Electricity Corporation of New Zealand Limited v New Zealand Electricity Exchange Limited HC Wellington CP166/02
[2004] NZHC 1023
•12 February 2004
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CP166/02
BETWEENELECTRICITY CORPORATION OF NEW ZEALAND LIMITED
Plaintiff
ANDNEW ZEALAND ELECTRICITY EXCHANGE LIMITED
First Defendant
AND M-CO CLEARING HOUSE LIMITED
Second Defendant
ANDTHE MARKETPLACE COMPANY LIMITED
Third Defendant
Hearing: 7 May 2003
Appearances: I Millard QC and I Veale for the Plaintiff M D Arthur for the Defendant
Judgment: 12 February 2004
JUDGMENT OF GODDARD J
Introduction
[1] These proceedings arise out of the operations of the New Zealand Electricity Market (“NZEM”). The NZEM is a self-regulating private contractual arrangement, much like a stock exchange, by means of which its members voluntarily trade electricity. Although its membership is not mandatory, approximately 75% of New Zealand’s electricity is apparently traded through the NZEM.
ELECTRICITY CORPORATION OF NEW ZEALAND LIMITED V NEW ZEALAND ELECTRICITY EXCHANGE LIMITED And Ors HC WN CP166/02 [12 February 2004]
[2] The NZEM is governed by the NZEM Rules (“the Rules”). The broad purpose of these Rules is to govern the manner in which the market participants sell, purchase and dispatch electricity. Essentially the Rules constitute a multilateral contract between all of the market participants with particular focus on the supervision of market participant members.
[3] The Rules also provide for a number of service providers, each of which has particular functions and obligations set out in the Rules. In this case, the relevant service providers are the Pricing Manager, the Clearing Manager and the Market Administrator. Their respective responsibilities under the Rules are as follows: the Pricing Manager is responsible for calculating the price of electricity and publishing prices; the Clearing Manager is responsible for invoicing market participants on the basis of those published prices and then clearing the payments made by the invoiced participants; the Market Administrator is responsible for fulfilling the functions prescribed in Rule 9. These include providing secretarial support to the Rules Committee, administering the rule making process, and providing all necessary secretarial and other support required by the Market Surveillance Committee (“MSC”). The division within the Market Administrator which actually provides the necessary support to the MSC is known as Surveillance & Compliance (“S&C”). At all times relevant for this case, the service provider functions of Pricing Manager, Clearing Manager and Market Administrator were carried out by a company called M-co and its various subsidiaries.
[4] The other service provider functions provided for under the Rules are scheduling, dispatching, grid operation and reconciliation management. This group of functions is undertaken by Transpower New Zealand Limited (“Transpower”).
[5] Service providers are not parties to the NZEM Rules in the same way that market participants are: rather, each service provider is required to execute a deed poll in which it expresses its commitment to carry out the functions prescribed under the Rules and the basis upon which it will be remunerated for its services. The Rules then provide for such deed polls to become a schedule to the Rules. The plaintiff, Electricity Corporation of New Zealand (“ECNZ”) relies upon the deed polls that were entered into by the M-co service providers as evidence of their agreement to
perform, in accordance with the Rules of NZEM, their duties and comply with their obligations set out in the Rules. I will refer to those deed polls again in more detail later.
[6] The market participants are however parties to the Rules and thus governed by them. In this regard Rule 2.1 is said by the defendants to be particularly significant in the context of this case. It provides:
2.1 There shall be a Market Surveillance Committee
There shall be a standing committee of NZEM, known as the Market Surveillance Committee, which shall be constituted in accordance with rule
2.2. Each Market Participant, service provider and the Market Administrator has submitted to the jurisdiction of the Committee in respect of the matters described in these rules and neither the Market Administrator or any Market Participant or service provider shall seek to enforce, other than under this rule 2 (including rights of appeal), any duty or obligation of any other person described in these rules. This rule shall not preclude any other form of enforcement rights arising independent of these rules. [emphasis added]
The Market Surveillance Committee and the Rules
[7] The MSC, referred to in Rule 2.1 above, is a permanent standing committee of the NZEM with functions and powers directed to the oversight of all aspects of the NZEM. Rule 2.4 provides for the functions of the MSC. Amongst these are the following:
2.4 Functions of the MSC
The functions of the Market Surveillance Committee shall be to:
2.4.3 Exercise disciplinary powers conferred by these rules
Exercise the powers of investigation, suspension and termination, and any other powers, conferred on the Market Surveillance Committee by these rules;
2.4.6 Investigate alleged misconduct or breaches of these rules
Investigate all allegations of misconduct, or suspected breaches of these rules, by Market Participants, service providers or the Market Administrator and investigate all complaints by clients or members of the public against Market Participants, service providers or the Market Administrator;
[8] Rule 2.5 provides for the MSC to have certain powers of delegation in fulfilling its functions. In relation to the MSC’s investigative function these powers of delegation have significance for this case. They are as follows:
In order to assist it in fulfilling its functions under these rules the Market Surveillance Committee may:
2.5.1Appoint the Market Administrator to carry out investigations
Appoint the Market Administrator, any officers or employees of the Market Administrator, the auditors of the Market Administrator or of NZEM, or such other persons as the Committee thinks fit, to act as agent or agents of the Committee in carrying out any investigation, inspection or other function. Any such agent or agents shall report in writing to the Committee on completion of such investigation;
2.5.2Employ or seek advice from other persons
Employ, or otherwise seek advice or assistance from external investigators, auditors, accountants, lawyers and other experts, and such other persons as the Committee thinks fits,
Provided that, in appointing investigators or other persons pursuant to this rule 2.5, the Committee will ensure that any appointed person does not have a conflict of interest in carrying out the investigation. [emphasis added]
[9] The MSC is provided with a discretion under Rule 2.7, if application is made to it by the Market Administrator or a service provider or a market participant, to make rulings relating to the interpretation or application of the Rules.
[10] Rule 2.8 provides a right of appeal for market participants and service providers against any ruling made by the MSC under the Rules. In contrast, Rule 2.8 prohibits the Market Administrator from appealing against any ruling relating to the inspection or investigation of it by the MSC. The Market Administrator is required to accept as final any ruling the MSC makes in relation to inspection or investigation of it and is precluded from taking any step whatsoever to directly or indirectly challenge or call such a ruling into question.
[11] Rule 2.9 provides for the reporting and investigation of breaches of the Rules. If a person who alleges a breach is not the Market Administrator, or a market participant or service provider, the complainant must agree in writing to submit to the jurisdiction of the MSC and agree to be bound by any decision of the MSC, as if
the complainant were a market participant. That agreement to be bound includes any order for costs the MSC may ultimately make against the complainant.
[12] Immediately any breach is alleged, the MSC is required to appoint an investigator to investigate the breach. If the breach is admitted, the investigator is required to prepare a report for the MSC for disposition purposes. If there is no admission the investigator is required to conduct a full investigation of the facts surrounding the allegation, including ensuring that “all persons the subject of the investigation have a reasonable opportunity to review and comment on all material collected during the course of the investigation”. Following completion of any such investigation, the investigator is required to determine whether a complaint should be formally laid, and if not, is required to inform the complainant of this. The complainant is then entitled to advise the investigator in writing, within 10 business days, if it nevertheless requires a complaint to be laid.
[13] The process for laying a complaint is provided for under Rule 2.9.9. This includes the following requirements:
2.9.9Process for laying a complaint
2.9.9.3The investigator will forward to each of the Committee, the complainant and the person allegedly in breach a copy of the complaint formulated in accordance with rule 2.9.9.2 and a copy of the report prepared in accordance with rule 2.9.10;
2.9.9.4The Committee will give to each of the complainant and the person allegedly in breach not less than 20 business days’ notice in writing of the place, date and time at which the complaint will be heard by the Committee.
[14] Rule 2.10 requires the MSC to adopt an appropriate procedure for the hearing of a complaint. As the provisions of Rule 2.10 are of importance to this case, I set them out in full as follows:
2.10MSC to adopt appropriate procedure for hearing
2.10.1Pre-hearing statements and material
Where a matter is to proceed to a hearing, the Market Surveillance Committee will, not less than 5 business days before the hearing, provide all persons involved in the hearing with a statement of the matter under consideration,
and a copy of all relevant material collected during the course of the investigation of the matter up to the time such information is provided.
2.10.2Hearings will be in private and recorded verbatim
The Market Surveillance Committee will, subject to the requirements of natural justice, adopt such procedures as it sees fit for the conduct of a hearing. Hearings will be in private, unless the Market Surveillance Committee directs otherwise, and will be recorded verbatim.
2.10.3Public hearings may be opposed
Where the Market Surveillance Committee considers that a hearing should be public it will notify the affected parties of its decision and the grounds for that decision. If a party disagrees with this decision it may make a written submission, within 5 business days of receiving the notification referred to in this rule, to the Market Surveillance Committee. The Market Surveillance Committee will consider the submissions and then notify the affected parties of its decision and the grounds for that decision. A Market Participant may appeal the decision of the Market Surveillance Committee in the manner prescribed in rule 3. [emphasis added]
[15] Rule 2.12 provides the right for persons who are “the subject” of an MSC hearing to have representation and to call witnesses and make submissions.
[16] Rule 2.13 provides for an informal resolution process between the complainant and the person allegedly in breach. This is to be conducted by the investigator before a hearing of the complaint takes place.
[17] Rule 2.14 requires the MSC to keep confidential all information provided or disclosed to it under the Rules, with certain exceptions.
[18] Rule 2.15 provides for the MSC to prohibit publication of any information or document which comes into its possession during the course of carrying out its obligations and duties under the Rules.
[19] Rule 2.16 provides the MSC with power to make certain orders as a consequence of its consideration or investigation of any matter under the Rules.
Amongst the powers of disposition listed under Rule 2.16 is the power to order compensation to be paid:
2.16 MSC may make certain orders
The Market Surveillance Committee, after considering any matter referred to it, or investigating any matter of its own volition, may:
2.16.8 Order compensation to be paid
Order that the Market Administrator, the Market Participant or service provider pay any sum by way of compensation to a third party;
[20] Part 8 of the Rules deals with the resignation of market participants from the NZEM. Thirty days written notice of intention to resign is required and resignation is not effective until it is approved by the MSC in writing. The MSC has power to refuse to accept the resignation of a market participant on the following specified grounds:
8.3MSC may refuse to accept a resignation on certain grounds
The Market Surveillance Committee may, where it has reasonable grounds for doing so, by notice in writing to a Market Participant, refuse to accept a resignation:
8.3.1If Market Participant is, or should be, under investigation
Any matter affecting the Market Participant is being investigated or, in opinion of the Market Surveillance Committee, should be investigated as a preliminary to a decision on the question whether or not the trading rights of the Market Participant should be terminated or the Market Participant should be otherwise disciplined; or
8.3.2If it is desirable that the Market Participant is suspended
The Market Surveillance Committee consider that it is desirable that a suspension of trading rights should be imposed upon the Market Participant or that any suspension already imposed should continue in force; or
8.3.3If Market Participant continues to have obligations under these rules
Any obligation of the Market Participant under these rules remains outstanding.
