Wellington International Airport Ltd v Commerce Commission
[2013] NZHC 3289
•11 December 2013
PUBLIC VERSION
Confidential information is redacted at [390], [965], [1275](b) and [1278] of this judgment
IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY
[2013] NZHC 3289
UNDER Part 4 of the Commerce Act 1986
IN THE MATTER OF appeals under s 52Z of input methodology determinations of the Commerce Commission
BETWEEN
AND
AND
WELLINGTON INTERNATIONAL AIRPORT LTD CIV-2011-485-249
CHRISTCHURCH INTERNATIONAL AIRPORT LTD CIV-2011-485-251
AIR NEW ZEALAND LTD
CIV-2011-404-802
AUCKLAND INTERNATIONAL AIRPORT LTD CIV-2011-404-820
Appellants
as regards Decision no. 709
POWERCO LTD CIV-2011-485-180
CIV-2011-485-248
WELLINGTON ELECTRICITY LINES LTD CIV-2011-485-229
CIV-2012-485-2393
VECTOR LTD CIV-2011-485-259
CIV-2012-485-2178
THE MAJOR ELECTRICITY USERS' GROUP CIV-2011-485-268
Appellants
as regards Decisions nos. 710, 711 and 712, [2012] NZCC 26, [2012] NZCC 27 and [2012] NZCC 28
MAUI DEVELOPMENT LTD
an interested party as regards Decision no.
712
WELLINGTON INTERNATIONAL AIRPORT LTD & ORS v COMMERCE COMMISSION [2013] NZHC [11 December 2013]
AND TRANSPOWER NEW ZEALAND LTD
CIV-2011-485-1032
CIV-2012-485-1656
THE MAJOR ELECTRICITY USERS’
GROUP CIV-2011-485-269
CIV-2011-485-1660
Appellants
as regards Decisions no. 713 and [2012] NZCC 17
ANDCOMMERCE COMMISSION Respondent
UNDER
IN THE MATTER OF
BETWEEN
Part 6 of the Commerce Act 1986
appeals under s 91(1B) of input methodology determinations of the Commerce Commission
VECTOR LTD CIV-2011-485-258
POWERCO LTD CIV-2011-485-180
CIV-2011-485-248
Appellants
as regards Decisions nos. 710, 711 and 712
AND
TRANSPOWER LTD CIV-2011-485-1032
CIV-2012-485-1656
Appellant
as regards Decisions nos. 713 and [2012] NZCC 17
AND
COMMERCE COMMISSION Respondent
Hearing: 3-7, 10-14, 17-21, 24, 25 September 2012 (cost of capital appeals);
26-27 September, 1-5, 15, 17-19, 23, 25-26 October 2012 (asset valuation appeals);
3-4, 6, 10 December 2012 (cost allocation and treatment of taxation appeals); and
11-14 February 2013 (SPA, asset valuation - capex, IRIS and
DPP reopener appeals).
Court:Clifford J, Mr R Davey (lay member) and Mr R Shogren (lay member)
Appearances: V L Heine and N S Wood for Wellington International Airport
Ltd
J E Hodder SC and B A Davies for Christchurch International
Airport Ltd
J A Farmer QC, S Robertson, M Toner and E Willis for Air New
Zealand Ltd
J D Every-Palmer, C R Shrive and E L Rae with
A R Galbraith QC for Auckland International Airport Ltd
J E Hodder SC, B A Davies and E N L Peart for Powerco Ltd
J Oliver and O Meech for Wellington Electricity Lines LtdA Myers QC, A R Galbraith QC, M Borsky, A Butler, N Hegan, C Marks, R Versteeg and N Lambie for Vector Ltd
N M Pender, S L Franks and J H Williams for the Major
Electricity Users' Group
D H Shavin QC, V L Heine, T D Smith and M On for
Transpower New Zealand LtdB J Brown QC, M T Scholtens QC, V E Casey, D A Laurenson, A Boadita-Cormican, S Jerebine, C Fleming, T Hallett-Hook and N Gray for the Commerce Commission
O Meech for Maui Development Ltd (interested party) Judgment: 11 December 2013
JUDGMENT OF THE COURT
Solicitors:
Chapman Tripp, Wellington for Wellington International Airport Ltd, Christchurch International
Airport Ltd, Powerco Ltd and Transpower New Zealand Ltd. Webb Henderson, Auckland for Air New Zealand Ltd.
Russell McVeagh, Auckland and Wellington for Auckland International Airport Ltd and Vector Ltd respectively.
Minter Ellison, Auckland for Wellington Electricity Lines Ltd and Maui Ltd.
Franks & Ogilvie, Wellington for The Major Electricity Users’ Group.
Crown Law Office, Wellington for the Commerce Commission.
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JUDGMENT PARTS
PART 1 – WHAT THESE PROCEEDINGS ARE ABOUT ................................... 3
PART 2 – CONTEXT............................................................................................... 31
PART 3 – GENERAL THEMES ............................................................................. 73
PART 4 – VECTOR’S SPA APPEALS ................................................................... 91
PART 5 – THE ASSET VALUATION APPEALS ............................................... 121
PART 6 - THE COST OF CAPITAL APPEALS ................................................. 343
PART 7 – POWERCO’S TAX APPEAL .............................................................. 571
PART 8 – VECTOR’S COST ALLOCATION APPEAL ................................... 585
PART 9 – VECTOR’S REGULATORY PROCESSES AND RULES
APPEAL ................................................................................................. 615
PART 10 – WELL’S CAPEX ASSET VALUATION APPEAL .......................... 631
PART 11 – RESULTS AND COSTS ..................................................................... 635
GLOSSARY ............................................................................................................ 637
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PART 1 – WHAT THESE PROCEEDINGS ARE ABOUT
Outline
Introduction .................................................................................................... 3
An overview of Part 4 regulation .................................................................. 5
Workable competition and prices ............................................................... 5
Part 4 regulation and prices ..................................................................... 12
ID regulation......................................................................................... 12
Price-quality paths................................................................................ 13
DPP regulation ..................................................................................... 13
CPP regulation ..................................................................................... 14
IPP regulation ....................................................................................... 15
The role of “building blocks” – BBAR and ROI..................................... 16
Implementation of the Part 4 scheme ......................................................... 17
Section 52T IM determinations................................................................ 18
Section 52P determinations ...................................................................... 20
Part 4 rights of appeal .............................................................................. 21
IMs and regulatory period time frames ................................................... 21
The Appellants and their appeals................................................................ 22
The Energy Appellants ............................................................................. 22
Powerco ................................................................................................ 22
Vector .................................................................................................... 23
WELL .................................................................................................... 24
Transpower................................................................................................ 24
The Airports and Air NZ........................................................................... 24
MEUG ....................................................................................................... 25
The interested parties................................................................................... 25
MDL .......................................................................................................... 25
MEUG ....................................................................................................... 26
Relationship between appeals ..................................................................... 26
How the hearings were organised ............................................................... 27
Glossary and footnotes ................................................................................. 29
Introduction
[1] Part 4 of the Commerce Act 1986 (the Act) 1 provides for the regulation of the price and quality of goods and services in markets where there is little or no
competition and little or no likelihood of a substantial increase in competition.2
1 All references in this judgment to the Act, Parts, Subparts and sections are, unless otherwise indicated, references to the Commerce Act 1986 and to Parts, Subparts and sections of the Act.
2 Section 52.
Part 43 regulation will, in the future, be imposed on a particular market and the firms within that market following an inquiry by the Commerce Commission (the Commission) and a decision by the Government. But, reflecting previous regulatory arrangements, from the outset Part 4 has provided for the regulation of:
(a) under subpart 9, electricity distribution businesses (EDBs) and Transpower Ltd (Transpower) as suppliers of electricity lines services;4
(b)under subpart 10, gas pipeline businesses (GPBs)5 as suppliers of gas pipeline services;6 and
(c) under subpart 11, Auckland International Airport Ltd, Wellington International Airport Ltd and Christchurch International Airport Ltd (individually AIAL, WIAL and CIAL and together the Airports) as suppliers of specified airport services.7
[2] An important feature of Part 4 is the requirement, found in s 52T, for the Commission to determine what are known as input methodologies (IMs). IMs set the rules pursuant to which the Commission will determine the parameters of two formulae (building blocks allowable revenue (BBAR) and return on investment (ROI)) that are central to price regulation under Part 4.
[3] In these proceedings:
3 Part 4 came into force on 14 October 2008, except for subpart 9 relating to the electricity industry and other miscellaneous sections, which came into force on 1 April 2009.
4 Section 54C defines electricity lines services as meaning the conveyance of electricity by line in
New Zealand and as including services performed by Transpower as system operator. Small scale providers are excluded from this definition and thus Part 4 regulation.
5 Although GPBs and EDBs are the acronyms used in this judgment a variety of acronyms have been used throughout the IMs process. Where we quote a passage that uses an alternative acronym the corresponding acronym from this judgment will be indicated.
6 Section 55A defines gas pipeline services as meaning the conveyance of natural gas by pipeline.
Small scale providers are excluded from this definition and thus Part 4 regulation.
7 Specified airport services are defined in s 56A to mean all of the services supplied by AIAL, WIAL and CIAL in markets relating to airfield, aircraft, freight and specified passenger terminal activities.
(a) Powerco Ltd (Powerco), Vector Ltd (Vector), Wellington Electricity
Lines Ltd (WELL) (together the Energy Appellants), as EDBs; (b) Transpower;
(c) Powerco and Vector, as GPBs; (d) the Airports;
(e) the Major Electricity Users’ Group Inc (MEUG); and
(f) Air New Zealand Ltd (Air NZ),
appeal against various of the IMs the Commission has determined.
[4] The Energy Appellants, Transpower and MEUG are interested parties as regards each other’s energy sector appeals. In the Airports sector appeals, the Airports and Air NZ are interested parties as regards each other’s appeals and MEUG is an interested party in the Airports’ appeals.
