VECTOR LIMITED v ELECTRICITY AUTHORITY [2019] NZCA 49

VECTOR LIMITED v ELECTRICITY AUTHORITY [2019] NZCA 49 [13 March 2019]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA481/2017[2019] NZCA 49BETWEEN VECTOR LIMITEDFirst AppellantPAUL HUTCHISON, WILLIAM CAIRNS,JAMES CARMICHAEL, KAREN SHERRYAND MICHAEL BUCZKOWSKISecond AppellantsAND ELECTRICITY AUTHORITYRespondentHearing: 15 February 2019Court: Kós P, Winkelmann and Asher JJCounsel: J A Farmer QC and S M Hunter for First AppellantA R Galbraith QC and L A O'Gorman for RespondentD A Laurenson QC and J L W Wass for Commerce Commissionas intervenersJudgment: 13 March 2019 at 3 pmJUDGMENT (NO 2) OF THE COURTA The appeal is allowed in part.B Declarations are made that:(a) proposed clauses 12A.4(1)(b) and 12A.10(2) of the ElectricityIndustry Participation Code 2010 would be unlawful;(b) the Electricity Authority may not regulate quality standards as thatterm is used in pt 4 of the Commerce Act 1986; and(c) the Electricity Authority may not mandate quality standards (asabove) in any distribution agreement between electricitydistribution businesses and their customers or otherwise.C The respondent must pay the appellants one set of costs for a complexappeal on a band B basis and usual disbursements. We certify for secondand third counsel at the first hearing, and second counsel at the secondhearing.____________________________________________________________________REASONS OF THE COURT(Given by Kós P)[1] This judgment is to be read in conjunction with our judgment of 30 November.1That judgment allowed in part Vector's appeal, granting a declaration that twoclauses which the Electricity Authority proposed to introduce in amending theElectricity Industry Participation Code 2010 would be unlawful.2 The effect of thoseclauses would have been to mandate the almost complete standardisation ofdistribution agreements between distributors (line companies, such as Vector) andelectricity retailers.3 We held that the legislation did not permit the Authority toprohibit the negotiation of terms essentially collateral to standard terms mandated bythe Code.[2] That disposed of the first issue in the appeal. Our prior judgment reservedfor further evidence and argument a second issue:4Does s 32(2) of the Act prohibit the Authority from amending theCode to require distributors to offer a default UoSA (because suchamendments prescribe quality standards for distributors, a matterreserved to the Commerce Commission)? In particular:(i) is the Authority prohibited from prescribing quality standardsfor distributors, because that is a matter for theCommerce Commission; and1 Vector Limited v Electricity Authority [2018] NZCA 543 [prior judgment].2 Vector was supported by its principal shareholders, the trustees of Entrust, who are the secondappellants. We refer to them together in this judgment as "Vector".3 These agreements are known as "use of system agreements", or "UoSAs".4 In this judgment "the Act" refers to the Electricity Industry Act 2010.(ii) in setting a comprehensive set of standardised contractualterms for distributors, is the Authority prescribing qualitystandards?[3] We now have that further evidence, and those further submissions.Ultimately there was substantial consensus as to the form of declarations that shouldbe made. The Authority eventually did not oppose the revised terms of thedeclarations advanced by Vector and made by this Court at the hearing.5 Thosedeclarations on the second issue are rather different to those sought from SimonFrance J, or initially in this appeal, and reflect a measure of compromise.6Issue 2: does s 32(2) of the Electricity Industry Act 2010 prohibit theAuthority from amending the Code to require distributors to offer a defaultUoSA (because such amendments prescribe quality standards fordistributors, a matter reserved to the Commerce Commission)?[4] Section 32(2)(b) of the Act provides that the Code may not regulate anythingthat the Commerce Commission is authorised or required to regulate under pts 3 or4 of the Commerce Act.7 Vector submits that in amending the Code to prescribeterms on which the distributors offer their services, the Authority is doing what s 32says it may not do. They say the draft default agreement mandates quality standardsfor which the Commission is expressly responsible under the Commerce Act:reliability of supply, reduction in energy losses and voltage stability.