Court of Appeal overturns Vector victory

The Court of Appeal has upheld the Commerce Commission's appeal against the September 2011 High Court decision Vector v Commerce Commission under Part 4 of the Commerce Act 1986.  The background to this was the Commission's decision not to set an input methodology for starting price adjustments when carrying out a "mid-point price reset" for electricity distribution businesses (EDBs) subject to price control.  Vector successfully challenged the Commission's decision in the High Court.

The Court of Appeal held that the Commission had correctly applied the law and that it did not need to set an input methodology for EDBs' starting price adjustment.

This decision represents yet another twist in the tale of New Zealand's latest price control regime, but it is not the end - a number of other related challenges are ongoing.  The Commission succeeded for the most part in a series of judicial reviews at the end of 2011, but the merits appeals of the Commission's input methodologies still await judgment.  There is also the possibility of an appeal by Vector of the Court of Appeal decision to the Supreme Court.

The Commission is currently consulting on the draft input methodologies for other inputs (valuation of assets, allocation of common costs, and treatment of taxation) that were required to be made as a result of the High Court decision, as these were not part of the appeal. It has also recommenced its work on the potential reset of the price paths for EDBs and gas pipeline services.

A refresher on input methodologies and Part 4

Part 4 requires the Commission to determine input methodologies as part of the Commission's powers to prevent monopoly behaviour.  Their purpose is to set methodologies, rules, processes, requirements and evaluation criteria for services regulated under Part 4 - for example, how to work out a regulated supplier's cost of capital or valuation of assets.

Part 4 also requires the Commission to specify certain input methodologies, but leaves the determination of others at the Commission's discretion. 

The reason for introducing input methodologies was to give greater certainty, transparency, and predictability to businesses (including businesses not subject to regulation) and their customers.

Broadly, Part 4's overall purpose is to constrain monopoly behaviour and create incentives on monopoly businesses to operate efficiently. 

The High Court decision

Clifford J held that Part 4 required the starting price adjustment to be specified in an input methodology, as this detail was methodological, rather than being specified in the pricing determination itself.  In reaching his decision, Clifford J relied on the purpose and parliamentary history of Part 4, and input methodologies in particular, as well as on the nature of Part 4's appeal rights.  Clifford J emphasised the particular role of input methodologies in promoting regulatory certainty. 

The Court of Appeal decision

The Court of Appeal disagreed with Clifford J's proposition that input methodologies should promote certainty by specifying every relevant factor in a Commission determination.  Taking into account the parliamentary history of Part 4 (on which the Court's view differed from Clifford J's), and noting in particular the ambitious timeframe in which the Commission had to develop its input methodologies, the Court of Appeal held that it was not necessary for the Commission to specify an input methodology for EDBs' starting price adjustment.  It was also not contrary to Part 4's purpose, nor the purpose of input methodologies. 

The Court also held that promoting certainty is not the be-all and end-all of Part 4.  Indeed, the Court noted that businesses operating in competitive markets often face considerable uncertainty.  The Court considered that Part 4 balances certainty against the Commission's role as a regulator that, ultimately, must make regulatory determinations for the long-term benefit of consumers.  It was not Parliament's intention to overburden the Commission with methodological minutiae. 

In short - regulatory certainty is important.  But so too are other factors that might advance Part 4's purpose, and sometimes these may eclipse promoting certainty.  In any case, regulatory certainty will be achieved long-term by consistency, consultation, and transparency.  The Court of Appeal decision therefore provides a more practical pathway for navigating Part 4, perhaps at the expense of regulatory certainty in the short term. 

Commerce Commission review of airport services

The Commission has also released a process and issues paper for its forthcoming review of the information disclosure regime established under Part 4 for the three major airports at Auckland, Wellington, and Christchurch. The paper sets out the Commission’s proposed process and seeks responses from any interested parties to a number of questions. Submissions are due by 29 June.

The review's statutory purpose is to look at the effectiveness of the information disclosure regime. The Commission has indicated it will undertake a detailed analysis of the airports' implementation of the regime, and particularly examine whether and how the regime has affected pricing behaviours. Although the Commission notes that it does not propose to recommend whether alternative regulation should apply to the airports, this review will undoubtedly influence the Commission in deciding whether a more "heavy-handed" form of regulation is necessary.

As Wellington Airport and Auckland Airport have recently set new charges, and Christchurch is in the process of doing so, the review is likely to focus on whether those charges are appropriate.

Some quarters may well view this review as a prelude to a full regulatory inquiry, even though the Commission is mandated by statute to carry out regular reviews of information disclosure regulation. The sort of questions the Commission is asking may give an element of credence to their views. With an ambitious timetable (a final report is due at the end of November), this is a space to watch.