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Paul Swain Speech - Commerce Act Reform Process

20 June, 2000 – 7am Speech Notes
Address to Rudd Watts & Stone -
Commerce Act Reform Process

Thank you for inviting me here today – it's brave of you to risk the chilly morning air to listen to me talk about the Commerce Act Reform Process. Not exactly everyone's breakfast conversation but one which is important to the way in which business is conducted in New Zealand.

I'd like also to say that I am looking forward to your questions about the Commerce Act Reforms – It's always good to hear what the people at the coalface of the issue so to speak think about it.

Before I talk about the reform process I think it's important to look at some background to the Commerce Act itself.

The Commerce Act - 1986
The Commerce Act became law in 1986 and as we all know the face of business and society has changed somewhat since then.

In 1986 the government ran the post office and the railways, nobody had heard of the Internet, let alone e-commerce, and cellphones that looked like bricks were still considered pretty neat

It was a time when the government was looking to free up the New Zealand economy after years of stifling regulation.

The Commerce Act indicated a shift away from industry specific rules and regulation to a generic piece of legislation incorporating the principles of how competitive markets should operate

In just over a decade we've seen huge change. The globalisation of trade and production has lead to increased foreign investment in the New Zealand domestic market. And the corporatisation and privatisation of state-run organisations has increased the range of sectors in which large corporations are operating.

Because of all these changes we believe that our competition law is now facing an environment significantly different from '86. For this reason we have decided to amend the Commerce Act.

The courts
Essentially the Act needs more teeth to deal with today's competitive environment. One of the reasons for that is the courts have skewed the original intent of the word 'dominance' in the act, and mergers and penalties have been treated too lightly.

Let me deal with the issues one by one.

Dominance
When Parliament introduced the Act in 1986, it expected the courts to give an economic interpretation to the word “dominance".

But over time the meaning of the word 'dominance' has come under some confusion. The courts moved away from assessing “dominance” solely on the basis of an economic interpretation of “high market power”. It applied a dictionary definition to “dominance” – ie “of having a commanding, prevailing, paramount, or ruling influence”.

We believe the courts have raised the threshold of the definition of dominance to a higher level than intended in the original spirit of the Act.

Mergers
In 1996 the Commerce Commission’s safe harbours for merger proposals were developed taking into account the courts’ interpretation of ‘dominance’.

As a result New Zealand has some of the more permissive merger guidelines in the world. In fact they have been described by some commentators as “the antipodean alternative” in which only “bonecrushing dominance” is prohibited.

At the moment the safe harbour for a merged entity in New Zealand is less than a 40% market share, or has 60% market share where one other market participant has at least a 15% market share.

Compare that to Australia where safe harbour for a merged entity is less than a 40% market share, or the combined market shares of the four largest market participants is less than 75% and the market share of the merged entity is less than 15%.

The current merger test does not allow a merger to be scrutinised on the basis that it may facilitate collusion between firms and we believe that needs to be tested.

A possible example of this would be if a merger occurred in the petrol market at the moment. The entry of Gull and Challenge! has had a significant impact on petrol prices. Their influence has exceeded their market share as they have acted as maverick players and price setters. If one of the major oil companies were to acquire one or both of these new entrants it would likely have a substantial impact on competition. However, such an acquisition is unlikely to result in a dominant position.

Penalties
In recent years courts have imposed low penalties for breaches of the Commerce Act, that is of concern to the new government and we want to put in more of a deterrent for companies who break the law.

Up until August 1998 the highest penalty imposed on a company for breaching the Commerce Act was $500,000 on Port Nelson Ltd. While on the face of it this amount is substantial it was for three breaches of the Act and the company was a repeat offender.

Penalty awards from 1990-1998 ranged from $5,000 to $250,000 with most in the $30,000 to $50,000 range. One of the most recent cases which brought penalties under scrutiny was a decision about oil company price fixing. The court ordered three oil companies to pay a total of $1.175 million between them for fixing prices.

The changes
So what are we doing to address these issues? The government's first intention is to strengthen the Commerce Act to give the Commerce Commission more teeth and to bring New Zealand in line with its key trading partner Australia.

To bring us in line with Australia we will amend Sections 36 and 47 of the Act that deal with anti-competitive behaviour by dominant firms and rules for mergers and acquisitions.

We are replacing the phrase “dominance” with the lower threshold of “a substantial degree of power in a market”; and replacing “use” with “take advantage of”.

We also intend tackling the difficult task of proving that a firm acted with an anti-competitive purpose.

One option that will be put to the select committee to decide is whether reversing the onus of proof should be available to the Commission when it is applicable. This is contentious and I expect a number of submissions on this proposal.

We want to refocus the merger and acquisition restrictions to align us with Australia.

The intention is to restrict those mergers that have the effect of substantially lessening competition, this will allow the High Court and Commerce Commission to take into account the full range of anti-competitive mergers.

I must emphasise that revising the merger threshold does not mean we want to stop a significant number of mergers each year.

In practice mergers that trigger the threshold would be allowed to proceed if it was expected they generate efficiency gains that would outweigh any anti-competitive detriment.

And even where they didn’t the proposal could, in consultation with the Commerce Commission, be reconfigured, probably through divestiture of shares or assets, to let it proceed.

Other issues we will address include:
 Increasing the penalties for offences by body corporates from the existing maximum of $5 million up to $10 million;
 Removing the requirement for the Commerce Commission to give an undertaking as to damages when seeking interim injunctions; and
 Removing a provision in the existing bill that may have inadvertently prohibited some franchising and other similar pro-competitive agreements.
 Amending the act to include an overriding purpose statement that clarifies the fact that increased consumer welfare is the long-term goal of competition.
 Empowering the Commerce Commission to issue cease and desist orders.

Also important is to remember that the inquiries into the electricity and telecommunications markets may result in specific changes to the way in which those industries operate.

Why not go with the proposals currently in the Commerce Amendment Bill?
The previous Government had proposed amendments to the Act with its Commerce Amendment Bill.

A number of those proposals are still to go ahead, including extending the statutory limitation period for bringing offences and ensuring courts give weight to the interests of consumers when deciding whether to grant an interim injunction.

But we have decided not to include the previous government's changes to section 36 and section 47 referring to firms with "a high degree of market power" and mergers and acquisitions.

The changes the previous government wanted to make to these sections were to insert novel words in the Act for section 36 and to base mergers and acquisitions on a very new European concept of joint dominance.

We believe those moves would have been problematic. We prefer adopting the Australian model in both cases. That will mean we can reduce costs for businesses operating in both countries and that may mean more investment in New Zealand.

It will also reduce uncertainty for businesses because they can use the case law developed in Australia help their interpretation of the Act here.

What next?
So what's next? We now want to hear from the public and business about the policies.

I will be introducing a supplementary order paper (SOP) to the Commerce Amendment Bill currently before the Commerce Select Committee. This SOP will be introduced in the next few weeks and the select committee will seek public submissions on it. It is hoped that the changes will be made law later in the year.

It is important that we hear public opinion and business opinion on this matter. We would like to have the Commerce Act Amendments in place by the end of the year.

One of my key goals as Commerce Minister is to improve New Zealand confidence in investing in local business. Improving our competition law is one way of doing that.

ENDS

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