Commerce Commission v Powerco Limited CA123/06

[2006] NZCA 484

IN THE COURT OF APPEAL OF NEW ZEALAND

CA123/06

BETWEEN  COMMERCE COMMISSION First Appellant

ANDTHE ATTORNEY-GENERAL Second Appellant

ANDPOWERCO LIMITED First Respondent

ANDVECTOR LIMITED Second Respondent

Hearing:         19 and 20 September 2006

Court:            Glazebrook, Robertson and Ellen France JJ Counsel:  R A Dobson QC and D J Boldt for First Appellant

W G Liddell for Second Appellant
T C Weston QC and V L Heine for First Respondent
J A Farmer QC and G A Hughes for Second Respondent

Judgment:      9 November 2006         at 10 am

JUDGMENT OF THE COURT

A        The appeal is allowed.

B        The cross appeal is dismissed.

CThe first appellant  is entitled to costs of $9,000 plus usual disbursements from the respondents.  There is no order for costs in relation to the

second appellant.

COMMERCE COMMISSION AND ANOR V POWERCO LIMITED AND ANOR CA CA123/06  9 November

2006

REASONS OF THE COURT

(Given by Ellen France J)

Table of Contents

Introduction   [1] Issues   [6] The pleadings   [7] Discovery                 [12] (i)  Documents relating to the transfer cost ratio  [16]

(ii)      Documents relating to matters in Ms Rebstock’s affidavit             [24] Cross-examination  [30] (i) Ruling as to cross-examination of experts  [31]

(ii)      Ruling as to cross-examination of Commission chairperson         [45]

Results and costs  [54]

Introduction

[1]      Powerco Limited and Vector Limited, the respondents, are gas distributors. They buy gas from producers/wholesalers and on-sell it to retailers.   The retailers then often bundle gas with electricity and sell the combined services to consumers.

[2]      In April 2003 the Minister of Energy asked the Commerce Commission, the first appellant, to report to him on whether price control should be imposed on gas distribution under Part 4 of the Commerce Act 1986.  The Commission undertook an inquiry into the matter and, on 29 November 2004, reported to the Minister that price controls may and should be imposed on Powerco and Vector in terms of ss 52 and 56 of the Commerce Act.

[3]      The Minister in turn recommended that an Order in Council be promulgated to impose price control and on 28 July 2005 price control was introduced via the Commerce (Control of Natural Gas Services) Order 2005 (SR 2005/213).

[4]      Powerco and Vector have brought judicial review proceedings challenging the Commission’s decision and that of the Minister.   In the course of those proceedings,  Powerco  sought  further  discovery  and  both  respondents  sought  to

cross-examine some of the Commission’s experts who have given evidence by way of affidavit.   Powerco also sought leave to cross-examine the chairperson of the Commission.

[5]      In  a  judgment  delivered  on  9  June  2006,  Wild  J  dismissed  Powerco’s application for further discovery and granted leave to cross-examine the experts and the     chairperson     of     the     Commission:     HC WN CIV 2005-485-1066     and CIV 2005-485-1220.    The  Commission  appeals  against  the  decision  on  cross- examination and Powerco cross-appeals on the discovery issue.   We deal with discovery first because the discussion on that is relevant to the questions about cross-examination.

Issues

[6]      The appeal raises the following issues:

(a)      Did the Judge err in the approach to discovery?

(b)Did the Judge apply the right test in determining whether to grant leave to cross-examine?

The pleadings

[7]      Powerco’s pleadings raise  five causes  of  action  against  the  Commission. Three of these are claims the Commission has acted unlawfully and/or unreasonably. Two of the causes of action raise process type claims: failure to give any or adequate reasons, and failure to consult.

[8]      The first of the three lawfulness/reasonableness causes of action relates to the cost-benefit analysis undertaken by the Commission.   It is common ground that a cost-benefit analysis is necessary but Powerco challenges the way the Commission approaches its analysis under ss 52 and 56 of the Commerce Act.  We return to some of the detail of this challenge when we consider discovery.

