Chapter 3: Potential Issues With the Current Regime
36. Experience with two regulatory control inquiries (into airports and gas pipelines services) and the evolution of the Part 4A electricity lines thresholds regime have highlighted a number of potential issues with the current regulatory control provisions. The issues with the Part 4A thresholds regime are discussed further in Chapter 10, where the question of whether or not the thresholds regime should be retained is considered in greater detail.
Are policy objectives sufficiently clear?
37. The generic regulatory control provisions (those in Parts 4 and 5) do not have a specific purpose statement. In addition, while the Act is relatively clear on the test for when control may be imposed,3 it is silent on criteria for when control should be imposed, leaving this decision for judgement by the Minister.
38. The absence of a specific purpose statement gives rise to debate around the objectives of the regulatory control provisions. The regulatory provisions do not fit easily with the overall purpose of the Commerce Act ("to promote competition in markets for the long-term benefit of consumers within New Zealand") because Parts 4 and 4A of the Act relate to markets where it would not be economic to promote and/or achieve effective competition.
39. Furthermore, the two regulatory control inquiries to date have highlighted uncertainty about the policy intent of the regulatory provisions. In particular, there has been debate around whether the Act requires consideration of economic efficiency only, or whether distributional considerations (e.g. the incidence of costs and benefits between consumers and producers) should also be taken into account, and if so the relative weighting between consumer protection and economic efficiency objectives. The overall purpose statement of the Act has been interpreted by the courts in decisions relating to other parts of the Act to be an efficiency test, and, in the absence of a specific purpose statement for the regulatory control provisions, it has been argued that a similar approach should apply to interpreting the purpose of the regulatory control provisions.
40. Overall, there appears to be inadequate clarity and certainty concerning the legislative tests for economic regulation.
41. Part 4A does have a specific purpose statement (s 57E of the Act). However, some commentators argue that the purpose statement is unclear and/or may not be appropriate. In particular, s 57E does not refer to incentives to invest.
Are decision-making processes efficient?
42. The current Act requires separate processes and decisions on whether and how control should be imposed. This means that the decision on whether to control will be based on incomplete information regarding how control would be applied. Furthermore, the separation is arguably time-consuming and costly as it requires two, largely duplicative, processes. As such the regulatory processes may be more cost-effective and timely if the decisions on whether and how to impose regulation are considered concurrently.
Is there regulatory uncertainty?
43. The Commerce Act currently does not require that key technical decisions relating to how regulation will be imposed (e.g. type of control, how to determine rates of return and asset valuation), be set in advance of control inquiries and the imposition of control. Furthermore, the Act does not require that specific processes, such as consultation requirements, be followed in setting and amending such methodologies. This may create uncertainty for businesses (because it is difficult to predict regulatory outcomes) and lead to concerns that the Commerce Commission has the ability to settle on and change methodologies "as it goes".
Are there constraints on regulatory approaches?
44. Arguably, the existence of the thresholds regime in Part 4A, and the Commerce Commission's use of a certain methodology to set thresholds, has the effect of constraining the methodologies that the Commission may use to set control terms under Part 5. This is notwithstanding that Part 5 (s70) allows the Commission to use "whatever approach it considers appropriate".
45. Thus, arguably, the Commission does not have a full "toolbox" of regulatory approaches available to it under Part 5 because the approach needs to be different from those used under Part 4A. In particular, because control under Part 5 may be perceived to be a "penalty" for breaches of the Part 4A thresholds, control under Part 5 is seen as needing to be relatively "heavy handed".
Are there sufficient regulatory accountability mechanisms?
46. The Commerce Commission's decisions to recommend and impose regulatory control are generally subject to judicial review only, although there is a right to appeal on a question of law against the Commission's authorisation or provisional authorisation. There may therefore be insufficient regulatory accountability.
47. Regulatory decisions are complex and often require difficult judgements. A key design parameter of an effective regulatory regime is therefore to ensure that accountability mechanisms provide strong incentives for high-quality decision making by the regulator, error correction, and guidance to the regulator and stakeholders (so that the quality of decisions improves over time, and the regime is more predictable for those affected by it).
48. While judicial review provides an important check on the regulator's decision and process, it can be argued to be insufficient because it does not provide for a check of the substance and reasoning of the decision itself.
Is the Part 4A thresholds regime meeting its design objectives?
49. The evolution of the thresholds regime has highlighted several potential issues, including:
- uncertainty resulting from breaching a price or quality threshold (a breach of a threshold, including technical and/or historical, may lead to an inquiry into whether or not control under Part 5 of Act should be imposed);
- the inability for firms to seek ex ante approvals for major capital expenditure (the methodology to set price and quality thresholds used by the Commission is based on sector averages and has to date been largely backward-looking);4 and
- potentially wrong targeting (firms with a too-easy threshold are able to price up to that level while firms subject to a threshold that is too tough for their individual circumstances are most likely to breach, resulting in subsequent regulator focus potentially being on the wrong firms).
50. These issues may be inherent features of a thresholds regime, since the more that thresholds applying to individual firms are customised for particular circumstances the more this form of regulation becomes the same as conventional firm-specific price control.
51. The question of whether the Part 4A regime should be retained is considered in detail in Chapter 10.
Questions for submitters: Chapter 3
Q1. Does the above list capture the main issues with the current regulatory regime?
Q2. Are these issues adequately identified and described?
Q3. Are there are any other issues with the current regime that are not listed above and should be considered as part of this review?
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