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Commerce Commission delivers for consumers

Commerce Commission delivers for consumers

2005 has

been a busy year for the Commerce Commission, with some

great results for New Zealand consumers.

"The Commission

set a new strategic direction two years ago to maximise the

impact of its activities," said Commission Chair Paula

Rebstock.

“We have a strategy of focusing our efforts

where they will have the greatest impact for consumers, and

that strategy is working.”

Ms Rebstock said the Commission

had responsibilities right across the New Zealand

economy.

“It's important for consumers and businesspeople

to understand that competition and consumer law applies

equally to the biggest companies in New Zealand and the

corner dairy.”

Commerce Act The Commission’s priorities

for Commerce Act enforcement are cartels and price fixing.

In April, proceedings were filed against parties in an

alleged Chemicals cartel. In 2004 the Commission introduced

a Leniency Policy that encourages cartel members to break

ranks and receive immunity by cooperating with the

Commission’s investigation. Since the policy’s introduction,

the Commission has received five of applications for

leniency which are now under investigation.

In October

four Palmerston North eye surgeons admitted to price fixing,

and were ordered to pay a total of $85,000 in fines and

costs. By fixing prices instead of competing with each

other, the surgeons effectively created a monopoly,

potentially resulting in higher prices for eye surgery in

the Palmerston North area. “The Commission remains concerned

about anti-competitive conduct in the health sector,” said

Ms Rebstock.

The Commission currently is considering

three significant authorisations for anti-competitive

arrangements in relation to the Maui Pipeline Operating

Code, the Pohokura gas pipeline, and the New Zealand Rugby

Football Union.

In the six months since July 1 2005 the

Commission has received 16 applications for mergers and/or

acquisitions, compared to 18 applications for the whole of

2004/05 and 24 for the whole of 2003/04.

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Many of the

applications raised complex issues, resulting in longer

timeframes for decision making. “The Commission appreciates

that timely decision making is needed to provide certainty

to business but this must be balanced the need to undertake

appropriate analysis and ensure our decisions are robust,”

said Paula Rebstock. “The Commerce Commission still makes

decisions on mergers and acquisitions in a fraction of the

time taken by overseas agencies, and New Zealand is the only

jurisdiction where full written reasons are given for

decisions.”

Fair Trading Act Fair Trading work in 2005

ranged from high-profile court cases against some of New

Zealand’s biggest companies, to enforcing safety standards

that protect New Zealand’s smallest citizens.

The

telecommunications industry has been a focus for Fair

Trading Act enforcement. “Telecommunications is a large

sector of the economy, and one that touches our lives every

day,” said Ms Rebstock. “It is also a fast-moving industry

with many areas where competition is still emerging. With

new products and services coming out all the time, consumers

sometimes struggle to keep up with the play, so it’s

particularly important that telecommunications companies

don’t attempt to mislead them.”

In May internet provider

Slingshot admitted it misled customers in television

advertising. In August the Court of Appeal ordered Telecom

Mobile to publish corrective advertising that could result

in multi-million-dollar refunds after it found the company

should have told customers of their rights under the Door to

Door Sales Act. In October Telecom Mobile agreed to pay

$54,000 in compensation to over 11,000 customers who were

charged peak rates for off-peak calls. In November the

Commission reached a settlement with TelstraClear over

unauthorised switching of customers, and with Cardcall and

Global Card Services, two Australian providers of pre-paid

calling cards.

Health and nutrition claims are another

priority area for the Commission. “The blatant deceit

attempted by some traders in promoting so-called health

products is staggering,” Ms Rebstock said. “Unfortunately,

as one expert witness commented in the Body Enhancer trial,

‘the consumers of weight loss products are particularly

vulnerable to “magic bullet” claims.’ The scientific or

pseudo-scientific claims made about health and weight loss

products are particularly hard for consumers to assess, so

it is crucial that they are accurate.”

In July, Ecoworld

were ordered to pay $136,000 in fines and refunds for

misrepresenting the powers of its “living water” product. In

September Zenith Corporation was found guilty of

misrepresenting the effectiveness of its Body Enhancer

product, and is awaiting sentencing. In November, misleading

claims about Celluslim pills resulted in refunds of $195,000

from vendors Marketing Direct, along with $61,000 in fines

and costs. Also in November, the Tomorrow Dream Line company

and its director Jonathan Ken were convicted for a second

time for claiming ordinary honey was Active Manuka honey,

valued for its antibacterial properties.