[5] We will analyse this issue after setting out the relevant statutory history andframework, the judgment appealed and the submissions made before us.Statutory history and framework[6] We pick up where we left off with the statutory history and framework forIssue 1.8 It will be recalled that the Electricity Act 1992 introduced deregulation,light-handed regulation, and the prospect of more heavy-handed regulation (includingprice control) if need be. Information disclosure was an important part of that regime.5 The Authority did oppose a third declaration mooted by Vector, which the Court declined to make:see [33] below.6 Prior judgment, above n 1, at [13]–[14].7 Other than setting quality standards for Transpower and pricing methodologies for Transpowerand distributors.8 Prior judgment, above n 1, at [17]–[28].The Caygill Inquiry then recommended an increased role for theCommerce Commission, setting information disclosure regulation and targeted pricecontrol for distributors.9[7] A new pt 4A was added to the Commerce Act 1986 in 2001. It created atargeted control regime to promote efficient operation of markets directly related toelectricity distribution and transmission services.10 A screening and post-breachenquiry process was established. The Commission was empowered to impose controlon prices, revenue or quality. It is important to note that the Commission'selectricity industry-focused jurisdiction pre-dated the present legislation. At the sametime the Electricity Commission also held regulatory functions impacting on qualitystandard performance by distributors.11[8] In 2009, the earlier version of pt 4A was repealed and replaced with the presentpt 4 regime. As a consequence, distributors have been subject to price-quality andinformation disclosure regulation by the Commission since April 2010. This waseffected by the Commerce Amendment Act 2008.[9] The Electricity Industry Act was enacted later that year. It arose from therecommendations of an electricity industry-specific ministerial review led byDr Layton.12 In our prior judgment we referred to a Minister's observation in the thirdreading debate to the intended transfer of functions from the formerElectricity Commission to bodies other than the new Authority.13 The Minister ofEnergy made a similar observation in the second reading debate:14 the bill improves the governance arrangements for the electricity industry. Functions that are more sensibly performed by other bodies — such asapprovals for grid upgrades, management of supply emergencies, andpromotion of energy efficiency — are transferred to other bodies that alreadyhave a role in doing exactly those things. We are effectively taking outduplication of effort. The objectives of the authority are narrowed to thethings that it can and should be held accountable for — namely, providing for9 David Caygill, Susan Wakefield and Stephen Kelly Inquiry into the Electricity Industry(Ministry of Economic Development, Wellington, June 2000), at [135] and ch 7.10 Commerce Act 1986, s 57E (now repealed).11 Prior judgment, above n 1, at [20].12 At [21].13 At [22].14 (20 July 2010) 665 NZPD 12473.an efficient, competitive, reliable market — and do not include things thatother bodies are already legislated to do.[10] Section 32(2) of the Act, with which we are most concerned in Issue 2,provides:(2) The Code may not—(a) impose obligations on any person other than an industryparticipant or a person acting on behalf of an industryparticipant, or the Authority; or(b) purport to do or regulate anything that theCommerce Commission is authorised or required to do orregulate under Part 3 or 4 of the Commerce Act 1986 (otherthan to set quality standards for Transpower and set pricingmethodologies (as defined in section 52C of that Act) forTranspower and distributors); or(c) purport to regulate any matter dealt with in or underthe Electricity Act 1992.(Emphasis added)[11] We turn now to pt 4 of the Commerce Act. Subpart 9 applies pt 4 regulationto suppliers of "electricity lines services". These are defined in s 54C to include"the conveyance of electricity by line in New Zealand". While they do not apply toall distribution services, they apply to the distribution of electricity to retailers.Sections 54 and 54E–54G provide that all suppliers of electricity line services aresubject to information disclosure regulation. Suppliers of electricity line services thatare not consumer-owned are also subject to price-quality regulation. The definition of"consumer-owned" in s 54D requires that all control and equity-return rights (for thepurposes of the Electricity Act) in the supplier be held by customer or communitytrusts or customer co-operatives. Three-quarters of Vector's equity is held by acommunity trust, so it is not consumer-owned for pt 4 purposes. Its electricity lineservices are therefore subject to price-quality regulation.