New Zealand Airports Association Incorporated v Commerce Commission
[2024] NZHC 3948
•19 December 2024
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2024-485-61 CIV-2024-485-66 CIV-2024-485-68
[2024] NZHC 3948
UNDER Section 52Z of the Commerce Act 1986 IN THE MATTER
of an appeal against the Airport Services Input Methodologies Amendment Determination 2023 ([2023] NZCC 34)
dated 13 December 2023
BETWEEN
NEW ZEALAND AIRPORTS ASSOCIATION INCORPORATED
First Appellant
AUCKLAND INTERNATIONAL AIRPORT LIMITED
Second Appellant
WELLINGTON INTERNATIONAL AIRPORT LIMITED
Third Appellant
CHRISTCHURCH INTERNATIONAL AIRPORT LIMITED
Fourth Appellant
AND
COMMERCE COMMISSION
Respondent
AND
AIR NEW ZEALAND LIMITED
Interested Party
QANTAS AIRWAYS LIMITED
Interested Party
BOARD OF AIRLINE
REPRESENTATIVES NEW ZEALAND INCORPORATED
Interested Party
NZ AIRPORTS ASSOC INC & ORS v COMMERCE COMMISSION [2024] NZHC 3948 [19 December 2024]
Hearing: 16 December 2024 Counsel:
J B M Smith KC, T D Smith and E N L Peart for Wellington International Airport Ltd and Christchurch International Airport Ltd
M N Dunning KC and K M Massey for Auckland International Airport Ltd
K M Massey for NZ Airports Association Inc
J D Every-Palmer KC and T G Bain for the Commerce Commission
J C L Dixon KC and S C Trevella for Air New Zealand Ltd S C Keene and L Wright for Qantas Airways Ltd
T Lindsay for Board of Airline Representatives New Zealand Inc
Judgment:
19 December 2024
JUDGMENT OF RADICH J
[Application for adjournment and stay]
[1] On 13 December 2023, the Commerce Commission issued the Airport Services Input Methodologies (IM Review) Amendment Determination 2023 (the Determination).1 The Determination amended the input methodologies that are to apply to regulated suppliers of the specified airport services under the Commerce Act (Specified Airport Services Input Methodologies) Determination 2010, as previously amended.
[2] The Airports2 filed notices of appeal on 1 February 2024. The Airlines were joined to the appeals as interested parties on 18 March 2024.3 A two week fixture is in place for the hearing of the appeals, beginning on 21 June 2025.
[3] In a memorandum on 25 October 2024, the Commission explained that, in the course of determining the asset beta for airports as a parameter for the cost of capital, the Commission carried out various statistical calculations using a programming language called R. The results of the calculations appear in the “Cost of capital topic
1 Commerce Commission Airport Services Input Methodologies (IM Review 2023) Amendment Determination 2023 ([2023] NZCC 34, 13 December 2023).
2 I will refer to the parties, generally in this decision as the Commission, the Airports and the Airlines.
3 New Zealand Airports Association Inc v Commerce Commission HC Wellington CIV-2024-285-61, 18 March 2024 (Minute of Palmer J).
paper” in the Determination and were used by the Commission in determining an asset beta of 0.67 for airports.
[4] In their notices of appeal, the Airports allege, among other things, that the code written by the Commission for this purpose (the R-code) contained errors in the sense that the R-code did not perform correctly the calculations described in the topic paper. The Commission went on to explain that, having reviewed the claims, it accepts that the R-code contained errors which affected the output from the R-code and, therefore, may have affected the asset beta determination.
[5] In its memorandum, the Commission submitted that the most pragmatic and principled course in the circumstances is for:
(a)the remaining issues in the appeals to be determined by the Court; and
(b)unless superseded by the Courts findings in relation to other matters under appeal, the appeal in relation to the coding errors be disposed by the Court referring the Determination back to the Commission under s 52Z(3)(b)(iii) of the Commerce Act 1986 with directions to reconsider it in light of the admitted errors and the Court’s judgment.
