Todd Energy Limited v Transpower New Zealand Limited HC Wellington Civ-1999-485-43
[2005] NZHC 1730
•26 April 2005
IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY CIV-1999-485-43
UNDER the Commerce Act 1986
BETWEEN TODD ENERGY LIMITED
Plaintiff
ANDTRANSPOWER NEW ZEALAND LIMITED
First Defendant
AND POWERCO LIMITED
Second Defendant
Coram: MacKenzie J Dr J P Small
Hearing: 8-10 February 2005
Counsel: G P Curry with J Palmer and M Robinson (to oppose) for plaintiff
D J Goddard, QC, with L Theron (in support) for first defendant
B W F Brown, QC, with C Griffin (watching brief) for second defendant
Judgment: 26 April 2005
In accordance with r 540(4) the Registrar is directed to endorse this judgment with the delivery time of 10.30 a.m. on 26 April 2005.
JUDGMENT OF THE COURT
I INTRODUCTION
[1] These proceedings allege a number of breaches of the Commerce Act 1986 on the part of the defendants. In this application, the first defendant (“Transpower”) applies to strike out the proceedings against it, or, alternatively, for summary judgment in its favour. The plaintiff (“Todd”) opposes the application. The second defendant (“Powerco”) takes no active part on this application.
II BACKGROUND
(a) The relevant electrical installations
[2] There is a co-generation plant located within the Fonterra dairy factory at Whareroa near Hawera in South Taranaki. The Co-gen plant consists of four 10 megawatt gas turbine generators and a 28 megawatt steam turbine generator, giving a 68 megawatt rated generating capacity. The plant supplies the factory with steam and electricity. Electricity which is surplus to the requirements of the dairy factory is also generated. The plant is connected to Transpower’s substation at Hawera, some six kilometres away.
[3] The Hawera substation forms part of the national grid for the transmission of electricity The substation includes transformers for the conversion of electricity from 110 kV to 33 kV. On the 110 kV side, the Hawera substation is connected by transmission lines to two other substations on the national grid, at Waverley and Stratford. Also connected to the Hawera substation, on the 110 kV side, is a transmission line from a 30 MW hydro-electric generating plant on the Patea River (“the Patea generation station”). On the 33 kV side, the Hawera substation is connected to the local distribution lines network which serves electricity consumers in South Taranaki. When the Co-gen plant was first commissioned in July 1996, the connection to the Hawera substation was effected by means of a 33 kV line, which formed part of the local electricity distribution lines network in South Taranaki. In 1998, the joint venture built and commissioned a 110 kV line to the Hawera substation, which replaced the 33 kV connection.
[4] In summary, then, the relevant connections at the Hawera substation have been:
(a)From 1996 to 1998: 110 kV connections
(i) to Transpower substations at Waverley and Stratford, and
(ii)to the Patea generation station.
33 kV connections: to the distribution lines network, and to the Co-gen plant.
(b)From 1998:
110 kV connections:
(i)to the Waverley and Stratford substations;
(ii)to the Patea generation station;
(iii)to the Co-gen plant.
33 kV connections: to the distribution lines network.
(b) Ownership of the relevant installations
[5] Transpower has, throughout the relevant period, owned and operated the national grid, including the Hawera substation. The Co-gen plant is owned and operated by a joint venture between Todd and Kiwi Co-generation Ltd, which is a company owned by Fonterra and formerly by Kiwi Co-operative Dairies Ltd. For various procedural reasons, following interlocutory steps in these proceedings which it is not necessary to detail here, Todd, a 50% partner in the joint venture, is the only plaintiff.
[6] When the Co-gen plant was commissioned, the local distribution network (including the 33 kV line connecting the Co-gen plant to the substation) was owned by Egmont Electricity Ltd, which was both the owner of the South Taranaki distribution network (“the lines business”) and a retailer of electricity to customers served by that distribution network (“the energy business”). In 1997, Egmont became a wholly owned subsidiary of Powerco and was amalgamated with Powerco in 1999. In 1999, as a consequence of the Electricity Industry Reform Act 1998 (which required a split of the lines and energy businesses), the energy business was sold by Powerco, which since then has retained and operated only the lines business. The Patea generation station and the line connecting it to the Hawera substation were, at the start of the relevant period, owned by Egmont, and subsequently by Powerco. In 1998, Powerco sold the Patea generation station to Trustpower Ltd.
(c) Contractual arrangements
(i) Transpower
[7] Transpower has contracts with a number of parties in relation to the national grid. It has a policy of contracting only with parties who are directly connected to its network. Those parties fall broadly into the following categories:
(a)Generators, connected for the purpose of injecting electricity into the grid; and
(b)Off-take customers, which fall broadly into two categories:
(i)Large-scale users of electricity, with installations connected directly to the national grid; and
(ii)Distribution companies, that is, companies operating lines networks through which electricity is transmitted to end users. Until 1999, the owners of the lines networks were typically also sellers of electricity. Since 1999, it has not been lawful for the owners of lines businesses to carry on business as sellers of electricity.
