COMMERCE COMMISSION Regulation of Electricity Distribution Businesses Review of the Information Disclosure Regime

Transcription

1 COMMERCE COMMISSION Regulation of Electricity Distribution Businesses Review of the Information Disclosure Regime Process Paper: Implementation of the New Disclosure Requirements 30 April 2008.

2 Network Performance Branch Commerce Commission Wellington NEW ZEALAND April 2008

3 3 CONTENTS INTRODUCTION 4 Background 4 Purpose of this Process Paper 6 KEY ISSUES RELATING TO THE PROCESS FOR INTRODUCING THE NEW REQUIREMENTS 7 Overview of Key Issues Relevant to Process and Timetable 7 Possible Change in Asset Valuation Method 7 Proposed Amendments to the Commerce Act 10 Compliance Costs and Practical Issues 12 Timing of Asset Management Plan Disclosures 15 Proposals for Further Workshops 16 IMPLEMENTATION PROCESS AND TIMETABLE 18 Minor Amendments to the Disclosure Requirements from 1 May Implementing the New Requirements 18

4 4 INTRODUCTION Background Information disclosure regime 1 Part 4A of the Commerce Act 1986 (the Act), which came into effect on 8 August 2001, provides for a regulatory regime for electricity lines businesses (ELBs) to be implemented by the Commerce Commission (the Commission). Lines businesses comprise electricity distribution businesses (EDBs) and Transpower New Zealand Limited (Transpower). 2 Subpart 3 of Part 4A of the Act sets out requirements for an information disclosure regime, providing for the monitoring of lines businesses operation and behaviour. The Commission issued its first set of information disclosure requirements for ELBs on 31 March 2004 (the Disclosure Requirements). 1 Exposure Draft of the revised Disclosure Requirements 3 On 20 December 2007, the Commission issued a Consultation Package on its Exposure Draft of proposed changes to the information disclosure requirements for EDBs. The Consultation Package was prepared by the Commission to give effect to the high-level and implementation decisions on changes to the information disclosure regime that the Commission had made in 2005 and The Exposure Draft comprised: draft Electricity Distribution (Information Disclosure) Requirements 2008 (New Requirements) including a draft set of schedules, forms and definitions; a draft of the Electricity Information Disclosure Amendment Requirements 2008; and a draft of the revised Electricity Information Disclosure Handbook 2008 showing proposed amendments. 4 The structure of the Exposure Draft was prepared in light of two key transitional issues: the proposed amendments to the Disclosure Requirements and to the Disclosure Handbook in the Exposure Draft only relate to electricity distribution businesses (EDBs), and not to Transpower; 3 and The current Disclosure Requirements are: Commerce Commission, Electricity Information Disclosure Requirements issued 31 March 2004 (Consolidating All Amendments to 1 April 2007), 31 March With the exception of issuing its own ODV Handbook in August 2004 which all electricity distribution businesses used to value their system fixed assets as at 31 March 2004 and updating disclosure requirements for asset management plans (AMPs), the Commission s current Disclosure Requirements largely replicate, as an interim measure, the previous Electricity (Information Disclosure) Regulations (which had been administered by MED pursuant to the Electricity Act 1992). Commerce Commission, Regulation of Electricity Lines Businesses, Review of the Information Disclosure Regime, Decision Paper, 13 October 2005; Commerce Commission, Regulation of Electricity Lines Businesses, Valuation of the Regulatory Asset Base, Decision Paper, 13 October 2005; and Commerce Commission, Regulation of Electricity Lines Businesses, Valuation of the Regulatory Asset Base (Implementation Matters) for Distribution Line Businesses, Decision Paper, 13 April The Commission indicated that it will consider what changes to the information disclosure regime are appropriate for Transpower, and consult on proposed changes, once it has completed the ongoing consultation process on whether to declare control of Transpower s transmission services, pursuant to subpart 1 of Part 4A.

