Commerce Act applies to local authority water monopolies
26 February 1998
In a speech delivered today by Commissioner Dr Kate Brown, the Commerce Commission reminded providers of water services that the Commerce and Fair Trading Acts apply to services provided by local authorities in exactly the same way as they do to other organisations involved in business in New Zealand.
Dr Brown was speaking at the Annual New Zealand Water Summit in Auckland today. She said that these two Acts apply to local authorities when they provide goods and services in trade, which include the provision of water supply and waste water disposal. As local authorities go through the process of deregulation of services under their control, they must be aware that New Zealand's competition law applies to them.
A key issue in the water industry is that local authorities own the natural monopoly elements of water systems. It is not economically viable for the networks to be duplicated, and whatever reforms or changes occur, these networks would still be monopolies. The Commission has formed the view that ownership of those natural monopolies places local authorities in a dominant position in the market for water network services.
The use of a such a dominant position for an anti-competitive purpose in that or any other market is prohibited by the Commerce Act.
The market power that local authorities have through their ownership of these network monopolies can be used anti-competitively in associated contestable markets, such as the markets for making connections to and servicing the network.
The Commission is concerned that some local authorities have entered into contracts that exclude potentially competitive contractors from making connections to the network.
The Commission accepts that there are important health and safety concerns about water supplies, but notes that some local authorities have met these concerns without using potentially anti-competitive contracts. They have developed criteria that contractors must meet to be authorised to make connections to the network. Property owners can then choose which authorised contractor they hire.
Another significant issue is bundling within one contract of the expertise and equipment-intensive work of network maintenance, and the comparatively straightforward connection work.
Such contracts prevent small contractors competing to provide connection work. Furthermore, the contract is usually awarded to the tender with the lowest overall price, which is not necessarily the tender with the lowest price for connections.
The result is that competition is eliminated. Property owners can no longer choose who does their connection work for them, and contractors who can meet health and safety requirements for connections are excluded.
The most significant Fair Trading Act issue for water supply is that contracts for domestic supply must not mislead consumers about their rights.
Local authorities must be aware that the Consumer Guarantees Act puts into law guarantees and remedies that must be met when goods or services are provided for domestic use.
Local authorities cannot contract out of these mandatory guarantees and remedies for consumers. If domestic supply contracts try to do so, then they are misleading consumers about their rights and risk breaching the Fair Trading Act.
Copies of Dr Brown's speech are available from reception at the Commission's Wellington office, 7th floor, Landcorp House, 101 Lambton Quay.
Media contact: Communications Officer Vincent Cholewa
Phone work (04) 498 0920
Commission media releases can be viewed on its web site www.comcom.govt.nz