The Commerce Committee has examined the Commerce Amendment Bill and recommends that it be passed with the amendments shown.
Introduction
This bill amends the Commerce Act 1986. In particular it focuses on reforming the regulatory control provisions in the Act. The bill aims to provide an efficient and credible regime to address the potential exercise of market power in markets where competition is not possible. Key amendments to the principal Act in the bill as introduced include the following:
a specific Part 4 purpose statement
a clearer test as to when regulation may be imposed
broadening the forms of regulation available under the Act to include information disclosure, a negotiate/arbitrate regime, and a default/customised price-quality path regime
requiring the Commerce Commission to determine input methodologies as soon as possible, and providing for merits review of methodologies
specific regulation for electricity lines, gas pipelines, and specified airport services.
Most submitters supported the general intent of the bill, considering that the proposed amendments to the principal Act would be likely to promote regulatory certainty and accountability.
This commentary covers the major amendments that we recommend. We also recommend minor technical amendments to clarify the intent of the bill, which are not discussed in this commentary.
New Part 4 purpose statement
New section 52A sets out a purpose statement for Part 4, which is aimed at safeguarding the long-term interests of consumers in markets where there is little or no competition, by promoting outcomes consistent with competition. This requires incentives for suppliers to invest and innovate, share the benefits of efficiency gains with consumers, limit excessive profits, improve efficiency, and provide services of the quality required by consumers.
Most submitters supported the purpose statement as drafted. Others argued that the primary objective in the purpose statement should be investment. Although we agree that incentives to invest are important, we consider they need to be balanced against the need to protect consumers from excessive prices.
When and how regulation may be imposed
We recommend amendments to subpart 2 of clause 4 of the bill as introduced to clarify when goods or services could be regulated and when regulation should be imposed.
Test for when regulation may be imposed
As introduced, new section 52F provides a new test for when regulation may be imposed. The three criteria of the test are that the goods or services must be supplied in a market where there is little or no competition; there must be substantial scope for the exercise of market power by the supplier; and the benefits of regulation must clearly exceed the costs of regulation. This test is clearer than the test it is intended to replace, but we consider that “clearly” in the third criterion is open to uncertain interpretation. We recommend amending new section 52F(1)(c) (clause 4) to replace “clearly” with “materially”, to make the test more precise.
We also recommend amending the second criterion, new section 52F(1)(b), to clarify that the mere existence of market power is not a problem, as firms have market power in many competitive markets. The problem occurs where there is substantial market power.
Some submitters argued that the circumstances when the Commission and the Minister “should” impose regulation should be set out, in addition to the “may” test under new section 52F. We note that the test in new section 52F is a minimum step in deciding whether regulation is permissible, and consider that the Commission and the Minister should have the discretion to consider wider issues when deciding whether to introduce regulation.
To improve clarity we recommend replacing the heading for new section 52F with the heading “When goods or services may be regulated”. New section 52H(1)(b) should make it clear that if the test under new section 52F is satisfied the Commission should then consider whether regulation should be imposed.
Consultation process
Some submitters argued that more detailed and prescriptive consultation requirements should be set out in the bill. We did not agree, as the consultation provisions are extensive and additional requirements might unnecessarily constrain the work of the Commission. We note that general administrative law requires the Commission to follow good processes.
Publicly available information
New section 52K sets out what is required when the Minister is considering a recommendation by the Commission to impose regulation. We recommend amending new section 52K to provide that if the Minister requested the Commission to provide additional information as to the detailed requirements that the Commission would apply under alternative regulation proposed by the Minister, the Minister’s request and the Commission’s response should be made publicly available.
We recommend amending new section 52L to provide that if the Minister’s decision for regulation is different from the Commission’s recommendation, the reasons should be made publicly available. The bill as introduced does not require the reasons for a contrary decision by the Minister to be published.
Input methodologies
We recommend the addition of new section 52S(1A) (clause 4) to ensure that input methodologies would be set out in sufficient detail to allow affected suppliers to reasonably estimate the impact on their business.
We did not agree with submitters who put forward a range of proposals for additional matters to be covered by input methodologies in new section 52S. Given that the Commission is already faced with a very large and demanding workload we consider that additional requirements would put pressure on the input-methodology process.
We recommend changing the term “pricing principles” to “pricing methodologies” in new section 52S(1)(a), and adding a definition of “pricing methodology” to new section 52C.
New section 52U sets out the Commission’s process for determining input methodologies. We recommend amending new section 52U(4) to require the Commission to consult interested parties on whether earlier work meets the requirements for developing input methodologies. The Commission should not be allowed to adopt previous work on input methodologies without consultation, as any such work might be inconsistent with the legislative framework proposed by the bill.
Appeals
Appeals on input methodologies
New section 52Y (clause 4) of the bill as introduced allows any person who has an interest in an input methodology determination the right to appeal to the High Court against the determination. We recommend amending new section 52Y to provide clearer guidance to the High Court on its role in considering appeals on input methodologies. In particular we recommend allowing the High Court to amend or substitute a new input methodology only if it would be “materially better” in achieving the purpose statements in new sections 52A and 52Q.
