Commerce Amendment Bill

SIMON POWER (National—Rangitikei) Link to this

I raise a point of order, Mr Chairperson. Just for clarification, because this is a very complex piece of legislation, and so none of us on this side of the Committee get out of order in respect of contributions that we might make during the Committee stage, the debate that we are about to enter into relates to Part 1. Does that include those matters contained only in clauses 3 and 4, including the new Part 4 substituted, which of course would lead us right through almost the entire bill up to what would be regarded as Part 2, which commences with clause 27? Am I reading that correctly?

Hon LIANNE DALZIEL (Minister of Commerce) Link to this

I would like to thank the member for his constructive contribution to the debate on this bill, and indeed we have had really good cooperation from the Opposition in respect of the matters contained within it.

I will deal with the first point that was raised, which is about how we judge the interests of future consumers versus current consumers. I think that is set out in the purpose clause. The purpose is “to promote the long-term benefit of consumers in markets … by promoting outcomes that are consistent with outcomes produced in competitive markets such that suppliers of regulated goods or services—(a) have incentives to innovate and to invest, including in replacement, upgraded, and new assets;”. I do not think we should ignore the fact that that is No. 1 of a series of four tests against which those outcomes are being measured.

Starting with the incentives to innovate and to invest is really sending a signal about how important it is not to forget that future needs are just as important when we are looking at a non-competitive market. New section 52A, to be inserted by clause 4, sets out incentives for suppliers of regulated good or services to innovate, to improve efficiency, and to provide services of a quality that reflects consumer demand—that is, current consumers. The purpose of this provision is also to ensure that suppliers share with consumers the benefits of efficiency gains, and to limit the ability of suppliers to extract excessive profits. I think we have the order right, and that sends a very good signal.

The amendments to Supplementary Order Paper 244 are technical amendments. Perhaps as we go through the debate there may be particular questions the member would like me to refer to. There are no material changes to policy contained within these amendments. Essentially the first one is to clarify that input methodologies cannot provide for the legal costs of appeals to be passed through to prices. That is probably one of the less technical aspects of the changes being promoted by the Supplementary Order Paper. I will use new section 54T as an example. The Commerce Committee recommended that the power to transfer jurisdiction be limited to Transpower only. Therefore, the Supplementary Order Paper makes a consequential change to section 54T, to limit the criteria and consultation requirements to Transpower and transmission issues. If the member goes through the different parts of the explanatory note of the Supplementary Order Paper, then he will see that the amendment is simply designed to deliver technically what has been approved by way of policy.

The third area that I want to spend just a little bit of time on is the question of appeals on input methodologies. It has not been a controversial area, but it has been an approach we have adopted to try to achieve a purpose. The purpose is certainty, in an area where the previous law has not allowed for certainty in investment decisions. The only way to get in front of the Commerce Commission in respect of negotiating administrative settlements was to breach a threshold. We are already on the back foot when we are doing that. We are being punished, as it were, for failure in the past, instead of a forward-looking approach being taken, which is what the new provisions of the bill allow. I personally was very passionate about having appeals at the input methodologies stage, because it is really important that when businesses are making investment decisions, they have certainty in respect of how the regulator will act. Businesses actually could not be certain in this area of the input methodologies, which I have to say are pretty much the basis for all of the court cases that have been taken in respect of the Commerce Commission and Part 4 and Part 4A.

We recognise, though, that the input methodologies having appeals in the High Court will present some novel challenges for it. I think we will have to use constructively the period between the passing of this legislation and the implementation of the input methodologies and the appeals that may arise from that. As we have 2 years, essentially, through to 2010, there will be ample time to appoint suitable and available experts—the panel of lay members. We will be ahead of the game, as it were. In that time, the High Court will be able to consider the best way to optimise the appellate process so that it is fair to all while dealing efficiently with the issues raised in appeals.

Once this legislation is passed, I intend to write to the Rules Committee to ask it to start thinking about the processes around High Court appeals to deal with this rather novel area of law, as it will become. I think it is worth doing that, because the alternative would have been to set up a specialist tribunal just to deal with this. I believe very firmly that the first time this occurs, and the input methodologies are then set, appeals will arise out of that. I think that is pretty much a given. I believe that will settle it for quite some considerable time. Even though the system may be reviewed again in 7 years’ time, I do not think we will see significant changes beyond that initial period.

