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• Levy design

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• Levy Funding Commerce Act

3.1 Existing levy design

31. The existing levy design for collection of costs for each sector and the reasons for that levy design for each sector are as follows:

3.1.1 Electricity lines businesses

32. Each lines business and Transpower pay a proportion of the total cost of regulation based on its share of the total valuation across all lines businesses and Transpower (using the valuation methodology required by the Commerce Commission – currently ODV). This method is used to allocate costs because:

1. It provides consistency - all businesses use the same prescribed methodology for determining their asset valuations, which is established and transparent.
2. It is administratively straightforward – it would be difficult to levy particular businesses depending on their status in terms of price regulation, as well as creating additional uncertainty of revenue for the Commerce Commission.

33. Lines businesses are not levied separately for the different activities required for regulation, as all businesses were subject to the full regulatory regime under Part 4A of the Commerce Act.

3.1.2 Controlled gas pipeline businesses

34. Controlled gas pipeline businesses (Powerco and Vector's Auckland pipelines) pay an equal share of the total cost of regulation. Originally, a share of valuation methodology was considered for allocating costs. However, an equal share approach was chosen for allocating costs as valuations for the pipelines of the two controlled businesses were closely aligned and a 50/50 split was chosen for administrative simplicity.

3.1.3 Major International Airports

35. Auckland, Wellington and Christchurch International Airports have not been levied for the costs of information disclosure under the Airport Authorities Act 1966.

3.2 Proposed Design for levies under revised Commerce Act

36. There are two main aspects to consider for levy design for each sector. Firstly, how costs should be allocated between various regulatory activities, and secondly the basis on which costs are recovered from businesses.

37. The design of the levy will need to take into account the range of activities described in section two and in particular the fact that application of the regime can vary from business to business (e.g. for electricity lines businesses, not all businesses are subject to the price-quality path regime.)

38. A summary of proposals for design of levy is provided in section 3.4.

3.2.1 Electricity Lines Businesses

Allocation of costs for different activities

39. All electricity lines businesses are subject to information disclosure, but only non consumer-owned businesses are subject to ‘default/customised price-quality path' regulation. Consumers of a consumer-owned lines business will be able to petition the Commission to investigate that lines business to determine if it should be subject to price-quality path regulation.

40. The costs of regulation relating to electricity lines businesses subject to price-quality path regulation is higher than for lines businesses that are not subject to that regulation.

41. It is therefore proposed that only those businesses subject to default/customised price-quality path regulation pay for the costs of that regulation. As all lines businesses are subject to the other parts of the regulatory regime it is proposed that all businesses contribute to the costs.

42. Other possible allocations of costs between activities (and the reasons that these methods are not proposed) include:

1. One levy for all activities: this would mean that lines businesses not subject to price-quality path regulation would be charged for the costs of this regulation, so would be paying more than their share of the cost of regulation.
2. A separate levy for every individual activity: as all lines businesses are subject to activities other than default/customised price-quality path regulation, charging separately for every activity (eg input methodologies, information disclosure, residual administration of Part 4A) would create additional unnecessary compliance and administrative costs.
3. Lines businesses pay directly for costs based on the activities and time spent on each lines business by the Commerce Commission: activities like information disclosure and input methodologies apply to all businesses in the sector so it is not clear, other than an equal allocation, how costs would be allocated. This method could be used to allocate costs for investigating lines businesses whose consumers have petitioned the Commerce Commission and for investigations under the price-quality path regime. However, this methodology is not preferred for the reasons outlined in paragraph 46e below.

Basis of levy costs

43. It is proposed that, within this allocation of costs based on activities, costs for electricity lines businesses continue to be recovered on the basis of share of the total valuations of fixed assets (using the valuation methodology required by the Commerce Commission – currently ODV). We consider the reasons outlined in paragraph 32 for using this methodology for levying electricity lines businesses (consistency and ease of administration) are still valid, relative to consideration of other methodologies.

44. Allocating costs proportional to a business' share of total valuation of fixed assets means that larger businesses pay a greater proportion of the costs of regulation. It can be argued that this is unfair to larger businesses as the Commerce Commission's costs do not vary significantly according to the size of the business being regulated, and large businesses are therefore paying more for the cost of regulation relative to the costs incurred for regulating each business.

