Contact Energy Ltd v Jones HC Wellington CIV 2007-485-2761 [2008] NZHC 2631; [2009] 2 NZLR 830; (2009) 9 NZBLC 102,634; (2009) 12 TCLR 405 (24 April 2009)

Last Updated: 22 January 2018

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IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

_{CIV 2007-485-2761}

BETWEEN CONTACT ENERGY LIMITED First Plaintiff

AND EMPOWER LIMITED Second Plaintiff

AND GENESIS POWER LIMITED Third Plaintiff

AND MERIDIAN ENERGY LIMITED Fourth Plaintiff

AND MIGHTY RIVER POWER LIMITED Fifth Plaintiff

AND JUDITH NGAIRE JONES, ELECTRICITY AND GAS COMPLAINTS COMMISSIONER Defendant

Hearing: 28 and 29 January 2009

Counsel: D Goddard QC and B Ross for the Plaintiffs

P D McKenzie QC and N Moreau for the Defendant

Judgment: 24 April 2009

_{JUDGMENT OF MILLER J}

Introduction [ 1] The protagonist [ 7] Structure of the New Zealand electricity industry [ 11] Quality problems experienced by consumers [ 21] Consumer self-help [ 25] The legislation [ 28] Policy context for the 2003 amendments [ 36] The complaints [ 44] The Latten complaint [ 44]

CONTACT ENERGY LIMITED And Ors V JUDITH NGAIRE JONES, ELECTRICITY AND GAS COMPLAINTS COMMISSIONER HC WN CIV 2007-485-2761 [24 April 2009]

The Taylor complaint [ 50] The Reeves complaint [ 55] The Foster complaint [ 59] Sample case “G” [ 62] The Commissioner’s evidence in this proceeding [ 65]

Does the retailer’s guarantee of acceptable quality exclude liability for distribution faults? [ 68]

Content of the retailer’s guarantee of acceptable quality [ 77] The parties’ positions [ 77] Does the guarantee of acceptable quality extend to outages? [ 80] The reasonable consumer standard [ 85] The reasonable consumer’s knowledge of state and condition [ 86] Guarantee of acceptable quality not designed to ensure continuous improvement in quality [ 91] Expectations of the reasonable and fully informed consumer [ 94] Mismatch between retailer and lines company liabilities [109]

Excusing retailer where defects specifically drawn to consumer’s attention [110] Consumer misuse of goods [117] Does availability of consumer surge protection equipment affect causation and damages? [119]

The parties’ positions [119]

Non-use of surge protection equipment does not excuse retailer entirely [124] Loss-sharing between retailer and consumer [129] Relief [138] The general issue [138] Specific consumer complaints [139] Costs [140]

Introduction

[1] The Consumer Guarantees Act 1993 treats electricity as a good, supplied to consumers by electricity retailers through distribution systems owned and operated by independent electricity lines companies. It treats electricity distribution - which it calls electricity line function services - to consumers as a service, provided by the lines companies. It defines neither electricity nor electricity line function services.

[2] The Act attaches to all goods supplied to consumers a guarantee that the goods are of acceptable quality. The guarantee is met if the goods are, among other things, as fit for all purposes for which goods of that type are commonly supplied, as free from minor defects, and as safe, as a reasonable consumer fully acquainted with the state and condition of the goods, including any hidden defects, would think acceptable having regard, among other things, to the nature and price of the goods

and any representations that the supplier or manufacturer made about them. Liability is strict, in the sense that it is no defence for the retailer to show that a manufacturer or other supplier was at fault, or that the retailer could not have detected or prevented the defect.

[3] The Act attaches to services, including electricity line function services, a guarantee that the services will be carried out with reasonable skill and care. It is common ground that liability of lines companies under this guarantee is fault-based.

[4] Most quality problems experienced by electricity consumers take the form of voltage surges, brownouts, or outages resulting from events within the distribution system. These phenomena may damage sensitive electrical equipment such as computers.

[5] The Electricity and Gas Commissioner accepts that such damage may occur although the lines company is not at fault and so is not liable under its guarantee. She believes that in such cases the retailer may nonetheless be liable to the consumer under the guarantee of acceptable quality. Indeed, as a generalisation she thinks the retailer is liable for all distribution faults except those attributable to force majeure events or third party damage. Retailers say their liability excludes anything falling under the rubric of line function services. The parties have brought this proceeding to clarify the workings of the Act.

[6] The first issue is whether retailers are liable at all under the guarantee of acceptable quality for power fluctuations or outages attributable to the distribution system. A second is what the guarantee means, if they are. A third issue is whether the availability of domestic surge protection equipment affects damages payable by retailers. All three issues are raised both in the abstract and in a group of five sample consumer complaints. The parties helpfully agree on many things, but one of them, less helpfully, is that the Consumer Guarantees Act is not easily applied to intangible goods in general and to electricity in particular.

The protagonists

[7] The plaintiffs are New Zealand’s major electricity generators and retailers, supplying electricity to consumers and businesses nationwide. They are members of the Electricity and Gas Complaints Scheme established by deed dated 7 August

2001. The scheme has 40 member firms, including electricity distribution companies and Transpower. It provides for the Commissioner, whose work includes facilitating the resolution of complaints about services provided to consumers. Where complaints cannot be settled, the Commissioner may make recommendations, which bind the member company if accepted by the consumer. The Commissioner must determine complaints by deciding what is fair and reasonable after observing and applying any applicable law, including the Consumer Guarantees Act. I am not concerned in this proceeding with the exercise of her remedial discretion under the Deed but with the interpretation of the Consumer Guarantees Act.

[8] Indirectly involved in the proceeding are four consumers whose specimen complaints the Commissioner proposes to resolve, or may resolve, against the retailer concerned. A complaint from a fifth consumer is also before me, but no recommendation is to be made as the Commissioner has been unable to contact the complainant.

[9] No lines company is represented, although there is an affidavit from a representative of one of them, Nigel Barbour of Powerco, which owns New Zealand’s second largest distribution network. It is common ground that the lines company involved in each of the five complaints has not breached its guarantee of reasonable skill and care. I was advised that so far as the wider issues are concerned, lines companies were approached but expressed no interest in being heard.

[10] Affidavits have also been sworn by the Commissioner, Ms Jones, and by representatives of most of the plaintiffs. The plaintiffs filed an affidavit of Dr Richard Fairbairn, a very experienced electrical engineer, and the Commissioner filed an affidavit of Trevor Whitlow, a consultant to the electrical industry, registered engineering associate, and formerly longstanding senior manager at Mainpower, a lines company. There are no material disagreements on the facts or between the experts.

Structure of the New Zealand electricity industry

[11] Electricity is generated, transmitted nationally, and distributed to consumers in real time through a large, complex and profoundly interdependent system owned and operated by many different firms.

[12] Most electricity is generated in remote locations, where the fuel (typically water) is found, by a small number of major firms. They inject it into the national grid in response to consumer load, with generation stations despatched in an order determined by prices at which they are bid into a wholesale market. The electricity is transmitted at very high voltages through the national grid, which is owned and operated by Transpower, to some 240 grid exit points nationwide. At the grid exit points the voltage is stepped down to intermediate levels and distributed to consumers through distribution networks owned and operated by regional electricity lines companies; the evidence is that there are 28 or 29 of them. As it is distributed, the voltage is reduced gradually to the low voltages demanded by consumer loads.

[13] The Electricity Regulations 1997, made under the Electricity Act 1992, establish quality requirements for supply systems. The frequency of electricity supplied must be maintained within 1.5% of 50 hertz, except for momentary fluctuations. Transpower regulates the frequency of electricity throughout the transmission and distribution system. Supply to electrical installations operating between 200 and 250 volts AC must be at standard low voltage, and except for momentary fluctuations must be kept within 6% of that voltage. Voltage at the consumer’s point of supply is controlled by lines companies, by adjusting generator reactive output and transformer taps and switching capacitors and inductors in distribution lines. The Regulations also provide that no person may use or continue to use any fittings or electrical appliance that unduly interferes with the satisfactory supply of electricity to any other person, or that impairs the safety of or unduly interferes with the operation of any fittings or electrical appliances.

[14] Almost all transmission lines are overhead lines mounted on poles or pylons. Distribution lines in urban areas may be undergrounded, but some 75% of distribution lines are overhead. Overhead lines are susceptible to interference from

weather, vegetation, birds or animals, or third party damage. However, they are a cost-effective means of distributing electricity to dispersed consumers.

[15] Dr Fairbairn explains that equipment protection systems in the generation and transmission sectors are complex and robust because equipment failures may affect many consumers and the equipment that needs protecting is large and expensive. For the same reasons there is also a degree of equipment redundancy. But distribution assets are very large in number and each asset may supply few customers. For economic reasons, equipment protection systems for distribution assets are less sophisticated and a degree of asset failure is accepted. In many cases replacement is the only option because assets cannot usefully be maintained. And the number of distribution assets is such that lines companies cannot closely review the condition of individual assets.

[16] Structural separation was imposed on the electricity industry under the Electricity Industry Reform Act 1998. With limited exceptions which are not presently relevant, electricity lines companies (which include Transpower) may not own or operate generation assets or sell electricity to consumers, nor may generators and retailers own distribution assets. Most generators have chosen to vertically integrate into electricity retailing. Retailers can and do own meters on consumer premises, and they may provide meter-reading and other ancillary services.

