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• Appendix B

• Competition Policy

• Commerce Act Pts 4/4A/5 Review

• Regulatory Control Provisions

• Cabinet Papers

A. Purpose statement

1. 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 the prospect of little or no future 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. face strong incentives to improve efficiency and provide services at a quality that reflects consumer demands;
3. share the benefits of efficiency gains with consumers, including through lower prices;
4. are limited in their ability to extract excessive profits.

2. Note: throughout these specifications, the term "price(s)" includes individual prices, aggregate prices and revenues.

B. Forms of regulation

1. The Act should provide for the following forms of incentive regulation:

1. Information disclosure
2. A negotiate/arbitrate regime
3. A "default/customised price-quality path" regime for sectors (replaces Part 4A)
4. Price-quality control for individual businesses.

2. Note: the above forms of regulation may apply in combination.

C. Test for whether regulation may be imposed

1. Goods or services in a market may be subject to regulation where:

• 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 regulations or arrangements (including ownership arrangements)
• The benefits of regulation in meeting the objectives of the purpose statement clearly exceed the costs and risks of regulation.

2. In providing recommendations to the Minister, the Commission should undertake a qualitative analysis of all material long-term efficiency and distributional considerations.

As part of this analysis, the Commission should, as far as possible and practicable:

1. quantify material effects on market efficiency
2. quantify material distributional and welfare consequences on suppliers and consumers
3. assess the direct and indirect costs and risks of the forms of regulation considered, including administrative and compliance costs, transaction costs, and spill-over effects.

3. Any regulation should be the least intrusive necessary to meet the objectives of the purpose statement.

4. Where competition develops in a market so that the test for whether regulation may be imposed is no longer met, regulation should be removed.

5. "Whether to regulate" and "how to regulate" should, to the extent practicable, be determined at the same time. (Repeal current requirement in the Act to undertake separate inquiries on "whether" to regulate and "how" to regulate.)

D. Processes for making decisions on whether and how to regulate

1. Regulation under this Part may be imposed on goods and services by Order in Council on the recommendation of the Minister of Commerce in consultation with any sector Minister (such as Energy, Transport).

2. The Minister may only make a recommendation following consideration of recommendations from the Commerce Commission. The Commission may only make recommendations following an inquiry.

3. The Commission may undertake an inquiry on request by the Minister or on its own initiative. An inquiry by the Commission must include consideration of submissions from interested parties. The Commission may hold one or more public conferences.

4. The same processes are required for any change in the form of regulation, including removal of regulation.

E. Input methodologies

1. The Commission's input methodologies must set a methodology or methodologies for calculating or determining the following matters:

1. cost of capital
2. valuation of assets (including depreciation)
3. allocation of common costs, including between businesses, customer classes and geographic areas
4. treatment of taxation
5. preparation of regulatory accounts
6. regulatory specifications (where applicable), including:
   • duration of regulatory period
   • excluded costs
   • circumstances for re-considering terms during the regulatory period
   • processes for re-setting terms and conditions
7. requirements for a proposal under "default / customised price-quality path" (where applicable)
8. pricing principles.

2. The Commission may adopt, with modifications where required, methodologies used by regulatory bodies in similar overseas jurisdictions

3. The Commission may determine the level of prescription of the input methodologies

4. The Commission should consolidate the development and release of its decisions on methodologies to the extent possible and practical because of the interrelated nature of the methodologies and to minimise costs to businesses and for appeals processes

5. Appeals. Any materially affected party may appeal to the High Court for a merits review on input methodologies:

• Any appeals must be made within 20 working days of the release of Commission decisions on input methodologies
• The Court may appoint up to two lay members with expertise in economic regulation to assist it
• The court may only consider submissions and associated material relied on by the Commission to make its decisions
• The Commission may raise before the court a possible outcome or effect should the court make a determination setting aside or varying the original decision

6. Criteria for appeals:

1. The Commission made an error of fact in its findings of facts, and that error of fact was material to the making of the decision
2. Commission made more than one error fact in its findings of facts, and those errors of fact, in combination, were material to the making of the decisions
3. The exercise of the Commission's discretion was incorrect, having regard to all the circumstances
4. The Commission's decision was unreasonable, having regard to all the circumstances.

7. No further appeals may be taken except on points of law.

8. The Commission must apply input methodologies when making decisions on any of the forms of regulation referred to in B above.

9. The Commission may, at any time, make amendments to input methodologies, but:

• Must follow the processes specified above before setting the amended input methodology
• May not complete inquiries or set default or customised price-quality paths until the process is complete
• May not re-open default or customised price-quality paths within a regulatory period on the grounds of changes in input methodologies. (See also section H 11).

10. The Commission must consult with interested parties on whether any amendments should be made to the input methodologies every seven years following the promulgation of initial methodologies.