A finding in

November that Air New Zealand misled customers in its

advertising will have wide implications for advertising in

New Zealand, particularly the judge’s ruling that

operational costs must be included in the price and cannot

be added as extras. Of 20 sample charges, the Court found 14

were proven, suggesting that the Commission is likely to

succeed on approximately 300 of the total 342 charges. The

Commission has appealed the decision to clarify aspects of

the case.

Also in November, the Commission warned on-line

sales site TradeMe that it was breaking the law by

advertising babies’ cots that did not meet a safety standard

designed to stop children being suffocated or strangled.

TradeMe toughened its compliance programme and agreed to ban

customers who advertised unsafe products.

Credit

Contracts and Consumer Finance Act The Commission began

enforcing this new Act in April and by June had visited

fifty credit providers in Auckland, Wellington and

Christchurch and came back with a mixed report card for the

credit industry. As a result of the visits the Commission

gave advice to the industry and agreed to provide guidance

on s 45 of the Act, relating to credit insurance. In October

the Commerce Commission warned Financial Options Group and

its director Anton Keane that they may be breaching the

Credit Contracts and Consumer Finance Act with house

buy-back schemes in Auckland.

Regulation In July the

Commission was given new responsibilities to regulate the

gas pipeline industry. The Minister of Energy accepted the

Commission’s finding that lack of competition in the

industry was leading to high prices and excess profits. The

Minister announced that the gas pipelines businesses of

Powerco and Vector would be placed under the Commission’s

control, and a thresholds regime would be introduced for the

industry. In August the Commission made an order requiring

Powerco and Vector to drop their prices by 9% and 9.5%

respectively.

The Commission reached a milestone when it

announced for the first time its intention to declare

control of an electricity distribution business. The

Commission published its intention to declare control of

Unison Networks in September after preliminary findings that

consumers would benefit from control being imposed. Unison

Networks is owned by the Hawke’s Bay Energy Trust, and the

Commission’s inquiry found that profits earned from Unison’s

Rotorua and Taupo consumers, who are not beneficiaries of

the Trust, are significantly higher than those taken from

consumers in Hawke’s Bay, who own the Trust. Consultation on

the intention to declare control is continuing.

In

December the Commission published its intention to declare

control of Transpower, the electricity transmission company

that owns the national grid. The move follows an inquiry

after the company breached regulatory thresholds. The

Commission’s preliminary view is that the imposition of

control will result in long-term benefits for consumers. The

Commission must now consult with interested parties and aims

to make a final decision by March 2006.

In August the

Commission issued a final determination on telephone number

portability meaning telephone users switching companies will

be able to keep the same phone number. Companies must

provide number portability by 1 April 2007. “Universal

number portability will improve competition in the local and

cellular markets,” said Telecommunications Commissioner

Douglas Webb. “Number portability must be in place by April

2007, but I expect companies will do their best to bring

forward the availability date.”

The Commission’s December

decision to give TelstraClear access to the wholesale

bitstream service provided by Telecom was welcomed by

telecommunications users. “This decision gives TelstraClear

the ability to compete and innovate in supplying broadband

services across New Zealand” said Telecommunications

Commissioner Douglas Webb. “TelstraClear will be able to

differentiate its services from Telecom’s broadband

services. The result will be more choice and greater

competition.”

Also in December the Commission released its

draft report on mobile termination recommending that the

cost of calling cellphones from landlines should be

regulated. A previous report reached the same conculusion

but the Commission was asked to reconsider that in the light

of offers from Telecom and Vodafone to voluntarily reduce

mobile termination rates. The Commission compared the

benefits of regulation to the offers by Telecom and Vodafone

and found that regulation would bring greater benefits for

end users. “The Commission continues to believe that

regulation will bring substantial benefits to businesses and

consumers making fixed-to-mobile calls,” said

Telecommunications Commissioner Douglas Webb.

In December

the Commission finalised its determination of a dispute

between Open Country Cheese and Fonterra relating to the

reasonable transport costs for transport of raw milk to OCC.

The Commission found that Fonterra’s transport charge is not

reasonable and breaches regulations under the Dairy Industry

Reform Act. Fonterra must now calculate its charge in a

different way, resulting in a lower transport cost for Open

Country Cheese.