5 5 the proposed changes for EDBs in the Exposure Draft comprise the first, but most significant, stage of amendments further changes in respect of several areas (e.g., pricing methodologies and line charges; cost allocation; related party transactions; specification of the treatment of distributed generation, transmission bypass and pass-through costs; and reconciliations with statutory financial accounts) would be consulted on as part of a second stage of amendments; hence, any existing provisions in those areas in the current Disclosure Requirements would need to remain in force in the meantime. 5 In addition to the Exposure Draft, the Commission s Consultation Package contained two explanatory documents: a Companion Paper explaining the provisions in the Exposure Draft and how they relate to the Commission s previous high-level and implementation decisions on information disclosure; 4 and a Supporting Paper providing more detail on those sections of the Exposure Draft relating to rolling forward the value of the regulatory asset base (RAB) and to the specification of return on investment (ROI). 5 6 In the Consultation Package, the Commission indicated that once the views of interested parties had been taken into account, the Commission would finalise the changes to the requirements, with those changes to apply to EDBs for the 2007/08 disclosure year (i.e., ending 31 March 2008). Most disclosures relating to financial and efficiency performance are currently required to be disclosed five months after the end of the disclosure year (i.e., 31 August), to align with the due date for statutory financial accounts for many businesses. Views of interested parties 7 Submissions on the Consultation Package were invited by 22 February In response to requests from a number of interested parties, the Commission extended the date for submissions until 7 March 2008, with cross submissions due on 25 March Thirteen submissions on the Consultation Package were received, from: the Electricity Networks Association (ENA), largely supported by 23 of its EDB members; PricewaterhouseCoopers (PwC), supported by 21 EDBs; Eastland Network; Marlborough Lines; Northpower; Orion; Powerco; PowerNet (which manages Electricity Invercargill, OtagoNet Joint Venture and The Power Company); Unison Networks; Vector; WEL Networks; the Major Electricity Users Group (MEUG); and Mighty River Power. One cross-submission was received, from PwC. March 2008 process note on information disclosure 9 On 31 March 2008, the Commission issued a process note to provide a brief update on the Commission s review of the information disclosure regime. 6 In that process note, Commerce Commission, Regulation of Electricity Lines Businesses, Review of the Information Disclosure Regime, Companion Paper to the Exposure Draft of the Revised Information Disclosure Requirements, 20 December Commerce Commission, Regulation of Electricity Lines Businesses, Supporting Paper to the Exposure Draft of the Revised Information Disclosure Requirements, Specification of Return on Investment and Revised Draft Methodology for Rolling Forward the Regulatory Asset Base, 20 December Commerce Commission, Regulation of Electricity Lines Businesses, Update on the Review of the Information Disclosure Regime, 31 March 2008.

6 6 the Commission indicated that, as a result of extending the date for submissions on the Consultation Package, it did not intend making any decisions on possible amendments to the current Disclosure Requirements before 31 March Rather, the process note explained that, once the Commission had had the opportunity to consider the views of interested parties as set out in submissions and cross-submissions, it would announce by 30 April 2008 whether it intended: making any amendments to the disclosure requirements that would affect disclosures for the 2007/08 year and, if so, the timeframe and process for finalising those amendments and the associated disclosure dates; and requiring any full ODV revaluations to be undertaken as at 31 March 2008, either because four years have passed since the last full ODV valuation, or because the system length or transformer capacity has changed by 10% or more since the previous full ODV valuation. Purpose of this Process Paper 10 The purpose of this Process Paper is to make the announcements referred to in the Commission s March 2008 process note. In particular, this Process Paper provides the Commission s decisions on the process it will follow to finalise the New Requirements, the matters that it will resolve and at what stage, and the way in which the Commission will transition the implementation of those New Requirements. 11 Hence, in taking into account the views of interested parties, the Commission has focused first on responding to matters relating to the process, timetable and applicability of the New Requirements. The Commission considers that this is important in order to assist EDBs with planning their compliance with the New Requirements. The Commission will respond to submissions on other topics during subsequent stages of the process for finalising the New Requirements.

7 7 KEY ISSUES RELATING TO THE PROCESS FOR INTRODUCING THE NEW REQUIREMENTS Overview of Key Issues Relevant to Process and Timetable 12 EDBs generally oppose publishing changes to the Disclosure Requirements that might apply to the 2007/08 disclosure year. Key reasons given in submissions for postponing any significant changes to the current Disclosure Requirements include the following. Possible change in valuation method: In the Consultation Package, the Commission proposed initiating further work needed to consult on implementing indexed historic cost (IHC) as the possible asset valuation method applying to all EDBs on an ongoing basis, rather than the optimised deprival value (ODV) method. Although many EDBs support further consideration of the use of historic cost, rather than ODV, they also argue that significant changes to the Disclosure Requirements should await the Commission s final decisions on asset valuation. Proposed amendments to the Commerce Act: Many EDBs argue that, apart from possible changes that may arise from considering alternative valuation methods to ODV, the Disclosure Requirements are likely to require changing again once input methodologies (proposed under the Commerce Amendment Bill 2008) are finalised. Compliance costs and practical issues: EDBs highlight a number of compliance cost and practical issues associated with the proposals in the Exposure Draft, particularly for provisions that would apply to any period before the date when the New Requirements are published. 13 In addition, submitters have proposed a change to the disclosure date for asset management plans (AMPs), and have offered input to the Commission through workshops if/as required. These issues are responded to below. Possible Change in Asset Valuation Method Overview 14 In the Consultation Package, the Commission sought the feedback of interested parties on its preliminary view that, having now had greater experience with implementing the Part 4A regulatory regime, it might be preferable to dispense with the current requirement to undertake periodic revaluations using the ODV asset valuation method, and to require the use of IHC in all future years instead. Consequently, the Commission proposed initiating further consultation on implementing IHC as the possible asset valuation method applying to all distribution businesses on an ongoing basis. 15 The Commission also explained that, pending further consideration of the proposal to undertake more work on IHC, the Exposure Draft had been prepared on the basis of the previous high-level decision that full ODV revaluations, and associated ODV reconciliations, would be required at some point in the future whether as at 31 March 2008 or as at some later date. 7 The Commission stated that it considered this approach 7 Proposed provisions for disclosing reconciliations between the 2003/04 ODV rolled forward using IHC, and periodic full ODV reconciliations, were a key feature of the Exposure Draft (and were explained in detail in the Supporting Paper). At earlier stages of the consultation process, a number of EDBs had expressed the concern that significant differences can arise between actual incremental capital

