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.

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

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