[17] Accordingly, generators both manufacture electricity and sell it to consumers, but their physical involvement is confined to generation and, in some cases, ownership of meters on consumer premises. Transpower transmits electricity to grid exit points, and lines companies distribute it to consumers. In most cases the retailer and lines company enter a use of system agreement under which the retailer purchases line function services, which include voltage control, from the lines company. The consumer purchases delivered electricity, being electrical energy and line function services, from the retailer. Several distribution companies instead employ conveyance agreements under which they provide line function services direct to the consumer, who by agreement between the retailer and the lines company receives a single bill from the retailer.

[18] Lines companies are still regulated under thresholds set by the Commerce Commission under Part 4A of the Commerce Act 1986, which established an industry-specific regulatory regime. (Part 4A has now been repealed and the thresholds are to be reset by 1 April 2010.)

[19] The Commission has developed price path and quality thresholds, which are found in the Commerce Act (Electricity Distribution Thresholds) Notice 2004. Those lines companies which breach the thresholds risk explicit price control. The current thresholds anticipate that lines companies will hold quality constant (or better) while achieving reductions in the real price paid by consumers. Under the price path threshold, lines companies may increase charges by the consumer price index less an ‘X’ factor. The quality threshold rests on the System Average Interruption Frequency Index (SAIFI) and the System Average Interruption Duration Index (SAIDI). These respectively record the number of interruptions and their duration, with a distinction being drawn between planned and unplanned interruptions. The quality threshold provides that the SAIFI and SAIDI of a distribution business are not to exceed its five-year average to 31 March 2003. During 2007 New Zealand distribution companies reported, on average, 3.1 interruptions for a total duration of 347 minutes.

[20] The industry is also regulated in part by the Electricity Commission, established under the Electricity Act 1992. It was described in Major Electricity Users Group v Electricity Commission and Transpower New Zealand [2008] NZCA

536. Its functions under s 172O of the Electricity Act include developing “best practice methodologies and other standards and model agreements for use by industry participants”. It is developing a set of model distribution agreements which it would like lines companies and retailers to adopt. It appears that there is at present nothing compelling them to do so, although the Commission can recommend new regulations and rules to the Minister of Energy if its objectives, which include the efficient, fair, and reliable delivery of electricity to consumers, cannot be met by persuasion.

Quality problems experienced by consumers

[21] Quality problems for consumers usually take the form of outages, voltage surges, or brownouts.

[22] An outage is a loss of supply, which can be very brief. Outages may be planned, as where maintenance or new construction is required, or unplanned. Unplanned outages may be attributable to equipment failure, transmission problems occurring within the national grid, trees growing into lines or falling, lightning, storms, animals or birds, subsidence affecting poles, or third party action such as vehicle accidents, people accidentally severing underground cables when digging, inexperienced people trimming trees, consumers adding excessive loads, or vandalism. Most of these events occur within distribution networks. On the evidence before me, none is likely to be attributable to generators or retailers.

[23] Temporary excess voltage beyond the tolerance permitted under the Electricity Regulations is known as a surge, while under-voltage is a brownout. There are many causes, most associated with the distribution network. Voltage oscillations may be associated with an outage, as network loads or lines are switched on or off within the distribution or transmission systems. They may occur if a fault current is experienced, as when a conductor contacts the ground, when overhead lines clash during storm conditions, when insulators fail, when a neutral conductor is broken, or when one phase of a 3-phase supply is lost. Non-compliant or heavy consumer loads may affect the supply to nearby consumers.

[24] Rural consumers may experience more quality problems than those in urban areas. In urban areas it is economic to provide diversity of supply, so consumers may not experience an outage if there is a fault on a given circuit, and lines may be undergrounded. Rural networks frequently cannot offer diversity of supply, and most lines are overhead.

Consumer self-help

[25] Consumers commonly connect expensive and sensitive appliances, such as computers and modern television sets, to their power supply.

[26] Uninterruptible power supply devices, which rely on batteries, may be used to prevent loss of supply. Consumers may also install surge protection equipment to protect a house, or a given circuit within it. Few houses are thought to have central surge protection, which costs about $800. Plug-in devices range in price from about

$9 to $150. The working life and quality of such devices is variable, and they may not protect against long or extreme voltage surges. Their cost is low relative to that of some appliances, but the question whether they are economic depends also on the likelihood of faults that would damage the appliance but for the device. Lines companies do not normally fit circuit protection equipment within their networks.

[27] In their standard terms and conditions of supply retailers invariably warn consumers in general terms that there is a risk of outages and voltage fluctuations, emphasising that they are beyond the retailer’s control, and identify a risk of damage to sensitive appliances. Some retailers also urge consumers to use surge protection devices.

The legislation

[28] The Consumer Guarantees Act protects consumers by imposing statutory guarantees upon the supply of goods and services to them and prohibiting contracting-out. A consumer is a person who acquires from a supplier goods or services of a kind ordinarily acquired for personal, domestic, or household use or consumption. Goods “means personal property of every kind (whether tangible or intangible), other than money and choses in action” and specifically includes gas and electricity.

[29] A supplier relevantly means:

(a) ... a person who, in trade,—

(i) supplies goods to a consumer by—

(A) transferring the ownership or the possession of the goods under a contract of sale, exchange, lease, hire, or hire purchase to which that person is a party; or

(B) transferring the ownership of the goods as the result of a gift from that person; or

(C) transferring the ownership or possession of the goods as directed by an insurer; or

(ii) supplies services to an individual consumer or a group of consumers (whether or not the consumer is a party, or the consumers are parties, to a contract with the person); and

(b) includes,—

(i) where the rights of the supplier have been transferred by assignment or by operation of law, the person for the time being entitled to those rights:

(ii) a creditor within the meaning of the Credit Contracts and Consumer Finance Act 2003 who has lent money on the security of goods supplied to a consumer, if the whole or part of the price of the goods is to be paid out of the proceeds of the loan and if the loan was arranged by a person who, in trade, supplied the goods:

(iii) a person who, in trade, assigns or procures the assignment of goods to a creditor within the meaning of the Credit Contracts and Consumer Finance Act 2003 to enable the creditor to supply those goods, or goods of that kind, to the consumer:

(iv) a person who, in trade, is acting as an agent for another, whether or not that other is supplying in trade; and

(c) for the avoidance of doubt in the following circumstances, means only,— (i) in the case of a supply of electricity as a good, the retailer of

^{the electricity with whom the consumer has a contract; and}

(ii) in the case of a supply of electricity line function services, the distributor who owns or operates the line that is connected to the consumer's premises; and

(iii) in the case of other services relating to electricity, the person who provides that service to the consumer.

[30] As mentioned, “electricity” is not defined. The term “electricity line function services” used in paragraph (c)(ii) of the definition of supplier is not defined in the Act either, but a definition is found in the Electricity Act 1992. There it means the provision, maintenance and operation of works for the conveyance of electricity, including the control of voltage and assumption of responsibility for losses of electricity. Losses in that context I take to mean losses naturally occurring whenever electricity is transmitted through a wire; such losses must be quantified and reconciled with the electricity sold by retailers to consumers within the distribution network.

[31] Section 6 provides that where goods are supplied to a consumer there is a guarantee that the goods are of acceptable quality. The meaning of that term is prescribed by s 7:

(1) For the purposes of section 6 of this Act, goods are of acceptable quality if they are as—

(a) Fit for all the purposes for which goods of the type in question are commonly supplied; and

(b) Acceptable in appearance and finish; and

(c) Free from minor defects; and

(d) Safe; and

(e) Durable,—

as a reasonable consumer fully acquainted with the state and condition of the goods, including any hidden defects, would regard as acceptable, having regard to—

(f) The nature of the goods:

(g) The price (where relevant):

(h) Any statements made about the goods on any packaging or label on the goods:

(i) Any representation made about the goods by the supplier or the manufacturer:

(j) All other relevant circumstances of the supply of the goods. (2) Where any defects in goods have been specifically drawn to the

^{consumer's attention before he or she agreed to the supply, then}

notwithstanding that a reasonable consumer may not have regarded the goods as acceptable with those defects, the goods will not fail to

comply with the guarantee as to acceptable quality by reason only of those defects.

(3) Where goods are displayed for sale or hire, the defects that are to be treated as having been specifically drawn to the consumer's attention for the purposes of subsection (2) of this section are those disclosed on a written notice displayed with the goods.

(4) Goods will not fail to comply with the guarantee of acceptable quality if—

(a) The goods have been used in a manner, or to an extent which is inconsistent with the manner or extent of use that a reasonable consumer would expect to obtain from the goods; and

(b) The goods would have complied with the guarantee of acceptable quality if they had not been used in that manner or to that extent.

(5) A reference in subsections (2) and (3) of this section to a defect means any failure of the goods to comply with the guarantee of acceptable quality.

[32] The Act provides remedies against suppliers in ss 18-24. I summarise those provisions at [124]-[125] below.

[33] Under s 25 consumers also have a right of redress against manufacturers where goods fail to comply with the guarantee of acceptable quality. There is a parallel right to damages under s 27. It is not necessary to decide whether lines companies, including Transpower, also “manufacture” electricity for purposes of the Act by altering voltage. I accept that generators are manufacturers, but for reasons already outlined, it is unlikely that a given consumer’s quality problem can be traced to a particular generator.

[34] “Services” is defined in s 2 to include the rights, benefits, privileges or facilities that are, or are to be provided, granted or conferred by a supplier under a contract for, or in relation to, the supply of electricity, gas, telecommunications, or water, or the removal of waste water.