8 8 to be prudent, as it meant that if, following consultation, the Commission were to confirm its previous decision to require periodic ODV revaluations, the New Requirements would be consistent with that decision. On the other hand, if following further consultation the Commission were to decide to require IHC to be applied, the New Requirements would also be consistent with that decision (at least until any efficiency or prudency reviews of investment might be required). 16 The Commission also proposed in the Consultation Package that, in any event, it might be appropriate to change the date of the next full ODV revaluation in the current Disclosure Requirements from 31 March 2008 to 31 March In addition, the Commission proposed revoking the current provision in the Disclosure Requirements requiring a full ODV revaluation to be undertaken when the system length or transformer capacity has changed by 10% or more since the previous full ODV valuation (i.e., clauses 19(2)(b) and (c) of the current Disclosure Requirements). Such changes would allow the issues associated with IHC to be explored further with interested parties, while ensuring that resources would not be committed by the Commission or interested parties during 2008 to developing an updated ODV Handbook that might never be utilised. Views of interested parties 17 Most EDBs support undertaking further consultation on the use of historic cost, rather than ODV, for rolling forward the value of the RAB in future (although most of these EDBs generally favour un-indexed rather than indexed historic cost). However, they argue that significant changes to the Disclosure Requirements should await final decisions on asset valuation by the Commission, particularly given that asset valuation is one of the key input methodologies provided for under the Commerce Amendment Bill (paragraph 24 below). On the other hand, Vector argues that the possible abandonment of ODV and the proposed deferral of the 2008 ODV update add significantly to regulatory uncertainty. 18 PwC supports the Commission s proposal to delay the 31 March 2008 ODV disclosure date on the grounds that any New Requirements should be delayed until the appropriate method for ongoing valuation of the regulatory asset base is determined, subject to further consultation and alignment with the Commission s input methodologies workstream (refer paragraph 26 below). In addition, PwC supports the proposal to remove the provisions requiring EDBs to undertake a full ODV revaluation because the system length or transformer capacity has changed by 10% or more since the previous full ODV valuation. 8 expenditures (even where incurred at least cost ) and the ODV value ascribed to them in the current (or future) ODV Handbook. To address these concerns, the Exposure Draft proposed allowing for an explicit adjustment to the Regulatory Profit Statement to reflect a number of differences between the rolledforward and ODV values of asset additions, with this adjustment flowing through to the calculation of the ROI. One of the components of this adjustment was intended to allow for the assumed higher costs of incremental investments, when compared to standard replacement costs based on modern equivalent assets (MEAs) installed at a significant scale of construction. The Consultation Package indicated that these higher costs could be determined as part of any process for updating the Commission s August 2004 ODV Handbook. The Commission first proposed changing the date of the next full ODV revaluation from 31 March 2008 to 31 March 2009 in its September 2007 information disclosure process paper (Commerce Commission, Update on the Review of the Information Disclosure Regime and Proposed Change to the ODV Disclosure Date, 25 September 2007). Submissions on that paper were addressed in the Consultation Package.

