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Dalziel: Examining NZ’s Competitive Environment

Hon Lianne Dalziel
Minister of Commerce, Minister for Food Safety,
Associate Minister of Justice, MP for Christchurch East

18 February 2008 Speech Notes

Examining New Zealand’s Competitive Environment – Business as Usual or Room for Improvement?

Key Note speech by Commerce Minister Lianne Dalziel to the 8th Annual Competition Law & Regulation Review
Duxton Hotel, Wakefield St
Wellington
9am

Thank you for inviting me to open the proceedings here today. I noted the title of the conference this year: “Examining New Zealand’s Competitive Environment – Business as Usual or Room for Improvement?”

The current competition law and regulatory reform agenda which falls under my Commerce portfolio has been about taking stock of New Zealand’s regulatory environment and essentially asking that very question – should it be business as usual or is there room for improvement?

The review of parts 4 and 4A of the Commerce Act fall squarely within the latter category and that is what I wish to address today.

There are two preliminary points that I want to make. First I want to acknowledge the contribution received from those of you who made submissions, either directly or on behalf of your clients, to feed into the policy development process.

Personally, I consider that the review process has been a great success, in terms of the Labour-led government and business working together to deliver solutions that work for business, and ultimately benefit the New Zealand economy as a whole.

The second point I want to make is this. The solutions to some of the challenges we face in developing appropriate regulatory frameworks for a country our size, so distant from our international markets and with such a small domestic market, require a balanced approach. I have made the point several times that I don't believe that the characterisation of the government's approach as either light-handed or heavy-handed adds anything to the debate. Our unique circumstances require a balanced approach and the purists amongst us have to settle for less than theoretical perfection in the face of practical reality.

I feel that we have got the balance right and I am sure that there will be people in the room who agree and others who disagree, so I look forward to a robust discussion after this address.

I am on track to having the Commerce (Regulated Goods & Services) Amendment Bill introduced into the House mid-March. Although the Select Committee process usually takes up to 6 months, I am hoping that we have got sufficient detail agreed before introduction so that the process takes less than that, which means that the Bill could be passed before the election. Although the work on the input methodologies will proceed regardless of the timing of the legislation, I believe it would provide greater certainty if the legislation were passed. I am hopeful that this Bill will find the sort of cross-party support that other Commerce Bills have found.

In order to help achieve this timetable, officials ran a further round of consultation on the design detail of the new regulatory regime with major stakeholders in parallel to the drafting of the Bill. This proved to be very constructive. I have been briefed on some of the changes that officials are recommending as a result and my colleague, Hon David Parker, and I are in the process of signing off on those.

The main message coming from submitters is the need for certainty, particularly around the scope and timing of the regulatory change programme.

Regulated businesses want to know, as far as practical, what the rules will be and when they will apply, so they are better placed to meet the government's objectives for increased innovation and investment in infrastructure.

Another common theme from submitters revolved around the transitional arrangements for regulated firms. I am hoping that we may be able to provide a greater degree of certainty around the timetabling of decisions – for example, by when the Commerce Commission needs to set input methodologies.

So that, in a nutshell, is where the government is at in the process.

What I would like to do now is to explain why I believe New Zealand's approach to competition policy has evolved the way it has and to comment on the rationale for the new Part 4 of the Commerce Act which will be introduced in the Bill.

We know that New Zealand is unique. As I said before, we are a small, developed but isolated nation, at a great distance from many of our markets, with a small population spread over a geographically challenging landscape. The application of competition policy in New Zealand creates many challenges for us.

Most obvious in this is that our markets are very small compared to other developed nations and barriers to market entry can be high. Nor do we have sufficient firms with the scale and scope to effectively compete in international markets.

Our one global company of real significance is Fonterra, and that required the government's assistance to lift it over the threshold set by the Commerce Act when it was first established.

I think it is important to remember that competition is not an end in itself – it is a means to an end.

It is also important to remember that New Zealand’s regulatory environment for natural monopolies has evolved differently to most other jurisdictions. In New Zealand major infrastructure monopolies had always sat in the hands of local and central government until the 1980s and 1990s. Tragically for New Zealand the separation of the infrastructure from the contestable business did not happen at the time deregulation occurred, nor were appropriate regulatory frameworks put in place to protect consumers from what followed.

With only a marginal threat of regulation the relevant firms spent a lot of time gaming the situation, while trying to anticipate how the government of the day and the Commerce Commission would react to certain conduct. So the threat of regulation was not a meaningful constraint on inappropriate behaviour.

The review of Parts 4 and 4A of the Commerce Act can therefore be seen as moving New Zealand back into the international mainstream, by creating a modern regulatory system that will promote efficiency, innovation and investment, as well as protecting consumers from rent-seeking behaviour.

The absence of a regulatory specific purpose statement under the existing Part 4 of the Commerce Act has led to dispute and uncertainty because the overall purpose of the Commerce Act applies by default; that is, “to promote competition in markets for the long term benefit of consumers”. This purpose statement simply does not apply to markets where there is little or no scope for competition.

For this reason, at the very beginning of the process, the review of the Commerce Act canvassed whether there should be a specific purpose for the new Part 4.

