Opening remarks
Good morning everyone and thank you Brent (Layton) for your warm introduction. I am delighted to be here today. Before I begin, I would like to acknowledge the Minister of Commerce Simon Power.
I am here today to not only give you an update on the Commerce Commission's work programme, but to offer you an insight into how the Commission is adapting and changing its approach to meet the changing times.
The Commission's role is to promote competition in New Zealand markets and prohibit misleading and deceptive conduct by traders. In doing this, we support the government's goal of growing the New Zealand economy in order to deliver greater prosperity, security and opportunities to all New Zealanders.
Today, I will be speaking about the impact of the economic recession on our work programme, what we are doing in some of our key areas of work, how we are going on implementation of the Part 4 changes, and where we are turning our attention in areas under the Fair Trading and the Credit Contracts and Consumer Finance Acts.
Economic conditions
At this time last year it seemed likely that the global financial crisis and the ensuing economic recession would have some effect on competition in New Zealand and on the workload of the Commerce Commission. Indeed, the recession that started in late 2008 led to a global decline in GDP of about 2.2% in 2009, but in New Zealand GDP fell by only about 1% last year.
At the Commerce Commission we expected the recession to initially create a decline in the number of merger clearance applications. This prediction came true - in the 2008/09 year there were only 11 clearance applications compared with 26 in 2007/08.
We also expected that merger clearance applications would then increase as the recession deepened, reflecting a rising number of acquisitions of so-called failing firms. But so far there have not been many failing firm transactions, perhaps partly because the New Zealand economy has not suffered a severe recession and has in fact started to show some promising signs of an early recovery. Indeed, we have recently been advised of a number of merger applications in the pipeline - so we expect to see activity in this area pick up this year.
It was also anticipated that the recessionary economic conditions might lead to more instances of collusive behaviour. For example, firms might try to preserve their profit margins by fixing prices with their competitors, rather than competing on price as demand weakens during the recession. Suppliers, too, might be more susceptible to conspire in bid-rigging in an economic slump, when there might be fewer tenders to compete for.
This has been the international experience, but it is perhaps too early to tell whether the recession has generated any additional collusion in New Zealand markets.
A new internal structure
The Commerce Commission is not immune from the need to maximise its resources in the public interest, and to obtain the most effective possible remedies from its enforcement activities.
The Commission is responding to the government's wishes for a cost-efficient public sector, and is taking or has taken a number of steps to deliver a more efficient and productive service.
We have recently reviewed our organisational structure.
In recognition of the overlap between consumer and competition law, and so as to operate as efficiently and effectively as possible, the Commerce Commission has restructured itself, effective from 1 January this year. We now have only two operational branches: the Regulation Branch and Enforcement Branch. In the latter branch we combined the consumer and competition activities and hope to make the most of the investigative expertise that previously existed in different parts of the Commission. We will be flexible and sufficiently resourced to dedicate effort where it is needed, whether that is in further cartel enforcement, large consumer finance investigations or a challenging and disputed merger.
The Commission's bedrock Fair Trading activities, upon which the Commission's public reputation has been largely built, will continue within this new branch structure, and I have more to say about that work a little later.
I have referred to the new Regulation Branch within our reorganised structure. That branch brings together the telecommunications and regulated networks teams in recognition that although they are working within different legislation these teams are applying the same disciplines and similar approaches. We also recognise that the way the Commission engages with its stakeholders in the regulated markets is necessarily different to the way that we engage with business in our enforcement areas.
These changes have resulted in a streamlined senior management team that will be taking a strategic approach to running the Commission's day to day work programme. Let me briefly tell you about the three new members of that team.
Kate Morrison has joined us as General Manager, Enforcement. Kate comes from a background in investment banking regulatory compliance, having most recently been an Executive Director of Global Compliance for ABN Amro in London.
Brent Alderton is the new General Manager, Regulation. Brent has an industry background in energy, and was acting in the previous role of Director Network Performance for a year.
And Peter Alsop has joined us from Pharmac as the new General Manager Organisation Performance. Peter has a background in the public and private sectors, and will be, among other things, ensuring that the Commission has the tools and capability to deliver on its strategic priorities.
We have more recently also begun a review of the Economic and Legal services branches, to ensure that the Commission's essential legal and economic inputs are optimally delivered. By the end of this year the Commission will have completed its organisational review.
I'll turn now to an update on the Commission's current and recent work programme.