[6] In a joint memorandum for the Airports of 6 November 2024, the Airports agreed with the Commission’s approach and proposed, in addition, the Court indicate that the parties are to make submissions at the hearing of the appeal as to the appropriate terms of the “directions as to the particular matters that require amendment” to deal with the admitted errors in accordance with s 52Z(3)(b)(iii).
[7] The Airlines do not agree with that approach. They seek an adjournment of the hearing of the appeal to a two week fixture that is available, beginning on 16 February 2026, and/or a stay of the appeal proceedings on the basis that the Commission would (of its own volition or following a direction from the Court) amend the determination in the first instance under s 52X of the Commerce Act in order to correct the errors.
[8] They say that the Court does not have jurisdiction to proceed on the basis proposed by the Commission and the Airports and that it is in the interests of justice to proceed on the basis that they have proposed.
The appeals and the R-code error
The grounds of appeal
[9] In the Determination, the Commission amended the Cost of Capital Input Methodology. The Cost of Capital Input Methodology requires the Commission to determine, for each disclosure year, a mid-point estimate of the vanilla and post-tax weighted average cost of capital (WACC) of a supplier of specified airport services using a specified formula that is set out in cl 5.1 of the Cost of Capital Input Methodology.
[10] The parameters of the formula in cl 5.1 include certain fixed WACC parameters. The parameters include an “equity beta” (a parameter used to estimate the cost of equity) and “leverage” (which is used to weight the cost of debt and the cost of equity in calculating the WACC).
[11] Historically, the Commission has estimated the equity beta based on a broad range of comparator firms and observations of those firms over the two most recent five year periods.
[12]The Airport’s grounds of appeal include the following:
(a)Comparator Sample: It is alleged that the Commission was wrong to apply various filters that excluded firms from the comparator sample used to estimate the equity beta.
(b)COVID Uplift: It is alleged that the Commission was wrong to have excluded observations of those firms during the COVID period and to have applied, instead, an uplift to the pre-COVID beta using a method modelled on that developed by the economic consultancy Flint Global.
(c)R-code errors: It is alleged that the Commission’s implementation of its approach to calculation of the assets beta, even if correct in principle, included errors in the R-code it used.
[13] The Airports say that success on either of the Comparator Sample or COVID Uplift grounds of appeal will mean that the R-code errors either fall away or can be addressed on any referral back to the Commission. In particular, it is said that success on both the Comparator Sample and COVID Uplift grounds means that the correct parameter figure can be adopted from the record without referral back to the Commission and the need to address the correction of R-code errors falls away. Conversely, it is said, if the Airports are successful on only one of the first two grounds, then there would be a question of how the R-code errors should be corrected.
[14] The Commission puts it on the basis that, even with the closed record,4 there are a number of possible alternative options. For example, if the Commission succeeded on the first appeal ground, but the Airports on the second, there would be at least three alternative options for the COVID adjustment methodology available on the record.
[15] However, as the Commission says, it is not possible to give more guidance at this point in time as to the changes that may have been made in the Determination if the R-code errors had not been made as there are a myriad of judgments involved and there is no way to know in advance, if any changes were made, the way in which they would traverse across other grounds of appeal.
The nature of the R-code errors
[16] There are two R-code errors. The first involves the calculation of the pre-COVID adjustment asset beta. The Commission intended to take the average of weekly and four weekly observations but, in error, took the average of weekly observations only.
4 Under s 52ZA(2) of the Commerce Act 1986, the appeal must be by way of rehearing and must be conducted solely on the basis of the documentary information and views that were before the Commission when it made its determination, and no party may introduce any new material during the appeal.
[17] The second was in the calculation of the COVID Uplift. The Commission intended to use a weighted-leased square regression but, due to a coding error, failed to implement it.
The positions of the parties on the way in which the R-code errors should be dealt with
[18] On 2 April 2024, New Zealand Airports Association wrote to the Commission about the R-code errors it had identified. It enclosed a report from Competition Economists Group explaining them. The letter and report were published on the Commission’s website on 9 September 2024.
