Issue I: The Commission's Powers to Revoke, Amend or Replace Authorisations
Background
128. Section 65(1) states the Commission may revoke, amend or replace an authorisation if it is satisfied that:
- It was granted on information that was false or misleading in a material particular; or
- There has been a material change in circumstances since the authorisation was granted; or
- A condition upon which the authorisation was granted has not been complied with.
129. The Commission has varied or revoked an authorisation on two occasions:
- In 1989 the Commission revoked an earlier decision to authorise a national collective pricing agreement for kiwifruit under section 65(1)(b).46 In effect, the original authorisation enabled growers to collectively negotiate with coolstorers in relation to kiwifruit intended for export.47 A two season time limit was imposed on the authorisation.48 The material change was the establishment of the Kiwifruit Marketing Board in 1988 under the Kiwifruit Marketing Regulations 1977. Those Regulations empowered the Board to be a single seller of New Zealand-produced kiwifruit intended for export. The Board substituted for the growers and exporters in agreements with the coolstorers. Thus, the kiwifruit industry structure moved from one in which primary coolstorers were able to negotiate the terms of sale of their own services to one in which the sale became dictated to them by the Board.49 The weak seller argument underpinning the authorisation had gone.
- In 2006 the Commission revoked an authorisation granted to four companies to jointly market and sell gas produced from the Pohokura natural gas field.50 When applying for the original authorisation, the parties had stated that joint marketing and sale would be required in order to achieve early production from the field. In the event the parties chose not to jointly market and embarked instead on separately marketing and selling the gas. The Commission concluded that there had been a material change of circumstances and that the authorisation was granted on information that was false or misleading in a material particular. The Commission concluded that it had jurisdiction under subsection (b), and in the alternative, subsection (a), to reconsider the earlier authorisation decision.51
The issue
130. The reasons for subsections (a) and (c) are obvious and they should be retained. However, the Pohokura decision has brought into focus the issue of whether (b) should be retained, repealed or replaced. The issue is whether the power to amend, revoke or replace an authorisation due to events that were unknown at the time the authorisation was granted is fully consistent with the policy intent of encouraging efficient conduct that would not otherwise take place.
131. The major risks associated with retaining subsection (b) would appear to relate to infrastructure development because the payback periods can be lengthy and authorisation might be a way of significantly reducing business risk. This is a potentially major issue because effective infrastructure in energy, transport, communications and water distribution is crucial to New Zealand's productive capacity and growth prospects. Subsection (b) may discourage firms from going ahead with major investments if they need the certainty of a long-lasting authorisation to make the investment viable. A hypothetical example appears in the box below.
Options
132. Other than retaining the status quo, two options would be:
- To repeal section 65(1)(b); or
- To replace section 65(1)(b) with a provision that would allow the applicant to ask the Commission to revoke, vary or replace the authorisation. The person could request:
- A minor variation to the authorisation (e.g. to fix a small mistake in the original application);
- The substitution of the authorisation with a new authorisation, if the proposed variation is more than minor; or
- That the authorisation be revoked.
Hypothetical long term contract
- Firm A intends to construct a gas pipeline to the premises of a major industrial user. There are no other major customers on or near the route of the proposed pipeline.
- The payback period is 15 years. A long term take-or-pay contract is needed to justify making the investment.
- Firm A decides not to seek authorisation because of the risk that the Commission could withdraw it under subsection (b) before the payback point has been reached.
- Firm A decides not to build the pipeline.
Analysis
The quality of outcomes
133. The main trade off is between the benefits to the economy of encouraging a greater amount of efficient conduct from the outset against the risk to the economy that approved conduct could later become inefficient due to a material change in circumstances.
134. The kiwifruit authorisation could be used to support or oppose the subsection (b) power. On one hand, it demonstrates how quickly market circumstances can change, especially when the government uses statutory powers to reshape a market. On the other hand, it would not have mattered if the authorisation had continued for the second season. It had fallen into disuse.
135. The kiwifruit decision also highlights the fact that the Commission has the ability to guard against risks by imposing time limits and other conditions on an authorisation. Therefore, it can be argued that there would be no great harm if subsection (b) were repealed. However, it can also be argued that it might encourage the Commission to impose a wider range of conditions to guard against the possibility of unknown adverse future events.
136. It could also be argued that the circumstances associated with our hypothetical example or something similar would be so rare that there is unlikely to be a real problem. An alternative view is that even if it is a rare situation, the adverse impact of infrastructure deficits on the economy can be very high. Therefore, it is essential to acknowledge the risk.
137. It can also be argued that there are parallels between trade practices and mergers. The Commission does not have the power to require a firm to de-merge in the event of a material change of circumstances. The Commission makes a decision based on the best information available to it at the time even though circumstances might change for the worse later on. However, it could also be argued that the risks of an adverse material change are much lower for mergers.
Opportunity for effective participation
138. If the Commission is to lose the power to act on its own motion under section 65(1)(b) then there is a strong case for modifying the power rather than removing it. It is important to provide the applicant with the flexibility to apply for a revocation, replacement or variation, with the Commission considering the application on public benefit grounds. We also consider that minor variations should be able to be sought.52
Conclusions
139. In our view ex ante business certainty is the issue that needs to be given the greatest weighting. In some authorisation cases subsection (b) will not be a major issue for the parties to the application. However, it may be an issue in other cases, especially where a long term contract is at the heart of an application. The risks of losing the authorisation under subsection (b) due to events that could not have been anticipated at the time an authorisation was granted may be enough to discourage parties from giving effect to the conduct in the first place.
140. Our preliminary view is that the Commission should not have the power to vary, replace or revoke an authorisation on its own motion under subsection (b). However, the original applicant should be able to apply for a revocation, replacement or variations, including minor variations.
Question
Q15. Should the Commission's power to vary, replace or revoke an authorisation if there has been a material change of circumstances (i.e. section 65(1)(b)) be (i) retained, (ii) repealed or (iii) replaced by a provision that allows the original applicant to ask the Commission to vary, replace or revoke an authorisation?
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