9 9 19 PwC and some EDBs also highlight that a number of schedules in the Exposure Draft have been prepared to support a future ODV reconciliation, and a number of performance indicators rely on ODV concepts and definitions. In particular, Schedule 5 of the Exposure Draft (which contains Report AV1 - Annual Regulatory Valuation Roll-Forward Report) has been designed to be flexible enough to be able to support information that needs to be carried forward in all intervening years to allow a reconciliation to be undertaken in years that a full ODV revaluation is required. 9 PwC has argued that there would be significant compliance costs involved in preparing information for this Schedule for all intervening years, and that much of this work would not be necessary if the Commission eventually decides no further ODV valuations are to be undertaken by EDBs. This is because there are a number of line items in Report AV1 that would not be used if ODV reconciliations are not needed. Commission s response 20 The Commission has already made a number of key decisions on rolling forward the RAB of EDBs going forward (paragraph 3 above). These decisions form an internally consistent package with the specification of the ROI in the New Requirements, based on the principle of financial capital maintenance (FCM) a principle which the industry generally supports (and which is reiterated by ENA in its submission). By way of contrast, the existing provisions in the current Disclosure Requirements for rolling forward the RAB (i.e., in Schedule 1, Part 8) are not consistent with this principle, and could potentially result in efficient levels of capital expenditure not being appropriately reflected in the RAB. The Commission considers that it is appropriate to address this issue as soon as practicable. The Commission also notes that it has already been applying a consistent approach to rolling forward the RAB when it has undertaken building blocks analysis in the context of post-breach inquiries under subpart 1 of Part 4A In the Commission s view, any future decision to apply a different valuation method can be separated out from the current decision concerning disclosed asset values for the 2007/08 year (and earlier years since the 2003/04 ODV revaluation). On the one hand, if the Commission were to decide to apply ODV or IHC for future asset valuations then this would be entirely consistent with the Commission s previous decision to roll the 2003/04 ODV forward using IHC. On the other hand, if the Commission were to accept the arguments from some EDBs concerning the application of un-indexed historic cost in future, this would not mean that asset values as at 31 March 2008 (or 2009) established using the 2003/04 ODV values rolled forward using IHC would be inappropriate. Any subsequent change in valuation method can be implemented in a manner consistent with the Commission s underlying principle of financial capital maintenance. 22 Having taken into account relevant views of interested parties, the Commission has decided to consult further on the asset valuation method to apply in future years. In the interim, the Commission has decided to change the date in the current Disclosure Requirements as at which a full ODV revaluation must be undertaken from 31 March 2008 to 31 March In addition, the current provision requiring that a full ODV revaluation be undertaken where the system length or transformer capacity has changed by 10% or more since the previous full ODV valuation will be revoked. These 9 10 Refer footnote 7 above. For example: Commerce Commission, Regulation of Electricity Lines Businesses, Targeted Control Regime, Intention to Declare Control, Unison Networks Limited, 9 September 2005, paragraph 130.

10 10 provisions will be changed or revoked by making an amendment to clause 19 of the current Disclosure Requirements that will take effect from 1 May The Commission accepts that there is a compliance cost in disclosing the information necessary to support future ODV reconciliations, and that this cost would be unnecessary if it were subsequently decided not to proceed with periodic ODV revaluations. Therefore, the Commission intends amending the New Requirements so that they are consistent with the IHC roll-forward, as already decided by the Commission as being appropriate for years in which ODV revaluations are not required. Before finalising such changes however, interested parties will have a further opportunity to provide their views on the technical detail of those changes. More details are provided below (paragraphs 44-48). Proposed Amendments to the Commerce Act Overview 24 In its Companion Paper, the Commission explained it intended that the New Requirements would apply to all EDBs from (and including) the 2007/08 disclosure year. Since then, the Commerce Amendment Bill which contains a number of significant proposed changes to the regulatory provisions in Parts 4, 4A and 5 of the Act has been tabled in Parliament, and is currently being considered by the Commerce Select Committee. A key change proposed in the Bill is a new requirement for the Commission to consult on and set regulatory rules termed input methodologies applying to regulated services (which include electricity line services) by 30 June Input methodologies include, among other things, methodologies for: the cost of capital; asset valuation (including depreciation and the treatment of revaluations); allocation of common costs; and the treatment of taxation. The intention of this new requirement is to improve regulatory certainty and predictability for businesses supplying regulated services. 25 The Commerce Amendment Bill also expands the range of economic regulatory instruments that would be available under the Act. Whether the Bill is passed or not, the information disclosure regime will continue to apply to all ELBs under the regulatory provisions in the existing or amended Act, and this regime would continue to be administered by the Commission. A key distinction between the current and proposed new regulatory provisions is that information disclosure would become the only regulatory instrument applying to small consumer-owned EDBs where consumers are effectively the owners of the business around half of the 28 EDBs. (As is explained below, it is the Commission s view that, notwithstanding proposed legislative change, it is prudent to continue evolving the information disclosure regime). Views of interested parties 26 A number of submissions on the Exposure Draft criticise the Commission for the delay in making changes to the information disclosure regime, as they claim this has contributed to regulatory uncertainty. While some submitters consider that a change in asset valuation method could be appropriate (paragraph 17 above), nonetheless such a possible change is also seen as adding to this uncertainty. Submitters note that, in any event, the proposed changes in the Exposure Draft did not address some inter-related