[8] Transpower has a methodology for calculating the prices which it charges. That methodology involves calculating a revenue requirement for Transpower, to reflect the costs of owning and operating the national grid, and allocating that revenue requirement among its customers. The precise details have changed over the period, but the basic structure has at all times had the following components:
(a)A connection charge allocating Transpower’s revenue requirement in respect of those transmission assets which can be identified as serving specific customers. The connection charge allocates the cost of those assets to those customers.
(b)An HVDC (High Voltage Direct Current) charge that allocates Transpower’s revenue requirement in respect of the HVDC link (via
the Cook Strait cable) to, since October 1996, South Island generators connected to the grid.
(c)A demand charge that allocates the remainder of Transpower’s revenue requirements in respect of all HVAC (High Voltage Alternating Current) assets not recovered by a connection charge. The demand charge is payable by all off-take customers, and is based on electricity flows at the relevant grid exit point. In the case of the Hawera substation, the only off-take customer directly connected to that grid exit point is Powerco.
[9] Before the 110 kV line from the Co-gen plant was commissioned in 1998, the joint venture had no direct contract with Transpower. At that time the only contracting party in respect of the connections at the Hawera substation was Powerco, for all 33 kV connections, and for the 110 kV connection from the Patea generation station. Since the commissioning of the 110 kV line from the Co-gen plant, the joint venture has had a direct contract with Transpower in respect of its injection into the Hawera substation. It pays a connection charge for that connection. It has no direct contract with Transpower for off-take from the Hawera substation, or any other substation.
(ii) Powerco
[10] Electricity is conducted across Powerco’s distribution lines network from the Hawera substation to end users. As the operator of the lines business, Powerco enters into a number of contracts with users of its services. It contracts with end users of electricity, or with retailers who sell electricity to end users, to provide that distribution service. The amounts which it pays to Transpower by way of demand charges are recovered through the prices which it charges. Until the separation of the line and energy businesses, Powerco also had contracts for the sale of electricity direct to end users. That ceased in 1999.
[11] Powerco had, at the time when the 33 kV connection between the Co-gen plant and the Hawera substation was in place, a contract with the joint venture for the use of that line. That contract ceased in 1998. Powerco also has a contract with
Todd, which, in addition to being a partner in the joint venture, is also a retailer of electricity. That contract is for the use of Powerco’s distribution network for the carriage of the electricity which Todd sells to customers on that distribution network.
III THE ESSENCE OF TODD’S COMPLAINTS
[12] With that very brief background description, we turn to describe in broad terms the essence of Todd’s complaints in these proceedings.
[13] Todd alleges that both Transpower and Powerco have contravened ss 27, 29 and 36 of the Commerce Act 1986. It alleges that there is a contract arrangement or understanding between Transpower and Powerco which has the purpose or effect of substantially lessening competition in the pleaded markets, contrary to s 27. Todd also alleges that Transpower and Powerco have entered into, or given effect to, an exclusionary provision of a contract arrangement or understanding contrary to s 29. It further alleges that Transpower and Powerco have each used a dominant position, or taken advantage of a substantial degree of power, in their respective markets, for anti-competitive purposes contrary to s 36.
[14] The alleged practices and actions which underlie Todd’s complaints can be briefly described. The first is that Transpower refused to contract with the joint venture directly in relation to the supply of transmission services, during the period when Powerco’s 33 kV line was being used between the Co-gen plant and the Hawera substation. The second is that Transpower has refused to contract directly with Todd for the supply of transmission services in relation to the off-take of electricity from the Hawera substation, for supply to Todd’s electricity customers on the Powerco network, and in relation to off-take at other grid exit points where Todd may have customers. Todd alleges that Transpower’s refusal to contract directly with it forces Todd to purchase transmission services, bundled with distribution services, from Powerco. Todd further alleges that the cost of these services was subject to an excessive mark up by Powerco.
[15] The third broad ground of complaint is that Todd alleges that Transpower has wrongfully declined to treat the Co-gen plant as notionally embedded in the Powerco
network. Some further preliminary explanation of that complaint is desirable. Transpower’s prices to off-take parties connected to its network are, as briefly described earlier, based on the amount of off-take at the relevant grid exit point. At some locations around New Zealand there are injection connections and off-take connections to the grid at the same substation or in close proximity. That is the case at Hawera. Transpower’s normal pricing methodology treats injection and off-take separately and charges a demand charge based on the total off-take. If the input to the substation were netted off against the off-take from the substation, the demand charge would be lower. In certain situations, such a lower charge could be physically achieved. That is possible where it is technically feasible and economically advantageous for the injection customer and the off-take customer to bypass the Transpower transmission system by effecting a direct connection from the generation source to the off-take network. Where this is done, the generation is said to be physically embedded in the distribution network. That result may be beneficial to those parties, by lowering the Transpower charges. However, it may involve bypassing some assets of Transpower, which are already in place, and building new assets, at an overall higher cost to the economy as a whole. In recognition of this, Transpower has a notional embedding policy whereby it will adjust its charges to reflect the costs which the parties would incur if the physical embedding were carried out. Transpower has two pre-conditions to the operation of this policy:
(a) That physical embedding would bypass existing transmission assets which have a remaining economic life; and
(b) That both the injection customer and the off-take customer are party to the notional embedding agreement.
