• The Commerce Act 1986 aims to promote competition in markets in New Zealand. It is the primary legislative tool used to facilitate the competitive process in markets in New Zealand. It does this to facilitate the efficient operation of markets, which will provide long term benefits to all New Zealanders.

What's involved in the Commerce Act reforms?

• The Government has decided on a number of key measures to enhance the effectiveness of the Commerce Act 1986. Key features are:

  Mergers and business acquisitions

  • Strengthening the control of business acquisitions by replacing the existing "dominance" test with the better targetted and stronger "substantially lessening competition" test (section 47);
  • Inviting the Commerce Commission to review its merger guidelines and safe harbours to reflect the new merger threshold in section 47;

  Misuse of a dominant position

  • Broadening the range of firms and conduct subject to the prohibition against unilateral anti-competitive conduct by prohibiting persons with "a substantial degree of power in a market from taking advantage of that power" for the proscribed purposes (section 36);
  • In a new step, inviting the Select Committee to consider and report back on the preferred of two options for reducing the evidential burden of establishing "purpose" in section 36. These options are:
    • Where the Commerce Commission is the applicant, reversing the burden of proof on establishing "purpose"; or
    • Adopting the equivalent Australian provision that purpose may be inferred from relevant conduct and circumstances;
  Penalties
  • Further increasing the penalties for offences by body corporates from the existing maximum of $5 million up to $10 million;

  Commerce Commission's enforcement tools

  • Removing the requirement for the Commerce Commission to give an undertaking as to damages when seeking interim injunctions;

  Retargetting offences

  • In response to submitters' requests, amending the existing Commerce Amendment Bill to retain the status quo on the scope of the "per se" offence relating to price fixing in section 30 and refocus the ban on indemnifying directors so that it only relates to price fixing offences.

• These reforms replace supplementary order paper No. 203 and build on other measures to strengthen the Commerce Act 1986 outlined in the Commerce Amendment Bill 1999.
  • Cabinet will consider further papers in coming weeks which will:
    • Insert a new purpose statement in the Commerce Act focused on the long term benefits to consumers;
    • Better target the prohibition against group boycotts and concerted refusals to deal in section 29;
    • Update the generic regime for controlled goods or services under Parts IV and V of the Commerce Act; and
    • Review the capability and resources of the Commerce Commission.
    • The Government's policies will be included in a supplementary order paper and submitted to the Commerce Select Committee for its consideration before the middle of the year. There will be an opportunity for the public to comment.

    • In the second part of the year, the Government looks forward to considering the outcomes of the Inquiries into Electricity and Telecommunications.

Why do we need to improve the effectiveness of the Commerce Act?

• Since the Act was passed in 1986 the New Zealand economy has become much more open and competitive. Domestic deregulation, privatisation of certain public-owned assets, and increased globalisation have meant that it is timely to review our competition law.

• In some areas the Act's rules are not as effective as they could be in promoting competition. Section 36, dealing with misuse of a dominant position, needs to be strengthened. It is the key prohibition in promoting competition in utilities markets, which are central to the efficient operation of the economy. The current threshold for mergers in section 47 has shown to be unable to deal with some accumulations of market power. The Act's penalties and remedies are too low to consistently deter non-compliance with the Act.

• These limitations of the Act mean that the efficiency disciplines are weaker than they should be, or were intended to be. This creates less pressure for innovation and economic growth and is a tax on the competitive sector.

What is the extent of the change to section 36?

• Section 36 aims to prevent dominant firms from using their market power to prevent or eliminate competition, while at the same time still allowing those dominant firms to compete.

• In utilities markets it is the key instrument relied on by competitors of dominant firms to gain access to essential facilities and compete effectively in related markets. While the importance of section 36 is not limited to ensuring access to essential facilities, it is its most important function. Anti-competitive conduct within utilities markets has the potential to inflict severe harm on the economy. Effective functioning of section 36 is vital.

• Section 36 will be amended so that the threshold for this prohibition will be changed from persons having a "dominant position" to persons having a "substantial degree of power in the market". This is equivalent to the threshold in the Australian Trade Practices Act. The intent of this change is to increase the number of firms and markets subject to the scrutiny of the section. Instead of being limited to firms having a dominant or controlling position, this prohibition will in some cases also apply to major participants in an oligopolistic market and to a leading firm in a less concentrated market.

• The term "use" will be replaced by the equivalent Australian provision of "take advantage of". This change will retain the essential element of a causal connection between the firms market power and the alleged conduct. However, it should signal to the courts some dissatisfaction with the focus on "use tests" as a basis of interpretation of the section.