[9]      The other two lawfulness/reasonableness causes of action challenge aspects of  the  Commission’s  analysis  of  Powerco’s  business.  In  particular,  Powerco  is critical of the Commission’s treatment of taxation in its cost-benefit analysis and of the basis on which the Commission made adjustments to Powerco’s common costs (those shared between Powerco’s gas and electricity businesses).

[10]     Vector’s statement of claim similarly challenges the Commission’s approach to the cost-benefit analysis and the Commission’s treatment of income tax factors in its modelling.  In addition, Vector says the Commission erred in combining historic data with projections in determining whether Vector could continue to earn excess returns over the relevant period.  Finally, Vector says the Commission did not give proper reasons for its conclusions on key issues.

[11]     Both respondents also challenge the Minister’s decision but that challenge is not relevant at this point.

Discovery

[12]     The appeal in relation to discovery concerns documents dealing with three topics:    the  transfer  cost  ratio;  the  weight  placed  on  excess  returns;  and  the importance of the threat of control.  The latter two topics can be dealt with together because Powerco’s application in relation to both of those topics arose out of statements made by Ms Rebstock in her affidavit in the proceedings.   All of the documents for which discovery is sought are internal to the Commission.

[13]    Some reference to the history of Powerco’s application for discovery is necessary.   Powerco made an initial application for further discovery which was unsuccessful:  MacKenzie J HC WN CIV 2005-485-1066 and CIV 2005-485-1220

10 March 2006.  There was no appeal from that decision.  Powerco, after amending its pleadings, then made a further application for discovery.   That application was dealt with by Wild J in the decision under appeal. (Vector also made a more limited application for further discovery but that is not relevant now.)  The Commission did not oppose Wild J granting Powerco leave under r 262 to bring a second discovery application so that it could be dealt with on its merits.  Leave was granted.

[14]     The Commission in its written submissions questioned the ability of Powerco to challenge the correctness of MacKenzie J’s decision given there was no appeal from that decision.   However, in argument before us, Mr Dobson QC for the Commission accepted that there is no question of jurisdiction.

[15]     Powerco, on the other hand, is critical of Wild J’s reliance on the earlier decision of MacKenzie J.  Powerco says Wild J had to deal with the matter afresh. Wild J in his decision does make observations which suggest that he may have treated MacKenzie J’s views as conclusive on some issues.  But, having said that, it is plain from the decision overall that the Judge has considered these matters for himself.  The issue is therefore whether his approach was right.  On that, there is no dispute between the parties as to the principles applicable.  Relevance is determined in accordance with the “Peruvian Guano” test on the basis of the issues raised by the pleadings:  M v L [1999] 1 NZLR 747 (CA) and New Zealand Rail Ltd v Port Marlborough New Zealand Ltd [1993] 2 NZLR 641 (CA) at 644 respectively.

(i) Documents relating to the transfer cost ratio

[16]     Taking first the documents relating to the transfer cost (or efficiency loss)

ratio, Powerco sought:

documents, including internal emails, internal memoranda, minutes of meetings, notes, drafts of documents and correspondence, relating to [the Commission’s] application of the “transfer cost ratio” … and in particular as to the ratio at which the Commission would have a “concern”.

[17]     The background to this part of the application is that the Commission in considering s 56 of the Commerce Act (whether control should be recommended) looked at the size of the company’s recoverable excess returns relative to the net public benefit.  This comparison is described as the transfer cost or efficiency loss ratio.  For some of the companies the Commission evaluated, it decided that the size of the negative net public benefit was of concern relative to the excess returns that could be recovered.   The Commission’s written submissions give the example of NGC Holdings - Transmission for whom the Commission concluded that a transfer cost ratio of 30% was a matter of concern and so a reason against control.   For

Powerco, the transfer cost ratio was 17% and the Commission decided that this was not of concern.

[18]     Powerco in its pleadings (the first cause of action) says the transfer cost ratio was both an irrelevant consideration, and arbitrary because there is no principled basis upon which the Commission can decide the point at which the ratio becomes of “concern”.    It says that, regardless of the level of recoverable  excess  returns  a company might earn, control under Part 4 of the Commerce Act may not be imposed unless the net public benefit of control is positive.  On this analysis, any comparison between excess returns and the net public benefit was unlawful.  Powerco also pleads that the Commission acted unlawfully or unreasonably in determining a transfer cost ratio of 17% was not a matter of concern.   Finally, in its fourth cause of action dealing with the adequacy of reasons, Powerco pleads that the Commission failed to give any or adequate reasons in relation to, amongst other matters, the rationale for and the operation and materiality of the transfer cost ratio.