It also seemed that business uncertainty was being generated by the Act’s requirement that sequential inquiries be carried out on, first, whether or not to regulate, and then, if the answer was "yes", how to regulate. This process as many of you will know involves a high degree of uncertainty, cost and duplication.

To date, the Commerce Commission has carried out two Part 4 regulatory control inquiries in relation to gas pipeline services and airfield activities. In carrying out these inquiries, the Commission was not able to consider alternative forms of regulation as a means to address the competition problems. This was another identified problem of the Commerce Act in its current form.

Electricity lines businesses in particular told us that the Part 4A thresholds regime has had the unintended side effect of discouraging investment in infrastructure. This is the opposite of what the government needs to hear at a time when investment in infrastructure is a critical component of the economic transformation agenda.

In theory, the concept of the Part 4A thresholds regime is simple. In practice it has not worked as well as was hoped. 27 of the 28 electricity lines businesses have breached the thresholds at some point and there have been over 100 individual instances of breaches since the regime was introduced in 2003. Some breaches have been minor or technical in nature, or related to the need to engage in major new investment.

However, the potential consequences of any breach under Part 4A are significant and can be disproportionate to the nature of that breach. The uncertainty generated by a lack of predictability and transparency, can undermine business incentives to maximise efficiency gains within the price cap threshold and discourage future investment.

The government believes that the focus of economic regulation should be cooperative, forward-looking and incentive-based, where the regulator and businesses work collaboratively to seek to mimic the outcomes of competitive markets.

Consequentially, Part 4A will be repealed and all regulatory control provisions will be provided for under a single regulatory framework, which will provide for alternative forms of regulation in addition to conventional price control including: information disclosure; a negotiate/arbitrate regime; and a 'default/customised price path' regime, which replaces the thresholds regime. We will clarify and define to the fullest extent possible, what behaviour will trigger regulation, although the intent is that the minimum intervention required to achieve the objective will be applied.

Smaller lines companies that are wholly owned by consumer trusts and where there is at least a 90 per cent overlap between the owners and customers will not be regulated in the same way as other lines companies, but will be required to disclose information about the operations of their business.
The test for whether regulation may be imposed will be focused on those areas of the economy where there is little or no competition or prospect of competition and where there is substantial scope for the exercise of market power. The Commission will be required to take into account the effectiveness of existing regulation or arrangements and although we may not have the wording quite right, the benefits of regulation in meeting the objectives of the (new) purpose statement will need to clearly exceed the costs of regulation. We have been advised that there may be a technical difficulty with the word ‘clearly’, but what we are trying to say is that a marginal cost benefit ratio would not be sufficient to warrant regulatory control being imposed.
The rules for how costs and prices should be calculated (input methodologies) will be spelt out in advance by the Commerce Commission. These decisions will be subject to merits review by way of appeal to the High Court.
When I announced that merits review would be included in the discussion paper, I said:

"As part of this process we will also be considering the question of merits review of Commerce Commission decisions. However, I do not wish to raise any particular expectation as to outcome. There is potentially considerable cost and delay associated with another layer of review, so I will be looking for evidence of significant public benefit. I was asked the question earlier this year – would merits review be on the table?

"The answer is yes. But I will be looking closely at the cost-benefit analysis before it goes any further than that".
By providing merits review for the decisions on the input methodologies, I think we have placed the discipline in the right place. I know that there are those who want merits review repeated or provided for at the end of each individual decision, but I don't agree. By placing merits review at the front end when the rules are set we get the certainty for all firms going into the process, hopefully reducing the potential for litigation in the longer term.

The new Part 4 is designed to achieve the right balance between providing businesses with incentives to achieve efficiencies, to seek innovation and to invest, within clearly defined rules, while protecting consumers from poor quality, restricted output, or unnecessarily high prices.

So that is a quick outline of the rationale behind the amended Commerce Act and a fleshing out of some of the changes. The Bill is only a few weeks away from introduction and as has been said on many occasions, the devil is in the detail. So I hope that you will welcome the effort that has gone into getting the detail right enabling you to focus your submissions on the substance of the proposals.

Conclusion

And that concludes my stocktake today of our regulatory environment in the context of competition law. In particular, I wanted to highlight the government's desire to take a fresh look at the way in which we regulate businesses that have natural monopoly characteristics.

I am confident that the changes will provide greater certainty to businesses, investors and consumers. They will also ensure that regulatory intervention is proportionate to the competition concerns and that business compliance costs are kept to a minimum. This will help businesses plan and make investments.

This review has not been about moving along the regulatory spectrum between the polarised construct of “light versus heavy-handed” regulation. It is establishing a quality regulatory regime that, first and foremost, is the best fit with our economy, given our country’s relative isolation, market size, geography, population and pool of resources.

Our competition law and regulatory framework needs to balance the trade-off between flexibility and certainty. We all want New Zealand to continue to grow on the world economic stage, so that domestically we prosper. This will involve an assessment from time to time of that trade-off, to make sure we have the balance right, to achieve our goals.

I look forward to the discussion that follows.

Thank you.


ENDS

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