Good morning everyone and thank you for inviting me to give a keynote address to this conference. Thank you Jean-Pierre de Raad for your introduction.
At the Commerce Commission the outcomes we want for New Zealanders guide our work. Those outcomes are: that markets are more competitive and consumers are better informed, and that regulation is better targeted and more effective.
Like every government agency, we're working in a challenging economic environment as Government keeps a steady focus on bringing New Zealand's budget back into surplus.
But in recent years we have put considerable effort into rethinking the way we work, with changes to our internal structure, a lean management team and a focus on using our resources wisely to achieve maximum efficiency for the effort we put in.
In a year which sees us deal with a wave of litigation in the regulatory sector, possibly take on new responsibilities under the Dairy Industry Restructuring Amendment Bill 2012, and maintain our busy programme under the competition and consumer legislation we enforce, these improvements have paid off.
We are well positioned to meet the challenges of a busy work programme and new responsibilities and workload, and to contribute to a more competitive and productive economy.
What I'll cover
In this address I'll cover the essentials of our current and upcoming work programme across our Competition and Regulatory branches, including legal areas that create issues for us, highlight significant cases and preview important legislative developments. At the end of my address I'll be happy to take questions from you.
Competition
We place high priority on seeking redress for consumers through our interventions. Over the last two years, through our work under the Fair Trading and Credit Contracts and Consumer Finance Acts, we have achieved over $50 million in compensation for consumers.
We respond to breaches of the law by identifying where we can most effectively achieve the greatest benefit for affected consumers and businesses. While we will sometimes have good reason for taking cases to court, it is often through negotiated settlements with the businesses involved that we can achieve more immediate redress, and avoid the time and costs of litigation.
As we address the need for cost effective enforcement tools targeted to appropriate sectors, we've been very active with our advocacy and education programme. Because Kate Morrison, the Commission's General Manager Competition, will speak to you in detail tomorrow about the case for advocacy as an effective enforcement tool, and the innovations we have developed, I won't cover that material here.
Instead I'll talk about the significant cases we have completed or have underway and important developments in the pipeline.
Cartels
A suite of cartel cases have continued to dominate our Competition programme over the past 18 months. A record number of cartel settlements have produced a string of recent judgments. These judgments provide valuable judicial guidance on the principles and processes that apply when calculating financial penalties under the Commerce Act and, in particular, they reinforce deterrence as the primary objective.
We currently have nine active cartel investigations with another four having been resolved over the past year without litigation. The large-scale Freight Forwarding and Air Cargo cases feature heavily in the Commission's Competition programme for 2012.
Freight Forwarding
Following a leniency application in 2007, the Commission began an investigation into allegations of "hard core cartel conduct" in the international freight forwarding industry. We filed proceedings in August 2010.
The Commission reached settlements with four of the parties to the cartel, with the High Court endorsing jointly recommended penalties against each company. The penalties were:
- In December 2010, the High Court at Auckland ordered
- EGL Inc. to pay a penalty of $1.15 million
- Geologistics International (Bermuda) Limited to pay a penalty of $2.5 million.
- In June 2011, the High Court further ordered
- BAX Global Inc/ Schenker AG to pay a combined penalty of $2.5 million
- Panalpina World Transport to pay a penalty of $2.7 million.
Litigation continues against the remaining cartelist, Kuehne + Nagel International Ag. While the Commission successfully applied to the High Court to set aside Kuehne +Nagel's challenge to jurisdiction, Kuehne +Nagel has appealed the jurisdiction judgment to the Court of Appeal. The appeal was heard on 3 April 2012 with the underlying proceedings stayed pending the appeal outcome. We are currently waiting for the Court of Appeal's decision.
Air Cargo
The Air Cargo investigation began with a leniency application in 2005 involving allegations of anti-competitive conduct by international airlines in the air cargo industry.
In August 2011, the Commission succeeded in the first phase of a split trial against the defending airlines. In May 2011, the High Court was asked to decide whether there was a "market in New Zealand" for the inbound air cargo services that the Commission alleges were the subject of price-fixing by the defending airlines. The High Court at Auckland determined that inbound air cargo services were supplied in a market in New Zealand, and that the Court had jurisdiction to hear the Commission's case in full.
Appeals to this decision have been stayed pending the second liability stage of the proceedings, which will determine whether the defending airlines entered into arrangements to agree on fuel and security surcharges, which were components of freight rates. That hearing is set to start in February 2013 and scheduled to last up to five months.
