Commerce Commission granted new powers to study the competitiveness of New Zealand markets

Late last month, Parliament granted the Commerce Commission the power to conduct market studies.  This article outlines these new powers and explores their potential application.

Overview of Commission’s market studies powers

On 24 October 2018 Parliament passed the Commerce Amendment Act 2018, which notably conferred new powers upon the Commission to conduct ‘competition studies’ (commonly referred to as ‘market studies’).

It is well recognised that a lack of effective competition between industry participants can lead or contribute to poorly functioning markets. The Commission’s new market studies powers will enable it to examine how well competition is working in a particular market, and whether it could be improved.

Under the new legislative regime, market studies can be initiated in two ways: the Commission has the power to initiate a market study itself; and the Minister of Commerce and Consumer Affairs can require the Commission to undertake a market study.   Market studies must be carried out in accordance with the study’s published terms of reference, which will be set by the study’s initiator.  In the course of carrying out the study, the Commission is empowered to use its statutory information gathering powers, to the extent that this is necessary or desirable.

At the conclusion of a market study, the Commission will record its findings in a ‘competition report’.  A draft of this report must be released for public consultation, and the completed report must also be made publically available.  The report may include recommendations regarding changes to the law, or to the policies and practices of a regulator or central or local government.  The report may also recommend that certain industry behaviour be researched or monitored, or that actors within a specified industry change alter their behaviour.

The Commission anticipates publishing draft guidelines on the conduct of market studies next month.

Bringing New Zealand into line with its foreign counterparts

The conferment of market studies powers on the Commission brings New Zealand into line with international practice and bridges a longstanding gap New Zealand’s competition and consumer protection framework.

In 2015, the OECD surveyed 62 national competition authorities and found that only two economic regulators – New Zealand’s and Chile’s – did not have the ability to carry out market studies.  Chile rectified this in 2016, leaving New Zealand as the last country from the group surveyed by the OECD to allow the competitiveness of its markets to remain largely uninspected.

For the sake of completeness, we note that the Commission has had some limited involvement with market studies over the years.  Readers with long memories may recall that in 1994, the Commission conducted an inquiry into the development of competition in the telecommunications industry, and concluded that Telecom “makes the rules and other parties in the industry, by and large, play by them”.  Telecom, in response, alleged that in conducting such an inquiry, the Commission was acting illegally and outside of its powers.  The High Court and the Court of Appeal agreed with Telecom, holding that the Commission had no power to conduct such an inquiry.  The Court of Appeal stated, “no doubt there is ground for arguing that the Act should be amended to enlarge the Commission’s functions and powers”.  However, it was not until 2018 – almost 25 years later – that this translated into law.

More legitimately, the Commission has had a ‘market studies’ function under section 9A of the Telecommunications Act 2001 since 2006.  The Commission’s role under the Telecommunications Act is to monitor competition in, and the performance of, the telecommunications market.  In doing so, the Commission can engage in a study into any matter relating to the telecommunications industry or the long-term benefit of consumers in New Zealand (an example of this was a study prepared by the Commission in 2012 regarding broadband services).  However, this power is severely restrained in scope given that it is to be exclusively applied to the telecommunications sector.

Market studies represent a further bid to improve productivity

The introduction of market studies is the latest in a series of political initiatives designed to help improve New Zealand’s comparatively weak productivity, which has been an issue of significant concern for successive Governments. This same strategy led to the establishment of the Productivity Commission in 2011, a substantial increase in maximum fines under the Fair Trading Act 1986 in 2014, and most recently, the overhaul of New Zealand’s cartel laws in August 2017.

The Productivity Commission called for the Commerce Commission to be granted market studies powers in 2014.  The Productivity Commission felt that market studies were a tool that would usefully enable the Commission to build a deeper understanding of the dynamics of specific markets and to feed into the policy process.  The Productivity Commission’s recommendation was echoed by the OECD in its 2017 New Zealand Economy Survey. The OECD was of the view that market studies could help New Zealand markets to work better, especially in cases when obstacles and distortions to competition are not caused by competition law violations.

Looking specifically at the question of cost of conducting market studies, the Productivity Commission determined that the benefits of a well-designed study would likely to outweigh its cost.  The Ministry of Business, Innovation, and Employment reached the same view in 2017, concluding that market studies could produce an economic benefit to New Zealand to the tune of $62 million over three years.

Some overseas examples

Overseas examples illustrate some of the practical applications of market studies:

  • In 2016, the United Kingdom’s Competition and Markets Authority (CMA) initiated a market study in the retail banking industry. The CMA found that there was a weak customer response to quality and price differences between banks, which in turn reduced the incentive of banks to compete.  As a result, the CMA issued orders that required banks to take a number of steps to address this, such as publishing information online about how likely people were to recommend their bank.
  • A few years ago, Ireland’s then-Competition Authority undertook a general medical practitioners market study. The Competition Authority found that general practitioners were restricted in how they could treat public patients, and doctors in Irish hospitals faced unnecessary restrictions when transferring to private GP practices.  The Competition Authority made a range of recommendations, and the Irish Government subsequently passed legislation to remove certain restrictions on general practitioners who wished to treat public patients.
  • In 2017, Australia’s Competition and Consumer Commission (ACCC) initiated a market study in the cattle and beef market. The ACCC made 15 recommendations for the industry to action in order to address concerns about transparency in cattle and beef markets (though as of May 2018 the industry has by and large not actioned these).

Interestingly, the ACCC’s 2017 cattle and beef market study also found that repeated interactions between buyers in cattle yards provided fertile ground for anti-competitive strategy sharing.  The ACCC stated that it will separately examine allegations of anti-competitive conduct raised during the course of this market study.

This raises the question of whether, In New Zealand, information gathered during the course of a market study could subsequently be used as the basis of separate allegations of anti-competitive conduct.  There is currently no clear answer on this point.  The Commission, in a public submission dated 15 June 2017, requested a drafting change to clarify that the Commission could use information acquired in the course of a market study as the basis for a separate investigation. As no such amendment made its way into the Commerce Amendment Act 2018, it remains to be seen how the new legislation will be interpreted.  This is a particularly interesting issue in view of the High Court’s comments in April this year that the purpose for which information is gathered by a public body (such as the Commission) will limit the purpose for which it can be used.

Where to from here?

It is widely believed that the Commission’s first market study under the new legislation will be into the petrol industry.  The Government has repeatedly expressed concern at prices that New Zealand consumers are paying for petrol at the fuel pumps, and has described petrol margins as unacceptable.  A fuel study conducted by MBIE last year was stymied by MBIE’s inability to compel fuel companies to provide information in a ‘usable’ form (MBIE was unable to compare the information it received, due to differences in accounting practices between fuel companies).  To what extent the Commission can improve on this position remains to be determined.  Unlike MBIE, the Commission does have the ability to compel parties to provide specific information.  However, it is less clear whether the Commission can compel market studies participants to provide information in a particular format. This power was requested by the Commission when the Consumer Law Reform Bill 2018 was at the Select Committee stage, but the request was not ultimately actioned.

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