Court of Appeal confirms decision to control Powerco’s and Vector’s gas pipeline services

(LAWFUEL) – The Court of Appeal has dismissed a challenge by Powerco Limited to the Commerce Commission’s 2004 recommendation to control gas pipeline services supplied by Powerco Limited and Vector Limited. The Court also dismissed Powerco’s challenge to the Minister of Energy’s subsequent decision to impose control. The Court found that, in recommending price control, the Commission’s interpretation of the relevant regulatory provisions in the Commerce Act was “the correct approach”.

Commerce Commission Chair Paula Rebstock welcomed the decision noting that, in his judgment, Justice Robertson concluded that the “Commission was transparent and consistent in its evaluative methodology, and its reasoning was sound.”

“Without price control, monopolies like Powerco can potentially overcharge consumers,” said Ms Rebstock. Powerco had argued that any such ‘wealth transfers’ from price control should not have been taken into account by the Commission in making its recommendations to the Minister.

“The Court confirmed the Commission’s view that reducing monopoly profits through lower prices is an obvious and significant benefit to gas consumers,” Ms Rebstock said. “Gas consumers have been receiving such benefits since October 2005, when the Commission required Powerco and Vector to lower their average gas pipeline prices by 9% and 9.5%, respectively.”

Ms Rebstock emphasised that the Commission had also taken into account wider factors, such as the ability for gas pipeline businesses to make efficient investments. The Court noted that it was reassuring that the Commission and the Minister were aware of the broader economic impacts of imposing control and had assessed those impacts against the interests of consumers.

Background

Powerco Limited. Powerco is New Zealand’s second largest natural gas distribution company, representing 46% of New Zealand’s gas connections and serving the central and lower North Island regions.

Judicial review proceedings. Powerco (and Vector) challenged the Commerce Commission’s recommendation to the Minister of Energy, as contained in the Commission’s final report dated 29 November 2004, to impose price control on the gas pipeline services supplied by Powerco and by Vector (in its Auckland gas network only). The central issue in the proceedings was whether it was lawful for the Commission to value ‘wealth transfers’ as part of its cost-benefit analysis when determining whether control may or should be imposed. Wealth transfers are the consequences of the reduction in the price paid by acquirers of gas pipeline services as a result of the removal of Powerco and Vector’s monopoly rents. Powerco and Vector also challenged other components of the Commission’s cost-benefit analysis, including the treatment of tax and the allocation of common costs, as well as the Commission’s process.

Justice Wild heard the judicial review proceedings in the High Court from 16-24 November 2006. On 24 December 2007, the High Court dismissed all the challenges made by Powerco and Vector. In his judgment, Justice Wild found that the purpose statement of the Commerce Act in section 1A does not apply to the regulatory provisions in Part 4 of the Act, because Part 4 does not have the purpose of promoting competition. Rather, it provides for control in situations where effective competition is absent. Justice Wild also found that the Commission was entitled to value wealth transfers in deciding whether control may be imposed under the Commerce Act.

Powerco appealed the High Court’s judgment in respect of valuing wealth transfers. The appeal was heard in the Court of Appeal on 24 July 2008 by Justices William Young P, Robertson and Ellen France. The judgment on 11 August 2008 dismissed Powerco’s appeal.

Provisional and final gas authorisations. The Commission made a provisional authorisation involving price reductions in October 2005. The Commission is considering offers of undertaking made by Powerco and Vector while continuing to work towards making its final decisions for the final authorisation.

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