[16] Todd’s complaint in relation to the notional embedding policy is in essence that:
(a) Transpower has wrongly applied its existing policy in refusing to treat the injection from the Co-gen plant at Hawera as notionally embedded in Powerco’s network;
(b) Alternatively, if the decision not to grant notional embedding is in accordance with Transpower’s policy, then that policy is unduly restrictive;
(c) Transpower has discriminated between the two sources of injection at the Hawera substation by granting notional embedding to the Patea generation station but not to the Co-gen plant.
IV THE STATEMENT OF CLAIM
[17] The amended statement of claim dated 30 October 2003 pleads a total of 11 causes of action against Transpower and Powerco, both jointly and individually. It is necessary to describe briefly those causes of action, and the market definitions which are pleaded in relation to them:
(a) The section 27 causes of action
There are four causes of action under s 27 of the Commerce Act, against both defendants. Todd alleges that:
57(b) Transpower has a direct contact with … Powerco (“Powerco Connection Contract”) which renders a direct contract with the joint venture Todd or Kiwi Cogeneration Ltd impossible.
Todd further pleads:
“59. Prior to July 1996, Transpower and Powerco arrived at an understanding that:
(a)Transpower would not provide transmission services at the substation unless the users are physically connected to the substation;
(b)Transpower would not offer users of the substation the same or better terms for the supply of transmission services at the substation, than those terms offered by Transpower to Powerco for the supply of transmission services at the substation. (‘Transpower/Powerco Understanding’)”
[18] Todd alleges that the Powerco Connection Contract and/or the Powerco Understanding have amongst other things a substantial purpose, and have or are likely to have the effect of, substantially lessening competition in:
(a) the South Taranaki wholesale transmission services market, and
(b)the South Taranaki local delivered electricity market.
(b) The s 36 causes of action
[19] Six causes of action plead breaches of section 36 by Powerco and Transpower, separately. Against Transpower, three causes of action are pleaded. Todd alleges that Transpower has a dominant position in the high voltage transmission services market. It alleges that Transpower has used and continues to use its dominance in the high voltage transmission services market for the purpose of preventing the joint venture from engaging in competitive conduct in the South Taranaki wholesale transmission services market and in the South Taranaki local delivered electricity market and of restricting the entry of Todd into the New Zealand wholesale transmission services market. That use is alleged to arise from “Transpower’s refusal to provide transmission services at the substation on the same terms and conditions as Powerco”.
(c) The s 29 cause of action
[20] The final cause of action is against both defendants, and pleads a breach of section 29 of the Act. Todd alleges:
“153. The Powerco connection contract and/or the Transpower/Powerco understanding is an exclusionary provision and in contravention of section 29 of the Act. In breach of section 29(4) of the Act Transpower and Powerco have given effect to and continue to give effect to the exclusionary provision.”
(d) The market definitions
[21] The amended statement of claim pleads the existence of a number of markets. The pleading of the market definitions is as follows:
27. There is a market in New Zealand for the transmission of high voltage electricity including transmission, metering and transforming of electricity to distribution voltages ("high voltage transmission services market").
28. The high voltage transmission services market includes services for the injection of electricity into the national grid by the
generators ("input") and the offtake of electricity from the national grid ("output") for the distribution of electricity to the national electricity consumers.
29. There is a national market in New Zealand for the retail supply of the electricity energy ("national electricity retail market"). There is a national market in New Zealand for the retail supply of the electricity energy ("national electricity retail market").
30. The national electricity retail market encompasses the supply of electricity to end users throughout New Zealand and includes the supply of electricity to industrial, commercial, farmers and residential consumers.
31. There is a market in New Zealand for the wholesale transmission of electricity ("New Zealand wholesale transmission services market").
32. The New Zealand wholesale transmission services market encompasses the supply of transmission services from substations around New Zealand to distributors and retailers of electricity.
33. There is a market in South Taranaki for the supply of wholesale transmission services for electricity ("South Taranaki wholesale transmission services market").
34. The sale of wholesale transmission services in the South Taranaki market encompasses sales of transmission services at the substation to distributors and retailers of electricity.