We also recommend amending new section 52X to make it clear that the seven-year timetable for reviews of input methodologies should run from the date the methodologies were published as set out under new section 52V.
Stages of appeal
Most submitters argued that appeals should be permitted against final decisions by the Commission. However, they differed as to whether such appeals should replace appeals on input methodologies, or be available in addition to them.
We have concluded that there is a good case for allowing appeals on the final decisions of the Commission on customised and individual price-quality paths. We also recommend retaining the right to appeal on input methodologies. As input methodologies would affect all parties, not just those subject to customised or individual price-quality paths, certainty on the rules as soon as possible would be essential for investment in infrastructure with long-life assets. We consider that if input methodologies could be appealed only in the context of final decisions, there would be considerable delays in finalising input methodologies, appeals would be much more complicated, and there would be a risk of persisting uncertainty because decisions on the rules would be case-specific.
We were concerned about possible gaming risks associated with allowing appeals on input methodologies and certain final decisions. New section 53 provides that input methodologies cannot be stayed while under appeal, and we recommend an amendment to new section 95 of the Act to achieve the same with respect to appeals against appealable final decisions.
Information disclosure regulation
We recommend amending new section 53A (clause 4) to clarify the purpose of information disclosure, which is to ensure that sufficient information would be provided to interested parties to assess whether the regulatory objectives set out in the purpose statement in new section 52A were being met. This ties the purpose of information disclosure more clearly to the new purpose statement under new section 52A.
Requirements for information disclosure regulation
New section 53C sets out regulatory provisions relating to goods and services subject to information disclosure. For the sake of clarity we recommend amending new section 53C to allow the Commission to require the disclosure of additional information, including terms and conditions relating to prices and quality performance measures and statistics, and to require independent audits of disclosed information.
We recommend amending new section 53D to allow the Commission the power to require the disclosure of consolidated information and financial performance measures where a business operates more than one regulated service. The bill as introduced does not deal well with multi-network utilities, such as joint gas pipelines and electricity lines businesses, in this respect.
New section 53F of the bill as introduced provides that if information disclosure is the only regulation to be applied to goods or services, then input methodologies regarding the cost of capital and pricing principles need not apply. We recommend adding a new definition of pricing methodology to new section 52C, and amending the reference to “pricing principles” in new section 53F to “pricing methodologies”. We recommend amending new section 53F(2) to make it clear that, while this exemption exists, the Commission could still require, under new section 53C(2), that suppliers disclose their methodologies for pricing and the cost of capital they were using. New section 53P(2) has also been amended to allow the Commission to use their own input methodologies for monitoring and analysing information.
Negotiate/arbitrate regulation
Arbitrator
New section 53J as introduced requires the arbitrator to determine a commercially fair and workable outcome. Submitters raised the risk that the arbitrator might focus only on the parties to the arbitration, rather than the interests of the end consumers of the regulated goods or services. We recommend amending new section 53J to make it clear that the arbitrator’s role would be to determine the outcome that promotes the purpose statement in new section 52A, rather than commercial fairness, as proposed by the bill as introduced. Furthermore we recommend that the arbitrator be required to have particular regard to the effect of arbitration on final consumers of the regulated goods or services.
New section 53I (clause 4) of the bill as introduced sets out the requirements for a determination by the Commission to apply negotiate/arbitrate regulation. Arbitration is about parties voluntarily submitting to an arbitrator to settle a dispute; and we have concerns over the potential conflicts between the various roles proposed by the bill for the Commission. We did not therefore agree with submitters to the effect that the Commission should be allowed to appoint itself as arbitrator.
Requirements for negotiate/arbitrate regulation
We recommend amending new section 53I(3)(c) to clarify that appeals to the High Court on arbitral awards would be limited to points of law, as parties do not normally have a general right to appeal on arbitral awards.
We recommend the addition of paragraph 2B to new section 53I to allow the Commission to extend the time allowed for negotiations if requested by any of the parties, as there might be good reasons for doing so.
New section 53I should also be amended so that where parties voluntarily undertook arbitration in an effort to reach a negotiated settlement, any of the Commission’s requirements for the application of negotiate/arbitrate regulation would not apply. This would give the parties more flexibility to determine the timeframes and terms of reference for arbitration. However we note that if the parties failed to reach agreement by the date set by the Commission, then the Commission’s rules would apply.
Submitters were concerned that new section 53J(2) specifies that nothing in the Arbitration Act 1996 applies to arbitration. We recommend clarifying this section to allow the Commission to draw on the provisions of the Arbitration Act when it is setting the terms of arbitration.
Default/customised price-quality regulation
Default price-quality regulation
We recommend new section 53M (clause 4) be amended to provide that for default price-paths to apply to a supplier, they must be set at least four months before they are to come into effect, as suppliers need advance notice of permitted prices in order to give notice to their customers.
We recommend deleting new section 53P(2)(c) to allow the Commission to use its statutory powers to obtain information for the purpose of setting default paths for electricity lines and gas pipelines. This restriction would no longer be required as a result of amendments clarifying that the Commission may not use comparative benchmarking on efficiency in order to set the default price-quality path.
