Chapter 12: Accountability Mechanisms
12.1 Background
214. Regulatory decisions have wide ranging implications that affect the rights and interests not only of businesses in regulated markets but also those of the wider community.
215. The purpose of regulatory accountability arrangements is therefore to support good quality regulatory outcomes. Because regulatory decisions are complex and often require difficult judgements, some mistakes may be made. 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 (so that any incorrect decisions are likely to be reviewed and re-considered), and guidance for the regulator and stakeholders (so that the quality of decisions improves over time, and the regime is more predictable for those affected by it). If the accountability arrangements are not sufficient, errors are more likely to occur, and uncertainty is likely to be greater.
216. Policy decisions made by politicians are subject to contestable advice from different Government agencies, various forms of Parliamentary scrutiny, judicial review and the overall political accountability of democratic processes. We propose that these mechanisms are sufficient to ensure that regulatory decisions made by Ministers are appropriately scrutinised.
217. We have also proposed to make a clear distinction between making rules and applying them to individual cases, with the aim of ensuring improved transparency of regulatory processes. However, improved transparency does not always provide parties directly affected by a poor-quality decision with a means of redress. This section therefore examines what appeal rights are appropriate for the regulator's decisions.
218. There are different forms of review and/or appeal mechanisms and each addresses different types of error:
- Judicial review provides a check on the regulator's decisions and processes. The grounds for review can be broadly characterised as illegality (including acting outside the scope of its powers or making errors or law), unfairness (including breach of natural justice and poor process) and unreasonableness.
- In some contexts, judicial review is supplemented with merits review. Merits review is a review of the substance and reasoning of the decision itself. It requires a person, or a body (other than the primary decision-maker) to reconsider the facts, law, reasoning and other relevant aspects of the original decision, and determine the correct and preferable decision. The process of review may be described as "stepping into the shoes" of the primary decision-maker. The result of merits review is the confirmation or variation of the original decision, or a requirement that the primary decision-maker reconsider all or part of its decision. As discussed later in this chapter, there are various forms of merits review, ranging from appeals on a question of law only through to a full "de novo" rehearing.
219. The two options to ensure that regulator's decisions are subject to sufficient accountability mechanisms, therefore, are:
- judicial review only; or
- some form of merits review in addition to judicial review.
Current provisions
At present the Commission's decisions to recommend and impose regulatory control (and to set thresholds for electricity lines businesses) are subject to judicial review only. Authorisations made under ss 70 and 71 are appealable on matters of law, which also provides a check on the quality of the decision making process. However, no review on merits is provided for by legislation.
Decisions made by the Commerce Commission in relation to clearances and authorisations of mergers and acquisitions, and authorisations of trade practices, are subject to merits review. Appeals are heard by a High Court Judge sitting with a lay member (usually an economist). (There is a further right of appeal to the Court of Appeal, with the leave of the High Court or Court of Appeal. Leave can be sought to appeal from the Court of Appeal to the Supreme Court if the criteria in the Supreme Court Act 2003 are satisfied.) The form of merits review for these decisions is an "appeal by way of rehearing",20 key features of which are:
- the onus is on the appellant to show that the decision of the regulator was wrong in some material way;
- the Court recognises that the expertise and resources of the Commission equip it, rather than the Court, to be the primary fact-finding and adjudicative body. The Court will give considerable weight to the advantages enjoyed by the Commission, and will show some deference to its conclusions unless persuaded that they are wrong. On the other hand, the Court is not merely a "rubber stamp";21
- further evidence can be introduced at the appeal stage only with the leave of the Court. Leave will not be granted unless the evidence is "fresh" (i.e. was not placed before the Commission, and could not reasonably have been placed before the Commission) and material. In practice this means that limited updating evidence about recent developments is often filed, and in a few cases there has also been economic evidence addressing the implications of that updating evidence. The Courts have emphasised the importance of this rule for ensuring that the first hearing is not merely a "dummy run", with the appeal turning into a new trial with large quantities of new material;22
- the Court can confirm the Commission's decision, or send the matter back to the Commission for reconsideration, or modify or reverse the Commission's decision. 23
Some commentators argue that the safeguard of judicial review is not sufficient, because it does not look into the substance of the regulator's decision, and that it should be supplemented with merits review of regulatory decisions. They argue that the experience of merits review of Commission decisions relating to mergers and acquisitions and trade practices has been a positive one, and that merits review could provide similar benefits in the regulatory context.
12.2 Should regulatory decisions be subject to merits review?
220. While judicial review addresses issues of natural justice and poor processes, it may be considered insufficient to ensure high quality regulatory outcomes.
