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Call in the lawyers: New Zealand's largest firms face scrutiny over market power

Business / news
Call in the lawyers: New Zealand's largest firms face scrutiny over market power

New Zealand’s largest firms are calling in the lawyers to ensure they don’t abuse their market power after a new, wide-ranging effects test passed into law.

The Commerce Amendment Bill has changed how the Commerce Commission will approach those holding substantial market power, and how New Zealand’s large firms can wield that power. 

Under the new effects test, those with substantial market power are prohibited from engaging in conduct that has, or is likely to have, the effect of substantially lessening competition in a market.

The old competition rules under section 36 of the Commerce Act looked at whether a business had acted with an anti-competitive purpose. That out for large firms is now gone.

The change has been called “surprisingly flexible” and low by competition lawyers, and brings New Zealand into line with other jurisdictions.

Minter Ellison competition partner Jennifer Hambleton said under the new test large firms won’t be able to do the same things as a smaller business and be “saved” by the old rule.

Hambleton said if a company has a substantial degree of market power they need to be very careful to make sure that their conduct won’t be picked up by the new effects test. She said the new test is “very broad” and covers any conduct.

She said large firms have a special responsibility to ensure their conduct does not have an impact on competition, or a substantial impact on competition in the market, that small companies do not have.

MInter Ellison was working closely with its large clients on the law change, Hambleton said, starting from a point of working out whether or not they had substantial market power.

This isn’t an easy process, she said.

Market share can provide a guideline, but Hambleton said the first step is to understand which markets the businesses are participating in.

“That is not a straightforward analysis, because there are economic concepts at play here. A bit of a complex economic and legal analysis determines what the market actually is from a legal point of view, because, of course, companies do define their own market, but that may not necessarily reflect what the legal market is under the Commerce Act.”

In terms of working out if a business has substantial market share, Hambleton said there's a whole range of factors which depend on the particular market. But, one rule of thumb is an ability to increase price sustainably, and over a long term.

“Most of our clients have been reasonably comfortable in terms of their own conduct. But there is a general underlying concern about just the breadth of the conduct that could potentially be considered as part of this, because the law is quite broad and a pipeline to all conduct. So any conduct that could have the relevant effect potentially brings into play a significant range of activities, or decisions, that might be made within an organisation, and so there has been some concern about that.”

New Zealand’s largest firms are taking this big legal change seriously. Fonterra Legal Director Andrew Cordner said it had systems and procedures in place to ensure the diary giant complied with all laws applicable to its operations, including competition laws in New Zealand, and in the offshore markets where it does business. 

“We are approaching the recent Commerce Act changes on that same basis. Given competition law can be an area of some complexity, where appropriate we obtain specialist legal advice on competition law matters and, if required, we would expect to do so in connection with these changes.”

Genesis Energy said in a statement that it considers the recent amendments to the Commerce Act 1986 represent a significant change to New Zealand’s competition law framework. 

“The company will continue to obtain ongoing legal advice to understand the implications of these changes, if any.”

A spokesperson for Fletcher Building said it has always supported the promotion of competition as a means of providing consumers with the best quality, choice and pricing for goods and services.

"Under the new test this will continue to remain our focus.”

Power up Commerce Commission

Hambleton said the Commerce Commission taking cases will iron out where the lines will be drawn on large firms who use their market power in anti-competitive ways, but those cases coming through the courts will take time.

Law firm Bell Gully has said there remained uncertainty as to how the Commission and the courts would apply the new test in practice.

It said the Commission released guidelines which set out the factors the Commission expects to consider when interpreting the new test, however, the Commission has avoided being prescriptive, noting the guidelines are general in nature and not an attempt to codify the Commission’s approach.

It said it is likely the Commission will challenge more behaviour from companies in New Zealand with substantial market power.

Flick Electric boss Pavan Vyas has some ideas on where it thinks the Commission should focus its investigations.

Flick has long been pushing for New Zealand’s so-called gentailers, or firms that both generate power and sell to retail customers, to have their market activities scrutinised.

He said the gentailers, such as Genesis Energy, are stifling competition in the sector because they can use their market power to stop independent retailers from competing.

Vyas pointed to a gentailer’s retail business being able to purchase electricity from their generation business at an Internal Transfer Price (ITP) of their own choosing, which he said was “generally significantly lower than wholesale market prices”. 

They then onsell the balance to independent retailers at a much higher price.

"The ITPs don’t include the same costs and risks an independent retailer faces. Essentially, gentailers are leveraging their vertically-integrated position to benefit from low electricity prices acquired through inherited assets."

Vyas said wholesale electricity margins have risen from about 30% to 50% while retail margins were trending downward year-on-year. 

“We believe that across the board that's happening in gentailer land, and that's putting long-term competition under threat for New Zealanders because it makes new, innovative business models like Flick, really hard to compete and enter the market.”

Vyas said a number of independent retailers have left the market, or lost a lot of ground’ “because of that sort of abuse of market power in our view”.

“The Commerce Commission should absolutely look into this with the new regulation.”

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Is using the excuse of "inflation" to raise prices when your actual costs to produce are falling considered an abuse of market power? Genesis  delivered a half year EBITDAF - of $298 million, up from $210m in the previous comparative period. Why. Because  rainfall allowed for record hydro generation from it's North Island stations and conversely, this reduced thermal generation at its coal-powered Huntly Power Station to record lows, significantly lowering fuel costs.

Did anyone get a price cut from their electricity retailer lately?

Does the government care more about their 50% share of the dividend and the tax on the overall profit,or the inflation effect on the economy?


Genisis overcharged me by almost 50% on "line charges" for a number of years.

They fought hard to deny it but I got a big refund.  You can't trust these characters.


Is this really a new approach to competition commercial law, or just a return to the 1975 Commerce Act?