[19] The Commission, after some consideration, accepted the existence of the errors. It considered whether it would be preferable to amend the Input Methodologies immediately and sought feedback on that from the Airports and the Airlines. On balance, it decided not to because it did not believe it would be possible to confine such an amendment in a way that would avoid the risk of traversing the other issues on appeal. That, it considered, would interfere with the integrity of the appeal process.
[20] The Airlines consider that the best approach is for the Commission to amend the Determination now so that, essentially, there is a fresh start. It has proposed a timetable that would involve the Commission issuing a notice of intention by the end of the working year, issuing a consultation paper in February 2025, issuing (following consultation) an updated methodology determination by early July 2025 and a timetable for all pre-hearing steps in fresh appeals leading to a hearing (on dates that the Court has indicated already are available) beginning on 16 February 2026.
[21] The Airlines say that this cause of action is necessary because, first, agreeing now to refer the R-code errors back to the Commission gives rise to significant jurisdictional challenges that may render the appeal process pointless and, secondly, the procedural complexities of the Commission’s proposal are such that it is in the interests of justice for an amendment process to take place in the first instance.
Jurisdiction under s 52Z(4)
The position of the Airlines
[22] As discussed, the Commission submits that the most pragmatic and principled course for dealing with the R-code errors is for the remaining issues in the appeals to be determined by the Court and that, unless superseded by the Court’s findings on other matters under appeal, the appeal relating to the R-code errors be disposed of by the Court referring the Determination back to the Commission under s 52Z(3)(b)(iii) of the Commerce Act with directions to reconsider it in light of the amended errors and the Court’s judgment—with submissions on the appropriate terms of those directions to be made in the course of the substantive hearing.
[23] The Airlines say that approach is simply not tenable because there could be no basis under s 52Z upon which the Court could refer the Determination, insofar as it relates to the R-code errors, back to the Commission with directions.
[24]Section 52Z(3) and (4) of the Commerce Act are in the following terms:
52Z Appeals against input methodology determinations
…
(3)In determining an appeal against an input methodology determination, the court may do any of the following:
(a)decline the appeal and confirm the input methodology set out in the determination:
(b)allow the appeal by—
(i)amending the input methodology; or
(ii)revoking the input methodology and substituting a new one; or
(iii)referring the input methodology determination back to the Commission with directions as to the particular matters that require amendment.
(4)The court may only exercise its powers under subsection (3)(b) if it is satisfied that the amended or substituted input methodology is (or will be, in the case of subsection (3)(b)(iii)) materially better in meeting the purpose of this Part, the purpose in section 52R, or both.
[25] Unlike a general appeal from determinations of the Commission under s 91, a bespoke regime is prescribed for appeals against input methodology determinations under s 52Z. It is not a matter of finding an error and then either correcting it or sending it back to the Commission. Rather, the Court can only allow an appeal if it is satisfied that an amended or substituted input methodology is (or will be) materially better in meeting the purpose of Part 4 of the Act.5 The purpose of Part 4 of the Act is provided in s 52A.
[26] The Airlines say that there is no basis upon which the Court could be satisfied that the R-code errors are such that an input methodology that did not include them would be “materially better”. Therefore, they say, the Court does not have jurisdiction to remit the methodology to the Commission under s 52Z(4). The only tenable way through, it is said, is for the Commission to begin an amendment process under s 52X of the Act before hearing the current appeals to address the R-code errors—from which the Airports and the Airlines would have further merits appeal rights.
[27] The Airlines say that, as was explained by the Court in Wellington International Airport Ltd v Commerce Commission, it is not permissible to remit a matter to the Commission where that involves the exercise of a material discretion.6 That is because the Court’s power to make an order is conditional upon it being satisfied that the order that it makes is materially better. Accordingly, the Commission cannot be left with a power or discretion with reference to a matter that is material because, if it did, the Court couldn’t be satisfied that the order that ultimately results would be materially better.