45. On the other hand, using this methodology means that businesses are paying a cost in line with value of the regulated business. If instead, businesses were charged a flat rate, it can be argued that smaller lines businesses and their customers are being apportioned a larger share of the total regulatory costs than their share of the industry customer base would warrant and that these businesses would be paying a larger cost relative to value of services provided by the regulated business. We therefore propose to continue use of share of valuation of fixed assets as the basis for cost recovery.

46. Other possible methods for recovering costs (and the reasons that these methods are not proposed) include:

1. The number of customers served: This method would not be feasible for lines businesses. Distribution businesses, with numbers of customers based on the number of points of connection (ICPs) in each network, would not be comparable with Transpower, whose customers are large generators, large loads, and lines businesses themselves. In addition, customers have different loads and different assets employed to serve them, so it can be argued that networks with mainly small customers and few large industrial customers would be penalised.
2. The length (in kilometres) of networks: This methodology would disadvantage rural networks relative to more densely populated urban networks, which already face a higher cost of delivery per consumer as they require a greater infrastructure for the same number of consumers. This method may also disadvantage networks with mainly small customers supplied using lower capacity lines.
3. Total amount of electricity supplied over the network: Generator and retailer activity largely dictates the volumes of electricity contracted, sold and transmitted over lines and therefore the amount of levy paid by a lines business will largely be beyond their control.
4. A flat rate charge for each business being regulated: This results in a higher charge per consumer for smaller networks. It can be argued that this is unfair to consumers in smaller networks as they are paying more for the costs of regulation relative to other consumers.
5. Costs allocated based on time spent by the Commerce Commission on regulation of each business: This method would be administratively difficult for the Commerce Commission to assign costs. It would lead to costs of regulation varying significantly year by year for businesses depending on the action taken by the Commission in relation to regulation. It also would create uncertainty of revenue for the Commission for forward-looking work. The first businesses to be regulated or investigated under the new regime may also pay higher costs of regulation, as costs for specific regulatory undertakings may reduce over time as the new Commerce Act regime becomes bedded in and precedent is available for future regulation.
6. A combination of methods: For example, levying for information disclosure based on a flat rate, and levying for price-quality regulation based on share of valuation or some other method. This would be more complex to administer both for levy payers and the Commission.

3.2.2 Gas Pipelines

Allocation of costs for different activities

52. Gas pipeline businesses are subject to an information disclosure regime and will be subject to a default/customised price-quality path.

53. However, those gas pipeline businesses currently subject to Part 5 price control (Powerco and Vector's Auckland pipelines) will continue to be subject to price control until they are transferred to the default/customised price-quality path that other gas pipelines are subject to. This means there will be a period where some gas pipeline businesses are subject to price control, and some subject to a default/customised price-quality path, until all are subject to the latter regime.

54. It can be argued that costs should be separated so that only those subject to Part 5 price control should pay for that component of the regime until those controlled businesses are moved to the default/customised price-quality path regime. However, a corollary of this argument is that businesses under Part 5 price control should not pay for the costs of price-quality regulation until they are subject to that regime. This would mean that the costs of default/customised price-quality regulation would need to be separated from the other costs of regulating gas pipeline businesses so they can be charged only to those businesses not under price control.

55. Given gas pipeline businesses are eventually to become subject to the default/customised price-quality path regime, and gas pipeline businesses will be subject to some form of price regulation (albeit different forms until those under price control are transferred to the default/customised price-quality regime), in the interests of administrative simplicity, it is proposed that all gas pipeline businesses are charged for all activities³.

Basis of levy costs

56. It is proposed that, rather than using an equal share methodology as is currently used, costs are instead recovered on the basis of share of the total valuations of fixed assets, as with electricity lines businesses. We consider the reasons outlined in paragraph 32 for using a share of total valuations methodology for levying lines businesses (consistency and ease of administration) also apply to gas pipeline businesses. Additionally, gas pipelines additional to those already under control (Powerco and Vector's Auckland pipelines) are to be included in information disclosure and price-quality path regulation.