[35] The guarantee as to reasonable care and skill for services is contained in s 28, which provides:

...where services are supplied to a consumer there is a guarantee that the service will be carried out with reasonable care and skill.

There are also guarantees as to fitness for a particular purpose made known by the consumer, and time of completion; in relation to those, the guarantee is not breached only because of something done or omitted by anyone other than the supplier or its agent, or because of a cause independent of human control. The consumer may recover damages under s 32, including damages for loss or damage to the consumer resulting from the failure which was reasonably foreseeable or liable to result from it.

Policy context for the 2003 amendments

[36] Those parts of s 2 in which “goods” are defined to include gas and electricity and “services” to include contracts for the supply of electricity, together with those parts of the definition of “supplier” relating to electricity and electricity line functions services, were inserted under the Consumer Guarantees Amendment Act

2003. That Act did not alter the service and quality guarantees, or the consumer’s remedies.

[37] The amendments may be traced to the judgment of this Court in Electricity

Supply Association of New Zealand v Commerce Commission (1998) 6 NZBLC 102,

555. Neazor J held that electricity was not goods for the purposes of the Consumer Guarantees Act. The thread of tangibility ran through the definition of goods, and the Act’s guarantees and remedies in respect of goods sensibly related to tangible things. He instanced the guarantees of title, acceptable quality, fitness for purpose, compliance with description or sample, and availability of repairs and spare parts, and the statutory remedies including rejection and compensation for reduction in value. Nor could electricity be treated as a service as defined.

[38] In February 1998 major distribution lines failed in the Auckland central business district, causing extended outages and resulting in substantial losses to consumers. An inquiry concluded that the lines (actually gas-filled 110kV cables) were known to be unreliable and exhibited gas leaks that had not been adequately investigated.

[39] Introducing the omnibus Consumer Protection (Definitions of Goods and Services) Bill on 10 October 2001, the Minister of Women’s Affairs, Laila Harre, explained that one of the purposes of the bill was to ensure the Consumer Guarantees Act would apply to all products and services supplied to domestic consumers, including electricity. It would ensure that suppliers of network services for utilities such as electricity would be directly responsible to consumers where they failed to perform with reasonable care and skill. A lines company should be directly accountable to consumers for performance even where it had no direct contractual relationship with the household. The judgment in Electricity Supply Association of New Zealand v Commerce Commission had reduced incentives for lines companies and energy retailers to meet acceptable standards for quality or fitness for purpose.

The Auckland power crisis had demonstrated that there were no incentives for lines companies and retailers to organise their relationships so that consumers suffering loss due to lines companies’ failures were fairly compensated.

[40] The bill was referred to the Commerce Select Committee, which reported on

18 November 2002. In relation to the treatment of electricity as goods, the

Committee reported:

There is concern among submitters about the inclusion of electricity and gas in the principal Act as goods. Electricity and gas are already expressly included in the Fair Trading Act 1986 and the Commerce Act 1986 as goods. The bill inserts electricity into the definition of goods in the principal Act, and also adds the supply of electricity line function services into the definitions of services in all three Acts.

We consider adding electricity and gas into the definition of goods in the principal Act will means that the guarantees applying to goods will apply to electricity. In this instance, the most relevant guarantee is that the electricity is of acceptable quality. The principal Act contains general guidance to the meaning of acceptable quality in section 7. It is an objective test, based on the reasonable consumer. We were advised that, in the case of electricity, this is likely to be a consumer who understands that electricity is subject to momentary fluctuations, prone to interference by environmental factors and the actions of third parties, and may not be supplied at all due to planned shutdowns or emergencies.

We do not consider the guarantee of acceptable quality amounts to a guarantee of ‘gold plated’ supply. We understand the intended effects of the inclusion of electricity as goods in the principal Act are that:

• electricity retail companies should be responsible as suppliers of electricity to consumers

• electricity generators, Transpower New Zealand Limited (Transpower), and lines companies will potentially be responsible as manufacturers of electricity (Transpower and lines companies can be liable as manufacturers because they ‘process’ electricity received from generators, in that they convert its voltage and frequency)

• manufacturers will not be responsible for failures that result from the acts of third parties or events beyond human control, provided that the manufacturer manages the risk of the occurrence adequately.

[41] The Committee rejected a submission that electricity should be included as services only. The requirement to show lack of reasonable care and skill would be onerous for consumers, who would not be adequately protected. If lines companies were solely responsible for supply failures then there would be no incentive for the

electricity companies, which I take to mean generators and retailers and lines companies, to determine who had caused a particular fault:

Including electricity as goods as well as services in the principal Act will create incentives for all suppliers and manufacturers to take reasonable steps to avoid failures of supply, and to provide accurate information to consumers.

[42] The Committee explained that submitters were concerned that the removal of the requirement for a direct contractual link between consumer and suppliers of services would mean that any supplier of electricity lines function services, such as Transpower, could be liable to consumers. It accordingly recommended an amendment to the definition of supplier to clarify that only lines companies which actually supplied line function services to consumers should be responsible under the Act.

[43] Moving, on 1 April 2003, that the bill be read a second time, the Minister for the Environment, Marian Hobbs, on behalf of the Minister of Consumer Affairs, discussed whether electricity ought to be removed from the definition of goods. The Minister said:

Several submissions urged the committee to delete electricity from the definition of goods. This would undermine the Consumer Guarantees Act purpose with regard to consumers’ redress. The Consumer Guarantees Act provides incentives for everyone in the chain of supply – manufacturers, distributors, and retailers – to stand behind the products and services they supply. If electricity were included as a good, then the guarantee of acceptable quality would apply to electricity retailers and manufacturers. If electricity were included as a service only, then the injured consumer would have to prove that the lines company was negligent, before redress was available. This would leave most consumers without any remedy, and it would remove the incentive for electricity companies to determine who has caused a particular fault.

Defining goods to include electricity makes a lot of sense, and it is not onerous for electricity suppliers. This is because the meaning of “acceptable quality” is based on what a reasonable consumer, who is fully acquainted with the nature of the product, would regard as acceptable. A reasonable consumer understands that electricity is supplied in real time, is subject to momentary fluctuations, and is prone to outages due to environmental or other hazards and periodic maintenance.

A major concern of submitters was identifying who is a supplier of electricity for the purpose of the Act. The committee has formulated an amendment to make this easier. In practice, electricity retailers will be responsible for supplying electricity that is of acceptable quality. Electricity

lines companies will be responsible for supplying line function services with reasonable care and skill. They will not, however, be responsible for failures that result from the acts of third parties, or events beyond human control where the supplier manages the risk of that occurrence with reasonable care and skill.

The complaints

The Latten complaint

[44] The Lattens are customers of Empower, a subsidiary of Contact Energy. They live on a lifestyle block at Leeston in Canterbury. On 26 January 2006 their property was affected by an outage, which damaged a breadmaker, a video recorder, a computer, and an electric fence used to contain domestic livestock. The Lattens claimed damages of $1,462.60 for inspection and repair costs, including replacement of the computer.

[45] Empower’s terms and conditions warned that supply might be interrupted for events beyond its control, and strongly encouraged the Lattens to install surge protection devices to protect sensitive equipment. They specified that Empower would not pay compensation for loss or damage to a computer, and would not in any event be liable for incidents beyond its reasonable control.

[46] The Commissioner heard from the parties and issued a notice of intention to make a recommendation on 2 March 2007. She found that the most likely cause of the outage was a faulty insulator within the distribution network. Because the lines business, Orion, could not have foreseen the fault occurring and had adequately maintained lines and insulators, it was not in breach of its duty of care.

[47] The Commissioner reasoned that a reasonable consumer fully acquainted with the state and condition of the goods: would understand that external events beyond the control of both the retailer and the lines company can interfere with electricity supply through overhead lines, and that when power is restored after an outage there may be some initial instability; would expect failures in the network that are related to fair wear and tear rather than the lines company’s failure to take reasonable skill

and care in delivering line function services; would accept that environmental factors such as birds, possums, contact with trees or flying debris are likely to interfere with the delivery of electricity and the lines business and retailer should not usually be held liable for them; and would recognise that if he or she did not use surge protection for sensitive appliances those appliances may suffer damage from instability in the system. Lastly, a reasonable consumer in a rural area would expect a lower standard of supply than in an urban area because the total length of line supplying the property is likely to be longer and there is limited diversity of supply.

[48] The Commissioner went on to reason, however, that “[m]y view on application of the Act to electricity is neither the retailer nor the network company should be held liable for disruptions to supply caused by force majeure incidents.” Force majeure is an umbrella term including acts of God, which in turn means an extraordinary circumstance that could not have been foreseen and guarded against. An insulator failure is not a force majeure incident; it is expected that an insulator will fail at some point during its lifetime, although that point is very difficult to foresee. And:

It is my view Parliament did not expect consumers to be required to accept damage or loss from failures in the supply system which result in electricity (the good) at the point of supply being less than acceptable quality when those failures are not the result of force majeure or third party action.

[49] Accordingly, the Commissioner concludes, Empower is liable under the guarantee of acceptable quality. It was also not certain that surge protectors would have prevented the damage. Empower is liable to pay the Lattens $1462.60.

The Taylor complaint

[50] Mr Taylor is a customer of Genesis Energy, living at Red Beach, Auckland. On 21 March 2004 he experienced an unplanned outage which lasted around nine hours. A floor mat suffered damage when a freezer compartment in his refrigerator defrosted and leaked water over the floor. It was one of a series of outages in the area.

