Changes Good For Consumers - Bradford
Commerce Act changes announced today are good for consumers, Enterprise and Commerce Minister Max Bradford says.
"The changes will protect competition in markets and in doing so encourage downward pressure on prices and improvements in the quality of goods.
"By promoting competition, the changes encourage innovation and better consumer access to a wider variety of goods," he said.
Mr Bradford said the proposed amendments added to those already before Parliament.
"The additional changes underline the Government's commitment to achieving real, sustainable economic growth by creating an environment where competition can thrive," he said.
Competition Law Strengthened
Commerce Act changes to ensure competition law keeps track with New Zealand's increasingly open and diverse economy have been announced by Enterprise and Commerce Minister Max Bradford.
Mr Bradford said today the changes underlined the Government's commitment to achieving real, sustainable economic growth by creating an environment where competition can thrive.
He announced the Government would:
Further strengthen the Commerce Act's penalties and remedies for commercial behaviour that stifles competition. The Commerce Commission will be empowered to issue cease and desist orders.
Restore the strength of section 36 of the Commerce Act to pre-1992 levels, by incorporating the "high market power" concept into the definition of dominance.
This will make it easier for competitors of dominant firms to use section 36 to restore competition in their markets.
Parliament had always intended this to be the case, but successive court decisions have relied on a dictionary definition, rather than the intended economic test, of dominance, Mr Bradford said.
Set the threshold for mergers and acquisitions so that it allows scrutiny of all proposals that are potentially detrimental to competition in New Zealand markets.
This will allow the Commerce Commission to scrutinise mergers where "high market power" can be gained in a sector without a single firm gaining a high market share.
Where mergers do breach the new threshold, the changes will allow them to proceed if there are public benefits that outweigh the anti-competitive detriment.
Mr Bradford said the changes set a delicate balance between preventing dominant firms from using their market power to stifle or eliminate competition, while at the same time allowing those dominant firms to compete.
"Although, the Commerce Act has made an important contribution to making our economy more open and competitive, in some areas its rules can be improved further," he said.
"These latest measures add to the initiatives to strengthen the Act’s penalties and remedies already before Parliament.
"The changes will greatly benefit the competitive process and in so doing help facilitate innovation, inward investment and economic growth," Mr Bradford said.
The changes would be introduced through a Supplementary Order Paper, he said.
Commerce Act Changes
What Is The Commerce Act Designed To Do?
The Commerce Act 1986 aims to
promote competition in markets in New Zealand. It is the
primary legislative tool used to facilitate the competitive
process. It does this to secure gains in economic growth,
which are critical to improving the standard of living of
Why Do We Need To Improve The Effectiveness Of The Commerce Act?
New Zealand's economy has changed dramatically over the past decade. It is more open and competitive due to domestic deregulation and an increase in global competition. Competition has particularly increased in the tradeable sector of the economy. Successive Governments have sold most of the large state-owned enterprises, and whole sectors of the economy that were monopolies have been opened up to competition. Sector specific regulation of businesses has also been removed or greatly reduced.
These changes place a heightened reliance on the Act to promote effective competition in the non-tradeable sector. Inefficiencies in the non-tradeable sector creates less pressure on the tradeable sector for innovation and economic growth and is a tax on the tradeable sector. If we want to continue to succeed on the world’s markets we need to ensure that strong efficiency disciplines are brought to bear on the non-tradeable sector. The Commerce Act provides a mechanism to reduce the possibility that government regulation is not replaced with private regulation with the effect of reducing efficiency in the non-tradeable sector.
In some areas the Act’s rules need to be more effective in promoting competition. Section 36 needs to be strengthened to pre-1992 levels. It is the key prohibition in promoting competition in utilities markets, which are the core of the non-tradeable sector. The current threshold for mergers in section 47 cannot deal with some accumulations of market power, particularly in the non-tradeable sector, that can be detrimental to the economy. The Act’s penalties and remedies need to be higher to ensure compliance with the Act.
What Is The Extent Of The Change To Section 36?
Section 36 aims to prevent dominant firms from using their market power to prevent or eliminate competition, while at the same time still allowing those dominant firms to compete.