• The Government has also decided to seek public comment through the Select Committee process on the preferred approach to addressing evidential problems with establishing "purpose" under this section. Two provisions will be included in the supplementary order paper to the Commerce Amendment Bill. These are:
  • In those cases where the Commerce Commission is the applicant, there will be a reverse burden of proof on the respondent to demonstrate that they did not take advantage of their market power for one of the proscribed purposes; or

  • Similar to the Australian provisions, there will be a requirement for the court to infer purpose from relevant conduct and circumstances.

What is the problem with the current merger threshold?

• The current merger threshold requires that a single firm must be shown to be dominant in the market in which it operates. The threshold's role is to identify for scrutiny those mergers that could be detrimental to the economy. However, the Act provides that such mergers can nevertheless be authorised if the merger is likely to generate public benefits that will outweigh the anti-competitive detriment.

• The problem with the current threshold is that it does not allow the Commerce Commission and the courts to scrutinise mergers where high market power can be obtained without a single firm gaining a high market share. It also ignores mergers that may facilitate collusion.

• An example of a proposed merger that would result in high market power, but not high market share, is the proposal by TransAlta to acquire Contact. The market power of that merged entity would arise from being a substantial "marginal price setter" in the wholesale electricity market. That is, the merged entity would be the price setter for a good part of the time regardless of the output and price decisions of more cost effective electricity producers. A study commissioned by the Ministry indicated that if that acquisition went ahead electricity prices would rise by up to 5% per annum over a five year period.

• An example of the fact that collusion is still possible in a globalised market and that significant economic harm can result is the recent vitamin price fixing case against a number of international pharmaceutical companies. In that case Hoffman-La Roche agreed to plead guilty and pay a record $500 million criminal fine for leading the worldwide conspiracy to raise and fix prices and allocate market shares for certain vitamins sold in the United States and elsewhere. The conspiracy lasted from 1990 to February 1999 and affected the vitamins most commonly used as nutritional supplements. It affected more than $US 5 billion of commerce in products sold on the US market alone.

• Petrol and banking are further examples of markets where mergers and takeovers of firms may have significant effects on the level of competition and prices, but which would not be subject to scrutiny under the current threshold.

• In response to these problems the merger threshold will be recast to allow scrutiny of all mergers that threaten economic detriment. The prohibition in section 47 will be change to prevent mergers and business acquisitions that will substantially lessen competition.

• These changes will in the future allow cases like the proposed TransAlta acquisition of Contact to be scrutinised.

What mergers would have been stopped under a revised dominance threshold?

• Apart from TransAlta's proposed acquisition of Contract, it is also likely that the acquisition in the retail petrol industry of the Top Group and Solo by BP, in the early days of deregulation in the late 1980s, would have been blocked under the revised threshold. The threshold would have been triggered as the acquisition would have raised the potential for substantially lessening competition as the acquisition took two maverick competitors out of the market.

• It is not envisaged that a revised merger threshold would stop a significant number of mergers each year. In practice mergers that trigger the threshold would be allowed to proceed if it was expected they generate efficiency gains that would outweigh any anti-competitive detriment. And even where they didn't the proposal could, in consultation with the Commerce Commission, be reconfigured, probably through divestiture of shares or assets, to enable it to proceed.

If we get the competition prohibitions right why strengthen penalties and remedies?

• Having well-designed competition prohibitions is pointless if there are no incentives for market participants to comply with those prohibitions. Like any other legislative regime, the Commerce Act promotes compliance through penalties and remedies.

• It is likely that the Act fails to consistently achieve compliance as its penalties and remedies are unlikely to be sufficient for the largest firms in the economy and in instances of large scale offending.

• In particular the current maximum penalty for bodies corporate is NZ$5 million. This is less than a day's turnover for the largest firms.

• Effective deterrence requires that penalties be set at a level that compensates for the fact that the probability of detection and prosecution is not 100% rather it is likely to be low.

• To ensure that all firms have incentives to comply with the Act, the penalties and remedies need to be strengthened. The Government proposes to increase the penalties from $5 million to $10 million. The new sanctions will be the greater of $10 million, three times the value of any commercial gain or expected commercial gain; or if the commercial gain is not know, 10% of the turnover of the body corporate and its interconnected bodies corporate, if any.

But won't tougher competition law discourage foreign direct investment?

• We want to encourage foreign direct investment that is efficiency enhancing. To do this an effective competition law is needed to ensure that foreign firms compete against local firms, rather than misuse their market power to eliminate or deter aggressive local competitors. We don't want to encourage foreign investment that is attracted simply by the opportunity to exploit market power.

• A study of the implications of adopting competition law for APEC by PriceWaterhouseCoopers found that while evidence is limited, there is a positive correlation between the existence of competition law in an economy and foreign direct investment flows.

• A more competitive utilities sector is likely to make the New Zealand economy more attractive as an investment destination, not less.