[51] The standard terms and conditions of supply asserted that Genesis Energy is not responsible where voltage fluctuations damage sensitive equipment. They warned that voltage fluctuations may damage such appliances, can occur at any time, and may be caused by events beyond the control of Genesis Energy.

[52] The Commissioner issued a notice of intention to make a recommendation on

25 January 2007. She provisionally concludes that the outage was the result of overhead lines clashing. It followed tree trimming by the lines business, United Networks Limited, as part of a regular maintenance programme. That seems to have left the lines more exposed to wind. There had been several outages as a result, but United Networks went to considerable lengths to identify the cause, and did not breach its service guarantee.

[53] Turning to Genesis, the Commissioner’s reasoning was very similar to her Latten findings, and she reached the same conclusion; the guarantee of acceptable quality extends to outages that are not the result of force majeure or third party actions. In this case there had also been a series of outages. They were not beyond the control of “the electricity companies involved”, presumably meaning the retailer and the lines company. A nine-hour outage in an urban area, not caused by force majeure or third party damage, is of sufficient length to breach the retailer’s guarantee of acceptable quality.

[54] The Commissioner also reasoned that it is also reasonably foreseeable that consumers will have refrigerators with iceboxes that defrost when they are without power for nine hours. She proposes that Genesis Energy should pay $200 compensation for the outages and $976.88 for damage to the mat.

The Reeves complaint

[55] Mr Reeves is a customer of Mercury Energy, living at Campbells Bay, Auckland. He suffered an outage at his home on 20 February 2004, resulting in damage to a television set.

[56] The Commissioner issued a notice of intention to make a recommendation on

7 December 2007. She concludes that the fault was likely caused by a stray low voltage or telecommunications line breaking in high winds and connecting with an

11 kV line. That caused a voltage surge, which damaged the television set.

[57] Because of uncertainty about the cause, the Commissioner considers it is not open to her to find the lines company, United Networks, liable for a breach of its service guarantee. The Commissioner has again found that the reasonable consumer would understand external events or environmental factors, including birds and animals, can interfere with the delivery of electricity and that neither the lines business nor the retailer should usually be held liable; her view on “the application of the Act to electricity” is that Mercury is “prima facie liable”.

[58] In this case a surge protection device fitted to the television probably would have protected it. But the Commissioner proposes to find that Mercury’s terms and conditions did not require Mr Reeves to have surge protection for his television, and the incident occurred at a time when the use of surge protection devices was not as well-known as it is today. She proposes recommending Mercury pay Mr Reeves

$244.47, being the cost of repairing the television set, but has suspended a final decision pending this proceeding.

The Foster complaint

[59] The Fosters are customers of Mercury Energy, the retail operating division of Mighty River Power. They live at Papakura. On 19 September 2003 they experienced a power surge. It is said to have caused a fire in their downstairs garage, destroying that area and causing smoke, heat, and water damage to the remainder of the house.

[60] Mercury Energy’s terms and conditions warned that voltage and frequency fluctuations could damage sensitive appliances, stated that it was the consumer’s responsibility to protect them, and advised that protection was obtainable by installing surge protection equipment.

[61] The Commissioner has not issued notice of intention to make a recommendation, but an investigation summary records her preliminary conclusion that she cannot decide whether the lines company, Vector, is at fault. She has not decided Mercury Energy’s liability pending this proceeding. The evidence of the two experts who have sworn affidavits in this proceeding, Dr Fairbairn and Trevor Whitlow, suggests the cause of the fire was more likely than not a neutral conductor detaching, causing power surges. (Domestic single phase supply requires one phase and one neutral conductor.) The evidence also suggests the lines company, Vector, is not at fault. Standard visual line surveys would not show the conductor was close to failure, and it would be unreasonable to expect a lines business to prevent all neutral conductor failures, because such failures are uncommon and the costs of preventing them prohibitive.

Sample case “G”

[62] This complaint has been included for illustrative purposes only. The name of the complainant, a Whangarei resident, has been treated as confidential by agreement between the parties.

[63] On 28 February 2004 the complainant suffered a power surge as a result of a line falling. It damaged a computer, television set, video recorder, microwave, and washing machine. The number of appliances damaged suggests that surge protection equipment would have been ineffective.

[64] The fault apparently resulted from a broken cross-arm which resulted in a live conductor falling across a neutral line. The Australian hardwood cross-arms used by the lines company, Northpower, have been in widespread use in New Zealand since the 1920s. They are very durable. In this case the cross-arm had deteriorated internally, but the fault would not have been detected on a visual inspection. It is not normal practice during maintenance inspections to climb every pole and test the cross-arms.

The Commissioner’s evidence in this proceeding

[65] In her affidavit the Commissioner, who has held her position since 2002, says her experience is that consumers typically do not understand a lot about the nature of electricity. But a reasonable consumer fully acquainted with the state and conditions of the goods must be taken to understand that external events beyond the control of either the lines company or the retailer can affect the delivery of electricity. So third party incidents such as car accidents or force majeure events (of which extreme weather is an example) would be expected to interfere with supply. Such interference may extend to initial instability, of a sort that is unlikely to cause damage, when power is restored.

[66] In respect of that initial instability, and in respect of momentary fluctuations as permitted by the Electricity Regulations, the Commissioner further considers that reasonable consumers would accept fluctuations in supply for which there is a risk that sensitive appliances may suffer damage that could under certain tolerances be protected by using reasonably available surge protection. Using surge protectors for sensitive appliances is a reasonable precaution, although there are difficulties with their quality and working life.

[67] The Commissioner interprets the legislation to mean that Parliament did not expect consumers to accept damage or loss from failures within the supply system which result in electricity at the point of supply being less than acceptable quality when those failures are not the result of force majeure or third party action. Specifically, consumers should not be required to accept failures due to fair wear and tear. In the Commissioner’s view this means, in practical terms, that consumers accept networks will be designed to withstand normal weather events, and have regard to the nature of the supply (so that where overhead lines pass through bush or are in a rural area there are likely to be more interruptions to supply from external events such as trees and possums), and accept that fluctuations in supply happen and may damage sensitive appliances that could in some circumstances be protected by using reasonably available surge protection equipment.

Does the retailer’s guarantee of acceptable quality exclude liability for distribution faults?

[68] Mr Goddard argued that the Act contemplates that retailers are not liable at all for supply of electricity line function services. As a matter of construction, he founded that submission on the definition of “supplier”, emphasising that the term “means only”, in the case of a supply of electricity as a good, the retailer of the electricity with whom the consumer has a contract and, in the case of a supply of electricity line function services, the distributor who owns or operates the line that is connected to the consumer’s premises. It follows that the retailer cannot be liable for faulty line function services. He added that electricity must be taken to mean “electrical energy” to the consumer, and so by definition excludes line function services.

[69] In support of this construction, counsel argued that Parliament decided to impose fault-based liability on the provider of line function services, and cannot sensibly have decided to impose strict liability for lines faults on the retailer, who can neither manage the risk nor pass the resulting costs back to the lines company. To find that the legislation imposes strict liability on retailers for lines faults is to attribute an absurd policy choice to the legislature, for which there could be no coherent justification. It cannot be assumed that retailers will be able to pass the costs to lines companies, for the latter are monopolies which can dictate the terms of use of system agreements.

[70] Accordingly, Mr Goddard submitted, for loss that results from the provision of line function services the lines company alone is the relevant supplier, and its liability is determined under s 28. If the loss does not result from the provision of line function services, then the question is whether the supply of electricity met the acceptable quality guarantee. In such circumstances, the retailer has a strong incentive to investigate the problem to ascertain its cause.

[71] That construction of subparagraph (c) of the definition of “supplier” attaches too much weight to the verb/adverb “means only”, and too little to the phrase “in the case of a supply ...” that introduces and qualifies each of the succeeding objects of the definition of supplier. Subparagraph (c) is an addendum “for the avoidance of doubt”. The work assigned to it is that of distinguishing the retailer with whom the consumer has a contract from all other retailers, and the lines company whose line is

connected to the customer’s premises from all other lines companies. So, for example, the definition provides that for electricity as a good, ‘supplier’ means only the retailer of the electricity with whom the consumer has a contract. The distinction is necessary because of structural separation and the strongly interdependent nature of the electricity system; that may be inferred from the definition itself and is confirmed by the legislative history. By separating the main verb from the objects of the definition the drafter has sacrificed some clarity for economy, but the meaning is plain enough.

[72] This construction admits overlap between electricity line function services and the supply of electricity as a good. But the absence of any definitions of “electricity” and “electricity line function services” suggests the legislature did not think it important to clearly demarcate them, so far as this legislation is concerned. Rather, the consumer is free to claim against either firm. It does not assist the retailers to remedy the omission by defining electricity as electrical energy, since the quality of electrical energy supplied depends comprehensively on the distribution of electrical energy by lines companies.

[73] Further support for this construction is found in the Vernon Report to the Minister of Justice, dated 1 July 1987, which preceded the Consumer Guarantees Act. The report (An Outline for Post-Sale Consumer Legislation In New Zealand) concluded at p17 that as a matter of policy the retailer ought to be liable to the consumer for badly made goods, leaving the retailer to claim reimbursement from others in the supply chain, even where the retailer was ignorant of the defects. And in the context of electricity, the legislative history suggests strongly that Parliament wanted to ensure consumers do not labour under the onus of proving which firm - retailer or lines company - is responsible for a defect in the quality of electricity supplied; rather, the two firms should be encouraged to resolve liability between them, with the consumer free to claim against either.

