Review of price control provisions in the Commerce Act

The Ministry of Economic Development (MED) has released its long awaited discussion document reviewing the price control provisions under Parts 4, 4A and 5 of the Commerce Act.

In its present form, the regulatory control provisions in the Commerce Act provide:

• generic price control provisions under which any firm may be regulated if competition in the relevant market is limited or likely to be lessened and regulation is considered in the interest of acquirers of the firm’s goods or services (under Part 4);

• a specific thresholds regime for electricity lines businesses which allows the Commerce Commission to place an electricity lines business under control if it breaches the thresholds (under Part 4A); and

• in cases where a decision to control has been made (under Part 4 or Part 4A) the controlled good or service must be authorised by the Commerce Commission under Part 5. 

The decision of whether to impose price control is functionally separate from the decision on how control should be designed and imposed.

Key discussion issues

The discussion document raises a number of issues for the purpose of determining whether the current controls are consistent with the objective of providing for the long-term benefit of consumers in New Zealand. It also addresses whether any amendments to the Act are necessary to meet the Government’s policy objectives on infrastructure investment. The issues raised for discussion include whether:

• the regulatory provisions would benefit from the inclusion of specific purpose statements in the Act and guidance on when regulation should (and/should not) be imposed on a firm or sector;

• more light-handed types of economic regulation (such as a negotiation/arbitration regime or an information disclosure/price monitoring regime) should be provided for in the Act;

• key input methodologies/decisions should be set as a stand-alone process in advance of an inquiry and recommendation to regulate;

• the regulatory processes would be more cost-effective and timely if the decisions on whether and how to impose regulations are considered concurrently;

• the existence of the thresholds regime in Part 4A of the Act and the Commerce Commission’s use of a certain methodology to set thresholds has the effect of constraining the Commission’s approaches to control under Part 5;

• specific provision should be made to allow the Commission to use comparative benchmarking as a methodology for setting control terms and whether there is value in allowing firms to propose their own control terms for consideration;

• there is sufficient regulatory accountability under the current regime and in particular whether Commerce Commission’s decisions should be subject to merits review; and whether

• the Part 4A thresholds regime should be retained.

Alternative proposal packages

The MED notes the various proposals put forward for change in the discussion document could be packaged in a variety of ways. By way of illustration in the discussion document, the MED has set them out as two separate options for reform.

Option One

The changes set out in Option One are more limited and appear to be more process based than substantive. Option One does include as one of the purposes of regulation that suppliers:

“…have incentives to innovate and to invest including in replacement, upgraded and new assets and in related businesses”.

Importantly, the MED has proposed that input methodologies (such as WACC, etc.) should be set in advance through a stand-alone and transparent process, which would ensure consistency in the application of the regime across industries. 

It also proposes that:

• the current thresholds regime could simply be made generic so that additional industries could be placed under this system; 

• the Act would be extended to provide for other regulatory options to be considered by the Commission in addition to control; and

• the decision whether to impose price control will remain functionally separate from the decision on how control should be designed and imposed.

Option Two

Option Two incorporates the same features as Option One with some important extensions:

• the decisions whether to impose price control and how control should be designed and imposed would be considered together;

• the Act would provide for other regulatory options to be considered by the Commission in addition to control, such as negotiation/arbitration and information disclosure;

• control terms may be set using comparative benchmarking and/or firm-specific information with firms being given a role to propose their own regulatory control terms; and

• introduction of merits review rights (in addition to judicial review), on final control terms and action taken in the event of a breach for an individual company, although that will be limited to appeal by way of rehearing.

Submissions

MED has invited written submissions on the issues raised by the discussion paper from all interested parties. The closing date for submissions is Friday, 6 July 2007. If you would like to know more about the discussion document or require assistance with your written submissions please contact one of our competition team:

Phil Taylor
Partner

Torrin Crowther
Senior Associate

David Blacktop
Senior Associate

A copy of the Discussion Document is available on the MED’s website. The review of the clearance and authorisation provisions in Part 5 of the Commerce Act are the subject of a separate discussion document which is expected to be released soon.

Enquiries and information

For more information on any of the cases, articles and features in Commercial Quarterly, please email Diane Graham or call her on 64 9 916 8849.