221. Availability of merits review, in addition to judicial review, may result in the following benefits:
- strengthening incentives for high quality analysis and decision-making by the regulator;
- correcting poor quality decisions in individual cases;
- providing principles and guidance for future cases; and
- reducing the incentive or need for resort to political processes/lobbying.
222. However, the following issues are likely arise if merits review is provided for regulatory decisions:
- Additional costs, including:
- costs of litigation for both the Commission and businesses;
- extra funding required by the Commission to ensure that they "get it absolutely right" in the first instance. Note that while this may improve the Commission's chances of having their original decision confirmed by the review body, it will not necessarily reduce the likelihood of firms seeking review of its decision.
- Delays to regulatory processes.
- Potential for simply different (rather than better) outcomes, as different experts may come to different conclusions.
- Incentives for regulated businesses to "game" the system in search of the ultimate decision maker.
223. Thus, while availability of merits review may improve quality of and confidence in the regulatory decision-making, this may come at a substantial cost. Therefore, if merits review is provided for, it will need to be designed in such a way that the impact of cost and delay factors is minimised.
224. The following sections outline possible measures that could be considered in an attempt to limit merits review provisions (if introduced).
12.3 Which regulatory decisions should be open to merits review?
225. If merits review of regulatory decisions is provided for, then decisions would have to be made on what elements of the regulatory regime should be subject to merits review.
226. If the proposals, as outlined in this paper are implemented, the Commerce Commission will have responsibility for making the following decisions:
- Recommending methodologies for calculating key design parameters of the regime such as WACC, allocation of common costs, pass through costs, etc.
- Undertaking an inquiry and making recommendations to the Minister on the questions of whether control should be imposed.
- Setting the control terms for individual firms.
- Approving or determining the (final) customised control terms (where a proposal is submitted).
- Imposing penalties for individual breaches.
227. The Australian Administrative Review Council identifies decisions that are unsuitable for merits review.24 These are:
- legislation-like decisions of broad application which, by their nature do not affect the interest of any one person and which are subject to the accountability safeguards that apply to legislative decisions; and
- decisions that automatically follow from a statutory obligation to act in a certain way upon the occurrence of a specified set of circumstances (which leaves no room for merits review to operate).
228. The Council also identifies some additional factors that may justify excluding merits review. Among these are:
- preliminary or procedural decisions;
- recommendations to ultimate decision-makers;
- decisions of a law enforcement nature; and
- decisions with limited impact.
229. The New Zealand Legislation Advisory Committee has also issued some guidance on when regulatory decisions should be subject to appeal and review rights. The Committee's Guidelines 13.1.1 states that:
"It is generally desirable for legislation to provide a right of appeal against the decisions of officials, tribunals and other bodies that affect important rights, interests or legitimate expectations of citizens. The reasons for providing an appeal are to correct error and to supervise and improve decision-making. However, the value of having an appeal right must be balanced against the following factors:
- Costs;
- Delay;
- Significance of the subject matter;
- The competence and expertise of the decision-maker at first instances;
- The need for finality.
It will usually be appropriate to respond to concerns about cost and delay by limiting the scope of any right of appeal, rather than denying it altogether."
230. Input methodologies by and large are not envisaged to be directed towards the circumstances of particular persons/firms, but will apply generally to businesses in a given sector/economy. In addition, if set by the Minister, who is subject to political accountability mechanisms, the decisions on input methodologies may not need to be merits reviewable.25 However, if input methodologies are set by the Commission, without any Ministerial involvement, than merits review on these decisions may be desirable.
231. The Commission's advice to the Minister on whether or not to impose control on a given firm/industry (i.e. if there is a need to deviate from the default) is also unsuitable for merits review. This is because the ultimate decision-maker need not adopt this recommendation.
232. The Commission's decisions with respect to setting initial control terms should not also be subject to merits review since it is proposed that firms have an ability to propose customised terms if the initial terms are not appropriate. In addition, merits review of this step would create pressure on the Commission to undertake a very conservative estimate, thereby undoing the cost-effectiveness of the proposed approach.
233. On the other hand, the Commission's decisions with respect to setting customised firm-specific control terms should be subject to merits review.
234. The Commission's action in the event of a breach, e.g. the decision that there was a breach and the amount of the penalty imposed, may also be suitable for merits review.