[74] Mr Goddard’s preferred construction also suffers from the disadvantage that, having gone to the trouble of imposing an explicit 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, that are separately addressed

under subparagraph (c)(iii). As I have already observed, consumer faults are almost always attributable to events in the distribution network, and there is no evidence that any are attributable to retailers.

[75] That leaves the argument that concurrent but strict retailer liability for lines faults attributes to the legislature an irrational policy choice. I begin by accepting that retailers have no direct control over distribution faults, and I am prepared to assume a retailer cannot pass on the costs of honouring the guarantee to an unwilling lines company except to the extent that the lines company is liable under its own guarantee. That assumption requires explanation. It would not be right to assume that lines companies exercise monopoly power with respect to generator/retailers; that requires evidence of market structure, regulatory behaviour, countervailing power, and market behaviour. Nor is it necessary to examine whether any regulator’s discretionary jurisdiction extends to imposing on lines companies strict liability for consumer outages and faults. I prefer to hold that in circumstances where the Consumer Guarantees Act itself imposes only a fault-based liability on lines companies, it is reasonable to assume they have no incentive to accept any additional liability, nor would a regulator have any obvious justification for imposing it.

[76] The proposition that concurrent but strict retailer liability for lines faults is irrational rests on two related assumptions. The first is that the guarantee of acceptable quality may impose liability on retailers for distribution faults although the lines company is not liable under its own guarantee. The second is that any mismatch is in practice so marked as to outweigh the presumed consumer benefits of concurrent liability. For reasons outlined in the next section of this judgment, I accept the first assumption. However, I conclude that the mismatch is rather less marked than the Commissioner would have it. In any event, the legislative history demonstrates that Parliament was alive to this risk. By nonetheless defining electricity as a good supplied by retailers, Parliament must be taken to have decided that such mismatches are acceptable.

Content of the retailer’s guarantee of acceptable quality

[77] Mr Goddard argued that the guarantee of acceptable quality is not a guarantee that the product is free from all risk. Product and price are “given”, and the question is what the consumer can reasonably expect in terms of quality and performance from goods of that price and attributes. If what is being bought and sold carries inherent risk, the consumer accepts that risk and has no claim under the Act when it comes to pass. The reasonable consumer would expect reasonable steps to be taken to avoid those risks, and liability arises unless it can be shown that reasonable steps were taken. That approach does not require the consumer to identify who did or did not act reasonably, and it supplies retailers with a strong incentive to identify the cause of any fault. I observe that it would also lead to the retailer’s guarantee becoming essentially co-extensive with that of the lines company.

[78] In his written submissions Mr McKenzie elaborated on the Commissioner’s position, arguing that the reasonable consumer would accept not only environmental hazards such as storms and lightning that cannot reasonably be foreseen and guarded against, and third party damage, but also momentary fluctuations within the tolerances permitted by the Electricity Regulations, planned outages of which the consumer has notice, and emergency shutdowns. He maintained that the reasonable consumer would not find acceptable any other defect in quality resulting from failures “internal” to the distribution system, such as the failure of a faulty insulator that could not have been detected by a reasonable maintenance programme. As a general proposition, consumers are not required to accept responsibility for risks in the chain of supply.

[79] Mr McKenzie nonetheless accepted that the Act takes the nature of the goods as given, with all their defects. Further, he accepted that, as the select committee said, the consumer must be taken to know that electricity is subject to momentary fluctuations, and prone to interference by environmental factors and the actions of third parties, and may not be supplied at all due to planned shutdowns or emergencies. To adopt Mr Goddard’s construction, however, is to introduce a fault- based test, contrary to s 7. A focus of the Act generally is improving the quality of goods supplied.

[80] I rashly inquired of counsel whether the guarantee of acceptable quality applies to outages, noting that it attaches under s 6 “where goods are supplied” to a consumer but electricity does not flow in an outage. Needing no encouragement, Mr Goddard argued that no question of quality of electricity as a good arises in an outage, for none is being supplied. There may be an issue about a service, being the right to supply of electricity, but that falls to be assessed under s 28.

[81] Mr McKenzie responded that the supply of electricity by its very nature involves continuity. Contracts offer continuing supply until the consumer gives notice that electricity is no longer wanted. It would be artificial to interpret an outage as the retailer no longer supplying electricity; outages may last only a few seconds; when supply is restored there can be damaging surges, which are properly be regarded as a consequence of the outage; and the Parliamentary record suggests the legislature regarded outages as faults going to quality of supply.

[82] This issue highlights the absence of any definition of electricity. I have already referred to a working definition of ‘electrical energy’, according to which there would be no supply during an outage. Mr Whitlow offered this definition, reasoning that although electricity and electrical energy are technically two different things, the consumer is cognisant only of electrical energy.

[83] I reject his definition, preferring the view that the legislature had a more expansive concept in mind. Specifically, electricity as a good, for purposes of the Consumer Guarantees Act, includes not only electrical energy delivered but the right to receive it on demand, meaning that outages are captured by the retailer’s guarantee of acceptable quality. ‘Goods’ is very widely defined to mean personal property of every kind, whether tangible or intangible, and includes electricity. ‘Supply’ includes leasing, which has a time dimension. Indeed, the retailers themselves defined the good in argument as electrical energy supplied over time through a network. Electricity is supplied in real time to meet consumer loads, so the right to use it at any moment is central to the contract between retailer and consumer, under which the retailer contracts not only to supply quantities of electrical energy,

measured in kilowatt hours, but also to supply it on demand. The purposes for which it is sold to consumers include, obviously, operation of electrical equipment which will not work at all without it. If it is not available, the consumer may suffer diminution in value for purposes of s 18(3), especially if the retailer’s pricing includes a fixed charge, and consequential losses.

[84] I acknowledge that the right to use electricity on demand is naturally described as a service to the consumer. Under the Act it is a service, vis-a-vis lines companies. It is also naturally described as a chose in action (that is, a right enforceable only by legal action and not by possession: Re Marshall, Commissioner of Inland Revenue v Public Trustee [1965] NZLR 851, 861) and choses in action are generally excluded from the definition of goods. But to exclude the right to use electricity on demand would be to apply a different guarantee to outages, which may be fleeting, and voltage fluctuations, which may be associated with an outage. The legislature having chosen, with knowledge of the judgment in Electricity Supply Association v Commerce Commission, to specify that electricity is a good for purposes of the Act, I cannot see why it should have drawn that distinction. The definition of ‘supplier’ suggests it did not, for the service concerned would have to be captured by subparagraph (c)(iii), “other services relating to electricity”, which is an indirect way of capturing so essential a property of the thing supplied. The legislative history further suggests that Parliament saw outages as an important concern, for both retailers and lines companies; see [41] above.

The reasonable consumer standard

[85] Complaints about the quality of goods are raised by consumers who claim to have suffered loss, but acceptability for purposes of ss 6 and 7 is determined objectively by the reasonable consumer, a “construct by whose standards the Judge is required to evaluate the quality of the goods”, as it was put in Jewson Ltd v Boyhan [2003] EWCA Civ 1030 at [78]. The reasonable consumer is not “equipped with the buyer’s personal agenda”, which may well reflect not only his or her particular circumstances but also, loss having been suffered, a degree of hindsight bias. Evidence of what consumers in general think acceptable may not be readily

available. For these reasons, the test is not necessarily easy for a Court, and presumably the Commissioner, to apply.

The reasonable consumer’s knowledge of state and condition

[86] The quality standard is set by reference to the expectations of a reasonable consumer “fully acquainted with the state and condition of the goods, including any hidden defects”. The phrase derives from s 16(b) of the Sale of Goods Act 1908, which established an exception to the warranty of merchantable quality of goods bought by description from sellers dealing in goods of that description. The warranty does not apply where the buyer had examined the goods, as regards defects which such examination ought to have revealed. In Australia Knitting Mills Ltd v Grant [1933] HCA 35; (1933) 50 CLR 387, 418, Dixon J held of an identical provision in the Sale of Goods Act 1895 (SA):

The condition that goods are of merchantable quality requires that they should be in such an actual state that a buyer fully acquainted with the facts and, therefore knowing what hidden defects exist, and not being limited to their apparent condition would buy them without abatement of price.

[87] This test was later criticised on the grounds that it overlooked the purpose for which goods were sold, so that they might be considered merchantable if usable for some other purpose: Hardwick Game Farms v Suffolk Agricultural Producers Association [1968] UKHL 3; [1969] 2 AC 31, 78 per Lord Reid. It also assumed that quality is inexorably correlated to price, yet market or contract prices may vary for other reasons: Cehave NV v Bremer Handelsgesellschaft mbH [1976] QB 44, 77, 80-1. Further, some goods may not possess merchantable quality even at a throwaway price: Brown & Son Ltd v Craik [1970] UKHL 6; [1970] 1 WLR 752, 757-8 per Lord Guest.

[88] Presumably for these reasons, s 7(1)(a) of the Consumer Guarantees Act requires that quality be assessed by reference not only to defects and price but also fitness for purpose. Fitness for purpose is assessed by reference to all purposes for which the goods are commonly supplied, so it does not suffice if the goods are suitable for any one or more of their common purposes; cf Henry Kendall & Sons v William Lillico & Sons Ltd [1968] UKHL 3; [1969] 2 AC 31. But it is not an absolute requirement, in that the Act does not positively require that the goods be fit for all common purposes.