I am very keen for the High Court to give some thought to how it might handle a process where it might be better to get people around the table to talk about issues and really thrash them out, rather than leaving the case for the Commerce Commission, with the case for the individual parties to be made by counsel, and then for rulings to be made. I think that will be a challenge in terms of the new process, but I think it will be worthwhile. I am very grateful that we have the support of the Opposition on this bill. I believe it will improve investment in our important infrastructure companies.

SIMON POWER (National—Rangitikei) Link to this

I thank the Minister for that explanation. I am particularly interested to follow the procedure around the new role for the High Court and how that pans out in a non-legislative sense. I am not sure of the procedures around how a Minister of the Crown does that, but if it is just a matter of informing the body—or signalling to it—

Hon LIANNE DALZIEL (Minister of Commerce) Link to this

Again I am very grateful to the member. I was just jotting down and checking my recollection of what had happened. We have resourced the Commerce Commission to develop the input methodologies. It is a specific allocation for it to do that. The commission has already issued a discussion document with both the process and the timetable included in it. It intends to hold a conference on all the input methodologies in February 2010, so that is after it has consulted on all of the individual input methodologies. It plans to have it determined by mid-2010, in accordance with the legislation, with 20 days then allowed for appeal.

LINDSAY TISCH (National—Piako) Link to this

One of the most controversial parts of the select committee process was dealing with the inclusion of airports. Although we came to some consensus that they should be included in the disclosure regimes, there is probably more debate over this than on any other point. I have a particular interest in airports—I mentioned this in the second reading—so I want to concentrate my comments just on the airport part of the bill. Airports were a late inclusion and, as I have said, National feels that they should be included in the regime.

One of the issues that came out when we were trying to set a pricing regime was whether companies should be operating as a whole. The argument came forward that in airport company situations they were not: they were not operating as a single till, each of their entities was separately in a charging regime, so that they became profit centres. One of the arguments was simply that if we want to have some fairness and equity in terms of setting prices, we should actually be looking at their operating as a whole.

The information supplied to the committee indicated that some airport companies over-recovered in regard to their airfield activities under the Commerce Commission scenario based on historic cost of those specialised assets, and also under the Commerce Commission scenario of using the optimised depreciated replacement cost, which is the optimised deprival value, for specialised assets. We were keen to make sure that this part of the debate was fully canvassed and, as I said, it was the most controversial.

The bill now has a regulatory regime that allows for the setting of the airport charges, and moves it away from the Airports Act into the Commerce Commission. But, I say to the Minister, I need some clarification in terms of what we are looking at with the methodology. We have just had an inquiry into State-owned enterprise valuation methodology, and my understanding is—and the Minister’s advisers here today may be able to help me with this—that the aim of applying the optimised deprival value methodology is to value the assets at the cost to the owner of reinvesting in that business if he or she was deprived of those assets.

So if they were taken away, what actually is the methodology we would use? The optimised deprival value methodology is usually higher than the historic cost. My understanding is that in New Zealand the post-tax nominal weighted average cost of capital is normally used. The next point is that the rate works perfectly well with the historic cost valuation. The next point is that combining the post-tax nominal weighted average cost of capital and the revalued assets can create a double counting of the inflation effect. Those are questions that the Minister, with her advisers, may be able to help me with.

On the other side of the equation, of course, we heard that although the airlines and the Board of Airline Representatives of New Zealand in particular were keen to have the airports included in the Commerce Amendment Bill, the airports—which would argue that they have for the last 20 years operated very successfully without this new regime—were not happy that this was included. They gave examples of where there are deregulated regimes. They mentioned Stansted and Manchester in the United Kingdom, and they mentioned Sydney. But we felt that at the end we need to have this fair and consistent so that there was some equity and that we were not operating where monopolies could be seen to be operating, and that including the airports in this bill was the right way to go. So with those points I would be interested in the Minister’s reply to me as to the clarification of those valuation methodologies, which she may be able to help me with.

