• Home
• Energy & Resources
• Electricity
• Regulatory Framework
• Reviews and Development
• Levy Funding Commerce Act
• Cabinet Documents
• EGI Cabinet paper and RIS
• Comment

• Electricity

• Regulatory Framework

• Reviews and Development

• Levy Funding Commerce Act

18. In October 2008, MED released a discussion paper on the proposed levy allocation and collection methodology.

19. The paper proposed the following allocation (in summary):

20. The considerations underlying the above proposed allocation methodology were: consistency, fairness and administrative simplicity.

21. Overall, submissions on the discussion paper showed a broad level of support for the proposed allocation and collection methodology. Airports and Vector were the main exception. One airport suggested revenues as a better allocation methodology and another suggested passenger numbers. Vector argued that a more cost-reflective allocation would result from having a combination of a flat fee and variable fee. More generally, airport submitters felt that the Commission's costs should not be recovered by a levy, but should be taxpayer funded. Airport submitters also pointed out that, given the airport price setting cycle, they would not be able to recover the costs until the next price reset and criticised the magnitude of the costs.

22. On the basis of a relatively high level of agreement on the proposed allocation methodology, and the absence of any widely-supported alternatives, it is proposed to adopt the levy allocation and collection methodology summarised above.

23. This will see only those electricity lines businesses subject to default/customised price-quality path regulation charged for the costs of that regulation, while all electricity lines businesses will be charged for all other aspects of the regulatory regime as it pertains to electricity. All of the regulated gas pipeline businesses and all of the regulated airports will be charged for the costs associated with the regulation of their respective sectors.

24. Proposed exceptions to this above, for 2008/09 are:

• The existing Electricity Line Owners (Commerce Commission Costs) Levy Regulations 2001 (which enable the recovery of input methodology costs) will apply to electricity lines businesses; and
• Powerco and Vector will pay the costs of the Authorisation⁶ while the rest of the costs (including input methodology costs) allocated to gas pipeline businesses will be shared between all regulated gas pipeline businesses.

25. The reason for these proposed exceptions (respectively) are that;

• Electricity lines businesses have already been invoiced for 2008/09 under the existing regulations. It would be administratively complex to include retrospective provisions in the new levy regulations⁷ and it would make no difference to the amount paid by each business in 2008/09; and
• It would be unfair to other gas pipeline businesses to apply the proposed methodology retrospectively (and therefore require them to pay a proportion of the Authorisation costs) for 2008/09.

26. With regards to the costs of input methodologies, the costs for 2008/09 have been divided between the three sectors based on fixed asset valuation. The Ministry used this methodology in the absence of any other workable method of allocating the costs. The Ministry has had discussions with the Commission on the best method for allocating the costs between sectors, but the Commission has indicated that it has no practical or workable alternative. Officials therefore propose the levy design principle that the 2009/10 and 2010/11 input methodology costs will be allocated between the regulated sectors on the basis of fixed asset valuations.

27. Some further implementation issues are also addressed in the proposed levy design, such as including provisions for electricity lines businesses that become exempt from certain regulation within a financial year and specific provisions for some gas pipeline businesses and major international airports in the 2008/09 financial year.