[21] Rule 8.7 provides that a market participant who resigns continues nevertheless to be subject to the jurisdiction of the MSC for a period of two years in two specified situations:
8.7Resigned Market Participants remain subject to MSC for two years
Notwithstanding acceptance by the Market Surveillance Committee of a Market Participant’s resignation, the Market Participant shall continue to be subject to the jurisdiction of the Committee for a period of two years thereafter:
8.7.1For acts and omissions under these rules
In respect of its acts and omissions under the rules committed or omitted before the acceptance; and
8.7.2For proceedings instituted against that Market Participant
In respect of any proceedings instituted against the Market Participant before the acceptance or, in respect of such acts and omissions, after the acceptance.
[22]Part 10 of the Rules deals with the appointment of service providers. Rule
10.7 requires an approved service provider to execute a deed containing the terms and conditions of its appointment and its agreement to perform and comply with the duties and obligations required under the Rules. Rule 10.7.3 provides for the service provider deed to become a schedule to the Rules. Upon becoming a schedule to the Rules the service provider deed is enforceable by market participants, the Market Administrator and other service providers against the service provider whose deed it is; and, in return, is enforceable by that service provider against market participants, the Market Administrator and the other service providers.
[23] The M-co entities which are the Pricing Manager, the Clearing Manager and the Market Administrator, all entered into service provider deeds as required under the Rules and these deeds are a schedule to the Rules. In relation to the enforceability of the obligations and duties of these particular service providers, as referred to in Rule 10.7.3, each deed poll simply states:
7.Enforceability
7.1The covenants of the Provider contained in this deed (including, without limitation, the covenants in clause 3.2) are given for the benefit of each Spot Market Participant, EMCO as market administrator, or any other market administrator from time to time and (to the extent they are affected) the other service providers pursuant to the Contracts (Privity) Act 1982, and are enforceable at the suit of any Spot Market Participant and EMCO as market administrator or other market administrator from time to time and other service providers. [emphasis added]
[24] In contrast, the deed poll entered into by Transpower contains the following additional proviso:
… PROVIDED HOWEVER (and this covenant is given by the Provider solely on this basis) the only manner of enforcement shall be in accordance with Part 1 of the Rules (that is before the Market Surveillance Committee with appeal rights) and subject to the terms of this deed and the limitations on liability contained in this deed. A positive vote by Market Participants in favour of this deed becoming a service provider contract is an acknowledgement by Market Participants that the enforcement procedures in Part 1 of the Rules are the only manner of enforcement of rights against the Provider as a service provider except to the extent that any rights arise independently of the Rules. [emphasis added]
The parties
[25] Until April 1999 ECNZ was both a generator class market participant and a purchaser class market participant (as those terms are defined in the NZEM Rules), such participants being collectively spot market participants under NZEM. The defendants were at the relevant times the Pricing Manager, the Clearing Manager and the Market Administrator. In addition to undertaking the role of Market Administrator, the third defendant was also the guarantor of the obligations of the Pricing Manager and Clearing Manager.
This proceeding
[26] ECNZ seeks to review a decision of Master Gendall delivered on 20 February 2003, wherein the Master granted a stay of proceedings commenced by ECNZ in the High Court. Those proceedings mirror a complaint that ECNZ had
lodged with the Market Administrator, initially against the Pricing and Clearing Managers, but subsequently against the Pricing Manager only. ECNZ’s complaint concerns the possible payment of compensation to it as the result of a pricing error. At the time ECNZ lodged its complaint it was no longer a market participant and was therefore required to submit voluntarily to the jurisdiction of the MSC under Rule 2.9. ECNZ did so submit. However, the MSC subsequently ruled that ECNZ could not attend at the hearing of its complaint against the Pricing Manager, on the grounds that ECNZ was not a party to the hearing of that complaint, the only parties being the appointed investigators and the Pricing Manager. The MSC viewed ECNZ’s legitimate interest as confined to any right it might have to compensation for the pricing error and it had decided not to deal with the issue of compensation until it had first determined whether the pricing error had involved any breach of the Rules by the Pricing Manager.
[27] Following the MSC’s ruling that it was barred from participating in the breach hearing, either as complainant or as an observer, and upon learning that in a meeting on 18 March 1999 the MSC had “agreed” that “… final prices could be recalculated, but would not be published until [Transpower’s] appeal had been resolved”, ECNZ purported to withdraw its complaint and claim for compensation from the MSC and issued the present proceedings in the High Court in contract, alleging breach of obligations and duties by the first and second defendants under the deed polls they had entered into. The breach alleged was the failure to promptly recalculate electricity prices for the months of March-July 1998 and to promptly carry out the requisite wash-up after the Mangahao error (explained below), thereby allegedly causing loss to ECNZ. A declaration that the third defendant is liable (as guarantor of the first and second defendants) for loss suffered by ECNZ as a result of that breach is also sought.
The Mangahao error
[28] Briefly described, the event that led to ECNZ’s complaint to the MSC and its subsequent alternative issue of proceedings in this Court was an electricity pricing error that occurred when Transpower failed to supply the Pricing Manager with data
for the calculation of provisional and final prices for electricity sold through the NZEM in the months of March to July 1998 (inclusive). The error was detected around 4 September 1998, so that final prices for the month of August 1998 were able to be calculated using the correct data. However final prices for the months of March-July 1998 had already been published and the sales and purchases of electricity for these months settled. The result was that the published final prices were higher than they would have been had Transpower not made the error, and the practical effect of the error was that the purchasers of electricity on the wholesale market paid too much for the energy they bought and the generators of that electricity were overpaid for what they supplied.
[29] Rule 4.5, section G of Part 2 of the Rules, as it was in force at the time, provided for the recalculation of final prices in the event of discovery of such an error. Expressly, if the MSC were to determine that the error had materially financially disadvantaged any market participant it provided:
Notwithstanding any error subsequently discovered in the information described in rule 4.2 or in the process carried out by the Pricing Manager in this rule 4, the Pricing Manager will not be obliged to recalculate the final price, final marginal load factor or final reserve price for any trading period except where the Market Surveillance Committee determines that the error was such as to materially financially disadvantage any Spot Market Participant. This rule 4.5 is not intended to limit any right that any Spot Market Participant may have against any service provider or other Spot Market Participant that may have caused or been responsible for such error.
[30] The process for recalculation, as set out in Rule 4.5 above, when carried into effect would result in a “wash-up” generally of payments between market participants to correct the effect of the error. Generators would be required to refund to electricity purchasers the amounts which the former had been overpaid. As the MSC later observed “[u]ncorrected, the Mangahao error would have resulted in some substantial winners and losers”.
[31] In line with industry practice, ECNZ had in a place a number of hedge contracts for a significant proportion of its generation capacity. These included a “wash-up” clause designed to address the event of overcharging or undercharging. This wash-up clause allowed 12 months after the month in which any account was delivered to make appropriate adjustments.
[32] Dr Saha of Ernst & Young’s Energy Market Services Group (at a hearing before the Appeal Board) described the purpose and effect of energy hedges as follows:
Energy hedges mitigate the impact of any temporary change in wholesale prices. If Market Participants were in aggregate 80% hedged against wholesale market changes, the impact of any changes due to omitted Mangahao data would be reduced by about 80%. Any amount that has been undercharged or overcharged due to retrospective changes in final prices could be recovered under the hedge contracts within the twelve month limitation.
[33] The effect of the Mangahao error was that ECNZ either paid more to the hedge counter party than it should have done; or ECNZ received less from the hedge counter party than it should have done.
The essence of ECNZ’s complaint
[34] Following the discovery of the Mangahao error the MSC sought a report from the Pricing Manager as to whether any market participant felt it had been materially financially disadvantaged by the error. Numerous reports, decisions, hearings and appeals followed the receipt of that report, with the result the ECNZ was found obliged to pay $4,700,597.36 to the Clearing Manager.
[35] The essence of ECNZ’s complaint to the MSC and its identical proceedings in this Court is that following a decision by the MSC on 4 February 1999 that spot market participants had suffered material financial disadvantage as the result of the Mangahao error, the Pricing and Clearing Managers then breached their obligations under the Rules by not recalculating and publishing final prices for the period of the error in a prompt and timely way and by failing also to carry out the requisite wash- up promptly. The period of these alleged breaches was 4 February to 9 November 1999. That period was circumscribed by two events: the MSC’s decision of 4 February 1999 that final prices would be recalculated and published; and a successful appeal from that decision delivered on 9 November 1999. ECNZ’s case is that the failures by the Pricing and Clearing Managers to recalculate and publish in a timely way deprived it of the ability to pass on the adjustment ultimately arrived at to its hedge counter parties, with the result that it has been unable to recover any of the
$4,700,597.36 under its hedge contracts, as it says it would have been able to had the recalculation been carried out expeditiously and published promptly.
[36] The express findings of the MSC in its 4 February 1999 decision were as follows:
… that Spot Market Participants have suffered material financial disadvantage. It is a consequence of this is that final prices for March to July 1998 will be recalculated by the Pricing Manager in accordance with rule 4.5 of section G. The Committee expects that the recalculation of final prices will be completed as soon as possible.
[37]On the basis of that determination the MSC had ordered:
… that once the Clearing Manager has received the recalculated pricing information from the Pricing Manager all the Information should be washed up at the end of the month in which this information is received. The Committee understands that this may involve the Clearing Manager conducting a special washup.
[38] ECNZ’s sole concern is to be compensated for the alleged failure of the Pricing and Clearing Managers to correct the effect of the Mangahao error in time for it to pass on that effect to its hedge counter parties. Its focus is on the Pricing Manager, against whom it has directed its complaint and from whom it seeks compensation.
The Master’s decision
[39] The application before the Master by all three defendants was for a stay of the proceedings filed by ECNZ in this Court after it withdrew its complaint and claim for compensation from the MSC’s jurisdiction. The basis of the application for stay was that the NZEM provides a comprehensive dispute resolution process which ECNZ is obliged to use to resolve its complaint and claim for compensation. The merits of ECNZ’s complaint and its claim for compensation were not relevant to the Master’s decision. He described the question for determination by him in the following way:
The defendants apply for this stay because, in the circumstances … they believe it is an abuse of the process of the Court for the plaintiff to seek to have this dispute resolved at first instance by the Court. The defendants
claim the dispute should be decided by the MSC and if necessary, the Appeal Board. The basis for this position is that ECNZ agreed to the Rules, which included a clear provision that claims were not to be brought in any other way.