[5] Maui Development Ltd (MDL) also appeared as an interested party to the EDBs and GPBs’ appeals, but did not itself appeal. MDL’s written submissions were limited in scope and were supportive of the arguments advanced by Vector and Powerco. MDL elected not to make oral submissions. In those circumstances it is not necessary for us to refer to MDL again.
An overview of Part 4 regulation
Workable competition and prices
[6] The general purpose of the Act is to promote competition, ie workable or effective competition, in markets for the long-term benefit of consumers within
New Zealand.8
8 Sections 1A and 3(1).
[7] There are, however, a number of markets in which there is little or no competition and little or no likelihood of a substantial increase in competition. In such markets promoting competition cannot, therefore, protect the long-term interests of consumers of goods or services supplied in such markets. Part 4 provides for the regulation of the price and quality of goods and services supplied in such markets.
[8] In other words, Part 4 provides for the regulation of natural monopolies and firms that, while falling short of being true natural monopolies, have substantial market power deriving from the structural characteristics of their markets.
[9] Section 52A expresses the purpose of Part 4 as follows:
Purpose of Part
(1) The purpose of this Part is to promote the long-term benefit of consumers in markets referred to in section 52 by promoting outcomes that are consistent with outcomes produced in competitive markets such that suppliers of regulated goods or services–
(a) have incentives to innovate and to invest, including in replacement, upgraded, and new assets; and
(b) have incentives to improve efficiency and provide services at a quality that reflects consumer demands; and
(c) share with consumers the benefits of efficiency gains in the supply of the regulated goods or services, including through lower prices; and
(d) are limited in their ability to extract excessive profits.
(2) In this Part, the purpose set out in subsection (1) applies in place of the purpose set out in section 1A.
[10] Section 52A(1) therefore directs attention to workably competitive markets. Specifically, it speaks of promoting outcomes that are consistent with outcomes produced in competitive markets, where “competition” is defined in s 3(1) as “workable or effective competition”. The outcomes are those listed in s 52A(2)(a) to (d). All this is within the broader context of promoting the long-term benefit of consumers.
[11] “Workable” and “competition” are plain English words, but dictionary definitions are not sufficient to give flesh to the term as it is used in economic regulation. The concept of workable competition was first introduced by JM Clark
in 1940 and developed over a considerable period. Clark wrote, in the context of theories of imperfect and monopolistic competition, of the refinement of the definition of perfect competition and “the realization that ‘perfect competition’ does not and cannot exist”.9 His concern was that once there is a departure from any single condition of perfect competition, the existence of other conditions of perfect competition may lead to greater rather than lesser imperfection.10
[12] Clark gave no definition of workable competition but defined competition as “rivalry in selling goods”.11 Given the inevitability of imperfections, he sought to specify the conditions that in real markets would nevertheless lead to reasonably competitive outcomes. This gave rise to considerable investigation of the structural characteristics of markets that would ensure workable competition.
[13] The OECD has, however, said that “No consensus has arisen over what might constitute workable competition but all bodies which administer competition policy in effect employ some version of it.”12 It might also be said that no set of conditions sufficient to ensure workable competition has been rigorously defined. Rather, the legacy of Clark’s notion is that workable competition is a practical description of the state of an industry where government intervention to make the market work better is
not justified because the socially desirable outcomes generated by competition already exist to a satisfactory degree.
[14] A workably competitive market is one that provides outcomes that are reasonably close to those found in strongly competitive markets. Such outcomes are summarised in economic terminology by the term “economic efficiency” with its familiar components: technical efficiency, allocative efficiency and dynamic efficiency. Closely associated with the idea of efficiency is the condition that prices reflect efficient costs (including the cost of capital, and thus a reasonable level of
profit).
9 JM Clark “Toward a Concept of Workable Competition” (1940) 30 AER 241 at 241,
60/612/030991.
10 At 241, 60/612/030991.
11 At 243, 60/612/030993.
12 OECD “Glossary of Industrial Organisation Economics and Competition Law” (16 July 1993)
< at 86.
[15] There is a large body of theoretical literature about the relationship between prices, incentives, efficiency and market outcomes. But the practical context is the existence of sufficient rivalry between firms (sellers) to push prices close to efficient costs. The degree of rivalry is critical. In a workably competitive market no firm has significant market power and consequently prices are not too much or for too long significantly above costs.
[16] These terms are admittedly not precise. No two markets are the same and no single market stays the same. Whether workably competitive conditions exist is a judgement to be made in the light of all the information available, rather than something that can be ascertained by testing whether certain precise conditions are satisfied.
[17] Much of the discussion of workable competition in competition law involves, naturally enough, market power. Workable competition implies that no player has excessive market power. See, for example, the Australian Trade Practices Tribunal’s discussion in Re Queensland Co-operative Milling Association Ltd 13 and the High Court’s discussion in Auckland Regional Authority v Mutual Rental Cars (Auckland Airport) Ltd.14
[18] In our view, what matters is that workably competitive markets have a tendency towards generating certain outcomes. These outcomes include the earning by firms of normal rates of return, and the existence of prices that reflect such normal rates of return, after covering the firms’ efficient costs.
[19] Of course, firms may earn higher than normal rates of return for extended periods. On the other hand, firms may earn rates of return less than they expected and less than commensurate with the risks faced by their owners when they made their investments. They may even make losses for extended periods. Prices in workably competitive markets may never exactly reflect efficient costs, including a
normal rate of return.
13 Re Queensland Co-operative Milling Association Ltd (1976) 8 ALR 481 (Trade Practices
Tribunal).
14 Auckland Regional Authority v Mutual Rental Cars (Auckland Airport) Ltd [1987] 2 NZLR 647 (HC) at 671.
[20] But the tendencies in workably competitive markets are towards such returns and prices. By themselves, these tendencies will also lead towards incentives for efficient investment (investment that is reasonably expected to earn at least a normal rate of return) and innovation. That is to say, the prices that tend to be generated in workably competitive markets will provide incentives for efficient investment and for innovation.
[21] The same tendencies towards prices based on efficient costs and reasonable rates of return will lead also to improved efficiency, provision of services reflecting consumer demands, sharing of the benefits of efficiency gains with consumers, and limited ability to extract excessive profits.
[22] In short, the tendencies in workably competitive markets will be towards the outcomes produced in strongly competitive markets. The process of rivalry is what creates incentives for efficient investment, for innovation, and for improved efficiency. The process of rivalry prevents the keeping of all the gains of improved efficiency from consumers, and similarly limits the ability to extract excessive profits.
[23] Indeed, the term “workably competitive markets” means markets in which these tendencies are seen. The more those tendencies are seen in a market, the more the market can be regarded as workably competitive. And of course, the more competitive the market, the more those tendencies will be seen.
[24] A degree of circularity may be discerned in the preceding paragraphs. This is because workable competition is best thought of in terms of market outcomes and specifically the market outcomes produced by (strong) competition. The circle can perhaps be expressed as follows:
(a) Vigorous competition is known from experience to generate market outcomes that are socially desirable, such as productive efficiency (doing as much as possible with a given set of resources), allocative efficiency (producing goods and services that customers want in accordance with their willingness to pay for them), and dynamic
efficiency (responding quickly to opportunities or changes in circumstances).
(b)These outcomes of competition are also well explained by a highly developed theory.
(c) Actual markets demonstrate varying levels of competition. To a large extent these varying levels are caused by structural characteristics of the market, such as its barriers to entry, the level of sunk costs, economies of scale and scope (with natural monopoly at an extreme).
(d)As a consequence, actual markets will produce outcomes that are nearer or further from the socially desirable ones seen where competition is strong.
(e) The outcomes of strongly competitive markets are better (for society)
than those from less competitive markets.
(f) As a corollary, the outcomes from workably competitive markets are better than from markets that do not rise to that level of competition.
(g)Further, within workably competitive markets, the outcomes produced in the more competitive markets are better than those produced by the less competitive.
(h)Since it is outcomes that matter to society, when thinking about workably competitive markets, the outcomes to be pursued are the outcomes produced by the more strongly competitive markets. This is not because such outcomes can be routinely expected, but because they are desirable. Why would regulation aim lower than what is desirable?
[25] As mentioned, the s 52A purpose involves promoting outcomes that are consistent with outcomes produced in competitive markets. It might be asked: why not simply seek to achieve the outcomes produced by competitive markets, as
opposed to workably competitive markets? In our view, the use of the term “workable competition” is no more than a recognition that perfectly competitive markets do not exist. Perfectly competitive markets require conditions – axioms for the mathematical proof of the outcomes – that can never be met, including perfect information completely shared among market participants.
[26] Reflecting that analysis this Court has on two occasions approved the following formulation of workable competition:15
...workable competition means a market framework in which the presence of other participants (or the existence of potential new entrants) is sufficient to ensure that each participant is constrained to act efficiently and in its planning to take account of those other participants or likely entrants as unknown quantities. To that end there must be an opportunity for each participant or new entrant to achieve an equal footing with the efficient participants in the market by having equivalent access to the means of entry, sources of supply, outlets for product, information, expertise and finance. This is not to say that particular instances of the items on that list must be available to all. That would be impossible. For example, a particular customer is not at any one time freely available to all suppliers. Workable competition exists when there is an opportunity for sufficient influences to exist in any market, which must be taken into account by each participant and which constrain its behaviour.
[27] Thus the purpose is to promote the s 52A(1) (a) to (d) outcomes consistent with what would be produced in workably competitive markets. For example, suppliers of regulated goods or services are to have incentives to innovate and invest, but consistent with the manner in which suppliers in workably competitive markets have incentives to innovate and invest.
[28] When s 52A speaks of promoting outcomes, the question arises: what actions does the regulator take to promote such outcomes? Part 4, in providing for regulation of the price and quality of goods or services in markets where there is little or no competition and little or no likelihood of a substantial increase in competition, envisages that regulation of price and quality will promote those
outcomes.