[19]     Powerco argues that documents analysing why a certain level of efficiency loss to the economy was acceptable but another not, will be very relevant in deciding whether the Commission (and the Minister) erred.

[20]     Wild J gave two reasons for declining to order discovery of these documents. The first reason reflected the state of the pleadings.   At that stage, Powerco’s challenge was to the Commission’s entitlement to compare the net public benefit and the net acquirers benefit at all rather than the threshold at which the ratio would become a point of concern.

[21]     The  second  reason  was  that  Wild  J  accepted  MacKenzie  J’s  view  the documents were internal deliberative material of the Commission and not discoverable.  MacKenzie J’s approach at [21] was that whether or not an error of law had occurred “will need to be determined on the basis of the [Commission’s] report”.  The “tests which the Commission has used, the way it has developed them, and the conclusions which it draws from them” are in the report.  MacKenzie J said it would be for the Court to decide whether the Commission’s approach was correct in law.

[22]     Powerco’s argument is that neither of these reasons can stand in light of the amended pleadings.

[23]     We consider that Wild J was right to decline to order further discovery.  The Commission’s role under s 56 is to report to the Minister on whether or not control should be imposed.   The proper focus of judicial review is on the Commission’s report because that reflects the Commission’s decision and its decision making process.   What went before that is not likely to be relevant to show that the Commission’s decision was unreasonable when made.   The observations of this Court in ENZA Ltd v Apple and Pear Export Permits Committee [2001] 3 NZLR 456 (CA) per McGrath J at [22] are accordingly apt:

In the present case we were satisfied that … the committee had put its position sufficiently before the Court to enable the issues raised by ENZA in its proceedings to be properly addressed by the High Court.  The record of its deliberative material, while technically relevant in terms of discovery principles was not in our view of a nature likely to inform the Court materially on the reasons for the committee’s decisions, as opposed to the dynamics of how it got to them.

(ii)     Documents relating to matters in Ms Rebstock’s affidavit

[24]     Ms Rebstock in her affidavit deposes to two concerns of the Commission relating to the earning of “excess returns”.  Powerco accordingly sought discovery of documents:

relating to the basis of the [Commission’s] belief, referred to in the affidavit of [Ms] Rebstock … that:  “monopolies earning excess returns would never, or virtually never, be controlled under Part 4 if [net public benefit] were the sole test”.

[25]     Powerco also seeks documents concerning Ms Rebstock’s comment in her affidavit that:

there is a concern at long run excess returns, where they are not able to be dissipated or competed away by new entrants.

[26]     The  point  made  by  Powerco  is  that  neither  of  these  comments  reflect reasoning spelt out by the Commission in its report.   Rather, Ms Rebstock is advancing a new justification for the Commission’s approach to valuing wealth transfers.  Powerco’s first cause of action will entail consideration of whether or not

wealth transfers are a “benefit” that can properly be taken into account in assessing whether control may or should be imposed.   Powerco submits this underlies its argument that the Commission (and the Minister) have become “unduly fixated” on removing excess returns “at almost any cost”.

[27]     Powerco’s application for discovery of documents relating to the issue of threat of control are in the same category.  Ms Rebstock in her affidavit says that the threat of control:

will never be a major consideration; the Commission would never allow it to tip the scales, in terms of a decision to recommend control, in a finely- balanced case.

[28]     Powerco contrasts this statement with material in the Commission’s report and in the Minister’s materials and says Ms Rebstock now seeks to downplay this aspect.  Powerco says it needs discovery so it can test this apparent conflict.

