Better incentives for investment in infrastructure - Minister of Commerce Media Statement

Infrastructure businesses like electricity lines companies and airports will gain improved incentives to innovate and invest while giving consumers protection from excessive prices and poor quality, under a Bill amending the Commerce Act introduced to Parliament today.¹

Commerce Minister Lianne Dalziel and Energy Minister David Parker said the Commerce Amendment Bill is the culmination of a 22-month review of the price control provisions of the Commerce Act. It amalgamates Parts 4 and 4a of the Act which apply to sectors where there is little or no competition or prospect of competition, such as electricity lines, gas pipelines and now airports. Sectors like this are regulated in all OECD countries.

The Bill introduces a purpose statement specifically for this section of the Act to give clearer guidance to the Courts and the regulator that the aim of regulation is to promote investment.

The main changes are:

• for the first time, a clear emphasis on the importance of incentives for regulated businesses to invest
• a requirement for the Commerce Commission to clearly set out the regulatory rules (called input methodologies) applying to these businesses, and to complete this work by 30 June 2010. These rules will be subject to merits review by the High Court. Clearly specifying the rules will greatly improve certainty and predictability for businesses and improve business confidence;
• allowing fit-for-purpose regulation, such as information disclosure and a negotiate/arbitrate regime, as alternatives to full price control;
• a much simpler and more predictable regime for electricity lines businesses, removing the threat of relatively heavy-handed regulation for minor breaches of thresholds, and with time limits for Commission decisions;
• a more appropriate regime of information disclosure for small locally consumer-owned electricity lines businesses where the customers are essentially the owners of the business. This will lower their compliance costs and result in savings to consumers;
• an enhanced regime for gas pipelines which enables them to propose a price path to the Commission;
• a more robust information disclosure regime (compared to the Airport Authorities Act) for the Auckland, Christchurch and Wellington international airports, with monitoring by the Commerce Commission.

The Bill also includes some tidying up relating to the clearance or authorisation of business mergers, the most significant of which is a new provision to enforce undertakings that are made by parties to the proposed merger.

"We have undertaken extensive consultation with interested parties in developing this Bill, and most stakeholders have warmly welcomed the proposed improvements in certainty and in regulatory processes," Lianne Dalziel said.

"Overall, most regulated businesses should face lower compliance costs because of greater certainty about the rules, and better designed regulatory processes."

David Parker said the Bill represents a particular win for consumer-owned electricity lines companies which were previously subject to onerous and costly rules.

"Now they will only have to disclose information to the Commerce Commission, rather than meet the more demanding requirements faced by commercial electricity lines companies. This is because they're owned by their customers who are therefore less likely to require protection from excessive prices."

"The Bill will be referred to the Commerce Committee for consideration, and I hope that it will be possible to have it passed before the election," Lianne Dalziel said.

Attachment: detailed summary of amendments to the legislation.

Summary of main changes to Parts 4, 4A, 5 and 6 of the Commerce Act in the Commerce Amendment Bill

Purpose statement

• A purpose statement is introduced for the first time for price control provisions. It seeks to promote outcomes consistent with competitive markets, including providing incentives to invest, innovate and make efficiency gains, while requiring suppliers to share gains with consumers and to limit excessive profits.

Test for when regulation may be imposed

• A new test for when regulation may be introduced includes requirements that:
  • There is little or no competition and no likelihood of a substantial increase in competition, and
  • There is substantial scope for the exercise of market power, taking into account the effectiveness of existing regulation or arrangements (including ownership), and
  • The benefits or regulating clearly exceed the costs and risks of regulating.
• A full inquiry by the Commerce Commission is required as a first step before new goods or services may be regulated. Decisions on whether and how to regulate rest with the Minister of Commerce in consultation with any sector Minister.

Input methodologies

• Input methodologies cover matters such as how to calculate the cost of capital, value assets and allocate common costs, and processes and procedures for regulatory decisions.
• The Commission is required to set input methodologies for electricity lines, gas pipelines and airports by 30 June 2010. (The Minister may grant one extension of 6 months). The methodologies are binding on the Commission and regulated suppliers.
• Interested parties have a right of general appeal against the input methodologies to the High Court sitting with lay members. (The Select Committee has been asked to consider whether narrower and more specific appeal criteria would be appropriate).

Information disclosure

• Powers to impose information disclosure requirements are provided in the Bill. (At present, this lighter-handed form of regulation is not available without new legislation).

Negotiate/arbitrate regime

• This is a new relatively light-handed form of regulation which may be suitable for suppliers with relatively few larger customers. It requires a supplier to negotiate prices and supply agreements with its customers, with mandatory arbitration if they cannot agree. The parties themselves enforce any agreement.
• The processes and procedures for the negotiation and any arbitration are set by the Commerce Commission. The Commission also appoints an arbitrator If the parties cannot agree on one.

Default/customised regulation

• This is a new form of regulation (replacing the Part 4A thresholds regime). It will apply to electricity lines businesses that are not consumer-owned, and to gas pipelines.
• It requires the Commerce Commission to set a default price-quality path for regulated suppliers for (normally) 5 year periods. The start price may be existing prices or amended prices, with the rate of change in prices determined by the consumer price index less a requirement for productivity improvement, based on long run productivity improvement rates for the sector.
• Suppliers may apply to the Commission for a customised price-quality path if they have special requirements, such as significant new investment requirements. The Commission must make decisions on the proposal within approximately 12 months.

Electricity lines businesses (ELBs)

• Consumer-owned ELBs (such as trusts) will be subject only to information disclosure requirements. However, consumers will be able to petition the Commerce Commission if they consider the ELB should be put on the default/customised regime. (This regime will apply to about 16 ELBs).
• Other ELBs will be subject to the default/customised regime (as well as information disclosure), instead of the Part 4A thresholds regime. The Commission will be required to set a default path for these ELBs by 1 April 2010. Existing Part 4A thresholds will be rolled over until then. Breaches of Part 4A thresholds after 1 April 2008 will be subject to the new penalties and remedies regime.

Gas pipelines

• The gas pipelines of Powerco and Vector (Auckland) will continue to be under price control until 2016 or any earlier date agreed with the Commerce Commission, at which time they will go on to a default/customised regime. Other gas pipelines will be subject to a default/customised regime from 1 July 2010.

Auckland, Wellington and Christchurch international airports

• These airports will be subject to a new information disclosure regime from 1 July 2010, using input methodologies set by the Commission. The Commission will monitor disclosed information and report to Ministers after 2012 whether the information disclosure regime is effective.

Penalties and remedies

• The Bill provides for a range of pecuniary penalties and offences, to be applied by the courts, for breaches of regulatory requirements. It also provides for compensation for breaches of price-quality paths and for injunctions. These provisions replace current powers which enable the Commission to impose penalties and remedies without reference to the courts.

Section 69A undertakings on mergers

• The Bill provides for variances to undertakings given by merger parties, and new enforcement provisions.

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