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96. It is recommended that the Committee:

1. Note that on 4 April 2007 Cabinet approved release of a discussion paper on reviewing Parts 4 and 4A and s70-73 of Part 5 of the Commerce Act [EDC Min (07) 7/13];

2. Note that the Ministers of Commerce and Energy propose a comprehensive re-focus of Parts 4 and 4A to move away from punishment-oriented "control" to more incentive-based regulation for sectors where competition is not possible and where there is scope for exercise of market power;

3. Note that detailed specifications for proposed amendments are provided in Appendix B to this paper;

Purpose statement

4. Note that there is currently no purpose statement for Part 4;

5. Agree to a purpose statement for Part 4 along the following lines (subject to drafting by Parliamentary Counsel):

The purpose of this Part is to provide for regulation of prices and quality of goods and services for the long term benefit of consumers in markets where there is little or no competition and prospect of competition. Any regulation provided for under this Part should promote outcomes such that suppliers:

1. have incentives to innovate and to invest, including in replacement, upgraded and new assets and in related businesses;
2. gg. face strong incentives to improve efficiency and provide services at a quality that reflects consumer demands;
3. hh. share the benefits of efficiency gains with consumers, including through lower prices;
4. are limited in their ability to extract excessive profits.

Forms of regulation

6. Agree that the Act should provide for the following forms of regulation:

6.1 Information disclosure

6.2 A negotiate/arbitrate regime

6.3 A "default/customised price-quality path" regime for sectors like electricity lines to replace Part 4A

6.4 Customised (conventional) price-quality control for individual businesses;

Test and processes for imposing incentive regulation

7. Agree that the test for whether regulation may be imposed, and the form of regulation, should be:

7.1 there is little or no competition and prospect of competition and there is substantial scope for the exercise of market power, taking into account the effectiveness of existing regulation or arrangements (including ownership arrangements); and

7.2 The benefits of regulation in meeting the objectives of the purpose statement clearly exceed the costs and risks of regulation;

8. Agree that the Commerce Commission should undertake qualitative analysis concerning this test, with quantification where possible and practical;

9. Agree that the Minister of Commerce should make decisions on whether to impose or amend regulation in consultation with sector Ministers and after considering recommendations by the Commerce Commission;

Input methodologies

10. Note that submissions strongly supported the early preparation of "input methodologies" (for example on how to determine the cost of capital) in order to provide certainty and predictability to businesses and other interested parties;

11. Agree that the Commerce Commission should prepare and set input methodologies and that its decisions should be subject to appeal (merits review) to the High Court;

12. Note that the Commission estimates its costs for preparation of methodologies (excluding the cost of defending appeals) at $1.000 million in 2007/08, $2.000 million in 2008/09 and $1.000 million in 2009/10;

13. Note that these costs will be met by levy on parties subject to regulation under Parts 4/4A;

Information disclosure

14. Agree that information disclosure may require the disclosure of forward-looking information, including asset management plans, investment proposals, prices, projected regulatory accounts and expected quality out-turns;

Negotiate/arbitrate

15. Agree that the Commission may set the detailed specifications for a negotiate/arbitrate regime where that form of regulation has been agreed to by the Minister of Commerce in consultation with the relevant sector Minister;

Default/customised price-quality path

16. Agree that the Act should provide for a default/customised price-quality path regime whereby:

16.1 the Commerce Commission should set a default price-quality path for a regulatory period based on information like productivity trends and comparative benchmarking;

16.2 firms should have a time-bound ex-ante opportunity to propose a customised path to the Commission, with a requirement for the Commission to make a decision within a specified period;

Merits review

17. Agree that appeals on Commerce Commission decisions on setting price-quality paths should be restricted to points of law, and that its decisions should apply without limit pending resolution of any appeals and judicial reviews;

Electricity lines businesses

18. Note that electricity lines businesses are currently subject to the Part 4A thresholds regime and that the Commerce Commission has commenced consultations on re-setting thresholds for 2009-14;

19. Agree that 100 percent consumer trust-owned electricity lines businesses (meeting criteria specified in Appendix B) should be subject only to information disclosure;

20. Agree that the consumers of such lines businesses should have an opportunity to petition the Commerce Commission for stronger regulation;

21. Agree that other electricity lines businesses should be subject to the "default / customised price-quality path" regime, which should replace Part 4A thresholds;

22. Agree that the re-set of thresholds under Part 4A of the Commerce Act should become the default price-quality price path from 1 April 2009;

Gas pipelines

23. Note that the gas pipelines of Vector and Powerco are subject to price control under Part 5 of the Commerce Act and that the Commerce Commission is currently in the process of setting control terms;

24. Agree that all gas pipelines (except those of Nova Gas and the Taranaki pipelines) should be subject to a "default/customised price-quality path" regime;

25. Agree that the gas pipelines or Vector and Powerco should be subject to the "default/customised price-quality path" regime on expiry of authorised control terms for the first regulatory period;

Other sectors

26. Note that a companion paper makes recommendations regarding an amended regulatory regime for airports;

27. Note that no changes are proposed for other sectors;

Financial

28. Agree that the scope of the non-departmental output expense Enforcement of Electricity Sector Regulation within Vote: Energy be amended to allow for the development of input methodologies as follows (amendment in italics):

For the provision of development of input methodologies under Part 4 and 4A of the Commerce Act 1986, the review of asset valuation methodologies, collecting and disclosing information, assessing performance against thresholds and implementing price controls as necessary in relation to electricity lines businesses and Transpower;

29. Agree that the scope of the non-departmental output expense Control of Natural Gas Services within Vote: Energy be amended to allow for the development of input methodologies as follows:

For development of input methodologies under Part 4 of the Commerce Act 1986 and the costs of administering the Commerce Act 1986 Part 5 control regime over the gas pipeline services of Powerco and Vector;.

30. Approve the following changes to appropriations within Vote: Energy to enable the Commission to develop input methodologies for the electricity lines and gas pipeline businesses currently subject to Parts 4A and 4 of the Commerce Act, with no impact on the operating balance or debt:

31. Agree that the above changes to appropriations for 2007/08 be included in the 2007/08 Supplementary Estimates and that, in the interim, the increases be met from Imprest Supply;

32. Note that the above funding increases have no impact on the government's operating balance because the funding will be recovered through levies on relevant businesses;

33. Note that funding for 2008/09 and outyears (also to be recovered by levy) will be requested separately following further consultation and the opportunity to better estimate what those costs will be; subject to the constraints and timing of consultation, that request is targeted for inclusion within the Budget 2008 process;

Legislation

34. Invite the Minister of Commerce to issue drafting instructions to Parliamentary Counsel based on the detailed specifications provided in ,Appendix B;

35. Note that the Ministers of Commerce and Energy propose to recommend that the 2008 Legislative Programme include introduction and passage of legislation amending Parts 4, 4A and ss70-73 of Part 5 of the Commerce Act;

36. Invite the Ministers of Commerce and Energy to undertake informal consultations with interested parties on design details in Appendix B in parallel with the preparation of draft legislation;

37. Authorise the Ministers of Commerce and Energy, in consultation with the Ministers of Finance and Transport, to make consequential decisions which are consistent with the overall approach in the recommendations of this paper;

Publicity

38. Invite the Ministers of Commerce and Energy to announce the decisions in this paper;

39. Agree that this paper may be publicly released on the Ministry of Economic Development's website.

Hon Lianne Dalziel
Minister of Commerce
Date signed:

Hon David Parker
Minister of Energy
Date signed: