Wednesday, 4 April 2001 Speech
First Reading Speech for the Commerce Amendment Bill (No 2)

Mr Speaker, I move that the Commerce Amendment Bill (No 2) be now read a first time.

I will also be recommending to the House that the Bill be referred to the Commerce Select Committee for its consideration, with an instruction that the Committee report back to the House by 30 April 2001.

Mr Speaker, the Commerce Amendment Bill (No 2) contains a comprehensive package of measures to increase the effectiveness of the Commerce Act. It has as its common theme the promotion of competition in markets in New Zealand and the strengthening of the Act’s enforcement regime.

This Bill replaces the previous Commerce Amendment Bill and parts of the Commerce (Controlled Goods or Services) Amendment Bill. The previous Commerce Amendment Bill was considered by the Select Committee, but the Committee was tied 4 – 4 on some of the key reforms. We are determined to push on with these changes. This Bill brings all those matters together, including the generic price control amendments, so that they can be considered at one time.

The issues that I want to speak on today are the changes to the key prohibitions in sections 36 and 47, and the new price control provisions.

Section 36 of the Commerce Act prohibits a firm that is dominant in a market from using its position to prevent competition. When Parliament introduced the Act in 1986, it expected the courts to give an economic interpretation to the word “dominance". That is, to focus on market power and the ability of a firm to raise prices above the supply cost without rivals taking away customers in due time.

But over time the interpretation of this term has changed. The courts moved away from assessing “dominance” solely on the basis of economics and instead applied a dictionary definition which referred to “having a commanding, prevailing, paramount, or ruling influence”.

We believe the courts have raised the threshold of “dominance” to a higher level than intended in the original spirit of the Act. This has weakened the effectiveness of the constraints on anticompetitive behaviour by large firms.

The same threshold of “dominance” also exists in the prohibition against anticompetitive mergers in section 47 of the Commerce Act. As a consequence of the court’s recent interpretation, New Zealand has some of the more permissive merger guidelines in the world. Some commentators have described them as “the antipodean alternative” in which only “bonecrushing dominance” is prohibited.

So how does this Bill address these issues?

The Bill amends section 36 to bring New Zealand law in to line with the equivalent provisions in the Australian Trade Practices Act. The prohibition is changed from “abuse of dominance” to “taking advantage of a substantial degree of power in a market”.

This will widen the scope of the section so that it applies to a greater number of firms and markets. However, this change is not intended to bring collective dominance within the purview of the prohibition. Anticompetitive arrangements will continue to be considered under section 27.

The change will signal to the courts that the test to be considered is whether a firm has sufficient market power to harm the process of competition, rather than what each of the words mean. The actual application of that test will need to take into account what makes economic sense in New Zealand conditions.

The provisions also replace ‘use’ with ‘take advantage of’. This change is not intended to neutralise the importance of this limb in defining anticompetitive conduct. Rather New Zealand courts should look to case law in Australia where the courts have confirmed that what is required is to establish a causal link between the substantial market power of the firm and the conduct prohibited by the Act.

The amendments to the prohibition in section 47 of the Commerce Act will also bring the prohibition in to line with Australia and international best practice. The threshold for anticompetitive mergers will change from “strengthening or acquiring dominance” to “substantially lessening competition”.

The critics of this change argue that this lower threshold is not appropriate for a small economy like New Zealand. We recognise that small economies may have to tolerate more concentrated markets in order to obtain economies of scale. This will be important as New Zealand companies seek to compete in a globalised market place. However, there is another side to that argument. Economies of scale may become a barrier to competition in a small country and hence there is a greater risk that market power may endure for longer periods of time.

The adoption of the test of “substantially lessening competition” does not mean that we must adopt the same merger guidelines as other large countries. Rather we are importing an analytical framework, which squarely focuses attention on market power. This framework will be applied in a way that fits the particular circumstances of the New Zealand economy.

It will also make the prohibition in section 47 consistent with the prohibition against anticompetitive arrangements between firms in section 27 of the Act. This makes sense as a merger is the most permanent form of commercial arrangement between firms. The Act should be neutral as to whether firms enter into mergers, joint ventures or other forms of commercial arrangements. In addition, mergers should be subject to the same scrutiny in terms of both unilateral and co-ordinated effects on competition.

Finally, the Bill updates and strengthens the generic price control regime in the Commerce Act. The price control amendments are based upon the generic provisions contained in the old Commerce (Controlled Goods or Services) Amendment Bill.

We are not proposing to introduce price control. Rather we are giving the Commerce Commission more tools in the tool box.

The range of controls that may be imposed is expanded to include price,
revenue and quality standards, which reflects modern practice overseas. Modern forms of price control focus less on simply regulating prices, but adopt other concepts such as CPI – X, which is aimed at capping the total revenue a firm can earn.

CPI – X enables a price controlled firm to increase its prices by the rate of inflation minus a certain factor, in anticipation of it becoming more efficient. It provides incentives on the firm to minimise its costs. This and other forms of incentive-based regulation are currently not permitted under the Commerce Act, but are commonly used to regulate utilities overseas.

The Commission's powers to investigate and audit companies subject to
price control are also strengthened.

These amendments will assist the Commission in its current inquiries into
airports and the electricity sector.

Mr Speaker, I think this Bill will do much to promote competition in New Zealand and protect consumers and businesses from anticompetitive behaviour.

Mr Speaker, I move
- that the Commerce Amendment Bill (No 2) be referred to the Commerce Select Committee; and
- that the Committee be instructed to report back to this House by 30 April 2001

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