57. Other possible bases for recovering costs (and the reasons these are not preferred) are similar to those outlined in paragraph 46 for recovery of costs for electricity lines businesses. Using number of customers served would penalise gas networks with mainly small customers. Using the length (in kilometres) of pipelines as a basis for recovering costs would disadvantage those networks with mainly small customers supplied using lower capacity lines and/or smaller diameter pipelines. An allocation based on total amount of gas supplied over the network would mean the amount of levy paid by a gas pipeline business would be largely beyond their control as shipper and retailer activity will largely dictate the volumes of gas contracted, sold and transmitted through pipelines.

58. Using either a flat charge for each business being regulated, or an allocation of costs based on time spent by the Commission in regulating each business is not preferred for the same reasons these methods are not preferred for allocating costs for electricity lines businesses (paragraph 46).

59. It can be argued that share of total valuations of fixed assets means that larger businesses are paying more for the cost of regulation relative to the costs incurred for regulating each business. However, if businesses are charged a flat rate it can be argued that smaller lines businesses and their customers pay a larger share of total regulatory costs than their share of the industry customer base or size would warrant.

1.9.3 Major International Airports

65. Auckland, Wellington and Christchurch International Airports are all subject to an information disclosure regime, and it is proposed all three airports will fund a levy to pay the cost of the regulation.

Basis of levy costs

66. Is it proposed that, consistent with the gas and electricity sectors, costs are recovered on the basis of share of valuations of fixed assets (using the valuation methodology required by the Commerce Commission⁴).

67. Many of the same reasons apply to airports as to the other two sectors. Using a valuation methodology means that airports are paying a cost in line with value of the business being regulated. Airport companies with a lesser ability to pay are being charged less. If airports are charged equally, it can be argued that smaller airports and their customers are being apportioned a larger share of total regulatory costs than their share of the industry would warrant. If airports pass costs through to their airline customers, smaller airports would have to pass on a higher unit cost.

68. Consistency (all businesses use the same prescribed and transparent methodology) and ease of administration (it would be difficult to levy particular businesses for particular costs), as noted for the other two sectors, would also apply in the case of airports.

69. The basis for the levy would be the share of the total valuation relating to the fixed assets used in supplying airport services specified in the Act. Other services provided by airports are not regulated under part 4 of the Act.

70. Other possible bases for recovering costs (and the reasons these are not preferred) are similar to those outlined for electricity lines businesses in paragraph 46. Airports may consider that using the number of passengers is undesirable as this factor is demand-driven and dependent on the airlines and is therefore outside their control. The same may also be said of the number of flights, although airports currently do charge on the basis of number of flights landing or departing. However, relative to using the number of flights landing, share of valuation would provide greater certainty up front for both airports and the Commerce Commission.

71. Using either a flat charge for each business being regulated, or an allocation of costs based on time spent by the Commission in regulating each airport is not preferred for the same reasons these methods are not preferred for allocating costs for electricity lines businesses (paragraph 46).

3.3 Levy Collection Arrangements

77. Presently, levies are collected in the following way:

1. Electricity lines businesses are liable for the full amount of the levy at the start of the financial year. The levy is collected in quarterly instalments. Any shortfall or excess is reconciled and paid/refunded after the end of the financial year (when audited financial statements are tabled in Parliament). The amount of levy collected each quarter can vary – the levy collected is based on valuations for the preceding year (i.e. the 2007/08 financial year is collected on the basis of 2007 valuations), which are not required to be disclosed by lines businesses until (usually) the third quarter of the financial year.
2. Controlled gas pipelines (i.e. Powerco and Vector's Auckland pipelines) are liable for the full amount of the levy at the startt of the financial year, payable in equal monthly instalments. Where the Commission seeks an increase in its annual funding requirement from that originally budgeted, the controlled pipeline businesses are required to make an additional payment once the Commission's accounts have been audited. This part of the levy must be reconciled against actual Commission costs at the end of the financial year and is paid as either a one-off payment or refund to each of the controlled businesses.
3. Major international airports do not pay levies at present.

78. Levies are currently collected quarterly for electricity lines businesses, and monthly for gas pipeline businesses. Making levy collection periods consistent may reduce compliance costs for collection and administration of levies. It is proposed levies be collected quarterly by the Ministry of Economic Development for both the gas and electricity sectors. For administrative simplicity, it is also proposed that levies for airports are collected quarterly in advance, consistent with the gas and electricity sectors.

3.4 Summary of Proposals

80. The following table summarises the proposed levy design for each sector, including allocation and basis for recovery of costs.