Authority identifies issue with WACC that could affect 2025 transmission prices

The Electricity Authority Te Mana Hiko has identified an issue with regulatory rules that could affect how transmission costs are shared between Transpower’s customers in early 2025.

The Authority works closely with the Commerce Commission on areas of mutual interest, including rules around transmission cost recovery. The Commerce Commission determines the maximum revenue that Transpower can recover and sets the Weighted Average Cost of Capital or WACC, one of the inputs used to calculate transmission charges. The Authority is responsible for the Transmission Pricing Methodology (TPM), which determines how transmission charges are allocated between lines companies, generators and large direct connect consumers (eg factories). The TPM sets out how the WACC affects the allocation of transmission charges between customers.

The WACC is expected to increase when it is set by the Commerce Commission for the next five-year period starting on 1 April 2025. The revised WACC will be used to calculate the total revenue Transpower is allowed to earn through transmission charges for that period.

We’ve identified an issue with how the new WACC will be used to set transmission charges. The TPM requires the revised WACC to be used to calculate certain transmission charges (known as benefit-based charges) from 1 April 2027 (two years later than 1 April 2025). The two dates are not aligned. So, between 1 April 2025 and 31 March 2027, overall aggregate transmission revenue would be set using a higher WACC; while benefit-based charges would continue being set using the current (lower) WACC. The difference in revenue would be made up by increases in another type of transmission charge (residual charges).

We’re looking into options, including whether we should change the rules in the TPM to align the key dates so the revised WACC would be used to calculate benefit-based charges from 1 April 2025. If we do propose a change in this area, it would be to promote the Electricity Authority’s main statutory objective. This change could help ensure that customers that benefit from an investment in the grid would collectively pay the full costs of that investment (including the cost of capital) through benefit-based charges – which could promote the efficient operation of the electricity industry for the long-term benefit of consumers.

The Authority anticipated that there would be some minor changes required to the TPM, which came into force in April this year, as the new methodology beds in. We planned ahead to enable any issues with the new methodology identified during its implementation to be addressed in a timely manner. The Authority works constructively with Transpower and other industry participants to address issues as they arise.

The Authority will prepare a consultation paper within the next six months that sets out any proposed changes to the TPM, with key regulatory considerations as well as the estimated impact on charges and customers. We also expect to consult on proposed changes to the Electricity Industry Participation Code that would clarify the circumstances in changes to the TPM that might be progressed. Both consultations would give stakeholders the opportunity to have their say on any proposed changes. We would make any decisions on proposed Code amendments after completing the consultation process and carefully considering public and industry submissions.

The Authority is aware that consumers are currently facing critical cost pressures across a range of products and services and we are committed to investigating changes that could promote the long-term interests of consumers as overall electricity demand increases into the future.