Vector Ltd v Transpower New Zealand Ltd
[2014] NZHC 3411
•24 December 2014
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-7098 [2014] NZHC 3411
BETWEEN VECTOR LIMITED
Plaintiff
AND
TRANSPOWER NEW ZEALAND LIMITED
First Defendant
ELECTRICITY AUTHORITY Second Defendant
Hearing: 12 November 2014 Counsel:
D J Goddard QC and A Kraack for Plaintiff
I Millard QC and C Browne for First Defendant
A Galbraith QC and L O'Gorman for Second DefendantJudgment:
24 December 2014
JUDGMENT OF WILLIAMS J
Introduction
[1] Between 2013 to 2014, Transpower built its North Auckland and Northland (NAaN) network. This was an upgrade providing a further cable connection between its Albany and Penrose substations. The NAaN upgrade was built in three stages: the Albany substation to a grid exit point at Wairau Road; Wairau Road to a second grid exit point at Hobson Street; and then Hobson Street to close the loop at the Penrose substation.
[2] The original intention was to commission the entire upgrade (essentially) at the same time, but construction delays led to staged commissioning. There was a nine month delay between the commissioning of the first link south to Wairau Road,
and the simultaneous commissioning of the remaining two stages.
VECTOR LIMITED v TRANSPOWER NEW ZEALAND LIMITED & ANOR [2014] NZHC 3411 [24 December 2014]
[3] It is common ground that once the NAaN upgrade was connected at both ends to the grid, it was an “interconnection asset” according to the Electricity Authority’s Transmission Pricing Methodology (TPM). This meant Transpower’s standard annual charges under the TPM could from that point forward be “socialised” to all grid takers in New Zealand; that is, all lines companies and a few large electricity users. The issue in this case is the proper treatment under the TPM of the Albany-Wairau Road link for the nine months during which the upgrade was effectively only a spur; connected to the grid at one end only, and whose sole taker was Vector.
[4] Vector says the link should be treated as an interconnection asset and its charges fully socialised. The authority says that for the relevant nine months the upgrade was a spur and, in accordance with the requirements of the TPM, Vector must pay all costs of that period.
[5] Transpower abides since, either way, it gets paid.
[6] The relevant charge for the nine months at issue is $3.2 million.
Background
Relevant facts
[7] The NAaN comprises a 220 kV cable connecting the Penrose and Albany substations. It was approved by the (then) Electricity Commission (now the Electricity Authority) on 1 May 2009. Its purpose is to provide secure transmission capacity to the northern side of the Auckland harbour by providing transmission path diversity through Auckland. I understand that prior to the NAaN upgrade, this load was served primarily by a single double circuit 220 kV line.
[8] The original timetable foresaw the entire project completed and commissioned at the same time (in 2013 or 2014). However, delays in construction meant that the first section of the cable to Wairau Road was completed well ahead of links two and three.
[9] Albany to Wairau Road was commissioned on 25 May 2013 and Vector connected to a new grid exit point at Wairau Road on that date. Wairau Road to Hobson Street was completed on 20 October 2013 where a further grid exit point was built, and Hobson Street to Penrose was completed on 26 February 2014. These two links were not commissioned until completion of the link to Penrose on
26 February 2014. The four month delay in commissioning the second link (Wairau Road to Hobson Street) after it was completed arose because of the dispute that I must address.
[10] The question, as I have said, relates to who must pay for the period between
25 May 2013 to 26 February 2014, the latter being the date when the NAaN upgrade
transformed from a spur to a loop within Transpower’s network.
[11] To address that question, it is necessary to turn to the legislation and, ultimately, the TPM.
[12] For completeness, I should point out that Transpower has in fact charged for Stage One twice: first, when it forward-charged all national network takers assuming that the project would be completed in a single commissioning at some time in 2013 or 2014, and then again when it billed Vector for the same amount in October 2013. The Vector invoice was issued when Transpower failed in an application to the Electricity Authority for an exemption under the TPM from treating Stage One as a spur. So, in fact, the practical question is who should be repaid.
The legislation and the TPM
[13] The Electricity Industry Act 2010 (the Act) establishes the Electricity Authority, a Crown entity that took over from the abolished Electricity Commission. Section 15 provides:
The objective of the Authority is to promote competition in, reliable supply by, and the efficient operation of, the electricity industry for the long term benefit of consumers.
[14] The Authority must operate a code (the Code) under s 34, certified by the responsible Minister under s 35. The Authority can amend the Code at any time. Section 32 controls the allowable subject matter of the Code as follows:
(1) The Code may contain any provisions that are consistent with the objective of the Authority and are necessary or desirable to promote any or all of the following:
(a) competition in the electricity industry:
(b) the reliable supply of electricity to consumers: (c) the efficient operation of the electricity industry: (d) the performance by the Authority of its functions:
(e) any other matter specifically referred to in this Act as a matter for inclusion in the Code.
[15] The TPM is an aspect of the Code. Specifically, it is Schedule 12.4 to Part 12 of the Electricity Industry Participation Code 2010. It came into force in November
2010 and is subordinate legislation provided for in subpart 3 of Part 2 of the Act.
[16] The crucial provisions of the TPM in terms of establishing the status of the Albany-Wairau Road link are cls 5 and 6. Clause 6 defines connection assets and interconnection assets. It relevantly provides that a connection asset is “any grid asset that is a connection link”.1 A connection link is then defined in clause 5(c) as a “link with a connection node at one or more of its ends”. A connection node is defined in cl 5(b) as “any node that is not an interconnection node”. An
interconnection node is defined in cl 5(a), which provides that an interconnection node is:
… any node connected to 2 or more nodes in a “loop” other than a “small regional loop”. A loop is a continuous path of nodes and links with the same start and end node.
[17] The long and short of this is that an interconnection asset is a series of connection nodes that together form a loop, while a connection node is effectively a single line spur taken off an interconnection loop (that is, connected to the grid at
one end only). The difference is crucial for the takers who must pay Transpower’s
1 Electricity Industry Participation Code 2010, sch 12.4(6)(1)(c).
charges. A taker from interconnection assets has its costs “socialised” with every other taker from Transpower’s national network – that is, lines companies like Vector and major electricity users. Under this scenario, Vector would pay only the charges applicable to the NAaN upgrade equal to its share of the national take. If, however, Vector is a taker – indeed the only taker – from what is properly described as a connection asset, then Vector must pay the whole cost of using that asset for the nine months.
[18] The reason for this difference seems to be a matter of physics rather than economics. Because electricity flows in one direction only through connection assets, it is possible to determine how much load each taker is using and therefore the amount each should be charged. This is not possible in respect of interconnection assets where electricity can flow in either direction. It is therefore too difficult to track individual use of these assets and it is not possible to levy individualised charges. That is why charges for interconnection assets must be socialised.
The exemption application
[19] Before moving forward, it is relevant to note that the current proceeding is round two of this dispute. I pause to summarise what happened in round one.
[20] Section 11(2) of the Act allows the Authority to grant exemptions from compliance with the Code. The provision is as follows:
(2) The Authority may grant an individual exemption to an industry participant only if the Authority is satisfied that—
(a) it is not necessary, for the purpose of achieving the Authority's objective under section 15, for that participant to comply with the Code or the specific provisions of the Code; and
(b) exempting the participant will reduce overall administration and compliance costs.
[21] Vector discovered, when considering the proper charging treatment for Stage Two, that there may be an issue as to whether that link was a connection or an interconnection asset. Transpower then applied to be exempted from the TPM in
respect of the Albany to Wairau Road link accepting for the purposes of argument that the link was a connection asset rather than an interconnection asset. Vector wanted clarity over the status of the second link before exposing itself to further cost by commissioning it.
[22] The Authority issued its final decision on 29 October 2013, shortly after the
Stage Two was completed.
[23] The Authority considered that Albany to Wairau Road was indeed a connection asset and that without an exemption, Vector would be required to meet all relevant Transpower charges in relation to it. The same applied to the second link. The Authority found that the TPM definitions classified assets according to their configuration at any given time, and not according to their final intended use. That was because, the Authority considered, the nature of grid assets can change over time and because this interpretation was consistent with the Authority’s “deep connection” approach that underlay connection asset definition.
[24] “Deep connection” in this context was intended to mean adopting a charging regime which charged takers from a spur for the entire cost of operating the spur from its grid interconnection point rather than from its shallow connection to the spur.
[25] The Authority then declined to grant the exemption. The Authority found:2
2.5.29On balance, since the loss in short term operational efficiency from declining the exemption is likely to be small or negative, the promotion of future investment efficiency is the greater consideration, in terms of the overall efficiency of the electricity industry for the long term benefit of consumers as referred to in the DM & E [Decision-making and Economic] framework. These investment efficiencies arise from declining the exemption to demonstrate that the Authority is taking a longer term perspective to ensure the correct incentives for future investment decisions.
2 Electricity Authority, “Exemption application from Transpower New Zealand Limited for considering connection assets as interconnection assets for transmission pricing” final decision dated 29 October 2013.
[26] The Authority did however note that it was “going to consider a new policy be developed to explain the Authority’s preferred approach to any future applications for exemptions of this type …”.3
[27] The Authority’s reasoning was essentially that allowing an exemption in this case could incrementally undermine the clear pricing signals the TPM gives to the market in relation to connection and interconnection assets. In essence, an exemption in this case would open the floodgates and remove incentives for Transpower and connection asset takers in these circumstances to come to their own pricing arrangements over stage commissioning. There was also a risk of creating an incentive for Transpower and/or lines companies to restructure building projects so as to socialise charges and reduce charges for lines companies. The short term benefits of an exemption to competition, reliable supply and efficient operation in the electricity industry were secondary whereas risk to the long term benefit of consumers in accordance with s 15 of the Act was more significant.
Submissions
[28] For Vector, Mr Goddard QC submitted that a purposive approach is required in the interpretation of the TPM. Taking into account s 15 of the Act, he submitted that the phrase in cl 5(a), that a “loop is a continuous path of nodes and links with the same start and end node”, should be construed with the gloss “under normal operating circumstances”.
[29] Such a gloss would ensure that assets remain interconnection assets where a connection is interrupted for reasons beyond Transpower’s control (serious storm or earthquake damage for example) or, in cases such as the present one, where what is now a spur is in fact part of a larger project being developed within a set project timeframe. That approach must be particularly appropriate where, as here, the Authority has in fact approved the project timeframe in accordance with s 54R of the
Commerce Act 1986.
3 At 2.9.2.
[30] Mr Goddard submitted that not only does this approach make good sense, it also avoids the perverse outcome that would otherwise occur in this case: viz that all takers of the New Zealand grid – line companies and major electricity users – would receive a $3.2 million windfall because Vector is required to pay for an asset that is ultimately built for their collective benefit rather than Vector’s exclusive benefit.
[31] Mr Goddard submitted further that the interpretation preferred by the Authority also threatens to create perverse incentives. There are significant advantages, he submitted, in staged commissioning of large network upgrade projects:
(a) Energy loss on the rest of the grid is reduced immediately on commissioning of the link because lines in the wider network are less loaded.
(b)Reduced loss means prices are incrementally lower and Transpower can transport more usable electricity.
(c) Immediate commissioning reduces the effects of wear and tear on new assets. Electricity assets deteriorate more quickly when not enlivened.
(d)Staged commissioning helps to smooth out resource demands and reduce risks to hardware as each link is enlivened. That reduces construction costs.
(e) Commissioning links as completed improves the security of supply for those connected to it as there is then an alternative connection available in the event of an outage.
[32] On the other hand, Vector argued, treating Stage One as a connection asset will mean that no lines company will consent to staged commissioning despite its benefits and efficiencies because the charges will always outweigh them. Mr Goddard submitted that this did nothing to enhance reliable supply and efficient
operation of the electricity industry for the long term benefit of consumers. It would therefore be inconsistent with s 15.
[33] In addition, Vector argued (relying here on Transpower’s evidence to the Authority in its exemption application), the benefit to Transpower, and therefore the cost to consumers, of staged commissioning was roughly equivalent to deferred commissioning: a net present value of $376.7 million for staged commissioning and
$376.8 million for deferred commissioning. The Authority seemed to accept this analysis.
[34] Overall, Mr Goddard submitted that Vector’s approach – an intention-based test rather than an at-the-time-of-assessment test, was the approach more consistent with s 15 of the Act. It therefore should be adopted.
[35] For the Authority, Mr Galbraith QC submitted that the words of the TPM should be applied in their plain terms without adding any unjustified gloss. He submitted that certainty in the marketplace is the key value in support of the objective in s 15. He submitted that treating the Albany-Wairau Road link as a connection asset was thus also consistent with the purpose of the Act. A finding in Vector’s favour in this application would send wrong pricing signals to the market. It would encourage Transpower and lines companies, through agreements or otherwise, to game the system so that New Zealand consumers generally would come to subsidise new upgrades designed primarily for the benefit of one or a few takers.
[36] Vector’s response was that it has always been necessary to read appropriate glosses into TPM definitions. After all, Mr Goddard submitted, Transpower says that “when commissioned” must be read into the definition of connection and interconnection assets so that charging obligations are not created as soon as the furniture is built but before the assets are enlivened. Transpower, he submitted, is required to read that trigger point into the relevant definitions in order for them to make sense. He submitted that the gloss he proposed was for a similar purpose.
[37] Secondly, Mr Goddard submitted, the fear of Transpower or takers gaming the system is unfounded. There are too many checks and balances in place to allow it. Transpower must review its pricing once a year and the Authority must audit Transpower’s processes in that regard. All upgrade projects must be pre-approved by the Authority and, in the proposals for such projects, timing and completion estimates must be included.
[38] It is, Mr Goddard submitted, unrealistic to suggest that interpreting cl 5 in the manner proposed undermined the certainty and integrity of the electricity pricing system.
[39] As I indicated, Transpower abides this decision. Transpower did however express concern about the potential loss of efficiency gains from staged commissioning if the TPM is interpreted in a manner that discourages off-take customers from agreeing to early commissioning. In that sense, Transpower echoed the concerns being put more forcefully by Vector.
Analysis
[40] In my view the Authority’s interpretation of the TPM is to be preferred.
[41] The first and obvious point is that the relevant clauses in the TPM are all drafted in the present tense:
– a connection node is any node that is not an interconnection node;
– an interconnection node is any node connected to two or more nodes in a loop.
[42] So the assessment of the status of any particular link is, on the face of it, to be made at any given time and from time to time.
[43] There is no merit in the suggestion that the Authority already reads in its own “when commissioned” gloss into the definition, in order to prevent liability from being triggered as soon as the assets are built. That is not a gloss at all. The term
“connected” in cl 5(a) must mean connected in an electrical sense: that is either carrying electricity safely or capable of doing so at the throw of a switch.
[44] In those circumstances, Mr Goddard’s proposal to introduce an element of subjective intention into the definition by inserting into the definition his phrase “under normal operating circumstances”, requires considerable justification.
[45] The Authority is correct that even with the purposive approach to statutory construction directed by s 5(1) of the Interpretation Act 1999, elucidated further in Commerce Commission v Fonterra Co-operative Group Ltd, I am not in a position to rewrite clause 5(a) of the TPM.4 I must strive of course to find consistency in the words with their statutory purpose, but I may not ignore those words to achieve that purpose except in cases of obvious error – and there is no suggestion of that here.5
[46] In any event, once recourse is had to section 15, it is clear in my mind that the Authority’s approach is consistent with its statutory objective. A present tense approach is, in short, more consistent with section 15 than a future intention approach.
[47] It is not efficient to introduce, into a relatively clear and certain regime, the suggested element of subjective intention. Intentions can change, sometimes significantly, especially in an industry such as this that utilises long-lived and expensive assets pursuant to equally long term plans. What should be an appropriate cut-off for such expressed intentions? If nine months is an acceptable time period within which to leave a link live and in place pending the closing of a loop, yet still to treat it as if it is a loop, then is two years or five years equally acceptable? I predict that if the suggested approach is adopted, network upgrades will become a site for extensive and difficult argument around who should pay, with the test being what was in the mind of one of the potentially liable entities. This would, in my view, be unsatisfactory, inefficient and inconsistent with the long term interests of
consumers.
4 Commerce Commission v Fonterra Co-operative Group Ltd [2007] NZSC 36, [2007] 3 NZLR
767.
5 At [22].
[48] Such ambiguity does not, in my mind, serve any larger purpose. In reality, Transpower and Vector misinterpreted the effect of the TPM. They will not make that error again. But I do not, as Vector (and perhaps Transpower) suggests, consider that this interpretation will signal the end of staged commissioning in large upgrade projects. As the Authority submits, it is open to Transpower to negotiate a reduced charge to connection customers in the position of Vector that more closely approximates the value of early commissioning to that customer. Although the benefits identified by Transpower in staged commissioning are real enough – to the assets, grid operation and price – they are diffuse and, as the Authority said in its exemption decision, secondary in nature compared to the actual cost to the taker.
[49] If Transpower sees advantage to national users, and therefore to it, in staged commissioning, it will need to negotiate more realistic charges with its customers on the relevant link.
[50] Finally, Mr Goddard submitted that the Authority’s approach fails to address problems with scenarios where, perhaps through no fault of Transpower, interconnection assets become inoperable for weeks or months or even longer. Applying a present tense test, a broken loop would become a connection asset, shifting liability from the wider network where it had resided to those on the new and unintentionally created link. Mr Goddard submitted that this would be a perverse outcome.
[51] I do not agree. It is not unrealistic to suggest that at some time in the future, some point on the network will suffer a catastrophic event rendering interconnection assets inoperable as such and transforming them into connection links. These scenarios are best addressed, in my view, by way of an exemption application under s 11(2) of the Act.
[52] If a damaged loop is to be repaired, then an exemption may very well be consistent with the s 11(2)(a) test. It may be seen as a truly exceptional occurrence without likely negative effects on pricing efficiency or supply reliability and with positive benefits for consumers in terms of consistency of treatment. It would also
be open to the Authority to revoke any such exemption under s 11(3) if Transpower began dragging its feet in repair.
[53] I conclude that there is nothing in the Authority’s objective as set out in s 15 that requires the gloss suggested by Mr Goddard to be read into cls 5 and 6 of the TPM. Rather, in my view, the better approach is to address true exceptions through the exemption process. As I have said, the Authority has already signalled that it is considering developing a new policy for issues of the type raised by the NAaN upgrade.
[54] The application is dismissed accordingly.
[55] The Authority will be entitled to costs on a 2B basis.
Williams J
Solicitors:
Thorndon Chambers, Wellington
Shortland Chambers, Auckland
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