Commerce Commission seeks views on applying new price control law

David Blacktop, Senior Associate | Thursday 15 January 2009

The Commerce Commission has published a discussion paper setting out its preliminary views on the implications of the recent rewrite of New Zealand's price control legislation which passed into law in October 2008.

Released just before Christmas, the discussion paper raises a number of important questions and seeks submissions by 16 February 2009.

Those that hoped that the rewrite of the price control legislation would cause a fundamental change in the Commission's approach to regulation might well be disappointed by its 159-page discussion document.

This is perhaps not that surprising. After all, as the American Economist John Kenneth Galbraith said: "Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof."

While the Commission has yet to make the decisions that will shape the regulatory framework, for those that have previously taken a different approach to the Commission, a response to the discussion paper now may present the best time to influence the Commission's thinking.

What is hoped for from the rewrite of the price control legislation?

The rewrite of the price control legislation was enacted relatively quickly by New Zealand standards. One of the key drivers for the speed with which the changes were made appeared to be the Government's concern at the controversy resulting from the Commission's decisions to publish an intention to declare control of Vector's electricity lines businesses and Transpower's transmission pricing. These decisions were roundly criticised by many businesses, both regulated and unregulated, which were frustrated that both the regime and the Commission's approach provided little certainty and little incentive to make investments.

The new regime is designed (and is hoped) to improve certainty and clarity for businesses and to provide greater incentives for future investment.

The new regime has improved the regulatory processes and this should mean more certainty and clarity for businesses from a process perspective.

For example, the requirement for the Commission to publish binding input methodologies and the introduction of the potential for customised price quality thresholds for firms with particular circumstances, such as a need for extensive capital investments, are definite process improvements.

Will the rewrite of the price control law cause the Commission to change its approach?

While there are real improvements to regulatory processes, those hoping the new regime would cause a dichotomy shift in the Commission's approach in implementing regulation may well be disappointed. Indeed, the discussion paper leaves the reader with the distinct impression that the Commission's application of its regulatory agenda will be unlikely to change significantly. This is hardly surprising – the Commission's membership has not changed and the Commission has publicly paraded its success in achieving what it considers to be improved outcomes for New Zealand consumers.

An illustration of the Commission's unchanged stance is its discussion of the new purpose statement. The new purpose statement essentially builds on the purpose statement that previously applied only to Electricity Lines Businesses (ELBs).

The introductory words of the new statement include the same overarching goal as was included in the ELB purpose statement i.e. regulation is "to promote the long-term benefit of consumers".

The previous statement had three sub-paragraphs detailing the specific factors the Commission had to consider when applying its powers for this overarching purpose. The new purpose statement adds a fourth: that regulated business have incentives to innovate and to invest, including in replacement, upgraded, and new assets.

While this change seemingly elevates the importance of investment, the Commission does not seem to view this as a fundamental change requiring it to modify the emphasis on the factors it considers. The discussion paper notes the High Court's interpretation of the previous statement:

"The Court also noted that subsections (a) to (c) "are identified by Parliament as central aspects of the long-term interests of consumers and are central, though not exclusive, goals for the Commission in the performance of its duties under subpart 1 of Part 4A." This serves as a useful guide to interpreting the new purpose statement in section 52A." (Emphasis added)

It also notes the Commerce Select Committee's statement that although "incentives to invest are important, we consider they need to be balanced against the need to protect consumers from excessive prices", and, perhaps more tellingly, notes that "...in the context of performing its regulatory functions prior to the introduction of the [amendments], it considered the promotion of dynamic efficiency to already be implicit in section 57E(b)...) and in section 70A(c) of the Act..., as well as in the 2006 GPS..). This is because the Commission considers that in each case the reference to efficiency relates to all three efficiency dimensions".

These statements serve to illustrate that the Commission does not see the addition of investment into the purpose statement as requiring it to change its approach. Rather the addition simply makes an existing consideration explicit.

Is responding to the discussion paper important?

The purpose statement example is symptomatic of the view implicitly expressed in the discussion paper that the changes to the legislation will not require the Commission to change its approach.

This is important because while key decisions on input methodologies and the way in which regulation will be imposed have yet to be made, the discussion paper cannot be regarded as solely a process paper – indeed it raises many fundamental questions that will shape the way in which the subsequent decisions about input methodologies and the various regimes are implemented.

For example, the questions posed concern:

• the way in which the regulatory asset base should be valued;

• the way in which tax and depreciation should be treated;

• the continued use of NPV=0 and Financial Capital Maintenance concepts;

• the way in which common costs are allocated;

• whether P0 adjustments should be made;

• how the "claw back" provisions should be applied;

• what factors should be considered in setting information disclosure requirements;

• whether X factors should be set taking into account overseas benchmark productivity information;

• can an index other than CPI be used in the price path thresholds; and

• how prescriptive information disclosure requirements should be.

For regulated businesses especially, while the process changes will no doubt improve outcomes, if they disagree with the Commission's previous regulatory approaches, then the discussion paper intimates that there is still work to be done. While it might be tempting to wait until specific discussion papers on input methodologies etc are published to fully respond to the Commission's views, it may be that the time to move is now because influencing the Commission's thinking at an early stage may be easier and more effective.

If you have any queries or would like assistance with making submissions please contact a member of Bell Gully's competition team.

A copy of the discussion paper is available at www.comcom.govt.nz/IndustryRegulation/regulatoryprovisionsofthecommercea.aspx

 

For further information, please contact your usual Bell Gully adviser or:

Phil Taylor
Partner

Torrin Crowther
Partner

Ian Gault
Partner

Simon Ladd
Partner

Roger Partridge
Partner

Jenny Stevens
Partner

David Blacktop
Senior Associate