Court affirms Commission's electricity thresholds

Supreme Court affirms Commission's electricity threshold decisions

The Supreme Court has dismissed a challenge by Unison Networks Limited to the Commerce Commission's thresholds for large electricity lines businesses. The Court found that the Commission acted lawfully in setting both initial and revised thresholds.

Commerce Commission Chair Paula Rebstock welcomed today's decision. "The Supreme Court has made clear that the thresholds regime for electricity distribution businesses is robust and that the Commission's approach is consistent with the purpose of Part 4A of the Commerce Act," Ms Rebstock said. "Today's judgment removes the uncertainty created by Unison's challenge."

The Supreme Court upheld the Court of Appeal's findings in respect of the current thresholds. The Court of Appeal stated that the Commission's current thresholds are "a means of promoting the statutory objectives because, over time, businesses will be constrained in their ability to extract excessive profits and there will be associated incentives to improve efficiency in order to make the same revenue go further".

The Court of Appeal had also agreed that the thresholds provide incentives for businesses to maintain the quality of services while reducing prices. Consequently, consumers will share in the efficiency gains through the lower prices that will result.

In administering the regulatory regime the Commission aims to ensure distribution companies are constrained from earning excess profits, face incentives to invest appropriately and share efficiency gains with consumers. "Today's Supreme Court judgment brings certainty and continuity to ensure consumers can continue to benefit from the regime," Ms Rebstock said. "The Commission is hopeful the industry will now take note of the Supreme Court's findings that the regime is consistent with the Act and that there is a strong public interest in the regime being implemented."

"The Commerce Commission will continue to ensure that all large electricity lines companies are subject to the scrutiny and oversight that Parliament intended when the regime was introduced."

Unison has been ordered to pay the Commission costs of $25,000.

Background

Unison Networks. Unison supplies electricity consumers in the Hawke's Bay, Rotorua and Taupo regions. The company is 100% owned by the Hawke's Bay Power Consumers' Trust, which acts on behalf of the consumers connected to Unison's distribution network in Hawke's Bay.

Electricity distribution services. New Zealand's electricity industry has five parts: generation, wholesaling, transmission, distribution and retailing. Distribution services take electricity from the national grid and distribute it to homes and businesses. Unison's electricity distribution charges comprise around 20 to 40% of the average power bill.

The regime. The Commerce Commission administers regulation of 28 electricity distribution companies and Transpower under Part 4A of the Commerce Act. The companies are regulated because they face limited competition, and without regulation could charge too much for their services and earn excess profits.

The companies are regulated by having thresholds set for them that govern the quality of services they deliver and/or how much they can raise their prices by each year. The price thresholds are linked to the Consumer Price Index rate of inflation with the current five-year regulatory period lasting from 1 April 2004 to 31 March 2009. Unison has breached the Commission's thresholds in each year from 2003-2006.

Judicial review proceedings. Unison issued judicial review proceedings against the Commission in the High Court on 17 May 2004, claiming that the Commission's thresholds and its approach in inquiring into Unison's threshold breaches were unlawful. On 28 November 2005, the High Court dismissed both of Unison's challenges. In his judgment, Justice Wild indicated he was satisfied that the Commission had at all times sought to formulate a regime giving effect to the legislation's purpose—to promote the efficient operation of markets directly related to electricity distribution services.

On 21 December 2005, Unison appealed the first part of the High Court's judgment relating to the lawfulness of the Commission's thresholds. The Court of Appeal found that the initial thresholds had been set in breach of the Act's requirements but that the revised thresholds had not. By a majority the Court of Appeal refused to grant relief in respect of the unlawfulness of the first threshold and dismissed the appeal.

Control. If companies breach price or quality thresholds set for them, the Commission can consider whether to impose control on their electricity services. However, it must first seek the views of interested parties on its intention to do so.

Administrative settlements. As an alternative to control being imposed, the company can reach an administrative settlement with the Commission. This usually involves the Commission and the company agreeing to pricing levels and quality measures for a period of up to five years. The result is that prices and quality are maintained at levels the Commission considers appropriate for the long term interests of consumers, without the need to impose control, which can be intrusive and costly.

Intention to declare control of Unison. Since the targeted control regime was initiated in 2001, the Commission has published its intention to declare control in relation to Unison Networks Ltd, Transpower NZ Ltd, and Vector Ltd. In its intention to declare control of Unison, the Commission outlined its preliminary findings that Unison was earning significant excess profits, with the greatest impact on consumers in Rotorua and Taupo. On 1 April 2006, Unison reversed its most recent distribution price rises to Rotorua and Taupo consumers, with consumers saving, on average, about $40 per year in Rotorua and $46 in Taupo. In response, the Commission delayed its decision whether to place Unison's electricity distribution services under control. This delay gave Unison time to prepare an administrative settlement offer for the Commission.

Unison's administrative settlement offer. On 9 November 2006, the Commission released its consultation package on an administrative settlement offer proposed by Unison as an alternative to the imposition of regulatory control. Following consultation, the Commission accepted Unison's settlement on 11 May 2007. As part of the settlement, Unison reduced its average electricity line charges on 1 December 2006 and will comply with the Commission's existing price path threshold for the remainder of the current five-year regulatory period. Unison also rebalanced its charges to customers in its different regions in two stages, with the first stage having been completed on 1 December 2006 and the second on 1 April 2007. The Commission concluded that, as well as limiting excess profits and rebalancing prices between consumers, the settlement ensures Unison has incentives to be more efficient. As a result, the Commission decided that control of Unison's distribution services is not necessary.

ENDS

© Scoop Media