15 Donald and Heydon Trade Practices Law (Law Book Co, Australia, 1978) approved in Auckland
Regional Authority v Mutual Rental Cars (Auckland Airport) Ltd [1987] 2 NZLR 647 (HC) at
671; Fisher and Paykel Ltd v Commerce Commission [1990] 2 NZLR 731 (HC) at 759.
[29] A key output of Part 4 regulation is prices,16 the prices that regulated businesses charge for their services. In workably competitive markets, prices are the manifestation of market outcomes: that is, the outcomes of the process of competitive rivalry and of the interaction between supply and demand. It is prices that provide signals to suppliers to innovate and invest. It is prices that determine profits. In each case, of course, prices interact with demand and expected demand. Markets where there is little or no competition do not produce price outcomes that are consistent with the outcomes to be promoted in the s 52A(1) purpose. It is the difficult role of Part 4 regulation to produce prices that generate the s 52A(1)(a) to (d) outcomes, consistent with the outcomes produced in workably competitive markets. Prices are, therefore, at the heart of Part 4 regulation.
Part 4 regulation and prices
[30] Part 4 provides for the following types of regulation:
(a) information disclosure (ID) regulation (subpart 4); (b) negotiate/arbitrate regulation (subpart 5);
(c) default price-quality path (DPP) regulation and customised price-quality path (CPP) regulation (subpart 6); and
(d) individual price-quality path (IPP) regulation (subpart 7).
ID regulation
[31] ID regulation requires a supplier of a regulated service to disclose, on an after the event – or ex post – basis, information specified by the Commission relating to
prices and quality.17
16 Whether expressed in terms of prices or revenue – s 52C.
17 Section 53A.
Price-quality paths
[32] In DPP, CPP and IPP regulation the Commission determines price-quality paths. Those paths must specify (i) (either or both) of maximum prices and revenues that may be charged and recovered and (ii) quality standards that must be met.18
DPP regulation
[33] The purpose of DPP regulation is to provide a relatively low-cost way of setting price-quality paths for suppliers of regulated goods or services, while allowing the opportunity for individual regulated suppliers to have alternative price-quality paths that better meet their particular circumstances.19 DPP regulation is at times described by the Commission as ‘one size fits all’ or ‘generic’ regulation of a group of suppliers. This is a slight over-statement in that, as will become apparent,20 the Commission included a number of supplier-specific components when determining the DPPs. But much of a DPP is generic and the Commission’s capacity to take account of a supplier’s specific circumstances is limited by the intention that a DPP be relatively low-cost.
[34] An important aspect of DPP regulation is the incentive for suppliers to increase efficiency and thus profitability provided in a CPI minus X (CPI-X) price-quality path. Suppliers are allowed to increase their prices over the five-year regulatory period by the CPI minus an X factor (specific to each supplier) that reflects the Commission’s assessment of anticipated efficiency gains over that regulatory period. Suppliers who improve their efficiency at a rate greater than expected make profitability gains. The quality control aspect of the price-quality path ensures that efficiency gains do not come at the expense of goods or services
meeting minimum quality standards.
18 Section 53M.
19 Section 53K.
20 See for instance Part 6.10 of this judgment which deals with the TCSD and Part 10 which deals with capex.
CPP regulation
[35] CPP regulation is, on the other hand, individual supplier specific. A supplier subject to a ‘one size fits all’ DPP may make a proposal to the Commission for a CPP if it considers that it may better meet its particular circumstances.21 In contrast to industry-wide DPP regulation, a CPP provides an alternative price-quality path addressed to the proponent supplier’s particular circumstances.
[36] A proposal for a CPP must, however, apply or adopt relevant IMs, limiting the scope for individualisation.22 At the same time s 53V(2)(c) of the Act provides that in determining a CPP, the Commission may, with the agreement of the supplier, vary an IM that would otherwise apply to the supplier. Thus, whilst the Commission has acknowledged23 that suppliers must apply existing IMs when making their applications for a CPP, they may submit an application for a variation to one or more IMs in addition to the application that applies existing IMs.
[37] A supplier may make only one proposal for a CPP during a regulatory period,24 is not entitled to withdraw a proposal once made,25 and will be bound by the CPP once determined.26 Further, and not surprisingly given the Commission’s position as regulator and the right of appeal provided by s 91(1), the Commission may set a CPP less favourable to the supplier than the otherwise applicable DPP.27
The supplier does, however, have a right to appeal the Commission’s
determination.28 Reflecting the relationship between DPP and CPP regulation, we refer to them together as DPP/CPP regulation.
21 Section 53K.
22 Section 53Q(2)(d).
23 Commerce Commission Input Methodologies (Electricity Distribution and Gas Pipeline Services) Reasons Paper (22 December 2010) at [K1.23], 3/7/001612 [EDBs-GPBs Reasons Paper].
24 Section 53Q(3).
25 Section 53R(a).
26 Section 53R(b).
27 Section 53V(2).
28 Section 91(1).
[38] The Commission comments in the Input Methodologies (Electricity Distribution and Gas Pipeline Services) Reasons Paper (EDBs-GPBs Reasons Paper) on CPP regulation as follows:29
... one of the key features of default/customised price-quality regulation is that, where a regulated supplier subject to a DPP expects to receive lower than normal returns over the current regulatory period, due to its business-specific circumstances occurring during that period, it is able to propose a CPP instead.
[39] For example, a CPP may allow a supplier with planned capital expenditure (capex) greater than that provided for by a DPP to gain a price path which provides for that capex.
IPP regulation
[40] IPP regulation is akin to CPP regulation. In providing for IPP regulation, s 53ZC(1) simply states:
If individual price-quality regulation applies to goods or services supplied by a supplier, the Commission may set the price-quality path for that supplier using any process, and in any way, it thinks fit, but must use the input methodologies that apply to the supply of those goods or services.
The section goes on to provide that the Commission must set and monitor compliance with a price-quality path where a supplier is subject to IPP regulation.
[41] In terms of the impact of Part 4 regulation on prices and on the achievement of the s 52A(1) purpose and outcomes:30
(a) in ID regulation, the Commission requires information to be disclosed so that pressure is exerted to move prices closer to ones which would satisfy the s 52A(1) purpose (efficient prices) and achieve the (a) to
(d) outcomes, than would otherwise be the case; and
29 EDBs-GPBs Reasons Paper at [2.79], 3/7/001023.
30 Whilst Part 4 provides for the regulation of both prices and quality of regulated services, these appeals generally relate to decisions made by the Commission that affect the regulation of prices, not quality.
(b)in DPP/CPP and IPP regulation, the Commission determines price paths which set the maximum prices suppliers can charge to achieve that purpose and those outcomes.
[42] The prices ideally produced by each of those types of regulation will therefore share the same characteristics and be similarly related to those produced in workably competitive markets. The analytical processes, economic framework and consideration of market mechanisms involved in each type of regulation are, whilst not identical, substantially equivalent.
The role of “building blocks” – BBAR and ROI
[43] Implicit in Part 4 price regulation is the use by the Commission of what is known as the “building blocks” approach to determine or assess the revenues of suppliers of regulated services, and in that way to control or influence the prices charged by those suppliers for those services. The building blocks approach is based on the notion that workably competitive markets produce prices based on costs, or at least prices that tend towards those based on costs. The building blocks approach is directed towards estimating those costs and hence those prices.
[44] This theory is relatively uncontroversial in economics and in regulatory systems throughout the world. The use of the building blocks approach is not itself the subject of any of the current appeals. It is accepted by all parties as an appropriate method for generating prices (in DPP/CPP and IPP regulation) and rates of return (in ID regulation).
[45] Nevertheless, some of the tenets of economic theory and practice that underlie the building blocks approach did come under attack.
[46] Under DPP/CPP and IPP regulation, the building blocks approach requires the Commission to set, in advance, regulated revenue – that is BBAR – that will allow a supplier to recover its costs and to earn a reasonable rate of return on its capital.
[47] The general expression of the annual BBAR for a regulated supplier is:31
BBAR = regulatory asset base x cost of capital + depreciation +
operating expenditure + tax – revaluation gains (or +
revaluation losses) – other income
[48] Under ID regulation, a supplier is required annually to calculate and disclose its ROI for the previous year. The general expression of ROI for a regulated supplier is:32
ROI = revenue – depreciation – opex – tax + revaluation regulatory asset base
[49] The ROI equation is effectively the same as the BBAR equation, rearranged in terms of the cost of capital, and then expressed in terms of the ROI. Other than revenue, which in the ROI formula is the actual revenue earned by a firm from the supply of regulated services, the inputs into the ROI equation are the same as the inputs into the BBAR equation. When ROI is calculated in this way it may be compared to the regulatory cost of capital (or weighted average cost of capital (WACC)) applicable to supplying the type of regulated service in question. If a firm’s disclosed ROI is consistently higher than its regulatory WACC this may imply that the firm is earning excessive profits.
Implementation of the Part 4 scheme
[50] Implementation of the Part 4 regulatory controls involves a two-step process which requires the Commission:
(a) first, to determine pursuant to s 52T IMs that will be of general application to the supply of particular services;33 and
(b)secondly, to determine pursuant to s 52P for each regulated supplier the actual regulatory controls to which it will be subject.
