Commerce Commission v First Gas Ltd

• Jurisdiction: New Zealand
• Judge: Mallon J
• Judgment Date: 21 February 2019
• Neutral Citation: [2019] NZHC 231
• Court: High Court
• Docket Number: CIV 2018-485-980
• Date: 21 February 2019

Under Sections 27 and 47 of the Commerce Act 1986

Between

Commerce Commission

Plaintiff

and

First Gas Limited

Defendant

[2019] NZHC 231

CIV 2018-485-980

IN THE HIGH COURT OF NEW ZEALAND

WELLINGTON REGISTRY

I TE KOŌTI MATUA O AOTEAROA

TE WHANGANUI-A-TARA ROHE

Competition — acquisition substantially lessening competition in a market — restraint of trade lessening competition — breach of Commerce Act 1986 — penalties

Appearances:

D A Laurenson and F J Cuncannon for Plaintiff

T D Smith and B K Reddington for Defendant

JUDGMENT OF Mallon J

Introduction

1 First Gas Limited (First Gas) provides reticulated gas transmission and gas distribution services in North Island cities and towns. In December 2016 First Gas entered into an agreement with GasNet Limited (GasNet) to acquire GasNet's gas distribution assets in the Papamoa area of the Bay of Plenty region (the Agreement). First Gas accepts:

• (a) the acquisition had, or was likely to have, the effect of substantially lessening competition in a market in breach of s 47 of the Commerce Act 1986; and

• (b) a restraint of trade clause in the Agreement (the Restraint of Trade) had, or was likely to have, the effect of substantially lessening competition in a market in breach of s 27 of the Commerce Act.

2 The Commerce Commission seeks that the Court impose a penalty of $3.4 million on First Gas for these breaches, and that the Court issue an injunction to restrain First Gas from enforcing the Restraint of Trade. 1 First Gas has agreed with the Commission to recommend that this penalty be imposed for its admitted breaches. It has assured the Commission that it will not enforce the Restraint of Trade but agrees the Court should make the formal injunction sought.

3 The established approach in such circumstances is for the Court to impose the penalty that has been agreed between the parties so long as it falls within an appropriate range. 2 This is because of the public interest and the interests of the parties in promoting a resolution, and thereby avoiding costly, time consuming and uncertain litigation. 3

The facts

4 The application before me proceeds on the basis of an Agreed Statement of Facts. The following is a summary of these facts.

Gas transmission and distribution

5 Reticulated natural gas is distributed to residential dwellings and commercial premises in the North Island through a combination of high pressure gas transmission pipelines (transmission network) and lower pressure distribution pipelines (distribution networks). Distribution networks transport and distribute natural gas

from the end points on the transmission network (delivery points) to meters at the premises of consumers

6 Transmission and distribution networks are regulated by price-quality regulations imposed by the Commission under Part 4 of the Commerce Act. The effect of this is to prevent gas pipeline businesses from earning excessive returns.

7 Gas distribution pipelines are generally laid in trenches. Pipelines may be installed to provide distribution services to existing residential or industrial areas or subdivisions or to new developments. New developments provide the most cost-effective opportunity to extend distribution networks because the pipelines can be laid in already open trenches dug by the developer for the simultaneous laying of all network utilities. Once the development is complete, the laying of new pipelines will involve disrupting roads, paths or berms. This is called retrofitting.

8 When a developer chooses to offer reticulated gas to the new development, it contracts with a gas distributor to install a distribution network. The terms of the contract are subject to commercial negotiations. These negotiations may involve the timeframe within which the pipe lines will be laid, the gas distributor seeking a capital contribution towards the costs of installation, or the gas distributor offering incentives, such as free gas appliances, to encourage connection and the use of gas.

9 Under the Part 4 regulations, a gas distribution business expects to earn, from consumers, the risk-adjusted cost of capital on the forecast capital costs of installing distribution assets in subdivisions. These costs are relevant to the revenue cap set by regulation that applies to the gas distributor's business as a whole, and therefore the prices charged by the distributor across its business.

10 However, when a developer pays a contribution to the capital costs of installation, those contributions are excluded from the distributor's costs which go into the revenue cap calculation. In principle, therefore, gas consumers will pay a lower price over time when a developer has paid a contribution. However, developers have an incentive to pass on, to purchasers of subdivisions, the capital contribution it has made.

