This article first appeared in Law News Issue 4 (28 February 2014),
published by Auckland District Law Society Inc.
In December 2013, the High Court released an important decision about the
regulation of natural monopolies under Part 4 of the Commerce Act 1986
(Wellington International Airport Ltd v Commerce Commission  NZHC
3289). In a judgment running to 661 pages, the Court dismissed a number of
appeals brought by regulated businesses against input methodologies set by the
Commerce Commission. In doing so, the Court made some useful observations in
relation to a key concept in the Act – that of “workable competition”.
As section 52 explains, Part 4 of the Act provides for the regulation of
markets where there is little or no competition and little or no likelihood of a
substantial increase in competition. The purpose of Part 4 is then set out in
52A Purpose of Part
(1) The purpose of this Part is to promote the long-term benefit of consumers
in markets referred to in section 52 by promoting outcomes that are consistent
with outcomes produced in competitive markets such that suppliers of regulated
goods or services—
(a) have incentives to innovate and to invest, including
in replacement, upgraded, and new assets; and
(b) have incentives to improve
efficiency and provide services at a quality that reflects consumer demands;
(c) share with consumers the benefits of efficiency gains in the supply
of the regulated goods or services, including through lower prices; and
are limited in their ability to extract excessive profits.
The idea of competition thus underpins Part 4, as it does the rest of the
Act. Crucially, section 3(1) provides that “in this Act competition means
workable or effective competition”.
In carrying out its duties under Part 4, the Commission issued a number of
“input methodologies” which are important ingredients in the regulation of
airport, electricity and gas businesses. Dissatisfied, those businesses appealed
to the Court. In essence, they asked the Court to determine whether their
proposed alternative approaches would be “materially better” in achieving the
aims of Part 4 than those adopted by the Commission. This required the Court to
consider carefully the purpose of Part 4, and so the meaning of “workable or
The following propositions can be distilled from the Court’s reasoning in
relation to those words:
The theoretical ideal of perfect competition is unattainable in reality.
In practice, markets demonstrate varying levels of competition. The outcomes
produced by a more competitive market (including productive efficiency,
allocative efficiency, and dynamic efficiency) are better for society than those
produced by a less competitive market.
A strongly competitive market is one where prices reflect efficient costs,
and firms earn no more than a normal rate of return.
A workably competitive market is one that produces outcomes that are
reasonably close to those found in strongly competitive markets. In a workably
competitive market, no firm has significant market power. The tendencies are
thus towards cost-reflective prices and normal rates of return (although those
outcomes may never in fact be achieved).
Ultimately, whether a market is workably competitive is a judgment to be made
in light of all of the available information.
This logic led the Court to conclude that the purpose of regulation under
Part 4 is to promote the outcomes in section 52A(1)(a)-(d), consistent with the
outcomes that would occur in a workably competitive market.
The Court then sought to apply that touchstone in determining the issues
presented by the appeals. For instance, one of the key issues in the appeals
concerned the appropriate regulatory asset base (the greater that asset
valuation, the higher the regulated prices that could be charged in the future).
According to the appellants, that valuation should have been calculated by
reference to the costs a hypothetical new entrant would face. The Court
concluded that such an approach was not mandated by the reference in section 52A
to promoting outcomes consistent with those produced in workably competitive
Several observations may be made:
The Court itself notes in passing that the reference to workable competition
in section 3(1) may just be a recognition that perfectly competitive markets do
not exist in reality. If that is so, then it may not be helpful to try to
understand exactly what is meant by “workable competition”. It may be better
simply to acknowledge that markets demonstrate varying levels of workable
competition (unless they are characterised by little or no competition, such as
markets which require regulation under Part 4). In the context of Part 4, the
focus would fall instead on the outcomes in section 52A(1)(a)-(d).
Although section 3(1) in fact refers to “workable or effective competition”,
the Court does not consider in detail the meaning of “effective competition”.
The inference seems to be that “effective” adds nothing to “workable” in section
3(1). Given that the phrase “effective competition” was used in sections 2A and
21 of the Commerce Act 1975, and that the Courts are usually reluctant to
conclude that a statute includes redundant words, that inference may not be
As noted above, section 3(1) is not specific to Part 4. The concept of
“competition” underpins the entire Act (such as the section 27 prohibition on
agreements which have the purpose or effect of substantially lessening
competition in a market). The Court’s reasoning may therefore be relevant in
other contexts. For instance, the Supreme Court has already established that
determining whether a party has taken advantage of its substantial degree of
market power under section 36 involves asking whether a defendant would have
acted as it did in a workably competitive market (Commerce Commission v
Telecom Corporation of New Zealand Ltd  1 NZLR 577 at ).
Perhaps the key point is that, even 28 years after the Commerce Act was
passed, there remains real uncertainty about the meaning of “workable
competition”. It may be hoped that the appellate courts will have an opportunity
to consider this fundamental issue soon.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.