Applying new regulatory laws on Commission’s New Year radar
By David Blacktop, senior associate, Bell Gully
The Commerce Commission (Commission) has started the year with a full book of reviews that will shape its approach to the regulation of some of New Zealand’s key industries.
Among those on the immediate horizon are, in the telecommunications industry, reviews of access to Telecom’s local loop backhaul services and the implications of the roll-out of Next Generation Networks for telecommunications competition and regulation, and more generally, decisions regarding how the Commission will apply the revised regulatory control provisions in the Commerce Act 1986, which passed into law in October 2008. These decisions will have implications across multiple industries and businesses.
On 24 December, the Commission published its Discussion Paper on Next Generation Networks setting out its preliminary views on the implications of the revised regulatory control provisions. The discussion paper raises a number of important questions and seeks submissions by 16 February 2009.
Those that hoped that the rewrite of the regulatory control legislation would cause a fundamental change in the Commission’s approach to regulation might well be disappointed by its 159-page discussion paper. This is perhaps not that surprising. After all, as the American economist John Kenneth Galbraith said: “Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.”
Why a new regulatory control regime?
The new regime is designed (and is hoped) to improve certainty and clarity for businesses and to provide greater incentives for future investment. It has improved the regulatory processes and this should mean more certainty and clarity for businesses from a process perspective. The Commission is now required to publish binding input methodologies and the potential for customised price quality thresholds for firms with particular circumstances, such as a need for extensive capital investments, are definite process improvements.
One of the key drivers for the speedy (by New Zealand standards) rewrite of the legislation was the Government’s concern at the controversy over the Commission’s decisions to publish an intention to declare control of Vector’s electricity lines businesses and Transpower’s transmission pricing. These decisions were roundly criticised by many businesses, both regulated and unregulated, which were frustrated that both the regime and the Commission’s approach provided little certainty and little incentive to make investments.
Will the Commission change its approach?
The discussion paper leaves the reader with the distinct impression that the Commission’s application of its regulatory agenda will be unlikely to change significantly. This is hardly surprising – the Commission’s membership has not changed, and the Commission has actively publicised the regulatory outcomes it has achieved.
An illustration of the Commission’s unchanged stance is its discussion of the new purpose statement. The new purpose statement essentially builds on the purpose statement that previously applied only to Electricity Lines Businesses (ELBs).
The introductory words of the new statement include the same overarching goal as was included in the ELB purpose statement, ie regulation is “to promote the long-term benefit of consumers”.
The previous statement had three sub-paragraphs detailing the specific factors the Commission had to consider when applying its powers for this overarching purpose. The new purpose statement adds a fourth: that regulated businesses have incentives to innovate and to invest, including in replacement, upgraded, and new assets.
While this change seemingly elevates the importance of investment, the Commission does not seem to view this as a fundamental change requiring it to modify the emphasis on the factors it considers. The discussion paper notes the High Court’s interpretation of the previous statement:
“The Court also noted that subsections (a) to (c) ‘are identified by Parliament as central aspects of the long-term interests of consumers and are central, though not exclusive, goals for the Commission in the performance of its duties under subpart 1 of Part 4A’. This serves as a useful guide to interpreting the new purpose statement in section 52A.” (Emphasis added.)
It also notes the Commerce Select Committee’s statement that although “incentives to invest are important, we consider they need to be balanced against the need to protect consumers from excessive prices”, and, perhaps more tellingly, notes that “in the context of performing its regulatory functions prior to the introduction of the [amendments], it considered the promotion of dynamic efficiency to already be implicit in section 57E(b) … and in section 70A(c) of the Act..., as well as in the 2006 GPS... This is because the Commission considers that in each case the reference to efficiency relates to all three efficiency dimensions.”
These statements illustrate that the Commission does not see the addition of investment into the purpose statement as requiring it to change its approach. Rather, the addition simply makes an existing consideration explicit.
Is responding to the discussion paper important?
The purpose statement example is symptomatic of the view implicit in the discussion paper that the changes to the legislation will not require the Commission to change its approach. This is important because while key decisions on input methodologies and the way in which regulation will be imposed have yet to be made, the discussion paper cannot be regarded as solely a process paper – indeed it raises many fundamental questions that will shape the way in which the subsequent decisions about input methodologies and the various regimes are implemented.
For example, the questions posed concern:
• the way in which the regulatory asset base should be valued;
• the way in which tax and depreciation should be treated;
• the continued use of NPV=0 and Financial Capital Maintenance concepts;
• the way in which common costs are allocated;
• whether P0 adjustments should be made;
• how the ‘claw back’ provisions should be applied;
• what factors should be considered in setting information disclosure requirements;
• whether X factors should be set taking into account overseas benchmark productivity information;
• can an index other than CPI be used in the price path thresholds; and
• how prescriptive information disclosure requirements should be.
For regulated businesses especially, while the process changes will no doubt improve outcomes, if they disagree with the Commission’s previous regulatory approaches, then the discussion paper intimates that there is still work to be done. While it might be tempting to wait until specific discussion papers on input methodologies etcetera are published to fully respond to the Commission’s views, it may be that the time to move is now because influencing the Commission’s thinking at an early stage is likely to be easier and more effective.
A copy of the discussion paper is available at www.comcom.govt.nz/IndustryRegulation/regulatoryprovisionsofthecommercea.aspx.
NZLawyer, issue 105, 5 February 2009