[28] Therefore, the Airlines say, the Court could not refer a matter back under this provision unless it was satisfied about what the significance of the errors was. But the Court cannot know that at this point because the appeal must be conducted solely on the basis of the documents that were before the Commission under s 52ZA(2).
[29] Accordingly, the Airlines say, until the coding errors are corrected by the Commission—by way of an amendment to the Determination under s 52X—the
5 Wellington International Airport Ltd v Commerce Commission [2013] NZHC 3289 at [157].
6 At [189] and [190].
Commission and the Airports have no ability to satisfy the Court that it has jurisdiction to proceed as they have proposed.
[30] The Airlines say that these are issues of law and that, accordingly, a conclusive answer can be given on them now by a Judge alone, sitting without lay members under s 77(14) of the Act.7
[31] The matter must, the Airlines say, be resolved now and cannot be left until the substantive appeal because, without the errors being corrected, the Court would be proceeding on an abstract basis—essentially in a vacuum—because it could not answer the question “materially better than what?”.
Discussion
[32] Ultimately, I am not satisfied that it is appropriate to determine these issues conclusively now in advance of considering the other issues on appeal. The issues raised by the Airlines are substantive questions on the availability and form of relief. As mentioned in [13] and [14] above, the determination of the two other issues (relating to the Comparator Sample and the COVID Uplift) may render consideration of the R-code errors as unnecessary. The Airports have raised three primary sets of issues in the appeals they have filed and they are entitled to have answers from the Court on them.
[33] If the answers on the other issues are such that the only remaining issue is the Court’s jurisdiction to direct the Commission to consider the R-code errors, the Airlines’ submission might prevail. If that (of the several appeal outcomes scenarios available) was where matters ended up, and if the Court then found that there was no jurisdiction to refer pure errors back, then Mr Every-Palmer KC for the Commission has said that the Commission would in those circumstances most likely undertake a s 52X amendment process. But to do that now would be being ahead of ourselves in circumstances in which the Airports are entitled to their appeal on all issues.
7 Section 52ZA of the Commerce Act provides that s 77 applies to an input methodology appeal and that s 77(14) is not limited by s 52ZA(3), which requires the Court to sit with two lay members (unless the Court considers that only one is required) for input methodology appeals.
[34] In addition, it is not entirely clear at this stage—and without full argument and reference to the record—that there is no jurisdiction at all on the Court’s part to refer the coding errors back to the Commission under s 52Z(3)(b)(iii). The Airports, the Commission and the Airlines all have slightly different positions on how broad or narrow the directions to the Commission on a reference back might be. In Wellington International Airport, the Court said that the reference back must be in such terms as to enable the Commission to be able to give effect to the Court’s decision. It could not, therefore, refer a matter back to the Commission for further consideration and substantive decision-making.8
[35] However, the Airports say that, in deciding whether an amended or substituted input methodology is or will be materially better in terms of s 52Z(4), there is no requirement for mathematical precision as to the quantitative significance of any error identified. The Commission put it on the basis that the Court’s comments in Wellington International Airport are such that any reference back must be “relatively prescribed” but that that does not necessarily mean that a reference back must always be narrow or mechanical. Rather, a reference back cannot be broader than is consistent with ensuring that what results will achieve a “materially better” regulatory approach.
[36] I do not see it as appropriate for the Airlines’ position to be addressed conclusively at this stage. There is something to be said for the Airports’ position that the Court need not be in a position to quantify and compare results before having the power to send an input methodology back as being materially better. As the Airports say, it could at least be possible for the Court to conclude that an input methodology that does not rely on reasons that contain mathematical errors is materially better than one that does.
[37] It is apparent that any change to the asset beta calculation from the R-code errors being corrected will be relatively significant. In a table provided by the Commission in its submissions for this hearing, it can be seen that relatively small changes to the asset beta would have a considerable impact on the WACC; which will flow through to the Airports’ revenue expectations. For example, an increase to the
8 Wellington International Airport Ltd v Commerce Commission, above n 5, at [189].
vanilla WACC could be up to 9.25 per cent. However, whether a purely mechanical adjustment to the equity beta of that nature could be the product of the appeal process would be the subject of considerable contest between the parties.