We further recommend amending new section 53P(3)(b) to clarify that reset default prices for suppliers should be based on the suppliers’ current and projected profitability.
Content of price-quality paths
We recommend amending new section 53M to allow the Commission to include in price-quality paths penalties or incentives for individual suppliers to maintain and improve quality standards. Quality standards could be defined in any way the Commission considered appropriate, and might include reliability of supply, a reduction in energy losses, and voltage stability.
Customised price-quality regulation
We recommend the addition of new section 53WA to clarify what would happen at the end of a customised price-quality path. In particular it would require that the supplier move to the standard default applying to other suppliers. It would also require that any new start price be set at least four months before the default price-quality path came into effect. This would minimise uncertainty for suppliers and their customers.
New section 53Z sets out what would happen if the Commission had not decided on a customised price-quality path within 150 working days. To avoid uncertainty, we recommend new section 53Z(2) be amended to require the Commission to notify the supplier that the default price-quality path continues to apply, if the Commission considers the supplier has not complied with the Commission’s request for information regarding the customised proposal.
As introduced, new section 53ZA requires the Commission to re-consider price-quality paths when a material change in input methodologies occurs as a result of an appeal. We recommend that new section 53ZA be amended to require the Commission to reset price-quality paths and to apply a claw-back of any over- or under-recovery of revenue in these circumstances.
A consequential definition of “claw-back” is provided for in new section 52CA, which specifies that where the Commission requires a supplier to lower its prices the reduction must be spread over time; and if the Commission allows a supplier to recover any shortfall of revenue, this too must be gradual. Further consequential amendments are proposed to new section 53V(2)(b) and (c).
Regulation of electricity lines businesses
When and how regulation would apply
We recommend the addition of new section 54JA (clause 4) to allow the Commission to provide for a claw-back, if the application of an input methodology determined after 1 April 2010 would affect the price set in the default price-quality path.
Some submitters were concerned with the transitional timetables in the bill as introduced, arguing that incentives to invest could be undermined.
In particular they were concerned about the retrospective nature of the penalties in new section 54O of the bill as introduced, which provides for the pecuniary penalties and compensation set out in the new Part 4 to apply to breaches of thresholds after 1 April 2008. Submitters argued that this was inappropriate because the thresholds were set for screening purposes rather than as a price control mechanism.
We recommend that new sections 54M to 54P be replaced to provide that the old Part 4A processes and provisions would continue to apply until new default price paths were set from 1 April 2010. We consider that it is not appropriate for the new penalties and remedies to apply to breaches of the old regulatory regime.
Five electricity lines businesses submitted that a special regime should apply to them until they obtained customised price-quality paths. We consider that the amendments recommended above would make this unnecessary, since any breaches of thresholds before 1 April 2010 would be considered under Part 4A provisions as at present. When setting the default paths from 1 April 2010, the Commission could set new start prices for individual suppliers.
Submitters were also concerned about inconsistency between the date for setting default price-quality paths (1 April 2010) under new section 53P and that on which input methodologies for electricity lines businesses must apply (30 June 2010 or 20 December 2010 if the Minister agreed to an extension) under new section 52T.
We consider that while transitional timetables are difficult because of the trade-offs between getting the benefits of a new regime and allowing enough time to exit the existing regime, we were not convinced there was a better alternative. It is important that the new regime should come into effect as soon as possible so that suppliers could make customised proposals.
Transfer of jurisdiction
We recommend amending new section 54R to limit the power to transfer jurisdiction over lines services supplied by Transpower from the Commission to the Electricity Commission. As introduced, new section 54R gives the Governor-General the power to transfer jurisdiction for the regulation of all electricity lines businesses. Submitters raised a number of concerns with this provision; in particular they suggested that a lack of expertise regarding economic regulation might mean the Electricity Commission would rely on the expertise of the Commission, and problems could then arise where the Electricity Commission was considering the regulation of multi-network utilities while the Commission regulated gas pipelines.
We also recommend amending new section 54S so that when a transfer of jurisdiction took place, the Electricity Commission should apply the input methodologies determined by the Commission, except where modifications were required to meet the particular circumstances of Transpower. The need for expertise and processes would be minimised by requiring the use of input methodologies set by the Commission.
Interface with the Electricity Act 1992
New section 54V(2) sets out what the Commission must take into account before performing any of its functions or duties set out in new Part 4 of the bill as introduced. We recommend amending new section 54V(2) to require the Commission to take into account any obligations an electricity lines business might have to continue to supply to remote rural consumers under section 62 of the Electricity Act 1992. This would ensure that the Commission took into account the additional costs imposed by this obligation.
Exemption for consumer-owned electricity lines businesses
The bill as introduced provides for wholly consumer-owned electricity lines businesses to be subject only to information disclosure regulation and monitoring by the Commission. Some submitters supported the exemption for consumer-owned electricity lines businesses from price-quality regulation, while others argued that the exemption should be removed.
