Dalziel Lianne: Commerce Amendment Bill — Second Reading 
Text is incorporated into the Bound Volume 
Dalziel Lianne: Commerce Amendment Bill — Second Reading 
[Sitting date: 02 September 2008. Volume:649;Page:18313. Text is incorporated into the Bound Volume.] 
Hon LIANNE DALZIEL (Minister of Commerce) 
: 
 I move  
That the Commerce Amendment Bill be now read a second time 
. The overarching objective of this bill is to provide for efficient and cost-effective regulation of the price and quality of key goods and services that are not subject to competition and to do so in a way that promotes greater certainty and incentives to invest and innovate for regulated businesses.  
In practice the number of services not subject to competition is small. However they tend to be important services relating as they do to essential infrastructure such as electricity lines gas pipelines and airports. The Commerce Committee has recommended a number of amendments to strengthen the bill and the Government both welcomes and supports these improvements. The bill introduces a specific purpose statement for economic regulation which is a significant improvement to the current Act. I would go so far as to say that the absence of such a purpose statement has led to considerable uncertainty which has affected the ability of infrastructure companies to make timely investment decisions. The new purpose statement makes it clear that the objective is the long-term benefit of consumers of goods or services that are not faced with competition or the likelihood of a substantial increase in competition. This is to be achieved by promoting outcomes consistent with those in competitive markets including providing incentives to suppliers to invest innovate and improve efficiency while requiring them to share efficiency gains with consumers and to limit excessive profits.  
The bill makes it clear that regulation may be imposed only if three criteria are met: namely there is little or no competition and little or no likelihood of a substantial increase in competition; there is scope for the exercise of substantial market power taking into account the effectiveness of existing regulation or arrangements including ownership arrangements; and importantly the benefits of regulation must materially exceed the cost. Getting the rules right is critical for promoting confidence and providing certainty for businesses particularly for infrastructure providers who need to invest in long-life assets. One of the main criticisms of the current regime is the lack of certainty and predictability on crucial regulatory matters such as how to calculate the cost of capital and value assets allocate common costs and so forth. To address this the bill requires the Commerce Commission to develop as a priority the rules requirements and procedures—and we have described them as input methodologies—for regulation.  
I note that submitters were unanimous in supporting the intent of these provisions but were concerned that as drafted these objectives might not be achieved. It is pleasing to note that the select committee has given considerable thought to this and recommends strengthening these provisions to require the commission to develop the rules in sufficient detail to provide predictability and certainty for businesses.  
The bill as introduced provides for a right of appeal on the Commerce Commission’s determinations on input methodologies. The appeal is to the High Court with the judge sitting with expert lay members. The select committee has recommended that should the High Court decide to amend or substitute a new input methodology it would need to meet the test of being materially better in meeting the purpose statement. This is a sensible criterion to apply in the circumstances where we have an expert body but where it is essentially the rule maker and the regulator. In Australia there are separate bodies in the energy sector to make the rules on the one hand and to implement the rules on the other. New Zealand simply does not have the scale to achieve the separation so the appeal right was designed to essentially mimic the separation of functions. 
The biggest change to the bill recommended by the committee is providing for appeals to the High Court on the commission’s final decisions on customised or individual price-quality paths. Submitters were unanimous in supporting such appeals. Appeals that may be lodged in order to game the process are dealt with by excluding matters already determined as input methodologies and providing for the commission’s decisions to apply pending an appeal. For those who have read my concerns which I expressed before the bill was introduced about the potential for gaming I can say I am satisfied with this approach.  
Under the current regime price control is the only response available to address markets where goods and services are not subject to competition. We consider that it is desirable to provide a range of regulatory options to provide fit-for-purpose regulation. In this regard the bill provides for the following alternative forms of regulation to price control. The first is information disclosure which is a relatively non-intrusive form of regulation that requires firms to disclose information to the public about their costs prices asset management plans and so forth.  
The second option is negotiate/arbitrate. This form of regulation requires a supplier to negotiate prices in supply agreements with its customers with compulsory arbitration if parties cannot agree. The commission will set the processes and procedures for negotiation and arbitration and if the parties cannot agree on an arbitrator then the commission will be responsible for appointing one.  
The next is the default and customised pathway. This form of regulation requires the commission to set a simple relatively low-cost default price-quality path for regulated suppliers for 5-year periods. The key feature of the default price path is that the rate of change in prices will be determined by the consumer price index less a requirement for productivity improvement based on long-run productivity improvement rates for the sector. Suppliers will be able to apply to the Commerce Commission for a customised price-quality path if they can justify this—for example because they need to make significant new investments. The commission would be required to make decisions within 12 months.  
The bill has specific subparts that set out how economic regulation will apply to electricity lines business gas pipelines and airports. For electricity lines businesses Part 4A will be repealed. Small consumer-owned businesses will be subject to information disclosure regulation only. This is because consumers as owners are able to ensure that the business looks after its long-term interests. These provisions should significantly reduce compliance costs and avoid complex regulation where the risk that the long-term interests of consumers will not be met is relatively low. However as a safeguard consumers will be able to petition the commission if they consider that increased regulation is required.  
For other electricity lines businesses information disclosure and the new default customised regime will apply. This new regime is expected to provide greater certainty for businesses than the current Part 4A. This is the result of a combination of design features such as requiring input methodologies to be set in advance provision of an upfront opportunity for firms to apply for customised paths statutory time frames for processes and the introduction of conventional penalties and remedies. I mention that because the real benefit is that it removes the requirement to breach thresholds before being able to negotiate with the commission which under the current arrangements is an administrative settlement based on past history rather than a customised approach going forward. The bill also provides detailed transitional arrangements. I note that the committee has recommended improvements to these provisions in response to submissions.  
The key change for the regulation of gas pipelines recommended by the committee is for the gas pipelines of Powerco and Vector which are currently under price control to transition to the new default customised regime for other gas pipelines in 2012 rather than 2016 or at an earlier date agreed with the commission. Other gas pipelines will be subject to a default customised regime from 1 July 2010.  
Specified airport activities supplied by the Auckland Wellington and Christchurch international airports will be subject to information disclosure from 1 July 2010 and the Commerce Commission will monitor disclosed information and report to Ministers after 2012 as to whether the information disclosure regime is effective.  
In conclusion I say that I am confident that this bill is a significant improvement on the current provisions and that it will improve certainty for businesses provide better incentives to invest and protect consumers from excessive prices and poor quality where there are no competitive pressures to do so. I would like to take this opportunity to acknowledge and thank the officials and the Commerce Committee for their hard work on this bill for the careful consideration they have given to submissions and for a unanimous and timely report recommending worthwhile improvements to the bill. I commend the bill to the House.