[38] These are, in my view, not pure questions of law that the Court should, sitting without lay members, make at this preliminary stage. The appeals should take their natural course. The arguments the Airlines make—which would likely impact on all three grounds of appeal – should be made in the context of the substantive appeal hearing. The fact that an early concession has been made in relation to the R-code errors should not change that.
[39] The Airports advanced arguments under this head on an alternative basis: that, essentially, the Airlines are inappropriately seeking determination of a preliminary question or applying to strike out a portion of the appeal. They observe that the threshold for a strike out application is high9 and that the starting point for a preliminary question application involves an assumption that all matters in issue will be dealt with in one hearing—subject then to a range of practical considerations tending one way or the other.10
[40] An assessment through the tests for strike out or for the isolation of a preliminary question is not necessary in the light of the discussion in [32] to [38] above. However, the strike out and preliminary question tests do have some resonance here in the sense that the Airlines’ approach is essentially pre-emptive. The principles are relevant also in a broad sense to an assessment of the interests of justice in this case, which is the subject of the final section of this decision.
Does the Court have jurisdiction to direct a s 52X process?
[41] The approach that is proposed by the Airlines would, in order to be effective, require the Commission to undertake an input methodology amendment process under s 52X of the Act. That provision simply provides that, if the Commission proposes to
9 High Court Rules 2016, r 15.1; and see Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
10 Rule 10.15; and see Hayden v Attorney-General [2011] NZHC 1432, (2011) 22 PRNZ 1, at [46].
amend an input methodology by making a material change, s 52V applies as if the amendment were a new input methodology.
[42] The Airports say that the Commission does not propose to commence a s 52X amendment process and that the Court does not have jurisdiction to order it to do so.
[43] The Commission’s position is that, if these appeals had not been brought and the Commission had found coding errors in a determination it had issued, then it would most likely have used a s 52X process. But where, as here, there are appeals on foot, to do that now would be to cut across the appeals and to interfere with the integrity of the appeal process. That is particularly so, it is said, when—despite the need to correct the coding errors—there are meaningful issues to be determined.
[44] Mr Dixon KC for the Airlines said, in response, that the Court would not be interfering with the integrity of a “proper” appeal process because the process is flawed. Mr Every-Palmer KC observed that substantive results can be produced despite the coding errors. As mentioned, even if the first and second appeal grounds are not made out, and if the Court was to find there to be no jurisdiction on the third ground at the substantive appeal, then the Commission would consider a s 52X process in any event. But, given the existence of the appeal, it would not intend to do so at this point in time.
[45] Would, then, the Court have the power to direct the Commission to carry out a s 52X process? For the Airports, Mr Smith KC says that, if the hearing of the substantive appeal is adjourned until February next year on the basis of the Airports’ application, then that would at the very least be close to a direction that a s 52X process should be carried out. And that, it is said, would be contrary to fundamental principles in the sense that it would interrupt vested appeal rights.
[46] The Airports say that there is no power at all on the Court’s part to direct a s 52X process.
[47] In the event that the Court finds against the Airlines on this application, then the question may well be put to the test. The Airlines have prepared draft judicial
review proceedings. They would seek judicial review of the Commission’s Determination based upon what is said to be incomplete and incorrect coding information and judicial review of what would be alleged to be an unreasonable decision on the part of the Commission to decline to conduct a s 52X process to amend the coding errors.
[48] It is said for the Airlines that, under s 17(b) of the Judicial Review Procedure Act 2016, the Court could direct the Commission to reconsider and determine a decision not to commence a s 52X process. These would be difficult arguments in the face of the bespoke appeal regime for input methodology determinations. However, they are not arguments that fall for consideration here and I see no basis for the appellant’s appeal rights to be stifled by the potential judicial review proceeding.
