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199. The section outlines the processes for amending and enforcing control terms, irrespective of whether control is imposed on a firm or sector.

11.1 Process for "re-opening" control terms within a regulatory period

200. Once control terms are proposed, accepted and set, there is a question of whether there should be an opportunity, under some circumstances, for either the regulated firm or the Commission to re-open the control terms prior to the end of the regulatory period.

201. Relevant considerations include:

• Disallowing the re-opening of the control terms would likely to be timelier, more cost-effective and create incentives for both the regulator and the regulated entity to "get it right" in the first instance;
• Disallowing re-opening also creates stronger incentives for the regulated firm to make efficiency gains (noting that customers benefit when the price/revenue path is re-set); but
• There are risks for the regulated firm that the control terms may prove too tough, which results in a higher cost of capital than otherwise;
• Note that it is proposed that cost increases outside a firms' control be accounted for under the pass through costs methodology (see Chapter 8).

202. Given the need for timely and cost-effective regulatory processes, and noting that factors that are outside of firms' control will be accounted for as part of pass through costs methodology, it is proposed that both the regulator and the regulated firms are only provided with an opportunity to re-open the control terms within a regulatory period under very limited circumstances.

203. For example, it may be desirable to allow control terms to be re-opened in exceptional circumstances such as:

• force majeure events (e.g. an extreme storm that caused significant damage to infrastructure); or
• where control terms have been set based on a presumption of a certain level of capital expenditure that, for reasons beyond the firm's control, will no longer go ahead during the regulatory period.

11.2 Enforcement of the penalty/remedy regime

204. The regulatory control regime needs to provide for the enforcement of penalties that result from a breach. As such, decisions have to be made with respect to the appropriate institutional arrangements for investigating breaches and the extent of penalties required to remedy any such breach.

Who should investigate a possible breach and decide on the penalty?

205. There are several bodies that could, if required, undertake the function of investigating a breach and imposing penalties, these include:

1. The Commerce Commission;
2. The Government/Minister;
3. An independent expert panel (e.g. similar to the Rulings Panel provided for by the Electricity Act 1992);¹⁹ or
4. The courts.

206. In considering these options the following factors should be taken into account:

• Both the government and the courts may lack the appropriate regulatory expertise to easily identify the nature and causes of a breach. With respect to the latter, however, there may be the option of appointing a lay member with the appropriate expertise to the court;
• The courts have experience/expertise in applying and enforcing penalties;
• There would likely be issues around institutional capacity if an independent body (in addition to the Commerce Commission) was to be set up in New Zealand; and
• There may be a perceived lack of checks and balances if the body imposing the penalty is the same as the body imposing control terms, though this could be mitigated through the design of the decision-making process.

207. On balance, the Ministry proposes that the Commerce Commission should continue to have responsibility for identifying breaches and enforcing penalties and/or remedies. The Commission has the requisite regulatory expertise and is well placed to understand the nature and causes of a breach.

208. To minimise the risk of insufficient checks and balances, extra legislative guidance and the requirement for separation between penalty design and enforcement could be provided for.

209. The level of discretion/guidance comes down to a trade-off between certainty and flexibility:

• Less guidance/more discretion implies greater flexibility for the decision-maker to adjust consequences to firm specific circumstances;
• More guidance/less discretion implies greater certainty for firms and the decision-maker as to what will and what should happen in the event of a breach.

210. We propose that the Act should provide extra guidance on the matters that the Commerce Commission should have regard to in undertaking this task. For example, ensuring that the penalty/remedy regime:

• is proportionate to the harm caused by the breach;
• acts as a deterrent to future breaches; and
• ensures firms are held accountable to investments that were provided for as part of the control terms.

211. Requiring the Commission to set the consequences of a breach at the time control terms are set would have the following benefits and costs:

• Certainty and predictability would be improved for businesses, the regulator and Government, as to the consequences of a breach;
• Transparency of decision-making process would be improved through the separation of penalty/remedy design and enforcement; but
• There would be less flexibility to account for changing circumstances.

212. On balance, the Ministry considers that the Act should require the Commission, when imposing control terms, to include detail on the consequences of a breach.

213. Merits review of penalties is also proposed (see Chapter 12).