To date the Commission has reached settlements containing substantial penalties with three of the 11 airlines in the Air Cargo litigation:
- On 5 April 2011, the High Court endorsed the penalties jointly recommended against British Airways and Cargolux. British Airways was ordered to pay a penalty of $1.6 million, and Cargolux received a $6 million penalty.
- Settlement with Qantas followed in May 2011, with the company ordered to pay the jointly recommended penalty of $6.5 million.
Criminalisation of cartels
As you will no doubt be aware, a Bill proposing the criminalisation of cartel conduct was introduced to Parliament in October 2011.
The question of introducing criminal sanctions arose out of the Single Economic Market agenda, and the desire for businesses to face the same consequences for the same conduct on both sides of the Tasman.
However, if the Bill becomes law in its current form we will see not only the introduction of criminal sanctions, but also an overhaul of s 30 of the Commerce Act.
The Bill proposes a parallel civil and criminal offence in a new s 30.
Drawing on the OECD definition of hard core cartel behaviour, and in line with the Australian offence, the new s 30 prohibits agreements between competitors that fix prices, restrict output, allocate markets and/or rig bids.
Put briefly, a person who enters into or gives effect to such an agreement will commit the civil offence. A person who enters into or gives effect to such an agreement, and who has the intention to fix prices, restrict output and so forth will commit the criminal offence.
The Commission recognises that it will be important for parties to understand the circumstances in which the Commission is likely to take a civil prosecution, and those in which we are likely to seek a criminal prosecution. Guidelines on this issue will be published before the criminal offence comes into force.
The legislation introduces some other new concepts.
The joint venture exemption is replaced by a collaborative activity exemption. This is said by the Ministry of Economic Development (MED) to be a wide exemption covering both ancillary restraints and joint ventures. It is a novel exemption, not found in Australia or any other jurisdiction.
In order to provide certainty for business, the Bill proposes a clearance regime for collaborative activities that do not substantially lessen competition. Depending on applications for clearance received, this regime may allow the Commission to build up a body of precedent as to how it enforces the exemption.
In any event, the Commission intends to publish guidelines on the collaborative activity exemption before it becomes law.
Although not dealt with in the Bill itself, we understand that the Crown Solicitor and not the Commission will be responsible for any criminal prosecution. Accordingly it is important for the Commission to work closely with the Crown Law Office in preparation for the changes.
For example, the cartel leniency programme is a crucial tool for the Commission in detecting cartels. To ensure the continued effectiveness of the leniency programme we have worked with the Crown Law Office to develop draft guidelines for criminal immunity in cartel cases. We will continue to draw on their extensive experience with criminal matters, for example in the development of prosecution guidelines.
MED have run an extensive consultation process on the Bill that many of you may have contributed to. Throughout the process it has been the Commission's role to advise MED on the operational implications of the proposals. Our goal has been to ensure that any law change is not overly burdensome on businesses, but at the same time allows us to properly detect, investigate and prosecute cartel conduct.
Although it is before Parliament, it is currently unknown when the Bill will become law.
Once the Bill has received its first reading it will go to a Select Committee, where interested parties can make a submission. The Commission intends at this stage to make a further submission on some operational implications of the proposals.
Section 36 of the Commerce Act
Monopolisation is perhaps the single most complicated area of antitrust law. Every competition jurisdiction in the world of which I am aware has struggled to develop clear rules to distinguish illegitimate anti-competitive activity from legitimate, aggressive competition.
The same has proven to be the case for our jurisdiction. Of particular concern is the reconfirmation by the Supreme Court of the counterfactual test, perhaps now known as the "comparative exercise", as the sole test for taking advantage of market power. This test, which asks what would have happened in a hypothetically competitive market, is not considered a relevant enquiry in any other jurisdiction, except Australia, and even there it is not the sole test.
The approach to single-firm conduct in Australia has been quite flexible. The recent amendments to s 46 of the Competition and Consumer Act only codified a judicial trend, which was already well underway, to view unilateral conduct by dominant firms from a variety of angles depending on what approach was best suited to elucidating the issue, without relying solely on the counterfactual test.
The Commission saw the 0867 proceedings as an appropriate factual matrix in which to urge, on appeal to the Supreme Court, the departure from Privy Council precedent and the adoption of a more flexible approach, such as that taken in Australia.
Interestingly, the Supreme Court did not share the Commission's understanding that the approaches set out in the Australian authorities differed materially from the counterfactual test required by the Privy Council. Rather it appeared to interpret the Australian jurisprudence as being consistent with the Privy Council precedent applicable in New Zealand.