We consider the lighter-handed regulatory regime is suitable, as consumers own these electricity lines businesses and therefore are best placed to ensure the businesses act in their interests. We note that under new section 53B(2)(b) the Commission would be required to publish annual comparative performance information on all electricity lines business, which should ensure that consumers had the information necessary to effectively self-regulate the companies.
As introduced, new section 54C(1) defines a “consumer-owned” supplier. We recommend relaxing some of the qualifying criteria for consumer ownership of electricity lines businesses, to include multiple trust owners of electricity lines businesses, and to relax the requirement for income distribution to at least 90 percent of a supplier’s consumers. Our proposed amendments would make amalgamations of lines businesses easier, and would allow more trusts to qualify for exemption under the bill, thus reducing compliance costs and increasing benefits to consumer owners.
We recommend amendments to new section 54C(2) to the definitions of “customer trust” and “community trust”, in particular requiring that income distributions be made to at least 90 percent of a supplier’s beneficiaries. There is some uncertainty as to the scope of the definition as introduced, caused by the use of the words “substantially” and “largely” with respect to the requirements for income distributions.
New section 54H of the bill as introduced would allow the Commission to recommend to the Minister to apply price-quality regulation to consumer-owned electricity lines businesses, if it had received a petition from specified classes of the supplier’s customers requesting price-quality regulation. We recommend adding new subsection 3A to allow the Commission to rely on a reasonable estimate of the number of customers in a class, if the exact figures are not available.
Regulation of gas pipeline businesses
For the sake of clarity, we recommend that new section 55A(5) (clause 4) be amended to specify the criteria for adding or deleting gas pipelines from Schedule 6. Schedule 6 sets out specific gas pipeline exemptions from the new Part 4 regime.
When and how regulation applies
We recommend amending new section 55G to set the date for gas pipeline services, currently controlled by the Commerce (Control of Natural Gas Services) Order 2005, to transition to the new price-quality regime at 1 July 2012, or earlier if agreed with the Commission. As introduced, new section 55G provides for such gas pipeline services to continue to be regulated under Part 5 of the Commerce Act until 2016, after which time they would move to the new regime proposed by the bill. Our recommended amendments would allow those gas pipeline services to benefit from input methodologies and merits review of such methodologies at an earlier date.
New section 55F sets out how the initial default price-path would be set for gas pipeline services; in particular, if a supplier had increased its prices above the consumer price index in the period before the default price-path was set, the Commission could use its powers to determine the initial default price-path in any way that it saw fit. We recommend that new section 55F be amended, to clarify that the reference to prices in the section means weighted average prices, and to define the powers of the Commission more tightly.
Regulation of specified airport services
New subpart 11 of the bill as introduced imposes information disclosure regulation on specified airport services (at Auckland, Wellington, and Christchurch international airports). Submitters were divided on whether airport services should be included under the new regulatory regime. Some submitters supported the general intent of doing so, arguing that these airports clearly have market power and therefore should be subject to a more robust regulatory regime. Others opposed the inclusion of airports in new subpart 11 of the bill as introduced, arguing that the current provisions for regulating airports in the Airport Authorities Act 1966 are effective.
We consider that the information disclosure regime currently provided for under the Airport Authorities Act is not effective because there are no detailed rules on how disclosed information must be compiled, and there is no monitoring and analysis by a regulator of the disclosed information. We support the proposed inclusion of airports in subpart 11 of the bill as introduced.
We recommend amending new section 56A(2) to exclude subsidiaries of airport companies that have no role in the operation of the airport.
Regulation of port activities
We heard a proposal that particular port activities should be subject to regulation under the Commerce Act, on the grounds that some ports hold substantial market power in particular markets. As there has been no consultation and evidence is limited on the extent of any problem, we do not recommend including port activities in the bill. We note that the bill contains some generic tests and processes for considering whether regulation should be imposed and the form that regulation should take, which could be applied to port activities if necessary.
Penalties and remedies
We recommend amending new sections 86(4)(b) and 87(4)(c) (clause 15) to allow the Commission and the courts to consider whether breaches were deliberate, negligent, or inadvertent, when considering the amount of pecuniary penalty to impose for certain contraventions. Some submitters were concerned that unintentional breaches, which might not be inconsistent with the purpose statement, would be liable for the same penalties as deliberate breaches.
We recommend adding new section 79B (clause 12) to clarify the relationship between pecuniary penalties and criminal liability, so that once criminal liability proceedings had been determined an order to also pay a pecuniary penalty could not be made, and vice versa. As introduced, the bill appears to allow a supplier to be both liable for pecuniary penalties and criminally liable for the same breach.
Appendix
Committee process
The Commerce Amendment Bill was referred to the committee on 20 March 2008. The closing date for submissions was 9 May 2008. We received and considered 39 submissions from interested groups and individuals. We heard 28 submissions.
We received advice from the Ministry of Economic Development.
Commentary
Recommendation
The Commerce Committee has examined the Commerce Amendment Bill and recommends that it be passed with the amendments shown.