35. There is a market in South Taranaki for the retail supply of local delivered electricity to consumers in South Taranaki ("South Taranaki local delivered electricity market").
36. The sale of electricity to the South Taranaki local delivered electricity market encompasses the sale of delivered electricity to end users throughout South Taranaki and includes the supply of electricity to industrial, commercial, farmers and residential consumers.
37. There is a local distribution market in South Taranaki for the supply of distribution line services for the distribution of electricity ("South Taranaki distribution line market").
38. The sale of distribution line services to the South Taranaki distribution line market encompasses the services of providing a network for the conveyance of electricity from the substation at the correct voltage, to the South Taranaki local delivered electricity market.
V THE APPROACH TO THIS APPLICATION
[22] Transpower’s application is an application both to strike out the pleading against Transpower as disclosing no cause of action, under Rule 186(a), and for summary judgment, under Rule 136(2). The principles as to a strike-out application are well established, and need no detailed elaboration here. They are set out in Attorney-General v Prince & Gardner [1998] 1 NZLR 262 (CA). The allegations in the statement of claim must be taken as capable of proof. The claim should be struck out only if, assuming that the allegations in the statement of claim can be proved, the claimed result in law will not follow. Affidavit evidence to contest the factual allegations in the statement of claim is not permissible. The principles as to a summary judgment application under Rule 136 may also be stated quite shortly for present purposes. They are set out in Pemberton v Chappell [1987] 1 NZLR 1 (CA). A defendant may on a summary judgment application seek by affidavit evidence to show that the allegations in the statement of claim are not true. Where this is done, the plaintiff must adduce sufficient evidence to establish that the plaintiff’s allegations are not baseless. However, the summary judgment procedure is not appropriate for resolving material disputes of fact. A robust approach is required in determining whether there are material disputes as to fact, but, if the affidavit evidence discloses a dispute as to facts, the proper course is for the matter to proceed to trial. Applying those principles to Commerce Act claims, Williams J said in Commerce Commission v British American Tobacco Holdings (New Zealand) Ltd (2001) 10 TCLR 320, para 39:
Courts should be more than usually cautious in striking out claims under the Commerce Act 1986 … because of the elusive nature of some of the concepts involved and the multitude of transactions against which they are often to be measured.
That comment was made in relation to a strike-out application. In our view, similar considerations are relevant in relation to a summary judgment application. The pleadings raise issues as to the existence and definition of markets. Those are questions of fact, to be resolved on the facts, assisted by expert opinion as to those facts. Extensive affidavit evidence, including expert evidence, has been filed on both sides. The concepts involved in the alleged markets are indeed elusive, and complex. The Court should not, on the summary judgment application, endeavour to resolve the conflicts which that evidence discloses. The task is to examine whether that evidence does raise material disputes as to fact which should be resolved at trial.
[23] Another significant difference between an application to strike out and a defendant’s application for summary judgment is that an application to strike out may succeed for part of a claim, even if other parts of the claim do disclose a cause of action. In a defendant’s application for summary judgment, the defendant must satisfy the Court that none of the causes of action in the plaintiff’s statement of claim can succeed.
[24] Neither summary judgment nor striking out will be appropriate where it is possible for the plaintiff to amend the claim so as to remedy the pleading defects relied on by the defendant. In Commerce Act cases, the test to be applied has frequently been expressed in the metaphor first adopted in Marshall Futures Ltd (In Liquidation) v Marshall [1992] 1 NZLR 316, 324. The question is whether the statement of claim is so badly drafted that it is a “total write off” or is deficient but capable of effective repair.
[25] In considering whether the statement of claim is a total write off or capable of repair, it is not for the Court to advise the plaintiff how its claim should be pleaded. We consider that a broad approach to the issue of whether a statement of claim is a total write off or capable of repair is desirable. The task is to focus on the essential elements in the claim, as they are revealed by the current pleadings. If those elements do not disclose a cause of action on which the plaintiff could succeed, then the claim should be struck out. If, on the other hand, the elements of the claim which are pleaded could, if properly particularised or re-cast, disclose a cause of action, then the claim should not be struck out. How they are recast is then a matter for the plaintiff.
[26] In this case, Transpower raises a number of pleading issues, in support of its application. We deal specifically with those, as necessary, below. At this point, a general comment upon the current state of the pleadings is appropriate. Mr Curry acknowledged the need to amend the statement of claim, but indicated that this had not been done because he contended that discovery was incomplete. We regard that as less than satisfactory. It is incumbent upon a plaintiff, particularly a plaintiff which is facing a strike-out application, to plead its case as well as possible. Discovery should generally follow, not precede, completion of the pleadings. The
relevance of documents must be assessed against the issues as disclosed by the pleadings. Discovery may reveal facts that may require some subsequent amendment, but any amendments now considered necessary should be made.