28. The proposed design detail of the new levy regulations is specified below:

1. The costs for gas pipelines businesses (other than the costs collected under the existing gas pipeline levy regulations) and major international airports will be collected from 14 October 2008 (the date the Commerce Act amendments came into effect). Specific design principles relating to this financial year are outlined below. The costs for electricity lines businesses will be collected from 1 July 2009.
2. For the financial years 2009/10 onwards:
   1. The amount appropriated to the Commission for regulation of each sector (electricity lines, gas pipelines, major international airports) and sub-sector (non-exempt electricity lines) will be allocated to businesses in that sector in proportion to their fixed asset valuations (as publicly disclosed);
   2. The amount appropriated to the Commission for input methodologies from 2009/10 will be allocated between the regulated sectors (electricity lines, gas pipelines, major international airports) on the basis of fixed asset valuations;
   3. The Ministry of Economic Development will collect quarterly instalments from businesses based on the amounts appropriated to the Commission at the beginning of the financial year;
   4. The levy allocation may be recalculated during the financial year if more recent asset valuations are made available. Any recalculation should be reflected in adjustments to the next quarterly instalment (to provide for any over-recovery or shortfall from each business);
   5. The Ministry of Economic Development will reconcile the levy amounts at the end of each financial year based on the Commission's actual costs as disclosed in its audited Annual Report. Any over-collected levy (if the Commission has not spent all of the appropriation) will be refunded, or any shortfall (if the Commission has received additional funding) will be recovered through an additional invoice;
   6. The annual reconciliation should be based on the most recent asset valuations available;
   7. Only those electricity lines businesses subject to default/customised price-quality path regulation charged for the costs of that regulation (i.e. businesses exempt under the consumer-owned provisions in the Act will not pay for regulation they are not subject to);
   8. The regulations should include provisions for electricity lines businesses that receive (or lose) exempt status within a financial year as that status has implications for the amount of levy for which they are liable; and
   9. Regulated businesses should be given written notification of:
      1. The estimated cost to their sector (based on the Commission's relevant appropriation), including the estimated cost of input methodologies, that will be invoiced during the financial year, before the beginning of the financial year; and
      2. The relevant asset valuations used to allocate the estimated cost to each regulated businesses for the financial year, before the beginning of the financial year; and
      3. The relevant asset valuations used in calculating each businesses allocation of the levy each quarter, at the time of, or before, each quarterly invoice; and
      4. any recalculated levy amounts made within the financial year, at the time of, or before, the next quarterly invoice.
3. The following design principles apply to the 2008/09 financial year:
   1. The amount appropriated to the Commission for regulation of gas pipelines (including input methodologies, but excluding the cost of the Authorisation) and major international airports (including input methodologies) will be allocated to businesses within that sector in proportion to their fixed asset valuations (as publicly disclosed⁸);
   2. Regulated gas pipeline businesses will receive one invoice based on the amount appropriated to the Commission for regulation of their sector (including input methodologies) in 2008/09 as soon as practicable;
   3. Regulated major international airports will receive one invoice based on the amount appropriated to the Commission for regulation of their sector (including input methodologies) in 2008/09 as soon as practicable; and
   4. Any under spend on the amounts appropriated to the Commission for input methodologies in 2008/09 will be reconciled based on fixed asset valuation and refunded to businesses on that basis.

Costs to be recovered by levy

29. The proposed costs for the Commission's implementation of Part 4 are covered in a separate paper: Commerce Commission Funding for the Implementation of Part 4 of the Commerce Act 1986.

30. The total costs proposed for each sector (including indicative figures for input methodologies) are as follows:

Table One: Indicative Commerce Commission funding

*Portions subject to Cabinet approval

** Portions of funding subject to Budget 2009/10 processes

***Indicative allocation based on currently disclosed asset valuations

31. The allocation of costs to individual businesses will primarily vary depending on the size of their fixed asset valuation relative to others in their sector. As asset valuations vary widely between businesses, so will the total levy paid. For example, Buller Electricity (one of the smallest electricity lines businesses) could indicatively pay about $14,000 for the 2008/09 year compared to Transpower (the largest electricity lines business), which could indicatively pay about $1.4m.

32. The Act requires consultation on the levy design (essentially the allocation methodology) but not on the total levy to be recovered (i.e. the Commission's costs). Accordingly, while the discussion paper provided an indication of expected Commission costs, it did not consult on them. A number of submitters, particularly airports, expressed concern about the lack of transparency and consultation in relation to how the level of funding was determined.

33. I have instructed officials to consult with interested parties in future in relation to the determination of the level of funding to be recovered by levies prior to budget processes.