Electricity lines company fails in its attempt to get price thresholds set aside

David Blacktop, a senior solicitor in Bell Gully's Competition and Regulatory team, discusses the recent Court of Appeal decision in Unison Networks v The Commerce Commission. Notwithstanding a unanimous finding that the Commission's initial price path thresholds for large electricity lines companies was unlawful, the majority of the Court of Appeal went on to decline to set aside the thresholds on the basis that doing so would cause considerable disruption to the industry.

In a judgment1 issued on 19 December 2006, a majority of the Court of Appeal rejected Unison's claim to have the Commerce Commission's price path thresholds for large electricity lines businesses set aside.

Thresholds regime

The Commerce Commission is responsible under Part 4A of the Commerce Act for administering the regulatory regime applicable to large electricity lines businesses.  This includes a requirement for the Commission to issue "thresholds for control" against which to judge the price and service performance of lines companies.  If a lines company breaches the relevant thresholds, then the Commission must assess whether that company should be placed under price control.

Unison was the first company which the Commission identified as having breached the thresholds which the Commission preliminarily determined should be subject to price control.  Subsequently, the Commission has reached similar preliminary decisions in relation to Vector and Transpower for control. 

Unison's challenge

Unison challenged the thresholds used by the Commission to identify Unison as being a candidate for control – these thresholds included both:

• an initial price threshold, which required lines companies not to freeze prices; and
  
  
• a subsequent price threshold, which allowed companies to increase prices by an amount equal to CPI – X.

The court unanimously held that the purpose of the thresholds was "to perform a screening or filtering function, which, over time, should capture those who are potential candidates for control."  The candidates for control are those not acting in accordance with the purpose of the regime which provided that the purpose of the regime was to ensure lines businesses:

1. are limited in their ability to extract excessive profits; and
   
   
2. face strong incentives to improve efficiency and provide services at a quality that reflects consumer demands; and
   
   
3. share the benefits of efficiency gains with consumers, including through lower prices.

The court held that a "price freeze threshold" did not meet this purpose because "an inefficient and high charging business could put itself out of reach of the potential for control simply by maintaining its monopoly pricing and low quality service."  However, the court accepted that a CPI-X threshold did meet the statutory purpose because the thresholds did provide incentives to comply with (a)-(c) above. 

Relief

The issue of relief was complicated by the fact that while the initial thresholds were unlawful, the subsequent revised thresholds were lawful.  However, the revised thresholds took as their starting point the "unlawful" initial thresholds.  This meant that setting aside the initial thresholds would bring down the revised and lawful thresholds. 

The majority of the court declined to set aside the initial thresholds.  While noting that "there are strong cautions against exercising the discretion not to set aside an unlawful decision", the majority accepted that setting aside the regime would "cause considerable disruption to the industry and to the consumers".  The minority Judge, O'Regan J put the threshold for declining to grant relief higher, describing the threshold as requiring "exceptional" circumstances.  He was not satisfied that the disruption relief would cause to industry was "so exceptional that relief should be withheld".

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