The question to be decided is whether ECNZ may have the right to have its hearing in the High Court or whether it must follow the NZEM dispute resolution procedure.
[40] After commencing with a statement of the general presumption in favour of requiring parties to abide by an agreed dispute resolution process, the Master turned to consider a number of matters: first, whether ECNZ was contractually bound by the Rules; secondly, even if ECNZ were so bound by the Rules, whether compensation is an enforcement right arising independently of the Rules; and thirdly, whether, notwithstanding the Rules, ECNZ’s proceeding should be permitted to continue because good reason exists for allowing it to continue (breach of natural justice, apparent bias and pre-determination on the part of the MSC).
[41] In relation to the first two matters, the Master reached the following conclusion:
ECNZ has agreed to abide by the Rules of the NZEM. The Rules are clearly designed so that the market is a self-regulating one. The Rules include a provision that disputes arising under the Rules will be decided by the MSC with appeal rights. ECNZ remains bound by this provision if it wishes to enforce rights arising under the Rules. [emphasis added]
[42] In concluding thus the Master accepted that the MSC did not retain jurisdiction over ECNZ consequent upon ECNZ’s resignation from the NZEM on 9 April 1999, so that ECNZ had been required to submit to the MSC’s jurisdiction for the purposes of investigating and determining its complaint after this date. However he also accepted the defendants’ argument that ECNZ’s ability to enforce any duty or obligation on the part of persons described in the Rules could not be achieved other than under Rule 2. His findings in this regard are contained in the following extracts from his judgment:
The Rules create both the obligation and the mechanism by which the obligation is enforced – both the right and the remedy. A party cannot seek to enforce a prescribed obligation without following the prescribed procedure. ECNZ has alleged breaches by the defendants of certain obligations owed under the Rules. Yet it is trying to enforce these
obligations, which arose while ECNZ was still within the NZEM, in a manner excluded by the Rules. These arguments have some force.
In my view ECNZ is bound by Rule 2.1. ECNZ’s position, in essence, is that it wishes to enforce rights that arose from its agreement to the Rules. Instead of using the agreed dispute resolution process however it wishes to select its own forum. It is attempting to use the part of the Rules which suits it (the promises made by the defendants) and to exclude the part of the Rules that does not suit it (the promise to enforce the rules through the MSC and appeal rights).
Under the circumstances, at first glance, it may seem harsh to exclude the Court as an option for dispute resolution. To allow it however would render the promise made in Rule 2.1 nugatory. The logical extension of ECNZ’s argument is that should any Market Participant wish to enforce the Rules in the courts all it has to do is withdraw and then it would be free to do so. This would make the MSC a purely optional forum. In my view, this would be an unfortunate consequence and I cannot see how it can be correct.
ECNZ made detailed submissions providing evidence that it did withdraw. Whether or not it did withdraw is of no import. A party can withdraw. This is anticipated by the Rules. However, if the withdrawn party wishes to enforce its rights under the Rules then it must do so in accordance with the Rules. To do so it must submit to the jurisdiction of the MSC. If it does not wish to submit then the Rules are unenforceable. In my view, that is how the Rules, agreed to by ECNZ, must operate.
[43] Later in his judgment the Master again referred to the point, made above, in the following way:
… ECNZ having agreed at one point to abide by the Rules, is now attempting to use the part of the Rules which suits it (the promises made by the defendants), and to exclude the part of the Rules that does not suit it (the promise to enforce the Rules through the MSC and appeal rights).
[44] The Master also found the exception provided for at the end of Rule 2, “this Rule shall not preclude any other form of enforcement rights arising independently of these Rules” of no relevance, as the rights that ECNZ is seeking to enforce arise out of the Rules. He further found that the different forms of deed poll entered into by the Pricing Manager, Clearing Manager and Market Administrator, as opposed to the deed poll entered into by Transpower, did not alter that interpretation.
[45] The Master also found that to allow ECNZ to bring its claim in the courts would undermine the integrity of the NZEM and the principles behind self- regulation, particularly bearing in mind the specialist nature of the MSC and that it was seized of the dispute. In that latter regard, by the time the Master heard the
application for stay the MSC had actually conducted the hearing into ECNZ’s breach complaint and reserved its decision. That decision was delivered during the period when the Master’s decision was reserved (on 19 December 2002). The Master observed that if the complaint were to be litigated again in the Court there would be a risk of different findings of fact being made and of a doubling up of litigation costs.
[46] Insofar as the allegations of breach of natural justice were concerned, the Master found no overwhelming merit in ECNZ’s claim that there had been a breach of natural justice in this regard, the Rules giving no absolute right for ECNZ to be heard. He further observed that it was important for the Court not to entertain a “back door” method of putting an application akin to judicial review before it. On that basis he was satisfied that ECNZ’s exclusion from the breach hearing did not amount to a “good reason” for refusing a stay of the proceeding in the High Court.
[47] The Master further found that meetings between the defendants and the MSC about administrative matters relating to the complaint hearing and the method of recalculation of the Mangahao error, to which ECNZ had not been privy, did not amount to evidence of pre-determination, such as to constitute “good reason” for refusing the stay.
Chronology
[48] The following is a brief summary of relevant events. A more comprehensive explanation of the investigation and enquiry into the effect of the Mangahao error is annexed as Appendix A. A more comprehensive description of the tendering and acceptance of ECNZ’s resignation from the NZEM follows this chronology:
•
The Mangahao pricing error occurred during the months March to July 1998 inclusive.
•
The error was detected around 4 September 1998 so that final prices for August
1998 were not affected.
•
The MSC requested a report from the Pricing Manager on 4 September 1998 as
to the effect of the error on final price formulation for the months of March to July 1998.
•
On 25 November 1998 the MSC sought advice from market participants as to
whether any considered they had been materially financially disadvantaged by the error, taking into account their hedge positions, and if so whether any sought a recalculation of final prices under Rule 4.5 of section G, Part 2 Rules.
•
On 29 January 1999 ECNZ wrote to the MSC expressing its concerns about
possible delay in finalising final prices for the period of the error and drawing attention to the 12 month limitation period under its hedge contracts.
•
On 4 February 1999 the MSC determined that spot market participants had
suffered material financial disadvantage. As a consequence the Pricing Manager was obliged to recalculate the final prices for March to July 1998 in accordance with Rule 4.5 of section G of Part 2 of the Rules. The MSC expressed the expectation that the recalculation would be completed as soon as possible and that all information received would be washed-up by the Clearing Manager at the end of the month in which the information was received.
•
On 18 February 1999, Transpower appealed the MSC’s 4 February 1999
decision that spot market participants had suffered material financial disadvantage. The third defendant subsequently put out a statement, on 23 February 1999, acknowledging Transpower’s appeal and advising the market that the Pricing Manager had initiated work on recalculating the final prices, that the recalculations would continue to be carried out pending the appeal, and that it was expected the process could take between 6-8 weeks.
•
On 8 March 1999 the Chair of the MSC replied to ECNZ’s letter of 29 January
1999 and advised that Transpower’s appeal was expected to be heard in late March or April.
•
ECNZ responded by letter dated 12 March 1999 reiterating its particular concern
over the timeframe involved in concluding the final price recalculations but accepting that the delays were beyond the control of the MSC.
•
The minutes of a meeting of the MSC held on 18 March 1999, and attended for
part of the time by the Compliance Manager, Ms Woods, record: “The Committee noted that the recalculation of final prices from March to July 1998 had been appealed by Transpower New Zealand. The Committee agreed that these final prices could be recalculated, but would not be published until the appeal had been resolved.
•
On 9 April 1999 ECNZ resigned from the NZEM. Its resignation became
effective from midnight on 9 April 1999.
•
On 16 June 1999 Surveillance & Compliance issued a MSC newsletter advising
the market that the Pricing Manager had been instructed to recalculate final prices in accordance with Rule 4.5 pending the appeal being heard, although the Pricing Manager would not publish those prices until the outcome of the appeal were known.
•
On 31 August 1999 the 12 month limitation period for washing-up under
ECNZ’s hedge contracts expired. For this reason ECNZ sought and obtained leave, on 25 August 1999, to join in Transpower’s appeal against the MSC’s 4 February 1999 decision that spot market participants had suffered material financial disadvantage with the consequence that final prices would be recalculated.
•
On 9 November 1999 the Appeal Board set aside the MSC’s 4 February decision
that spot market participants had suffered material financial disadvantage. As a consequence the Pricing Manager was no longer obliged to recalculate final prices in accordance with Rule 4.5.
•
Following a number of further hearings, decisions and appeals, the MSC
determined on 19 December 2000 that certain market participants had been materially financially disadvantaged, with the consequential effect that prices for the period of the Mangahao error would be recalculated.
•
On 26 March 2001 ECNZ lodged a formal complaint with the MSC, alleging that
the Pricing and Clearing Managers had breached the Rules and/or failed to comply with the decision of the MSC of 4 February 1999 by failing to recalculate final prices and conduct a wash-up between 4 February and 9 November 1999. ECNZ’s sole purpose in lodging its complaint was to obtain compensation for the recalculated amount that it could no longer pass on under its hedge contracts.
•
On 4 April 2001 the Clearing Manager issued invoices to ECNZ and others for
payment by 20 April 2001 of the recalculated final prices for the period of the Mangahao pricing error. The effect of the invoices rendered to ECNZ was a net liability of about $4.5 million.
•
On 19 April 2001 ECNZ was requested to submit to the jurisdiction of the MSC
and did so (it says in ignorance of the MSC’s involvement of recalculation methodology issues and without knowledge of the 18 March 1999 minute).
•
On 5 July 2001 the Appeal Board upheld the MSC’s 19 December 2000 decision
that material financial disadvantage had occurred and the Clearing Manager sought payment of the two invoices issued to ECNZ.
•
On 7 January 2002 the MSC ruled that it would hear the breach allegations
against the Pricing Manager first and separately from ECNZ’s claim for compensation; and that ECNZ would not be permitted to make submissions at the breach hearing or attend as an observer.
•
On 25 January 2002, ECNZ received a written invitation from the Pricing
Manager’s solicitors (Chapman Tripp) to withdraw its complaint of breach against the Pricing Manager and any consequential compensation claim on the basis that neither could succeed because the MSC “decided, in March 1999, that the recalculated prices should not be published until after the outcome of Transpower’s appeal was known”. A similar letter was sent by Chapman Tripp
to the independent investigators, inviting them to withdraw the breach allegations.
•
On 12 March 2002 ECNZ withdrew its complaint, compensation claim and its
submission to the MSC’s jurisdiction.
