makes an assessment of the costs, revenues, assets and liabilities ("items") that would be avoided by the electricity supply company if it did not operate its "incremental" business. The components of the items that would be avoided are allocated to the electricity supply business, and the components that would not be avoided are allocated to the "other" business.

2.10 The costs, revenues, assets, and liabilities ("items") are allocated to the electricity supply and "other" businesses in such a way that:

1. Those items (and components of the items) that would not be avoided if the electricity supply company did not operate the electricity supply business are allocated to the other business; and
2. Those items (and components of the items) that would be avoided are allocated to the "electricity supply" business.

Explanatory note: Items that are directly attributable to one of the electricity supply or "other" businesses are allocated to that business. Items that are shared by the electricity supply and "other" businesses are allocated amongst those businesses, by:

1. direct allocation of any components of these items which are directly attributable to one of the businesses; and
2. for any components that are not directly attributable:
   1. assessing the proportions of these components which are avoidable and non-avoidable; and
   2. allocating these components amongst the businesses on the basis of those proportions (in a manner consistent with Principle I).

Exemption

2.11 If "other" activities account in aggregate for less than 5% of the electricity supply company's total assets and revenues, these may be accounted for in the electricity supply business or separately.

Explanatory note: Inclusion of "other" activities in these circumstances will have an insignificant impact on electricity supply business incremental financial statements. If the electricity supply business is not involved in other activities the "stand-alone" and "incremental" electricity supply business financial statements will be equivalent.

Allocation of Specified Items

2.12 Table 2 specifies a list of items (which is not exhaustive) to be allocated amongst the electricity supply and "other" businesses. The table is to be interpreted in the following manner:

Table 1: Allocation of Specific Items - Line Business

Table 2: Allocation of Specific Items - Supply Business

3 Natural monopoly activities are activities which can be provided at a lower cost if they are provided by only one business, rather than two or more businesses.

4 Conceptually there are two approaches to ACAM: (a) a "bottom-up" approach which asks what would the line company's financial statements look like if it only provided line services; and (b) a "top-down" approach which asks what the electricity company's financial statements would like if it ceased operating "other" services (assuming away transitional factors, such as redundancy costs and down-sizing of fixed assets). With the bracketed assumption in (b), the bottom-up and top-down approaches should provide identical financial statements.

5 Items ticked in the "LB" column may be allocated to companies' line business financial statements.

6 The Electricity Industry Reform Act permits line companies to own generation plants with a name plate capacity of up to 5MW (in aggregate) if owned prior to 23 June 1998, and to sell and generate up to 2.5GWh per annum.

7 Connection and transmission assets relating to a company's own generation plant are to be allocated to the "other" business. Where the company owns connection/transmission assets relating to another company's generation plant, these should be allocated to the line business.

8 Depending on the circumstances and the treatment of financial hedges in the financial statements, these may be classified as assets, liabilities, expenses and/or revenue items (they might also include costs arising from guarantees relating to performance under hedges).

9 Items ticked in the "ESB" column may be allocated to companies' electricity supply business financial statements.

10 This will include revenue recovering both electricity retailing costs and line charges (where line charges are passed on to the ERB by the LB, for collection from final customers).

11 Depending on the circumstances and the treatment of financial hedges in the financial statements these may be classified as assets, liabilities, expenses and/or revenue items.