F. Information disclosure: powers and processes

1. The Commission may set requirements for the disclosure of information which specify:

• What information must be disclosed
• How information is to be disclosed and the form of disclosure
• The timing of disclosure
• Methodologies which must be used in the preparation of disclosed information. These methodologies may be methodologies specified as input methodologies.²⁰

2. Disclosed information may include proposed or forecast investments, prices/revenues, quality standards, regulatory accounts and asset management plans.

3. Information disclosure may be required in combination with any other type or form of regulation.

4. The Commission may undertake monitoring and analysis and comment on disclosed information.

G. Negotiate/arbitrate: powers and processes

1. Purpose: The purpose of negotiate/arbitrate is to provide an opportunity for, and to incentivise, the supplier and its customers to reach agreement on prices and/or revenues and quality standards for the supplier for a specified period. This incentive is provided by providing for an arbitrated settlement if the parties are unable to reach agreement within a specified period. (May be combined with information disclosure).

2. The Commission must set requirements for negotiate/arbitrate including:

• Processes for negotiations, including the parties to be involved and the form of involvement, and the form, scope and coverage of any negotiated settlement;
• Time limits for negotiations (including stages in negotiations);
• Provide for the supplier to pay the reasonable costs of a representative or representatives of smaller consumers;
• Processes for setting up arbitration and the conduct of arbitration where negotiated settlements have not been reached within the time limit(s). The Commission must:
  1. Allow the parties to agree on an arbitrator or arbitrators;
  2. Appoint an arbitrator or arbitrator, including itself as arbitrator, where the parties are unable to agree on an arbitrator;
     • Specify requirements regarding the public disclosure of negotiated or arbitrated settlements;
     • The Commission may require particular forms of arbitration, including final offer arbitration;
     • Specify the input methodologies to be used by the parties in their negotiations and in the arbitration; and
     • Providing for cost recovery by the arbitrator.

H. Default/customised price-quality path

1. Purpose: The purpose of this form of regulation is to provide for a relatively low cost approach to setting price-quality paths while allowing the opportunity for individual businesses to propose an alternative path which better meets their particular circumstances, such as a requirement for abnormal investment to continue to meet customer expectations concerning service quality over the long term.

2. The Commission must set a default price/revenue path(s) (eg CPI-X) and quality standards for a specified regulatory period. The standard regulatory period should be 5 years

• The default path(s) should be based on factors such as productivity/efficiency trends and comparative benchmarking (domestic or international). The Commission may not undertake a building blocks or detailed forward-looking investigation of firms in setting default paths.
• The Commission may specify price-quality paths in any form or in any way it sees fit, but may not include a P₀ adjustment except on the basis of information disclosed pursuant to the information disclosure requirements.

3. In setting quality requirements the Commission should, as far as possible, provide incentives for firms to maintain and improve quality.

4. A firm may propose a customised price/revenue/quality path to the Commission:

• May make a proposal by annual dates specified by the Commission (the first annual date must be on or prior to the date at which default price paths take effect)
• May make only one proposal during a regulatory period
• May not make a proposal within 12 months of the expiry of a default regulatory period
• The proposal must be made public
• The proposal must use and comply with the input methodologies specified by the Commission
• The proposal must comply with requirements set by Commission (as part of input methodologies) for a complete proposal. Requirements may include:
  • Scope and specificity of information required
  • Extent of independent verification and audit
  • Extent of consultations and agreement with customers
• The proposal must be accompanied by any reasonable fees set by the Commission to recover its costs.

5. If a firm makes a proposal, it may not subsequently opt to revert to the default price path.

6. The Commission must determine within 40 w/days whether the firms' proposal complies with the criteria set by the Commission for a complete proposal. If the proposal does not comply, the Commission, at its discretion, may

1. Reject the proposal, or
2. Request the firm to remedy within 40 w/days any deficiencies in the proposal. If the firm fails to provide the additional information requested by the Commission the Commission may reject the proposal.

7. The Commission must provide an opportunity for interested parties to comment on the firm's proposal.

8. Subject to 9, 10 and 11 below, the Commission must make a determination on the proposal within 150 w/days of receiving a complete proposal

• Commission must consider submissions on the proposal from any interested party received within time-limits set by the Commission
• Commission may exercise its information gathering powers with regard to any further information it requires in order to make a determination
• The Commission may determine to apply the default price path or a more stringent path
• The Commission must publish reasons for its decisions within 10 days of announcing a determination

9. The Commission may prioritise consideration of proposals as it sees fit (similar to s57K). The Commission is only required to consider 4 proposals from firms within a sector in any one year and may defer additional proposals to a subsequent year. Criteria for Commission decisions on priorities (replaces s57K(2)) include:

1. Quality and completeness of proposal
2. b. Urgency of any proposed additional investment (compared to historic rates of investment) required to meet consumer requirements on quality
3. Materiality of proposal relative to size and revenues of the firm.