11 11 factors which ought to be addressed on a consistent basis as part of developing input methodologies assuming the Commerce Amendment Bill is passed in present form For example, an amended approach to cost allocation is not addressed in the Exposure Draft, because the Commission indicated its intention to address the allocation of costs as part of the second stage of changes to the Disclosure Requirements. 12 Consequently, many EDBs argue that, because the Disclosure Requirements are likely to require changing again once input methodologies are finalised, the proposals set out in the Exposure Draft should not be implemented at this time. For instance, PwC states that finalising the input methodologies should be the Commission s primary task, and should precede implementation of the New Requirements (or any reset of the thresholds). In a similar vein, ENA and Vector suggest that changing the requirements at this stage will impose unnecessary costs on EDBs and will disrupt the data series disclosed under the regime. 28 Nevertheless, PwC considers that there are some improvements to the Disclosure Requirements that could be implemented in the interim, but only where these are not influenced by input methodologies. PwC suggests that this could involve changes to the requirements for disclosing some technical statistics. Commission s response 29 In December 2004, at the outset of the review of the information disclosure regime, the Commission highlighted that the existing Disclosure Requirements had been developed pursuant to the Electricity Act 1992, and needed to be reviewed now that they were subject to an explicit purpose statement in subpart 3 of Part 4A of the Commerce Act. Since that time, the Commission has undertaken the majority of the work for considering revisions to the Disclosure Requirements. The Commission has consulted extensively on the issues that it has addressed, has published its high-level and implementation decisions that have formed the foundation for revisions to the Requirements, and has taken into account the views of interested parties. The December 2007 Exposure Draft of the New Requirements was prepared based on this process. 30 The Commission has previously indicated in a number of contexts that it must apply the legislation as it currently stands. Should the proposed amendments in the Commerce Amendment Bill take effect in the second half of 2008, then input methodologies would not be expected to be finalised until June This would likely mean that any impact of finalised input methodologies on the information disclosure regime could only be taken into account for the 2010/11 disclosure year at the earliest. In the Commission s view, it is preferable to better align the existing Disclosure Requirements to the current purpose statement, and to make the disclosed data series more reliable and effective (for at least the 2007/08, 2008/09 and 2009/10 disclosure years), than to continue requiring disclosures against requirements that were developed under entirely different legislation. Moreover, given that if the Bill is passed around half of the EDBs would be subject to information disclosure regime alone, it would become even more important to have a more effective set of disclosure requirements in place Some submitters have also noted apparent differences between the key principles used for the information disclosure review, the principles published by the Commission to be used in assessing options for resetting the thresholds under subpart 1 of Part 4A, and the principles used to assess different valuation methods. Commerce Commission, supra n 4, paragraph 88.

12 12 31 The Commission s current understanding of the Bill is that the proposed input methodologies in the Bill are intended to build on the experience with the regulatory regime gained to date, including consultation processes that have already been undertaken. Regulatory certainty is expected to be improved by requiring such input methodologies to be set early in the regulatory period beginning in 2010, and by placing some constraints on the ability of the Commission to subsequently revise those methodologies once they are set. The Commission also notes that the proposed purpose of information disclosure in the Bill is comparable to that under subpart 3 of Part 4A. 32 Consequently, while further consultation would be required on any input methodology before it could be finalised, the Commission s preliminary view is that experience and knowledge gained by both the Commission and stakeholders will be relevant to developing input methodologies under the proposals in the Bill, recognising that the majority of matters to be covered by input methodologies are issues traversed to a large extent in the regulatory regime to date. The Commission considers it would be artificial to view the development of input methodologies as something which is completely clean slate. 33 These preliminary views of the Commission can themselves be consulted on when the Commission releases its planned process paper on regulatory guidelines and principles under the Act as it stands (as well as on how that work would transition into developing input methodologies, should the Bill be enacted). The Commission intends releasing that process paper next month. 34 The Commission acknowledges that submitters on the Exposure Draft have raised valid issues concerning the inter-relationships between the various factors relevant to input methodologies. Similar issues have also been raised recently by interested parties in the context of other Commission workstreams relating to the regulation of ELBs. In the Commission s view, such inter-relationships between its information disclosure workstream (both first and second stages), threshold reset workstream and post-breach inquiry workstream as well as the role of key regulatory parameters such as the value of the regulatory asset base are equally important matters to address and clarify even in the event the Bill were not enacted. Consequently, the Commission intends addressing those inter-relationship issues as part of its planned workstream on regulatory guidelines (and input methodologies). 35 In the meantime however, the Commission has decided that improvements to the information disclosure regime should not be delayed pending amendments to the Act, and therefore the New Requirements will be implemented consistent with the current provisions in the Act. Compliance Costs and Practical Issues Overview 36 As noted above (paragraph 24), the New Requirements were intended to apply to EDBs from (and including) the 2007/08 disclosures. The Exposure Draft also included provisions requiring EDBs to provide a retrospective disclosure of their RAB values for 2004/05, 2005/06, and 2006/07, to be undertaken by rolling forward their 2003/04 RAB valuations (which largely comprised their system fixed assets valued using the ODV methodology) using the roll-forward methodology prescribed in the New Requirements. For system fixed assets, the prescribed roll-forward methodology in the Exposure Draft is an IHC method.