BACKGROUND SECTION FOLLOWS

Background - Commerce Act Eye surgeons price fixing. In

August four surgeons admitted breaching the Commerce Act by

fixing the prices to be paid for eye services, and were

ordered to pay a total of $85,000 in fines and costs. The

settlement followed a Commerce Commission investigation into

the surgeons’ dealings with the District Health Board,

MidCentral Health Limited. By fixing prices instead of

competing with each other on price, the surgeons effectively

created a monopoly, potentially resulting in higher prices

for eye surgery in the Palmerston North area. The Commerce

Commission has previously prosecuted the Opthalmological

Society and two eye surgeons for anti-competitive behaviour

in Southland. The case resulted in fines and costs of nearly

$600,000.

Maui Pipeline Operating Code. In August Todd

Petroleum Mining Company Limited and Todd Taranaki Limited

applied to the Commerce Commission for authorisation to

enter into a contract to which sections 27, 28 or 29 of the

Commerce Act might apply. The relevant contract is the Maui

Pipeline Operating Code. The Commerce Act allows for

authorisation of potentially anti-competitive business

practices if the public benefit is greater than the

detriment to competition.

Pohokura gas pipeline. In

October the Commission announced it would issue a second

draft determination on whether to revoke or vary the

Pohokura gas authorisation. The Commission previously

authorised an arrangement allowing Shell, OMV and Todd to

jointly market the gas from the Pohokura gas field in

Taranaki on the basis that joint marketing would allow the

gas to be made available earlier than would be possible if

the companies marketed it separately. Since that time, the

parties have been unable to agree on a joint approach, and

will separately market the gas. The Commission is

considering revoking its previous authorisation.

The New

Zealand Rugby Football Union applied to the Commission in

November for authorisation to enter into a Collective

Employment Agreement between the NZRU and Rugby Players

Collective Incorporated. It is proposed that the new

Collective Employment Agreement will set a salary cap on the

total annual player payments made by each of the 14 Air New

Zealand Cup provincial unions. The level of the proposed

cap will initially be set at $2 million for each provincial

union for 2006, and would be adjusted by the CPI each year

after that. A number of other measures are also being

proposed. The Commission intends to make a final

determination by the end of March 2006.

Background – Fair

Trading Slingshot. In May internet service provider

Slingshot admitted its television adverts were liable to

mislead consumers because conditions attached to its

unlimited dial-up internet plans from $9.95 offer were

unreadable in its television advertising. Slingshot changed

the graphics used in advertisements and added a voiceover

drawing attention to the conditions.

Telecom Mobile

Door-to-Door. In August the Court of Appeal found that

Telecom Mobile “seriously misled customers” in door-to-door

and telemarketing campaigns, by failing to tell them about

their rights under the Door to Door Sales Act. The marketing

campaigns targeted the customers of a rival network and

encouraged them to switch their mobile use to Telecom 027.

Telecom Mobile was ordered by the Court of Appeal to contact

customers who responded to the campaigns, and undertake

corrective advertising. The company has been granted leave

to appeal to the Supreme Court.

Telecom Mobile billing

fault. In October the Commission reached a settlement with

Telecom Mobile after a billing fault on the 027 network

resulted in thousands of customers being charged peak rates

for off-peak calls. Telecom Mobile admitted breaching the

Fair Trading Act and agreed to credit approximately 11,000

affected customers a total of $54,000. Telecom Mobile

admitted that it did not act quickly enough to fix the fault

or notify its customers of the problem.

TelstraClear. In

November TelstraClear admitted breaching the Fair Trading

Act and agreed to change its approach to telemarketing and

audit its compliance with the Act after a Commerce

Commission investigation found that it had switched

customers to the TelstraClear network without their consent.

Calling cards. In November the Commission reached a

settlement with two Australian-based providers of prepaid

calling cards, Cardcall Pty Ltd and Global Card Services Pty

Ltd, after an investigation found that hidden costs and

conditions meant customers were charged more for calls than

they expected.

Grander Living water units. In July,

Ecoworld paid out $136,000 in fines and refunds for

misrepresenting the powers of its Grander Living water units

which sold for up to $12,000. In a sealed section the units

contained “living water,” claimed to be from glacial melts

in Austria’s Tyrolean mountains, and Ecoworld claimed that

any water brought into close proximity with this living

water would gain special properties. Tests showed no

difference between water that had passed through the system

and ordinary water.

Body Enhancer. In September, Zenith

Corporation was found guilty of breaching the Fair Trading

Act with claims its Body Enhancer liquid would assist with

weight loss and improve health. Judge L.H. Moore found that

“Body Enhancer has been proved beyond reasonable doubt not

to be suitable for any of the purposes claimed and not to

confer upon its users any of the benefits alleged.” Zenith

Corporation has not yet been sentenced.

