News
Price control amendments: more or less control?
First published in NZLawyer, 4 April 2008.
A rewrite of New Zealand’s price control laws has hit the halls of Parliament.
The Commerce Amendment Bill, introduced to the House on 13 March, is the culmination of an 18-month review and consultation process and is described by Commerce Minister Lianne Dalziel as “a back-to-basics rewrite” of the country’s price control provisions drawing on “best-practice regulation in other OECD countries”.
Price control is designed to ensure that there is efficient and cost-effective regulation of the price and quality of goods or services which are not subject to competition. Until the last decade, the post-1984 era has seen very few goods and services placed under price control in New Zealand. This trend has reversed in the last decade as telecommunications, electricity lines businesses and gas pipelines fell under price control. The experience in these sectors has perhaps guided the Government to reassess the price control provisions and led to the following key changes.
New purpose statement
The Bill introduces a specific price control purpose statement. The objective is to maximise the long term interests of consumers by mimicking as far as practicable the outcomes of competitive markets. This does not just mean lower prices today or tomorrow; the Bill recognises the importance of providing correct price signals for investment, research and development and efficiency, in order to promote sustainably lower prices.
New Zealand welfare approach to regulation
Under the Bill the Minister can only recommend regulation if the benefits of regulating clearly exceed its costs and risks. The Bill also requires the Commerce Commission to examine the impact of regulation on market efficiency, distributional and welfare consequences, in both qualitative and quantitative terms where “possible and practicable”. In economic terms, this reflects more of a “total welfare” approach to regulation – i.e. regulation is justified if it is in the interests of New Zealand as a whole – as opposed to the Commission’s current approach where regulation is mandated if consumers as a group are better off overall. These changes reinforce the idea that regulation is a back-stop mechanism not to be invoked lightly and only where it is demonstrably good for New Zealand rather than particular groups.
More options for “control”
The current regime provides for bright line regulation. This means there is either full price control or there is none. There is no middle ground. Given the costs of control this places a high bar before price control can be imposed.
The Bill provides the Commission with a greater armoury to exert “control”. It will be able to recommend companies be placed under a range of forms of regulation namely:
- An information disclosure regime under which companies must disclose certain information, such as prices, to the Commission which in turn performs a monitoring role. The rationale being that businesses will temper any supra-competitive pricing for fear of further regulation. The Bill immediately imposes this regime on Auckland, Christchurch and Wellington international airports.
- A negotiate/arbitrate regime under which a company will be required to reach agreement, through negotiation, on the supplier's prices and quality standards during a specified regulatory period, and to provide for binding arbitration if negotiation is unsuccessful. This regime is similar in concept to the Telecommunications Act 2001.
- A default/customised price-quality regime, similar to the existing Electricity Lines Business (ELB) price path threshold regime but with major improvements (outlined below).
Whether these changes mean more businesses will fall under price control remains to be seen. However, they do appear to lower the costs of some form of control, making it more likely that any cost/benefit analysis would favour regulation. The requirement that benefits of regulation clearly exceed the costs should provide a check and balance in the system to prevent over-regulation.
Electricity regulation: fitting the punishment to the crime
The Bill reforms the current price path regime for ELBs, which now provides that ELBs can only increase prices by the CPI-X each year. If an ELB breaches the threshold, the Commission can impose control regardless of the size of the breach. To illustrate, Vector’s entire lines business was controlled after it breached the thresholds by less than $80,000. Arguably, the punishment did not fit the breach. In fact, arguably it was not aimed at the actual breach at all but rather provided a window to require Vector to “re-balance” its prices and the returns from each customer segment it supplied.
The Bill also removes the Commission’s ability to simply impose control for breach. The Commission will now have to apply for a court order that a company in breach pay a fine of up to NZ$5m, and pay compensation to affected persons suffering loss. The Commission will also be able to seek an injunction restraining a business from supplying goods or services in contravention of a price path threshold, or positively requiring them to do so.
More certainty for Electricity Lines Business
The default/customised price-quality regime has evolved from the current ELB price regime. Critics have argued this regime provides little incentive and certainty for investment. This is because an ELB making an investment and wishing to earn a return on that investment will almost invariably increase prices and thereby breach its CPI-X threshold.
In effect this gives the Commission an ex-post investment approval role. The ELB in breach must satisfy the Commission the investment was warranted so it is not subject to price control. This creates obvious uncertainty because an ELB does not know ex-ante whether it will be able to earn a return on an investment. The issue was infamously highlighted when Vector put a hold on all new investment after the Commission published its intention to declare control.
Under the new regime, ELBs will be able to apply for a customised price path where, for example, major investments are needed. This enables ELBs to ascertain ex-ante what return they will receive on an investment. Combined with the new penalty provisions this should materially alter the risk profile for new investment.
Allied to this is the new requirement for the Commission to publish binding input methodologies setting out its method for determining the cost of capital, valuing assets, allocating common costs, etc. These will be set and applied equally and consistently to provide more certainty and timeliness to the customised path process.
While these changes are generally very positive, with the Commission’s burgeoning responsibilities, it could be that resource constraints limit their practical effectiveness. For example, the Bill limits the number of customised paths the Commission needs to consider each year to four. If an ELB is not “in early” it may end up with the default path for an additional 2-3 years thereby delaying necessary investment or forcing ELBs to risk a breach.
* David Blacktop is a senior associate with Bell Gully specialising in competition and regulatory law.
