Briefing for Commerce Committee on Consumer Law Reform Bill: Electricity and Gas Retailer Indemnity

Transcription

1 Briefing for Commerce Committee on Consumer Law Reform Bill: Electricity and Gas Retailer Indemnity Introduction Document MED June The purpose of this paper is to assist the Committee in its consideration of submissions received on the provisions in the Consumer Law Reform Bill that relate to electricity and gas. 2. The Bill (clause 36) amends the Consumer Guarantees Act to provide a tailor made guarantee of acceptable quality that applies to electricity and reticulated gas (new ss7a and 7B). This is done because the supply of electricity and reticulated gas does not fit easily under the existing guarantees in the Act relating to either the supply of goods or services. 3. The Bill (clause 41) also provides for a statutory indemnity of electricity and gas retailers by providers of lines function services electricity and gas lines companies and Transpower. 4. In general the submissions on the Consumer Law Reform Bill support having a tailor made guarantee of acceptable quality for electricity and reticulated gas. With respect to the indemnity provisions, submissions are divided concerning whether the Consumer Guarantees Act should include indemnity provisions or whether the Electricity Authority, through the Electricity Industry Participation Code, should be responsible for determining indemnity arrangements between retailers and electricity lines companies and Transpower. 5. The paper sets out the problems with the current provisions in the Consumer Guarantees Act and the new acceptable quality guarantee for electricity and reticulated gas that aims to correct them. It then sets out how the Bill provides for a retailer indemnity, views in submissions on this approach and comments on alternative approaches. The Current Position 6. The extent of the coverage of electricity retailers and lines companies under the Consumer Guarantees Act 1993 has been problematic since the electricity companies were split in the 1990s electricity industry reforms. A High Court case in 1998 held that electricity was neither a good nor a service under the Act. 1 As this was not the intention of Parliament, the Act was amended in 2003 to say that electricity retailers supply electricity as a good, and electricity lines services are a service for the purposes of the Act. Despite the amendments in 2003, both industry and consumers continue to have difficulty understanding how the Act applies because the supply of electricity and reticulated gas is not of the typical nature of the supply of goods and services. 1 Electricity Supply Association of New Zealand v Commerce Commission (1998) 6NZBLC 102, Neazor J

2 7. There are two issues with the current application of the Act to electricity: a. Electricity retailers are liable for breaches of the acceptable quality guarantee that applies to electricity as a deemed good under the Act, while lines companies are subject only to the lesser due care and skill guarantee for providing a service. Lines companies are seen to have more control over the quality of electricity delivered over their networks than retailers, so making the retailers liable for breaches of the acceptable quality guarantee misdirects incentives for improvement. b. There is uncertainty about the definition of the acceptable quality guarantee in the Act, and how it applies to electricity. An attempt was made to address this in a High Court case taken by retailers against the Electricity and Gas Complaints Commissioner, Judi Jones. 2 Despite the interpretative guidance provided in the judgment there is still some uncertainty. 8. Retailers have supply contracts with consumers, so in that respect it makes sense for them to bear primary responsibility under the Act for the electricity supplied to the consumer. Lines companies generally do not have direct contracts with consumers, but the due care and skill guarantee applies to services provided to consumers, whether or not the suppliers are party to contracts with the consumers Ordinarily, market participants further up the supply chain would be expected to contractually indemnify those lower down against failure of the goods or services they provide. This suggests that lines companies should indemnify retailers against failures of acceptable quality. However, retailers have reported that the natural monopoly position occupied by lines companies has made it impossible for them to negotiate these indemnities. New Acceptable Quality Provisions in the Consumer Law Reform Bill 10. Clause 36 of the Bill inserts new ss 7A and 7B in to the Act defining a new acceptable quality guarantee for electricity and gas. Only retailers are subject to this guarantee. The new sections mean that supply of electricity and reticulated gas by electricity and gas retailers is specifically excluded from the definitions of goods and services for the purposes of the other guarantees provided in the Act. 11. The ss 7A and 7B electricity and gas guarantee more accurately details the standard the supply of reticulated gas and electricity must meet. It states that the supply must be as safe, reliable and consistent as a reasonable consumer would expect. However, this requirement is made subject to considerations of emergency, safety, maintenance, normal fluctuations, location of supply and price. 2 Contact Energy v Jones HC WN 24/4/09 Miller J 3 Transpower provides electricity grid and system services to other industry participants, rather than to consumers. It is therefore generally not liable to consumers under the Act. There is also one lines company, The Lines Company that contracts with and bills customers directly. 2