Competitive markets
The Commission's purpose is to promote dynamic and responsive markets so that New Zealanders benefit from competitive prices, better quality and greater choice. When businesses compete on their merits, ultimately the consumer decides their success or failure based on price, quality and choice.
We are very focussed on creating greater understanding of how the Commission approaches Commerce Act issues. To this end we have consulted extensively on a series of guidelines, including those covering failing firms, the clearance process, streamlined authorisations and soon to be added divestment and leniency guidelines.
As I mentioned earlier, the expected downturn in merger applications has eventuated. And in the year to date we have had just three applications. However we have had indications from major law firms that we can expect a number of applications in the coming months.
In recent years we have also very rarely had applications for authorisation, but again, we do expect some in the coming year, with at least one likely to involve major issues.
So while work in the area of mergers and authorisations has been quiet this past year, the Commission has used the time productively to prepare for the coming year by preparing the streamlined authorisation process and the failing firm guidelines.
The first of these, the streamlined authorisation process, has been designed mainly to enable faster decisions for straightforward authorisation applications that have clear public benefits and a relatively limited impact on competition. The streamlined process will allow businesses to make more timely and cost-effective decisions. Already, we have had a number of discussions with legal firms expressing an interest in making use of this process.
The failing firm guidelines are designed to assist businesses and their legal representatives by explaining how the Commission will assess claims that the target firm (or division of a firm) is failing, as well as outlining the types of supporting evidence that may be required.
Let me turn now to other areas of competition work. A major competition case that we have resolved in the past year is that of credit card interchange fees.
Interchange
The Commission's view was that the fixing of interchange fees was anticompetitive, and was increasing the cost of credit card services. At this time last year, litigation seemed intractable to all concerned. Yet a year on, the scheme rules have been changed and we believe that the parties have achieved a competitive market outcome. With some very active engagement by all parties, we were able to resolve that proceeding and avoid the cost, delay and uncertainty of a Court hearing.
What we resolved was a forward-looking set of scheme and bank rule changes that we think will benefit the New Zealand consumer. We applied our efforts, in the months before trial, to designing a competition remedy of the kind that the Court could not have delivered even if it had upheld the Commission's claim.
A lot of attention of late has been focused on a small number of retailers that have begun surcharging customers for the use of Mastercard or Visa cards. But let us not lose sight of what was at the heart of this case.
The Commission claimed in High Court proceedings that the multilateral interchange fees substantially lessened competition by artificially inflating the cost to retailers of accepting credit cards, and ultimately raising prices paid by all consumers, irrespective of their choice of preferred payment method.
As a result of our settlements with Visa and Mastercard and the banks involved, retailers will benefit from significant new product offerings, and it is likely that interchange fees charged in respect of transactions in New Zealand using Visa and MasterCard credit cards will be lower on average. We expect to see downward pressure on interchange fees while ensuring that those fees remain transparent and open to competitive forces in the future.
We expect the savings to retailers over the next three years as a result of these settlements to be in the order of $70 to $80 million. Additionally, we expect as a result of some businesses adding a surcharge for credit card use, that we will see a reduction in credit card use, which will create the competitive pressure on credit card companies to renegotiate terms and conditions with banks, and the same pressure on banks to negotiate better deals with retailers. Also, consumers can make an informed choice. Use a credit card and possibly pay a surcharge, or choose to pay by another means. This removes the cross-subsidisation that existed where all consumers paid higher prices to cover the cost of those who paid by credit card.
The solutions reached have been of great interest to other agencies in North America and elsewhere, who are investigating the same problems, and we count it as an example of effective out-of-court resolution. We are continuing our efforts to achieve similarly efficient outcomes in other matters, and have several significant settlement negotiations currently underway. We hope to have more progress to record shortly.
Cartels
Cartel investigations remain a resource-intensive, significant focus of our competition programme. We continue with a busy schedule of 19 active cartel investigations. Ten of these were the result of leniency applications. During 2009 the Commission received five new leniency applications.
Internationally the high detriment of cartels is acknowledged, and the Government's discussion paper on criminalisation is further recognition of this.
Section 36
I note that there will be discussion on section 36 later in this conference, and I do not want to discuss this matter at length here. However, during the course of the last year, the Commission received two significant judgments in section 36 cases, both of which are under appeal.
In the first, known as the 0867 case, the Commission is appealing the Court of Appeal's application of section 36 to Telecom's introduction of the 0867 internet access package. The Supreme Court will hear this case in June.
