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Dalziel: Commerce Amendment Bill – First Reading

Commerce Amendment Bill – First Reading Speech

I move that the Commerce Amendment Bill be now read a first time.

Madam Speaker, at the appropriate time I intend to move that the bill be considered by the Commerce Committee and the committee report finally to the House on or before 22 July 2008.

This Bill comprises a new Part 4 of the Commerce Act, replacing Parts 4 and 4A of the current Act, and amending related sections of Parts 5 and 6.

In summary, the new Part 4:

• Puts in place a forward-looking purpose statement for the regulation of services not faced with competition
• Improves the test and processes for considering whether to regulate such services
• Provides for the upfront development of rules, processes and procedures (called "input methodologies") so that businesses get certainty over what to expect
• Provides for alternative, lighter-handed forms of regulation as fit-for-pupose alternatives to price control, and
• Puts in place improved regulatory regimes for electricity lines, gas pipelines and the three main international airports.

The Bill also upgrades penalties, offences and remedies provisions and improves the working of some parts of the restrictive trade practices provisions.

This Bill is primarily a back-to-basics re-write of the price control provisions of the Commerce Act 1986. It has drawn on best-practice regulation in other OECD countries, and it has benefited greatly from three rounds of consultation with stakeholders over the last 18 months.

The main objective of the Bill is to provide for efficient and cost-effective regulation of the price and quality of key goods or services which are not subject to competition.
In practice there is a very limited number of services which fall into this category. They are the important infrastructure services: electricity lines, gas pipelines and airports.

All countries in the OECD regulate these types of services because they are essential and because, in the absence of regulation, suppliers could charge excessive prices or provide poor quality service. So the issue is not whether or not we need powers to regulate these types of services, but rather, have we got in place the appropriate regulatory framework to ensure we get the benefits consumers would expect from a competitive market, as well as the investment in innovation and infrastructure that this country needs?

In other words, how do we balance the need to protect consumers from excessive prices while ensuring that suppliers have incentives to invest, innovate and improve efficiency, so we can be assured of reliable, efficient supply over the long term?

I believe that the new Bill gets this balance right, and makes significant improvements to the current legislation.

Purpose statement

For the first time, the Bill puts in place a purpose statement for economic regulation. The absence of a purpose statement in the current Part 4 has led to uncertainty as to the objective of this form of regulation.

The new purpose statement makes it clear that the objective is the long term benefit of consumers of goods or services which are not faced with competition or the likelihood of a substantial increase in competition. It aims to do this by promoting outcomes consistent with those produced by competitive markets, including providing incentives to invest, innovate and make efficiency gains, while requiring suppliers to share gains with consumers and to limit excessive profits.

Test for when regulation may be imposed.

The Bill upgrades the test for when regulation may be introduced. Specifically, it requires that:
• There is little or no competition and no likelihood of a substantial increase in competition, and
• There is substantial scope for the exercise of market power, taking into account the effectiveness of existing regulation or arrangements (including ownership arrangements), and, most importantly
• The benefits of regulating clearly exceed the costs and risks of regulating.

In contrast to the current Act, goods or services may not be regulated unless the Minister has the benefit of advice from a full inquiry by the Commerce Commission. Decisions on whether, and how to regulate rest with the Minister of Commerce in consultation with the relevant sector Minister.

Getting the rules right

A major improvement to the current regime is the provision that will require the Commerce Commission to develop, as a priority, the rules, requirements and procedures, collectively called "input methodologies", for regulation. Businesses have complained about a current lack of certainty and predictability about the rules on crucial matters like how to calculate the cost of capital, value assets and allocate common costs.

The Bill requires the Commission to set input methodologies for electricity lines, gas pipelines and airports by 30 June 2010.

In recognition of the importance of the rules we are providing for merits review by way of a right of general appeal on input methodologies. Appeals will be to the High Court sitting with expert lay members. Appeals must be submitted within 20 working days and will be limited to consideration of the material and documentation before the Commission.

The original Cabinet decision had a narrower form of merits review, however I was persuaded to broaden the criteria particularly as the input methodologies have been the focus of all the litigation in the past, and it is important that we get that right. There is a question why there is no second right of appeal on individual cases, however I believe this would create a risk of gaming. This is why we have only provided for appeals on points of law for final Commission decisions relating to specific firms.
Most disputes about final decisions are in fact disputes about what the rules or input methodologies should be, so it is much more important to provide full appeal rights on the rules, rather than on the implementation of the rules. We also saw the need to retain a balance between providing accountability for the regulator and allowing it to get on with its job rather than being tied down with litigation.