In particular, the Court seemed not to recognise any significant difference between the counterfactual test and either of the "materially facilitated" or "Deane J" tests. While apparently acknowledging the different formulations of these enquiries, the Court emphasised what it viewed to be the essential feature common to all of them, namely the employment of a "comparative exercise".
The Supreme Court laid down what it considered to be the nub of the analysis in any given case, holding that "it must be shown, on the balance of probabilities, that the firm in question would not have acted as it did in a workably competitive market". Although the Court does not use the moniker, this is effectively a verbatim restatement of the counterfactual test laid down by the Privy Council, and most commentators have interpreted the decision to have upheld the prevailing approach as previously mandated by the Privy Council.
Despite the clarity of language in the Court's restatement of the counterfactual test, it must be acknowledged that references elsewhere in the judgment to the concept of "facilitation" could raise questions about whether the Court intended to broaden the mandated approach.
The Court's apparent decision not to refer explicitly to the "counterfactual test" in its judgment, but rather to speak of a "comparative exercise", may give oxygen to such speculation. As one commentator has put it, "Did the Supreme Court intend to confirm the counterfactual test by a different name? Or did it intend to introduce some greater flexibility?" The answer is not clear.
For now, the consequence of the Supreme Court's judgment for the Commission, firms and their advisers is a significant measure of uncertainty. The decision has not delivered the alignment with Australian jurisprudence that the Commission had sought in terms of being able to employ alternative tests for determining whether a firm has taken advantage of its substantial market power.
As a result of the very clear availability of alternative tests in Australia, which have now been codified in s 46(6A) of the Competition and Consumer Act, it would seem that any policy preference in New Zealand for clear alignment with Australia will require legislative intervention.
Mergers and Acquisitions
In the mergers and acquisitions area we have seen an upswing in the numbers of companies applying for clearances or authorisations.
In the 2009 / 10 year we had seven applications for clearance. The following year saw 10 applications for clearance, two for business acquisition authorisations and one for a restrictive trade practice authorisation. Between the end of last year and May 2012 we've had nine applications for clearances and two for restrictive trade practices authorisations.
Since the global financial outlook is still uncertain we're unsure whether this upward trend will continue. In the meantime we've used our staff resources in a productive and efficient way with mergers and acquisitions personnel moving between other areas of the Competition Branch depending on where demand is greatest.
The Christchurch earthquakes were factors in two applications for clearance. The first was the IAG (NZ) Holdings Limited application to acquire certain business assets of AMI Insurance Limited, excluding AMI's Canterbury earthquake liabilities. You will probably remember that as a result of the Canterbury earthquakes, AMI incurred significant insured losses which required it to enter into a capital support arrangement with the New Zealand Government in order to continue operating. Subsequently, AMI determined that the best course of action was to seek an external investor.
The second was Southern Community Laboratories Limited's application to acquire 100% of the shares in Medlab South Limited from Sonic Healthcare (New Zealand) Limited. The application followed the loss of the Canterbury DHB contract and the destruction of Medlab South's Christchurch laboratory as a result of the February 2011 earthquake.
Seagate Technology Plc's application for a clearance to acquire certain assets of the hard disk drive business of Samsung Electronics Co. Limited, illustrated the trend we are increasingly seeing of global mergers. As the acquisition and competition effects of the proposed merger would play out in other jurisdictions, the Commission had to delay its decision until the American and European authorities had completed their competition assessment.
As a consequence of this type of work the Commission has strengthened its ties with its fellow agencies and in particular, the Australian Competition & Consumer Commission (ACCC).
Godfrey Hirst
Of particular interest during the year was Godfrey Hirst's appeal in the High Court against the Commission's decision to authorise Cavalier's acquisition of the wool scouring assets of its sole New Zealand competitor, NZ Wool Services. The Commission was satisfied that the acquisition would result in such a benefit to the public that it should be permitted.
While the High Court dismissed the appeal it found that the margin between the benefits was closer than the Commission determined. However, the likely detriments were still outweighed by the public benefits and consequently the acquisition was authorised.
The judgment determined that the Commission does not need to identify a single figure for a particular detriment or benefit; it can choose a range, however, if it does adopt a particular value for a detriment or benefit, we should set out our reasons why we have chosen that figure as likely.
It was argued on appeal that different analytical standards were required in the merger-to- monopoly situation. The Court held that the word "monopoly" adds nothing to the Commission's factual assessment and there are no special standards for analysing merger-to-monopoly. Any concern that the sole remaining competitor will have a high level of discretionary market power, leading to potential detriments in the market, should be accounted for in the factual/counterfactual comparison and the related quantitative analysis.
