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• Commerce Act Pts 4/4A/5 Review

• Regulatory Control Provisions

• Cabinet Papers

2. Part 4 of the Act has generic provisions enabling price control to be imposed where competition is limited and control would be in the interests of acquirers. Part 4A empowers the Commerce Commission to impose control on electricity lines businesses where they breach thresholds set by the Commission. Sections 70-73 of Part 5 set out process requirements.

3. In 2006 Cabinet agreed to review Parts 4, 4A and 5. In April 2007 Cabinet approved release of a discussion paper [EDC Min (07) 7/13].

4. The discussion paper and submissions identified a number of issues with the current legislation, including the absence of a specific purpose statement for Part 4, absence of powers to implement alternative forms of regulation, lack of certainty for electricity lines businesses under Part 4A, and a limited accountability regime for the Commerce Commission as regulator. In addition, the view was expressed that the "control" provisions tended to be punitive rather than to have a forward-looking focus on long-term incentive regulation.

5. Following consideration of submissions, the following key amendments are proposed:

1. Specifying a purpose statement for Part 4
2. Provision for alternative forms of regulation in addition to conventional price control, namely:
   1. information disclosure
   2. a negotiate/arbitrate regime (potentially suitable for sectors with a few large customers), and
   3. a "default/customised price-quality path" regime for sectors like electricity lines to replace Part 4A. This would allow the Commission to set a default price-quality path (like Part 4A) while providing an ex-ante, time-bound opportunity for a firm to seek a customised path (eg where it needs to make a step-change in investment to maintain quality standards required by consumers)
3. A more conventional, qualitative test (with quantification where possible) for when regulation may be imposed. Decision-making powers on whether to regulate would remain with the Minister of Commerce, in consultation with sector ministers
4. A requirement that "input methodologies" (how to determine the cost of capital, value assets, allocate common costs etc) should be set as soon as possible by the Commission with the aim of improving certainty and predictability for businesses. Commission decisions on input methodologies would be subject to merits appeal to the High Court.

6. It is also proposed that trust-owned electricity lines businesses (17 out of 28 ELBs) be subject only to information disclosure, while the "default/customised price-quality path" approach would be applied to other ELBs and to gas pipelines.

7. The amendments are expected to be generally welcomed by affected businesses. They aim to improve certainty and apply more internationally conventional forward-looking approaches to regulation than the Act currently allows. The changes are expected to improve business confidence and, as a consequence, improve the climate for investment in infrastructure.

8. It is proposed that the Act be amended in 2008. We also recommend a brief and informal period of consultation with interested parties on design details in parallel with commencement of drafting.