Fake manuka

honey. In November, Tomorrow Dream Line and its director

Jonathan Ken were convicted for a second time for claiming

ordinary honey was Active Manuka honey, which attracts

higher prices for its antibacterial properties. In March

2005 Mr Ken pleaded guilty to similar charges, but the

Commission pursued a second case after more instances of

false labelling came to light. Fines of $14,500 were

imposed.

Celluslim. Denis O’Neil and Martini Limited faced

a $195,000 refund bill in November after making misleading

claims that its Celluslim pills would assist with weight

loss and cellulite reduction. Judge Wilson QC said: “…any

person who purchased Celluslim wasted their money.”

Air

New Zealand. The Auckland District Court ruled in November

that 14 of 20 sample Air New Zealand advertisements were

misleading. A key finding was that fuel costs are an

operating cost and must be included in the price of airfares

and not charged as an extra.

TradeMe cots. The Commission

warned TradeMe in November that it could be liable for fines

up to $200,000 if it allowed people to advertise unsafe cots

on its site. TradeMe agreed to proactively monitor the site

and remove any non-compliant products posted for sale, and

ban users who persist in advertising unsafe products. The

cot safety standard is designed to prevent children being

suffocated or strangled and is enforced by the Commerce

Commission.

Background – Credit Contracts and Consumer

Finance Act Financial Options buy-back warning. A buy-back

transaction is where a homeowner transfers, or agrees to

transfer, ownership in a property to another party (known as

the buy-back operator). The homeowner will still occupy the

property and has the right to repurchase the property from

the buy-back operator at a later date. The Commission has

longstanding concerns about buy-backs, and the warning to

Financial Options is part of its ongoing focus on buy-back

operators.

Background – Regulation Gas pipelines industry.

In July the Minister of Energy accepted the Commerce

Commission’s recommendation that gas pipeline services

provided by Powerco and Vector be controlled under Part 5 of

the Commerce Act. The Commission found in its gas control

inquiry report that competition in the gas pipeline industry

was limited and excess returns were being made by Powerco

and Vector.

Intention to declare control of Unison

Networks. Unison supplies consumers in the Hawke’s Bay,

Taupo and Rotorua regions. The company is 100% owned by the

Hawke’s Bay Power Consumers’ Trust, which acts on behalf of

the consumers connected to Unison’s network in Hawke’s Bay.

The Commission assessed Unison’s return on investment for

the year ended March 2006 to be as high as 12.23%. This

compares to the Commission’s estimate of the required rate

of return of 7.35%.

Intention to declare control of

Transpower. By January 27 2006 the Commission will release a

paper setting out the reasons for its intention to declare

control, which are based on the Commission’s preliminary

conclusions from its post-breach inquiry and analysis

undertaken to date. Interested persons may make submissions

on the paper. The due date for written submissions is 5pm,

15 February 2006. Cross-submissions will be due by 5pm, 22

February 2006. The Commission will aim to make a final

decision and publish its decision paper by 5pm Friday 17

March 2006.

Telephone number portability. Number

portability makes it easier for customers to switch

telecommunications service providers by allowing customers

who switch provider to keep their existing telephone number.

While local number portability is currently available to

some customers, the determination sets a path for an

efficient industry-wide solution that will provide number

portability for all local and cellular users.

Mobile

termination. The Commission expects that reductions in

mobile termination rates will flow through into retail

fixed-to-mobile prices paid by consumers, and it will

monitor retail developments. Written submissions on the

Commission’s draft determination close on 20 January 2006

and cross submission on 5 February 2006. The Commission

expects to send its final reconsideration recommendation to

the Minister of Communications in the first quarter of

2006.

TelstraClear bitstream access. Bitstream is an input

to the provision of broadband to consumers on Telecom’s

copper local access network. TelstraClear will combine

bitstream with its own transmission and ISP services to

create its own broadband services for customers. Telecom is

required to provide nationwide bitstream access to

TelstraClear with the maximum downstream speed technically

available (currently 7.6Mbps) and an upstream speed of

128kbps upstream, at a GST-exclusive price of $27.87 per

month.

Open Country Cheese dispute with Fonterra. Under

the Dairy Industry Restructuring (Raw Milk) Regulations

2001, Fonterra is required to supply Open Country with raw

milk at the default milk price. Regulation 8(5) provides

that the default milk price is the wholesale milk price for

the season plus the ‘reasonable cost of transporting the raw

milk to the independent processor’. The Commission found

that Fonterra’s charge based on its national average

transport cost is not reasonable for transport to Open

Country. Fonterra has therefore been acting in breach of

the

Regulations

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