First Gas

11 First Gas is a relatively new entrant to the gas transmission and distribution markets. It entered the market by purchasing existing transmission and distribution networks. This included purchasing the non-Auckland assets of Vector Gas Limited (Vector), including its transmission network and its Bay of Plenty distribution network, on 20 April 2016.

12 First Gas now owns and services one of New Zealand's largest gas networks. This includes owning and controlling the transmission network in the North Island and having gas distribution networks in more than 40 North Island towns and cities. It has more than 65,500 customers across the North Island. In the 12 months ending 30 September 2018 its total revenue was approximately $157,600,000 of which approximately $154,000,000 (around 97 per cent of total revenue) is regulated under Part 4.

GasNet's entry into the market

13 GasNet is controlled by the Whanganui District Council. It operated a reticulated natural gas network and metering business in the Whanganui-Manawatu region and was looking to expand. During 2015 and 2016, GasNet identified the Bay of Plenty as providing an expansion opportunity. At this time, Vector owned the transmission network servicing this region and was the sole gas distributor in the area.

14 On 27 January 2016 GasNet secured its first contract in the Bay of Plenty, securing exclusive rights to lay pipes in the open trenches of a development in Papamoa, on the basis of benefits to the developer concerning the capital contribution payment. It subsequently resolved to proceed with the extension of its network in the Papamoa area and continued to seek contracts with developers on the basis of benefits concerning the capital contributions payment.

15 GasNet secured its second exclusive contract with a developer on 20 April 2016 (the day First Gas acquired the non-Auckland assets of Vector). GasNet advised First Gas that it was proceeding to construct a new distribution network in Papamoa. By mid-May 2016 GasNet began to build this network. In June 2016 it was in negotiations with a third developer.

First Gas' response to GasNet's expansion

16 In early July 2016 First Gas internally assessed the impact of GasNet's entry into Papamoa on First Gas's own plans for expansion. First Gas subsequently advised GasNet at a meeting held at GasNet's Whanganui office on 6 July 2016 that:

• (a) Tauranga was an important area to First Gas and one in which First Gas could beat GasNet on cost due to its lower overheads;

• (b) First Gas would compete with GasNet in Papamoa in the future;

• (c) First Gas would be happy to work together with GasNet in relation to services such as metering and operations and maintenance;

• (d) First Gas was prepared to buy GasNet out in Papamoa now for invested cost (the First Offer); and

• (e) That if First Gas were to buy out GasNet at a later date, GasNet would have assets that First Gas would not need.

17 GasNet rejected First Gas's First Offer and advised that it did not want to sell its Bay of Plenty gas distribution assets. On 7 July 2016 GasNet signed an agreement with First Gas for interconnection to First Gas' transmission network, including at the Papamoa delivery point. GasNet anticipated its first connections to residential consumers from its Papamoa distribution network would be made in early 2017.

18 First Gas developed plans to minimise GasNet's penetration. From early September 2016 First Gas commenced its expansion plans in Papamoa. This included:

• (a) advising developers and the Tauranga City Council that First Gas planned to retrofit gas distribution pipelines in Papamoa developments where GasNet had laid gas distribution pipelines;

• (b) corresponding and working with the Tauranga City Council to obtain access to roading corridors to install gas distribution pipelines, including by retrofitting; and

• (c) in October 2016, arranging a contractor to physically lay gas distribution pipelines, including by retrofitting.

19 On 31 October 2016 First Gas again advised GasNet that First Gas was prepared to purchase GasNet's Papamoa assets, based on reimbursement of costs (Second Offer).

20 On about 2 November 2016 First Gas called GasNet. It advised GasNet that it was going to lay distribution pipelines parallel to GasNet's network and service two developments GasNet had been intending to service, and that it would be able to supply those developments before GasNet. First Gas also tabled with the Tauranga City Council its work programme for retrofitting those developments, publicly announced its plans to retrofit in Papamoa and took steps to begin to do so by delivering pipes on-site.

21 On about 11 November 2016 First Gas met with the third developer (referred to earlier) with which GasNet had been in negotiations. On 18 November 2016 GasNet made a revised offer to that developer. This included other benefits to houses in the subdivision as well as to the developer. GasNet was also in contact with a fourth developer around this time.

22 On 25 November 2016 First Gas made...