Following recent Commerce Commission decisions, significant media attention has been focused on developments in the price regulation applying to certain sectors (particularly electricity and gas). However, as a result of ongoing litigation, there remains significant uncertainty as to where this price regulation will actually end up. We take a look below at some of the major developments, which are providing a bumpy road to setting price paths for these regulated entities.

Electricity distribution and gas pipeline services input methodologies

By way of recap, the Commerce Commission sets input methodologies (IMs) applicable to goods and services regulated under Part IV of the Commerce Act 1986 (the Act). Part IV applies (to varying extents) to what tend to be natural monopolies, such as electricity distribution businesses (EDBs), gas distribution and transmission pipelines (GDBs) and specified airports.

EDBs (apart from those that are community owned) and GDBs are subject to a default price-quality path and information disclosure. The price-paths set the maximum average prices or total allowable revenues, along with service quality standards.

The Commission's setting of IMs has been beset by a series of legal challenges, some of which are still ongoing. As a result, it could be well into 2013 before consumers and businesses have any certainty as to the actual IMs which will apply (or even 2014/2015 should anyone appeal the merits review decision).

Vector judicial review

The court action started when Vector sought judicial review of the proposed reset of the price paths. This was heard in the High Court in August 2011. As described in this column in October last year (Back to the start for starting price adjustments?), the High Court's key finding was that the Commission must determine the stand-alone starting price adjustment (SPA) IM. Because the price path is calibrated off year-one income, if starting prices are too high, an ‘excessive' return becomes entrenched via regulation (or equally if the starting price is too low the firm will face less than 'normal' returns). A SPA is designed to remedy this by reducing (or increasing) the starting price.

The Commission appealed this decision. In June 2012 the Court of Appeal upheld the appeal and ruled the Commission was not required to determine a SPA IM. The Court noted that the statutory language did not provide for such a requirement and further that the legislature had specifically considered, but rejected, including it. However, this part of the story is not yet over: in October 2012 the Supreme Court heard Vector's appeal and a decision is pending.

The Commission was due to determine the price paths by September 2011 but the court case has substantially delayed that. If the Supreme Court sides with Vector, the process will be extended even further while the Commission determines a SPA IM. This would involve lengthy consultation (although it has already done some work on this) and may mean a reset of the price paths again (if the price paths would have been materially different had the IM been in place). That IM itself would also be subject to a merits-based appeal.

Judicial review on Commission consultation process

Vector was not alone in seeking judicial review. A number of parties (including Vector, Transpower and a number of airports) also sought review of the Commission's processes in reaching IM determinations. The parties argued the Commission should have consulted on a sector-specific (rather than cross-sector) basis.

In December 2011, the High Court ruled against the parties, (apart from Transpower which was partly successful in requiring the Commission to consult again on one aspect). This decision has not been appealed.

Merits review

It doesn't end there: the judicial review proceedings were something of a side-show to the main event, being the merits review on the IMs determined by the Commission in December 2010. A number of parties (again including Vector, Transpower and a number of airports) have recently put their cases to the High Court.

The appellants attacked what they see as "flawed methodologies", such as the assumed asset values and appropriate costs of capital. While a decision on these arguments is not expected any time soon, the outcome is critical for the wider process. The case could result in an amended IM or even one that is entirely new. Further, the appellants may be able to "claw back" through higher prices any under-recovery incurred through following the price-path under the previous IM.

But, the decision is unlikely to suit all of the parties involved. The parties have much at stake, as IMs impact their allowable revenue and therefore their customers' costs, so further appeals on points of law are likely.

Commission's process continues, subject to court decisions

Notwithstanding the various court proceedings, the Commission remains business as usual in setting the default price paths for electricity and gas. This is partly due to statutory deadlines and partly a desire to reach a landing on these issues prior to the next pricing year (beginning 1 April). Much media attention has been given to the Commission's draft price paths and estimates of the changes they will cause in prices to customers. For example, the Commission estimated in a recent draft determination that Vector's gas customers could receive an average saving of $4.60 a month as a result of the 25% decrease in allowable revenue it proposes. Of course, these paths remain subject to the outcomes of the current court action (and any further independent court action).

So, while the Commission has continued to progress its regulatory processes under Part IV, if any of the current action is successful it could see yet more delay in achieving the certainty for businesses and consumers that Part IV seeks to achieve. Watch this space.

Addendum

A decision was determined on Vector’s judicial review appeal to the Supreme Court the day before this article was released. The Supreme Court determined to dismiss Vector’s appeal and upheld the Court of Appeal decision described in our article. The overall result is that the NZCC does not have to provide a SPA IM for electricity distribution and gas pipeline services.

First published in NZLawyer, Issue 197, 16 November 2012.