We are not required to overlay some kind of social policy judgement enabling us to decline an authorisation even if the merger-specific efficiencies accepted by us outweigh the efficiencies lost or, conversely, to grant an authorisation where losses exceed gains.
The Court confirmed the importance of using quantitative analysis, acknowledging that it underpins and facilitates the balancing exercise the statutory test requires and noted that such an assessment avoids the speculation and intuition that might come into play without the discipline and rigour of a facts-based quantitative assessment.
The quantitative analysis is not the only reference point in the balancing exercise - there may be non-quantifiable benefits that are still to be given weight.
Multiple counterfactuals
Multiple counterfactuals are somewhat problematic for New Zealand competition law because New Zealand's jurisprudence has departed from the rest of the world.
The substantial lessening of competition test under s 47 involves an inquiry into comparative levels of market power in the factual compared with the counterfactual.
The High Court in Woolworths v Commerce Commission formulated the principle that there could be multiple counterfactuals that are real and substantial possibilities and if so, it is necessary to assess the factual against each. This is a novel approach which does not apply elsewhere.
The High Court also advanced the further principle in Woolworths that where there is more than one real and substantial counterfactual, the Commission and the Court should not choose the one that either thinks has the greatest probability of occurring. Rather, the competition assessment should be made against each of the counterfactuals.
This framework is problematic and runs the risk of false negatives. There is the danger that in the absence of an assessment of the probability that an unfavourable counterfactual would occur, a merger may be declined clearance by the Commission in a scenario where the choice of a more probable and more favourable (in competition terms) counterfactual would have allowed us to give clearance.
Igloo case
As we recently announced, we have closed our investigation into the joint venture agreement between TVNZ and Sky television to provide low-cost pay TV services.
On the basis of the evidence available we considered that provisions of the Agreement between the parties were unlikely to substantially lessen competition and therefore were unlikely to breach s 27 of the Commerce Act. In particular, the relevant restraints on TVNZ's behaviour were relatively narrow.
TVNZ's acquisition of 49% of Sky's Joint Venture Company was unlikely to substantially lessen competition. With or without the acquisition TVNZ would retain a similar ability and likely incentive to enter pay TV or offer content to pay TV operators.
Given the number of complaints we have received, we investigated the scope for the acquisition to lessen competition, assuming that there is a material difference between the factual and the counterfactual. In other words:
- with the joint venture, TVNZ will not launch a low-cost pay TV operation competing with Igloo
- without the joint venture, TVNZ alone or with others will launch a low-cost pay TV operation.
Even if this was the case, we are of the view that any lessening of competition would not be substantial. This is because it is unlikely that TVNZ entering into pay TV would significantly increase competition in the market given the number of other likely new and potential entrants identified in our investigation.
However, our market inquiries, and overseas competition inquiries, identified potential material barriers to entry into pay TV. In particular, we have received concerns that access to content and Sky's contracts with internet service providers may be hindering competition.
Accordingly, we have started a separate investigation into concerns under Part 2 of the Commerce Act, in particular that:
- Sky's agreements for content acquisition might substantially lessen competition contrary to s 27 of the Commerce Act, by denying actual or potential rivals access to a critical mass of quality content.
- Sky's agreements with internet service providers such as Telecom, Telstra Clear, Vodafone and CallPlus might substantially lessen competition contrary to s 27 of the Commerce Act, by limiting internet service providers' ability and/or incentive to offer competing pay TV products.
The Credit Sails investigation
A significant issue for the Commission has been the ongoing investigation under the Fair Trading Act into the promotion and sales in New Zealand of an investment product called Credit Sails.
Credit Sails was promoted and sold to the New Zealand public in 2006 with the prospect of capital protection and 8.5% interest income over the six and a half year life time of the notes. The investment raised $91.5 million from the public, mostly retail investors.
Forsyth Barr Ltd acted as the lead manager, while Credit Agricole Corporate and Investment Bank, formerly Calyon, acted as arranger. Calyon also assumed a number of other roles. The investment notes were issued by Credit Sails Ltd, a Cayman Islands company set up for this purpose.
Credit Sails involved a complex series of related transactions, including the purchase of a series of notes issued by Momentum CDO (Europe) Ltd, a credit default swap between Momentum and Calyon in relation to a reference portfolio containing 120 entities, and a total return swap between Calyon and Credit Sails Ltd.