VI THE s 27 CAUSES OF ACTION
(a) Contract arrangement or understanding
[27] The first key element of s 27 is the existence of a contract arrangement or understanding. In this case, Todd alleges the existence of such a contract arrangement or understanding between Transpower and Powerco. The essence of the pleading is that since July 1996, when the joint venture started to use the 33 kV leased line, Transpower has refused to enter into a connection contract with the joint venture, which refusal is alleged to have arisen from a contract arrangement or understanding between Transpower and Powerco. Todd relies on reasons given by Transpower for refusing a connection contract in December 1996, which included that Transpower will breach an existing contract with another customer should it contract directly, and that it has a direct contract with Powerco which renders a direct contract impossible.
[28] Counsel for Transpower advanced a number of arguments in support of the submission that the contract arrangement or understanding relied on is not adequately pleaded. We consider that it is preferable to focus on the essence of what is alleged, rather than the precise form of the pleading. That approach is consistent with the proposition that only if it is incapable of repair should a pleading be struck out.
[29] The affidavit evidence discloses that, in response to a specific request for a client contract, Transpower, by letter dated 19 December 1996 to the joint venture, said:
….
I regret that it will not be possible for Trans Power to accommodate your request for a direct customer contract on the basis of your network services supply contract with Egmont Electricity. Trans
Power cannot accommodate your request without breaching an existing contract with another customer.
In refusing this request, we wish to make it clear that we are not denying you access to Trans Power’s network. By virtue of your network services supply contract with Egmont Electricity, you do already have access to the Trans Power grid.
….
[30] The affidavit evidence further discloses that at a meeting about this time Transpower’s legal adviser advised Todd at a meeting that there was an implied term in the Powerco connection contract which prevented Transpower from dealing with anyone else at the Hawera substation and that Transpower could be exposed to a claim by Powerco for damages if it breached that implied term. In response, Transpower’s deponent said that he accepts that Transpower was advised that there was an implied term, and that it was illogical (sic) to contract with Todd when a contract already existed with Powerco for the same service, and that Transpower acted on that advice, but that Transpower no longer considers the advice in respect of the implied term to be correct as a matter of law.
[31] In the face of that evidence, it cannot be said that the allegation that there was a contract arrangement or understanding between Transpower and Powerco to the effect alleged should be dismissed without being tested at trial. On the strike-out application, there is no basis for departing from the normal assumption that all facts alleged are capable of proof. On the summary judgment application, Transpower’s response to the evidence does not demonstrate that the allegation of the existence of a contract arrangement or understanding cannot succeed.
[32] None of the pleading objections to the allegations as to the existence of a contract arrangement or understanding lead to the conclusion that the allegations cannot succeed. Transpower submits that no term as alleged can be implied, since such a term would be unlawful. However, the existence of circumstances which would otherwise justify the implication of such a term would be sufficient to give rise to an “arrangement or understanding”.
[33] Transpower further submits that the terms of the alleged understanding or arrangement are inadequately particularised. The requirement as to pleadings in
circumstances such as this was expressed by Drummond J in State of Queensland v Pioneer Concrete (Qld) Pty Ltd (1999) ATPR 41-691, 42-831 in these terms:
34. Where a claim is based on a clandestine compact between a number of respondents, the applicant can be expected to be unable to give precise particulars of material facts sufficient to support its allegation of the making of that compact. In such cases, the entitlement of the respondents to be apprised before trial of the nature of the applicant’s case must, as McPherson J observed in Adsteam Building Industries Pty Ltd v The Queensland Cement & Lime Co Ltd (No 4) [1985] 1 Qd R 127 at 133, “be accommodated to the nature of that case itself”. It will generally be appropriate (and necessary) for the applicant to plead the overt acts it intends to rely on to justify the inference that a compact to the effect alleged was made ….
[34] In this case, the overt acts relied on are the statements by Transpower to which we have referred. The pleading of those is sufficient, in our view, to meet the hurdles of a strike-out and summary judgment application.
[35] Transpower also submits that a term in the Powerco Connection Contract cannot be relied on as the foundation for an “understanding”, since the understanding pleaded is alleged to have been reached prior to July 1996, and the contract was not entered into until October 1996. However, the later contract might well be supporting evidence for an earlier understanding. Whether or not that is so can only be resolved at trial.
(b) The relevant markets
[36] The second key element of s 27 is that the contract arrangement or understanding has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market. Market definition is an important part of a s 27 claim. So, an identification of the relevant market is an important element. It is therefore necessary to examine whether the pleaded markets are tenable. The term is defined in s 3(1A) of the Act as follows:
3. Certain terms defined in relation to competition
….
(1A) Every reference in this Act, except the reference in section 36A(2)(b) and (c) of this Act, to the term “ market“ is a reference to a market in New Zealand for goods or services as well as other goods or services that, as a matter of fact and commercial common sense, are substitutable for them.