3 The Retailer Indemnity 12. At clause 41 the Bill provides that, if a consumer obtains a remedy for a breach of the acceptable quality guarantee from a retailer, either because the retailer accepts it is liable, or the retailer is held to be liable by the Electricity and Gas Complaints Commission or a court, then the retailer can seek to recover the cost of that remedy from the relevant lines company or Transpower. The conditions for recovering the liability include: a. The breach of the acceptable quality guarantee occurred as a result of an event or condition associated with the lines company network; b. The breach was not a result of the lines company following a regulatory rule or order it was legally obliged to comply with (e.g. safety regulations or market rules); c. The amount of the lines company s liability is limited to the proportion of the loss attributable to events or conditions on its network; and d. There are rules against consumers double recovering from the lines company directly. 13. Further, the Bill provides that lines companies and Transpower can contest indemnity claims made by retailers before the Electricity and Gas Complaints Commission if they disagree that there has been a breach of the acceptable quality guarantee, or if they disagree that the breach is as a result of an event or condition on their network. This is intended to balance the interests between the different industry participants. It will mean that retailers take on some risk that they will not ultimately be indemnified when they pay a claim, encouraging them to be rigorous in investigating their validity. Views in Submissions 14. Electricity retailers preference is for lines companies to be responsible for events on their networks that affect the quality of the electricity supplied. They therefore generally support the indemnity provision and have focused their submissions on clarifying its operation and scope. 15. The Electricity and Gas Complaints Commission Scheme has no view on the appropriateness of the indemnity, but puts itself forward as the appropriate forum for resolving indemnity disputes. This is based on the likelihood of it having already dealt with disputes at the consumer level, and its general expertise within the industry. 16. The Electricity Authority is interested in the issue because it has recently completed an amendment to the Electricity Industry Participation Code. It specifies a clause to be included in contracts between retailers and lines companies indemnifying retailers. The inclusion of an indemnity in the Industry Participation Code is a requirement of s 42 of the Electricity Industry Act. However, this indemnification is only the default, and can be removed by mutual agreement. It also does not cover Transpower, and provides no dispute resolution mechanism. That said, the Authority has indicated it will undertake work on including Transpower in the Code. 17. Lines companies prefer the Electricity Industry Participation Code approach. Together with the Electricity Authority they tend to stress that issues dealing with interactions between businesses are best dealt with at an industry level. Some also question the appropriateness of the Electricity and 3

4 Gas Complaints Commissioner as the forum for resolving indemnity disputes. In the alternative, lines companies generally argue for various limitations on the indemnity; notably a monetary cap on liability. 18. Transpower is strongly opposed to its inclusion in any indemnity arrangement. This is on the basis of its special position as system operator, and the strict regulatory control that it already faces. 19. Various parties have raised a range of additional issues. It has been suggested that electricity generators should be subject to the indemnity, as they can also cause failures of acceptable quality. Some parties are concerned that the determination of liability to consumers lies exclusively with retailers, even though it is lines companies that will ultimately have to pay. 20. Concerns have also been raised that both the tailored acceptable quality guarantee and the indemnity are inappropriate to apply to the gas industry. Submitters have pointed out that gas supply tends to be very reliable, with much less frequent outages. Comment 21. There is validity in the argument that upstream interactions in the supply chain that do not affect consumers should be governed by industry standards. These can be formulated by industry participants that possess the requisite knowledge and are incentivised to ensure that industry relations run smoothly. This mechanism also avoids the need for potentially costly government intervention in adjudication and the updating of regulations. 22. This aim is manifested in the current industry regulation scheme. It is based on the Electricity Industry Act 2010 and the Gas Act 1992, which empower the Electricity Authority and Gas Industry Company respectively to regulate their own industries. In October 2011, the Electricity Authority put in place an industry standard regarding retailers obtaining an indemnity from lines companies. This indemnity industry standard is not as clear as the indemnity provisions in the Consumer Law Reform Bill and has been criticised by retailers. It was drafted after the Bill was introduced to Parliament. It fails to tie lines companies to an indemnity and leaves Transpower out altogether. The Gas Industry Company has yet to formulate any arrangement of this nature. 23. The Ministry of Consumer Affairs has consulted with the Ministry of Economic Development which is responsible for the Electricity Industry Act and the Gas Act and monitoring the Electricity Authority and the Gas Industry Company. Both the Ministry of Consumer Affairs and the Ministry of Economic Development consider the status quo outlined in paragraph 22 is insufficient given the similarities between electricity and gas, the prevalence of dual fuel energy services to consumers and the exclusion of Transpower and gas from present arrangements. 24. Accordingly, we recommend the Consumer Guarantees Act include indemnity provisions as provided in clause 41 of the Consumer Law Reform Bill, subject to minor changes recommended in the Departmental Report on the Bill. 25. We note the statutory and industry based approaches to regulation are not, however, incompatible. Section 32 of the Electricity Industry Act 2010 provides a broad authority for the Electricity Authority to regulate the industry. In contrast, the indemnity provision in clause 41 of the Bill is 4

5 high level and does not mandate the manner in which the industry must comply. This means that even if the Committee agrees the imposition of an indemnity at a statutory level is appropriate, the two industries will still be free to determine the details of the operation of that indemnity, and the contractual relationships that operate around it, as they see fit. George Minton Policy Analyst Ministry of Consumer Affairs Evelyn Cole Manager Consumer Policy Ministry of Consumer Affairs 5