Between September 2008 and March 2009 a series of six credit defaults occurred in the Momentum Reference Portfolio. In other words, six of the 120 entities in the portfolio (including Lehman Bros and three Icelandic banks) collapsed.
These six defaults were sufficient to reduce the value of the Credit Sails notes to zero, apart from a small balance resulting from the unwinding of the credit strategy.
On 12 May 2009 Credit Sails Ltd announced that, at maturity (December 2012), Credit Sails would be redeemed at zero plus the investors' pro rata share of the residual monies, which at the date of the announcement amounted to $11.66 plus interest for every $1,000 invested.
The Commission's investigation is focused on whether the promotion of Credit Sails involved misleading conduct in breach of the Fair Trading Act. If the Act has been breached, then the Commission hopes to obtain compensation for investors who were misled. The Commission has been liaising with the Financial Markets Authority, and has spoken with a number of investors, brokers and local and overseas financial experts.
The investigation has now advanced to the stage that the Commission is communicating its views with Forsyth Barr and Calyon. Progress is being made on this front, and we expect to be in a position to provide a further public update in July or August 2012.
Fair Trading
We continue to have a busy enforcement programme under the Fair Trading Act which ranges between compliance advice, warnings and prosecutions depending on the severity of the case.
One particular innovation has been the cost effective approach of the low level inquiry unit. Tomorrow Kate Morrison will highlight more of the thinking behind this unit and other enforcement choices, so I'll cover the significant enforcement actions of our programme over the past 14 months and the coming year.
Sometimes the Commission issues and publicises industry-wide compliance advice in order to try to influence behaviour change and to alert consumers to particular issues. One initiative which received widespread coverage last year was a caution to 280 sunbed operators and distributors about the risks of making false or misleading claims concerning the health benefits and risks of sunbed use.
This year we also issued a well publicised warning to Progressive Enterprises Ltd about beer sale promotions that we considered to be in breach of the Act.
Progressive claimed that customers could save "at least 20%" or "at least 25%" off all beer at its Countdown, Foodtown and Woolworths supermarkets. The Commission considered that consumers could reasonably have expected the discounts to be in relation to the usual price, or the price at which the beer was offered for sale immediately prior to the promotion. However, we found that, in a number of cases, the discount was calculated off Progressive's "standard shelf price", which in many cases had not been offered for a lengthy period of time.
We achieved considerable penalties in our prosecutions of major breaches of the Fair Trading Act.
In August 2011, Vodafone was fined over $400,000 after pleading guilty to breaching the Act in relation to its Vodafone Live mobile phone internet site. In September 2011, Vodafone was fined $81,900 after being found guilty of breaching the Act in relation to its $1 a day mobile phone internet data charges.
We have long been concerned about the advertising of cheap calling rates on prepaid phone cards. These rates are often prominently displayed in retailers' windows and on call rate comparison cards. However, in some instances there are various fees and surcharges that are disclosed only in fine print, and some purchasers - particularly migrants and international students - are liable to be misled. After previous attempts to educate phone card companies went largely ignored, the Commission has recently taken two prosecutions. These resulted in penalties of $100,000 for Tel Pacific NZ Ltd and $140,000 for Compass Communications Ltd.
In February 2012, Chrisco Hampers Ltd was fined $175,000 after pleading guilty to breaching the Fair Trading Act by misleading customers about their cancellation rights under the Layby Sales Act.
The Commission expects to bring a number of new Fair Trading Act cases to court over the coming year.
In addition, we continue to be involved in litigation that began in previous years, including the series of cases against Vodafone. The issues in those cases, which are to be heard in July and September, include the provision of a $10 registration credit for prepay mobile phone customers, the advertising of mobile broadband, and claims by Vodafone in 2008/09 to have the largest mobile network.
The Commission also expects to settle a large number of cases, and continues to encourage voluntary compliance in order to reduce the need for litigation.
Credit Contracts and Consumer Finance Act
Lower Tier Lenders Project
Under the Credit Contracts and Consumer Finance Act an important focus has been the activities of lenders who target vulnerable consumers. Working with a range of agencies has helped make the intervention more effective.
We started a project in 2011 to ensure lower tier lenders were compliant with the CCCFA. The project was started in South Auckland, and focussed on identifying "backyard" lenders operating out of garages that provide finance to vulnerable consumers.
Lower tier lenders were identified from a number of sources including information being provided by consumer advocates, for example, community law centres, budget advisory services, and local Citizen Advice Bureaux. Commission staff, in conjunction with Financial Markets Authority staff, visited a number of these creditors.