[37] The definition of markets for anti-trust purposes is a means to an end. Definitions should help to discern the nature and consequences of the conduct at issue. In this case, the consequences are claimed to be a reduction in Todd’s ability to compete in South Taranaki, and thereby a reduction in competition in that region. It is therefore entirely appropriate to begin by considering the possible existence of local markets.
(i)The South Taranaki wholesale transmission services market
[38] Todd claims that there is a market for wholesale transmission services in South Taranaki. Transpower raises a number of pleading points. It submits that the pleading must adequately identify the product, temporal, functional and geographical boundaries of the relevant market (State of Queensland v Pioneer Concrete (Qld) Pty Ltd. It points to several deficiencies:
(a)the suppliers are not identified;
(b)the purchasers are not identified clearly;
(c) the product is not clearly identified, particularly having regard to the fact that both local and national wholesale transmission services market are pleaded and there is no particularity of the products which fall within each of those markets.
[39] We regard these pleading deficiencies as being capable of repair, rather than a total write-off. If there is a local market for wholesale transmission services, it must involve the delivery of electricity to retailers at the Hawera grid exit point, where Powerco's network is connected. Moreover, since the service is confined to South Taranaki, the relevant transmission must also begin in that region or on its boundary. For this pleaded market to be distinct from a national market for
wholesale transmission services, local competitive conditions must be materially different from those prevailing nationally, or at least potentially so. This does not seem impossible in the abstract, and the fact that Transpower has granted notional embedding status to the Patea station suggests that it recognises some local differences. There would seem to be three potential suppliers in a local market for wholesale transmission services: Transpower from remote generators, Trustpower, who could compete locally using power imported from the Patea generation station, and the joint venture from the Co-gen plant. Potential purchasers would appear to include all retailers supplying customers in South Taranaki.
[40] Professor Bertram, a witness for Todd, says that the South Taranaki wholesale transmission services market pleaded does not exist as an actual functioning market, being limited to bilateral contractual dealings between Transpower and Powerco. He says that it is a potentially competitive or contestable market given the existence of multiple suppliers and purchasers of transmission services at the local level. As is clear from Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167 CLR 177, para 7, what matters is the potential existence of this market. Competition occurs in markets. If a potential market is foreclosed by certain behaviour, it is not unreasonable to inquire as to whether that results in a lessening of competition.
[41] It appears to us at least conceptually possible that, if one firm controlled all three sources of supply to the Hawera GXP, it could profitably implement a small but significant non-transitory increase in price (SSNIP). Thus, while the construct of such a market is clearly hypothetical, it is not possible to preclude its potential existence.
[42] In short, the existence or potential existence of a market is a question of fact, to be decided in the light of the evidence, and assisted by the opinions of experts in appropriate disciplines. On these applications, affidavits have been filed on both sides from a number of highly qualified experts. It is not appropriate, on these applications, to attempt to analyse that evidence in detail, or to reach concluded findings from that evidence. It suffices to say that there is a considerable measure of dispute among the various experts. In the light of the conflict in the evidence of the
experts which is apparent from the affidavits here, it is not appropriate to depart from the normal assumption, for a strike-out application, that the allegations in the statement of claim are capable of proof. Nor is it appropriate to attempt to resolve, by resort to the summary judgment procedure, the conflict of evidence.
(ii)The South Taranaki local delivered electricity market
[43] For similar reasons, we consider that it is not appropriate to attempt to determine, on these applications, whether this pleaded market does exist, as an actual or potential market. There is no basis to depart from the assumption, for the strike- out application, that the facts pleaded are capable of proof, in the light of the conflicting evidence. Nor is it appropriate, on the summary judgment application, to resolve that conflict: it is inappropriate to attempt to resolve a conflict of views between experts on an issue of such complexity without the assistance which the oral presentation of those opinions, and cross-examination on them, will provide.
(c) Purpose or likely effect of substantially lessening competition
[44] The consequence of the contract arrangement or understanding which is pleaded is that Todd is unable to obtain a direct contract with Transpower for offtake at the Hawera substation. So, it is necessary to consider whether that consequence could have the purpose or effect of substantially lessening competition in the two relevant markets.
[45] Since we have held that it is not possible at this stage to exclude the potential existence of the two local markets pleaded, we now consider the conduct complained of and its potential effect on competition in these markets.
[46] Todd’s primary concern with Transpower’s conduct is in respect of offtake from the grid rather than injection into it. In particular, Todd argues that when its demand charge is calculated its (Todd’s) supply from Whareroa to South Taranaki should not be counted. Transpower does not charge Todd directly but does so
indirectly through Powerco. Todd wants to be treated as notionally embedded, a status that Transpower will not grant without the approval of Powerco and the satisfaction of technical conditions which are in dispute in the evidence of Mr Gould (for Transpower) and Mr Deppe (for Todd). Todd argues that the policy Transpower uses to refuse notional embedding has either been wrongly applied or is unduly restrictive. The factual dispute over whether the technical conditions to qualify for notional embedding under Transpower’s policy, and the need to consider on the facts whether the required approval of the lines company (in this case Powerco) is an unduly restrictive component of that policy mean that this issue can only be resolved at trial.