Section 8 deals with guarantees of fitness for specific purposes that the consumer has made known to the supplier.

[89] In the case of electricity, there is no opportunity for intermediate examination. Still, s 7 treats electricity as being of acceptable quality where a buyer fully acquainted with its nature, including any hidden defects, would regard it as acceptable.

[90] Lastly, defects as that term is used in s 7(1) need not be inherent in the goods. In Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd [2004] FCA 853, Kiefel J cited with approval a passage from Heydons Trade Practices Law to the effect that defects may include design defects, manufacturing defects, or ‘instructional’ defects in accompanying warnings or instructions.

Guarantee of acceptable quality not designed to ensure continuous improvement in quality

[91] Mr McKenzie argued that one of the functions of the Act is to ensure steady improvement in the quality of goods supplied. He used the example of undergrounding of overhead lines, suggesting that a purpose of the Act is to encourage it because it leads to better quality of supply.

[92] I do not think that can be right. The legislation does not directly impose minimum quality standards. Rather, the reasonable consumer standard is to be applied having regard to the price and nature of the goods as supplied. By linking quality expectations to price, the Act contemplates that autonomous consumers may choose to buy bad goods cheaply.

[93] That is not to deny that undergrounding reduces faults, or that the purposes for which goods are supplied may change, or that the reasonable consumer’s expectations of the goods may evolve. It is merely to say that s 7 does not authorise the decisionmaker to pursue quality improvements by imposing a higher quality standard than is justified by the nature, price and other relevant attributes of the goods actually supplied.

Expectations of the reasonable and fully informed consumer

[94] The hypothetical reasonable consumer is taken to be fully acquainted with the “state and condition” of the goods, including any hidden defects. Less obviously, he or she must also be taken to know the nature of the goods, all relevant circumstances of supply, and any representations made about the goods by the manufacturer or supplier, so far as relevant. That is so because it is the hypothetical consumer who determines by reference to those considerations whether the goods are acceptable. The test is objective, but it is applied to the particular goods and circumstances.

[95] Acceptable quality is a composite and context-specific attribute. I adopt the observations of Ormrod LJ, speaking of merchantable quality, in Cehave NV v Bremer Handelsgesellschaft mbH [1976] QB 44 at p 80:

It is a composite quality comprising elements of description, purpose, condition and price. The relative significance of each of these elements will vary from case to case according to the nature of the goods in question and the characteristics of the market which exists for them. This may explain why the formulations of the test of merchantable quality vary so much from case to case.

[96] Not all of the attributes in s 7(1)(a) to (e) apply to electricity, which is not durable and lacks appearance and finish. Those that apply are the requirements that it be fit for all the purposes for which goods of the type in question are commonly supplied, and free from minor defects, and safe.

[97] Nor do all of the characteristics in s 7(1)(f) to (j) apply; notably, there is no packaging or label on the goods. But the nature of the goods and circumstances of supply introduce a wide range of relevant considerations. The evidence establishes that electricity distribution in New Zealand has certain characteristics which the consumer must be taken to know. They are: supply through overhead lines and/or supply that is dependent on a single circuit; planned outages for some maintenance; unplanned outages or voltage fluctuations related to fair wear and tear, environmental hazards such as birds, possums, contact with vegetation, storms, or excessive consumer loads; instability after outages; and third party damage. The frequency and severity of some of these events is affected by the nature of the distribution system in the consumer’s area; rural lines in bush-clad areas are prone to

outages caused by vegetation or animals, for example. Other relevant circumstances include quality and price thresholds set by the Commerce Commission, which establish benchmarks for performance, recognise that consumers will experience outages, and constrain distribution charges to levels broadly appropriate to the distribution system as presently engineered.

[98] It follows that the hypothetical consumer’s knowledge extends beyond the physical properties of electricity at the point of supply to the nature of electricity and attributes of the transmission and distribution systems, so far as such nature and attributes may determine its fitness for purpose, or cause it to suffer defects, or affect its safety.

[99] To state the obvious, it does not follow that the reasonable consumer must find acceptable all known risks inherent in the nature of the goods or the distribution system. That would leave the consumer without recourse no matter how frequent, how extreme, or how dangerous, the voltage fluctuation or outage. Acceptability is a composite quality, depending on the extent to which the goods prove to be fit for the purposes for which they are commonly sold, and safe, having regard to the factors in s 7(f)-(h); in this case, the nature and price of the goods, representations made about them by the retailer, and all other relevant circumstances of supply.

[100] Both parties focus too much, in my opinion, on responsibility for faults and too little on the quality of electricity supply actually experienced by consumers. The Commissioner’s position is that, having recognised the above characteristics of electricity supply, the reasonable consumer would nonetheless expect no faults or outages other than those attributable to force majeure or third party action. Put another way, the standard the Act imposes on retailers is one in which all ‘internal’ faults are eliminated. The distinction between ‘external’ and ‘internal’ faults assumes that the consumer is generally not concerned with the way in which goods are supplied, but will accept that the retailer should not be liable for force majeure or third party damage. I accept that the consumer may be indifferent to supply problems in other contexts, but the nature of electricity is such that its quality at the consumer’s premises cannot be separated from the transmission and distribution systems. The Commissioner attaches 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.

[101] The plaintiffs’ position is that the retailer should be liable for any material adverse event unless it can identify the probable cause and can further show, on the balance of probabilities, that the adverse event could not reasonably have been avoided by someone in the supply chain. This is also a fault-based standard at bottom, albeit with residual liability for the retailer when it cannot prove probable cause and absence of fault. It assumes that the acceptable quality standard should be qualified by a rule excluding liability in every case where it can be shown that someone in the supply chain could not reasonably have avoided the adverse event. For reasons outlined in succeeding paragraphs, I prefer the view that, while fault is relevant, the composite nature of acceptable quality precludes any such rule. And whatever the merit of the proposed standard from a policy perspective, it bears little relationship to the language of the legislation. By insisting that electricity be defined as a good, the legislature opted for strict liability for retailers.

[102] In the end, the question whether a given supply of electricity breached the acceptable quality guarantee is a question of fact and degree. So I attempt no exhaustive list of things that the reasonable consumer must be taken to consider. Some can be identified. The first is the purposes to which electricity is commonly put; these include operation of personal computers and other commonplace electronic consumer equipment.

[103] Second, the nature and extent of any risk posed by a given fault is relevant. Plainly safety is a very important consideration. That said, goods are not unsafe merely because some risk is inherent in them: Carey-Hazell Getz Brothers (above).

[104] The third consideration is the extent and duration and frequency of any departure from voltage or frequency standards, and the frequency and duration of outages, both planned and unplanned. As the Taylor complaint demonstrates, acceptability is a function not merely of the type of fault and its cause but also its frequency and extent. So one or more outages or voltage fluctuations may be acceptable, but more frequent or longer or more extreme events may not.

[105] Fourth, the point at which such an event becomes unacceptable should be assessed having regard to a) the nature of the distribution system to which the consumer’s premises are connected (does it offer diversity of supply, are the lines overhead or underground, what environmental risks exist); and b) quality standards set by the Commerce Commission, which reflect not only the design of the distribution system but also the essential nature of electricity and the absence of any alternative distribution system.

[106] Fifth, the cause of any given fault is relevant but not determinative. Some causes the reasonable consumer cannot expect the retailer or lines company to manage; they may include most force majeure events and third party damage. Contrary to the submissions of counsel, I do not think it can be said in the abstract that the reasonable consumer would accept all faults resulting from force majeure events or third party damage. It is possible that some assets are so exposed to third party damage, or the consequences of failure so severe, that the reasonable consumer would expect them to be better secured.

[107] The sixth consideration is the price of the service and the price the consumer would have to pay to eliminate faults of the sort that caused the loss. Electricity supply is a price/quality package, in which the consumer cannot expect a materially higher quality of supply without paying materially more. I accept Mr Whitlow’s evidence that it would probably be impossible to eliminate interruptions completely, while the cost of reducing them significantly would be unreasonably high and so unacceptable to consumers. In the case of an asset that might be expected to fail only at the end of its long service life, and the impending failure of which could not be detected in normal maintenance, that might mean the consumer must normally be taken to accept an outage or surge resulting from that cause.

[108] Lastly, anything said by the supplier that would make the quality of the goods more or less acceptable must be taken into account. The reasonable consumer is already taken to know of any hidden defects, but the legislation envisages that the supplier may add to or subtract from such knowledge. Accordingly, I agree that acceptability is affected by the consumer’s knowledge, having been so informed by the retailer, that consumer surge protection equipment may protect against risks that

the retailer cannot control. That may mean the guarantee was not breached although the quality of electricity would have been unacceptable but for the reasonable availability of appropriate surge protection equipment.

Mismatch between retailer and lines company liabilities

[109] The guarantee as I have analysed it may result in a retailer being liable for distribution faults although the lines company is not at fault. It is not possible to predict in what circumstances, and how often, that may occur. Mismatches will be much less common than would occur under the Commissioner’s approach, since the reasonable consumer is taken to accept many outages or voltage fluctuations

‘internal’ to the distribution system.

Excusing retailer where defects specifically drawn to consumer’s attention

[110] The retailers invoke s 7(2), saying that electricity they supply does not fail to comply with the guarantee, for “any defects in the goods have been specifically drawn to the consumer’s attention before he or she agreed to the supply”. For purposes of s7(2), a defect means any failure of the goods to comply with the guarantee of acceptable quality: s 7(5).