31 EDBs-GPBs Reasons Paper at [2.8.10], 03/07/001027 (footnotes omitted).
32 EDBs-GPBs Reasons Paper at [2.8.30], 3/7/001031.
33 Section 52U.
Section 52T IM determinations
[51] Section 52T(1) requires the Commission to determine a number of IMs to provide the rules whereby various of the terms of the BBAR and ROI equations are to be set. It does so in the following terms:
The input methodologies relating to particular goods or services must include, to the extent applicable to the type of regulation under consideration,–
(a) methodologies for evaluating or determining the following matters in respect of the supply of the goods or services:
(i) cost of capital:
(ii) valuation of assets, including depreciation, and treatment of revaluations:
(iii) allocation of common costs, including between activities, businesses, consumer classes, and geographic areas:
(iv) treatment of taxation; and
(b) pricing methodologies, except where another industry regulator (such as the Electricity Authority) has the power to set pricing methodologies in relation to particular goods or services; and
(c) regulatory processes and rules, such as–
(i) the specification and definition of prices, including identifying any costs that can be passed through to prices (which may not include the legal costs of any appeals against input methodology determinations under this Part or of any appeals under section 91 or section 97); and
(ii) identifying circumstances in which price-quality paths may be reconsidered within a regulatory period; and
(d) matters relating to proposals by a regulated supplier for a customised price-quality path, including–
(i) requirements that must be met by the regulated supplier, including the scope and specificity of information required, the extent of independent verification and audit, and the extent of consultation and agreement with consumers; and
(ii) the criteria that the Commission will use to evaluate any proposal.
[52] Section 52T(2) provides further direction as to the contents of IMs:
Every input methodology must, as far as is reasonably practicable,–
(a) set out matters listed in subsection (1) in sufficient detail so that each affected supplier is reasonably able to estimate the material effects of the methodology on the supplier; and
(b) set out how the Commission intends to apply the input methodology to particular types of goods or services; and
(c) be consistent with the other input methodologies that relate to the same type of goods or services.
[53] It is accepted that the Commission may, but is not required to, determine additional IMs not specifically referred to in s 52T(1).
[54] Section 52R defines the purpose of IMs as follows:
The purpose of input methodologies is to promote certainty for suppliers and consumers in relation to the rules, requirements, and processes applying to the regulation, or proposed regulation, of goods or services under this Part.
[55] Generally IMs are determined during a Commission inquiry into whether Part 4 regulation should be imposed. But, as part of the transitional arrangements for the implementation of Part 4 regulation of electricity lines, gas pipelines and airport services, the Commission was required to determine the applicable IMs by
30 December 2010.
[56] On 22 December 2010, the Commission determined IMs required by s 52T for EDBs, GPBs, the Airports and Transpower.34 The Commission also determined, as part of the regulatory processes and rules IM, rules for what is known as an incremental rolling incentive scheme (IRIS)35 for EDBs, GPBs and Transpower although s 52T did not require such a determination.
[57] As explained in more detail in Part 4 of this judgment, in 2011 Vector judicially reviewed aspects of the Commission’s decision-making process.36 As a result, and as relevant, the Commission was required to determine, which it had until then not done, asset valuation, allocation of common costs and treatment of taxation IMs for DPP regulation of the EDBs and GPBs.37 Transpower at the same time judicially reviewed the Commission’s decision on Transpower’s leverage as reflected in the Transpower cost of capital IM determinations.38 As a result, the Commission
was also required to reconsult on Transpower’s cost of capital IM as regards
34 Decision 709, 1/1/000001; Decision 710, 2/1/000046; Decision 711, 3/1/000215; and Decision
712, 4/1/000378.
35 See Part 9 of this judgment.
36 Vector Ltd v Commerce Commission HC Wellington CIV-2011-485-536, 26 September 2011.
37 The Commission had determined such IMs for ID regulation.
38 Transpower New Zealand Ltd v Commerce Commission HC Wellington CIV-2011-485-103,
4 November 2011.
leverage. As matters transpired, the Commission not only determined or redetermined the affected IMs, but also – when publishing those decisions, restated the EDB, GPB and Transpower IMs not successfully challenged. The Commission’s
2010 Transpower IMs were re-determined on 29 June 2012.39 The EDBs and GPBs
IMs were re-determined on 28 September 201240
[58] The IMs subject to appeal in these proceedings are thus found in: (a) for the EDBs, [2012] NZCC 26;
(b) for the GPBs, [2012] NZCC 27 and [2012] NZCC 28; (c) for Transpower, [2012] NZCC 17; and
(d) for the Airports, Decision 709.
Section 52P determinations
[59] Whilst s 52T mandates the determination of IMs for Part 4 regulation, how the various types of regulation are to be applied is determined by decisions made by the Commission under s 52P (s 52P determinations). Section 52P(3) provides generally that a s 52P determination must:
(a) set out, for each type of regulation to which the goods or services are subject, the requirements that apply to each regulated suppliers; and
(b) set out any time frames (including the regulatory periods) that must be met or that apply; and
(c) specify the input methodologies that apply; and
(d) be consistent with this Part.
[60] It is clear from subparagraph (b) that the making of the Commission’s s 52P determinations must follow the making of its s 52T IM determinations. Section 52S provides, in effect, that an IM must be applied in accordance with the relevant s 52P
determination.
39 Decision [2012] NZCC 17, 42/351/021030.
40 Decision [2012] NZCC 26, 67/716/033593; Decision [2012] NZCC 27, 67/715/033409; and
Decision [2012] NZCC 28, 67/717/033803.
[61] It is in the s 52P determinations that have now been made for ID and DPP regulation (particulars of which appear in Part 2 of this judgment) that the role of the BBAR and ROI formulas is made explicit.41
Part 4 rights of appeal
[62] Briefly, s 52Z gives interested persons a right of appeal to this Court against the merits of an IM determination. To succeed, an appellant must establish that the amended or substituted IM sought on appeal is materially better in meeting the purpose of Part 4, the purpose of IMs themselves, or both. A right of appeal against such a determination on a question of law is also available under s 91(1B). In these proceedings the appellants, who are – with two exceptions – regulated suppliers, challenge various aspects of the IM determinations under either or both ss 52Z and
91(1B).
[63] There are only limited rights of appeal against s 52P determinations.
[64] Further particulars of the rights of appeal under Part 4 including our views on the meaning of “materially better” and the nature of these appeals, are discussed in Part 2 of this judgment.
IMs and regulatory period time frames
[65] In very general terms, the time span of an IM will be seven years.42 An IM may only be amended within that seven-year period subject to the Commission following the extensive consultation process set out in s 52V.43
[66] The regulatory period of a DPP/CPP or IPP is generally five years and can be no less than four years.44 No regulatory period is specified for ID regulation but the
Commission has, where applicable, aligned the term of ID regulation with that of
41 See, for the Airports, Decision 715, 40/312/019752. The determination was amended on 1
March 2012 by way of Decision [2012] NZCC 5. See, for the EDBs, Decision 685,
27/185/013495. The determination was updated to consolidate all amendments as at 22 March
2012 in Decision 714, 64/685/032434. See, for the GDBs, Decision [2013] NZCC 4 and for the
GTBs, Decision [2013] NZCC 5.
42 Section 52Y.
43 Section 52X.
44 Section 53M(4) and (5).
DPP/CPP, IPP or, in the case of the Airports, with their five year pricing negotiation practices. The significance of these time frames is canvassed in Part 3 of this judgment.
The Appellants and their appeals
The Energy Appellants
[67] The Energy Appellants own and operate various electricity distribution services. Powerco and Vector also own and operate gas networks. As such they are, along with others, variously subject to ID and DPP regulation pursuant to ss 54F and
54G respectively, as EDBs and ss 55C and 55D respectively, as GPBs.45 The Energy
Appellants as EDBs or GPBs also have the right to propose a CPP.46 In regulating gas pipeline services the Commission has distinguished between firms providing gas distribution and gas transmission pipeline services (GDBs and GTBs respectively).
Powerco
[68] Powerco is an unlisted company, owned when these appeals were heard, as to
58% by QIC Ltd47 and as to 42% by Prime Infrastructure. Powerco owns and operates electricity and gas distribution networks throughout the North Island, including in Taranaki, Manawatu, the greater Wellington Area, the Waikato, the Bay of Plenty and Hawke’s Bay. In terms of customer connections, Powerco is, after Vector, we infer, New Zealand’s second largest electricity and gas distribution company. In terms of network length, it is New Zealand’s largest electricity and second largest gas distributor. Its 27,000 km of electricity networks service approximately 305,000 customers. Its 5,000 km of gas networks service 106,000 customers in five major and 30 smaller networks. Its EDB, contributing 80% of overall revenue, is the largest part of its business. Powerco is subject to regulation as
an EDB and a GDB accordingly.
45 There are 29 EDBs in New Zealand and all are subject to ID regulation. Seventeen non-consumer owned EDBs are also subject to DPP/CPP regulation. There are five GPBs in New Zealand all of which are subject to ID and DPP/CPP regulation.
46 Section 53Q.
47 QIC Ltd is an Australian investment fund manager.
[69] Powerco appeals the cost of capital, asset valuation and tax IMs for ID and
DPP/CPP regulation of EDBs and GDBs.
Vector
[70] Vector is a company listed on the NZX. Vector is owned as to 75.1% by the Auckland Energy Consumer Trust and as to the balance by individual and institutional shareholders.
[71] Vector owns and operates the electricity distribution network in the greater Auckland area. That network extends from north of Wellsford to Papakura in the south, covering what used to be Auckland Central region, Waiheke Island, North Shore, Waitakere, Rodney, Manukau and parts of the Papakura region. Vector’s electricity lines and cables deliver power to more than 456,000 homes and 60,000 businesses. It is subject to regulation as an EDB accordingly. Vector is the largest of the 29 EDBs.
[72] Vector owns the Auckland gas distribution network and gas distribution networks in various other parts of the North Island. Those networks service approximately 150,000 domestic and business customers in 30 towns and cities. It is subject to regulation as a GDB accordingly.
[73] Vector also owns some 2,300 km of high pressure gas transmission networks in the North Island, connecting Taranaki gas production facilities to major users and regional distributors. It is subject to regulation as a GTB accordingly.
[74] Vector appeals:
(a) the cost of capital, asset valuation and cost allocation IMs for ID and
DPP/CPP regulation of the Energy Appellants;
(b) certain parts of the regulatory processes and rules IMs, namely for the
IRIS and for the reconsideration of DPPs; and
(c) the Commission’s decision not to make an IM to set the rules for the
starting price adjustment (SPA) process for the DPP/CPP regulation of the Energy Appellants.