[47] We note that the power at the heart of Todd’s complaint (that supplied from the Co-gen plant to end-users in South Taranaki) does pass through connection assets owned by Transpower and located at the Hawera substation. Thus, Todd argues that the services provided by connection assets (primarily voltage reduction) and the core grid should be treated as distinct. We have already held that it is not possible to exclude the potential for these services to constitute distinct markets; we now consider whether it is possible to exclude Todd’s claim of competitive harm.
[48] We begin with the question of whether complete isolation from a service must be feasible for the existence of a competitive constraint. Counsel for Transpower argued that unless Todd was able to provide a complete substitute for grid services it could not be regarded as a substitute for those services. We consider that, for the purposes of these applications, that argument should not be accepted as one which must necessarily succeed. It is true that in a market with many buyers the competitive constraint is frequently felt through the complete switching of some buyers to alternatives. However, this need not be so, and will only apply with any generality to the case of unit demands - where each customer buys at most one unit of the item traded.
[49] There are two alternatives that seem to us to require consideration in the case at hand. First, buyers may vary in their usage of the product. It seems that as a matter of physics a significant amount of power delivered in South Taranaki is generated within the region. To that extent there is likely to be both customer and
time specific variation in demand for Transpower’s transmission service. Moreover, the lower is the price of locally generated power, the lower will be demand for Transpower’s transmission service. This is consistent with the economic definition of substitutes.
[50] A second possibility is that buyers may have constant demand but meet that demand by taking service from several different suppliers simultaneously but with intensities that vary over time. Consider the retail market(s) for television entertainment, where each individual typically consumes (views) the products of several suppliers. Shifts in the share of viewing time by individuals affect the market share of suppliers and provide a competitive constraint. This can occur even if no individual completely avoids any particular channel. Retailers or large users buying power in South Taranaki at spot market prices are in a similar situation: they remit funds to the market manager, who pays whichever firms supplied the power. Again, the lower the offer price of power generated in South Taranaki, the lower the demand for Transpower’s transmission service.
[51] Substitution is always a matter of degree. What matters for commercial purposes and for anti-trust assessment is the amount of switching in response to relative price changes, not simply whether it is zero or 100%.
[52] It is apparent that Todd would not want the grid connection to Hawera removed. It could not do so unless it could, either individually or in concert with Patea, guarantee 100% reliability of supply into South Taranaki. Even if it could do so, its desire to export power from South Taranaki, a desire which is increasing with the amount of spare capacity in South Taranaki and the consequent feasibility of complete independence from remote generation would require grid connection.
[53] Transpower places considerable reliance, in support of its contention that Todd is unable to demonstrate a substantial lessening of competition in either of the pleaded markets, on the proposition that Transpower’s relevant policies are not motivated by anti-competitive purposes, and that Transpower has no incentives to harm competition in downstream markets in which it is not a player, or to favour Powerco at the expense of its competitors. Transpower submits that Todd’s claim
involves requiring the Court to predict or infer economically irrational behaviour on the part of Transpower. Counsel submits that:
Where a Court is asked to predict what parties might do in the future or infer understandings or purposes, it does not predict or infer irrational behaviour. In Air New Zealand v Commerce Commission at paras 110-113 and 233, the High Court affirmed that it is a party’s incentive rather than ability to behave in a particular way that is the focus of the inquiry into whether there would be a substantial lessening of competition.
It is important to note that Air New Zealand v Commerce Commission (High Court, Auckland, CIV 2003-404-6590, 17 September 2004, Rodney Hansen J and Ms Vautier) was concerned with potential future behaviour. This case is concerned with alleged past behaviour. In determining whether past behaviour has an anti- competitive purpose or effect, the focus must be on the evidence adduced to prove the conduct alleged. It would be wrong, on this strike-out and summary judgment application, to foreclose an examination of the facts, by reference to inferences drawn from economic theory.
[54] For these reasons, we are satisfied that Tanspower’s applications for strike- out or summary judgment in respect of the s 27 causes of action, that is, causes of action numbers 1, 2, 3 and 4, must fail.
VII THE s 36 CAUSES OF ACTION
(a) Dominant position
[55] The first element of the s 36 cause of action is that Transpower is in a dominant position (per the old s 36) or has a substantial degree of power (per the new s 36) in the high voltage transmission services market. This allegation is substantially admitted in the statement of defence.