12.4 What form of merits review?
235. Costly delays and tactical use of appeal rights could be minimised by limiting the scope of the right of appeal.
236. The scope of merits review could range from:26
- pure appeals - no new evidence can be presented, starting from a presumption that the original decision was correct;
- appeals by way of re-hearing - further evidence can be submitted with the leave of the appeal body if it could not have been presented at the stage of the original decision-making, discretion as to whether the whole or a part of the determination is to be re-heard, starting from a presumption that the original decision was correct;
- hearings de novo - the case is heard entirely from the beginning, new evidence can be introduced, and there is no presumption that the decision appealed from is correct,
- appeals by way of case stated - this is not a re-hearing of a dispute, rather a procedure whereby further clarification, usually on the point of law, is sought.
237. The Legislation Advisory Committee Guidelines 13.4.1 recommend that appeals should usually be by way of rehearing, and this is the approach that has been adopted for Commerce Commission decisions on mergers and acquisitions and trade practices, which most commentators consider has worked well to date. This minimises costs compared with appeals de novo, and ensures that firms put all relevant material before the Commission. However it does enable updating material to be placed before the appeal body, which can be important where for example discretion is re-exercised because of an error at first instance. We propose that appeals on regulatory issues should be by way of rehearing.
238. Tactical delays could also be addressed by ensuring that a merits review does not of itself prevent the regulator's decision coming into effect, i.e. the regulator's decision would stand unless overturned by the appeal body.
12.5 What grounds for merits review?
239. In some contexts appeal rights are limited to particular types of error, such as errors of law. But this reduces the scope and benefit of the merits review procedure, and can raise difficult issues about the boundary between questions of law and questions of fact, or discretion. The proposal that appeals be by way of rehearing means that the starting point is a presumption that the decision appealed from is correct, and the onus is on the appellant to show that it is wrong in some material way. We propose that this is a sufficient limit on the grounds for review.
12.6 What is the appropriate review body?
240. Judges in generalist courts may not have the necessary highly technical skills and expertise to review price control determinations (which are complex and based on economic and technical concepts which are subject to considerable debate between experts). While this issue could potentially be resolved/minimised by the ability for the Court to sit with a lay member under s77 of the Act, as in the context of appeals from other Commission decisions, it remains an important consideration.
241. A specialist tribunal may be more appropriate, to ensure that appeals are heard by a small pool of Judges and expert lay members with relevant expertise, who can build up a body of experience in dealing with appeals on these matters over time. An equivalent model is the Australian Competition Tribunal which comprises a pool of judges, economists and business people, with each case being heard by one judge, one economist, and one business person. While the make-up of such a team may appear very similar to the option of appointing a lay member to the Court, there may be greater opportunity to appoint judges with specialist regulatory expertise, and to enable the tribunal members to build up experience in these matters over time. This may be an expensive option, however. In general, there must be compelling reasons for creating specialist tribunals and not referring matters to the courts.
242. With either the option of appointing a lay member to the High Court or setting up a specialist tribunal, issues may arise with getting the necessary skills and independence of the review body given New Zealand's limited pool of resources.
243. If merits review of regulatory decisions is provided for, then it would be sensible to ensure that the same body also considers/hears the judicial review procedures.
12.7 Summary
244. The table below summarises the decisions and relevant forms of review (if merits review is provided for):
| Decision |
Form of review |
| Recommendations on input methodologies |
Judicial review only, as this is a recommendation to a different decision-maker (who faces political accountability). |
| Recommendation to Minister on whether or not to impose control |
Judicial review only, as this is a recommendation to a different decision-maker (who faces political accountability). |
| Setting of initial control terms for a given firm or industry |
Judicial review only, as it is proposed that the firm has an opportunity to apply for customised terms |
| Setting of customised control terms for a given firm |
Merits review by way of appeal by rehearing, in addition to judicial review. Regulator's decision stands in interim. |
| Action in the event of a breach |
Merits review by way of appeal by rehearing, in addition to judicial review. Regulator's decision stands in interim. |
| Minister's decisions on the Commerce Commission's recommendations |
Judicial review only, as Minister is subject to political accountability mechanisms. |
Questions for submitters: Chapter 12
Q1. Do you consider that it is desirable to provide for merits review of regulatory decisions or does judicial review provide sufficient "checks and balances" on regulatory decisions?
Q2. Do you agree with the document's conclusions that, if merits review is provided for, it should only apply to control decisions made by the Commission and be limited to the form of "appeals by way of re-hearing" where new evidence can be introduced only if it could not have been submitted at the original decision-making stage?
Q3. What is your preferred composition of any merits review body, taking into account New Zealand's small size and limited resources?
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