Creditors have been made aware of their obligations under the CCCFA such as providing proper disclosure and not charging interest in advance, and the requirement for registration under the Financial Service Providers Act.
We are conducting follow up checks on the identified creditors, and rolling the project out to other parts of New Zealand. Commission staff continue to liaise with FMA staff when instances of non-compliance with financial service providers legislation are identified.
Prosecutions
We took two successful prosecutions in the consumer finance area.
eFeMCee Finance Limited (FMC)
FMC Finance pleaded guilty to charges under the CCCFA and FTA in May 2011, and was sentenced in October. FMC was a small finance company based in Auckland. It had approximately 50 debtors but as is common with many small creditors, there was a history of repeat lending to existing debtors and many debtors had multiple loans.
FMC and its director, Albert Loots admitted charging unreasonable fees on loan payment protection plans, unreasonably requiring debtors to buy insurances, failing to provide debtors with required information about their loans and failing to correctly rebate insurance premiums when loans were repaid early and misleading consumers in relation to the nature of the payment protection plans being sold by FMC.
The payment protection plan was in effect a bond designed by Mr Loots to ensure that borrowers met their repayments - which was both misleading and contrary to industry practice. Mr Loots had sole discretion in determining whether or not to offset this bond against the outstanding balance of the loan at the end of the contract. According to Mr Loots, the insurance was to cover the loan repayments if a debtor died or fell sick, but there was no policy document setting out the cover provided and payment was also at his discretion.
Mr Loots changed some of the company's practices in 2008. As the Commission only received a complaint about FMC's loans in late 2010, it was hamstrung by time limitation issues, and could only deal with the contracts taken out between April and June 2008.
However, as a result of the Commission's case, FMC reduced the loan balances of about 16 loan contracts belonging to debtors, and refunded $39,600 to six borrowers who paid unreasonable fees for insurance and payment protection policies, as well as the compound interest that was applied to those fees.
Banning Order against Trevor Ludlow
Under the CCCFA it is possible for us to apply to the Court to ban a person from acting as a creditor. In December 2011 we obtained our first banning order when Trevor Allan Ludlow was banned indefinitely from working in the consumer finance industry.
Mr Ludlow and his company Takarunga Management Limited trading as Mortgage Rescue were prosecuted by the Commission under both the CCCFA and the Fair Trading Act in relation to its conduct and fees it charged homeowners desperate to stave off mortgagee sales. Mr Ludlow is a convicted fraudster who the Judge said did not "display the integrity and fair dealing that is appropriate in this type of dealing."
Gym Contracts
Over recent years we have received complaints about gym memberships and in particular that consumers were unaware of the total financial commitment they were signing up for, and the cost of cancelling contracts.
In 2011 we decided to look further into these contracts. We contacted a number of gyms across the country and asked them about their practices, particularly in relation to disclosure of the total cost of membership and the information gym members were given about cancelling their contracts and costs of this.
After considering the terms of the contracts, particularly the fees charged, we formed the opinion that many of the contracts were likely to be consumer credit contracts. We provided information to the gyms covering why we thought they were likely to be subject to the CCCFA, the obligations the CCCFA imposed on creditors and also worked with a key industry body, Fitness NZ, to disseminate information about the CCCFA to the wider fitness/gym industry.
Many gyms outsource the fee collection process and we liaised with this business to ensure that the gym contracts contained the information required by the CCCFA. We also obtained widespread media coverage of the issue which helped publicise the issue to the industry and consumers.
Consumer credit law review
We have continued to work with the Ministry of Consumer Affairs on the consumer credit law review, in particular raising issues around the enforceability and clarity of particular provisions of the Act.
Our key focus within this work has been on providing comment on how the current consumer protection laws are working and providing the expected level of consumer protection, and ensuring lenders obligations are clear, particularly when the consequences of breaching those obligations are criminal sanctions and/or potential banning orders.
We expect to make a formal submission on the review and also on the current review of the Credit Repossession Act.
Regulatory work programme
In the electricity, gas and specified airport services part of our regulatory work programme, good progress towards regulation has been tempered by a considerable amount of litigation.
Input methodologies
Input methodologies for electricity lines services, gas pipeline services and specified airports services in Auckland, Wellington and Christchurch were set in December 2010. While parts of these input methodologies are subject to merits appeals in the High Court, they remain in place until any appeal is successful.