WELL
[75] WELL is an unlisted company owned by Cheung Kong Infrastructure Ltd and Power Assets Holding Ltd. WELL owns and operates the greater Wellington electricity distribution network. It is subject to regulation as an EDB accordingly.
[76] WELL appeals the cost of capital and asset valuation IMs for ID and
DPP/CPP regulation of EDBs.
Transpower
[77] Transpower is a state-owned enterprise. The shares in Transpower are owned by the Minister of Finance and the responsible minister as to 50% each. Transpower owns and operates New Zealand’s high voltage transmission network, known as the national grid. The national grid links electricity generators to electricity lines owned by the EDBs and to certain major industrial users of electricity. Transpower is subject to ID and IPP regulation. IPP regulation of Transpower enables recognition of the special characteristics of its business as the sole supplier of electricity transmission services via the national grid.
[78] Transpower appeals the cost of capital IMs for its ID and IPP regulation.
The Airports and Air NZ
[79] AIAL, WIAL and CIAL own and operate New Zealand’s major domestic and international airports at Auckland, Wellington, and Christchurch respectively. The Airports provide regulated airport services and, as such, are subject to ID regulation pursuant to s 56C. Auckland Airport is New Zealand’s principal international gateway. AIAL emphasised the importance of this role and, in that context, of appropriate incentives to invest. Wellington Airport is principally a domestic airport, and an important regional hub. It also services some trans-Tasman routes. Christchurch Airport services a mix of domestic and international routes.
[80] AIAL is a company listed on the NZX. WIAL is an unlisted company, owned as to 66% by Infratil Ltd and 35% by the Wellington City Council. CIAL is also an unlisted company. It is owned as to 75% by the Christchurch City Council and 25% by the Crown.
[81] Air NZ is a company listed on the NZX. Air NZ is owned as to 73% by the Crown and as to the balance by individual and institutional shareholders. Air NZ owns and operates the eponymous national domestic and international airline. As such it is by far the largest user of the regulated airport services provided by the Airports.
[82] The Airports appeal the cost of capital and asset valuation IMs for the
ID regulation of the Airports.48 Air NZ also appeals that asset valuation IM.
MEUG
[83] MEUG is an incorporated society that represents its members’ interests. MEUG’s members are major users of electricity and customers of both Transpower and of the EDBs directly, and hence also of Transpower indirectly. Its members are therefore affected by the Transpower and EDBs IM determinations. MEUG appeals the cost of capital IMs for Transpower and the EDBs.
The interested parties
MDL
[84] MDL is an unlisted company owned by the Maui Mining Companies, Shell, OMV and Todd. MDL owns and operates the high pressure Maui Pipeline which runs 308 km from Oaonui in Taranaki to the Huntly Power Station. Eighty-five per cent of all gas sold in New Zealand passes through the Maui Pipeline. MDL is subject to regulation as a GTB accordingly. MDL did not appeal itself, but was granted interested party status in the appeals against the EDBs and GPBs IMs.
MDL generally supports the approach taken by Powerco and Vector.
48 To be found in Decision 709 at pts 3 and 5, 1/1/000014-000022 and 000025-000031.
MEUG
[85] MEUG appears as an interested party in the Airports/Air NZ cost of capital
IM appeals.
[86] There can be no doubt of the significance to the New Zealand economy of the services the appellants and MDL provide. We acknowledge the significance of this decision for the parties and New Zealand’s economy.
Relationship between appeals
[87] These appeals were heard together as they each involve the common factual background of the process the Commission adopted and the materials the Commission considered between 11 December 2008 and 22 December 2010, and subsequently in 2012, in making the IM determinations. These appeals have not, however, been consolidated. Therefore, we must reach separate decisions on each substantive appeal and the questions of relief and ancillary matters those appeals raise, even though there are large factual and legal overlaps between them.
[88] Those overlaps are most apparent in the asset valuation IM appeals. There Powerco and WIAL/CIAL – relying on the same expert advisers and each represented before us by Mr Hodder – base their core challenges on the same legal and economic propositions. Similarly Vector and AIAL, represented by Mr Galbraith, take very similar approaches to each other, noting that AIAL too relies on the same experts as WIAL/CIAL. Likewise, the Commission responded to those overlapping challenges with a generally common set of arguments.
[89] We therefore consider those common aspects of the asset valuation IM appeals on a – to borrow a word from the challenges Clifford J heard to the Commission’s consultation methodologies – cross-sectoral basis. Doing so is efficient, as it avoids repetition. At the same time, we consider it promotes understanding of the issues and consistency in our decision-making. We recognise, where appropriate, differences between the approaches taken – in particular by Vector.
How the hearings were organised
[90] The hearing of these appeals involved 39 days hearing time.
[91] The first day, 3 September 2012, involved general opening statements by: (a) Mr Hodder SC, for Powerco, CIAL and WIAL;
(b) Mr Myers QC, for Vector; (c) Ms Pender, for MEUG; and
(d) Mr Brown QC, for the Commission.
[92] The parties who did not participate in that first day had declined the opportunity to do so.
[93] The cost of capital IM appeals were then heard on a sectoral basis: first the Energy Appellants and MEUG; then Transpower and MEUG; and then the Airports and Air NZ. Those appeals occupied 16 days of hearing time, from 4 to
25 September 2012.
[94] The asset valuation IM appeals were also heard on a sectoral basis: first the Airports and Air NZ, then the Energy Appellants with MEUG as an interested party. Those appeals occupied 14 days of hearing time, from 26 September to 25 October
2012.
[95] The balance of the appeals were heard in the weeks beginning 3 and
10 December 2012 and 11 February 2013, in the following order:
(a) Powerco’s regulatory tax IM appeal (3 and 4 December 2012);
(b) Vector’s cost allocation IM appeal (6 and 10 December 2012);
(c) Vector’s starting price adjustment (SPA) IM appeals (11 and
12 February 2013);
(d) WELL’s (capex) asset valuation IM appeal (13 February 2013);
(e) Vector’s regulatory processes and rules IM appeals (IRIS and DPP
reopening) (14 February 2013).
[96] We deal first with Vector’s appeals against the Commission’s decision not to make a SPA IM for the DPP/CPP regulation of the Energy Appellants. We do so because those appeals raise issues relating to what may be called the regulatory architecture of Part 4 that it is helpful to deal with first. They also involve aspects of the procedural history of these appeals which it is helpful to explain at the outset. We then consider the appeals against the asset valuation IMs, before moving to the appeals against the cost of capital IMs. We adopt that order, first, because it reflects the order in which those factors appear in the BBAR formula. Second, the asset valuation IM appeals raise a number of questions of economic theory as that theory is reflected in the mixture of law and economics which is s 52A(1). By contrast, the cost of capital IM appeals raise generally more specific, essentially – in an economic and corporate finance sense – factual issues relating to the various individual parameter values the Commission has determined for use in determining the regulated firms’ cost of capital. Finally, we consider the balance of Powerco and Vector’s individual appeals against various other IMs (tax, by Powerco, cost allocation, IRIS and DPP re-opening by Vector) and WELL’s capex asset valuation IM appeal.
[97] In dealing with the appellants, we generally follow the order of subparts 9, 10 and 11 of Part 4: EDBs, including – as argued – GPBs first, then Transpower, and then the Airports. We acknowledge that, generally speaking, Transpower is dealt with in subpart 9 before the GPBs in subpart 10. But where Vector and Powerco appeal in their capacities as both EDBs and GPBs, they each make their arguments by reference to their status as EDBs, and in terms of the EDBs IMs. They do so on the basis that the GPBs IMs are equivalent to the EDBs IMs, so that their arguments as EDBs apply equally to the IMs which apply to them as GPBs. Hence our approach. As between Powerco and Vector our order of address varies, as theirs did before us.
[98] Before turning to the particular appeals, we discuss important aspects of the factual and legal context of these appeals. We then summarise a number of issues of interpretation of general relevance to these appeals.
Glossary and footnotes
[99] Various terms are defined where they first appear in the text of this judgment. We list those terms and definitions in the glossary to this judgment. Frequently referenced documents are, consistent with the New Zealand Style Guide, given a reference tag, that is an abbreviated name, in both the text of this judgment and again in the footnotes. Those reference tags are also listed in the glossary together with the full citation of the document in question.
[100] In this judgment we generally follow the New Zealand Style Guide. Because of the length of this judgment we have, however, adopted the following footnoting conventions:
(a) Commission decisions are cited by decision number and common bundle reference.49 Full citations can be found in the glossary.
(b)Citations of documents in the common bundle include a citation to the common bundle in the format: vol/tab/page, for example 1/1/000001 the page number being the common bundle page number, not the page number within the document.
(c) All cases are cited in full even where the case has been cited previously.
(d) Unless otherwise indicated, footnotes are omitted from quotations.
(e) Quotes from the transcript of the appeal hearings and the parties submissions are, consistent with usual practice, not footnoted.
49 The common bundle comprised some 80 volumes, 1,055 documents running for over 40,100 pages.
[101] Given the nature of these appeals, it is often not possible to deal with a particular issue discretely in one part of this judgment. Inevitably there is repetition. To simplify the text, we only cross-reference such repetition where the cross-referenced text is relevant to understand that part of this judgment where the cross-reference is provided.
[102] At the beginning of our consideration of each of the appellants’ appeals we indicate, in a footnote, which paragraphs of which notice(s) of appeal set out that appeal. Notices of appeal have been given a reference tag and full references can be located in the glossary.
[103] In a few instances we refer – principally when recording an understanding of the background to the Commission’s decisions – to material that clearly was part of the closed record, although not in the common bundle. On many occasions, we were encouraged by the parties to read materials found in the common bundle that were only referred to, very briefly, in oral or written arguments. When doing so we sometimes followed references from that material in the common bundle to other material in the closed record, but not in the common bundle. We are satisfied that the limited occasions on which we did that raised no issues that had not been fully explored before us by the parties.
