A bumpy road to a dead end

Wednesday 19 December 2012

Authors: Simon Ladd and Andy Glenie

First published in NZLawyer, 14 December 2012.

Litigation continues to surround the input methodologies (IMs) set by the Commerce Commission to regulate electricity, gas and airport companies under Part 4 of the Commerce Act 1986 (the Act). Most recently, in mid November the Supreme Court knocked back Vector's attempt to challenge the Commission's reset of price-quality paths for electricity distribution businesses (EDBs) by arguing that it had failed to publish an IM for a starting price adjustment (SPA). That decision may have closed off that particular avenue, but there are still several routes open to regulated companies who remain determined to upset the IM apple-cart.

Background

As explained in the 16 November 2012 edition of this column (The bumpy road to a price path), Vector's challenge concerned the transition to price-quality path regulation for non-consumer-owned EDBs under Part 4 of the Act, which took effect in 2008. The relevant price path depends heavily on starting prices, which are then adjusted on a CPI – x basis.

The former Part 4A (the predecessor to Part 4) had regulated EDBs by way of a different regime that relied on thresholds. Part 4 deemed those thresholds to be price-quality paths for the interim period from 1 April 2009 to 31 March 2010.

On 30 November 2009, the Commission set starting prices and default price-quality paths for the five-year regulatory period commencing on 1 April 2010. It did so by simply rolling over the prices set under the old thresholds regime, because it had yet to publish the other IMs required for the new regulatory regime. The Commission took the view that, once it had published the necessary IMs, it would be able to reset the starting prices and default price-quality paths by reference to each supplier's expected profitability during the regulatory period using a power set out in section 54K(3).

On 22 December 2010, the Commission published the relevant IMs. Consultation in relation to resetting starting prices was commenced, but soon stalled by Vector's application for judicial review. Vector contended in particular that the Commission had failed to publish a SPA IM as required by section 52T. If the Commission had done so, that SPA IM would have been susceptible to merits review by the High Court.

In the High Court, Clifford J agreed with Vector that the Commission had misinterpreted Part 4. He held that the reference in section 52T(1)(c)(i) to "regulatory processes and rules, such as the specification and definition of prices" indeed required the Commission to publish a SPA IM. The Court of Appeal overturned Clifford J's decision. Vector appealed to the Supreme Court, which unanimously dismissed that appeal.

The Supreme Court decision

Vector's appeal raised two questions. The first, shortly put, was whether the Commission was required to publish a SPA IM. As a matter of statutory interpretation, the Supreme Court concluded that the Commission was able – but not required – to do so by section 52T. In reaching that conclusion, it made the following points:

  • The list in section 52T(1) of topics to be covered by IMs was non-exhaustive. It simply identified a number of topics which those IMs "must include".

  • Significantly, there was no explicit reference in section 52T to a starting price reset. That was so even though, during the legislative phase, submitters had argued to the Commerce Select Committee that the Commission should be required to publish IMs on a much wider range of topics than those reflected in section 52T.

  • Interpreting section 52T(1)(c) to require the Commission to publish a SPA IM would place it under an extremely onerous obligation to publish IMs for a wide range of matters relating to the specification of prices. Such an interpretation was unlikely to have been intended, given the tight statutory timeframes imposed on the Commission by Part 4.

  • It was clear that Part 4 had been intended to address the lack of regulatory certainty and absence of merits-based appeal rights offered by the former Part 4A. However, the Supreme Court was reluctant to accept that the Commission's approach would lead to greater uncertainty. It appeared to accept that the Commission's interpretation would lead to there being no merits review of its starting price reset, but did not see this as being determinative – it suggested instead that disappointed suppliers could propose a customised price-quality path, which would be subject to merits review.

The second question was whether section 54K(3) allowed the Commission to reset the starting prices fixed for the regulatory period which commenced on 1 April 2010. Vector argued that it did not, in particular because the Commission could not show that the IMs released in December 2010 would have resulted in a materially different default price-quality path being set. The Supreme Court disagreed, observing that Vector's approach involved placing a substantial gloss on the wording of section 54K(3).

In the result, Vector's judicial review failed to derail the Commission's reset process. The Commission moved swiftly in response, issuing a determination resetting default price quality paths for EDBs on 30 November 2012.

A footnote on jurisdiction

In the 19 October 2012 edition of this column (Exporting jurisdiction (2): more on the liability of foreign parents under the Commerce Act), we discussed the decision in Commerce Commission v Visy Board Pty Limited [2012] NZCA 383. The Court of Appeal there rejected Visy's protest to the jurisdiction of the New Zealand courts in connection with alleged collusion in a corrugated fibreboard packaging market, where much of the conduct occurred in Australia.

In late November, the Supreme Court dismissed Visy's application for leave to appeal. It reasoned that the Court of Appeal's decision was "provisional" and could be overtaken by an application of section 4 of the Commerce Act at trial. So, the position remains as outlined in our earlier column – an Australian parent may find itself subject to the jurisdiction of the New Zealand Courts, even where it operates through a New Zealand subsidiary and the relevant conduct itself did not occur here.


Disclaimer

This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.

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  • Competition