The effect of ECNZ’s resignation as an NZEM market participant
[49] ECNZ had written to the MSC on 25 February 1999 advising that it was to be split into three competing state owned enterprises, effective from 1 April 1999, with the consequence that the residual ECNZ would become a non-trading entity and no longer be an active participant in the electricity industry. It therefore tendered its resignation and was seeking the MSC’s acceptance of this. Its letter of resignation noted as follows:
ECNZ notes its continuing obligations to remain subject to the jurisdiction of the Committee for a period of two years (Rule 8.7 of Part 1), and we reiterate that ECNZ remains a legal entity for this period, fully able to comply with this rule. However, this application of resignation is conditional on receiving assurances from the Committee that ECNZ also retains the right to make submissions, and be heard on matters (both specific to ECNZ and of a general nature) related to the period prior to the effective date of resignation that have consequence for ECNZ. We would appreciate such assurances from the Committee in its written acceptance of ECNZ’s resignation, to be given pursuant to Rule 8.2 of Part 1.
[50] For reasons that do not concern this case ECNZ’s resignation, as tendered on that date, had to be withdrawn and was subsequently resubmitted. On 6 April 1999, the S&C provided a memorandum for the MSC on the issue of ECNZ’s resignation. In its memorandum the S&C noted that the MSC had power to refuse to accept a resignation under Rule 8.3 on three bases: where a market participant was under investigation; where it was desirable for the market participant to be suspended; or where the market participant continued to have obligations under the Rules.
[51] The memorandum then listed a few investigation issues relating to ECNZ outstanding at that date, the majority of which the S&C said could be conveniently addressed by the MSC at its next meeting. In relation to the issue of continuing obligations under Rule 8.3.3, the MSC noted that ECNZ would continue to be subject to the jurisdiction of the MSC for a period of two years after its resignation had taken effect (Rule 8.7). The memorandum then dealt specifically with the
assurances that ECNZ was seeking from the MSC “to be heard on matters of material consequence to it”. Inter alia, the memorandum noted the following for the MSC’s consideration:
It appears to S&C that a significant concern for ECNZ is the recalculation of final prices for the period March to July 1998 (which, as the Committee is aware, is now under appeal). While ECNZ is not directly involved with this incident, it is likely that the outcome of this matter will have material consequences for it.
…
It appears that there are specific issues concerning ECNZ, and that it is looking for comfort from the Committee with regard to these issues rather than a blanket assurance. The Committee may therefore wish to consider whether it would be appropriate to provide ECNZ with an assurance with regard to the specific matters concerning it, i.e. the recalculation of final prices.
[52] The recalculation of final prices referred to at the end of the above quoted paragraph is a reference to the Mangahao pricing error.
[53] Following this exchange of correspondence between ECNZ and the MSC about ECNZ’s proposed resignation as a market participant, the MSC advised ECNZ that it had accepted ECNZ’s resignation effective from midnight on 9 April 1999. This advice was conveyed to ECNZ in a letter from Ms Woods, the Compliance Manager. Ms Woods letter of advice stated inter alia as follows:
… pursuant to rules 8.3.3 and 8.7 of part 1 and 14.4.1 of Section H of part 2 of the rules ECNZ will continue to be subject to the jurisdiction of the Market Surveillance Committee for a period of two years after this resignation has taken effect.
The Committee noted that in its letter of resignation, ECNZ had again asked for an assurance that it would retain the right to make submissions, both general and specific, and be heard on matters related to the period prior to its resignation that had consequences for it. As you are aware, the Committee previously noted that the rules of NZEM make no provisions or otherwise for the hearing of any submissions from Market Participants which have resigned. The Committee had therefore agreed that for this reason, it could not give an assurance to ECNZ that it could make submissions outside of this statutory framework.
The Committee was conscious that a significant concern for ECNZ might be the recalculation of final prices for the period March to July 1998. The Committee agreed that it did not accept that Market Participants, excluding those that had made claims for material financial disadvantage, had the right to be heard on the recalculation of final prices for this period. However, the
Committee also agreed that should it allow Market Participants to make submissions on this matter at a later date, ECNZ would have the same rights as the other Market Participants.
The Committee also agreed that in the interests of natural justice, it would exercise its discretion when deciding whether it would accept submissions from ECNZ on other matters, and that it would consider each case on its merits.
ECNZ’s complaint
[54] The substance of ECNZ’s complaint, made on 26 March 2001, was as follows:
ECNZ wishes to lodge a complaint of a breach of the NZEM Rules and/or of non-compliance with an order of the Market Surveillance Committee by the Pricing Manager and/or the Clearing Manager in relation to their failure to recalculate final prices and conduct a wash-up for the months of March to July 1998 inclusive following a decision of the Market Surveillance Committee on 4 February 1999 that Spot Market Participants had suffered material financial disadvantage from the erroneous exclusion of data for the Mangahao Power Station.
ECNZ seeks compensation from the Pricing Manager and/or the Clearing Manager for the losses it has suffered as a result of those breaches, and for the expenses it has incurred in endeavouring to mitigate its losses.
Background:
The background to this issue is well known to you following the various hearings that have previously been held in relation to other aspects of this matter. However we wish to highlight the following:
…
· The recalculation order was not stayed or suspended, either by Transpower’s appeal, or by order of the MSC;
· The recalculation process was required by the MSC to be undertaken expeditiously and was expected by the MSC to be undertaken by April 1999;
· In the period 4 February 1999 to 9 November 1999, approximately 8 months, no recalculation and washup was undertaken;
· Due to the failure to expeditiously complete a recalculation of prices and a washup, ECNZ lost the ability to conduct its own washups under its hedge contracts;
· The failure to undertake a recalculation and washup may result, depending upon the final decision of the NZEM Appeal Board, in substantial loss to ECNZ.
ECNZ’s Loss
At the present time the MSC has for a second time ruled that market participants have suffered material financial disadvantage and therefore final prices must be recalculated. That decision has been appealed to the NZEM Appeal Board. If the appeal is lost, then it is likely that a substantial sum will be sought from ECNZ by way of a washup. ECNZ will be unable to recover any of this amount under its hedge contracts, as it would have been able to do if recalculation had been undertaken promptly following the MSC’s determination of 4 February 1999. ECNZ is unable to quantify this loss until recalculated prices for the relevant period have actually been published.
ECNZ has also incurred legal fees and expert witness fees in endeavouring to mitigate its loss. This has consisted of joining Transpower’s appeal, opposing re-opening by the MSC, opposing the claims of purchaser class market participants and appealing the MSC’s second decision of material financial disadvantage. These expenses can also not be fully quantified at the present time. None of these expenses would have been incurred by ECNA if recalculation had been completed expeditiously following the original MSC decision.
Finally, ECNZ claims interest on these amounts.
Although unable to precisely quantify its losses at the present time, ECNZ expected them to total approximately $4 million.
Investigation:
ECNZ requests that the MSC appoint an investigator in accordance with rule
2.9.2 of part 1. ECNZ considers that it is not appropriate for the Surveillance and Compliance section of the Market Administrator to be appointed in this instance.
ECNZ’s subsequent submission to jurisdiction of MSC by ECNZ
[55] In a letter dated 19 April 2001, responding to ECNZ’s complaint of 26 March 2001, the Chairman of the MSC sought from ECNZ its agreement in writing that it would submit to the jurisdiction of the MSC, as if it were still a market participant. The relevant passage in the letter is as follows:
The Committee note that while at the time your letter was written, ECNZ was a Market Participant, it has since ceased to be such. Accordingly, in terms of rule 2.9.2, the Committee asks that ECNZ forward to the Committee ECNZ’s agreement in writing that it submit itself to the jurisdiction of the Committee and agree to be bound by any decision of the
Committee as if it were a Market Participant, including any order the Committee may make against ECNZ pursuant to rule 2.16.9.
[56]ECNZ duly complied with this request.
The MSC’s ruling of 7 January 2002 excluding ECNZ for participating in the hearing of the breach allegations against the Pricing Manager
[57] The MSC’s ruling of 7 January 2002, which forms the basis of ECNZ’s allegation of breach of natural justice, was as follows:
Date: 7 January 2002
Re: Hearing of allegations of breach of the Rules of NZEM arising from Mangahao error and compensation claim by ECNZ against the Pricing Manager arising from the alleged breach.
At its meeting on 19 December 2001, the Market Surveillance Committee considered letters from Chapman Tripp on behalf of the Pricing Manager/Market Administrator and ECNZ, both dated 18 December 2001 with reference to the hearing before the Committee on 6, 7 and 8 March 2002.
The Committee also considered a separate letter from ECNZ dated 18 December 2001 advising that it was withdrawing its complaint against the Administration Manager (but not the Pricing Manager). In view of that advice, this memorandum is directed only to the hearing of the allegation of breach by the Pricing Manager and the claim for compensation by ECNZ against the Pricing Manager.
After considering the matters raised by Chapman Tripp and ECNZ, the Committee determined as follows:
1.The hearing on 6, 7 and 8 March 2002 will be confined to the allegation against the Pricing Manager of a breach of the Rules of NZEM. It will not include any claim for compensation by ECNZ against the Pricing Manager.
The reasons for this decision are:
a)The parties to the two sets of proceedings are different. The parties to the breach hearing are the investigator and the Pricing Manager. The parties to the compensation hearing will be ECNZ and the Pricing Manager.
b)The validity of the compensation claim may well be dependent on the outcome of the breach hearing, the decision on which may be reserved for some time after that hearing is concluded. This factor would make the
contemporaneous hearings of the alleged breach and the claim for compensation undesirable.
c)The breach hearing itself is expected to last two to three days. The compensation claim is likely to be complicated and may itself require a lengthy hearing. It would not be appropriate to conduct the two hearings together or seriatim.
2.ECNZ will not be able to make submissions at the breach hearing or attend as an observer.
The reasons for this decision are:
a)Rule 2.10.2 of the NZEM Rules (Part 1) provides that hearings will be held in private unless the Committee directs otherwise.
In the past, the Committee has not permitted complainants to be heard on breach proceedings.
The Committee sees no reason to direct otherwise in this case. Moreover, ECNZ has received a copy of the investigators report and is aware of the substance of the case for the investigator and the Pricing Manager. These factors make its attendance unnecessary.
b)The Pricing Manager objects to ECNZ's presence at the hearing.
c)To allow ECNZ to make submissions at the breach hearing would be in breach of natural justice in that the Pricing Manager would be called upon to face what, in effect, would be two prosecutors.
d)ECNZ's rights are rights to compensation. Those rights are not prejudiced by its absence from the breach proceedings.
e)ECNZ as a Market Participant became a party to the contract represented by the Rules of NZEM. Market Participants accepted these Rules and agreed to be bound by them. ECNZ was such a Market Participant. It would be odd if, having resigned from the NZEM, ECNZ were now to be placed in a better position than a continuing Market Participant.
The MSC’s substantive breach decision given 19 December 2002
[58] Although the substantive decision of the MSC, as to whether ECNZ’s breach complaint against the Pricing Manager was made out, was not issued until after the Master had delivered his judgment and therefore formed no part of his judgment, it was the subject of submission by both Mr Millard and Mr Arthur.