[12] Section 52 states that pt 4 provides for the regulation of price and quality ofgoods or services in markets where there is little or no competition, and little or nolikelihood of a substantial increase in competition. The purpose of pt 4 is thenspecified in s 52A(1):(1) The purpose of this Part is to promote the long-term benefit ofconsumers in markets referred to in section 52 by promoting outcomesthat are consistent with outcomes produced in competitive marketssuch that suppliers of regulated goods or services—(a) have incentives to innovate and to invest, including inreplacement, upgraded, and new assets; and(b) have incentives to improve efficiency and provide services ata quality that reflects consumer demands; and(c) share with consumers the benefits of efficiency gains in thesupply of the regulated goods or services, including throughlower prices; and(d) are limited in their ability to extract excessive profits.[13] Subpart 6 provides for "default/customised price-quality regulation". Itprovides price-quality paths that control prices charged and revenue earned by aregulated supplier. Section 53K provides that the purpose of default/customised price-quality regulation is to: provide a relatively low-cost way of setting price-quality paths forsuppliers of regulated goods or services, while allowing the opportunity forindividual regulated suppliers to have alternative price-quality paths thatbetter meet their particular circumstances.Section 53L provides for the Commerce Commission to impose default price-qualitypaths for regulated suppliers for a particular period. Suppliers may also proposecustomised price-quality paths.15[14] Section 53M(1), (4) and (5) provide that every price-quality path must specify:(a) maximum prices and/or maximum revenues that may be charged orrecovered by a regulated supplier;(b) "the quality standards that must be met by the regulated supplier"; and(c) the period for which regulation is to apply (being either four or fiveyears).15 Commerce Act 1986, section 53L(1)(b).[15] Section 53M(2) provides that the Commission may include incentives in aprice-quality path for regulated suppliers to maintain or improve quality of supply.Those may include price or revenue penalties for failure to meet the required qualitystandards, or rewards for exceeding them. They may also include consumercompensation schemes (setting minimum standards of performance and prescribedamounts of compensation for failure) and reporting requirements if a supplier fails tomeet quality standards.[16] Section 53M(3) provides that quality standards may be prescribed by theCommission in any way it considers appropriate (such as targets, bands or formulae).They may include responsiveness to consumers and (in relation to electricity lineservices) "reliability of supply, reduction in energy losses, and voltage stability orother technical requirements". By s 53N the Commission can require suppliers toprovide information as to compliance with a price-quality path (and may require thatstatement be audited). Section 53O provides that a default price-quality path mustinclude the starting prices for goods and services, the rate of price change relative tothe Consumer Price Index and the quality standards that apply during the firstregulatory period.[17] Turning now to information disclosure regulation, s 53A provides thatthe purpose thereof is to "ensure that sufficient information is readily available tointerested persons to assess whether the purpose of [pt 4] is being met". Section 53Bthen provides that every supplier subject to information disclosure regulation mustdisclose information in accordance with the terms of a "determination" issued by theCommission under s 52P. They must supply any further statements, reports,agreements, particulars or other information required in order to monitor the supplier'scompliance with that determination. Section 53C sets out the required content of sucha determination. A determination may include, but is not limited to, those matters setout in s 53C(2), which provision includes financial statements, asset values, prices andpricing methodologies, contract terms and conditions, and the like.[18] Finally, s 54V makes provision for the interface between the two Acts. Thatprovision was inserted by s 156 of the Act. It is part of the 2010 statutory schemecreated by the Act. The Authority is required to consult with the Commission beforeamending the Code in a manner that is likely to affect the Commission in itsperformance of its pt 4 powers. It must advise the Commission of any changeincreasing costs to distributors (which might therefore affect the Commission's price-quality path calculations).16 The Commission is not required to consult the Authority.Rather, it must take into account matters within the Authority's jurisdiction, includingany provision of the Code that affects pricing methodologies applicable to distributors,and performance requirements and quality standards specified by the Authority forTranspower.17Judgment appealed[19] The argument made before the Judge, and before us, was that the default UoSAgenerally infringes the prohibition in s 32(2)(b) of the Act.18 The Judge rejected thatsubmission. He found that the functions of the two bodies overlapped, at leastpotentially.19 It was clear Parliament had given the Commission a role involving theimposition of price-quality regulation: "[c]ontrolling price inevitably involves alsoregulating performance standards and therefore there is a potential overlap infunctions." 