Is each market a nail and the Commerce Commission a hammer? Review of the Commission's market studies

12 December 2022

On 6 December, the Commerce Commission published the final report of its market study into residential building supplies in New Zealand.  With the Commission's third market study now completed, it is a good time to step back and look at how the market study power has been used and key themes that have emerged. 

In this update, we provide an overview of the Commission's findings relating to residential building supplies, analyse the outcomes of the Commission's three completed market studies so far, and look forward to what might come next.

Residential building supplies

The Commission's study found that competition for the supply and acquisition of key building supplies is not working as well as it could.  It found that competition would be improved if it was easier for building products to be introduced and for competing suppliers to expand their businesses.  The Commission made recommendations to improve competition for key building supplies, specifically:

  • Recommendations to enhance the regulatory system and decision making by those involved in the regulatory system
    • introduce competition as an objective to be promoted in the building regulatory system (alongside safety, health, and durability)
    • better serve Māori through the building regulatory system, such as by ensuring the consenting system provides opportunities for Māori to build relationships with building consent authorities and the flexibility to accommodate Māori building objectives, and identifying more opportunities for Māori leadership in the sector
    • create clearer compliance pathways for a broader range of key building supplies
    • explore ways to remove impediments to product substitution (eg reducing specification by brand) and the need for consent variations for minor changes to building design
    • greater information sharing and coordination across (and in partnership with) government, including through establishing a national system to share information about building products and consents, and an education and mentoring function to facilitate a coordinated approach by building consent authorities
    • develop and implement an all of government strategy to coordinate and boost offsite manufacturing
  • Recommendations relating to the conduct of participants
    • promote compliance with the Commerce Act, and discourage the use of some quantity forcing rebates
    • consider the economy wide use of land covenants, exclusive leases, and arrangements with similar effect (with the Commission to undertake a compliance programme in early 2023 to promote compliance with the Commerce Act in relation to their use).

The Commission's study occurred alongside other government led initiatives in the building industry, and its recommendations are likely to feed into initiatives such as MBIE's ongoing review of the building consent system.

Outcomes of the market studies

The Commission's power to undertake market studies was added to the Commerce Act in 2018.  Any recommendations by the Commission in a final report are non-binding on the government but may include recommended measures to improve the performance of markets, such as changes to regulation, government policies or practices, or the conduct of market participants.

While the recommendations are not binding, the Minister of Commerce and Consumer Affairs is required to respond to the final report of the Commission within a reasonable time.  The Commission may also decide to start an investigation into conduct that may breach the law it enforces (such as the Commerce Act or Fair Trading Act) as a result of a market study.

The three market studies to date show that the Commission is prepared to make a broad range of recommendations.  While the government's response to the residential building supplies study is not due until in March 2023, the first two market studies have resulted in significant (and fast) legislative change proposals based on the Commission's recommendations. 

The recommendations across the market studies and resulting changes (both made and proposed) include:

  • Regulation of contractual arrangements and the conduct of industry participants – Both the Fuel Industry Act 2020 (FIA) and Grocery Industry Competition Bill 2022 (Grocery Bill) provide for the regulation of wholesale contract terms and the conduct of wholesale suppliers, including dispute resolution schemes
  • Information disclosure to promote competition and monitoring – As a result of the fuel market study, the FIA requires fuel retailers to display information relating to the price of fuel at retail fuel sites, and wholesale suppliers to post a terminal gate price. Mandatory unit pricing for groceries is also being considered following the grocery market study.  Information disclosure to enable monitoring of relevant markets is another common feature in the outcomes of the fuel and grocery studies
  • Introduction of 'regulatory backstops' – The Fuel Industry Amendment Bill 2022 provides for price regulation of the terminal gate price to be introduced, with the purpose of providing a threat of price regulation to incentivise wholesale suppliers to offer competitive prices.  Similarly, the Grocery Bill provides for additional regulation of the wholesale supply of groceries by the major supermarkets (including price regulation and non-discrimination obligations), to incentivise them to seek commercial agreements with wholesale customers.

    The Commerce Act already provides for the regulation of the price and quality of goods or services in markets where there is little or no competition and little or no likelihood of a substantial increase in competition (eg markets with natural monopoly characteristics such as electricity lines and airports).  The proposals relating to fuel and groceries sit outside this general regime and it remains to be seen whether such regulation will ultimately be applied.  However, a Cabinet paper on the grocery sector reform does acknowledge that applying price regulation in a market without any 'essential facility' or 'natural monopoly' characteristics is novel and complex.  It also goes beyond the Commission's recommendation
  • Broader powers for the Commerce Commission – This includes more general oversight and monitoring powers, as well as enforcement powers and the power to recommend further regulation, in the fuel and grocery sectors
  • Removal of restrictions on land use – Restrictive land covenants (and other restrictions such as exclusive leases) have been raised in all three market studies, with the Commerce (Grocery Sector Covenants) Amendment Act 2022 prohibiting the use of certain covenants by the major supermarkets.

The residential building supplies market study differs from the first two market studies in that the focus of the recommended changes is on the regulatory system itself, rather than recommending significant new regulation of industry participants.  However, a key theme across the three market studies is a focus on the conditions of entry in a market, with proposed changes aimed at reducing barriers to entry to promote competition.  The government has shown that it has heard that theme loud and clear and is unwilling to wait for participants to modify their behaviour voluntarily.

What next?

Market studies can be initiated by the Minister of Commerce and Consumer Affairs, or self-initiated by the Commission.  In either case, the initiator must be satisfied that it is in the public interest to do so, assessed by reference to the purpose of the Commerce Act, being to promote competition in markets for the long-term benefit of consumers in New Zealand.

The Minister has previously stated that certain criteria are considered in making the public interest assessment like:

  • There are existing indications of competition problems in the market (such as high prices or low levels of innovation)
  • The market is of strategic importance to the New Zealand economy or businesses, or of significant importance to consumers
  • It is likely that there will be viable solutions to any issues that are found
  • A formal Commerce Commission study would add value above work that could be done by other government agencies.

Similarly, the Commission states that factors that it will take into account are likely to include whether there are indications that the market may not be working as competitively as it could be, whether the particular conduct of concern can be considered under another part of the Commerce Act or other legislation, and whether the Commission is best placed to carry out the study.

When the proposed market studies power was progressing through Parliament, submitters raised concerns about the Commission being able to self-initiate studies.  However, the Commission's ability to do so is limited by its funding and resources, which means that only one market study at a time is likely (or potentially several smaller studies).  

Neither the Minister nor the Commission have yet announced what sectors are likely to be subject to the next studies.  The experience in Australia (where the Australian Competition and Consumer Commission (ACCC) can initiate market studies and a Minister can initiate price inquiries) suggests that a broad range of sectors could be potential subjects.

 

 

Conclusion

Regardless of which areas are the subject of upcoming market studies in New Zealand, the experience to date shows that there are a broad range of potential outcomes.  While the Commission states that outcomes of a market study could include a 'clean bill of health' for a sector, it would be remarkable if the Commission undertook a market study and did not make any recommendations directed at enhancing market performance.  Because ultimately, the Commission is a hammer and every market appears a nail (and the government could be the sledgehammer). 

The final report on residential building supplies does suggest that significant additional regulation, as was the case with fuel and groceries, may not necessarily flow from a market study.  We wait to see how the government will respond, and which area will be the next focus.

This article was co-written by Susie Kilty (partner), Tony Dellow (partner), Anna Parker (senior associate) and Hugo Schwarz (law clerk).