PART 2 – CONTEXT
Outline
Introduction .................................................................................................. 31
Factual ........................................................................................................... 32
The regulated services .............................................................................. 32
Previous regulatory arrangements........................................................... 32
The position by the end of our hearing.................................................... 35Energy Appellants – ID regulation ....................................................... 35
EDBs – DPP regulation ........................................................................ 35
GPBs – DPP regulation ........................................................................ 36
Transpower – ID regulation.................................................................. 37
Transpower – IPP regulation................................................................ 37
Airports – ID regulation ....................................................................... 38
All regulated services – WACC estimates ............................................. 38
A complex process ..................................................................................... 38
Legal .............................................................................................................. 39
Legislative history ..................................................................................... 39
The nature of these appeals...................................................................... 45
The structure of appeal rights against Part 4 determinations .............. 45
Section 52Z, error and the materially better standard ......................... 51
Deference .............................................................................................. 56
The closed record .................................................................................. 58
Permissible relief .................................................................................. 59
The error of law appeals ....................................................................... 63
The effect of allowing these appeals ........................................................ 67
Expert evidence ............................................................................................ 68
Introduction
[104] In law, context is everything. Accordingly, the appellants repeatedly emphasised the importance of context. We record here, in fairly summary form, important aspects of the factual and legal context of these appeals, and introduce the expert evidence we were referred to. We discuss these matters in more detail as we consider the various appeals.
Factual
The regulated services
[105] The supplier appellants generally emphasise the importance of the nature of the regulated businesses they operate, and their special features.
[106] Not surprisingly they – albeit in different ways – all emphasise the scale of their businesses and the long-term nature of the assets in which they invest. Access to capital markets is an issue for all of them as is the issue of regulatory risk and associated uncertainty. These factors are in many ways the correlatives of their being large, natural monopoly, infrastructure businesses. We acknowledge those important aspects of the context of these appeals.
Previous regulatory arrangements
[107] The Commission has summarised previous regulatory arrangements applying to the Airports, the Energy Appellants and Transpower as follows:50
Recent history of economic regulation in New Zealand
From 1986 to 2008, generic provisions in the old Part 4 of the Act (i.e. prior to the CAA) provided for the Commission to undertake inquiries into whether particular goods or services should be subject to ‘price control’ (comprising control of prices, revenues and/or quality standards). Inquiries could result in recommendations to the relevant Minister to impose price control under the old Part 5, on the grounds that: (a) those goods or services were or would be supplied in markets in which competition was limited or likely to be lessened; and (b) it was necessary or desirable for those goods or services to be controlled in the interests of persons acquiring those goods or services.
Two inquiries were completed by the Commission under the old Part 4.
Airfield activities at the three major international airports (i.e. Auckland, Wellington and Christchurch International Airports). The Commission’s recommendation to impose price control on relevant services supplied by Auckland International Airport was not accepted by the Minister of Commerce.
Gas pipeline services. The Commission’s recommendation to impose price control on relevant services supplied by Vector (its Auckland gas network only) and by Powerco was accepted by the Minister of Energy, and led to the Commission making authorisations for the supply of the controlled gas pipeline services under the old Part 5 (and which apply
50 EDBs-GPBs Reasons Paper at [1.2.11]-[1.2.15], 3/7/000988-000989 (footnotes omitted).
from 2005-2012). The authorisations create a CPI-X price path and quality standards (Gas Authorisation).
During the 1990s, information disclosure regulations were introduced for:
electricity lines businesses (ELBs) – i.e. electricity distribution businesses (EDBs) and Transpower – in 1994, under the Electricity Act 1992, administered by the Ministry of Economic Development (MED);
gas pipeline businesses (GPBs) in 1997, under the Gas Act 1992, administered by MED; and
the three major international airports in 1999, under the Airport
Authorities Act 1966 (AAA), administered by the Ministry of Transport.
In 2001, a number of sector-specific regulatory provisions were introduced: the Dairy Industry Restructuring Act 2001, the Telecommunications Act 2001, and the now-repealed Part 4A of the Commerce Act. Part 4A of the Act imposed a ‘targeted control’ (or ‘thresholds’) regime and information disclosure regime for all EDBs and Transpower, administered by the Commission. The targeted control regime was intended to be less costly than implementing full price control for all EDBs, given there were 28 EDBs at the time (now 29) for a small economy.
The regime was ‘targeted’ as only ELBs breaching the CPI-X price path or quality thresholds set by the Commission were potentially subject to a ‘post- breach’ inquiry and possible control under the old Part 5. The Commission did not impose control on any ELBs that had breached the thresholds, but it did, however, enter into ‘administrative settlements’ with three of those ELBs, namely Vector, Unison and Transpower.
[108] Powerco referred us to a more normatively expressed brief history of economic regulation in New Zealand:51
The history of economic regulation in New Zealand falls neatly enough into three periods:
1939-1986: These years were characterised by heavy-handed and intrusive regulation, including price control on a wide range of goods or services. This oppressive regulatory approach operated under a range of statutory instruments including the Control of Prices Emergency Regulations 1939, the Control of Prices Act 1947 and the Trade Practices Act 1975.
1986-2001: This period saw the birth and adolescence of light- handed regulation. Transitional price control remained for some previously controlled goods like natural gas and flour, with the last of these controls expiring in 1992. From then on Pt 4 of the Commerce Act only played a deterrent role until the 1998 Pt 4 inquiry into airports (a deterrent role because the thinking (and reality) was that the threat of regulation prevented firms from exercising natural monopoly power).
51 Quoting from Sumpter (with Hamlin) New Zealand Competition Law and Policy (CCH, 2010) at
[1032].
2001-2008: In recent years there has been a reaction against the light-handed approach of the Commerce Act’s early years. That reaction has seen network monopolies once again placed under regulation. In the course of the airports Pt 4 inquiry and the Caygill Inquiry into the electricity industry, it became clear that Pt 4 needed upgrading, and that blunt price control should be replaced with more modern price, revenue and quality controls. These changes were ushered in by Pt 4 which was inserted into the Commerce Act to regulate electricity lines businesses.
In 2007, the Ministry of Economic Development (MED) undertook a review of regulation under Pts 4, 4A and 5 of the Commerce Act. That review led to substantial Commerce Act amendments in September 2008.
[109] We find that classification helpful. We comment that the period between
1986 and 2001 saw the corporatisation of many utility providers that had previously existed as government departments or local body entities. There was also the introduction of a requirement that such entities act commercially and, in some cases, whole or partial sale to the private sector. We also note that not all commentators would concur with the authors’ assessment that the threat of regulation prevented the exercise of natural monopoly power.
[110] Thus, in October 2008, when Part 4 generally came into force:
(a) The Airports were subject to ID requirements under the Airport
Authorities (Airport Companies Information Disclosure) Regulations
1999, administered by the Secretary of Transport, by virtue of s 9A of the Airports Authorities Act 1966 (the AAA) .
(b)The EDBs and Transpower were subject to ID requirements and the thresholds regime promulgated and administered by the Commission under the old Part 4A. As a result of breaching the thresholds, Vector, Unison and Transpower were by then subject to separate administrative settlements.
(c) The GPBs (including Vector and Powerco) were subject to ID
requirements under the Gas (Information Disclosure) Regulations
1997 (the 1997 Gas ID Regulations) administered by the Ministry of
Economic Development (MED).
(d)Vector, in relation to some of its Auckland gas pipeline services (Vector Auckland), and Powerco, in relation to all of its gas pipeline services, were subject to price control regulation under the old Part 5 (the Provisional Authorisation and Gas Authorisation) administered by the Commission.52
The position by the end of our hearing
[111] The transition from the previous regulatory arrangements to the full implementation of Part 4 regulation has been, and continues to be, a complex process. Subparts 9, 10 and 11 provide transitional provisions. Given that these proceedings relate only to the IM determinations, those provisions are not directly relevant. Moreover, their complexity tends to confuse. The following explanation is sufficient for contextual purposes and summarises the regulatory arrangements under Part 4 which were in place on or about the last day of the hearing of these appeals, namely 14 February 2013.
Energy Appellants – ID regulation
[112] The Commission made its s 52P determination for the ID regulation of the EDBs and GPBs on 1 October 2012 after the commencement of the hearing.53 The first disclosures under those requirements were to be made for the 12 months ending March 2013 for the EDBs, December 2012 for MEUG and June, September or December 2013 for the GPBs.54 In previous years the EDBs continued to make disclosure under the (old) Part 4A Electricity ID Requirements and the GPBs under the 1997 Gas ID Regulations.
EDBs – DPP regulation
[113] The Part 4A thresholds which expired on 1 April 2009 were deemed to be
DPPs for the period 1 April 2009 to 31 March 2010.55 The Commission extended those deemed DPPs on 30 November 2009 for the period 1 April 2010 to 31 March
52 Decision 555, 46/381/023220; Decision 657, 22/124/010306; Decision 656.
53 Decision [2012] NZCC 22; Decision [2012] NZCC 23; Decision [2012] NZCC 24.
54 Commerce Commission Information Disclosure for Electricity Distribution Businesses and Gas
Pipeline Businesses: Final Reasons Paper (1 October 2012), 79/1048/039584.