Hon LIANNE DALZIEL (Minister of Commerce) Link to this

I continue this debate in the spirit of people genuinely wanting to debate these issues. The provisions relating to the input methodologies are the most important provisions in this bill apart from the introduction of a purpose statement for this particular part. Given that these rules determine how financial statements should be prepared for regulatory purposes, they actually allow the Commerce Commission to identify whether a natural monopoly business is taking monopoly rents. So they are the fundamental part of any form of regulatory control under the legislation, including the very light-handed information disclosure regime that we have just mentioned.

I think the member is asking me to set the input methodologies; we are not doing that. That is the Commerce Commission’s role, and it will be doing that by 2010. Asset valuations could use the optimised deprival value, they could use the optimised depreciative replacement cost method, and they could use the depreciated historic cost method. I think the member has gone through some of those options and asked me to define what it should be. The whole point of defining them up front is so that businesses have certainty going forward about how the Commerce Commission will interpret their obligations to report on their financial statements under any of the regimes included under the Act. That is the same with asset revaluations, the allocation of common costs, taxation, and the cost of capital.

That is the purpose of getting the input methodologies done ahead of time—so that there is certainty. I will not pick and choose which one I might prefer for any particular purpose, but we will have an input methodology that deals with asset valuations, and there will be certainty. That is the key point of this bill.

Dr RICHARD WORTH (National) Link to this

The Commerce Amendment Bill is highly complex legislation in two parts. One can mount sustainable criticism as to why that was done, because it clearly carries with it the potential to stifle debate, with a significant number of subparts in each part. I really wonder at the utility of prolonging the Committee stage. Instead I flag what might be called some high-level issues that caused various stages of the select committee process to pause.

The major part of the substantive change, of course, is in Part 1. Little can really be said of Part 2 because it just effects a number of amendments to other pieces of legislation. So I will focus on Part 1 for a moment and talk about the main changes. Clearly, as has been signalled before, a significant change was the introduction of a purpose statement specifically for the purpose of the Act, to give clearer guidance to the courts and the regulator that the aim of regulation is to promote investment. It is very easy to forget that. We are not seeking in this particular bill to stifle business activity. Rather, it is the opposite, and that is to promote investment.

The main changes are that for the first time there is a clear emphasis on the importance of incentives for regulated businesses to invest, there is a requirement for the Commerce Commission to clearly set out the regulatory rules, which are called “input methodologies”, with all their complications applying to these businesses, and to complete this work by a nominated date in the legislation. These rules are to be subject to merits review, and clearly specifying the rules will greatly improve certainty and predictability for businesses and improve business confidence.

One of the other changes the bill makes is that it allows what one could call “fit for purpose” regulation, such as information disclosure and this negotiate and arbitrate regime as alternatives to full price control. When it comes time to speak about Subpart 11, relating to airports, I will perhaps make some comment about that. Another thing it does, of course, is provide 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.

There is a more appropriate regime of information disclosure for small, locally consumer-owned electricity lines business, where, as Mr Power has said, the customers are essentially the owners of the business. That should—should—lower their compliance costs and result in savings to consumers. There is an enhanced regime for gas pipelines that enables them to propose a price path to the commission, and there is a more robust information disclosure regime for three airports: Auckland, Wellington, and Christchurch—those international airports with monitoring by the Commerce Commission. Mr Tisch has said that that was controversial. The current regime, contained in the Airport Authorities Act, is seen by the airlines to be satisfactory. Not so, the airport companies would say.

Let me just talk about some of the issues that detained us for a short time. The first was the time line for preparation and consultation of input methodologies. This is complex stuff. It centres on new section 52U, in clause 4. But, generally, I would describe the key process requirements in this way. First of all, the commission has to publish a notice of its intention to begin work on an input methodology, including the process to be followed and the proposed time frames. Second, it must subsequently publish a draft input methodology.

Then it has to give interested parties a reasonable opportunity to give their views on that draft. Then it must have regard to any views received; to that end, it may hold conferences. The commission has said it intends to hold one formal conference on all input methodologies by, I think, February 2010. Next, the commission is required to determine all the input methodologies specified in new section 52S, in clause 4, for electricity lines, gas pipelines, and airports by 30 June 2010, with an ability for limited extensions. So it is a complex time line. I do not doubt it will place the commission under some logistic pressure.

