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Price control now has some appeal

01 August 2008

It can be hard to get enthusiastic about the progress of regulatory (price) control legislation, particularly when it's your business that is likely to be subject to control. But this week's report by the Commerce Select Committee on the Commerce Amendment Bill compels some attention for a number of reasons.

For the uninitiated, the Bill fundamentally reforms the regulatory control provisions in the Commerce Act 1986, with the aim of establishing a more credible and certain control regime in markets where competition is not possible. A key change is the Bill requires the Commerce Commission to determine the regulatory rules (or "input methodologies") in advance of making particular price control decisions. The fact that setting the rules upfront is seen as progress gives an indication of how uncertain regulation has been up to now.

The Bill provides for several forms of regulation, including default price paths (general to an industry), customised and individual price paths (specific to an individual firm) and a "negotiate/arbitrate" process. Regulation of electricity lines businesses, gas pipelines and specified airport services is hard-wired into the Bill.

Another major change is the granting of appeal rights. Until now, regulated firms have not had a general appeal right against Commission decisions. The result has been a lack of accountability that impacted on the quality of regulation. The Select Committee has increased the accountability of the Commission.

What can be appealed

The Commerce Amendment Bill proposed an appeal right in relation to the Commission's input methodology decisions, but not the later price control decisions. This was unlikely to trouble the Commission. If anything, it created an incentive for the Commission to produce very general input methodologies, leaving more room for discretion at the implementation stage where the accountability of an appeal was absent.

The Select Committee has responded to these concerns by making amendments to allow appeals in relation to both input methodology determinations and the Commission's final decisions on customised and individual price paths.

This does not have to result in gaming. The Bill provides that the Court may not stay the application of a determination while an appeal is underway – the decision remains on foot while the appeal is heard.

There remains no general right of appeal against Commission determinations which set out (i) the default price path that applies to regulated suppliers (appeals of these determinations are allowed on questions of law only), or (ii) how information disclosure regulation or negotiate/arbitrate regulation applies to regulated suppliers.

Suppliers may face the choice of living with a default price path, which is not subject to a general appeal, or proposing a customised party where a general appeal right is available. This is likely to be of some concern if customised price paths are seen as unattractive by regulated businesses – a real risk given the Commission's ability to determine a customised price path that is less favourable than a default path. The Commission will to be keen to ensure that customised price paths, and in particular the first proposals made under the new legislation, are not seen as "easy wins".

The Bill as amended only allows for appeals of arbitral awards on questions of law – even though these awards will materially affect the rights of the individual parties.

What are the appeal criteria?

The Bill does not constrain the criteria for appeal. The Commission submitted that appeals should only be allowed if the High Court found that:

  • there were one or more errors of fact that were material to making the decision
  • there was an error of law, or
  • the decision was unreasonable having regard to all the circumstances.

This would have scaled back the scrutiny of Commission decisions. The Select Committee did not accept the Commission's submission.

What are the consequences of appeal?

Where the appeal is against an input methodology decision, the Bill as amended empowers the High Court to amend or substitute a new input methodology or refer it back to the Commission only if the new input methodology is (or will be) "materially better" in achieving the purpose statements in new sections 52A and 52Q. The "materially better" threshold is a Committee initiative and was not consulted on. While the phrase could allow for a wide range of interpretation its inclusion in the Bill is potentially insidious, as it suggests that even if errors are found on appeal the Commission should be allowed a potentially wide margin before this has any effect on the final result.

The consequences of successful appeals of other Commission determinations remain as at present under the Commerce Act: the Court may confirm, modify or reverse the determination or any part of it, and has all the powers the Commission would have had in this regard.

The Committee has also introduced a "clawback" principle in the Bill, where a supplier may be required to lower its prices (temporarily but over time) in order to compensate consumers for any previous over recovery, or allowed to increase its prices (over time) to recover any shortfall in revenues, due to prices previously charged. The Bill now requires the Commission to reset price/quality paths and to apply a clawback of any over or under recovery of revenue when a material change in input methodologies occurs as a result of an appeal.

Whether you view the Bill as a positive and reasonable way forward or an attempt to dress price control in sheep's clothing, the Bill as amended shows some progress away from the heavy-handed high-discretion regulatory regimes of old towards what should be a more predictable and principled (read: manageable) future business environment.

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