The Commission has been progressively rolling out the regulatory instruments that apply the input methodologies. Airports information disclosure and an individual price-quality path for Transpower are already in place. Information disclosure for gas and electricity distribution is expected to be in place around the middle of this year, with Transpower's information disclosure requirements being developed in the second half of the year.
It was also expected that the Commission would have decided by now whether to reset the default price-quality path for electricity distribution to take account of the input methodologies, and that a default price-quality path for gas pipelines would be in place by the middle of the year. However, these have both been delayed to due to a judicial review challenge by Vector.
Vector successfully challenged the Commission's decision not to set a Starting Price Adjustment Input Methodology in December 2010, and not to specify certain other Input Methodologies which apply to the Default Price Quality Path (the SPA JR).
The High Court ordered that the Commission had to set these further Input Methodologies, which we expect to do by September 2012.
The Commission has appealed the part of the High Court judgment relating to the Starting Price Adjustment Input Methodology to the Court of Appeal, and is awaiting that judgment. In our view Parliament never intended that there should be a Starting Price Adjustment Input Methodology.
Merits Appeals
Interested parties are able to appeal against any aspect of an Input Methodology on the basis that a materially better option was available to the Commission.
Twelve parties filed merits appeals against aspects of the December 2010 Input Methodologies determinations. Three have since withdrawn their appeals.
The merits appeals against the cost of capital and asset valuation Input Methodologies will be heard in the High Court in September and October 2012. The merits appeals against the other Input Methodologies will be heard in December.
Effect of litigation
The Starting Price Adjustment Judicial Review has caused substantial delay to our regulatory work programme. The Commission's decision regarding resetting the Default Price Quality Path for electricity distribution has been delayed by a year.
Our ability to implement an initial Default Price Quality Path for gas pipelines that reflects the Input Methodologies, has also been delayed by between nine and fifteen months.
While we are appealing the High Court's decision that a Starting Price Adjustment Input Methodology is required, we have substantially progressed work on that Input Methodology, along with the other aspects of the Court's judgment, to ensure that our regulatory work programme is not further delayed regardless of the Court of Appeal result.
A further round of process judicial reviews late last year has also had a substantial impact.
The main challenge in these process judicial reviews related to whether the Commission had been legitimately able to run its 2009/10 Input Methodology consultation and determination process that overlapped between the sectors of airports, gas and electricity and the functions of transmission and distribution. Parties particularly challenged the way in which the Commission's cross-sector process was communicated to them. The Commission also faced a number of other process challenges at the same hearing.
In relation to the cross-sector process, the High Court found in December 2011 that the Commission 'did what it was required to do and what it had said it would do'.
While we accept the right of parties to bring judicial review challenges, in our view the cross-sector process challenge was, when viewed against the full context of our two year Input Methodology consultation process, without real merit.
Further it is not clear to us what real benefit the parties were seeking from this process challenge - even if we had been required to re-do our process, the major arguments relating to the most contentious aspects of the Input Methodologies had already been put to and considered by the Commission prior to its 2010 decisions.
The cross-sector process challenge has caused material detriment to all involved. Because it challenged the fundamentals of the Commission's process, this judicial review essentially required that the merits appeals be put on hold for nine months. But for that challenge, we would have expected all, or at least the vast majority of, merits appeals of the 2010 determinations to have been heard by now.
We acknowledge that one party to the process judicial review was successful on a specific relatively narrow, cost of capital point, which we are re-consulting on at present. To give this some context, however, our costs in defending the process judicial review at a six day hearing were substantial. In particular, there were significant trial preparation costs. We estimate that between them the parties would have spent millions of dollars on legal fees in this exercise.
Dairy
A key development in dairy regulation has been the prospect of new roles for the Commission.
As some of you will be aware, the Parliament's Primary Production Select Committee is currently considering the Dairy Industry Restructuring Amendment Bill 2012. The Bill proposes a number of new roles for us, with the key one being monitoring Fonterra's methodology for setting the farm gate milk price and its application of that methodology against purpose principles specified in the Bill.
The proposed price monitoring regime is envisaged to play an important role in ensuring Fonterra's milk price is set consistent with the wider efficiency objectives of Dairy Industry Restructuring Act (DIRA). We are ready to play whatever role Parliament considers appropriate in implementing that regime.
So that we can implement the proposed regime effectively, we have been working with MAF officials and most recently the Primary Production Select Committee to provide them with our views on practical implementation issues of the regime. Our focus has been squarely on ensuring clarity of policy intent and identification of risks that may lead to unintended outcomes and higher than expected direct and indirect costs of implementing the monitoring regime.