Suggestions were offered by officials that there was a case for additional input methodologies under new section 52S. In fact, it is my recollection that the departmental report recommended two additional input methodologies. But there are some problems with that, and I think those problems were fairly noted by the Commerce Commission and have resulted in a position where that is not now to be advanced.

There was also an issue, which centres on new section 52Z(2), in clause 4, about whether new evidence should be permitted on appeals, because that provision prevents parties from introducing new evidence or information in appeals on input methodologies. That is a reasonable approach to take, because it should discourage gaming, and it should, in particular, require parties to put up their best evidence and experts in front of the commission. This gaming that occurs in appellate processes is not uncommon. One need only think about what happens in the world of resource management with the Environment Court to see that it is a legitimate concern, and it is a concern that is appropriately addressed in the Commerce Amendment Bill. Of course, the downside of not allowing new evidence is probably small, because there are no facts or changed circumstances at issue. So, presumably, the High Court Rules will provide a sufficient basis of protection in respect of the introduction of new evidence.

Others have spoken on these issues of appeals on final decisions in addition to appeals on input methodologies, and I do not want to deal with that. We were concerned, however, about the prospect of delays occurring in the High Court in the hearing of appeals on merits and appeals relating to input methodologies. I do not think that issue has been well addressed. The reality is, as others have said, that the courts are open to everyone, like the Ritz Hotel—those who have money can make their way determinedly through the processes, but for many there are huge costs, and the delays associated with cases reaching trial are a compounding effect. So I do not believe we have that issue right, and it may well have to be looked at in the period of the next Parliament.

Members of the Commerce Committee will recall the debate on the issues around whether the commission should be able to appoint itself as an arbitrator under the negotiate and arbitrate regime. The reasons for not allowing the commission to appoint itself an arbitrator are several. They include, clearly, the fact that the commission is a regulator not an arbitrator, so if the commission appoints itself arbitrator it is making regulatory decisions, becoming almost a judge and jury in its own cause, we might say. The second point is that the commission may well be vulnerable to review as an arbitrator, and it may well be seen as conflicted, having made the rules for negotiation or arbitration. I guess there may be a reduced likelihood of the parties reaching a negotiated settlement, and the commission may be perceived by one party or another as likely to make arbitral awards favourable to that party.

There is a big issue, as Mr Tisch has said, about whether airports should be included in the bill. It is right to say that I believe all members of the committee were lobbied determinedly by the different interests in that regard. The view that carried force on the day was that the major airports do have strong natural monopoly characteristics. The select committee was treated to an interesting statistic from Infratil showing that that company aimed to provide its shareholders with a consistent return of 20 percent per annum over the long term. That is a very high rate of return for a low-risk infrastructure business that is not facing competition.

It is also possible to argue quite credibly that the information disclosure regime under the Airport Authorities Act is ineffectual. There are no input methodologies on how information must be compiled for disclosure, and there is no monitoring and analysis by an expert body. As we look back at the history of disputes between airlines and airport companies, we would have to say that those disputes have been expensive, protracted, and, in the context of the court processes that have followed, not really satisfactory.

So information disclosure is a very light-handed form of regulation. It is proper to record that other OECD countries apply much more stringent regulation to their major airports even though their airports are subject to more competitive pressures from, for example, high-speed public transport than New Zealand’s airports. There are other matters that I could talk about, but I identify those as the issues that the Commerce Committee looked at with the closest consideration.

LINDSAY TISCH (National—Piako) Link to this

I want to carry on with a point made by my colleague Dr Worth. The Commerce Amendment Bill does not actually tie in, in terms of pricing methodology and disclosure. Airports will be able to treat information disclosure separately from pricing, and will be able to continue to set prices as they see fit. That will be one of the challenges the Commerce Commission has, and we will be looking very closely at what the regulations are and how this provision will work. I say to the Minister of Commerce that I do not think it is as clear-cut as we would like it to be. There are some huge challenges, and I mention that one in particular—

SIMON POWER (National—Rangitikei) Link to this

We know that any discussion in the Committee of the whole House in respect of clauses 1 and 2 are wide-ranging and comprehensive debates, and do not—