Introduction
This bill amends the Commerce Act 1986. In particular it focuses on reforming the regulatory control provisions in the Act. The bill aims to provide an efficient and credible regime to address the potential exercise of market power in markets where competition is not possible. Key amendments to the principal Act in the bill as introduced include the following:
a specific Part 4 purpose statement
a clearer test as to when regulation may be imposed
broadening the forms of regulation available under the Act to include information disclosure, a negotiate/arbitrate regime, and a default/customised price-quality path regime
requiring the Commerce Commission to determine input methodologies as soon as possible, and providing for merits review of methodologies
specific regulation for electricity lines, gas pipelines, and specified airport services.
Most submitters supported the general intent of the bill, considering that the proposed amendments to the principal Act would be likely to promote regulatory certainty and accountability.
This commentary covers the major amendments that we recommend. We also recommend minor technical amendments to clarify the intent of the bill, which are not discussed in this commentary.
New Part 4 purpose statement
New section 52A sets out a purpose statement for Part 4, which is aimed at safeguarding the long-term interests of consumers in markets where there is little or no competition, by promoting outcomes consistent with competition. This requires incentives for suppliers to invest and innovate, share the benefits of efficiency gains with consumers, limit excessive profits, improve efficiency, and provide services of the quality required by consumers.
Most submitters supported the purpose statement as drafted. Others argued that the primary objective in the purpose statement should be investment. Although we agree that incentives to invest are important, we consider they need to be balanced against the need to protect consumers from excessive prices.
When and how regulation may be imposed
We recommend amendments to subpart 2 of clause 4 of the bill as introduced to clarify when goods or services could be regulated and when regulation should be imposed.
Test for when regulation may be imposed
As introduced, new section 52F provides a new test for when regulation may be imposed. The three criteria of the test are that the goods or services must be supplied in a market where there is little or no competition; there must be substantial scope for the exercise of market power by the supplier; and the benefits of regulation must clearly exceed the costs of regulation. This test is clearer than the test it is intended to replace, but we consider that “clearly” in the third criterion is open to uncertain interpretation. We recommend amending new section 52F(1)(c) (clause 4) to replace “clearly” with “materially”, to make the test more precise.
We also recommend amending the second criterion, new section 52F(1)(b), to clarify that the mere existence of market power is not a problem, as firms have market power in many competitive markets. The problem occurs where there is substantial market power.
Some submitters argued that the circumstances when the Commission and the Minister “should” impose regulation should be set out, in addition to the “may” test under new section 52F. We note that the test in new section 52F is a minimum step in deciding whether regulation is permissible, and consider that the Commission and the Minister should have the discretion to consider wider issues when deciding whether to introduce regulation.
To improve clarity we recommend replacing the heading for new section 52F with the heading “When goods or services may be regulated”. New section 52H(1)(b) should make it clear that if the test under new section 52F is satisfied the Commission should then consider whether regulation should be imposed.
Consultation process
Some submitters argued that more detailed and prescriptive consultation requirements should be set out in the bill. We did not agree, as the consultation provisions are extensive and additional requirements might unnecessarily constrain the work of the Commission. We note that general administrative law requires the Commission to follow good processes.
Publicly available information
New section 52K sets out what is required when the Minister is considering a recommendation by the Commission to impose regulation. We recommend amending new section 52K to provide that if the Minister requested the Commission to provide additional information as to the detailed requirements that the Commission would apply under alternative regulation proposed by the Minister, the Minister’s request and the Commission’s response should be made publicly available.
We recommend amending new section 52L to provide that if the Minister’s decision for regulation is different from the Commission’s recommendation, the reasons should be made publicly available. The bill as introduced does not require the reasons for a contrary decision by the Minister to be published.
Input methodologies
We recommend the addition of new section 52S(1A) (clause 4) to ensure that input methodologies would be set out in sufficient detail to allow affected suppliers to reasonably estimate the impact on their business.
We did not agree with submitters who put forward a range of proposals for additional matters to be covered by input methodologies in new section 52S. Given that the Commission is already faced with a very large and demanding workload we consider that additional requirements would put pressure on the input-methodology process.
We recommend changing the term “pricing principles” to “pricing methodologies” in new section 52S(1)(a), and adding a definition of “pricing methodology” to new section 52C.
New section 52U sets out the Commission’s process for determining input methodologies. We recommend amending new section 52U(4) to require the Commission to consult interested parties on whether earlier work meets the requirements for developing input methodologies. The Commission should not be allowed to adopt previous work on input methodologies without consultation, as any such work might be inconsistent with the legislative framework proposed by the bill.
Appeals
Appeals on input methodologies
New section 52Y (clause 4) of the bill as introduced allows any person who has an interest in an input methodology determination the right to appeal to the High Court against the determination. We recommend amending new section 52Y to provide clearer guidance to the High Court on its role in considering appeals on input methodologies. In particular we recommend allowing the High Court to amend or substitute a new input methodology only if it would be “materially better” in achieving the purpose statements in new sections 52A and 52Q.
We also recommend amending new section 52X to make it clear that the seven-year timetable for reviews of input methodologies should run from the date the methodologies were published as set out under new section 52V.
