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Electricity Lines Businesses

24 March 2005

Electricity Lines Businesses: High Court dismisses claims against threshold decisions and consultation process

The High Court in Wellington yesterday dismissed claims from four electricity distribution businesses that the Commerce Commission’s consultation process for setting the thresholds was flawed and the threshold decisions were unreasonable. The Commission set thresholds as part of the targeted control regime for electricity lines businesses under Part 4A of the Commerce Act.

In her judgement, Justice France observed that the Commission’s consultation process was open and wide-ranging, and that at some point “the Commission has to be able to say, ‘enough’, and move on and make a decision.” She also noted that it is relevant that the thresholds are a screening mechanism to trigger further inquiry, and do not necessarily lead to control.

The four distribution businesses provide rebates to customers. They argued that in comparing their performance with other distribution businesses that do not provide rebates, the Commission’s approach to the treatment of tax was unreasonable. Justice France, however, found that “the economics advanced on the Commission’s behalf are reasonably obvious as a matter of commonsense”. She also highlighted that the Commission is an expert body with a broad discretion and mandate.

Commission Chair Paula Rebstock welcomed the judgement, which responded to the first legal challenge to the Commission’s threshold decisions and consultation process. “The Commission is pleased that the High Court recognised the relationship between the Commission’s approach and the statutory purpose—namely, to promote the efficient operation of markets for distribution and transmission services.”

“Justice France also acknowledged the Commission’s view that, in assessing the performance of rebating distribution businesses, some attention has to be paid to the overall efficiency of the business, not just to the tax efficiencies,” said Ms Rebstock. “The Commission remains concerned about the wider efficiency effects that arise from the lack of transparency associated with rebates, compared with keeping prices lower in the first place.”

Background

The Judicial Review Proceedings

On 1 March 2004, Electra Limited, The Lines Company Limited, Centralines Limited, and Counties Power Limited, issued judicial review proceedings against the Commission in the High Court in Wellington. There were three causes of action, the first alleging flaws in the Commission’s consultation process leading up to the decisions on the thresholds; the second a failure to have regard to relevant considerations; and the third based on unreasonableness. The Hearing was held from 30 November to 1 December 2004, and the judgement issued on 23 March 2005. Justin Ellen France dismissed all parts of the plaintiffs’ claim and awarded costs to be paid to the Commission.


The Thresholds

Part 4A of the Commerce Act 1986, which commenced on 8 August 2001, establishes, among other things, a targeted control regime for the regulation of large electricity lines businesses (distribution businesses and Transpower). The purpose of the targeted control regime, as set out in section 57E of the Commerce Act, is to promote the efficient operation of markets directly related to electricity distribution and transmission services through targeted control for the long-term benefit of consumers by ensuring that suppliers–

(a) are limited in their ability to extract excessive profits; and

(b) face strong incentives to improve efficiency and provide services at a quality that reflects consumer demands; and

(c) share the benefits of efficiency gains with consumers, including through lower prices.

As part of the targeted control regime, the Commission is required to set thresholds and assess the performance of electricity lines businesses against those thresholds. If one or more of the thresholds are breached by an electricity lines business, the Commission could further examine the business through a post-breach inquiry and, if required, control their prices, revenue or quality. In effect, the thresholds are a screening mechanism to identify lines businesses whose performance may require further examination and, if required, control by the Commission.

On 31 March 2004, after extensive consultation, the Commission set the thresholds applying to distribution businesses for a five year period from 1 April 2004. It was those decisions, and the consultation process leading to those decisions, that were the subject of the High Court judgement issued yesterday.

ENDS

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