Price control amendments update

The Commerce Select Committee has reported back on the Commerce Amendment Bill which rewrites New Zealand's price control laws. In this update, senior associate David Blacktop highlights two important changes the Committee has recommended be made to the Bill: the provision of additional appeal rights; and improvements to the transitional arrangements for electricity lines businesses.

Forms of control unchanged

As noted in the Autumn 2008 issue of Commercial Quarterly, New Zealand's current price control regime provides for bright line regulation. This means there is either full price control or there is none - there is no middle ground. The Bill provides the Commerce Commission with a greater armoury to exert "control". It will be able to recommend companies be placed under a range of forms of regulation namely:

• An information disclosure regime under which companies must disclose certain information, such as prices, to the Commission which in turn performs a monitoring role. The rationale being that businesses will temper any supra-competitive pricing for fear of further regulation. The Bill immediately imposes this regime on Auckland, Christchurch and Wellington international airports.

• A negotiate/arbitrate regime under which a company will be required to reach agreement, through negotiation, on the supplier's prices and quality standards during a specified regulatory period, and to provide for binding arbitration if negotiation is unsuccessful. This regime is similar in concept to the Telecommunications Act 2001.

• A default/customised price-quality regime, similar to the existing Electricity Lines Business (ELB) price path threshold regime but with major improvements (outlined below).

None of these options are fundamentally changed.

When control may be imposed

The Committee made two important changes to the test for when control may be imposed by the Commission:

• First, the Bill now requires that a person must have "scope" to exercise "substantial market power" before control may be imposed. Previously, this requirement would be satisfied where a person has "substantial scope" to exercise "market power", which is a much lower test.

• Second, the benefits of regulation must now "materially" exceed the costs of regulation. Under the previous drafting the word "clearly" was used. "Materially" appears to impose a more certain and higher standard than "clearly". For example, the benefits may "clearly" outweigh the detriments in the sense of leaving little doubt but the gap between benefits and costs may nonetheless be immaterial.

Given the purpose of regulatory intervention, we think these are sensible changes. We also agree with the Committee's decision not to set out the situations where control should be imposed as suggested by some submitters. We agree with the Committee that this is very much a second step (once the may threshold is reached) for which the Minister should exercise his or her discretion.

Appeals

For every regulated good or service, the Commission must publish input methodologies which are designed to promote certainty for business subject to regulation. Input methodologies set out the Commission's method for determining the cost of capital, valuing assets, allocating common costs, etc.

Under the Bill as introduced parties could appeal the "input methodologies" set by the Commission to the High Court. However, the Bill did not provide for customised price path decisions which applied the methodologies to particular companies to be appealed. That is, firms could appeal the method up front but not the application of that method to its particular circumstances in the context of, for example, the Commission setting a customised price path.

The Select Committee has recommended two changes:

• While the Bill retains an ability to appeal to the High Court against input methodologies, these can only be overturned where a different methodology would be "materially" better in achieving the purpose of the Bill. Only in exceptional circumstances would the court reach this view where an appeal arises from a specialist tribunal. It appears to us it is effectively an unreasonableness test akin to the judicial review standard.

• Introducing appeals against the Commission's final determinations – ie. appeals against decisions applying input methodologies to a particular business in relation to customised price/quality thresholds. There is no similar "materially better" threshold for these appeals and presumably the conventional High Court approach to appeals from Commission decisions will apply. However, parties appealing against a final decision cannot appeal "against all or any or part of an input methodology". While the rationale for this exception is apparent, it is unclear exactly how this division will play out, particularly in the light of the high thresholds that would apply for overturning a price path threshold. This might provide an incentive for the Commission to put a lot of detail in the initial methodologies which would be difficult to overturn but which would also be immune from later challenge at the final decision stage.

Improved transitional arrangements for Electricity Lines Businesses

The revised Bill includes improved transitional arrangements for Electricity Lines Businesses moving from the current price path thresholds regime to the new information disclosure regime and the default/customised price quality regime (for non "trust-owned" ELBs).

The current price path thresholds regime is a screening mechanism designed to identify ELBs that might warrant control. The new regime potentially imposes direct pecuniary penalties on firms that breach default/customised price quality thresholds. This raised the potential that an ELB would breach the current screening thresholds but be immediately exposed to pecuniary penalties. In effect, this would impose retrospective liability for decisions taken prior to the Bill coming into force. The Bill has been revised to remove this problem.

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.