13 13 Views of interested parties 37 A number of EDBs state that it would be unreasonable and impractical to apply the New Requirements starting with the 2007/08 disclosure year. In addition, it would be difficult to apply requirements which involve the collection of data in particular categories starting with the 2008/09 year unless the New Requirements were to be finalised very soon after the beginning of the current disclosure year (i.e., 1 April 2008). 38 The particular concerns raised in submissions (such as from PwC, Powerco, Marlborough Lines and Orion) largely arise from the difficulties associated with applying the proposed expenditure categorisation requirements retrospectively. This involves the categorisation of: operational expenditure in Schedule 2 (Report FS1 Regulatory Profit Statement); capital expenditure in Schedule 3 (Report FS2 Regulatory Asset and Financing Statement); and forecasts of capital and operational expenditure in Schedule 13 (Report AM1 Expenditure Forecasts and Reconciliation). 39 While there is support for the disclosure of information according to consistent categories, PwC notes this requires EDBs to establish their business processes and information systems towards the beginning of the financial year, so that information can be collected in a reliable and auditable manner. PwC also notes that the adoption of international financial reporting standards (IFRS) may cause a complication with the Exposure Draft s requirement for comparative data from past years since, under IFRS, comparatives must be restated on a basis that is consistent with the current year s statements. This would imply that to disclose 2007/08 data according to the New Requirements would also require a restatement of 2006/07 requirements. 40 Some submissions, notably from PwC and from Orion, also express concerns with the practicalities and associated compliance costs in being required to disclose the valuation roll-forward according to Report AV1 in the Exposure Draft. PwC considers that it is possible to roll forward system fixed asset valuations from the 2003/04 ODVs, provided a simplified roll-forward schedule is used. PwC acknowledges that this would not support subsequent reconciliation of the rolled forward valuation with a subsequent ODV revaluation. However, since the Commission has indicated that it is considering reviewing whether ODV revaluations will be applied in future, PwC notes that the considerable complexity and cost of complying with the detailed roll-forward reporting structure in the Exposure Draft (in Report AV1) may be avoided. Furthermore, PwC notes that the cost of disclosing a roll-forward according to Report AV1 will be no more onerous if introduced and undertaken sometime in the future (if and when any future ODV valuations are undertaken). 41 Orion proposes that new ODV valuations should be required as at 31 March 2008, or 2009, that the New Requirements should apply only from that time, and that the rollforward from the 2003/04 RAB valuations (and associated reconciliation with the new ODV valuations) should not be required. Commission s response 42 The Commission acknowledges the useful feedback that has been provided in regard to those aspects of the Exposure Draft that may be difficult to apply to disclosures for the

14 /08 and/or 2008/09 years. The Commission also accepts the logic in not requiring that the valuation roll-forward from the 2003/04 ODV be in a structure that facilitates later reconciliation with a new ODV revaluation, given that the review of the asset valuation method could make this effort redundant (paragraph 19 above). On the other hand, if full ODV revaluations are required in future years, then ODV reconciliation provisions could be introduced into the requirements at that time. 43 The Commission will review the Exposure Draft of the New Requirements with a view to defer the application in 2007/08 and 2008/09 of those aspects that would be onerous to apply in those years. The Commission considers that this is likely to include the following changes (for the 2007/08 and 2008/09 years only). Removing from Report FS1 the requirement to categorise operational expenditure to the level proposed in the Exposure Draft. The Commission will review the current Disclosure Requirements (which require a detailed categorisation of operational expenditure) so that, to the extent that certain categories in the current requirements are consistent with categories in the New Requirements, no less detail is provided for 2007/08 and 2008/09. However, where the current Disclosure Requirements require greater detail than the New Requirements, then these more onerous requirements will be removed. Removing from Report FS2 the categorisation of capital expenditure on system fixed assets to the level proposed in the Exposure Draft. No categorisation of such capital expenditure is currently required under the existing Requirements, and so none would be sought for 2007/08 or 2008/09. Amending Report AM1 such that the categorisation of forecast expenditure will commence with the year 2009/10 and the subsequent disclosure of categorised actual expenditure will commence with its disclosure for that same year. Removing those requirements in Schedule 11 (Report MP2 Performance Measures) that rely on categorised expenditure (the third and fourth measures in that report), and phasing in disclosures for previous years, such that the first year for which such measures are disclosed is 2009/ The Commission will also simplify Report AV1 so that it does not require the rollforward to operate separately in regard to assets included in the previous ODV, asset additions, net acquisitions (sales) since the previous ODV, and changes in asset register information. Rather, the roll-forward will operate on the total value of system fixed assets in each year. 45 The Commission will require a roll-forward of the total value of system fixed assets from 2003/04 using IHC for 2004/ /08. This will establish RAB valuations, in the first instance as at 31 March 2008, according to the Commission s high-level and implementation decisions. Following its review of the asset valuation method, the Commission will then decide how to implement any changes that it decides to make, including the year in which those changes would take effect. 46 In summary, therefore, the Commission will transition the implementation of the new asset valuation requirements by: simplifying Report AV1, such that the roll-forward is calculated in aggregate rather than according to separate tranches of assets;