[59] When ECNZ withdrew its complaint of 26 March 2001 and declined any longer to submit to the jurisdiction of the MSC it instead put a memorandum before the independent investigators, suggesting that the Pricing Manager ought to have recalculated the final prices before 18 March 1999 and not merely before 4 February and 9 November 1999, as first alleged.
[60] On the basis of that memorandum the investigators drafted fresh allegations to include alternatives within the timeframe suggested by ECNZ. All allegations were then inquired into by the MSC at a hearing on 10-12 June 2002. There were eight allegations in total which fell into two alternative categories. One category concerned allegations that the Pricing Manager should have used the ‘archived save case method’ of recalculation and carried out the recalculations by 18 March 1999 and should also have published the recalculated prices by 18 March 1999. The alternative category alleged that whatever method of recalculation the Pricing Manager used, either the saved case method or the ‘database method’, the Pricing Manager should have completed the recalculations in the period between 4 February and 9 November 1999 and published each recalculated price as it became available. The allegations stated that the recalculated prices for April 1998 had been available by 31 August 1999; the May 1998 recalculations by 19 August 1999; and the June recalculations by 3 November 1999.
[61] Considering first the allegations that recalculation and republication should have been completed by 18 March 1999, the MSC found that the time involved in making the recalculations (162.5 hours) and the need to give priority to current billing work rendered the allegation of failure to recalculate by 18 March 1999 unsustainable. It then followed that the associated allegation of failure to republish the recalculated prices within that time was also unsustainable.
[62] As original framed the basis of the first allegation of failure to recalculate promptly had been specified as the Pricing Manager not having used the archived save case method and the corrected data already provided for the recalculations. However that was clarified in preliminary argument as constituting a particular of the breach rather than the substantive breach itself. Such clarification appears to have been logical, when the alternative allegation (alleging failure to manage the
recalculation promptly by not having the database rebuilt with due diligence) is read alongside it.
[63] Turning then to consider the alternative category of allegations encompassing the wider timeframe of 4 February to 9 November 1999, the MSC found that the Pricing Manager was guilty of failing to manage its obligation to recalculate the final prices by failing to have the database rebuilt with due diligence. Expressly the MSC found:
In the view of the Committee, the Pricing Manager between 4 February 1999 and 9 November 1999 failed to carry out its obligation to recalculate prices for March, April, May, June, July 1998 with due skill, care and diligence. When the matter of recalculation is considered in the round, the Committee considers that the Pricing Manager went about the recalculation process in that period in a desultory fashion and in a manner which was inconsistent with its duty to act with due skill, care and diligence which, in dictionary terms, involves a careful and persistent application of effort.
[64] Turning then to the allegation of failure to publish the recalculated prices as soon as they were to hand, the MSC decided that although the minutes of its meeting of 18 March 1999 had not constituted a direction or formal statement by it and could not in any case circumscribe the Pricing Manager’s obligations under the Rules to publish in a timely way, it was reasonably possible for the Pricing Manager to have nevertheless thought that it was excused from publishing any recalculated price until the Appeal Board delivered its decision. On that basis the MSC held that any allegations of failure by the Pricing Manager to publish the recalculated prices in a prompt manner were not made out.
[65] Mr Millard submitted that the MSC’s dismissal of the allegation that the prices should have been recalculated by 18 March 1999 and published by that date overlooked the reasonable prospect that at least some months could have been calculated by 18 March 1999 and these prices published progressively. If this had been done, ECNZ’s loss would have been mitigated. Mr Millard further submitted that the finding by the MSC of a failure to recalculate promptly had not involved any determination as to whether the archived save case methodology would have proved more expeditious and should have been used and this constituted a deficit in its reasoning. In this regard, the MSC had expressly found that the particular method
used by the Pricing Manager “was not of concern, so long as any recalculation and consequent republication was done promptly”.
[66] Mr Millard also submitted that the avoidance by the MSC of giving any ruling on what a preferable recalculation methodology would have been, stemmed from its having been “compromised by its earlier dealings with the defendants, being those of 4 and 18 February 1999”. He said the MSC’s finding that its observation about publication (as recorded in the minutes of its 18 March meeting) had probably been informally conveyed to the Pricing Manager by Market & Surveillance and construed as releasing the Pricing Manager from the obligation to publish (but without the MSC actually knowing that was what had happened) contributed to the impression that the MSC had compromised itself by indulging in private meetings with the defendants or other entities of M-co. These perceptions were embarrassing for the MSC and brought into question its ability to properly adjudicate on the breach allegations against the Pricing Manager.
[67] Mr Millard emphasised that if ECNZ had not been “barred from the hearing” it could have made submissions about appropriate methodology, about the reasonable possibility that the Pricing Manager could have recalculated and republished at least some of the final prices by 18 March 1999, and about the Pricing Manager’s “contractual obligation” to publish in any event regardless of the unseen but rumoured ruling of the MSC, which could not in any event exonerate it from its contractual obligation.
ECNZ’s situation
[68] The facts underpinning the case for ECNZ can be summarised as follows. After the Mangahao pricing error was discovered and the MSC sought advice from market participants as to whether any had suffered material financial disadvantage, ECNZ had notified the MSC of its concern about any delay in recalculating final prices and drawn attention to the expiry date of the limitation clauses in its hedge contracts. Following the MSC’s decision of 4 February 1999, the advice to the market was that recalculation of final prices would take in the vicinity of a month to six weeks. In the meantime however, Transpower had appealed against the MSC’s
decision. The indication was that the appeal would be heard in late March or April. Subsequently ECNZ’s resignation from the NZEM was accepted by the MSC, effective from midnight on 9 April 1999. No recalculated prices were published before 31 August 1999, at which time the 12 month limitation period under ECNZ’s hedge contracts expired. On appeal, the MSC’s 4 February decision that material financial disadvantage had occurred was set aside; this on 9 November 1999, with the consequence that no recalculation of final prices was required afterall. Had that situation endured and the status quo remained, ECNZ would not have suffered the loss it now claims. However, following the Appeal Board’s decision, the MSC decided to revisit the issue of material financial disadvantage resulting from the Mangahao error and proceeded to do so. After a number of hearings and appeals in relation to this, the MSC once again determined that some market participants had suffered material financial disadvantage and consequentially that final prices would be recalculated and republished; this on 19 December 2000. ECNZ, in the knowledge that it could not now reopen its hedge contracts, lodged a complaint with the MSC against the Pricing and Clearing Managers for the sole purpose of obtaining compensation for the net loss it would suffer when the recalculated prices were published. As ECNZ was no longer a party under the Rules it was however required to voluntarily submit to the MSC’s jurisdiction in order to have its complaint investigated and determined by the MSC. Its claim for compensation rested on the failures it alleged against the Pricing and Clearing Managers in not having carried out their obligations under the Rules in a timely fashion. However the MSC ruled that it would enquire into the breach allegations separately and before proceeding to determine ECNZ’s claim for compensation and further ruled that ECNZ would not be permitted to participate in the hearing of the breach allegations, even though its complaint had triggered the investigation into these and even though its ability to obtain compensation would likely rest on the outcome of the breach hearing. One of the grounds stated for excluding ECNZ from the hearing was that the Pricing Manager objected to ECNZ’s presence at the hearing. ECNZ says that it did not appeal this ruling because it did not sight the ruling until 23 January 2003, by which time the appeal period had expired.
[69] Shortly after, the Pricing Manager wrote to ECNZ and the investigators advising that it had not published any recalculated prices prior to the Appeal Board’s
decision of 9 November 1999 because of a statement made by the MSC at a meeting on 18 March 1999, which ECNZ had not been privy to. Upon obtaining the minutes of this meeting ECNZ discovered that the Compliance Manager, Ms Woods, had attended the 18 March meeting, as had a representative of the first defendant. This led ECNZ to the jaundiced view that while the recalculation of the final prices for the Mangahao error was occurring “and unbeknown to ECNZ”, the MSC “in an administrative capacity was having a series of meetings with the Defendants about the very issue of the price recalculation and publication of the outcome”. ECNZ further ascertained that the Compliance Manager and a Mr Gemmell had earlier participated in a teleconference meeting with the MSC; this on 4 February 1999. On the basis of these revelations ECNZ decided that “[h]aving been barred from appearing before the MSC and in light of the prior involvement of the MSC in issues which go to the core of [its] claim” it would withdraw its claim from the MSC (and thereby its submission to the jurisdiction of the MSC) and commence proceedings in the High Court. Its rationale for doing so rested on its assertion that it is not bound to proceed with its claim through the MSC ; or, even if its contractually bound to go through the MSC, good reasons exist for it not to do so. Those good reasons are the alleged denial of natural justice in barring ECNZ from participation in the hearing of its breach complaint; the alleged involvement of the MSC in “private” discussions with the Compliance Manager and representatives of the defendants about the appropriate recalculation methodology, and the MSC’s unbeknown direction to the defendants that publication of the recalculated prices would not take place until after the Appeal Board’s decision.
[70] Now that it is in receipt of the MSC’s 19 December 2002 decision about the breach allegations, ECNZ is convinced that it has been prejudiced and can no longer enforce its right to compensation before the MSC, as the MSC has found no breach by the Pricing Manager. The submission was put this way by Mr Millard:
… the MSC then observed that ECNZ’s rights are rights to compensation which are not prejudiced by its absence from the breach proceedings. How can it enforce these rights before the MSC, if the MSC finds no breach, it is not explained and cannot be. ECNZ is left with the impression that the MSC “was embarrassed by its earlier minute [of 18 March 1999] and was therefore unable to properly pass judgment on the Pricing Manager. It is also of the clear view that if it had been able to make submissions on
methodology and publication at the breach hearing the MSC could not have avoided ruling on the appropriate methodology as it did.
The defendants’ case
[71] Put shortly, the defendants’ case is that ECNZ’s claim is founded entirely on alleged breaches of obligations arising under the NZEM Rules, and which ECNZ remains bound by notwithstanding its resignation from the NZEM. The defendants say that ECNZ promised not to enforce any duty or obligation owed by them other than under the Rules and that promise has not come to an end. In contending this, the defendants do not rely on ECNZ’s voluntary submission to the jurisdiction of the MSC on 19 April 2001; rather their application for stay was based on the promise made by ECNZ in the Rules themselves. They say that even if the MSC’s jurisdiction to make certain orders in respect of a market participant has come to an end by virtue of Rule 8.1, the promise by the market participants in Rule 2.1 not to enforce duties or obligations other than under the Rules is not affected. This promise must necessarily survive a market participants’ resignation and withdrawal from the NZEM. The defendants also argue that ECNZ was rightly excluded from the breach hearing, and that it was not provided with a copy of the investigators’ second supplementary report because by then it had purported to withdraw its complaint from the MSC; that the breach hearing did not determine any right or obligation on the part of ECNZ so that natural justice did not require ECNZ’s participation in the hearing; and that as ECNZ was not a party to the hearing then, in respect of its compensation claim, it is not bound by any aspect of the MSC’s decision.
