New Zealand: Electricity Supply, Acceptable Quality And The Consumer Guarantees Act

In a recent decision of the High Court, Justice Miller considered the difficult question of when an electricity retailer will be liable to a domestic consumer for losses caused by power supply issues such as voltage surges, brownouts or outages. In this update we briefly review the decision of the Court and consider its implications.

Background

Most participants in the New Zealand electricity system are members of the Electricity and Gas Complaints Scheme (the Scheme). The Scheme provides for an Electricity and Gas Complaints Commissioner (Commissioner), whose work includes facilitating the resolution of complaints about services provided to consumers. The Commissioner, whose decisions are binding on the participant, must determine complaints (up to a limit of $20,000) by deciding what is fair and reasonable after observing and applying any applicable law, including the Consumer Guarantees Act.

Since 2003, the Consumer Guarantees Act (CGA) has applied both to electricity retailers and electricity lines companies, despite many lines companies having no contractual relationship with consumers. Among other things, retailers must ensure that electricity supplied is of 'acceptable quality' as assessed by a reasonable consumer having regard to a range of specified factors. In addition, lines companies are required to use reasonable care and skill to transport electricity to consumers (line function services). Failure by retailers and/or lines companies to comply with these guarantees can give domestic consumers the right to claim compensation for resulting damage or loss (including consquential loss).

Until now, it has not been at all clear how the CGA applies in practice to the sale or delivery of an intangible good like electricity. Contact Energy & ors v EGCC gives some guidance.

In this case, all the major retailers (with the Commissioner as defendant) asked the High Court for a declaration as to how the Commissioner should deal with complaints against retailers under the CGA in relation to some specific complaints. The Court was asked to consider if, and to what extent, retailers should be liable under the guarantee of acceptable quality for any quality issues caused as a result of problems in the distribution system in circumstances where the Commissioner is unable to find the lines company at fault.

What Did The Commissioner Argue?

The Commissioner accepted that damage might occur to a customer as a result of an electricity quality problem where the lines company is not at fault because it has used reasonable care and skill in the management of its lines. However, in such cases, the Commissioner argued that the retailer could nevertheless be liable to the customer under the guarantee of acceptable quality.

All quality problems attributable to faults 'internal' to the distribution system (ie faulty insulators) would put the retailer in breach of its guarantee, whether or not any fault could reasonably have been detected or prevented. Only events 'external' to the system such as force majeure events (ie environmental hazards), third party damage, limited momentary voltage fluctuations, notified planned outages and emergency shutdowns would excuse a retailer from liability.

What Did The Retailers Argue?

The retailers starting position was that retailers should not be liable at all under the CGA for distribution faults. Distribution was the responsibility of lines companies and covered by a separate and less onerous 'reasonable care and skill' guarantee. The retailers argued that Parliament cannot have intended to impose fault based liability on lines businesses for distribution faults while imposing strict liability for the same faults on retailers (who cannot manage the relevant risk or pass the resulting costs back to lines companies because of an imbalance of bargaining power).

In the alternative, the retailers argued that, even if a distribution fault could give rise to a breach of the 'acceptable quality' guarantee, a reasonable consumer would be aware of the risks inherent in electricity and expect reasonable steps to be taken to avoid those risks. A retailer should not be liable if it could show that these reasonable steps were in fact taken.

Finally, the retailers made a number of arguments that any liability should be reduced or not arise because retailers communicated the risks inherent in electricity supply and the need for uninterruptible power supplies and/or surge protectors. Consumers who did not use these protections caused or contributed to the relevant losses.

What Did The Court Hold?

The Court first looked closely at the history of the 2003 amendments to the CGA and the policy behind those amendments. Based on this review, the Court concluded that Parliament intended that retailers could be liable for breach of the acceptable quality guarantee arising from distribution faults, even where lines companies themselves were not liable. Among other things, the Court observed that consumer faults are almost always attributable to events in the distribution network. It was noted that the retailers' argument suffered from the disadvantage that, if the retailers were correct, 'having gone to the trouble of imposing an implicit guarantee on electricity retailers, the legislature must be taken to have emptied it of content, leaving retailers liable only for ancillary services, such as billing and metering'.

In what is the key finding of the case, the Court then considered the content of the retailers' guarantee of acceptable quality. His Honour disagreed with the approach taken by both the Commissioner and the retailers saying that 'both parties focus[ed] too much, on responsibility for faults and too little on the quality of electricity supply actually experienced by consumers'. The Court went on to disagree with the Commissioner that a reasonable consumer would expect no faults or outages in the distribution system other than those considered to be 'external' in nature, finding that the Commissioner attached 'insufficient weight to the consumer's presumed knowledge of the 'internal' characteristics of supply, and the price that would have to be paid if 'internal faults' were to be eliminated'.

• The Court concluded that breach of the acceptable quality guarantee will be a question of fact and degree. His Honour listed the following non-exhaustive factors that the reasonable consumer must be taken to consider in assessing what is acceptable quality in the context of electricity supply:
• The purposes to which electricity is commonly put; these include operation of personal computers and other commonplace electronic equipment.
• The nature and extent of any risk posed by a given fault.
• The extent, duration and frequency of any departure from voltage or frequency standards, and the frequency and duration of outages, both planned and unplanned.
• The nature of the distribution system to which the consumer's premises are connected and the quality standards set by the Commerce Commission.
• The cause of the given fault (which is relevant but not determinative).
• The price of the services and the price the consumer would have to pay to eliminate faults of the sort that caused the loss.
• Anything said by the supplier that would make the quality of the goods more or less acceptable. His Honour agreed with the retailers that acceptability could be affected by the consumer's knowledge that surge protection may protect against risks that the retailer cannot control.

Having dealt with acceptable quality, the Court proceeded to deal with the other arguments advanced by the retailers. Arguments around 'defects' in the supply of electricity being pointed out to consumers were effectively rejected on the basis that the warnings in the relevant terms of trade considered by the Court were too general in nature to excuse the retailer from liability. The Court left open the question as to whether, in the particular circumstances, a failure by a consumer to use a surge protector could reduce the damages payable by a retailer. The onus would be on the retailer to show that the failure to use a surge protector was another contributing cause of the relevant loss.

Having rejected the approach taken by both parties, the Court invited the parties to submit revised draft declarations, if they wished to do so, for consideration by the Court. In relation to the specific Commission decisions placed before the Court, these were referred back to the Commissioner for further consideration in light of the decision.

Implications Of Decision

We suspect that electricity retailers will have mixed feelings regarding the decision. On the one-hand, the strict approach to liability favoured by the Commissioner has been rejected in favour of a more fact-specific analysis which arguably has greater regard to the probabilistic nature of failure in the electricity system. On the other hand, the prospect of liability for defects in the distribution network beyond the control of the retailer will still be regarded as unsatisfactory.

Similarly, from the consumer's point of view, the case leaves open the prospect of a consumer obtaining compensation from a retailer, even where reasonable steps have been taken to avoid the quality problem, but to some degree shifts the goal posts in favour of the retailer.

It will be interesting to see whether the decision results in retailers reviewing the information they provide consumers regarding the fragilities of the electricity system and the benefits of uninterruptible power supplies and surge protectors. In this regard, it seems to us that retailers tread a fine line between, on the one hand enhancing their position in any consumer dispute and, on the other, being seen to undermine confidence in the electricity system as a whole.

The next step for the parties to this litigation remains to be seen. As always, we will keep you posted.

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