Stages of appeal
Most submitters argued that appeals should be permitted against final decisions by the Commission. However, they differed as to whether such appeals should replace appeals on input methodologies, or be available in addition to them.
We have concluded that there is a good case for allowing appeals on the final decisions of the Commission on customised and individual price-quality paths. We also recommend retaining the right to appeal on input methodologies. As input methodologies would affect all parties, not just those subject to customised or individual price-quality paths, certainty on the rules as soon as possible would be essential for investment in infrastructure with long-life assets. We consider that if input methodologies could be appealed only in the context of final decisions, there would be considerable delays in finalising input methodologies, appeals would be much more complicated, and there would be a risk of persisting uncertainty because decisions on the rules would be case-specific.
We were concerned about possible gaming risks associated with allowing appeals on input methodologies and certain final decisions. New section 53 provides that input methodologies cannot be stayed while under appeal, and we recommend an amendment to new section 95 of the Act to achieve the same with respect to appeals against appealable final decisions.
Information disclosure regulation
We recommend amending new section 53A (clause 4) to clarify the purpose of information disclosure, which is to ensure that sufficient information would be provided to interested parties to assess whether the regulatory objectives set out in the purpose statement in new section 52A were being met. This ties the purpose of information disclosure more clearly to the new purpose statement under new section 52A.
Requirements for information disclosure regulation
New section 53C sets out regulatory provisions relating to goods and services subject to information disclosure. For the sake of clarity we recommend amending new section 53C to allow the Commission to require the disclosure of additional information, including terms and conditions relating to prices and quality performance measures and statistics, and to require independent audits of disclosed information.
We recommend amending new section 53D to allow the Commission the power to require the disclosure of consolidated information and financial performance measures where a business operates more than one regulated service. The bill as introduced does not deal well with multi-network utilities, such as joint gas pipelines and electricity lines businesses, in this respect.
New section 53F of the bill as introduced provides that if information disclosure is the only regulation to be applied to goods or services, then input methodologies regarding the cost of capital and pricing principles need not apply. We recommend adding a new definition of pricing methodology to new section 52C, and amending the reference to “pricing principles” in new section 53F to “pricing methodologies”. We recommend amending new section 53F(2) to make it clear that, while this exemption exists, the Commission could still require, under new section 53C(2), that suppliers disclose their methodologies for pricing and the cost of capital they were using. New section 53P(2) has also been amended to allow the Commission to use their own input methodologies for monitoring and analysing information.
Negotiate/arbitrate regulation
Arbitrator
New section 53J as introduced requires the arbitrator to determine a commercially fair and workable outcome. Submitters raised the risk that the arbitrator might focus only on the parties to the arbitration, rather than the interests of the end consumers of the regulated goods or services. We recommend amending new section 53J to make it clear that the arbitrator’s role would be to determine the outcome that promotes the purpose statement in new section 52A, rather than commercial fairness, as proposed by the bill as introduced. Furthermore we recommend that the arbitrator be required to have particular regard to the effect of arbitration on final consumers of the regulated goods or services.
New section 53I (clause 4) of the bill as introduced sets out the requirements for a determination by the Commission to apply negotiate/arbitrate regulation. Arbitration is about parties voluntarily submitting to an arbitrator to settle a dispute; and we have concerns over the potential conflicts between the various roles proposed by the bill for the Commission. We did not therefore agree with submitters to the effect that the Commission should be allowed to appoint itself as arbitrator.
Requirements for negotiate/arbitrate regulation
We recommend amending new section 53I(3)(c) to clarify that appeals to the High Court on arbitral awards would be limited to points of law, as parties do not normally have a general right to appeal on arbitral awards.
We recommend the addition of paragraph 2B to new section 53I to allow the Commission to extend the time allowed for negotiations if requested by any of the parties, as there might be good reasons for doing so.
New section 53I should also be amended so that where parties voluntarily undertook arbitration in an effort to reach a negotiated settlement, any of the Commission’s requirements for the application of negotiate/arbitrate regulation would not apply. This would give the parties more flexibility to determine the timeframes and terms of reference for arbitration. However we note that if the parties failed to reach agreement by the date set by the Commission, then the Commission’s rules would apply.
Submitters were concerned that new section 53J(2) specifies that nothing in the Arbitration Act 1996 applies to arbitration. We recommend clarifying this section to allow the Commission to draw on the provisions of the Arbitration Act when it is setting the terms of arbitration.
Default/customised price-quality regulation
Default price-quality regulation
We recommend new section 53M (clause 4) be amended to provide that for default price-paths to apply to a supplier, they must be set at least four months before they are to come into effect, as suppliers need advance notice of permitted prices in order to give notice to their customers.
We recommend deleting new section 53P(2)(c) to allow the Commission to use its statutory powers to obtain information for the purpose of setting default paths for electricity lines and gas pipelines. This restriction would no longer be required as a result of amendments clarifying that the Commission may not use comparative benchmarking on efficiency in order to set the default price-quality path.