At issue is the application of the so-called 'counterfactual test' that has been developed by the Privy Council as the sole test for determining whether conduct by a dominant player in the market is competition on the merits, or an unlawful use of market power.
The New Zealand law now deviates from the law developed under the parallel Australian provision, section 46 of the Trade Practices Act. In Australia the counterfactual test is not the sole test for determining whether a firm is taking advantage of market power.
The law as it currently stands is affecting the Commission's ability to fulfill its role in enforcing section 36, and the uncertainty surrounding the application of section 36 also cannot be assisting the decision-making by New Zealand's dominant businesses, or others who may seek to rely upon this provision. It is appropriate that the Commission tests the boundaries and obtains clarity on this issue from our highest court. I want to stress that the Commission is not, through this appeal, seeking to revisit the legislative framework. Rather we are asking the Supreme Court to review what is judge-made law.
In the second case, known as the Datatails case, the High Court held that Telecom breached section 36 in charging downstream competitors disproportionately high prices (in excess of ECPR) for wholesale access to its network. This was the Commission's first section 36 win for many years. The Court confirmed that dominant firms must price essential inputs to competitors in downstream markets to enable efficient competitors to compete. Telecom has appealed that decision to the Court of Appeal and a separate penalty hearing will be held in the High Court in due course.
These cases, although distinct, both confront the difficulties and intricacies of section 36 analysis. Because of that, and because both cases are still before the Courts, the Commission has elected to await the Courts' guidance before further developing its section 36 review or guidelines.
Consumer law
The Commerce Commission's enforcement of the Fair Trading Act has a history of significant success in influencing trader behaviour and improving consumer confidence. Through past successes we are able now to become more focussed about our interventions, and leverage off the past to impress upon businesses the importance of compliance.
Last year, after reviewing New Zealand and overseas experiences of heightened consumer concern, we created three focus areas in Fair Trading: financial services; sustainability and telecommunications. These focus areas have allowed the Commission to develop its knowledge of these industries and to take a proactive stance to resolving issues. They are constantly reviewed, and over time new focus areas will be developed in response to new emerging issues.
In the area of financial services we have been particularly busy. The most significant current investigation is into the representations made by ING and ANZ National Bank Limited with regard to the Diversified Yield and Regular Income Funds. The matters under investigation are complex and there is a large amount of information being provided by ING, ANZ and other parties that must be considered. We are aiming to reach a decision as to what action may be appropriate later next month.
In the financial services area there is frequently a crossover between Fair Trading work, and that undertaken under the Credit Contracts and Consumer Finance Act. We recognise the need for further guidance to the credit industry on the application of this Act, and further education of consumers as to their rights. Last year we released draft credit fees guidelines for public comment. Submissions showed strong support for the guidelines and raised several issues requiring further development. We expect to release revised draft guidelines some time in the next few months.
Ultimately, these guidelines will allow creditors to act with confidence in setting fees and establish business models that comply with the Credit Contracts and Consumer Finance Act.
They will also assist with ensuring transparency of pricing across the credit sector, reducing creditors' transaction costs and reducing compliance costs. But where the Commission's views are challenged or the law remains unclear in areas covered by the guidelines, the Commission has the option of initiating litigation to seek clarification.
In the area of sustainability, we were concerned that marketers were increasingly using so-called "green-washing" as a positioning tool, often with little or no science to back up their claims. The harm here is two-fold. Consumers are misled into buying a product or service they believe is better for the environment than another, and competitors are deprived of legitimate sales.
In this area we have provided guidance in the form of guidelines for green marketing, and for carbon claims. These have been well received by the business community. We have also engaged in discussion with a range of industries that make sustainability claims in their advertising. False or misleading green marketing claims will, from now on, be given enforcement priority by the Commission.
Let me now turn to telecommunications, which features prominently in the thousands of complaints we receive each year under the Fair Trading Act. You will be aware that we recently achieved a $500,000 court penalty against Telecom for misrepresentations of the Xtra Go Large broadband plan. Importantly for consumers this was accompanied by $8.4 million in refunds. In addition we resolved another large case with Telecom last month resulting in refunds to customers totalling $9.5 million. We also commenced litigation last year against Vodafone on various misleading representations made in relation to five different retail products (including broadband and mobile products).