[29]     Wild J’s response to the application as it related to both excess returns and the threat of control was that Ms Rebstock’s statements were not in issue.  Rather, the issue was the correctness in law of the Commission’s interpretation of the Act. We agree.  That approach is consistent with Mr Weston QC’s acceptance on behalf of  Powerco  that  interchanges  between  Commissioners  were  not  discoverable. Further, if the Commission’s report does not adequately address these matters or explain the Commission’s approach, that is a matter Powerco can advance by way of submission.  This is not a case where there is insufficient material before the Court on which it can fairly resolve the matter.

Cross-examination

[30]     The Commission’s appeal relating to cross-examination can be dealt with in two parts.   The first issue is the approach to allowing cross-examination of the Commission’s experts and the second is the approach to allowing cross-examination of the chairperson of the Commission.

(i)       Ruling as to cross-examination of experts

[31]     Wild  J  in  this  part  of  his  ruling  gave  leave  to  Powerco  and  Vector  to cross-examine the Commission’s expert witnesses Messrs Gunn, Ryan, Small and Eaton.   Messrs Gunn and Ryan are both employees of the Commission and they produced a joint affidavit.  Dr Gunn has an economics background and Mr Ryan is an accountant. Dr Small is an economist and Mr Eaton is an accountant specialising in taxation matters.

[32]     The Commission’s primary argument on the appeal against this ruling is that, as a matter of principle, the Court should not try to resolve what Mr Dobson characterises as differences of relatively arcane expert opinion in judicial review proceedings   based   on   reasonableness.      This   submission   is   based   on   the Commission’s view that unreasonableness or irrationality in this context will stand out.  Because the position here is not so plain, that supports the view the differences relied on by the respondents are matters of preference, not going to irrationality or unreasonableness.

[33]     In our view, the cross-examination issue cannot be decided on this basis. That is because, as Wild J said, matters such as the proper scope of judicial review and of the standard of review will be determined at trial as will whether any unreasonableness or irrationality has reached the required threshold.  To decide the matter on the basis advanced by the Commission would, in effect, decide the substantive issue between the parties.

[34]     The real issue here is whether Wild J has applied the wrong test.

[35]     The parties are in agreement on the relevant principles, that is, that cross- examination is not available as of right in judicial review proceedings but will only be permitted where that is clearly necessary in order to fairly resolve the matter before the Court: New Zealand Fishing Industry Association Inc v Minister of Agriculture and Fisheries  [1988] 1 NZLR 544 at 554 (CA); Minister of Energy v Petrocorp Exploration Ltd [1989] 1 NZLR 348 at 352–354; and Roussel  Uclaf

Australia Pty Ltd v Pharmaceutical Management Agency Ltd  [1997] 1 NZLR 650 at

656-658 (CA).  The test requires a determination of where the interests of justice lie.

[36]     This   Court   re-stated   the   position   and   the   policy   reason   for   it   in

Wilson v White [2005] 1 NZLR 189 (CA) at [25] per McGrath J in these terms:

[25]     The policy reason for the rule of practice that in all judicial review proceedings leave to cross-examine will be refused by the Court, except where the interests of justice require it, lies in the need in the public interest “to fulfil the purposes of judicial review as a relatively simple untechnical and  prompt  procedure  …”  (Petrocorp  at  p  353).    It  also  reflects  the experience of the Courts that in most cases, whether there is justification for the exercise of public powers, and the nature of it, will sufficiently emerge in the course of judicial scrutiny, without having to test affidavit evidence by cross-examination.   The availability of discovery in judicial review proceedings in New Zealand is in the Court’s discretion under s 10(2)(i) and has enhanced the utility of judicial review within this framework.  But, as the decisions of this Court which are cited in this judgment consistently recognise, there are occasions in judicial review proceedings when the rule of practice gives way to the potential for prejudice if the evidence is not tested.  Cross-examination will then be permitted in the interests of justice, and if a deponent is not made available for cross-examination, the Court will not permit the affidavit of that deponent to be used.

[37]     While  there  are  some  differences  in  focus  of  the   respondents  their submissions on this aspect are essentially the same.   Both respondents submit that Wild J has set out the relevant principles and properly acknowledged the scope of judicial  review.    They say  there  has  been  no  lowering  of  the  threshold.    Both Powerco and Vector maintain that there is a conflict in the evidence of the experts and that cross-examination is the best way to resolve it.   In this context, the respondents submit that the Judge’s decision is a recognition of the complexity of the decision making challenged in this case.  The respondents emphasise that this is the exercise of a discretion and the trial Judge’s view of what will assist should prevail where the decision has not been shown to be plainly wrong:  Roussel Uclaf  (CA) at

658.  Powerco also emphasises that cross-examination is an important discipline and submits that the Commission has rendered itself vulnerable to cross-examination by its omissions.