10. The timeframes specified above may be extended by 30 w/days with the agreement of the firm and the Commission

11. If the Commission does not make a determination within the set timeframe:

1. The default path should take effect where the Commission has made reasonable requests with reasonable deadlines for additional information it requires in order for it to make a determination, and the firm has not (in the view of the Commission) sufficiently complied
2. The firm's proposal should take effect where the firm has complied with the Commission's reasonable requests for additional information.

12. In considering a proposal and making a determination, the Commission may, at its sole discretion, vary an input methodology applying to that firm with the agreement of the firm.

13. The default price-quality paths apply pending a determination by the Commission on a proposal. The Commission may provide for revenue-recovery where it subsequently sets a higher customised price path, or for revenue claw-back where it subsequently sets a lower customised price path. (In providing for revenue recovery or revenue claw-back, the Commission must set timeframes which minimise price shocks to consumers or undue financial hardship to the firm respectively).

14. Any customised price path must apply for 5 years

• At the end of this period, the firm reverts to whatever default price paths are applicable at that time (but the firm may make a subsequent proposal for customised terms as above)
• The Commission may set a shorter period than 5 years where it considers this would better meet the purpose statement, but in any event may not set a term less than 3 years

I. Price-quality control for individual businesses.

1. The Commission may set price-quality control terms in any way it sees fit, but must use the set input methodologies. It may seek proposals from firms.

2. The current powers in the Act (s72) to accept alternative undertakings to be replaced by an amended penalties/remedies regime (see below).

J. Appeals

1. Appeals on points of law. [Judicial review is also available].

2. Commission decisions take full effect, including enforcement, on promulgation and until appeals are fully resolved.

K. Remedial action and penalties for failure to comply with price-quality paths

Where a firm has failed to comply with its price-quality path, the Commission may:

1. Decide to take no action after taking into account:
   • Any previous failures to comply
   • Whether the firm has taken all reasonable steps to prevent failure to comply
   • The gravity or seriousness of the breach
   • Action taken by the firm to remedy the breach
2. Require the business to take steps to ensure that the breach does not occur again
3. Apply penalties and remedies provided for in s70C.

L. Electricity lines businesses

Consumer trust-owned ELBs

1. Consumer trust-owned ELBs should be subject only to information disclosure, where

1. the ELB is 100 percent owned by an entity which is governed by elected consumer representatives, such as a cooperative, consumer trust or community trust
2. at least 90 percent of consumers of the ELB are eligible to vote in elections
3. all of the ELB's customers benefit from profit or fund distributions by the ELB or the entity that owns the ELB
4. the ELB has fewer than 100,000 ICPs. (ICP means a point of connection on a local or an embedded network which the distributor nominates as the point at which the retailer will be deemed to supply electricity to a consumer, and has the attributes set out in rule 1 of schedule E2 of Part E of the Electricity Governance Rules 2003).

2. The Minister may impose a "default/customised price-quality path" regime on ELBs which would otherwise be subject only to information disclosure where

• The Commission advises that an ELB no longer meets the above criteria
• The Commission recommends that the "default / customised price-quality path" regime would better meet the purpose statement. The Commission may only make such a recommendation following consideration of a petition by at least:
  • 15 percent of residential consumers of the ELB, or
  • 20 percent of non-voting (ie not eligible to vote) residential consumers, or
  • 25 percent of non-residential customers (by number or by consumption of that class of consumer)

3. Trust-owned businesses to which this regime applies should be named by notice in the Gazette.

4. The Commission may require trust-owned ELBs to disclose their performance against quality and price standards set by the Commission for other ELBs, and may analyse and comment on that performance.

Other ELBs

1. Other ELBs should be subject to the "default/customised price-quality path" regime. This regime replaces Part 4A.

2. Transitional arrangements:

• The Commission should continue its current work programme under Part 4A to re-set thresholds from 1 April 2009
• The "default / customised price-quality path" should apply from 1 April 2009 with the re-set thresholds becoming the default price-quality path
• Until the input methodologies are set, any proposals by firms should be based on the Commission's (non-statutory) Guidelines.
• Conventional penalties/remedies (section K above) apply to breaches of default or customised paths
• Any administrative settlements under Part 4A in place at 31 March 2009 continue for their term
• Breaches of thresholds under Part 4A older than six months expire when the legislation comes into force except where the Commission has notified the company of its intention to undertake an inquiry.

Energy Efficiency

The Commission must provide incentives to improve energy efficiency/demand side management and to reduce energy losses when administering the regime for electricity lines businesses.

M. Gas pipelines

1. All gas pipelines²¹ should be subject to "default/customised price-quality path" regulation.

2. Transitional arrangements: Prices set by the Commission for the gas pipelines of Vector and Powerco under Part 5 should continue to apply until the end of the regulatory period set by the Commission. At that time, these businesses should transition to the regime applying to all other gas pipelines.