20 It was not however the intent of Parliament to cede the entire area to theCommission. Section 42(2)(f) of the Act clearly also gave the Authority "the task ofstandardising distribution contracts".21 Moreover, the Authority also had a role inregulating service performance by retailers, unlike the Commission. This theAuthority would logically do via the UoSA, as s 42(2)(f) contemplated.22[20] The Judge concluded that each statutory entity had a complementary role inrelation to "performance services":23The Authority and the Commission both accept specific clauses required bythe Authority may encroach on the Commission's function, and therefore beimpermissible, but none has been identified by the plaintiff, so analysis is notneeded.16 Section 54V(3).17 Sections 54V(4)–(6).18 Vector Ltd v Electricity Authority [2017] NZHC 1774 [High Court judgment], at [82]. As theJudge noted at n 52 the appellants did not identify specific clauses they say encroach onthe Commission's domain.19 At [84].20 At [84].21 At [85].22 At [89].23 At [90].Agreed facts[21] Ahead of the resumed hearing the parties filed a statement of agreed facts, andcertain additional affidavit evidence. In light of the consensus that emerged at thehearing it is unnecessary for us to refer to the latter material in this judgment.[22] Prior to enactment of the present Act, the Electricity Commission existed inplace of the Authority. It had some limited powers to set quality standards fordistributors, but never exercised them.24 The Commerce Commission, on the otherhand, did do so - under the previous pt 4A regime. It set price path thresholds andquality thresholds, and it had the power to impose quality standards upon a declarationof control under s 70. The latter power was never used, however.[23] Under the present Act, the Authority again has never set quality standards fordistributors. The Commerce Commission however has set quality standards fordistributors in price-quality path determinations made under pt 4. These have involvedan annual reliability assessment, based on system interruption indices, which measurethe duration and frequency of interruptions. And, in one instance, a resilienceassessment based on the earthquake resilience of a particular distributor'sinfrastructure. As we note subsequently, the Commission has recently indicated it maybroaden its quality standard-setting remit.Discussion[24] In consequence of the exchange of evidence and submissions, including veryhelpful submissions from Mr Laurenson QC and Mr Wass, for the Commission,intervening, the disagreement between the parties narrowed considerably. As a resultit is sufficient to make six points before recording the declarations the Court made atthe hearing.[25] First, the Authority (in light of our prior judgment) has undertaken further workto develop its proposed standard distribution agreement. That development, in its24 Electricity Act 1992, s 172D(10) and (11).current form, would permit some collateral terms, the substantive content of whichwould not be regulated by the Code.[26] Secondly, it is now common ground that while the Commission is required toregulate quality standards, the effect of s 32(2)(b) is not to wholly exclude theAuthority from mandating some quality standards affecting distributors. It mayregulate quality issues that fall outside the purposes of pt 4 of the Commerce Act. Thatconsensus falls some way between the prior stances of the parties. Vector had earliersubmitted that the Authority could not prescribe quality standards for distributors atall; the Authority had submitted that the regulatory regime was a shared one, and thatit could specify quality dimensions of UoSAs to the extent the Commission was notempowered to do so.[27] Thirdly, it follows that if there is any dispute between the parties under Issue 2,it concerns the undefined expression "quality standards" in the Commerce Act –particularly in s 53M. The remainder of this discussion addresses that question.[28] Fourthly, the breadth of the "quality standards" the Commission may prescribepursuant to s 53M(3) is notable: expressly without limitation, it may includeresponsiveness to consumers, reliability of supply, reduction in energy losses, andvoltage stability "or other technical requirements". We have noted, at [23], the limitedrange of what may be termed quality standards thus far prescribed by the Commission.They focus on reliability. However in a November 2018 issues paper the Commissionhas indicated that it is considering prescribing quality standards well beyond merereliability. These include a number of more consumer-focused dimensions: serviceinterruption response time, provision of information to consumers regarding powercuts and programmed shutdowns, and new connection application processingstandards.[29] Fifthly, while the functional scope of "quality standards" is cast broadly by theAct, there are two important limitations. The first is mechanistic. As Mr Laurensonput it for the Commission, it is only authorised to regulate quality by utilising theparticular regulatory tools assigned to it. It does not seek to (and probably could not)directly prescribe contractual terms between distributors and retailers in the way that(as we have held in our prior judgment) the Authority can. The second and moresubstantial limitation is purposive. The Commission's power to prescribe qualitystandards is itself prescribed and circumscribed by defined legislative purposes.Section 52A informs that power by stating the relevant pt 4 purpose as to:Promote the long term benefit of consumers in [monopolistic markets] bypromoting outcomes produced in competitive markets such that suppliers have incentives to improve efficiency and provide services at a quality thatreflects consumer demands.Section 53K relevantly states the purpose of sub-pt 6 of pt 4 regulation to be to provide"a relatively low cost way of setting price-quality paths", while allowing theopportunity for customised paths that better meet particular supplier circumstances.[30] Sixthly, as Mr Laurenson acknowledged, these purposes are not coterminouswith the purposes governing the Authority's functions. By way of example, theCommission has no mandate by s 52A to promote competition in the downstream retailmarket. As we noted in our prior judgment, greater standardisation of distributionagreement terms may be expected to lower barriers to competition in that market andencourage new network arrangements.25[31] It follows from this discussion that two of the declarations proposed by Vectorwere acceptable to the Court, and were made at the hearing on 15 February 2019.They are:(a) The Electricity Authority may not regulate quality standards as thatterm is used in pt 4 of the Commerce Act;(b) The Electricity Authority may not mandate quality standards as thatterm is used in pt 4 of the Commerce Act in any distribution agreementbetween distributors and their customers or otherwise.[32] Declarations in those terms were supported by the Commission, and notopposed by the Authority (although Mr Galbraith QC expressed some reservations asto their practical utility). Time will tell as to the last point, but for present purposes25 Prior judgment, above n 1, at [48].their practical utility is to resolve the litigation between the parties in terms consistentwith legal principle and enable them to move forward.[33] A third declaration was sought by Vector, although not ultimately pressed uponus:(a) The Default Distribution Agreement proposed by the ElectricityAuthority in 2016 that was the subject of these proceedings would beunlawful if adopted by the Authority to the extent that it proposed tomandate quality standards (as above).We declined to make that declaration for three reasons. The first was that Vector hadnot made a clause-by-clause attack on the draft distribution agreement before eitherSimon France J or this Court. The second was that the Authority proposessubstantially to modify that draft agreement. And the third is that the declaration addsnothing of utility to the other declarations.Conclusion[34] For these reasons we made the declarations stated at [31].Costs[35] Bearing in mind the facts that the appellants' success is partial and that theyare represented by the same solicitors, we order that the respondent pay the appellantsone set of costs for a complex appeal on a band B basis and usual disbursements.We certify for second and third counsel at the first hearing, and second counsel at thesecond hearing.Result[36] We now set out the result of the appeal determined by both the prior judgmentand this judgment.[37] The appeal is allowed in part.[38] Declarations are made that:(a) proposed clauses 12A.4(1)(b) and 12A.10(2) of the Electricity IndustryParticipation Code 2010 would be unlawful;(b) the Electricity Authority may not regulate quality standards as that termis used in pt 4 of the Commerce Act 1986; and(c) the Electricity Authority may not mandate quality standards (as above)in any distribution agreement between electricity distributionbusinesses and their customers or otherwise.[39] The respondent shall pay the appellants one set of costs for a complex appealon a band B basis and usual disbursements. We certify for second and third counselat the first hearing, and second counsel at the second hearing.Solicitors:Gilbert/Walker, Auckland for AppellantsBuddle Findlay, Auckland for Respondent