[38]     We do not accept the respondents’ submissions there has been no lowering of the threshold in this case. We consider that the Judge has applied the wrong test.  We say that because the assessment made by the Judge is expressed in terms of what will

“assist” the Court.  That is a different analysis from what is “necessary”.  We accept that the Judge does also set out the correct principles and that he has reached his view as to what will assist against a background of familiarity with the case. However, on a plain reading of the decision the guiding factor he used in his decision appears to be what will help rather than what is necessary.

[39]     Our view that a different, lower, threshold has been adopted is supported by the fact that the Judge does not limit the cross-examination of the experts to specific topics/questions.  Further, the Judge granted leave to Vector as well as Powerco to cross-examine Ms Rebstock although Vector had not applied for leave to do that. Neither of those two matters sit readily with the application of a necessity test.

[40]     More generally, we agree with the Commission that cross-examination will be appropriate in much narrower circumstances in this type of case than the Judge appears  to  envisage.  Wild  J  in  reaching  his  decision  expressed  the  view  that Cooke P’s reference in Petrocorp at 353 to judicial review “as a relatively simple, untechnical and prompt procedure” may no longer be apt. That aspiration, however, in our view remains an important one and should not be lost sight of.

[41]     Even before us, the respondents have not narrowed down the matters in issue in the way we consider is required in order to show that the necessity test has been met.  We acknowledge that Mr Farmer QC in the course of his oral argument did identify what he saw as the three key issues from Vector’s perspective in the following terms:

Vector  criticises  the  Commission’s  conclusions  that  where  the  Model requires an estimate of income tax to be entered, the [Commission] chose to:

1     use the tax payable approach rather than the tax expense approach to calculate income tax, on the basis that tax expense failed NPV = 0

-    artificially exaggerating ‘excess returns’ due to timing differences; AND

wrong since tax expense with deferred tax accounting can meet NPV =

0.

2     use the actual tax asset values (the price paid for the assets) to calculate tax depreciation, and not the Optimised Deprival Values (ODV) which the Commission used elsewhere in its network asset valuation part of the Model to determine the amount of invested capital in the business for regulatory purposes

-    inconsistent, and penalising companies that paid above ODV to buy assets.

3    define the tax paying entity in its Model as the legal entity which owns the gas business (e.g. Vector Ltd) rather than the gas business …

- assumption that tax losses can be utilised by other businesses in the Group immediately.

[42]     But Vector’s written submissions illustrate that what is envisaged under each of these heads remains a fairly broad-ranging cross-examination.  For example, on the tax payable/tax expenses point Vector’s written submissions suggest that the purpose of cross-examination “would be to clarify the areas of common agreement and of differences of view … and then to test the validity of the differences of opinion that are shown to exist.”   It cannot be said that cross-examination of this nature meets the necessity test.

[43]     The Judge rejected an application for a conference of experts under r 330B. Such a conference in the formal sense envisaged by the High Court rules may not be appropriate but we consider that there are advantages in a discussion between the experts  with  a  view  to  at  least  clarifying  the  matters  that  are  truly  in  dispute. Certainly, we would not see cross-examination as necessary to clarify the areas of agreement and differences. This should be done in the affidavits themselves and by way of submission.

