Council to change water contracts – Commission continues local government investigation
Published01 Oct 1997
As part of a settlement with the Commerce Commission, the Western Bay of Plenty District Council will change water services contracts to ensure that they are not anti-competitive.
Commission Chairman Dr Alan Bollard said the Commission's view was that the Council was at risk of breaching the Commerce Act because of the way its contracts limited competition for work on its water network to only one contractor in each half of the Council's district.
"This settlement is part of a wider Commission investigation into potentially anti-competitive behaviour by local authorities," Dr Bollard said. "We are investigating other councils' contracts, and this settlement will be used as an example of how competition issues can be resolved.
"We are also looking at how we can best educate local authorities about the Commerce Act so that they can protect themselves and their residents from anti-competitive behaviour. We will be assisting local authorities in providing information to their key personnel to increase their understanding of the Act.
"Lack of understanding of the Act, rather than deliberate breaches, seems to be the main problem.
"We will investigate specific matters as necessary. When we find people or organisations at risk of breaching the Act we will issue warnings or enter into settlements so that they can change their behaviour to prevent a possible breach.
"Serious or repeated breaches may result in court action.
"The Commerce Act is a complex piece of law, and if any local authority is unsure of its, or its customers', business practices, I strongly advise it to get information from the Commission and legal advice from lawyers specialising in this area."
The Act prohibits contracts that substantially lessen competition, and also prohibits an organisation dominant in a market, using its dominance for an anti-competitive purpose.
In the Commission's view, the Western Bay of Plenty District Council's contracts had both the purpose and effect of substantially lessening competition, and the Council used its dominance to restrict competition.
Dr Bollard said that the Commission accepts that the Council did not deliberately breach the Act.
It also accepts that there are important health and safety issues in relation to water supplies. However, health and safety issues can be resolved without anti-competitive contracts.
For example, several councils specify the criteria that must be met, and allow people to choose their own contractor. The contractor must prove to the council that it can meet the criteria. If it can, then it is allowed to do the work. The price is not set by the council, but is negotiated between the contractor and its customer. If the customer doesn't like the price or the terms offered, then it can employ another contractor.
Background
The Commission concluded that, in its view, the Council's contracts were anti-competitive because:
· they reduced the number of people who may carry out water connections to only one in each half of the Council's area;
· the bundling of the expertise and equipment intensive work involved in maintenance of the network with the more straight-forward connection work led to the exclusion of all but larger contractors; and
· its acceptance of tenders was based on overall price and not on the price for water connections.
A key issue is that what may appear to be one service, often involves several different markets. In the case of water supply, there are markets for:
· acquiring the water;
· providing the network of water mains;
· maintaining the network; and
· connecting properties to the network.
The Council is dominant in the market for providing water mains because it is not economically viable for another person to duplicate the existing network.
Maintenance of the network is specialised work for which only larger contractors have the necessary expertise and equipment.
Connecting properties to the network is much more straight-forward, and many more contractors can do this work.
The Commerce Act does not prohibit an organisation being dominant, exclusive contracts nor bundling of different kinds of work into one contract. What it does prohibit is anti-competitive behaviour. In this case, the combination of dominance, exclusivity and bundling made the contracts anti-competitive.
