Greater Certainty for Businesses after Commerce Act Review - Minister of Commerce and Minister of Energy Media Statement

Commerce Minister Lianne Dalziel and Energy Minister David Parker are promising greater certainty around investment decisions as a result of changes announced today to the regulatory control provisions of the Commerce Act.

Changes include more clarity about how regulation will occur, the introduction of alternatives to price control, tailoring the regime to New Zealand's small size and providing specifically for incentives to invest in infrastructure.

"It's always a question of balance when we consider the interests that need to be protected in the context of a sector that does not face the discipline of competition, both in terms of consumer interest in prices and the economy's interest in encouraging investment in infrastructure and innovation," Lianne Dalziel said.

"I believe we have got the balance right."

The Commerce Act Part 4 allows goods and services to be placed under price control and/or quality control where there is limited or lessened competition, and control would be in the interests of acquirers. Two inquiries have been undertaken by the Commerce Commission under these provisions, into airports (1999-2003) and gas pipelines (2003-2005). Part 4A applies a 'thresholds' regime for electricity lines businesses, which enables price and quality control to be imposed if businesses breach thresholds set by the Commission. Twenty-eight electricity lines businesses and 2 gas distribution companies are currently regulated under the Act.

Major changes under the new regime include:

• Part 4 and 4A come together in a single regulatory framework, which will provide for alternative forms of regulation in addition to conventional price control including:
• information disclosure
• a negotiate/arbitrate regime
• a "default/customised price path" regime, which replaces the threshold regime
• The test for whether regulation may be imposed becomes:
• 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; and
• the benefits of regulation in meeting the objectives of the (new) purpose statement clearly exceed the costs of regulation.
• The rules for how costs and prices should be calculated (input methodologies) will be spelt out in advance by the Commerce Commission. These decisions will be subject to merits review by way of appeal to the High Court.

"All OECD countries regulate infrastructure companies to protect consumers from monopoly prices," Lianne Dalziel said.

"The new regime takes account of international best-practice, and focuses on forward-looking incentives for businesses rather than looking backward for breaches of thresholds."

David Parker said the review also recognised that New Zealand faces some unique circumstances in its regulated energy sector.

"For example, 16 of our 28 electricity lines businesses are small (under 100,000 consumers) and wholly owned by consumer trusts – and there is at least a 90 per cent overlap between the owners and customers of the electricity lines business; in other words, the company is owned by the people who use the power.

"These are smaller lines companies servicing their local community, which run a cost minimisation (rather than a profit maximisation) model. These trust-owned lines companies will not be regulated in the same way as other companies, and will be required to disclose information about the operations of their business."

David Parker said that there will be provision for consumers to petition the Commission for a change in the form of regulation as a backstop.

Legislation to implement these changes is due to be introduced next year.

Cabinet papers relating to the announcement will be available on the MED website.

Key reforms to the regulatory control provisions of the Commerce Act

• A new regulatory-specific purpose statement and criteria for when regulation may be introduced:
• Introduction of regulatory-specific purpose statement to clarify purpose and intent, which makes it explicit that regulation should ensure firms have incentives to innovate and to invest in infrastructure.
• Introducing powers to impose ‘lighter-handed' forms of incentive based regulation, as an alternative to price control, such as:
• Information disclosure:
• Requirement for firms to disclose prices, costs and quality including forward looking information.
• Negotiate/arbitrate:
• Supplier and customers encouraged to negotiate commercial outcomes, with mandatory arbitration if they fail to reach agreement.
• May be suitable for monopoly suppliers with a relatively few large customers (e.g. retailers and major users)
• Development and setting of "input methodologies" as soon as possible and as a standalone process:
• Input methodologies (such as how to value assets, treat asset revaluation gains, how to allocate common costs and calculate the cost of capital) are a key part of determining whether excessive prices are being charged by suppliers.
• The Act will impose a requirement to consult and set methodologies in advance of any inquiry on whether price control should be introduced, and for the consideration of specific proposals by firms on control terms.
• Providing for merits review by way of appeal to the High Court of the Commerce Commission's decisions on input methodologies.

Electricity Lines Businesses

• Repealing the current Part 4A threshold regime applying to electricity lines businesses and replacing it with:
• A default/customised price path regime for electricity lines businesses (except qualifying trust-owned companies).  This form of regulation would provide the Commission with the ability to set sector wide control terms in a cost-effective way using comparative benchmarking.  At the same time, should firms wish to make significant investment, and cannot do so within the default control terms, they will be able to apply to the Commission for customised control terms.  The criteria for evaluating firm's proposals will be preset by the Commission. 
• An information disclosure regime for 100 per cent consumer trust-owned electricity lines businesses where there is a very high overlap (over 90 per cent) between customers and owners of the business. Performance will be monitored by the Commerce Commission and consumers will be able to petition the Commission for a stronger regime if required.
• The new "default/customised price-quality path" regime for larger electricity lines companies will apply from 1 April 2009 with the current thresholds being set by the Commission under Part 4A becoming the default price-quality path.

Gas Pipelines

• All gas pipelines (other than those of Nova Gas and the Taranaki pipelines) will be subject to a "default/customised price-quality path" regime (i.e the same regime as for large electricity line businesses).
• The gas pipelines of Vector and Powerco are subject to price control under the Commerce Act.  The Commerce Commission is currently in the process of setting control terms for these companies. Once control terms are finalised by the Commission, they will apply until the end of the first regulatory period. Thereafter, Vector and Powerco will be subject to the default-customised price-quality path regime that other gas pipelines will be subject to.

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