In utilities markets it is the key instrument relied on by competitors of dominant firms to gain access to essential facilities and compete effectively in related markets. While the importance of section 36 is not limited to ensuring access to essential facilities, it is its most important function. Anti-competitive conduct within utilities markets has the potential to inflict severe harm on the economy. Effective functioning of section 36 is vital.
Section 36 will be amended so that “dominance” is defined to mean “high market power”. It will be made clear that “use” is just a neutral connector between “dominance” and “purpose”. As well the amendments will ensure that “purpose” can be inferred from conduct or circumstances.
The amendments to section 36 are widely supported by the business community.
What Is The Problem With The Current Merger Threshold?
The current merger threshold requires that a single firm must be shown to be dominant in the market in which it operates. The threshold’s role is to identify for scrutiny those mergers that could be detrimental to the economy. However, the Act provides that such mergers can nevertheless be authorised if the merger is likely to generate public benefits that will outweigh the anti-competitive detriment.
Currently the threshold does not allow the Commerce Commission and the courts to scrutinise mergers where high market power can be obtained without a single firm gaining a high market share. It also does not address mergers that may facilitate collusion.
For example, the recent proposal by TransAlta to acquire Contact. The market power of that merged entity would arise from being a substantial “marginal price setter” in the wholesale electricity market. That is, the merged entity would be the price setter for a good part of the time regardless of the output and price decisions of more cost effective electricity producers. A study commissioned by the Ministry indicated that if that acquisition went ahead electricity prices would rise by up to 5% per annum over a five year period.
An example of the fact that collusion is still possible in a globalised market and that significant economic harm can result is the recent vitamin price fixing case against a number of international pharmaceutical companies. In that case Hoffman-La Roche agreed to plead guilty and pay a record $500 million criminal fine for leading the worldwide conspiracy to raise and fix prices and allocate market shares for certain vitamins sold in the United States and elsewhere. The conspiracy lasted from 1990 to February 1999 and affected the vitamins most commonly used as nutritional supplements. It affected more than $US 5 billion of commerce in products sold on the US market alone.
Petrol and banking are further examples of markets where mergers and takeovers of firms may have significant effects on the level of competition and prices, but which would not be subject to scrutiny under the current threshold.
In response to these issues the merger threshold will be recast to allow scrutiny of all mergers that threaten economic detriment. This will be done by:
recasting “dominance” to mean “high market
power” in the same way as for section 36;
moving the threshold away from just focusing on single firm dominance, to encompass the concept of “joint dominance”. “Joint dominance” recognises that in some oligopoly markets, market power can be held and used collectively to raise prices; and
making it clear that high market power does not necessarily require high market share.
These changes will in the future allow cases like the proposed TransAlta acquisition of Contact to be scrutinised.
What Mergers Would Have Been Stopped Under A Revised Dominance Threshold?
It is likely that the acquisition in the retail petrol industry of the Top Group and Solo by BP, in the early days of deregulation in the late 1980s, would have been blocked under the revised threshold. The threshold would have been triggered as the acquisition would have raised the potential for joint dominance as the acquisition took two maverick competitors out of the market.
It has never been envisaged that a revised merger threshold would 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 enable it to proceed.
How Are The Reforms To The Competition Thresholds Perceived By The Business Community?
Most of the members of the business community that made submissions on a Ministry discussion document stated that that “dominance” should be restored to its pre-1992 level for both section 36. The other changes to section 36 are also widely supported.
If We Get The Competition Prohibitions Right Why Strengthen Penalties And Remedies?
Having well-designed competition prohibitions is pointless if there are not sufficient incentives for market participants to comply with those prohibitions. Like any other legislative regime, the Commerce Act promotes compliance through penalties and remedies.
The current maximum penalty for bodies corporate is NZ$5 million. This is less than a day’s turnover for the largest firms.
Effective deterrence requires that penalties be set at a level that compensates for the fact that the probability of detection and prosecution is not 100% rather it is likely to be low.
To ensure that all firms have incentives to comply with the Act, the penalties and remedies need to be strengthened. The key change is to provide an alternative maximum penalty based on the value of the illegal gain. This will supplement the existing maximum of $5 million.