We further recommend amending new section 53P(3)(b) to clarify that reset default prices for suppliers should be based on the suppliers’ current and projected profitability.
Content of price-quality paths
We recommend amending new section 53M to allow the Commission to include in price-quality paths penalties or incentives for individual suppliers to maintain and improve quality standards. Quality standards could be defined in any way the Commission considered appropriate, and might include reliability of supply, a reduction in energy losses, and voltage stability.
Customised price-quality regulation
We recommend the addition of new section 53WA to clarify what would happen at the end of a customised price-quality path. In particular it would require that the supplier move to the standard default applying to other suppliers. It would also require that any new start price be set at least four months before the default price-quality path came into effect. This would minimise uncertainty for suppliers and their customers.
New section 53Z sets out what would happen if the Commission had not decided on a customised price-quality path within 150 working days. To avoid uncertainty, we recommend new section 53Z(2) be amended to require the Commission to notify the supplier that the default price-quality path continues to apply, if the Commission considers the supplier has not complied with the Commission’s request for information regarding the customised proposal.
As introduced, new section 53ZA requires the Commission to re-consider price-quality paths when a material change in input methodologies occurs as a result of an appeal. We recommend that new section 53ZA be amended to require the Commission to reset price-quality paths and to apply a claw-back of any over- or under-recovery of revenue in these circumstances.
A consequential definition of “claw-back” is provided for in new section 52CA, which specifies that where the Commission requires a supplier to lower its prices the reduction must be spread over time; and if the Commission allows a supplier to recover any shortfall of revenue, this too must be gradual. Further consequential amendments are proposed to new section 53V(2)(b) and (c).
Regulation of electricity lines businesses
When and how regulation would apply
We recommend the addition of new section 54JA (clause 4) to allow the Commission to provide for a claw-back, if the application of an input methodology determined after 1 April 2010 would affect the price set in the default price-quality path.
Some submitters were concerned with the transitional timetables in the bill as introduced, arguing that incentives to invest could be undermined.
In particular they were concerned about the retrospective nature of the penalties in new section 54O of the bill as introduced, which provides for the pecuniary penalties and compensation set out in the new Part 4 to apply to breaches of thresholds after 1 April 2008. Submitters argued that this was inappropriate because the thresholds were set for screening purposes rather than as a price control mechanism.
We recommend that new sections 54M to 54P be replaced to provide that the old Part 4A processes and provisions would continue to apply until new default price paths were set from 1 April 2010. We consider that it is not appropriate for the new penalties and remedies to apply to breaches of the old regulatory regime.
Five electricity lines businesses submitted that a special regime should apply to them until they obtained customised price-quality paths. We consider that the amendments recommended above would make this unnecessary, since any breaches of thresholds before 1 April 2010 would be considered under Part 4A provisions as at present. When setting the default paths from 1 April 2010, the Commission could set new start prices for individual suppliers.
Submitters were also concerned about inconsistency between the date for setting default price-quality paths (1 April 2010) under new section 53P and that on which input methodologies for electricity lines businesses must apply (30 June 2010 or 20 December 2010 if the Minister agreed to an extension) under new section 52T.
We consider that while transitional timetables are difficult because of the trade-offs between getting the benefits of a new regime and allowing enough time to exit the existing regime, we were not convinced there was a better alternative. It is important that the new regime should come into effect as soon as possible so that suppliers could make customised proposals.
Transfer of jurisdiction
We recommend amending new section 54R to limit the power to transfer jurisdiction over lines services supplied by Transpower from the Commission to the Electricity Commission. As introduced, new section 54R gives the Governor-General the power to transfer jurisdiction for the regulation of all electricity lines businesses. Submitters raised a number of concerns with this provision; in particular they suggested that a lack of expertise regarding economic regulation might mean the Electricity Commission would rely on the expertise of the Commission, and problems could then arise where the Electricity Commission was considering the regulation of multi-network utilities while the Commission regulated gas pipelines.
We also recommend amending new section 54S so that when a transfer of jurisdiction took place, the Electricity Commission should apply the input methodologies determined by the Commission, except where modifications were required to meet the particular circumstances of Transpower. The need for expertise and processes would be minimised by requiring the use of input methodologies set by the Commission.
Interface with the Electricity Act 1992
New section 54V(2) sets out what the Commission must take into account before performing any of its functions or duties set out in new Part 4 of the bill as introduced. We recommend amending new section 54V(2) to require the Commission to take into account any obligations an electricity lines business might have to continue to supply to remote rural consumers under section 62 of the Electricity Act 1992. This would ensure that the Commission took into account the additional costs imposed by this obligation.
Exemption for consumer-owned electricity lines businesses
The bill as introduced provides for wholly consumer-owned electricity lines businesses to be subject only to information disclosure regulation and monitoring by the Commission. Some submitters supported the exemption for consumer-owned electricity lines businesses from price-quality regulation, while others argued that the exemption should be removed.
We consider the lighter-handed regulatory regime is suitable, as consumers own these electricity lines businesses and therefore are best placed to ensure the businesses act in their interests. We note that under new section 53B(2)(b) the Commission would be required to publish annual comparative performance information on all electricity lines business, which should ensure that consumers had the information necessary to effectively self-regulate the companies.
