Chapter 14: Summary of Options
Status Quo
When to regulate
Inquiry into whether to control a firm is guided by:
- overall purpose of the Act and s 3A efficiency consideration,
- the "may" test in s 52, stating the competition (competition is limited or likely to be lessened) and welfare (benefits to acquirers) criteria
- no express legislative test on when control "should" be imposed.
Part 4A provides for a thresholds regime for electricity lines companies, which, if breached, triggers an investigation into whether or not control under Part 5 should be imposed. The thresholds regime is guided by a specific purpose statement in s57E.
Act limited to consideration of control versus no control only.
Processes for whether and how to control a sector or a firm are undertaken separately.
Key input decisions
Made by the Commerce Commission "as it goes"
Regulatory control design issues
Under Part 4A, price thresholds are set using comparative benchmarking.
Under Part 5, control terms are based on firm specific information.
Both thresholds and control terms are determined by the Commission.
If breach occurs
Breach of an authorisation under Part 5 results in direct sanctions
Breach of Part 4A thresholds results in an investigation by the Commission into whether control under Part 5 is desirable.
Appeal rights
Judicial review only (no appeal rights on merit).
Option One
When to regulate
Inquiry into whether and how to regulate is guided by:
- adapted s 57E to apply to generic regulatory provisions and explicitly provide for incentives to invest, e.g.
"The purpose of this Part is, n markets where there is little or no competition or prospect of competition, to provide for economic regulation for the long-term benefit of consumers of New Zealand. Any regulation under this Part should seek to ensure that suppliers—
(a) are limited in their ability to earn excessive profits; and
(b) have incentives to improve efficiency and provide services at a quality that reflects consumer demands;
(c) share the benefits of efficiency gains with consumers, including through lower prices; and
(d) have incentives to innovate and to invest including in replacement, upgraded and new assets and in related businesses."
- amended s52, e.g. regulation may only be imposed if:
"There is little or no competition or prospect of competition in the relevant market"; OR "The goods and services are supplied by a person or persons with a substantial degree of market power", and
"Regulation is necessary or desirable to:
(a) promote efficiencies in a market; or
(b) provide long term benefits to persons acquiring the goods and services that [substantially] [clearly] exceed the direct and indirect costs of regulation"
- further guidance on when regulation may not be imposed could also be provided, e.g.:
"Regulation may not be imposed unless any net costs to economy are acceptable relative to the benefits to consumers [persons acquiring the goods or services (whether direct or indirect)] (or suppliers who face little or no competition or prospect of competition for the acquisition of the goods or services) of limiting excessive returns in the opinion of the Minister."
Act extended to provide for other regulatory options to be considered by the Commission in addition to control, namely:
- negotiate/arbitrate model, and
- information disclosure.
Processes for whether and how to regulate a firm are combined but kept separate in a sector inquiry.
Key input decisions
Input methodologies (e.g. how to calculate WACC, asset valuations, etc) set in advance of use (i.e. when an inquiry is announced, unless already set)
- recommended by the Commission,
- option as to whether these should be approved by the Minister (who may accept or reject or refer back)
Regulatory control design issues
Part 4A made generic so that other sectors (e.g. gas pipeline services) can be placed under a thresholds regime.
If breach occurs
As per Status Quo.
Appeal rights
As per Status Quo.
Option Two
When to regulate
Inquiry into whether and how to regulate is guided by:
- New regulatory-specific purpose statement, as per Option One.
- amended s52, as per Option One.
- further guidance on when regulation may not be imposed, as per Option One.
Act extended to provide for other regulatory options to be considered by the Commission in addition to control, namely:
- negotiate/arbitrate model, and
- information disclosure.
Criteria for imposing control on a sector as per Option One.
Processes for whether and how to regulate are considered simultaneously.
Key input decisions
As per Option One.
Regulatory control design issues
Control terms may be set using comparative benchmarking (likely approach for control of sector) and/or firm-specific information (likely approach for control of firm).
Part 4A is replaced with generic sector control provisions under Part 5.
Firms have a role in proposing their own regulatory control terms, which the Commerce Commission assesses against pre-set reasonableness criteria.
If breach occurs
Breach of final authorisation (whether based on customised or comparative information) results in direct sanctions.