But Won’t Tougher Competition Law Discourage Foreign Direct Investment?
We want to encourage foreign direct investment that is efficiency enhancing. To do this an effective competition law is needed to ensure that foreign firms compete against local firms, rather than misuse their market power to eliminate or deter aggressive local competitors. We don’t want to encourage foreign investment that is attracted simply by the opportunity to exploit market power.
A study of the implications of adopting competition law for APEC by PriceWaterhouseCoopers found that while evidence is limited, there is a positive correlation between the existence of competition law in an economy and foreign direct investment flows.
A more competitive utilities sector is likely to make the New Zealand economy more attractive as an investment destination, not less.
Competition Policy Reform Under The National Government
This Government has taken a broad and comprehensive approach to promoting an open and internationally competitive economy. This approach builds on the programme of domestic economic liberalisation that commenced in the mid-1980’s. As well as ensuring that the Commerce Act is effective, the key reforms in the last two years that have enhanced competition in the economy are as follows.
Tariff reform – tariffs on motor vehicles were removed in 1998. The Government also completed a review of the tariffs on all other goods and all remaining tariffs will be phased out by 2006.
Opening the accident compensation market to competition – the Government has introduced competition between ACC and commercial insurers in the delivery of the Employers’ Account and insurance for the self-employed. Competition will, over time, improve accident prevention and get people back to work faster, so reducing costs.
Parallel importing – as part of a strategy to promote an open and internationally competitive economy, New Zealand removed the prohibition on parallel importing of copyright goods on 19 May 1998. The removal of the restriction on parallel importing has had a positive impact on the standard of living for most New Zealanders as:
the level of
competition has increased, with multiple sellers of the same
product competing for market share;
prices have fallen for a range of consumer goods; and
the range of goods available has increased.
Deregulation of postal services - the postal services market was opened to full competition in 1998. Previously NZ Post had a monopoly on all letters priced below NZ 80 cents. Since deregulation a total of 10 postal operators are now registered with the Ministry of Commerce, with many more companies providing courier and counter services around the country. Competition has lead to price reductions, for example small postal businesses in Kaikoura and New Plymouth offer across town delivery at a rate of 25% below the rate offered by NZ Post.
Producer Board Reform – in partnership with primary producers the Government has made decisions that will enable New Zealand’s key primary industries to re-position themselves to better respond to the challenges of the international market.
Improving the quality of regulation – the Government has shown its commitment to making it easier for businesses to do business. It is committed to introducing processes that will stop poor-quality regulation being introduced in the first place and to weed out unnecessary and dated laws e.g. a review of the Securities Commission is currently under way aimed at lowering the regulatory costs of the Securities Act. The Resource Management Act is to be amended to minimise opportunities to abuse the Act for private advantage.
Occupational regulation – significant progress has been made to reduce unnecessary regulation of occupations. The Government has decided to streamline the regulatory regime for lawyers and allow for conveyancing to develop as a separate occupation. This should reduce the direct costs to consumers of legal and conveyancing services. The Government has also reviewed the legislation governing electrical and gas workers and made decisions to improve efficiency and safety in this area.
Information disclosure in the gas industry - a review of the gas information disclosure regulations has occurred to ensure that the information is relevant, useful and is user friendly.
The Trans-Tasman Mutual Recognition Agreement has been implemented, thereby opening up many service markets to competition from Australia and providing increased opportunity for New Zealanders to compete in Australia.
Airport reform – the Airport Authorities Amendment Act was introduced to limit the potential for monopoly pricing by airport companies. Information disclosure regulations have been developed to expose any occurrence of monopoly pricing and inform the consultation process. The Government also sold its shareholding Wellington and Auckland airports.
The Government has also increased the funding for the Commerce Commission, the public enforcer of the Commerce Act, by $1.3 million.
Along with steps to make the economy more open and competitive the Government has not ignored the need to ensure that individual participants are appropriately assisted to success in an open economy. Key initiatives here include:
5 Steps Ahead which is a set of initiatives to enhance New Zealand’s competitiveness and take it forward into the knowledge economy.
Launch of the BIZ programme which aims to enhance the competitiveness of small and medium enterprises by improving their management skills.