The effect of ECNZ’s resignation: does ECNZ nevertheless remain bound by the Rules in relation to its claim for compensation?
[72] The first and major issue on review is whether the Master was correct in finding that any right which ECNZ has to enforce a claim for compensation against the defendants arises solely by virtue of the Rules and is therefore a matter solely within the jurisdiction of the MSC.
[73] There is no question that ECNZ’s claim, both by way of complaint before the MSC and by proceeding in this Court, is based on the covenants in the deed polls entered into by the defendants. These comprise the duties or obligations of the defendants described in the Rules and which ECNZ now seeks to enforce. ECNZ’s statement of claim in this Court is brought entirely in contract, that contract being the NZEM Rules. It has frankly acknowledged both in evidence and submissions that it relies on the deed polls as providing the basis for its compensation claim in either jurisdiction. That acknowledgement must, in my view, dispose of any argument that the rights ECNZ now seeks to enforce somehow arise independently of the Rules, simply because the breach occurred after ECNZ had ceased to be a party to the Rules.
[74] The fact that the Pricing Manager “is not even a party to the Rules” does not alter this contractual reality. The Pricing Manager’s duties and obligations arise only under the Rules and by virtue of the covenants in its deed poll: they have no basis elsewhere. Whilst it is correct that the Pricing Manager and the other service providers are not parties to the Rules in the same way as the market participants, their relationship with the market participants and M-co is nevertheless contractual in nature. The essential structure of the NZEM and its relationships was helpfully summarised by Mr Arthur as follows:
For the market to work, a service provider must not only be subject to the obligations described in the Rules, but entitled to the rights described in the Rules. Each deed poll is therefore effectively a contract between the market and the individual service provider. The market however is not a legal entity so the service provider enters into a unilateral deed poll by which it promises to perform the obligations of that service provider, as set out in the Rules. The Rules bestow not only obligations upon service providers, but also rights. For example, the Clearing Manager has the right to insist on payment of invoices, and payment of prudential requirements. It has the right to require certain information of market participants.
Rule 10.7.3 expressly states that the service provider deed is to be treated as a schedule to the Rules and is to be enforceable by the appointed service provider against market participants, the market administrator and other service providers.
[75] On the basis of the above description, which is unquestionably accurate, it follows that the first and second defendants are entitled to the benefit of the promise that ECNZ made “not to enforce any duty or obligation of any person described in
the Rules” other than by way of the rules; or at the very least the defendants must be entitled to the benefit of those promises pursuant to section 4 of the Contracts (Privity) Act 1982.
[76] Any argument by ECNZ that it is not relying on “any duty or obligation of any other person described in these Rules” but is relying on the obligations of the first and second defendants in their deed polls in some way which is divorced from the Rules is simply not tenable, as it seeks to artificially separate out the various types of contractual relationship provided for in the Rules and their Schedules. The short point is that ECNZ sues on the Rules.
[77] The fact that the deed polls entered into by the defendants do not contain the additional proviso in the deed poll entered into by Transpower does not alter the situation either. The absence of such a proviso does not and cannot import by silence a negation of the express promise by spot market participants, M-co and other service providers in Rule 2.1. The additional proviso in Transpower’s deed poll serves only to emphasise that promise.
[78] Mr Millard suggested that the fact that ECNZ had necessarily to submit to the MSC’s jurisdiction, if it wished to have its complaint investigated by that body after it had resigned from the NZEM, demonstrated that ECNZ was not bound by the Rules for compensatory purposes but was free to choose its forum for complaint. However, whilst ECNZ’s resignation as a member of the NZEM meant that it was no longer bound by or subject to the Rules (except for the two year period in Rule 8.7), that did not imbue it with standing to enforce rights or obligations owed by others under the Rules other than by invoking the Rules and submitting to the jurisdiction of the MSC.
[79] The fact that ECNZ submitted to the jurisdiction of the MSC is a matter of some significance in my view, although not for the reason ECNZ has suggested. Submission to the MSC’s jurisdiction was a matter of election for ECNZ from which it should not be permitted to resile in the absence of good reason. The circumstances and basis on which ECNZ resigned are as set out in para [48] above. The chronology of events there described demonstrate that ECNZ knew, when it
resigned, that it had no assurance from the MSC that it would be heard in relation to the recalculation of final prices for the period of the Mangahao error. The only proviso was that the MSC agreed that, should it allow market participants to make submissions on this matter at a later date, ECNZ would have the same rights as the other market participants. No greater assurance than that was given.
[80] The further argument that the compensation now sought by ECNZ is simply a matter of disposition able to be dealt with at large and does not constitute the enforcement of any duties or obligations under the Rules is not persuasive either.
[81] In conclusion, I agree with the Master’s finding that no obligation or duty arising under the Rules is enforceable except according to the Rules, and any consequential claim for compensation by a party or former party must also arise under the Rules. ECNZ is therefore bound by the Rules and precluded from pursuing its proceeding in this Court. Even if I were wrong in reaching such a categorical conclusion, there are a number of good reasons why the Court should in any event exercise its discretion to stay ECNZ’s proceeding.
[82] First, there is the specialist nature of the MSC, whose members have been selected for their particular expertise and experience in the electricity market. Allied to this is the elaborate and comprehensive nature of the structure in place under the Rules for the investigation and prosecution of complaints and the conduct of hearings. The fact that this structure is disciplinary and regulatory in its focus rather than simply providing a forum for determining bilateral disputes has significance. It has thus a broader reach and purpose than simply a lis inter partes. That must be for the benefit of the industry generally and also beneficial for the public.
[83] A further reason why the Court should exercise its discretion to stay ECNZ’s proceedings is that ECNZ did not seek to judicially review the MSC’s decision to decline it the right to be heard at the breach enquiry. The Master referred twice in his judgment to the application for stay as being in the nature of a “back door” attempt to judicially review the MSC’s decision to exclude ECNZ from the breach hearing. Likewise the Master found that ECNZ’s allegations of bias and pre-
determination amounted in essence to an invitation to him to undertake an exercise akin to a judicial review of the MSC process.
[84] The question as to whether the decision to exclude ECNZ from the breach hearing or to exclude it from any pre-hearing process that the MSC participated in with the defendants or their representatives are decisions amenable to review by the Court was not argued. The justiciability of those matters is not however an irrelevant consideration. There are evident assumptions that the processes of the MSC and the Appeal Board are properly amenable to review by the Court. These assumptions appear in a number of statements. For instance, in the following submission by Mr Arthur on behalf of the defendants:
… the rules provide for more than merely the determination of private, bilateral rights and obligations between participants and service providers.
The Electricity Market is clearly a market that is of prime importance, particularly to industry and commerce in New Zealand. In the absence of agreed rules, it is likely that the market would be operating under Government regulation. The NZEM Rules can therefore be seen as self imposed regulation.
…
… on ECNZ’s complaint about natural justice, it is worth noting that ECNZ declined to appeal the decision of the MSC not to allow it to participate in the breach hearing. Neither did it seek to judicially review that decision in the five months before the hearing commenced on 10 June 2002.
[85] Likewise, the following statement by the Appeal Board in its decision A2/00 of 8 November 2000 makes clear that the Appeal Board considers its decisions are amenable to review:
On these findings we make one observation at this stage. The MSC found that if the Appeal Board intended to make a decision that was to resolve the matter once and for all, the Appeal Board’s decision was given in breach of natural justice. If by that finding the MSC meant that it could ignore the Appeal Board’s decision, that was a conclusion the MSC was not entitled to reach. It is not for the MSC to overrule a decision of the Appeal Board. Only the High Court on an application for review can quash a decision of the Appeal Board on the ground that it acted in breach of the rules of natural justice.
[86] Given the regulatory and disciplinary function of the MSC and the Appeal Board and the effect of their surveillance function on the market, their decisions and
processes are likely to be subject to supervision by the Court. Some parallel arose in the situations discussed by the Court of Appeal in the Electoral Commission v Cameron [1997] 2 NZLR 421 at 429 and by the English Court of Appeal in R v Panel on Take-overs and Mergers, ex parte Datafin plc [1987] QB 815.
[87] ECNZ did not seek to argue against this but simply advised that it saw useful purpose in judicial review.
[88] Taking all of the above matters into account, I am satisfied that the Master was correct in finding that any right which ECNZ has to enforce a claim for compensation against the defendants arises solely by virtue of the Rules and is therefore a matter solely within the jurisdiction of the MSC. I further agree with the Master’s observation that ECNZ’s institution of Court proceedings, as an alternative to the agreed dispute resolution process under the Rules, is an attempt to rely on the Rules whilst not submitting to the Rules and the Court should not permit its processes to be used in this alternative way.
Discussion: is there “good reason” for ECNZ to be permitted to bring proceedings in this Court?
[89] Two issues arise under this head: the first is ECNZ’s claim that a breach of natural justice occurred when it was denied the opportunity to be heard on the breach allegations; the second concerns allegations that the MSC indulged in private meetings with the defendants and S&C about aspects of ECNZ’s complaint, when ECNZ was not present at those meetings. In a sense the two issues are related, as the overall issue is whether ECNZ has been treated unfairly and effectively shut out of its claim. ECNZ’s view is that the MSC’s decision on its breach allegations serve to confirm that it has been unjustly treated and shut out of its claim unfairly.
Breach of natural justice
[90] The basis for ECNZ’s contention that it has suffered a breach of natural justice and should therefore be permitted to pursue its claim for compensation in this Court was put by Mr Millard in the following way:
The effect of MSC’s decision and the Master’s ruling is that ECNZ is likely to have lost the opportunity to pursue its very significant claim without being able to participate in the hearing. This is fundamentally unjust and ought to require clear rules before that occurs.
[91] Mr Arthur submitted however that the rules of natural justice did not require that ECNZ should have been represented at the breach hearing because that hearing did not determine any right or obligation on the part of ECNZ. He said the decision itself makes no reference to ECNZ’s compensation claim and plainly does not determine that claim. In addition, that the MSC’s decision of 7 January 2002 makes it clear that the MSC will treat the two proceedings as separate. In this regard Mr Arthur was referring to the MSC’s statement in its ruling that:
ECNZ’s rights are to compensation. Those rights are not prejudiced by its absence from the breach proceedings.
