In a few essential industries, we work to ensure consumers are not disadvantaged by a lack of competition. The approach we take depends on our specific powers and the characteristics of each market.
Two of the main approaches are:
promoting competition
influencing monopolies.
Both approaches change the incentives facing businesses, so that consumers benefit over the long-term.
Promoting competition
In most industries, competition between businesses generally ensures that people can get a good deal. The process of rivalry between businesses means that excessive profits are limited in the long term, and businesses also tend to have incentives to innovate, invest, and act efficiently.
Fortunately, competition occurs in many parts of the supply chain for essential services. Airports, for example, facilitate competition between airlines. And the Electricity Authority is responsible for promoting competition in the electricity industry: between generators and retailers, in different parts of the country.
Competition also occurs in the telecommunications industry, and we are entrusted with additional powers to promote competition further. For example, we have previously supported the entry of a third player in the mobile market (2 Degrees) by:
ensuring nationwide coverage from day one by enabling customers on the new network to use another network when necessary (which is often referred to as ‘national roaming’)
reducing the costs of network expansion by enabling access to existing infrastructure – such as mobile masts – when installing new transmission and reception equipment (known as ‘co-location’)
removing a barrier to consumers switching to the new provider by empowering them to take their mobile number with them when they change networks (which is known as ‘number portability’).
The resulting competition between network providers led to increased incentives for investment that have resulted in greater network coverage, and the roll out of new technologies such as 4G and 5G.
Competition can also be promoted by informing and empowering consumers when they have multiple suppliers to choose from. For example, we have previously published infographic fact sheets aimed at demystifying broadband services for consumers.
Influencing monopolies
In contrast, a number of markets in essential industries are monopolies, and they will stay that way for the foreseeable future. This is because it simply does not make sense to duplicate existing infrastructure. A geographic area only has one gas network, one electricity network, and one airport for a reason.
Each of these businesses should expect a reasonable return on their investments, and short term rewards for good performance. Equally, excessive profits should be limited, poor performance penalised, and businesses held to account when things go wrong that could and should have been avoided.
We can influence these outcomes in two main ways. The first is by improving transparency about performance, which can affect the reputation of the business and its relationships with certain stakeholders. The second approach is to create financial incentives through revenue limits and quality standards.
To help improve transparency, we require monopoly businesses to publicly disclose information, and we can analyse and report on what we observe. Notably, following our finding that Wellington Airport was targeting excessive profits, the airport elected to reduce prices and consumers were estimated to be around $30 million better off over a 3 year period.
However, our powers to set binding revenue limits and quality standards only apply to certain services. For example, in recent years, we have set maximum limits on revenue that have:
saved broadband consumers around $200m over a 5 year period by setting the price of wholesale broadband over Chorus’s national copper network
saved gas consumers around $350m over a decade by realigning revenues to costs for monopoly providers of gas pipeline services.
These revenue limits restrict excessive profits and can create an incentive to control costs, because every dollar saved improves the company’s bottom line. The minimum standards for service quality help address the risk that suppliers might cut costs by compromising quality.