Practically every New Zealander is a consumer of telecommunications products, so this is an area with very large impact when things go wrong. Hence, in addition to litigation where necessary, the Commission is focussed on providing guidance to the industry. We have begun, and will continue to have, regular compliance meetings with telecommunications companies. We also issued, in November last year, draft guidelines on disclosure of telecommunication product bundling. This is an important initiative to ensure advertising of such products meets clear minimum standards. This makes it easier for consumers to make informed choices, and will better drive competition in this market.
Aside from the focus areas I have just talked about, the Fair Trading team continues to take on complex cases in wide-ranging industries. The 'Wings and Wheels over Waikato case' saw the Commission work closely with the Police to bring charges against the failed airshow's organiser Ken Ross, and ensure refunds for ticketholders. Mr Ross will be sentenced next month on charges under both the Crimes Act and the Fair Trading Act.
And we received a judgment from the Supreme Court on whether the Commission's damages claim against Carter Holt Harvey should be struck out as time-barred. This judgment clears the way for the Commission to pursue compensation for consumers and builders affected by mis-graded timber sold by the company. The ruling has wider implications for the future enforcement of the Fair Trading Act.
Finally, on the subject of Fair Trading, let me tell you about a successful new initiative - the Low Level Inquiry Unit. Each year the Commission receives about 10,000 complaints under the Fair Trading Act. We do not have the resources to investigate each and every one, instead selecting cases according to our enforcement criteria, on factors such as the scale of detriment.
But often consumers are raising issues that can be resolved quite quickly, allowing the Commission to prevent a small problem from becoming a bigger one. The Low Level Inquiry unit looks for quick, simple resolution of straightforward Fair Trading Act complaints, either through compliance advice to the trader, or in more serious cases a warning. The unit has closed around 50 cases each quarter since its inception, exceeding all expectations.
This approach presents a win-win situation - the aggrieved consumer has their problem resolved and has confidence that the Commission has acted on their complaint, whilst the business has avoided more serious enforcement action but has learned what they must do to be compliant.
Part 4 of the Commerce Act
Let me turn now to our work in the regulation of networks. The most significant tasks facing the Commission over the coming year are as a result of the new requirements under Part 4 of the Commerce Act; these are the setting of Input Methodologies and information disclosure requirements for electricity distribution businesses and gas pipelines. In addition, we will be setting price quality paths for non-exempt electricity lines businesses and gas pipeline businesses. In the case of airports, we are required only to set an information disclosure regime.
A common feature across these workstreams is interpreting the new purpose statement for Part 4 which forms part of the statutory context of our decisions.
A common overall purpose statement
The previous targeted control regime and information disclosure regime for electricity lines businesses, under the now-revoked Part 4A, had specific purpose statements. However, there was no explicit reference to the importance of innovation or investment in those purpose statements. Also, there was no explicit purpose statement to guide Part 4 inquiries as to whether other sectors should be regulated, and if so, to guide how they should be regulated. For instance, the lack of a purpose statement was one of the factors that contributed to the scope and complexity of the judicial review of the Commission's recommendations in the 2004 Gas Control Inquiry. Part 4 now includes a common overall purpose statement that guides all aspects of the Commission's regulatory decision-making under that Part. That said, the Commission's interpretation of the new purpose statement continues to be a topic for consultation.
The clear focus of the new purpose statement is on the long-term benefits of consumers in regulated markets. The purpose statement recognises that competitive markets are expected to provide benefits to consumers over the long term, and that regulation is intended to promote outcomes consistent with those in competitive markets, to the extent possible in markets where competition is absent or limited. These outcomes must be such that suppliers have incentives to innovate, and to invest and operate efficiently - and that consumers share in the efficiency gains made by suppliers through prices lower than would otherwise be the case (absent competition).
We face tight statutory deadlines for this work, but the Commission is on track to meet these. We met our first deadline last year with the setting of the default price quality path for electricity distribution businesses that will apply from April 2010. This determination and the accompanying decisions paper were the result of a substantial consultation process and represent an important milestone in the transition to the new Part 4 regulatory regime.
Effective consultation will be the cornerstone of successful implementation of the new requirements. The Commission has embarked on a wide-ranging programme of publishing discussion documents and holding workshops and conferences on input methodologies, cost of capital and information disclosure for airports. We held a three day conference in September 2009 in which we had an open debate on all of the key areas on which we need to adjudicate for input methodologies, such as asset valuation, allocation of common costs and tax treatment. We also put out just before Christmas emerging views papers which we hope will be a valuable step in letting the industries see how our thinking is developing and will be a useful framework for our current series of workshops. We have been heartened by the quality of constructive engagement that has happened to date and look forward to parties continuing to participate in this spirit.