55 Section 54J.
2015.56 Following the December 2010 determination of EDBs DPP IMs and the re-determination of those IMs in September 2012,57 the extended DPPs were reset on
30 November 2012, with effect from 1 April 2013.58 The reset was on the basis that had the redetermined DPP IMs been set and applied on 30 November 2009 when the deemed DPPs were extended, the Commission’s assessment of the profitability of the EDBs would have been different and materially different DPPs would have been set.59 The key features of that reset are the adjustments to distribution prices summarised, on the assumption suppliers price up to the price cap, in the following table:60
Figure 4.1: Adjustment to distribution prices on 1 April 2013
GPBs – DPP regulation
[114] As at 14 February 2013, Vector and Powerco remained subject to the terms of the Gas Authorisation. The Commission anticipated making the first DPP determination for the GPBs by the end of that month to take effect on 1 July 2013 for the regulatory period ending 30 September 2017.61 That DPP was expected to require GPBs to make the following adjustments to their revenue in the first full
pricing year of the regulatory period:62
56 Decision 685, 27/185/013495.
57 Decision 710, 2/1/000046; Decision [2012] NZCC 26, 67/716/033593.
58 Decision [2012] NZCC 35, 79/1050/0399331.
59 EDBs DPP Reasons Paper at [2.2]-[2.4], 79/1049/039777.
60 At [4.3], 79/1049/039788.
61 The DPP was in fact made on 28 February 2013. Decisions [2013] NZCC 4 and [2013] NZCC 5.
62 Commerce Commission Revised Draft Decision on the Initial Default Price-Quality Paths for
Transpower – ID regulation
[115] No s 52P determination has yet been made for the ID regulation of
Transpower. The Commission was intending to consult on that issue this year.
Transpower – IPP regulation
[116] The Commission was required by s 54M(3) to recommend to the Minister of Commerce prior to the expiry of Transpower’s administrative settlement that Transpower be subject to DPP, CPP or IPP regulation. The Commission recommended on 14 April 2010 that Transpower be subject to IPP regulation.63 This recommendation was accepted by the Minister and an Order in Council subjecting Transpower to IPP regulation from 1 April 2011 was promulgated on 23 August
2010.64
[117] In October 2010, the Electricity Commission’s role in approving Transpower’s grid upgrade plans was transferred to the Commission.65 As a consequence, the Commission was required to determine a capex IM for Transpower
by 1 February 2012 at the latest.66
Gas Pipeline Services (24 October 2012) at [X8], 77/1006/038674.
63 Commerce Commission Recommendation to the Minister of Commerce regarding the type of regulation to apply to Transpower (14 April 2010).
64 Commerce (Part 4 Regulation – Transpower) Order 2010.
65 Electricity Act 2010, s 155.
66 Section 54S.
[118] The Commission made its first s 52P determination for IPP regulation of Transpower on 22 December 2010, contemporaneously with its s 52T IM determinations for that regulation.67 That determination set Transpower’s price- quality path for the period 1 April 2011 to 31 March 2015. The IPP consists of a revenue cap and quality performance targets. The revenue cap is based on a forecast of Transpower’s revenue requirements for each year of the regulatory period called forecast maximum allowable revenue (MAR). The 2010 IPP determination set the MAR for the first year of the IPP and a November 2011 amendment set the MAR for the remainder of the regulatory period (1 April 2012 to 31 March 2015).68
Transpower’s capex IM was determined in accordance with s 54S on 31 January
2012, and its IPP was amended again simultaneously.
Airports – ID regulation
[119] The Commission made its s 52P determination for the ID regulation of the Airports on 22 December 2010,69 contemporaneously with its s 52T IM determinations for that purpose.70 Those requirements came into force on 1 January
2011. The Airports made two annual disclosures on the basis of WACC determinations made by the Commission pursuant to the Airports cost of capital IM, for the years ending 30 June 2011 and 30 June 2012.
All regulated services – WACC estimates
[120] The Commission also made a number of decisions determining WACC estimates for the purposes of ID and price-quality path regulation of the Airports, EDBs, GPBs and Transpower.71
A complex process
[121] Powerco submits that the enactment of Part 4 is illustrative of a “fourth period”, one which places considerable emphasis on the importance of incentives for
67 Decision 714, 47/685/032434.
68 Decision 737.
69 Decision 715, 40/312/019752.
70 Decision 709, 1/1/000001.
71 Decision 718, 41/321/020331; Decisions 723, 727, 732, 745, [2012] NZCC 1 and [2012] NZCC 10.
investment. At various points in this judgment we consider the significance and implication of the reference in s 52A(1)(a) to regulated suppliers having incentives to invest. For now, it is sufficient to observe one far more obvious matter.
[122] It is clear that after the somewhat radical, by comparative standards, period of light-handed regulation, the New Zealand regulatory framework for natural monopolies has moved back towards a framework more typical of similar countries. The introduction of the new framework and its immediate application in the electricity, gas and airport services sectors, required the Commission, in making the initial IM and s 52P determinations, to address at one time a wide range of issues that, in other jurisdictions, have been able to be considered over a period of time. Of necessity, this judgment reflects the complexity of that process. So does the time it has taken us to deliver this judgment.
Legal
Legislative history
[123] In New Zealand, legislative history is an important contributor to the interpretation of an enactment.72 Section 5(1) of the Interpretation Act 1999 provides that “the meaning of an enactment must be ascertained from its text and in the light of its purpose”. As Tipping J observed in Commerce Commission v Fonterra Co-operative Group Ltd:73
It is necessary to bear in mind that s 5 of the Interpretation Act 1999 makes text and purpose the key drivers of statutory interpretation ... [T]he meaning [of the text] ... should always be cross-checked against purpose in order to observe the dual requirements of s 5. In determining purpose the court must obviously have regard to both the immediate and the general legislative context. Of relevance too may be the social, commercial or other objective of the enactment.
IMs........................................................................................................... 221
Reliance on past decisions no longer valid under Part 4 ...................... 221
The Commission an unsatisfactory regulator? ..................................... 222
The Commission’s change of mind on ODVs........................................ 223
Section 52T(1)(a)(ii) ............................................................................... 223
Asset valuation IMs retrospective and breach s 53P(4)? ........................ 226
Regulatory certainty and investor confidence ......................................... 233
Existing regulatory valuations flawed and not fit for purpose? ............ 235
Outcome ...................................................................................................... 246
AIAL’s not fit for purpose argument ........................................................ 246
Problems with relief ................................................................................... 247
Powerco and Vector ................................................................................ 247
Airports.................................................................................................... 249
5.5 VECTOR’S ALTERNATIVE 2 ................................................................... 253
The Commission’s decision........................................................................ 253
Vector’s appeal............................................................................................ 253
Analysis ................................................................................................... 254
Outcome of Vector’s Alternative 2 ............................................................ 256
5.6 VECTOR’S ALTERNATIVE 3 ................................................................... 259
Introduction ................................................................................................ 259
Indexation 2003-2005 for Vector’s uncontrolled GPBs ........................... 261
The Commission’s decision .................................................................... 261
Vector’s appeal ........................................................................................ 262
Analysis ................................................................................................... 263
Outcome ...................................................................................................... 264
The approach to optimisation – EDBs...................................................... 264
The Commission’s decision .................................................................... 264
Vector’s appeal ........................................................................................ 266
Analysis ................................................................................................... 267
The approach to optimisation – GPBs...................................................... 269
The Commission’s decision .................................................................... 269
Vector’s appeal ........................................................................................ 269
Analysis ................................................................................................... 269
Revaluation of easement rights – EDBs ................................................... 270
The Commission’s decision .................................................................... 270
Vector’s appeal ........................................................................................ 271
Analysis ................................................................................................... 271
Finance during construction – GPBs (controlled and uncontrolled)..... 273
The Commission’s decision .................................................................... 273
Vector’s appeal ........................................................................................ 273
Analysis ................................................................................................... 273
“Multiplier” adjustments – GPBs............................................................. 274
The Commission’s decision .................................................................... 274
Vector’s appeal ........................................................................................ 274
Analysis ................................................................................................... 275
Outcome of Vector’s Alternative 3 ............................................................ 275
5.7 THE AIRPORTS’ LAND APPEALS .......................................................... 277
The Commission’s approach ..................................................................... 277
The Airports’ appeals ................................................................................. 280
The valuation date ...................................................................................... 281
Issue......................................................................................................... 281
Analysis and outcome ............................................................................. 282
Exclusion of land held for future use ........................................................ 284
Issue......................................................................................................... 284
Analysis ................................................................................................... 287
Precluded by the AAA ......................................................................... 287
Inconsistent with workably competitive market outcomes by failing to provide appropriate incentives to invest ............................................. 289
Regulatory risk and price shock ......................................................... 291
Exclusion of works under construction .................................................... 293
Issue......................................................................................................... 293
Analysis ................................................................................................... 295
Exclusion of past land conversion costs.................................................... 296
The relevant provision and relief sought ............................................... 296
The Commission’s reasons ..................................................................... 297
The Airports’ challenges......................................................................... 298
Analysis ................................................................................................... 300
5.8 AIR NZ’S APPEAL ..................................................................................... 303
Introduction ................................................................................................ 303
The Commission’s response....................................................................... 307
The Airports’ response ............................................................................... 308
Analysis ....................................................................................................... 309
Drawing a line......................................................................................... 310
Problems with relief ................................................................................ 314
Vodafone v Telecom ................................................................................ 315
Outcome ...................................................................................................... 316
APPENDIX ............................................................................................................. 317
PART 6 - THE COST OF CAPITAL APPEALS ................................................. 343
6.1 INTRODUCTION ....................................................................................... 345
Cost of capital in Part 4 regulation ........................................................... 345
Calculating the cost of capital – the WACC ............................................. 346
The cost of debt formula ............................................................................ 349
The cost of equity formula ......................................................................... 349
The parameters of the WACC formulas ................................................. 351
The risk-free rate................................................................................. 351
The debt premium ............................................................................... 352
Debt issuance costs ............................................................................. 353
The investor tax rate ........................................................................... 353
The equity beta – asset betas and leverage......................................... 353
The TAMRP ......................................................................................... 356
Cost of capital range ............................................................................... 356
Cost of capital cross-checks.................................................................... 357
The TCSD.................................................................................................... 358
6.2 OVERVIEW................................................................................................. 361
6.3 SHOULD A COST OF CAPITAL IM HAVE BEEN SPECIFIED FOR
THE AIRPORTS? ....................................................................................... 363
The Commission's decision........................................................................ 363
Appeals ........................................................................................................ 364
Analysis ....................................................................................................... 365
Outcome ...................................................................................................... 370
6.4 SHOULD THE TRANSPOWER COST OF CAPITAL IM SPECIFY
TRANSPOWER’S ACTUAL COST OF CAPITAL ................................... 371
Introduction ................................................................................................ 371
The Commission’s decision........................................................................ 373
Transpower’s appeals................................................................................. 374
Do Transpower’s actual circumstances require the Commission to
recognise and accept its actual cost of capital for regulatory purposes?376Transpower’s general proposition.......................................................... 376
Transpower’s specific proposition.......................................................... 379
Analysis ................................................................................................... 381
Outcome ...................................................................................................... 385
6.5THE CHALLENGED WACC ESTIMATES AND THE CROSS-CHECK APPEALS .................................................................................................... 387
The challenged WACC estimates – an overview...................................... 387
The cross-check appeals............................................................................. 394
The Commission’s “decisions”............................................................... 394
EDBs and Transpower:....................................................................... 395
The Airports: ....................................................................................... 395
Appeals .................................................................................................... 396