15 15 requiring the simplified Report AV1 roll-forward to be completed for the years 2004/05, 2005/06, 2006/07 and 2007/08; and deleting Schedule 8 (Report AV4 ODV Valuation Reconciliation Report). 47 The Commission notes that this will leave a number of references to ODV valuations in the New Requirements. These mainly refer to the most recent ODV valuations (i.e., as at 31st March 2004) and will be reviewed to ensure that the information required is no more onerous than information that has already been reported (e.g., as per the Commission s 2004 ODV Handbook, at that time). Although such information may already have been reported, the Commission considers that re-disclosure in the context of the New Requirements aids transparency and understandability, and the compliance costs in doing so should be minimal. 48 The Commission would need to review its decision to simplify the valuation rollforward disclosure requirements in the event that it decides to require a further ODV revaluation in future. The Commission notes that the need for a reconciliation of the rolled-forward valuation with a subsequent ODV revaluation largely arose from concerns expressed by EDBs of a likely gap between rolled-forward valuations using IHC and ODV valuations, and the need to be able to adjust the ROI to account for any adjustments made to the valuations (so as to preserve FCM) The Commission considers that it is useful to ensure that there is clarity and certainty in regard to the New Requirements following the transitional period involving the deferral of some provisions taking effect (i.e., from 2009/10). Therefore, rather than excise those parts of the New Requirements that will not apply for 2007/08 and 2008/09, and introduce them subsequently, the Commission will publish the New Requirements to apply from 2009/10 in 2008, and will indicate which provisions do not apply to the 2007/08 and/or 2008/09 disclosure years. 50 As set out below (paragraph 67), the Commission intends publishing the New Requirements by the end of September 2008, with most schedules to be due around five months later, by 28 February In order that EDBs do not have to disclose similar information earlier under the current Disclosure Requirements, the Commission will make an interim amendment to the Disclosure Requirements, that will take effect from 1 May 2008, so that financial disclosures for the 2007/08 year under the existing Disclosure Requirements are not due until 28 February Once the New Requirements are issued in September, this interim provision would become superceded. Timing of Asset Management Plan Disclosures Overview 51 In the Exposure Draft, the Commission proposed requiring AMPs to be disclosed four months before the beginning of the financial year, rather than five months after the beginning of the financial year to which they first relate, as is currently the case. In addition, the Exposure Draft provided for the disclosure of variances against capital and operating expenditure forecasts, once the actual expenditure information is available. 13 Refer footnote 7 above.

16 16 Views of interested parties 52 The proposed disclosure of AMPs four months prior to the planning period was not supported by EDBs. A number of submissions noted that EDBs typically carry out their planning and budgeting processes in October to January, following which more structured data for the following year would be available for input into the AMP. Therefore, AMPs should be disclosed at the start of the planning period to allow completion of supporting planning processes and budgeting. 53 It was also submitted that, due to the timing of the publication of financial disclosures five months after the end of year to which they relate, but before publication of the next AMP (which would contain actual expenditures), it is not possible to cross-refer from the disclosed financial information to a published AMP in order to provide an explanation of any differences. For this reason it was proposed that the reconciliation explanations should be included in the AMP where the context exists by way of all of the background and supporting information for the plan. Commission s response 54 The Commission considers that there is merit in the practical timing suggestions that have been made by EDBs. The Commission considers that publication of AMPs at the beginning of the year to which they first relate would allow EDBs to make best advantage of information and plans assembled at that time for budgeting and internal planning purposes. This revised timetable would commence with the 2009 AMP. However, given that under the current Disclosure Requirements the next AMP is due to be disclosed at the end of August 2008, the Commission intends to amend the current Disclosure requirements changing the AMP disclosure date to the start of the financial year, to take effect from 1 May Therefore, no AMP will be due on 31 August 2008, and the 2009/10 AMP will need to be disclosed by 1 April The Commission also acknowledges the timing implications raised in submissions and considers that there is merit in requiring all explanation of variances to be included in the AMP itself; accordingly the Commission will delete the explanation requirements from the New Requirements. In order to provide context to the explanation of variances, the Commission will require that the most recently published Report AM1 is included in each AMP. Proposals for Further Workshops Overview 56 In the course of developing the Exposure Draft, the Commission undertook two workshops: a workshop on financial information on 31 October and 1 November 2005; and a workshop on performance measures, held on 22 and 23 November The purpose of the workshops was to provide industry and external expert input on definitions and compliance-related aspects of the requirements. Early drafts of the disclosure schedules were discussed and the Commission used the feedback provided at the workshops to further develop the draft schedules and their definitions. Views of interested parties 57 Two submissions from PwC and from Marlborough Lines have commented on the value of the workshops. However, PwC suggests that, since the schedules were not published until more than two years after the workshops, some points made at the workshops may not have been fully incorporated.