I note here that the Minister of Commerce granted a six month extension to the statutory deadline for setting input methodologies. We requested this extension in response to calls from the interested parties. The extension will allow more time for the Commission to consult closely, with interested parties and inevitably to ensure the effective implementation of the new regime.
Electricity reform
As a result of the Ministerial review of the Electricity markets, some changes are proposed which have an impact on the Commission's work. The reforms would do away with the Electricity Commission as it currently exists, replacing it with an Electricity Authority with a more streamlined role.
This change would see the responsibility for approvals of transmission investment under 'Part F' of the Electricity Governance Rules transferred to the Commerce Commission. The Commission is confident it can deliver on this work, due to our involvement already with Transpower through approving its non Part F expenditure, and the constructive relationship we have built up. The Commission will be addressing the need for more capability in this area in due course.
The other change is that, if approved, the Commission's role under the Electricity Industry Reform Act will conclude. Under this Act currently the Commission has both an enforcement and adjudication role.
Dairy
And finally a few words about a change that is on the radar in the dairy industry. The Dairy Industry Restructuring Act is currently under review and we expect to see further changes. Proposed changes are intended to provide Fonterra with a fairer and more efficient price for regulated milk. The pro-competitive measures of this Act are designed to be transitional, and include sunset clauses which expire current regulation when certain market share thresholds are met.
Whether workable and effective competition will be evident in dairy markets by the time these sunset clauses expire is one of the questions facing the current review of this regime. The Commission has made a submission on that review and has noted that workable competition is a significant threshold to be met. Moreover, market share alone is unlikely to be the best method for determining whether workable competition exists in relevant markets. The Commission's preferred approach for assessing workable competition - based upon principles endorsed by the Courts under the Commerce Act - is to look at all the factors that contribute to a competitive environment. Barriers to entry are particularly relevant for assessing whether the likelihood of entry is sufficient to constrain an incumbent with a firm in a dominant position, such as Fonterra.
Telecommunications regulation
Finally let me return to the subject of telecommunications, but this time under the Telecommunications Act.
Of the major reforms under the 2006 amendments to the Telecommunications Act, local loop unbundling continues to make a significant contribution to innovation and competition in the New Zealand broadband market. So far, 70 exchanges have been 'unbundled' by six different providers, resulting in around 47,000 customers having services delivered over unbundled lines.
In 2009, the mobile market saw the entry of a third operator, 2Degrees, with an immediate dramatic reduction in prices for pre-paid phone users.
The Telecommunications Act allows for credible industry solutions, in the form of undertakings, to create an alternative to a proposed regulatory change. This aspect of the Act was highlighted in the Commission's recent mobile termination access investigation, where industry parties provided undertakings as an alternative to regulation.
As with the input methodologies conferences I referred to earlier, the conference held on mobile termination access in September 2009 allowed the Commission to question the industry participants and their advisers on their submissions, to inform the Commission more clearly on the relevant issues.
This investigation, which was a major work stream for the Commission in 2009, has now concluded and the Commission has provided its recommendations in a report to the Minister. As the Commission's report is now with the Minister, no further comment on this matter is appropriate at this point.
In the coming year, the Government's ultra-fast broadband initiative will be an important focus for our telecommunications team. The regulatory regime has been primarily dealing with Telecom's copper network and other wireless technologies. However, with the fibre initiative there is an opportunity to put a quasi-regulatory regime in place before the investment is made, which will give certainty to the industry.
Concluding remarks
I would like to conclude by bringing today's focus back to what the Commerce Commission is here to achieve. Our role is to foster market competition, as this encourages businesses to be efficient and innovative and to meet consumer demands.
We are very mindful of the overall state of the economy and of the government's directive to all taxpayer funded entities to manage budgets tightly and increase productivity. We are genuinely changing the way we do business. We aim to complete our organisation's restructuring by the end of the year. At the same time we will be tightly focused on completing the challenging work in setting Input Methodologies in accordance with the extended deadline, whilst continuing to deliver on our core responsibilities in competition and consumer protection, as well as telecommunications regulation.
We are seeking to engage more with the businesses affected by our decisions and interventions. In so doing, we aim to balance our role as the regulator with the need to increase understanding of the benefits to be gained from dynamic, competitive markets.
Thank you for your attention today, and I wish you a stimulating conference.