Analysis ................................................................................................... 398
Outcome .................................................................................................. 405
6.6 COST OF DEBT APPEALS - OVERVIEW............................................... 407
Introduction ................................................................................................ 407
The risk-free rate and the TCSD ............................................................ 407
The debt premium ................................................................................... 408
Debt issuance costs ................................................................................. 408
6.7THE RISK-FREE RATE AND THE DEBT PREMIUM TERM AND THE TCSD............................................................................................................ 409
The Commission’s decisions ...................................................................... 409
These appeals .............................................................................................. 414
The Energy Appellants ........................................................................... 414
Transpower.............................................................................................. 416
The Airports ............................................................................................ 417
Analysis ....................................................................................................... 417
A five-year term for the risk-free rate/debt premium produces a material underestimation of the cost of capital .................................................... 417
The implications of interest rate swaps – the TCSD ............................. 419
Outcome ...................................................................................................... 427
The term of the risk-free rate/debt premium ......................................... 427
The TCSD................................................................................................ 427
6.8 THE DEBT PREMIUM.............................................................................. 429
The Commission’s decision........................................................................ 429
The suppliers’ appeals................................................................................ 431
The ratings appeals .................................................................................... 432
The Commission’s decision .................................................................... 432
Powerco and WELL................................................................................ 434
The Airports ............................................................................................ 435
Analysis ................................................................................................... 436
Powerco’s “simple approach” appeal ....................................................... 438
The Commission’s decision .................................................................... 438
Powerco’s appeal..................................................................................... 441
Analysis ................................................................................................... 441
The Bloomberg “fair value curve” appeals.............................................. 442
The Commission’s decision .................................................................... 442
The Energy Appellants’ appeals ............................................................. 444
Analysis ................................................................................................... 446
Outcome ...................................................................................................... 447
6.9 DEBT ISSUANCE COSTS ......................................................................... 449
The Commission’s decision........................................................................ 449
Appeals ........................................................................................................ 453
MEUG ..................................................................................................... 454
Appeal ................................................................................................. 454
Analysis and outcome ......................................................................... 454
Vector and Powerco ................................................................................ 455
Out of pocket expenses........................................................................ 455
New issue premium ............................................................................. 458
Funding liquidity costs........................................................................ 459
Interest rate hedging costs .................................................................. 460
Outcome .............................................................................................. 461
The Airports ............................................................................................ 461
Appeal ................................................................................................. 461
Analysis and outcome ......................................................................... 462
6.10 THE COST OF EQUITY APPEALS – OVERVIEW................................. 465
Introduction ................................................................................................ 465
6.11 COST OF CAPITAL RANGE ..................................................................... 467
The Commission’s decision........................................................................ 467
Appeals ........................................................................................................ 470
Challenges to estimates of standard errors .............................................. 470
Standard error of the debt premium ...................................................... 471
Standard error of the TAMRP................................................................ 472
Standard error of the asset beta ............................................................. 473
Standard error of the risk-free rate ........................................................ 474
Standard error of leverage...................................................................... 474
Estimates of standard errors – outcome ................................................ 475
Challenges to chosen percentiles ............................................................... 475
MEUG’s appeal....................................................................................... 476
The Commission’s response to MEUG .................................................. 478
Vector and Powerco’s response to MEUG ............................................. 480
MEUG’s appeal – analysis and outcome ............................................... 481
The Airports’ appeals .............................................................................. 491
6.12 ASSET BETAS – EDBS AND TRANSPOWER ........................................ 493
The Commission’s decision........................................................................ 493
The appeals ................................................................................................. 496
Vector’s appeal ........................................................................................ 496
Analysis – the three flaws ....................................................................... 497
A skewed average?.............................................................................. 497
Sensitivity to choice of sampling periods............................................ 499
Data too old ........................................................................................ 501
Upward adjustment for leverage and the impact of the GFC............. 502
The Commission’s asset beta cross-checks ......................................... 503
Transpower’s appeal .................................................................................. 504
Powerco’s appeal ........................................................................................ 504
Analysis ................................................................................................... 505
The tech boom and the GFC ............................................................... 505
Beta estimates supporting 0.46 ........................................................... 505
MEUG’s appeal .......................................................................................... 506
Outcome ...................................................................................................... 507
6.13 ASSET BETAS – THE AIRPORTS............................................................ 509
The Commission’s decision........................................................................ 509
AIAL’s appeal ..............................................................................................511
Analysis ....................................................................................................511
Overly conservative approach .............................................................511
Multi-division adjustment ....................................................................511
Upward adjustment for leverage ........................................................ 512
WIAL and CIAL’s challenges.................................................................... 512
6.14 LEVERAGE................................................................................................. 515
The Commission’s decisions ...................................................................... 515
Background ................................................................................................. 516
Leverage in the WACC ........................................................................... 516
The leverage anomaly ............................................................................. 518
MEUG and Transpower’s appeals ............................................................ 522
Analysis ....................................................................................................... 523
Uncertainty Inherent .............................................................................. 523
Evaluation of the Commission’s approach to leverage ......................... 523
WACC and leverage ............................................................................ 523
WACC invariant to leverage – our view ............................................. 525
The leverage anomaly and debt betas................................................. 527
The implications of the leverage anomaly – our assessment ................ 531
Evaluation of Transpower’s appeal .......................................................... 532
Evaluation of MEUG’s appeal .................................................................. 536
Summary ..................................................................................................... 537
MEUG’s alternative proposal ................................................................... 539
Outcome – Transpower and MEUG’s appeals ........................................ 540
The Airports’ appeals ................................................................................. 541
Analysis and outcome ............................................................................. 541
6.15 TAMRP ........................................................................................................ 543
The Commission’s decision........................................................................ 543
The TAMRP appeals ............................................................................... 544
Impact of the GFC .............................................................................. 545
Outcome .................................................................................................. 549
6.16 MODEL ERROR ......................................................................................... 551
The Commission’s decision........................................................................ 551
Vector, Powerco and Transpower’s appeals ............................................. 553
Vector ....................................................................................................... 553
Powerco ................................................................................................... 554
Transpower.............................................................................................. 555
Analysis ....................................................................................................... 556
General model error versus bias ............................................................ 556
Is the model biased?................................................................................ 557
Do market participants and other regulators make adjustments? ........ 558
Outcome ...................................................................................................... 558
6.17 ASYMMETRIC RISKS ............................................................................... 561
The Commission’s decision........................................................................ 561
Airports’ challenges in relation to asymmetric risk............................... 564
AIAL .................................................................................................... 564
WIAL/CIAL ......................................................................................... 566
Analysis ................................................................................................... 566
Outcome .................................................................................................. 569
PART 7 – POWERCO’S TAX APPEAL .............................................................. 571
Taxation in Part 4 regulation..................................................................... 571
The RTAV and regulatory depreciation ................................................... 572
The Commission’s decision........................................................................ 574
Powerco’s appeal ........................................................................................ 574
Analysis ....................................................................................................... 579
Outcome ...................................................................................................... 584
PART 8 – VECTOR’S COST ALLOCATION APPEAL ................................... 585
Cost allocation in Part 4 regulation .......................................................... 585
The Commission’s decision........................................................................ 588
Introductory concepts ............................................................................. 588
The joint provision of services and efficiency gains ........................... 588
CDA and CnDA................................................................................... 590
Allocation approaches: ABAA, ACAM, and OVABAA....................... 591
The terms of the Cost Allocation IM ...................................................... 593
Vector’s appeal............................................................................................ 600
Analysis ....................................................................................................... 603
ACAM required by ss 52A(1)(c) and 52T(3).......................................... 604
ACAM more consistent with workably competitive market outcomes .. 609
Outcome ...................................................................................................... 614
PART 9 – VECTOR’S REGULATORY PROCESSES AND RULES APPEAL615
Introduction ................................................................................................ 615
Reconsideration of DPPs ........................................................................... 616
The Commission’s decision .................................................................... 616
Vector’s appeal ........................................................................................ 618
Analysis ................................................................................................... 619
Outcome .................................................................................................. 622
The IRIS ...................................................................................................... 622
What is an IRIS? .................................................................................... 622
The Commission’s decision .................................................................... 624
Vector’s Appeal........................................................................................ 626Extend the IRIS to DPP regulation? ................................................... 627
Extend the IRIS to all expenditure? .................................................... 628
Ten-year timeframe for merger and acquisitions gains ...................... 629
Analysis and outcome ............................................................................. 630
PART 10 – WELL’S CAPEX ASSET VALUATION APPEAL .......................... 631
The Commission’s decision........................................................................ 631
WELL’s appeal ........................................................................................... 631
Analysis and outcome................................................................................. 632
PART 11 – RESULTS AND COSTS ..................................................................... 635
Outcome overall.......................................................................................... 635
Orders.......................................................................................................... 635
Costs............................................................................................................. 636
GLOSSARY ............................................................................................................ 637
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