17 17 58 Both PwC and Marlborough Lines have urged the Commission to consider using workshops further in the information disclosure review process. PwC suggests that this would be particularly useful in regard to finalising the specification of metrics and performance measures (Reports MP1, MP2 and MP3), while Marlborough Lines suggests using a workshop to confirm appropriate cost categories and to review compliance cost implications. PwC states that the 21 EDBs represented in its submission are willing to support further workshops as required. Commission s response 59 The Commission considers that the workshops conducted in 2005 provided useful input in regard to the specific information sought in the schedules to the Exposure Draft, the layout of those schedules, the definition of the data items and compliance issues. Following the workshops, the Commission further developed the initial drafts of all schedules. The Commission published asset valuation disclosure schedules (now represented by Reports AV1, AV2, AV3 and AV4) in its Draft Information Disclosure Requirements, in April All other schedules were published as part of the Exposure Draft in December Having reviewed feedback from submissions on specific aspects of the Exposure Draft, the Commission considers that it could be of value to hold a further workshop in order to obtain further input on the specification of non-financial technical performance measures (in relevant parts of Reports MP1, MP2 and MP3). The Commission notes that the current Exposure Draft in relation to these schedules has evolved considerably since the 2005 workshop on performance measures. Many aspects of these requirements are technical in nature, and industry input can be useful in minimising scope for ambiguous interpretation of definitions, as well as helping to ensure that disclosed information will provide adequate comparability between EDBs. The Commission considers that there can also be specific measurement and data collection practicalities and compliance costs associated with these schedules, which tend to rely on non-financial information systems. 61 The Commission therefore proposes holding a further workshop, to obtain input on these aspects of the draft non-financial performance measures. The focus of the workshop would be on ensuring that the required information is well-defined and also to assist the Commission in understanding any measurement, data collection and other compliance issues which may need to be taken into account. 62 The Commission considers that the first principles process of designing the required information on performance measures has been concluded, following the Commission s consultations (which included the 2005 workshops). Any further workshop would seek technical input based on the Exposure Draft schedules and definitions, and would not re-open high level decisions already made. 63 The Commission considers that this workshop could be held within the timeframe for completion of the Stage 1 New Requirements, as outlined in the next section. However, should it not prove possible to schedule such a workshop within this timeframe, the Commission does not intend delaying the process of implementing the New Requirements. 14 Commerce Commission, Regulation of Electricity Lines Businesses, Valuation of the Regulatory Asset Base, Draft Information Disclosure Requirement, Methodology for Rolling Forward the Regulatory Asset Base for System Fixed Assets, 13 April 2006.

18 18 IMPLEMENTATION PROCESS AND TIMETABLE Minor Amendments to the Disclosure Requirements from 1 May As discussed above, the Commission will make a number of minor amendments to the current Disclosure Requirements to take effect from 1 May 2008: ODV Disclosure Date: the date as at which a full ODV revaluation must be undertaken will be changed from 31 March 2008 to 31 March 2009, and the current provision requiring that a full ODV revaluation be undertaken where the system length or transformer capacity has changed by 10% or more since the previous full ODV valuation will be revoked (paragraph 22 above). Disclosure Date for Financial Statements and Performance Measures: the due date for any financial statements and performance measures currently due by 30 August 2008 will be changed to 28 February 2009 (paragraph 50 above). AMP Disclosure Date: the due date for AMP disclosures will be changed to 1 April the start of the disclosure year (paragraph 54 above), commencing with the 2009/10 AMP on 1 April Implementing the New Requirements 65 As discussed above, the Commission intends undertaking a detailed review of the first stage of the New Requirements (comprising the requirements, schedules, definitions and the Handbook in the Exposure Draft) based on its review of submissions from interested parties on specific line items and their definitions, and other drafting-related matters. Among other things, the Commission will revise the Exposure Draft so that the application of a number of requirements for information in the 2007/08 and 2008/09 disclosure years is deferred. This revision is intended is take into account the valid concerns of the industry regarding compliance costs and/or the practicality of obtaining data associated with: disclosures for the past or current disclosure years, particularly in respect of the categorisation of operational and capital expenditure (paragraph 43 above); and providing for an ODV reconciliation that might not be required (paragraphs above). 66 Given the technical nature of the revisions to be made to the Exposure Draft, the Commission considers that it would be valuable to receive further feedback from interested parties on those changes. In addition, prior to making those revisions, the Commission proposes scheduling a workshop on non-financial performance measures, if possible. Therefore, the Commission intends re-releasing the Exposure Draft, along with a brief explanatory paper setting out the differences from the December 2007 version. That explanatory paper will also address the relevant views of interested parties on the Exposure Draft in respect of matters not addressed in this Process Paper. 67 Following its review of submissions on the revised Exposure Draft and amendment of the New Requirements accordingly, the Commission will publish the New Requirements. The Commission intends releasing the revised Exposure Draft by the end of July 2008, and publishing the New Requirements by the end of September The Commission will update its Companion Paper and release this shortly after