[44]     Cross-examination could only be necessary to test the validity of differences of opinion that are shown to exist and which it is necessary to resolve for the purposes of the case.  Any application should define those issues with particularity and be as limited as possible.  This was not done here.  (Powerco’s application lists topics but without the necessary degree of particularity.)  Further, both respondents properly characterise the matters on which they seek to cross-examine as technical ones   (“dry   and   technical”   in   Vector’s   submissions).      We   envisage   that cross-examination on such technical matters in judicial review proceedings will be relatively rare  as  a  means  of  trying  to  fairly  resolve  the  matters  in  issue.  The affidavits and the submissions should be able to be structured in a manner that defines the issues clearly so that they can be resolved without the necessity for cross-examination.  The position here is in quite stark contrast from that in issue in

Wilson v White where cross-examination was allowed on a point of credibility in the context of a “he said/he said he did not” situation.   While, as Wild J says, the material conflict to which cross-examination is directed need not be confined to matters of credibility, we envisage that cross-examination of experts is more likely to be necessary where the expert evidence is evaluative rather than technical in nature.

(ii)     Ruling as to cross-examination of Commission chairperson

[45]     Wild J in granting leave to cross-examine Ms Rebstock confined that to three topics, namely, Ms Rebstock’s statements on pass-through; excess returns; and in relation to the threat of control.

[46]     In    reaching    his    decision,    Wild    J    distinguished    this    case    from Goodman Fielder Ltd v Commerce Commission [1987] 2 NZLR 10 at 20 (CA) where this Court indicated that, except possibly in very unusual cases, cross- examination should not be permitted on an affidavit by the chairperson or another member of the Commission.

[47]     The Judge also took a different view from that of Gallen J at first instance in Roussel Uclaf Australia Pty Limited v Pharmaceutical Management Agency Limited HC WN CP9/96 13 August 1997.   Gallen J at 5 did not see it as “reasonable or acceptable” to require one member of a Board responsible for what is a joint decision to  be  required  to  give  evidence.    Wild  J  said  any collective  unit  must  have  a spokesperson and cross-examination of that person ensures accountability.

[48]     Finally,  Wild  J  considered  that  the  practical  reasons  for  not  allowing cross-examination of a Minister did not apply to the Commission’s chairperson who is likely to have a grasp of the detail.

[49]     Powerco seeks to support the decision on this aspect on the grounds relied on by the Judge.  Mr Weston also emphasised the centrality of Ms Rebstock’s role and the absence of any evidence that a requirement to be available for cross-examination would have a chilling effect.

[50]     It follows on from our view on the approach to discovery on material arising from Ms Rebstock’s affidavit that it cannot be said that cross-examination is clearly necessary on these topics.  It will be the Commission’s report that is in issue.  In any event, we agree with the Commission that the Judge was wrong in his approach to cross-examination of the chairperson.

[51]     It is the case that Goodman Fielder dealt with an appeal against a decision of the Commission to refuse clearance under Part 3 of the Act for a merger.  However, the concern underlying the reluctance to allow cross-examination expressed by this Court in Goodman still applies, that is, a recognition of the value of assistance from the Commission as the decision maker.

[52]     We also agree with Gallen J’s observations in Roussel that cross-examination of the type sought by Powerco is not appropriate given this is a joint, collective, decision.   The challenge here is to the decision itself not to, for example, the statements allegedly made by a panel member in the employment context as was the case in Wilson v White.

[53]     Finally,  we  accept  the  Commission’s  submission  that  the  availability  of judicial review itself is a means of ensuring accountability for the Commission’s decisions.  There are also other means within the context of proceedings by which matters may be tested.  An illustration of this is Powerco’s complaint that it was not clear how the Commission had reached the figure of 12.2% in its assertion in the final report that the reduction in distribution charge would “save a typical consumer

$51 or a 12.2% reduction in their annual line charge bill.”   Interrogatories are an avenue for clarifying such matters.

Results and costs

[54]     For these reasons, the appeal is allowed and the cross appeal is dismissed. The first appellant having succeeded, the Commission is entitled to costs of $9,000 from the respondents together with usual disbursements.   The second appellant’s appeal against the decision to allow cross-examination of one of the witnesses for the second appellant was withdrawn after the parties settled the matter.  Mr Liddell did

appear and presented brief submissions for the second appellant.  The submissions were general in nature and while helpful were not made in the context of a live appeal.  In those circumstances, no costs award in relation to the second appellant is appropriate.

Solicitors:

Commerce Commission, Wellington for First Appellant

Crown Law Office, Wellington for Second Appellant

Chapman Tripp, Wellington for First Respondent

Chapman Tripp, Auckland for Second Respondent