Part 4 of the Commerce Act

This fact sheet explains the purpose of Part 4 of the Commerce Act and how the Commerce Commission regulates markets where competition is limited.

When competition is limited in a market, consumers can end up paying prices that don’t reflect the cost of goods or services they receive. When this is the case, regulation can help mimic the effects seen in competitive markets so that consumers benefit in the long term.

Under Part 4 of the Commerce Act, the Commerce Commission has a role regulating the price and quality of goods of services in markets where there is little or no competition and little prospect of future competition. Through regulation we aim to get the right balance between providing incentives for regulated businesses to invest, and ensuring that household and business consumers are charged prices that align with the cost of the goods or services they receive.

Getting the balance right

Part 4 is designed to ensure that suppliers of regulated goods or services:

  • have incentives to innovate and to invest, including in replacing or upgrading assets
  • have incentives to improve efficiency and provide services at a quality that reflects consumer demands
  • share with consumers the benefits of efficiency gains in the supply of the regulated goods or services, including through lower prices
  • are limited in their ability to extract excessive profits.

What markets are currently regulated under Part 4?

We currently regulate the following markets under Part 4 of the Commerce Act:

  • electricity lines services (distribution and transmission)
  • gas pipeline services (distribution and transmission)
  • specified airport services (at Auckland, Christchurch and Wellington International Airports).

We do not regulate telecommunications or dairy markets under Part 4. We have regulatory responsibilities for these industries under the Telecommunications Act and the Dairy Industry Restructuring Act.

How do we regulate these markets?

Under Part 4 we can impose up to three types of regulation on a business. They are:

  • information disclosure regulation
  • price-quality regulation
  • negotiate/arbitrate regulation.

We also have responsibility for setting and reviewing the upfront rules that apply to these forms of regulation. These are known as input methodologies.

Information disclosure regulation

Under information disclosure regulation we require regulated businesses to publish information about their performance. The aim of this type of regulation is to give transparency about how regulated businesses are performing and whether the purpose of Part 4 is being met.

Regulated businesses must publish information such as data on prices, measures of quality, financial information, and forecasts of future expenditure (including planned investment). We also produce a summary and analysis of this information to help people understand the performance of individual businesses, how they're performing compared to each other and any changes over time.

All regulated businesses are subject to information disclosure regulation.

Price-quality regulation

Under price-quality regulation we set price and quality controls known as “price-quality paths”. The paths either restrict the amount of revenue a regulated business can earn or set the maximum average prices it can charge. While price-quality paths limit total average price increases, they don’t constrain the prices a regulated business can charge individual consumers or groups of consumers.

Price-quality paths also set the service quality standard each business must meet, such as acceptable levels and duration of power outages. These standards help ensure that quality is not compromised as a result of the price controls.

All businesses subject to price-quality regulation start on a default price-quality path. However, if the default path does not suit a regulated business’s particular circumstances, it can apply to the Commission for a customised price‐quality path. You can read more in our fact sheet Customised price-quality regulation.

All gas pipelines services and certain electricity lines services are subject to price-quality regulation.

Negotiate/arbitrate regulation

Under negotiate/arbitrate regulation, regulated businesses must negotiate with their customers on prices and quality. If negotiation is unsuccessful, they must enter into arbitration. The terms of the arbitration are set by the Commission.

Currently there are no regulated businesses subject to negotiate/arbitrate regulation.

Input methodologies

Input methodologies are the upfront rules, requirements, and processes that apply to the regulation of goods or services. The purpose of input methodologies is to promote certainty for regulated businesses and consumers. For example, there are input methodologies for how to work out a business’s cost of capital and how to value assets.

The Commission is responsible for setting these upfront rules, which we do in consultation with the regulated businesses and other interested parties. Once determined, they apply for up to seven years.

We first determined input methodologies for electricity lines services, gas pipeline services, and specified airport services in December 2010.

Read more about input methodologies.

How does a market become regulated?

Before the Commission can recommend to the Minister of Commerce that goods or services be regulated under the Commerce Act, we must undertake an inquiry. An inquiry can be triggered in two ways – the Minister may require us to conduct an inquiry, or we may hold an inquiry on our own initiative.

During an inquiry we would look at the level of competition and market power in an industry. We would also consider whether the benefits of regulation would be likely to exceed the costs, and if so, the best way to regulate the goods or services.

You can read more in our fact sheet The Commerce Act – Regulation of Goods and Services.