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The Shoeshine Column: Commission goes after unholy grail

Friday 4th August 2000

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Is the Commerce Commission's Kupe role Sir Galahad or Don Quixote?

It's been a big week for Commerce Commission chairman John Belgrave and his legal lineup. Without pausing to celebrate the $525,000 fine Carter Holt Harvey copped for predatory pricing, it launched what is guaranteed to be a long and expensive action against another of the country's biggest corporates, Telecom.

And re-emerging from the Court of Appeal on its tortuous way to a substantive hearing was the Kupe case against Fletcher Challenge.

That it has taken so long - two-and-a-half years - to get the case this far partly reflects the grim determination of the opponents. But it also reflects the changes that have since swept through the whole energy sector. The commission's case has been filed, amended, refiled, pruned and added to many times.

The battle is over the Kupe oil and gas field off south Taranaki. Kupe was discovered in 1987. It's believed to hold around 15 million barrels of oil and 300 petajoules of gas but the operator - Fletcher Energy - considers it high risk. In other words, gas prices are going to have to rise a fair bit from where they are before it becomes economic to mine it.

The commission became interested in 1997 when Fletcher Energy bought a 20% interest from Norcen Energy. A few weeks later it bought a further 40% from Australia's Western Mining Corporation, taking its stake to 62.5%.

It immediately onsold 25.75% to ECNZ and signed a clutch of deals with the former state generator. The commission said all this was fine as long as no irreversible deals were done. It would have a look later.

It got around to it later that year and at that point accounts began to diverge.

The commission said it unearthed all manner of dubious dealings it hadn't been told about. Fletcher Energy said it made a full and voluntary disclosure of anything the commission might be interested in.

Whatever, the commission filed a case that December against Fletcher Energy, its parent, Fletcher Challenge Ltd, and ECNZ alleging various Commerce Act offences.

It said Fletcher Energy had breached s47 of the act by strengthening or, if not, acquiring, a dominant position in the gas production, wholesale, transmission and retail markets, and s27 of the act by undertaking acquisitions and agreements that had the purpose and effect of substantially lessening competition in those markets.

The commission claimed ECNZ was caught by the rules aimed at anyone who knows of, or is a party to, a s47 breach.

The commission's case for Fletcher Energy's dominance in production boils down to the observation that it owns all gas production other than Shell and Todd Energy's half of the Kapuni field.

The downstream markets' case is built on Fletcher Energy's ownership at that time of 33% of Natural Gas Corporation (NGC) which wholesales and retails gas and owns the North Island transmission grid.

Also a sore point was a gas supply agreement with ECNZ. The upshot, the commission claimed, was Fletcher Energy would have a stranglehold on the wholesale market and that it and ECNZ would have commercial incentives to delay production from Kupe.

Fletcher Energy's response to all this is novel and it will be interesting to see what the court makes of it.

It argues, quite simply, the key to competition in gas markets is the ownership of "free" (uncommitted) gas. As all Fletcher Energy's gas is committed to long-term fixed-price contracts, it says, it couldn't influence wholesale or retail market prices even if it wanted to.

So the ownership of production assets is irrelevant to competition. And upstream production, it claims, is inherently contestable - anybody can bid for a licence and drill a discovery well.

Those arguments will have their day in court. But energy markets have changed so much since 1997 that from a commercial perspective the commission's action now looks somewhat quixotic.

For one thing, Fletcher Energy has withdrawn from downstream activities. It no longer has any stake in NGC, so it can't manipulate gas transmission, treatment or retail and has little influence in wholesale.

For another, ECNZ no longer exists. "Baby EC" Genesis Power inherited its Kupe shares but not its gas supply agreements with Fletcher Energy, so any "collusion" that might have existed can no longer influence the market.

None of this will matter to the court. It will simply decide whether a series of transactions and agreements in early 1997 breached the Commerce Act.

If it decides they did, the commission wants Fletcher Energy to be ordered to sell its shares - the Court of Appeal ruled this week Genesis can't be ordered likewise - and FCL, Fletcher Energy and Genesis to be fined the maximum $5 million apiece.

If that happens the taxpayer will be a few bob better off, provided the fines add up to more than the commission spends on the case. But the watchdog won't have won a result for the consumer. Share sales now won't have any beneficial effect on competition, nor much on Fletcher Energy. Its stake cost it only $28 million and there are plenty of keen buyers.

So why fight on? At least two views are possible. The first is the commission is a legal Sir Galahad, fighting to have "law-breakers" brought to book even if no one will be any better off for it.

The other is regulation is a political beast. Regulators have to be seen to get results to protect and boost their budgets.

Having launched the action and, by some accounts, already having spent $1 million, the commission can't be perceived to "back down to big business."

But surely it can't be accused of that. If it carries on like this it will soon have every chief executive in the country in the dock.

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