The Commerce Commission (Commission) has started the year off with a number of announcements that shed light on its approach to and priorities for economic regulation under Part 4 of the Commerce Act 1986 (Commerce Act). This includes announcements to:
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conduct a review of the input methodologies (IM) in Part 4 of the Commerce Act to ensure the regime is fit for purpose (with an increased focus on decarbonising the electricity sector); and
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divide its Economic Regulation Branch into two separate branches to reflect the Commission's growing breadth and depth of responsibilities.
These developments also have potential implications for future economic regulatory regimes, in particular, the regulation of the four new water services entities that are expected to be established as part of the Government's Three Waters Reform programme.
Ensuring that Part 4 regulation is fit for purpose
The Commission has announced that it has begun reviewing the IMs in Part 4 of the Commerce Act. In basic terms, the IMs set the rules, requirements and processes that underpin the economic regulation of electricity lines services, gas pipeline services, and specified airport services.
Under the Commerce Act, the Commission is required to review the IMs at least every seven years. What is perhaps different from the previous review (the IMs have only been reviewed once since the IMs were first determined in 2010) is that the announcement of this review follows an open letter (here) that the Commission published to stakeholders seeking views on the emerging issues for electricity networks, gas networks and airports. The letter highlighted the need to ensure that the regulatory regime is fit for purpose, with a particular focus on the implications of the Government's decarbonisation goals on the energy sector.
The increased attention on decarbonisation follows from the Climate Change Commission's (CCC) advice to the Government, which outlined a decarbonisation pathway with increased electrification, declining natural gas use, and a potential future role for biogas and hydrogen. What is clear from the CCC's recommendations (and the Government's decarbonisation goals) is that the energy sector is facing significant disruption and transformation, which will require material investment. Unsurprisingly, this was one of the main issues raised in energy submissions on the open letter and the Commission subsequently held a workshop with electricity lines services to discuss how the Part 4 regime could support a shift towards decarbonisation.
The submissions received on the open letter, along with the feedback during the workshop, will largely inform the Commission's approach to the current IM review as well as its other Part 4 regulation work programmes in the near future, including:
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the upcoming reset of price-quality paths for gas pipeline businesses (which must be completed by the end of May 2022); and
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a targeted review of information requirements of electricity lines companies scheduled for later this year (although there is no required deadline for this).
The Commission will be publishing papers for consultation in Q2 of 2022 on its proposed decision-making framework and processes. From there, stakeholders will have the opportunity to engage with the Commission and provide submissions before the IM review is formally completed at the end of 2023.
Economic Regulation Branch split
Another significant announcement was that, as of 1 March 2022, the Commission's Economic Regulation Branch has been divided into two new branches, each focusing on specific areas of work, namely:
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an Infrastructure Regulation Branch will focus on work programmes for energy networks, airports, and fibre broadband services; and
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a Market Regulation Branch will lead the work in the telecommunications, fuel, and dairy sectors as well as the Commission's new responsibilities relating to retail payment systems.
The split reflects the fact that the breadth and depth of the Commission's economic regulation activities have grown in recent years, in line with increased areas of responsibility and expectations about its role. For example, the Commission will be the regulatory body responsible for enforcing the Retail Payment Systems Bill, and determining whether retail payment networks and their participants should be subject to further regulation. Each separate branch will be able to focus its attention on its specific area of work and ensure that it is appropriately resourced to perform its functions.
Implications for the four new water service entities
The IM Review could also have implications for the water sector. As part of the Three Waters Reform programme, the Government is considering how the proposed new regional water services entities should be subject to economic regulation (see our recent update on the Three Waters Reform here).
The Ministry of Business, Innovation and Employment (MBIE) consulted on a Discussion Paper (here) at the end of 2021 that looked at the future economic regulation of the three waters services, and it is now in the process of policy development with further decisions expected mid-2022. One of the policy decisions considered in the Discussion Paper is which regulatory body would be the most appropriate to be the regulator for the three waters services. The Commission is presented as a likely candidate given its existing expertise in economic regulation, meaning that it may have another regulatory regime within its remit in the near future (and hence even greater workload). Other potential candidates considered in the Discussion Paper include Taumata Arowai (the new drinking water regulator) or a new sector-specific regulator.
Further, the economic regulation model proposed by MBIE was closely modelled on Part 4 regulation. Changes made to IMs under this review could be relevant to any IMs developed for water regulation in the future. It remains to be seen whether MBIE will be influenced by submissions to the effect that the water sector will be different to sectors regulated under Part 4, such that a new and different (e.g. more flexible and light-handed) approach to economic regulation is required. In that context, it is also worth noting that it is apparent from submissions that not all stakeholders are convinced that the challenges facing the energy sector discussed above can be addressed by reviewing the IMs alone – that is, they argue that more fundamental change to Part 4 regulation is required. This may raise further questions about whether Part 4 regulation is a fit-for-purpose precedent for water economic regulation, bearing in mind that the Government's key rationale for establishing the entities is to undertake transformational investment in water infrastructure, amounting to billions of dollars.
We will be watching this space closely as the IM review and other work programmes develop. If you would like further information on the IM review and the Commission's work in the economic regulation space more generally, please contact one of the authors.