This process is ongoing. The Select Committee is expected to report back to Parliament in early June.
Dry run of proposed monitoring regime
Ahead of the Bill being passed into law, the Minister for Primary Industries requested we conduct a non-statutory 'dry run' review of Fonterra's 2011/12 methodology for setting the farm gate milk price and Fonterra's application of that methodology.
The purpose of the 'dry run' review is to help inform investors ahead of Fonterra launching Trading Among Farmers (TAF). In particular, the 'dry run' review is intended to show investors how the Government-proposed farm gate milk price monitoring regime might work in practice.
The 'dry run' review is a targeted review of Fonterra's current methodology for setting the farm gate milk price and its application. It is aimed at a limited number of key issues, identified by both industry stakeholders and our own analysis, as potentially contentious and material to the calculation of the farm gate milk price.
This dry run review is being conducted before the legislation is passed, and based on our interpretation of the draft legislation as it was introduced to the House.
It is, in effect, a voluntary review based on a Terms of Reference agreed with Fonterra.
Due to the constrained timeline for completing the 'dry run' review, it will not reflect any amendments to the Bill which may arise during the Primary Production Select Committee's consideration of the proposed amendments.
In March 2012, we published the Terms of Reference for the 'dry run' review and sought input from all interested parties in relation to information, evidence and key issues we should consider as part of the review.
We are currently working on our draft report, which we intend to publish on 31 May 2012. There will be a short period of consultation.
Following consideration of submissions on our draft report, we intend to publish the final report on the 'dry run' review by 14 August 2012, before Fonterra's planned launch of TAF in November 2012.
Telecommunications
Telecommunication regulation is not an area that I am personally involved in. I have been provided with this information to share with you, but will not be able to answer questions about telecommunications.
The telecommunications team has been focused on the implementation of the Telecommunications (TSO, Broadband, and other Matters) Amendment Act 2011. The changes to the Act build on the 2006 model replacing operational separation with structural separation, and rely on enforceable undertakings as the primary regulatory instrument for the fibre network.
The Commission's role in monitoring and enforcing those undertakings will ensure that the benefits that the 2006 Amendments have delivered will not be lost as we move to the next stage in this fast-evolving industry.
The copper regime remains basically intact for a transitional period of three years, after which the regulated Unbundled Copper Local Loop price will move from a de-averaged metro/ price to a nationally averaged price, and Unbundled Bitstream Access will move from "retail minus" to a cost based price. The three year transitional period is designed to provide a reasonable period for those access seekers who have unbundled Telecom exchanges to obtain a return on their Unbundled Copper Local Loop investments.
The fibre undertakings regime builds on the lessons learnt from the operational separation undertakings. The twin pillars of open access, non-discrimination in relation to third party supply, and equivalence in relation to self supply, are carried over into the fibre regime. The definition of non-discrimination has been expanded in accord with the interpretation we applied in relation to the Operational Separation Undertakings
The most significant feature of the 2011 Amendments is the structural separation of Telecom. Structural separation is the "nuclear option" of telecommunications regulation, and is what many commentators have concluded should have been done as part of the privatisation process 21 years ago. At a stroke it removes the economic incentives of a vertically integrated entity to discriminate in favour of its downstream business, to the disadvantage of its competitors in those downstream markets.
Another significant project the telecommunications team have also been working on has been the demand side study which is focused on identifying barriers to uptake of high speed broadband. Three issues papers have been published and a very successful conference on the topic was held in February. A final report is due in June 2012.
The year ahead is all about bedding down the new regime this includes:
- Finalising the framework for information disclosure with the local fibre companies, and completing the Unbundled Bitstream Access cost allocation review
- Closing out the last of the Telecommunications Service Obligations reviews now that we have had direction from the Supreme Court
- Confirming eligibility for the new Telecommunications Development Levy
- Continuing to monitor the telecommunications sector through our monitoring reports.
Conclusion
As you will gather from this overview of the Commission's work programme we are working in a busy and, at times, challenging environment. But as I indicated at the beginning of my address, the changes to our organisation mean that we are able to steer a steady ship and use our resources effectively.
Always in our work we have the end goals for New Zealanders in mind - that markets are more competitive and consumers are better informed, and that regulation is better targeted and more effective. Whether it's a choice about what litigation to pursue, or when to negotiate settlements, or the drive to bring our input methodologies to fruition, we always operate thinking of our contribution to building a healthy competitive New Zealand economy.
I am now happy to answer questions on any area, apart from Telecommunications regulation.
