Wednesday, 11 March 2020

One Rule to bring them all and in the darkness bind them

"Chatham House rules", said the invite, though as Chatham House itself says, "There is only one Rule", namely
When a meeting, or part thereof, is held under the Chatham House Rule, participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.
So let's just say I've been at a forum where two items got discussed - whether the institutional set-up of the Commerce Commission is all that it might be, and whether our Court of Appeal threw a lit firework through the windows of the Commerce Act.

The first bit was partly a push-back response to the New Zealand Initiative's 2018 Who Guards the Guards? - Regulatory Governance in New Zealand (media release here, fuller version here), but even if the Initiative had never raised it, it's a good idea to talk about, and MBIE or ComCom itself also ought to be kicking the tyres from time to time and checking that processes and policies are fit for purpose.

The Initiative argued that "the separation of board and executive functions at regulators like the FMA [Financial Markets Authority] contributes to greater accountability and to greater levels of expertise.  Commission models like the one in place at the Commerce Commission fared worse". In other words, in the Initiative's preferred state of the world, Commissioners would set the general strategic direction of the place, and hold the CEO accountable for delivery, in the way that a corporate board would, but the CEO and the staff would make the actual decisions on mergers, trade practices, and sector regulation.

I didn't find the Initiative's conclusions persuasive at the time about ComCom, and after this latest forum I remain unconvinced. It's true that the Initiative were onto a worthwhile topic, and also true that the data they collected from survey respondents on a wide range of regulators (which you can download for yourself here) were fascinating. But if you unpack ComCom's performance, you find some interesting patterns.

Its worst performance on the 23 criteria the Initiative canvassed came from "The ComCom understands the commercial realities facing your industry", where 57.9% strongly disagreed or disagreed. On its face, you can see why the Initiative would then call for "broadening the skills set of the commissioner/board members of the commission to include members with industry expertise".

But hang on: when asked whether "The leaders of the ComCom are skilled, knowledgeable and well-respected by businesses in your industry", they came out well, with only 18.9% strongly disagreeing or disagreeing. The staff at ComCom, ditto, with only 19.4%. That's hard to square with the picture of clueless wallies.

The simplest explanation of these two contrasting pictures is that the "you don't understand our industry" response is special pleading. "If only you understood airlines/electricity/shipping/insert professional service here, you'd realise why we need to be able to agree on prices/set capacity/restrict entry". And you might start thinking dark thoughts about regulatory capture if the likes of a ComCom ever got too-high marks for helpfully going along with old Spanish practices.

The next worst ComCom score, by the way, was on the question, "You are not hindered or deterred from taking action to improve the profitability of your business by any lack of predictability in the ComCom's decision-making", with a 54.1% thumbs down. Noting that this doesn't really speak to the issue of form of governance - a structure where the staff make the calls could be just as unpredictable as one where Commissioners do - my guess is that the low score says more about the state of New Zealand competition law (and in particular around the state of the law on abuse of market power)  than about ComCom structure or process.

At the forum I was at, the point was made that maybe we ought to have a comprehensive review of our competition law, as the Aussies did in 1993 (the Hillmer review) and again in 2015 (the Harper review). I tend to agree, though clearer or better legislation won't be the complete silver bullet: drawing the appropriate line between vigorous competition from big players and anti-competitive use of market power remains problematic in every jurisdiction, irrespective of the wording of the law. But taking whatever steps we can to clear the air (and adopting Australia's "effects test" would be a good start) would go some way to address the uncertainty the Initiative's respondents were voicing.

Finally, the other major area the Initiative survey identified as a concern was "The ComCom is readily held to account for the quality of their work (including any mistakes) by its responsible government department, minister, or some other effective external accountability mechanism", where 44.1% were unhappy. This seems to be a widespread concern across all 24 regulators asked about: the average answer is 43.4%, so ComCom's rating is entirely typical.

My personal feeling is that in ComCom's case the response may reflect the lack of visibility of the accountability mechanisms, which are stronger than people may realise. If, for example, you had to operate within and report on the tightly hypothecated budget buckets that MBIE makes the Commission use, I'd bet you wouldn't like it. And while Select Committee oversight tends to be for policy trainspotters rather than for the wider community, Committee members can be robust in their attitudes to the Commission (as I noticed for myself when I turned up to argue the case for the Commission being able to initiate market studies). Again, the state of the law may also be a factor: ComCom in its everyday business isn't subject to "merit reviews" through the courts. It can be challenged on the law, or on due process, not on substance. You can understand why people might feel frustrated at not being able to relitigate the facts.

While I'm sympathetic to the Initiative's accountability concerns, I'm not sure that the corporate board model is the right one in this quasi-judicial context, a point also made at this forum. I wouldn't want a Supreme Court sitting back and managing the clerks' budgets, while the (nameless?) clerks make the decisions.

The second part of the forum dealt with the possibility that the courts may have further muddied the legal waters, by calling into question how the Commerce Act is supposed to work. The case  is the Court of Appeal's 2018 NZME/Fairfax judgement, and the argument is about how you decide whether something is on balance a good idea, after taking all the benefits and detriments into account.  Is the test, the country as a whole will be better off (a "total welfare" standard)? Or is it, consumers will be better off (a "consumer welfare" standard)? Or something in the middle where the country's better off and at least some consumers see some of the benefits (a "modified total welfare" standard)?

At the time (including in my own coverage) the big issue in the NZME/Fairfax case was seen as what things can properly be counted as benefits or detriments, with a big focus on whether ComCom was entitled to count loss of media plurality as a detriment (it was). Nobody paid huge mind to the bits of the judgement dealing with 'The Act's objectives' in [42] to [53], with Australian precedents in [66] to [68], or the punchline in [75]. Essentially, the judgement said, "Look, ComCom, you've always used a total welfare standard. You seem to think the courts required you to. Don't know about that - we in this court certainly didn't. And at a minimum you're certainly free to use the modified total welfare standard if you want to. You call it like you see it, and we'll tell you if you've gone wrong".

My inclination is towards a total welfare test, even if it leads you down the odd uncomfortable path: the example everyone mentions is the Commerce Commission's 2015 wool scouring authorisation. There, there were consumer detriments (higher prices as a result of the market power of the merged-to-monopoly incumbent), offset by efficiencies from rationalising production facilities. The total welfare standard says money may have moved from consumers' to producers' pockets, but so what: the country's better off not tying up unnecessary resources in wool scouring plants. The consumer welfare standard says, get outta here.

Perhaps nobody will follow up the Court of Appeal's musings on the meaning of it all. But it is odd, to say the least, that this late in the game - the Commerce Act dates back to 1986, and its current purpose statement to 2001 - people are still wondering what, if anything, the legislators meant to achieve. Did the new purpose statement - "to promote competition in markets for the long-term benefit of consumers within New Zealand" - mean to enshrine a consumer welfare standard? If it didn't explicitly, can or should a consumer welfare standard be read into it?

There's a huge debate underway overseas about whether competition and merger enforcement has gone soft, particularly in the US: mergers, the argument goes, have been let through that shouldn't have been, and the big guys have been allowed to throw their market power around to ill effect. If you haven't read Thomas Philippon's The Great Reversal: How America Gave Up on Free Markets, now would be a good time. Against that background, maybe we should sort out our own thoughts in our own heads, too, and sit down and have a ground zero reassessment of what sort of competition law we ought to have.

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