[92] I find it understandable that ECNZ did wish to be present at the breach hearing and to make submissions of its own. However it was not a party to that hearing and the Rules provide for such hearings to be held in private at the discretion of the MSC. I note that ECNZ does not challenge the Rules themselves. The decision to exclude it was a matter entirely for the discretion of the MSC after receiving the Pricing Manager’s views and giving the matter due consideration. Although the Pricing Manager’s reasons for objecting to ECNZ’s presence are not known to the Court, they were clearly accepted by the MSC and that must suffice. The decision to separate the enquiry into the breach allegations from an enquiry into any consequential loss and compensation was appropriate and sensible in the circumstances. Certainly it is not an unusual decision for a tribunal or court to make. Whether the reality is that ECNZ is now in practical effect precluded from succeeding in its claim for compensation is not clear. What is clear is that the MSC is willing to hear such a claim and the view of both the MSC and the defendants is that a compensation claim can still be pursued notwithstanding the decision of 19 December 2002.
[93] The provision under the Rules for an independent investigator (either the S&C or some other investigator) makes it clear that a complainant is not a party (as such) to any complaint proceeding. This structure reflects the regulatory and disciplinary function of the MSC and its focus on market supervision.
Notwithstanding, a complainant does have status under the Rules and its position is to be considered, as it may be affected by the outcome of any complaint, for example by an award of costs against it. A number of the Rules specify the involvement of complainants: for instance Rule 2.9.3 and 2.9.4 (investigator to forward a copy of the complaint as formulated and a copy of the investigators report; and to notify the complainant and the person allegedly in breach of the hearing date); and Rule 2.10.3 (reference to affected parties). This does not however mean ‘ownership’ of a complaint and the S&C does not require a complaint to be made before it can investigate: it can do so of its own volition.
[94] In the present case, independent investigators were appointed in response to ECNZ’s request that S&C not be involved in investigating or prosecuting its complaint. That step of itself put a proper distance between ECNZ, the MSC and the M-co entities, whether acting in an administrative capacity, in an adjudicative capacity or as defendants.
[95] In the event, it is impossible to find that ECNZ has suffered a breach of natural justice by its exclusion from the breach hearing. Its right to possible future compensation was not the subject of enquiry at the breach hearing: rather, the rights, duties and obligations of the Pricing Manager were the subject of that enquiry. Furthermore, and significantly, ECNZ was never given any assurance that it would be allowed to make submissions in relation to the recalculation of final prices for the period of the Mangahao error and it resigned from the NZEM in the knowledge that it had not received any such assurance.
Private meetings from which ECNZ was excluded
[96]In Mr Millard’s memorandum to the MSC (at p9) he stated:
One problem that does emerge is that the MSC was extremely involved in an administrative role. Questions are likely to arise as to what was said at private MSC meetings attended by Ms Woods and Mr Dawson. It is, therefore, inappropriate that the MSC should now act in a judicial role to such events, particularly as the MSC has excluded ECNZ from participation in the breach hearing.]
[97] In response to Mr Millard’s similar submission in this Court (that the MSC had compromised itself by holding private meetings with the third and first defendants on 4 and 18 February and was thus unable to bring its objective judgment to bear in reaching its decision of 19 December 2002) I am unable to find any error of process or approach in relation to the meetings in question. Whilst the defendants are all entities of M-co (and this does not present an ideal image), examination of how that situation was managed by the MSC removes cause for doubt. Although the S&C has responsibility for providing the MSC with all administrative support, the evidence is that no S&C staff, or staff representing either of the three defendants, were present at any time when the MSC was deliberating on the issues that were to form the basis of the breach allegations, or when the MSC were deliberating on the allegations themselves. A perusal of the minutes of the 4 February 1999 meeting, at which the MSC decided that material financial disadvantage had occurred, makes it clear that all that Ms Woods advised the Committee of was that the recalculation of final prices would be a time consuming task for the Pricing Manager, likely to take 3-4 weeks plus a further month. There is no record of any discussion nor reflection of any view put forward by the MSC at that meeting with her about methodology or appropriate methodology. Clearly the methodology to be adopted was always going to be a matter for the Pricing Manager to determine as its judgment best dictated.
[98] In similar vein the minutes of the meeting of 18 March 1999 must dispel any concern. These record that at 11.45am, a Mr Dawson of the first defendant joined the meeting and then left at 11.50am. What the minutes record of his involvement in the meeting during the period of his attendance can only be described as innocuous. The minutes then record that after he left the meeting Ms Woods tabled a letter from Contact Energy concerning the recalculation of final prices and possible material financial disadvantage to spot market participants. The minutes then record that at 12 midday, Mr Gould of the Market Administrator joined the meeting to present the Market Administrator’s report. And so the minutes go on.
[99] Although, as I have noted, the fact that all of the defendants and the S&C are subsidiaries of the same company and this is not ideal in terms of image or comfort levels where a dispute arises, the fact is (as I have also already noted) that the MSC appointed independent investigators into ECNZ’s complaint of breach under the
Rules and did not use the S&C for this. The relationship of the various M-co entities, as explained by Ms Payne and Mr Bradley in their affidavits, arises from the provision under the Rules for a number of different service providers to assist and enable the NZEM to function. The issue for the Court is not whether all of these entities should ideally be subsidiaries of the same company: the issue is whether there is any reasonable possibility to suspect that the defendants (or any of them) obtained any unfair advantage in the matter at issue by virtue of their relationship with each other and with the MSC. I am satisfied there is no evidence of that. Not only were two independent investigators initially appointed to investigate and prosecute ECNZ’s complaint, it is also clear from a reading of the MSC’s decision of
19 December 2002, that the investigation and prosecution that followed were thoroughly and scrupulously conducted. This is exemplified by the manner in which the natural concern caused to ECNZ by the 18 March 1999 minutes was dealt with. That matter was examined and determined as a preliminary issue by the MSC before it turned to consider the breach allegations themselves.
[100] Given the amount of attention that this matter was accorded in argument on review, it is appropriate to set out in full the manner and extent to which the MSC dealt with this and related preliminary issues:
The [minutes of the MSC’s meeting of 18 March 1999] were referred to in a memorandum dated 1 February 20002 prepared by Mr Ian Millard QC counsel for ECNZ. In this memorandum Mr Millard expressed concern that the Pricing Manager was placing reliance on these minutes “by trying to excuse itself from failing to carry out the recalculation in a timely manner and also, for its failure to comply with rule G 4.4”.
In the same memorandum, Mr Millard also said that it was inappropriate that the Committee should act in a judicial role in relation to the event, particularly as the Committee had excluded ECNZ from participation in the breach hearing. (This was a reference to the fact that in a decision given on 7 January 2002, the Committee ruled that ECNZ would not be allowed to make submissions to the Committee on the breach proceedings which are the subject of this decision. …)
The Committee had itself already considered these questions and, because of t heir possible importance and the need for the Committee to be seen to be acting objectively, it decided to seek an opinion from Mr J A Farmer QC. Mr Farm gave his opinion to the Committee on these points and later prepared submissions to them which he presented at the hearing.
Later in this decision the Committee discusses the relevant minutes and the construction to be placed upon them. It now deals with the second of the
preliminary points raised by Mr Millard which goes to the Committee’s jurisdiction to hear the case at all. The Committee notes that at the time of the Mangahao error and the finding of material financial disadvantage on 4 February 1999, the Committee comprised Mr T Arnold, Professor L Evans, Mr B Lyttle, Dr K Turner and the present Chairman, Sir Duncan McMullin. Dr Turner resigned from the Committee on 13 January 1999 and was replaced by Mr A Muldoon on 10 September 1999. Mr Arnold resigned on 15 October 2000 and was replaced by Mr Q Hay on 17 January 2001. The other members of the original Committee remain. It follows that three of the members of the present Committee were involved in the Committee’s decision of 4 February 1999 and the meeting on 18 March 1999, at which the recalculation and republication of final prices was discussed. Only Mr Muldoon and Mr Hay were not then members. However, the Rules of NZEM (Schedule 1) provide that a quorum for any Committee of the NZEM shall be more than 50% of the total number of members of the Committee. For that reason, Mr Muldoon and Mr Hay could not alone comprise the Committee for the purposes of the hearing of the complaint by ECNZ against the Pricing Manager.
In his submission on this point, Mr Farmer said that there was no alternative to the present Committee hearing and determining the complaint. He referred to the legal principle known as the ex necessitate principles which is stated by Professor Wade, (Administrative Law 7th edition, pages 476/7) as follows:
“In all the cases so far mentioned the disqualified adjudicator would be dispensed with or replaced by someone to whom the objection did not apply. But there are many cases where no substitution is possible, since no one else is empowered to act. Natural justice then has to give way to necessity; for otherwise there is no means of deciding and the machine of justice or administration will break down.”
Mr Farmer pointed out that the cases in this area generally concern statutory authorities and some of them have been decided on the basis that Parliament can legislate away the principles of natural justice and, as a matter of legislative intendment, members of a statutory body can hear and determine notwithstanding an otherwise disqualifying component. However Mr Farmer submitted that in principle there was no difference in the case of consensual contractual authority for the establishment of a judicial or quasi- judicial body. No objection was taken by the investigators or Mr Arthur to the Committee hearing the complaint. Therefore, acting on the ex necessitate principle, the Committee decided to proceed with the hearing before the full Committee as at it is presently constituted.
[101] I find it impossible to quarrel with or see any viable alternative to the advice given by Mr Farmer in this matter. Axiomatically, it is impossible to question the MSC’s decision, after receiving his advice, that it had to hear and determine ECNZ’s complaint notwithstanding any possible effect that the 18 March 1999 minutes may have had on the Pricing Manager’s non publication of any recalculated prices.
[102] In summary, when the minutes of the meetings of 4 and 18 February are examined and analysed and the evidence about the way in which the various administrative relationships were managed is considered and the breach decision itself perused, it is fair to conclude that assertions such as “… the MSC’s involvement in recalculation methodology issues in February to March 1999” of which “ECNZ was unaware” are an overstatement or even a misstatement of what actually occurred. I am satisfied that, despite the somewhat incestuous nature of the defendants and the (at times) close working relationship between the S&C and the MSC on administrative matters, there is no evidence that the defendants obtained any unfair advantage in relation to ECNZ’s claim by virtue of those relationships.
Conclusion
[103] On the basis of the above findings the plaintiff’s application for review of the Master’s decision is declined and the stay of ECNZ’s proceedings in this Court is confirmed.
Costs
[104] The defendants are entitled to costs. Accordingly I award costs in accordance with category 2 of the Third Schedule of the High Court Rules, such costs to be calculated in accordance with Table B of the Third Schedule of those Rules
Solicitors:
Ivan Veale, Wellington, for the Plaintiff Chapman Tripp, Auckland, for the Defendants
Delivered at 3.30pm on Thursday 12 February 2004.