Interests of justice
[49] The Airlines say that the just, speedy and inexpensive determination of the appeal is best achieved by ordering the adjournment of the appeal to the February dates and by granting a stay to allow sufficient time for the Commission to correct the coding errors in advance of any appeal. A proposed timetable (summarised in [21] above) would see:
(a)the Commission issuing a notice of intention to amend by 20 December 2024 and an issues consultation paper by 25 February 2025;
(b)submissions and cross-submissions on the consultation paper leading to an updated input methodology determination by 9 July 2025;
(c)any appeals being filed by 6 August 2025;
(d)a timetable for the steps on appeal to be taken in this Court between mid-August 2025 and 9 February 2026;
(e)the appeal hearing from 16 February 2026.
[50] The Airlines put it on the basis that there is no perfect solution to the issues but that its approach would best meet the purpose of Part 4 of the Commerce Act and would be in the interests of fairness.
[51] In the context of what would be a tight timetable, the parties have made various submissions which, to varying degrees, are critical of other parties in terms of who should have done what, and when, in light of the current set of circumstances. The Airlines are concerned that they did not know about the existence of the errors when they decided to contribute to the appeals as interested parties, rather than as appellants or respondents, and that they were not copied into early correspondence relating to the identification of the R-code errors. In response it is said that the notices of appeal identified the R-code errors and that the Airlines could have chosen to participate as respondents in those circumstances.
[52] As I mentioned during the hearing, I do not see it as helpful for arguments of this sort to be pursued or analysed. The issue before the Court is whether the appeal should proceed to be heard, in the face of the coding errors, on the basis proposed by the Commission and the Airports or whether it should be stayed pending an amendment process.
[53] On balance, while there is a certain cleanliness to an approach that would see a whole restart to the process without the coding errors, I do not see the interests of justice as favouring that approach. The Airlines’ proposed timetable relies upon the Commission engaging immediately in an amendment process—and issuing a notice of intention to do so by the end of this week. As I have discussed, the Commission is unlikely to do so in the face of this extant appeal. Accordingly, the judicial review proceedings would follow. If this appeal was stayed while that occurred, then, whether the judicial review application was successful or unsuccessful, there would be significant delays in the hearing of this or any related appeal.
[54] The Airports have already waited approximately 18 months for the hearing of their appeals. The appeals should, in my view, be heard on the basis that jurisdictional issues of the type that have been raised on this application can be considered fully by the Court, sitting with lay members and with reference to the full record.
Outcome
[55] The application by the Airlines for an order adjourning the hearing of the appeal from July 2025 to 16 February 2026 or, alternatively, for a stay of the appeal pending an amendment by the Commission to the Determination under s 52X of the Commerce Act is declined.
[56]I direct that:
(a)in light of the Commission’s admissions about the coding errors, it is unnecessary for the parties to address the Court on the detail of the errors in their written and oral submissions, although the existence of them may be the subject of submissions;
(b)the remaining issues in the appeals will be determined by the Court;
(c)unless superseded by the Court’s findings in relation to other matters under appeal, the appeal in relation to the coding errors is to be disposed of by the Court following the receipt of submissions from the parties on its jurisdiction to refer the Determination back to the Commission under s 52X(3)(b)(iii) of the Commerce Act and on any directions it might give to the Commission to reconsider it in the light of the admitted errors and the Court’s judgment. Those submissions are to be made in the course of the substantive hearing.
[57] The Airports and the Commission are entitled to a single set of costs in relation to the applications that led to the 16 December hearing. In the event that any issues as to costs cannot be resolved by the parties, then the Airports and the Commission may file any memoranda by 5:00 pm on 14 February 2025 and the Airlines may file
any memoranda in response by 5:00 pm on 28 February 2025. Any such memoranda are to be limited to five pages in length—including any schedules.
Radich J
Solicitors:
Chapman Tripp, Wellington for Wellington International Airport Ltd and Christchurch International Airport Ltd
Russell McVeagh, Auckland for Auckland International Airport and New Zealand Airports Association Incorporated
Luke Cunningham Clere, Wellington for Commerce Commission
Webb Henderson for Qantas Airways Ltd
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