First published in NZ Lawyer, 21 October 2011.

Vector's recent successful judicial review proceedings against the Commerce Commission represents the first skirmish in what is likely to be a lengthy battle surrounding the Commission's initial decisions relating to regulation under the amended Part 4 of the Commerce Act.

Challenges to the Commission's input methodology (IM) decisions were always expected and are in progress; it is ironic, therefore, that the first challenge can be viewed as a challenge about what the Commission did not decide, rather than what it did decide.

Background to the proceedings

Electricity lines businesses (ELBs) which are not "consumer owned" (as defined in the Act), such as Vector, are subject to default price path regulation (DPP). Under DPP, an ELB can only increase its prices each year by an amount equal to CPI (i.e., the rate of inflation) – X (which is currently set to 0). Because the DPP is calibrated off year-one income, if starting income is "too high" or "too low", then a price path may not result in an ELB earning a "normal return". If starting prices are too high it is said that an "excessive" return becomes entrenched via regulation.

A starting price adjustment (a SPA or P 0 adjustment) is designed to remedy this by reducing (or increasing) the starting price. Whether a SPA is needed is a matter of judgement requiring an assessment of whether returns will be "normal" over time. Such an assessment requires views to be taken on asset valuation, costs etc.

The Commission has published a draft decision proposing to impose SPAs for the 2010-2015 regulatory period. The Commission's draft decision describes the methodologies, processes and rules the Commission proposes to apply in calculating SPAs (the SPA proposal).

SPAs can have a very large impact on businesses and hence, as Clifford J correctly noted, are "in many ways the sharp end of DPP regulation". To illustrate, the indicative impact of the SPA proposal on 2012/2013 prices would see ELBs' starting prices adjusted downwards by up to 10%, while other ELBs' starting prices could be adjusted upwards in the order of 20%. However, the SPA proposal was published outside the IM process set out in the amended Commerce Act. (To put this in context, the IM process was one of the most (if not the most) significant innovations in the 2008 amendments.) IMs are defined to mean "a description of any methodology, process, rule, or matter that includes any of the matters listed in section 52T ...." Section 52T(1) lists specific matters that the Commission must publish IMs for. A SPA process is not listed. Section 52T(2) provides that IMs be set in "sufficient detail so that each affected supplier is reasonably able to estimate the material effects of the methodology on the supplier". The Act provides that the purpose of IMs is "to promote certainty for suppliers and consumers in relation to the rules, requirements, and processes applying to" regulation.

Also importantly, IMs are subject to merits review, but other Commission decisions relating to DPP are subject only to appeals on questions of law.

Vector's challenge: the Commission should have set a SPA IM

Vector's challenge was, in effect, that the scheme of Part 4 required the Commission to publish an input methodology decision for SPAs (a "SPA IM", as the Court referred to it) despite it not being specifically listed in section 52T(1).

Naturally, both Vector and the Commission made detailed submissions regarding the correct construction of the amended Part 4. However, the nub of Vector's challenge appears to have been a matter of principle, i.e., the SPA proposal was a methodology, process, rule, or matter that had a significant impact on suppliers and Parliament's intention in amending Part 4 to introduce IMs was to replace "an undesirably uncertain regulatory environment with one that would provide more certainty for regulated suppliers".

Vector also noted the significant impact of the Commission not publishing a SPA IM on its rights of appeal. If the SPA was an IM, it was subject to merits review. If it was not, the SPA was subject only to appeal on a question of law such that "the constraint on the Commission's decision making which was intended by Parliament to be provided by merits appeals against IMs would not apply as it should".

Court accepts Vector's challenge

The Court upheld Vector's challenge, holding that the Commission should have published a SPA IM. Clifford J held that "there is no question that Parliament's intention was that IMs would be significant contributors to greater regulatory certainty" but noted also that "if such an IM is not required by Part 4 then that is not additional certainty Vector can ask for".

However, as a matter of statutory construction, Clifford J then rejected the Commission's arguments that a SPA IM was not required. Clifford J reached this view notwithstanding the fact that the Commerce Select Committee had specifically considered and rejected a proposal to specifically list in section 52T(1) a SPA IM as being required.

While Clifford J acknowledged "that is clearly a factor which counts against Vector's argument that the Commission must specify a SPA IM", he was not persuaded that this was conclusive given "the context of the interpretation that I think the legislation as passed calls for". Clifford J gave three reasons:

  • First, the inclusion of section 52T(2) at the Select Committee stage (requiring sufficient detail to estimate the material effects of a methodology), provided "at least a suggestion that the decision not to include a specific reference was made, not because a SPA IM was considered unnecessary, but that in the view of officials at least, s 52T(2) in effect met that need".
  • Second, Clifford J endorsed the Court of Appeal's statements in Skycity Auckland Ltd v Gambling Commission that "it can be difficult and even inappropriate – particularly in an MMP environment – to draw firm conclusions from expressions of opinions in legislative history as to what legislation, when enacted, may mean".
  • Third, his view was that "with contentious and very technical legislation such as the Commerce Act, what may or may not have been in the minds of a Select Committee, or individual submitters, is not necessarily in my view a particularly helpful source of guidance to interpreting the legislation when passed".

Remedy

Broadly the parties were in agreement that the Commission should now consult on and publish a SPA IM. Vector acknowledged that even if it succeeded, the Commission might well confirm its SPA methodology via a further consultation process – but, importantly, such a decision would then be subject to merits review.

The decision

Regardless of the merits of each party's legal arguments, as a matter of policy the outcome is the correct one given the significant impact SPAs can have on regulated businesses (both positive and negative). That it had to progress to review proceedings to determine the question is unfortunate and reflects a failure in the initial legislation.