Source: https://www.bellgully.com/publications/working-with-workable-competition
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Working with workable competition
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This article first appeared in Law News Issue 4 (28 February 2014), published by Auckland District Law Society Inc.
In December 2013, the High Court released an important decision about the regulation of natural monopolies under Part 4 of the Commerce Act 1986 (Wellington International Airport Ltd v Commerce Commission [2013] NZHC 3289). In a judgment running to 661 pages, the Court dismissed a number of appeals brought by regulated businesses against input methodologies set by the Commerce Commission. In doing so, the Court made some useful observations in relation to a key concept in the Act – that of “workable competition”.
As section 52 explains, Part 4 of the Act provides for the regulation of markets where there is little or no competition and little or no likelihood of a substantial increase in competition. The purpose of Part 4 is then set out in section 52A:
In carrying out its duties under Part 4, the Commission issued a number of “input methodologies” which are important ingredients in the regulation of airport, electricity and gas businesses. Dissatisfied, those businesses appealed to the Court. In essence, they asked the Court to determine whether their proposed alternative approaches would be “materially better” in achieving the aims of Part 4 than those adopted by the Commission. This required the Court to consider carefully the purpose of Part 4, and so the meaning of “workable or effective competition”.
The Court then sought to apply that touchstone in determining the issues presented by the appeals. For instance, one of the key issues in the appeals concerned the appropriate regulatory asset base (the greater that asset valuation, the higher the regulated prices that could be charged in the future). According to the appellants, that valuation should have been calculated by reference to the costs a hypothetical new entrant would face. The Court concluded that such an approach was not mandated by the reference in section 52A to promoting outcomes consistent with those produced in workably competitive markets.
The Court itself notes in passing that the reference to workable competition in section 3(1) may just be a recognition that perfectly competitive markets do not exist in reality. If that is so, then it may not be helpful to try to understand exactly what is meant by “workable competition”. It may be better simply to acknowledge that markets demonstrate varying levels of workable competition (unless they are characterised by little or no competition, such as markets which require regulation under Part 4). In the context of Part 4, the focus would fall instead on the outcomes in section 52A(1)(a)-(d).
Although section 3(1) in fact refers to “workable or effective competition”, the Court does not consider in detail the meaning of “effective competition”. The inference seems to be that “effective” adds nothing to “workable” in section 3(1). Given that the phrase “effective competition” was used in sections 2A and 21 of the Commerce Act 1975, and that the Courts are usually reluctant to conclude that a statute includes redundant words, that inference may not be entirely safe.
Perhaps the key point is that, even 28 years after the Commerce Act was passed, there remains real uncertainty about the meaning of “workable competition”. It may be hoped that the appellate courts will have an opportunity to consider this fundamental issue soon.