Appeal rights
Merits review rights (in addition to judicial review), on final control terms and action taken in the event of a breach for an individual company (original decision stands in the interim).
Form of merits review limited to "appeal by way of rehearing" (new evidence can not be presented unless it could not have been presented for the original decision-making), and material points of contention.
Assessment of the options against desirable characteristics of a regulatory regime
| Objectives |
Status Quo |
Option One |
Option Two |
| Clarity of policy intent, resulting in certainty and predictability of regulatory outcomes |
Lack of a regulatory-specific purpose statement (other than in Part 4A which may not be sufficiently clear) and the Commission's ability to set, and amend, input methodologies "as it goes" result in regulatory uncertainty for businesses.
However, the developing case law may, with time, provide certainty over the legislative intent.
Uncertainty about policy objectives |
A clear regulatory-specific purpose statement, amended s 52 criteria, and input methodologies set as a stand alone process ahead of inquiry, would improve clarity and predictability of regulatory objectives.
Clarity improved |
As per Option One.
Clarity improved |
| Consistent, coherent and transparent application of the regulatory regime across different firms/industries and over time |
Commission's ability to set, and amend, input methodologies "as it goes" may result in inconsistent application of the regulatory regime and lack transparency.
Potentially inconsistent and obscure processes |
Input methodologies set as a stand alone process ahead of inquiry, and according to a transparent consultation process, would ensure consistency in the application of the regime.
Consistency and transparency improved |
As per Option One.
Consistency and transparency improved |
| Regulatory processes are cost-effective and timely, and also tailored to New Zealand's small scale |
Separate processes for consideration of whether and how questions could be inefficient, costly and time consuming.
Thresholds under Part 4A may not be low cost.
Potentially not cost-effective processes |
Providing for a range of regulatory options under the Act and combining consideration of whether and how to control an individual firm is likely to improve cost-effectiveness and timeliness of regulatory decision-making
Retaining Part 4A means that processes and criteria for deciding on whether to put a sector under the thresholds regime have to be separate from processes and criteria for imposing control on a firm that breaches a threshold.
A post breach inquiry under Part 4A could look at the questions of whether and how to impose control simultaneously.
Widening the Commission's mandate to consider a range of regulatory options and requiring the Commission to develop input methodologies for Ministerial consideration will increase the costs to the Commission.
Cost-effectiveness may improve |
Providing for a range of regulatory options under the Act and combining consideration of whether and how questions, is likely to improve cost-effectiveness and timeliness of the decision-making process.
However, widening the Commission's mandate to consider a range of regulatory options; requiring the Commission to develop input methodologies for Ministerial consideration, engaging with firms on ex ante basis, and allowing appeal rights on merits - will increase the costs to the Commission.
Cost-effectiveness may improve |
| Regulatory regime is sufficiently flexible to account for firm/industry specific circumstances, changing market conditions, innovation and experience |
The Commission's ability to use "whatever approach it considers appropriate" (as per s70) is constrained by the perceived need to employ different methodologies for setting thresholds (under Part 4A) and control terms (under Part 5).
Lack of ex ante approval under Part 4A regime does not allow for firm specific circumstance to be provided for.
Flexibility of the regime is limited |
Widening the Commission's mandate to consider a range of regulatory options (rather than just control versus no control) improves flexibility of the regime.
However, setting input methodologies as a stand alone process ahead of inquiry reduces the Commission's flexibility to account for firm specific circumstances promptly.
Flexibility may improve |
Explicitly provides for ex ante engagement by allowing firms to submit proposed control terms to the Commission for consideration.
Widening the Commission's mandate to consider a range of regulatory options (rather than just control versus no control) improves flexibility of the regime.
However, setting input methodologies as a stand alone process ahead of inquiry reduces the Commission's flexibility to account for firm specific circumstances promptly.
Flexibility may improve |
| There are appropriate levels of regulatory accountability and independence |
Inability to appeal on merits results in limited ability to identify and correct errors.
Limited accountability mechanisms |
As per Status Quo.
Limited accountability mechanisms |
Some ability to appeal on merits would provide additional incentives for high quality analysis, error correction and future guidance.
However, regulatory independence may reduce due to Ministerial involvement in the rule setting process.
Stronger accountability mechanisms |
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