News
Input methodologies – the allure of certainty
First published in NZLawyer, 23 July 2010.
Throughout June, the Commerce Commission released a series of draft decisions on the input methodologies it will use in regulating those goods and services controlled under Part IV of the Commerce Act – namely natural monopoly services such as electricity lines companies, owners of gas distribution and transmission pipelines, and specified airports.
These documents run into the thousands of pages, reflecting both the size of the task before the Commission and the peculiarities of the regime.
The draft decisions follow the "emerging views" documents released by the Commission prior to Christmas (see Ins and outs of input methodologies, NZ Lawyer, January 2010 – David Blacktop). Those papers were the subject of submissions by interested parties and a series of workshops for industry participants held during February.
To recap, the input methodologies matter because they set the ground rules for the way regulated firms (and the Commission) deal with matters such as:
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cost of capital;
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valuation of assets, including depreciation, and treatment of revaluations;
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allocation of common costs, including between activities, businesses, consumer classes, and geographic areas;
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treatment of taxation;
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pricing methodologies; and
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regulatory processes and rules.
Ultimately the methodologies will strongly influence both prices paid by consumers and the investment decisions of the regulated firms.
Methodologies are required to be set for each type of regulated business, hence there are discreet draft decisions for airports, gas pipeline business, electricity lines businesses and Transpower.
Once set, the input methodologies will apply to the regulated industries for up to seven years before being reviewed. The underlying intention is to deliver greater certainty so as to create more predictable regulatory outcomes and thereby assist regulated suppliers to manage their businesses – fostering and encouraging efficient investment.
While it is difficult to disagree that input methodologies set for seven years will increase the level of certainty during that period, one open question is how quickly that certainty will be obtained. Final decisions will be made by the end of 2010, however, the Commerce Act provides a specific regime governing appeals of these input methodology decisions. Given the significance of the issues involved and the length of time that the input methodologies will apply for, it seems highly probable that there will be appeals in relation to one or more of the input methodologies. The Commission certainly appears to anticipate this – in its recent statement of intent it has adjusted the time profile of its litigation funding.
While the proposed input methodologies will continue to apply pending the resolution of any appeal, the very fact of an appeal will generate some uncertainty for businesses engaged in longer term planning. The Commission's statement of intent suggests that an appeal process could take up to two years.
Any appeal is to the High Court which will sit with two lay members in addition to the Judge, and any submitter who, in the opinion of the Court, has a significant interest in the matter, has standing to appeal. While the addition of a second lay member will itself create some interesting dynamics, more generally the appeal process throws up other interesting issues.
First, any appeal is strictly on the record – the Act provides that an appeal "must be conducted solely on the basis of the documentary information and views that were before the Commission when it made its determination" (section 52ZA2). This creates a fear of not having information available to rely on in Court and is likely to mean that submissions made in response to the draft decisions will be extremely detailed and comprehensive, to ensure that all possibly relevant information is before the Commission and, therefore, the Court, if needed.
Subsidiary issues may arise, for example: to what extent can submissions made in respect of input methodologies for one regulated service be relied upon in respect of an appeal relating to another input methodology? More generally, what, in fact, constitutes the information and views that were before the Commission? Such issues raise the potential for a number of interlocutory skirmishes.
Secondly, while the Court can amend, or revoke and substitute, an input methodology on appeal, it can only do so where the new methodology will be "materially better" in meeting the purpose of Part IV, or in promoting certainty for suppliers and consumers. What this means is an open question, even though the impact of this test can already be seen in a practical sense.
Indeed, it appears that the length of the Commission's draft decisions reflect an approach which seeks to minimise the potential for the Commission's final decisions to be appealed. The Commission has fairly rigorously addressed the matters raised in submissions to date, in particular explaining why its position meets the Act's purpose statement and why the other approaches (i.e., those of submitters) do not better meet the purpose statement. The Commission can be expected to take a similarly thorough and cautious approach in the final determinations given the threshold required for an appeal.
This approach, coupled with the incentives (outlined above) for submitters to have as much on the record as possible, suggests that any appeal could involve almost overwhelming volumes of documentary material.
Thirdly, the Act requires the Commission to set input methodologies for each type of regulated service. That is, there must be separate input methodologies for airports, gas pipelines, Transpower and electricity lines businesses. Not only does this raise issues as to extent of the Commission's "record" for any decision, it also raises interesting questions in terms of how the Court would deal with issues of timing and prioritisation (e.g., which service should go first?), and consolidation of hearings.
Fourthly, it is inevitable that various regulated suppliers will take differing views on various aspects of the regulation, at least to some extent. This creates the potential for one regulated supplier to join an appeal in support of the Commission's decision (and therefore against another regulated supplier). This position could be exacerbated where there are appeals across multiple methodologies on the same substantive issues.
Even putting aside the substance of the Commission's decisions, the very process by which they will be settled will be a saga in itself.