[111] Section 7(2) is concerned not with the reasonable consumer but an individual, so availability of this defence is ultimately an issue of fact. I have not been asked whether it applies in any of the specimen cases. That would require analysis of the standard terms and conditions applicable at the relevant time, and the application in each case of the requirement that defects be specifically drawn to the consumer’s attention before he or she agreed to the supply. The question is raised in a more abstract way, so must be approached with caution. It is nonetheless convenient to give the issue some definition. I use a set of Genesis’s terms and conditions, chosen because they seem the most comprehensive of those in evidence:

Circumstances or events beyond our control may cause supply to be interrupted from time to time. For example, the network company may shut down all or part of its network or the meter company may interrupt supply for maintenance or improving the reliability of supply. We will give you at

least 4 days’ notice of any planned shutdowns, provided the meter company or network company, which ever is responsible for the planned shutdown, gives us sufficient notice to do so.

The network may also be affected by a storm, high winds, third party interference like a car accident or for other reasons. We cannot give warning or notice of sudden, unplanned shutdowns or outages.

If you have sensitive equipment or property which may be affected by an interrupted supply, we strongly recommend that you protect that equipment or property in case of an unplanned shutdown or outage...

There may be voltage fluctuations which could damage sensitive electrical appliances like computers, televisions, videos, cordless phones and computerised appliances. Voltage fluctuations can occur at any time and may be caused by events beyond our control. Such as accidents, lightning or high winds.

You should consider arranging insurance that covers damage from power fluctuations, install your own back-up devices such as an uninterruptible power supply (UPS), and / or make other arrangements to protect your equipment or meet your special needs. Power conditioners and surge protectors may help reduce such fluctuations and can be plugged into appliances or wired into your house mains.

[112] These terms identify supply risks, in the form of outages and voltage fluctuations, that the retailer does not control and which may damage sensitive equipment. They further advise the consumer that surge protection equipment may protect appliances. They do not tell the consumer how likely it is that these events will occur in his or her location, or how severe they may be, or what sort of damage may result, or what sort of surge protection equipment is needed to protect against such events.

[113] Section 7(2) provides that goods do not fail to comply with the guarantee by reason only of a defect, meaning a failure to comply with the guarantee, that has been specifically drawn to the consumer’s attention. So a consumer who has chosen to accept the goods with actual knowledge of a failure to comply with the guarantee cannot invoke the guarantee in respect of that failure. An underlying premise is that the consumer could choose other goods without such defect, perhaps at a higher price. That is not so for electricity; retailers may compete, but they all use the same distribution network. Nonetheless, s 7(2) is available, and the question is what must be done in any given case to specifically draw any defects to the consumer’s attention.

[114] The subsection is not entirely clear whether specific defects must be drawn to the consumer’s attention, or whether defects must be drawn to his or her attention in a specific manner. In my view the drafter meant both; “specifically drawn” governs the defects and the telling. The statutory purpose requires both that the consumer be told plainly before taking supply of any failure of the goods to comply with the guarantee and that he or she be told enough about the specific failures and their consequences to make an informed decision whether to take the goods, and to evaluate precautions that might be taken.

[115] Further, ‘defects’ in 7(2) does not correspond completely to ‘defects’, hidden or otherwise, in s 7(1). In s 7(1) the term refers to attributes of the goods (including design, manufacturing, or instructional defects), while in s 7(2) it means failures of the goods to comply with the guarantee. Section 7(2) accordingly requires that the consumer be specifically told of any matters, including attributes of the goods, that result in the guarantee not being met.

[116] For these reasons I do not accept that s 7(2) excuses the retailer, merely because the consumer’s attention has been drawn in very general terms to a risk of faults, the possibility of damage, and the availability of surge protection equipment. The availability of s 7(2) is a question of fact in the consumer’s particular circumstances.

Consumer misuse of goods

[117] In argument Mr Goddard explained that the retailers also invoke s 7(4), arguing that where consumers choose not to employ surge protection equipment, they have used electricity in a manner or to an extent which is inconsistent with the manner or extent of use that a reasonable consumer would expect to obtain from it.

[118] I am not persuaded that s 7(4) invariably excuses the retailer where the customer was told about surge protection equipment, for several reasons. To begin, fitness for purpose is determined by reference to the purposes for which electricity is commonly supplied, which include operation of some sensitive equipment, such as personal computers. (I note that Mr Goddard argued New Zealand’s supply is not fit

for operation of sensitive equipment without surge protection, but for the avoidance of doubt record that I am not asked to decide whether retailers might by contract provide that the electricity they sell is not fit for particular end uses to which consumers commonly put it in fact, or is fit only if used with surge protection equipment, without being deemed to have contracted unlawfully out of the Act.) Surge protection equipment is not supplied by the retailer but must be purchased by the consumer independently. Section 7(4) appears to contemplate that the consumer uses the goods for some purpose for which they were sold, but will do so in an unreasonable manner or to an unreasonable extent. Because of the composite nature of the guarantee, it is not inevitably true that the consumer uses electricity in an unreasonable manner by powering sensitive equipment without using surge protection equipment. That depends inter alia on the circumstances of the supply, the nature of the equipment, the nature and extent of the particular fault, and what the consumer has been told about the risk. Finally, s 7(4) is of limited reach. It relieves the retailer only where the electricity would have complied with the guarantee had it not been used unreasonably. It follows from these reasons that the availability of s

7(4) is also a question of fact in the consumer’s circumstances.

Does availability of consumer surge protection equipment affect causation and damages?

The parties’ positions

[119] The retailers argue that no liability arises where damage could be prevented using appropriate surge protection equipment. Mr Goddard submitted that because a reasonable consumer would know voltage fluctuations are inevitable, and that sensitive appliances can and should be protected by appropriate surge protection equipment, breach of the guarantee is the effective cause of loss only if such equipment could not have prevented the loss.

[120] Developing this argument, counsel argued that the loss recoverable under the Act is loss resulting from failure of the goods to comply with the guarantee, and that loss results from the failure only if it is likely that the loss would not have been

suffered had the guarantee been complied with. From a causation perspective, loss is not caused by the failure to comply with the guarantee if the reasonable consumer would have had surge protection to manage fluctuations of the sort that inflicted the damage. In such a case, the retailer is not liable at all in damages notwithstanding that the guarantee was breached.

[121] In the alternative, Mr Goddard suggested a middle way; apportioning responsibility for loss as between retailer and consumer where loss results from both breach of the guarantee and failure to employ appropriate surge equipment. It is arguable that the term “fault” as used in s 2 of the Contributory Negligence Act 1947 extends to breach of the acceptable quality guarantee: Todd The Law of Torts in New Zealand (4 ed, 2005) at 22.2.04, Dairy Containers Ltd v NZI Bank [1995] 2 NZLR

30. Alternatively, the Act could be interpreted in a way that reflects basic principles of fairness and justice, by analogy with the approach to damages under the Fair Trading Act 1986, under which principles of contributory negligence inform the remedial discretion: Goldsbro v Walker [1993] 1 NZLR 394.

[122] The Commissioner recognises that the reasonable availability of appropriate surge protection equipment affects acceptability under s 7. However, Mr McKenzie went on to accept that:

...a complainant cannot recover for loss suffered where a reasonable consumer fully acquainted with the state and condition of the electricity supply system would have used an appropriate and reasonably available surge protection device, even though it did not use such a device, and it is probable that such a device would have prevented the loss claimed.

[123] Developing this submission, counsel emphasised that s 43 of the Consumer Guarantees Act forbids contracting out except in relation to business transactions, but acknowledged that statements in retailers’ standard terms and conditions may help show what information about surge protection equipment is reasonably available to consumers generally. Whether the availability of appropriate surge protection equipment renders the quality of supply acceptable is a question of fact. Relevant considerations are whether the surge protection device would have protected against the particular damage, and whether the device was by reason of cost and availability appropriately available to the particular consumer. A consumer might not reasonably

be expected to purchase a surge protection device costing more than $100 to protect computer equipment valued at $2,000, having regard to the risk of outage and the limited protection and limited life of a standard surge protector. This last submission met with the rejoinder from Mr Goddard that consumers who deliberately take the risk of damage should not be able to claim compensation from the retailer.

Non-use of surge protection equipment does not excuse retailer entirely

[124] Section 18 provides:

(1) Where a consumer has a right of redress against the supplier in accordance with this Part of this Act in respect of the failure of any goods to comply with a guarantee, the consumer may exercise the following remedies.

(2) Where the failure can be remedied, the consumer may—

(a) Require the supplier to remedy the failure within a reasonable time in accordance with section 19 of this Act:

(b) Where a supplier who has been required to remedy a failure refuses or neglects to do so, or does not succeed in doing so within a reasonable time,—

(i) Have the failure remedied elsewhere and obtain from the supplier all reasonable costs incurred in having the failure remedied; or

ii) Subject to section 20 of this Act, reject the goods in accordance with section 22 of this Act.

(3) Where the failure cannot be remedied or is of a substantial character within the meaning of section 21 of this Act, the consumer may—

(a) Subject to section 20 of this Act, reject the goods in accordance with section 22 of this Act; or

(b) Obtain from the supplier damages in compensation for any reduction in value of the goods below the price paid or payable by the consumer for the goods.

