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.
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.
ENDS