(b) Use of position
[56] The second element is the use of that position for one or more of the proscribed purposes. We have already dealt with the substance of the matters raised under this head, including the claims as to the notional embedding policy, in dealing
with the s27 claims. On this element, Transpower submits, as it does for the s 27 causes of action, that Transpower’s relevant policies are not motivated by anti- competitive purposes. Again, we note that what is in issue here is not what Transpower might do (to which its economic incentives might be relevant) but to what it has done (which must be determined in the light of its proved conduct). We do not consider that it is appropriate, in the context of these applications, to foreclose the factual examination, which must take place at that trial, by examining in detail the economic arguments which were advanced as to what would or would not be in Transpower’s best interests.
[57] Transpower also submits that the pleadings are inadequate, in that there is no pleading of how the conduct alleged has restricted entry into any of the pleaded markets, or prevented or deterred Todd from competing in any such market. We have already indicated that we consider that there is substance to Transpower’s complaint of inadequacy in the pleadings. But we have also held that these inadequacies have not been shown to be incapable of repair. These findings apply also to the s 36 causes of action.
[58] For these reasons, we hold that Transpower’s application for strike-out, and for summary judgment, in respect of causes of action numbers 6, 7 and 11, must fail.
VIII THE s 29 CAUSE OF ACTION
[59] In the s 29 cause of action, Todd pleads that the joint venture and Powerco were in competition in the South Taranaki retail electricity market. It pleads that, in order to compete in that market, both the joint venture and Powerco must purchase transmission services at the Hawera substation on the 33 kV side. It pleads that the purpose of the connection contract or the understanding between Powerco and Transpower, pleaded in respect of the s 27 causes of action, is to prevent the supply of transmission services to the joint venture. It pleads that, but for the contract or understanding, Transpower, the joint venture and Powerco would be in competition for the supply of wholesale transmission services at the Hawera substation, and the
contract or understanding is or contains an exclusionary provision for the purposes of s 29.
[60] It is an essential element of the s 29 cause of action that the relevant exclusionary provision be between persons who are in competition with each other. So, Todd must establish that Transpower and Powerco are in competition with each other. Todd seeks to establish that by its allegation that, but for the contract or understanding, Transpower and Powerco would compete for the supply of wholesale transmission services at the Hawera substation.
[61] We consider that that allegation is fatally flawed, in a way which is incapable of repair. The only wholesale transmission services which Powerco could supply at the Hawera substation are services purchased from Transpower. In relation to the s 27 causes of action, we have in effect held that the possibility that the on-sale of services purchased from Transpower might form the basis for, or be part of, a South Taranaki wholesale transmission services market cannot at this preliminary stage be excluded. However, the proposition that one potential purchaser from Transpower of these services, for on-sale in that market, is in competition with Transpower for the supply of those services does not follow. If the alleged contract or understanding is established, its effect is, on the s 27 causes of action, said to be to prevent Transpower from providing a direct connection to Todd and so hindering competition between Todd and Powerco. Viewed from the s 29 perspective, the effect of that would be to preclude competition by Transpower against Powerco. Accordingly, it cannot be said that Transpower and Powerco are in competition with each other so as to be in breach of s 29 in giving effect to a contract which precludes competition between them.
[62] For these reasons, we consider that the s 29 cause of action, number 10, cannot succeed, and must be struck out.
IX THE IMPACT OF REGULATION
[63] Two arguments were heard relating to the impact of regulation on the matters at hand. One was that the existence of the Electricity Commission, and in particular
the responsibility of that Commission for oversight of Transpower’s pricing, eliminates the need for the Court to become involved. Additionally, it was argued that courts are inherently ill-suited to the detailed assessment of prices and other terms of supply that lie at the heart of this case. Neither of these arguments are appealing.
[64] In the first place, if there was ultimately found to have been a breach of the Act, there is a possibility of damages being payable to Todd. Redress in this form would neither interfere with the Electricity Commission’s work nor require a detailed specification by the court of acceptable terms of future supply.
[65] The above arguments are hardly more attractive in respect of the future. The primary concern of the Electricity Commission is to ensure a secure and reasonably priced supply of electricity. Particular decisions of the Commission may or may not involve promoting competition in particular markets; whether they do so is incidental to the primary task of the Commission. This does not, of course, exclude the possibility that the Commission may develop views or even a specific policy about the role of competition in its overall mission. However, even if the Commission was to adopt a strongly pro-competitive stance, it is difficult to imagine why that fact should preclude parties in the electricity industry from access to the courts.
X CONCLUSIONS
[66] For the foregoing reasons, the 10th cause of action is struck out. In all other respects, the applications are dismissed.
[67]Costs are reserved. Counsel may submit memoranda.
“A D MacKenzie J” “J P Small”
Solicitors
Russell McVeagh, Auckland, for plaintiff Simpson Grierson, Wellington, for first defendant Horsley Christie, Wanganui, for second defendant
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