As introduced, new section 54C(1) defines a “consumer-owned” supplier. We recommend relaxing some of the qualifying criteria for consumer ownership of electricity lines businesses, to include multiple trust owners of electricity lines businesses, and to relax the requirement for income distribution to at least 90 percent of a supplier’s consumers. Our proposed amendments would make amalgamations of lines businesses easier, and would allow more trusts to qualify for exemption under the bill, thus reducing compliance costs and increasing benefits to consumer owners.
We recommend amendments to new section 54C(2) to the definitions of “customer trust” and “community trust”, in particular requiring that income distributions be made to at least 90 percent of a supplier’s beneficiaries. There is some uncertainty as to the scope of the definition as introduced, caused by the use of the words “substantially” and “largely” with respect to the requirements for income distributions.
New section 54H of the bill as introduced would allow the Commission to recommend to the Minister to apply price-quality regulation to consumer-owned electricity lines businesses, if it had received a petition from specified classes of the supplier’s customers requesting price-quality regulation. We recommend adding new subsection 3A to allow the Commission to rely on a reasonable estimate of the number of customers in a class, if the exact figures are not available.
Regulation of gas pipeline businesses
For the sake of clarity, we recommend that new section 55A(5) (clause 4) be amended to specify the criteria for adding or deleting gas pipelines from Schedule 6. Schedule 6 sets out specific gas pipeline exemptions from the new Part 4 regime.
When and how regulation applies
We recommend amending new section 55G to set the date for gas pipeline services, currently controlled by the Commerce (Control of Natural Gas Services) Order 2005, to transition to the new price-quality regime at 1 July 2012, or earlier if agreed with the Commission. As introduced, new section 55G provides for such gas pipeline services to continue to be regulated under Part 5 of the Commerce Act until 2016, after which time they would move to the new regime proposed by the bill. Our recommended amendments would allow those gas pipeline services to benefit from input methodologies and merits review of such methodologies at an earlier date.
New section 55F sets out how the initial default price-path would be set for gas pipeline services; in particular, if a supplier had increased its prices above the consumer price index in the period before the default price-path was set, the Commission could use its powers to determine the initial default price-path in any way that it saw fit. We recommend that new section 55F be amended, to clarify that the reference to prices in the section means weighted average prices, and to define the powers of the Commission more tightly.
Regulation of specified airport services
New subpart 11 of the bill as introduced imposes information disclosure regulation on specified airport services (at Auckland, Wellington, and Christchurch international airports). Submitters were divided on whether airport services should be included under the new regulatory regime. Some submitters supported the general intent of doing so, arguing that these airports clearly have market power and therefore should be subject to a more robust regulatory regime. Others opposed the inclusion of airports in new subpart 11 of the bill as introduced, arguing that the current provisions for regulating airports in the Airport Authorities Act 1966 are effective.
We consider that the information disclosure regime currently provided for under the Airport Authorities Act is not effective because there are no detailed rules on how disclosed information must be compiled, and there is no monitoring and analysis by a regulator of the disclosed information. We support the proposed inclusion of airports in subpart 11 of the bill as introduced.
We recommend amending new section 56A(2) to exclude subsidiaries of airport companies that have no role in the operation of the airport.
Regulation of port activities
We heard a proposal that particular port activities should be subject to regulation under the Commerce Act, on the grounds that some ports hold substantial market power in particular markets. As there has been no consultation and evidence is limited on the extent of any problem, we do not recommend including port activities in the bill. We note that the bill contains some generic tests and processes for considering whether regulation should be imposed and the form that regulation should take, which could be applied to port activities if necessary.
Penalties and remedies
We recommend amending new sections 86(4)(b) and 87(4)(c) (clause 15) to allow the Commission and the courts to consider whether breaches were deliberate, negligent, or inadvertent, when considering the amount of pecuniary penalty to impose for certain contraventions. Some submitters were concerned that unintentional breaches, which might not be inconsistent with the purpose statement, would be liable for the same penalties as deliberate breaches.
We recommend adding new section 79B (clause 12) to clarify the relationship between pecuniary penalties and criminal liability, so that once criminal liability proceedings had been determined an order to also pay a pecuniary penalty could not be made, and vice versa. As introduced, the bill appears to allow a supplier to be both liable for pecuniary penalties and criminally liable for the same breach.
Appendix
Committee process
The Commerce Amendment Bill was referred to the committee on 20 March 2008. The closing date for submissions was 9 May 2008. We received and considered 39 submissions from interested groups and individuals. We heard 28 submissions.
We received advice from the Ministry of Economic Development.
Committee membership
Gerry Brownlee (Chairperson)
Gordon Copeland (Deputy Chairperson)
Dave Hereora
Hon Darren Hughes (until 2 April 2008)
Hon Luamanuvao Winnie Laban
Simon Power
Hon Mita Ririnui (from 2 April 2008)
Hon Paul Swain
Lindsay Tisch
Dr Richard Worth