APPENDIX A
[105] ECNZ’s attitude to the possible recalculation of final prices arising from the Mangahao error was set out in its letter dated 29 January 1999 to the MSC as follows:
ECNZ has expressed its views on the recalculation of final prices on several previous occasions. In particular, we are concerned about the damaging effect that delays in finalising final prices has on the credibility of NZEM. We note and endorse the Committee’s desire to restrict [its] ability to order a recalculation to a period of six weeks, and believe that the Committee shares ECNZ’s concerns in this regard.
Given these concerns, we must express our dissatisfaction with the delays in identifying and resolving this case. We would also need to point out to you that ECNZ’s hedge contracts have “wash up” provisions that are limited to a period of 12 months. This means that any further delays will result in ECNZ being significantly financially disadvantaged (as a result of the process, rather than the error itself). Should the Committee be of a mind to order a recalculation of final prices, we ask that this order be given urgently, and that a time frame be imposed on the Pricing Manager in preparing revised prices such that they are available to the market (for at least the month of March 1998) before the end of February.
[106]The history of matters up to this point was:
[107]The Mangahao error was discovered on 4 September 1998.
[108] Upon being advised of the Mangahao error the MSC commenced an investigation into whether any party had been in breach of the rules and what the impact of the error was on the final prices in the March to July (inclusive) period.
[109] As part of its investigation the MSC requested a report from the Pricing Manager on 4 September 1998 as to the effect of the error on the final price formulation.
[110] In a preliminary report dated 22 September 1998 and a further undated report, the Pricing Manager advised the MSC that the total financial effect of the non- inclusion of Mangahao’s generation on NZEM energy prices and the consequential effect upon settlement between market participants was $9,431,213.73. The Pricing Manager estimated that some purchaser class market participants (“PCMP’s”) had
been overpaid by $1-$2,000,000, which represented between 1.40% and 1.96% of their settlement figures for the period. All affected parties were likely to be at least partially hedged and the Pricing Manager estimated that, if the hedge positions were taken into account, the total financial effect on the market could in fact be somewhere between $1.5-$2,000,000.
[111] On receiving the Pricing Manager’s reports the MSC decided to seek advice from PCMP’s as to whether any of these felt they had been materially financially disadvantaged as a result of the Mangahao error and if so whether they sought a recalculation of final prices under Rule 4.5 of section G of Part 2 of the Rules (set out in para [29] above). Pursuant to Rule 4.5 the Pricing Manager has no obligation to recalculate final prices unless the MSC determines that an error has resulted in material financial disadvantage to any market participant. However, once a determination that material financial disadvantage has resulted is made, the Pricing Manager’s obligation to recalculate final prices is automatically triggered irrespective of the financial consequences of the recalculation on any market participant.
[112] The MSC’s decision to seek advice from PCMPS as to whether any market participant had felt it had been materially financial disadvantaged derived from its “consciousness of the need to retain confidence both within and outside NZEM in the finality of final prices”.
[113] In furtherance of its decision, the MSC issued a memorandum on 25 November 1998 recording the Pricing Manager’s opinion that the total financial effect on settlement was $9,431,213.73, noting nevertheless that all parties were likely to be at least partially hedged. Market participants were asked to consider whether they had been materially financially disadvantaged, taking into account their hedge positions, and if so whether they sought a recalculation of final prices under Rule 4.5. No market participant queried the procedure the MSC was intending to follow. ECNZ did, however, express concern about possible delay in finalising prices, because of the 12 month limitation period under its contract. Several replies were received from market participants in response to the memorandum in which they claimed material financial disadvantage.
[114] On 16 December 1998 the MSC met and found, on the basis of the claims received, that a prima facie case for finding material financial disadvantage existed. However, as a recalculation of the final prices for the whole five month period was clearly a serious step with significant implications for the integrity of the market (a proposed rule change to limit the MSC’s ability to order recalculation of final prices to a period of six weeks was at that time under consideration), the MSC decided that it should “have on record evidence of material financial disadvantage that was unimpeachable”. Accordingly it sought an auditor’s certificate verifying the figures it had been provided by a market participant which had made out a prima facie case.
[115] In due course an auditor’s certificate was received, and on 4 February 1999 the MSC issued a decision that final prices for March to July 1998 would be recalculated by the Pricing Manager in accordance with Rule 4.5. The MSC also recorded its expectation that this recalculation would be completed as soon as possible and further ordered that once the Clearing Manager had received the recalculated price from the Pricing Manager that “all the information received should be washed up at the end of the month in which this information is received”: this was on the understanding that it “may involve the Clearing Manager conducting a special washup”.
[116] The NZEM Appeal Board, when subsequently considering Transpower and ECNZ’s appeal from the MSC’s 4 February 1999 decision that spot market participants had been materially financially disadvantaged, noted that the Pricing Manager’s consequential obligation to recalculate final prices for relevant trading periods was irrespective of the financial consequences for any market participant. In respect of the effect of hedging, the Appeal Board concluded that hedge contracts were relevant to the assessment of material financial disadvantage under Rule 4.5; specifically that “hedging contracts, while not referred to in Rule 4.5, are particularly relevant given that they are an accepted instrument for managing price risk in the wholesale electricity market”. The Appeal Board then considered the position of ECNZ in relation to its particular hedge contract position, which it recorded as follows:
ECNZ raised a further issue relating to hedge contracts. ECNZ’s ability to recalculate hedged settlements expires twelve months after the end of the
month in which the last invoice was delivered. As a result of the appeal against the MSC’s decision of 4 February 1999, the time for recalculating under the hedge contracts for the March to July 1998 period has now expired. This means, in ECNZ’s submission, that if prices are now recalculated, PCMPs will receive a major windfall and ECNZ will be “significantly financially disadvantaged”.
[117]However, the Appeal Board found:
When the Pricing Manager recalculated the final price he is required by rule
4.3 to do so in the manner described in schedule 1 of part 2 of the rules. The method described in schedule 1 does not provide for hedge contracts or their expiry to be taken into account. Nor can we see any other basis upon which hedge contracts can be taken into account in recalculating a final price, and in any consequential resettlement. This has the consequence that a resettlement figure can be in excess of a post-hedged amount judged to constitute material financial disadvantage.
It is for this reason that we have concluded that the evidence sought to be called by ECNZ at the hearing of the appeal, which relates largely to the financial consequences resulting from the hedge contracts having expired, is not relevant to the issues to be determined on the appeal.
As is apparent from the last sentence in rule 4.5, this conclusion does not limit any right that ECNZ may have against any SMP or service provided that may have caused or been responsible for the error.
[118] The outcome of the appeal decision, insofar as the issue of loss to ECNZ due to expiry of its hedge contracts is that, whilst the Appeal Board found that the existence or otherwise of hedge contracts was relevant to assessing material financial disadvantage under Rule 4.5, once material financial disadvantage had been established so that a recalculation of final prices required, the existence or expiry of any hedge contracts could form no part of the basis upon which the Pricing Manager made those price recalculations.
[119] Following delivery of the Appeal Board’s decision to set aside its ruling of 4 February 1999, the MSC signalled its intention to consider the effect of that decision. ECNZ applied to this Court for an injunction to prevent the MSC considering afresh whether any market participant had been materially financially disadvantaged as a result of the Mangahao pricing error. Its application was declined by Doogue J on 6 April 2000.
[120] Following that, the MSC held a formal hearing on 14 or 15 April 2000 to determine whether it could further consider the Mangahao pricing error and on 4
July 2000 issued a comprehensive decision, in which it retraversed the basis of its 4 February 1999 decision, analysed the Appeal Board’s decision setting that aside and determined that it could reconsider whether any market participant had been disadvantaged so as to trigger the recalculation of final prices for March to July 1998. In relation to the issue of hedge contracts and the Appeal Board’s decision to set aside its 4 February finding of material financial disadvantage, the MSC concluded that its processes and reasons, although they had not been expressed, coincided with the reasons in the minority judgment of the Appeal Board as to why the MSC was justified in determining that the Mangahao error was such as to materially financially disadvantage Mercury.
[121] The MSC’s decision to reconsider whether any market participant had been materially financially disadvantaged and thus again trigger a recalculation of final prices was again appealed by Transpower and ECNZ and by other market participants. In a decision dated 18 October 2000 the Appeal Board upheld the MSC’s decision, with the effect that the MSC was free to consider again whether any market participant had been materially financially disadvantaged.
[122] After a formal hearing on 25, 26 and 27 October 2000, at which nine market participants and former participants (including ECNZ) were represented by counsel, the MSC issued a decision on 19 December 2000, holding that certain participants had been materially financially disadvantaged, with the effect that prices were once again to be recalculated for the March to July 1998 period.
[123] ECNZ and Contact Energy appealed that decision and pending hearing of the appeal sought and obtained an order for a temporary stay of the MSC’s 19 December 2000 decision. On 5 July 2001, however, the Appeal Board upheld the MSC’s decision and the Clearing Manager sought payment of two invoices addressed to ECNZ. The first was an invoice seeking payment from ECNZ in the sum of $6,543,145.47. The second was a pro forma invoice by which the Clearing Manager was to pay ECNZ the sum of $1,842,548.11. Ms Payne, General Manager of Market Operations of the Market Place Company Limited, described the invoice situation thus:
The settlements on the NZEM are not netted off so we expected a payment from ECNZ in the sum of $6,543,145.47. That payment should have been made in cleared funds no later than 4pm on 20 July 2001. We would then have paid to ECNZ, on the same day, the sum of $1,842,548.11. The difference between those two figures is $4,700,597.36.
ECNZ, in its statement of claim in this proceeding, alleges that it could have passed on most of that net liability (about $4.4m) to its hedge counter parties, had it not been for the breaches by the Pricing Manager and Clearing Manager.
To date, ECNZ has not paid the invoice which was due for payment on 20 July 2001. Section H12 of Part 2 of the NZEM Rules sets out various steps that the Clearing Manager may take upon such an act of default. In accordance with those Rules, the Clearing Manager has not paid any amount to ECNZ in respect of the pro forma invoice I have just referred to. Instead, the funds received from other generators, which would ordinarily have been payable to ECNZ, have been paid, pro rata, to the purchasers pursuant to Rule H12.4.4.
Shortly after those invoices were due for payment ECNZ claimed in correspondence that it was not liable to pay the invoice as it, and a number of the payees, had by then been out of the market for more than two years. The same issue was raised by at least one market participant.
The Clearing Manager sought a binding ruling on the point from the MSC. The Rules provide for the MSC to give such rulings under Rule 2.7 of Part
1. The Clearing Manager asked the MSC to determine whether the invoices had validly been issued. Once again a formal hearing took place. Interested participants and former participants presented written submissions, as did the Clearing Manager. The Committee appointed an Amicus Curiae to present submissions. ECNZ was also represented at the hearing although it claimed that by attending the hearing and presenting submissions it was not submitting to the jurisdiction of the MSC. The MSC ruled that the invoices had been validly issued. It also ruled that the decision was not binding on ECNZ as ECNZ was no longer a participant.
0
0
0