(4) In addition to the remedies set out in subsection (2) and subsection (3) of this section, the consumer may obtain from the supplier damages for any loss or damage to the consumer resulting from the failure (other than loss or damage through reduction in value of the goods) which was reasonably foreseeable as liable to result from the failure.

[125] The section establishes a hierarchy of remedies, under which the retailer is given the opportunity to remedy the failure where it is capable or remedy. If the

failure cannot be remedied or is of substantial character, the consumer may reject the goods or obtain damages in compensation for any reduction in value below the price paid. No issue of making good arises here, so the consumer’s remedies under s 18 relevantly comprise a) compensation for any reduction in value of the goods below the price paid for them and b) damages “for any loss or damage resulting from the failure” of the goods to comply with the acceptable quality guarantee which “was reasonably foreseeable as liable to result from the failure”.

[126] It is arguable that because surge protection equipment mitigates risk, the goods may retain most if not all of their value notwithstanding that on a given occasion the guarantee was breached. However, the sample complaints illustrate that the consumer is typically concerned with damage to sensitive electrical equipment connected to the power supply or consequential damage, such as fire or water damage. Consequential losses may far exceed the value of both the electricity and the electrical equipment connected to it.

[127] It seems to me that the Commissioner’s position ([122] above) conflates two question: whether the quality of supply is acceptable, and what losses are recoverable when it is not. The first question is answered by reference to the hypothetical reasonable consumer, who departs the scene when it comes to assessing damages. The statute does not ask whether the reasonable consumer would have taken precautions to avoid harm caused by a defect in the goods; rather, his or her knowledge of the risk and available precautions is one factor taken into account when considering whether the quality of the goods was acceptable. The quality of the goods having been found unacceptable, damages must be assessed on the basis that:

a) the guarantee was breached notwithstanding the reasonable consumer’s knowledge of surge protection equipment that might have prevented the loss. That possibility arises because acceptable quality is a composite notion, affected by considerations such as those outlined at [97] - [108] above; and

b) the consumer did not use the electricity in an unreasonable manner or to an unreasonable extent. Alternatively, the electricity would not have complied even if used reasonably.

[128] The rationale for assigning causation to the consumer’s omission is that he or she alone enjoyed the opportunity to avoid the loss, since the retailer lacked both knowledge of the consumer’s circumstances and control over the distribution system, and had been warned about the risk. I will assume the retailer can prove the consumer knew about reasonably available surge protection equipment. But I am unable to see how, in circumstances where the retailer’s liability has been established, the consumer’s failure to use such equipment can be described as the effective or sole cause of loss. After all, there would be no loss but for a supply defect, in the form of a voltage fluctuation or outage, that was the immediate physical cause of the damage to the consumer’s property. Recovery of consequential losses is contained by the requirement that damage be reasonably foreseeable.

Loss-sharing between retailer and consumer

[129] The next question is whether the legislation admits sharing of losses where there is more than one cause.

[130] Goldsbro v Walker addressed the liability of an agent for misleading and deceptive conduct under the Fair Trading Act 1986. Having held that an agent may be liable where he or she did more than simply pass on the principal’s instructions, the Court of Appeal declined to import into the legislation the common law rule that a tortfeasor who contributes to the loss is liable in full (with a right of contribution from co-tortfeasors). The power to order payment of the entire loss encompasses a discretion to award less, and an all or nothing approach might be unjust. Hardie Boys J held (at 406) that, while it would be wrong to categorise factors relevant to the exercise of the discretion, they would include the defendant’s blameworthiness, the contribution of others, and the plaintiff’s failure to act reasonably in his or her own interests. So the discretion appears to extend to the plaintiff’s contribution to loss, and not merely allocation of loss among defendants.

[131] Section 43 of the Fair Trading Act 1986 provides that the Court “may” order payment of the amount of the loss or damage suffered by a person by conduct of another person that contravenes the Act. The Consumer Guarantees Act provides in s 18(4) that “the consumer may obtain from the supplier damages for any loss or damage resulting from the failure...which was reasonably foreseeable as liable to result from the failure”. In the context of a section that gives the consumer a range of remedies, that language suggests the consumer has the right to claim such damages (and may not recover more). In s 47, however, the statute provides that a Court of competent jurisdiction “may hear and determine” any claim for costs, damages, or a refund. By analogy with Goldsbro v Walker, that language indicates that the Court’s power to award the full loss is discretionary, carrying with it the power to award less.

[132] Does anything in the legislation exclude use of the Court’s remedial discretion to limit an award of damages to reflect another’s contribution to the consumer’s loss? It does preclude a reduction in damages payable by a supplier on the basis that someone else is also liable under the Act. The policy of the Act is that the consumer should be able to recover from the supplier without proof of fault, leaving the supplier to pursue any remedies of its own against the manufacturer or others. For that reason it has been described as a loss allocation mechanism: Acquired Holdings Ltd v Turvey (2008) NZBLC 102,107. That distinguishes electricity retailers from agents under the Fair Trading Act.

[133] However, it does not follow that the legislature intended to provide the consumer with an indemnity against all consequences of faults or outages. It plainly intended to make legal redress readily accessible to the consumer. Hence the retailer’s liability does not depend on proof of fault; it is enough that it supplied defective goods. The legislation also established a hierarchy of remedies in s 18. But it does not mandate a particular approach to calculating damages. Section 18 provides that the consumer may recover for any loss or damage “resulting from the failure ... which was reasonably foreseeable as liable to result from the failure.” That language evokes the common law, with its commonsense approach to causation and remoteness; the phrase “reasonably foreseeable” is drawn from Victoria Laundry (Windsor) Limited v Newman Industries Limited [1949] 2 KB 528. Causation is a

question of fact and degree, and the chain of causation may be broken by an intervening cause such as the plaintiff’s unreasonable conduct: Fleming v Securities Commission [1995] 2 NZLR 514, 524. The ultimate question is whether the particular damage claimed is sufficiently connected to the breach of the particular duty to merit recovery in all the circumstances: McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39, 41.

[134] Consistent with that, the legislation strikes a balance between supplier and consumer. As Winkelmann J held in Acquired Holdings at [12]-[14], suppliers are given an opportunity to first remedy defects that are capable of remedy. In other respects, the Act recognises that responsibility may be assigned to consumers. Section 7(1)(h) and (i) provides that statements or representations about the goods are relevant to the standard of acceptable quality. Section 7(2) excuses the retailer where defects were specifically drawn to the consumer’s attention. Section 7(4) provides that goods do not fail to comply with the guarantee where they were used in an unreasonable manner or to an unreasonable extent, provided they would otherwise have complied with the guarantee. That subsection is consistent with loss-sharing, in an appropriate case, where the goods do not comply with the guarantee.

[135] Accordingly, it is open to the decisionmaker in law to treat the consumer’s omission as one cause of his or her loss where necessary to produce a just outcome. To paraphrase the dissenting judgment of Kirby J in I & L Securities Limited v HTW Valuers (Brisbane) Pty Limited [2002] HCA 41; (2002) 192 ALR 1 at [157], where there are multiple causes of loss or damage the only part recoverable from the supplier is that part which fairly or truly represents the loss or damage caused by the supplier’s breach.

[136] It does not follow that loss-sharing is appropriate in fact. It depends, after all, on the notion that the particular consumer acted unreasonably by omitting precautionary steps against anticipated breach of the guarantee. I accept that electricity retailing may be distinguished from supply of most other goods in that the retailer cannot prevent or manage defects. By contrast, the consumer may be able to manage defects by installing surge protection equipment that would have avoided loss. That is a necessary but by no means sufficient condition for establishing a cause attributable to the consumer. It is a question of fact whether any such cause

exists. It would depend, among other things, on the consumer’s knowledge of the risk and of available surge protection equipment, the nature of the consumer’s use of electricity, the particular supply defect, and the nature of the losses claimed.

[137] It is common ground that the retailer bears the onus of showing it is more likely than not that surge protection would have avoided the loss in the circumstances. I prefer to hold more generally that in circumstances where the guarantee was breached and damage resulted, the consumer is likely to recover his or her reasonably foreseeable losses in full unless the retailer can point to evidence of another contributing cause.

Relief

The general issue

[138] The plaintiffs seek declarations as to the approach the Commissioner ought take to the pending complaints, and similar complaints in future. I am presented with alternatives reflecting the stance adopted by each party. For reasons outlined in this judgment, I do not find either approach entirely apposite. I invite counsel to confer and file draft declarations, if declarations are still wanted. So far as the content of the guarantee is concerned, I have held that acceptable quality is a composite notion, and that it is not possible to catalogue in the abstract the things that the reasonable consumer must take into account or the weight that must be assigned to any one of them.

Specific consumer complaints

[139] The retailer involved in each specimen complaint sought declarations about the approach that the Commissioner ought to take to it. As the argument evolved, I did not understand counsel to pursue the declarations, partly because the record does not disclose the facts necessary to determine whether s 7(2) applies. It will be apparent from my reasons that I consider the Commissioner’s approach is mistaken in several respects, notably her refusal to take into account circumstances of supply

internal to the distribution network. Accordingly, she should revisit the complaints. I do not think any further relief is needed or appropriate.

Costs

[140] No order as to costs is sought by either party.

Miller J

In accordance with r 11.5 I direct the Registrar to endorse this judgment with the delivery time of 4.00pm on the 24th day of April 2009.

Solicitors:

Kensington Swan, Wellington for the Plaintiffs

Electricity and Gas Complaints Commission, Wellington for the Defendant