Ministry of Economic Development to review Parts IV and V of the Commerce Act

The Minister of Commerce has announced the MED will undertake a review of Part IV (which deals with the imposition of price control) and Part V (which deals with clearances and authorisations) of the Commerce Act.

The terms of reference for that review have not yet been released. However, the Minister has stated that a key focus of the review is answering the question: do New Zealand companies have the scale and scope to compete globally?

In this article we outline some options for amending the clearance and authorisation provisions of the Commerce Act that might be considered as part of the review.

Possible options for reform

There are a number of ways in which the clearance and authorisation regime could be amended which might provide as much competition as possible, while recognising the unique characteristics of New Zealand's economy and geographic position. Bell Gully has no view on the appropriateness or otherwise of these options and any policy option would be the subject to detailed policy analysis. Nevertheless they are options that might well be canvassed in the MED's review. These options are not mutually exclusive.

• Clearances for restrictive trade practices.

Currently, clearances are available for business acquisitions, but not for market arrangements between competitors. Because of the cost of seeking authorisation, and the penalties associated with a breach of the Commerce Act, the authorisation process might deter some businesses from implementing business arrangements that have an uncertain effect on competition.

Allowing businesses to apply for faster and less costly clearances might create more certainty for businesses seeking to pursue these types of business arrangements.

• Remove the need for quantification of benefits and detriments

Currently the Commission is bound by the statement of Richardson J (as he then was) in Telecom Corp of NZ Ltd v Commerce Commission ([1992] 3 NZLR 429) that it has a responsibility to attempt, so far as possible, to quantify detriments and benefits rather than rely on a purely intuitive judgment to justify a conclusion that detriments in fact exceed quantified benefits.

There are few cases (either authorisation cases or regulatory intervention cases) where the Commission has been able to accurately calculate the relevant benefits and detriments. The exercise depends critically on the data and assumptions used. In our experience, this means that quantification often results in esoteric arguments between parties' external economic experts and the Commission's economists (both internal and external) with each advocating his or her own approach. The outcomes from this process are often widely varying estimates depending on the assumptions and data sources used, and an increased cost for the Commission and all parties involved. Furthermore, clients often complain that the economic models do not always resemble or mimic commercial reality.

In Australia, the Trade Practices Act does not require an applicant for authorisation to quantify, in precise terms, the benefits claimed to arise if authorisation is granted. Nevertheless, there must be a factual basis for concluding that the public benefits are likely to result. We agree with the statements of the Australian Competition Tribunal in Qantas Airways Limited ([2004] ACompT 9) which stated:

"We consider that the nature of public benefits needs to be defined with some precision, a degree of precision which lies somewhere between quantification in numerical terms at one end of the spectrum and general statements about possible or likely benefits at the other end of the spectrum",

and:

"All other things being equal, detailed quantification is the best option. However, quantification at all costs is not required by the Act, and has never been sought by the Tribunal. There are diminishing returns to the quantification exercise. Benefits should be quantified only to the extent that the exercise enlightens the Tribunal more than the alternative of qualitative explanation."

The authorisation process could be made simpler and substantially faster and cheaper if the requirement to quantify net benefits were removed. Some might argue that this would mean that the Commission would have to rely on "intuitive" judgments. However, the Commission already does this in respect of clearances and we see no reason in principle why the approach should be different for authorisations.

• Inclusion of mandatory consideration of increased export receipts for Authorisations.

The test for an authorisation is general and broad (i.e. a benefit to the public of New Zealand). Given the Minister's apparent concern with New Zealand's ability to compete on the world stage, there might be merit in considering enacting a provision similar to Australia's section 90(9A) of the Trade Practices Act which requires the ACCC when granting an authorisation:

• to regard a significant increase in the real value of exports or a significant substitution of domestic products for imported goods as public benefits; and



• to take into account all relevant matters that relate to the international competitiveness of any Australian industry.

The Commission already utilises a total surplus standard in assessing authorisations and, therefore, these matters are considered as part of any authorisation decision. However, such an amendment might bring into sharper focus matters that directly affect New Zealand's international competitiveness.

• Broader ability for Commission to accept and enforce undertakings.

A business can offer two types of undertakings to ameliorate any competition concerns or concerns that claimed public benefits will not accrue:

•  Structural undertakings, which are where a business undertakes to divest itself of a set of assets in order to allow another business to compete; and

•  Behavioural undertakings, which are where a business undertakes to do, or not to do, certain things to either promote competition or ensure public benefits accrue.

The Commission cannot accept behavioural undertakings in respect of an application for clearance of a business acquisition and has, historically, been generally reluctant to accept behavioural undertakings in respect of business arrangements. Structural undertakings are easy to monitor and enforce because they are one-offs. In contrast, behavioural undertakings require ongoing monitoring and enforcement.

Nevertheless, the Government's legislative intervention in the Fonterra case provides an example of the use of both structural and behavioural undertakings to provide a solution. In that case, the Government required Fonterra to divest New Zealand Dairy Foods to an un-associated party (a structural undertaking) and enacted the Dairy Industry Restructuring (Raw Milk Regulations) 2001 (a form of behavioural undertaking). 1

A possible option would be to provide a mechanism to encourage the Commission to play a more active role in designing, accepting and enforcing behavioural undertakings. While such an approach would require the Commission to have some form of ongoing monitoring role, given the number of authorisations applied for, it might not create a significant resource cost especially if those behavioural undertakings were given the force of regulations and could also be enforced by third parties.

Next steps

There are options available that could reduce the hurdles facing beneficial business arrangements from occurring, however, some of those options might impose equally significant detriments on the business community. We will continue to keep a watching brief on proposals for reform in this area.

1 The Raw Milk Regulations required Fonterra to make raw milk available to competitors in certain quantities and on the same terms as it supplied milk to itself. These regulations were designed to lower barriers to entry in the market and ensure that New Zealand Dairy Foods would continue to act as a strong competitive threat in the domestic dairy market.

Enquiries and information

For more information on any of the cases, articles and features in Competition Update, please contact one of our team:

Phil Taylor, Partner; Jenny Stevens, Senior Associate; Torrin Crowther, Senior Associate; David Blacktop, Senior Associate