New, fit-for-purpose regulatory powers

One of the limitations of the current Act is that it provides for price control as the sole response to the exercise of market power by suppliers with natural monopoly characteristics. The government considers that other more appropriate regulatory options should also be available.

Accordingly, the Bill provides for the power to put in place the following alternative forms of regulation:

Firstly, information disclosure. This is a relatively non-intrusive form of regulation, which requires regulated firms to disclose information to the light of day about their costs and prices, asset management plans, future intentions and the like.

Secondly, a new negotiate/arbitrate form of regulation is provided for. This requires a supplier to negotiate prices and supply agreements with its customers, with mandatory arbitration if they cannot agree. This form of regulation has proven successful overseas in encouraging the parties themselves to hammer out agreements that best suit their requirements.

The processes and procedures for the negotiation and any arbitration would be set by the Commerce Commission, and the Commission also appoints an arbitrator if the parties cannot agree on one.

Thirdly, the Bill provides for a new form of regulation called default/customised regulation. This replaces the current thresholds regime contained in Part 4A.

This requires the Commerce Commission to set a default price-quality path for regulated suppliers for 5 year periods.
The start price may be existing prices or amended prices, with the rate of change in prices determined by the consumer price index less a requirement for productivity improvement, based on long run productivity improvement rates for the sector.

Suppliers may apply to the Commission for a customised price-quality path if they have special requirements, such as needing to make significant new investments.

Sector-specific provisions

The Bill provides specific sub-parts covering the three sectors which are currently subject to economic regulation, namely electricity lines businesses, gas pipelines and airports.

On electricity lines businesses, the government has decided that 100 percent consumer-owned businesses (numbering about 16) should be subject only to information disclosure regulations. This is because the consumers, as owners, are able to influence the rates of return and price-quality trade-offs made by the business. However, as a safeguard, consumers will be able to petition the Commerce Commission if they consider the business should be put on the default/customised regime.

The remaining lines businesses (about 11 in total) will be subject to the new default/customised regime (as well as information disclosure), instead of the Part 4A thresholds regime. The replacement of Part 4A is expected to provide much more certainty for businesses, including giving them an up-front opportunity to get approvals for customised price-quality paths to cover the cost of a step-change in investment requirements. The Bill provides detailed transitional arrangements to the new regime.

As part of the new electricity lines regime, the Commission will be required to provide incentives to improve energy efficiency and demand-side management, and to reduce energy losses, as part of the Government's commitment to address climate change.

Secondly, on gas pipelines, the pipelines of Powerco and Vector (Auckland) will continue to be under price control until 2016 or any earlier date agreed with the Commerce Commission, at which time they will go on to a default/customised regime. Other gas pipelines will be subject to a default/customised regime and a new information disclosure regime from 1 July 2010.
Thirdly, airports. Airport companies are currently subject in varying degrees to information disclosure under the Airport Authorities Act 1966. The Bill however puts the Auckland, Wellington and Christchurch international airports on to an enhanced information disclosure regime under the Commerce Act from 1 July 2010. The Commission will monitor disclosed information and report to Ministers after 2012 whether the information disclosure regime is effective.

Penalties and remedies

The Bill provides for a range of pecuniary penalties and offences, to be applied by the courts, for breaches of regulatory requirements. It also provides for compensation for breaches of price-quality paths and for injunctions. These provisions replace current powers which enable the Commission to impose penalties and remedies without reference to the courts.

Section 69A undertakings on mergers

We have taken the opportunity in this Bill to address a couple of minor matters under Part 5 relating to undertakings that have been accepted as part of a merger clearance or authorisation decision. As well as providing for the Commission to approve minor variations to undertakings, new prohibitions for contravening undertakings are also established. These amendments improve the effectiveness of undertakings as a means to address competition concerns resulting from mergers.


This Bill is a major improvement in the way we think about and regulate basic services which are not subject to competition. It applies best-practice approaches from around the world. The proposed new provisions have been widely welcomed by businesses as providing them with more certainty, predictability and incentives to invest. In my view it achieves a better balance than we have at the moment between ensuring that businesses are prepared to invest and innovate and protecting consumers.

I commend this Bill to the House.

Note: At the end of the first reading speeches and after the Speaker has taken the vote on the first reading, the Minister then moves:

Madam Speaker, I move that the bill be considered by the Commerce Committee and the committee report finally to the House on or before 22 July 2008,


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