Commerce Commission to investigate whether a price control inquiry into retail milk is needed

Read the Commerce Commission's statement below:

The Commerce Commission is undertaking preliminary analysis to determine whether a price control inquiry into retail milk is warranted under Part 4 of the Commerce Act.

A number of parties have laid specific complaints with the Commission about the retail price of milk and are calling for the Commission to hold a price control inquiry.

Price control inquiries are provided for under Subpart 2 of Part 4 of the Commerce Act. An inquiry can either be instigated at the Minister’s request or by the Commission itself. The Minister of Commerce (Simon Power) has not requested the Commission initiate a dairy price control inquiry.

“A price control inquiry is undertaken in order to ascertain whether to recommend price regulation of a good or service. Goods or services may only be regulated under the Commerce Act if there is little or no competition, and if the benefits of regulation materially outweigh the costs of regulation. We do not undertake such inquiries lightly,” said Dr Mark Berry, Chair of the Commerce Commission.

There are potentially three market levels involved in the production of milk: the supply of raw milk to milk product processors, the manufacture and supply of milk products, and the retailing of milk products.

“The Commission intends to review the operation of each of these levels and consider whether it should hold a price control inquiry,” said Dr Berry.

There are a variety of factors that will influence the decision on whether to hold a price control inquiry. The Dairy Industry Restructuring Act aims to ensure that independent processors are able to obtain raw milk from Fonterra at the price which Fonterra pays to its own farmer suppliers. This legislation plays an important role in ensuring contestability in dairy markets. The existence of that legislation would be an important consideration in any decision to commence a price control inquiry.

Also important would be whether the increased prices reflect increases in the international price of milk products rather than a lack of competition in New Zealand. In deciding whether a price control inquiry is warranted the Commission would also need to consider the level of competition between the two major town milk processors and the two major supermarket chains. The Commerce Act requires that there be little or no competition between these parties before regulation can be imposed. Such an inquiry would also need to address the likelihood of potential new competition.

“Price control inquiries are rare and are normally confined to highly concentrated markets with very high barriers to entry. Normally these markets are natural monopolies such as electricity and gas transmission and distribution networks, ports and telecommunications,” said Dr Berry.

The Commission does not have powers at the end of such inquiries to impose regulated prices. It can only make recommendations to the Minister.

Background

Commerce Act provision relating to when goods or services may be regulated (1) Goods or services may be regulated under Part 4 of the Act only if – (a) the goods or services are supplied in a market where there is both – (i) little or no competition; and (ii) little or no likelihood of a substantial increase in competition; and (b) there is scope for the exercise of substantial market power in relation to the goods or services, taking into account the effectiveness of existing regulation or arrangements (including ownership arrangements); and (c) the benefits of regulating the goods or services in meeting the purpose of Part 4 of the Act materially exceed the costs of regulation.

Dairy Industry Restructuring Act

The DIR Act 2001 authorised the amalgamation of New Zealand’s two largest dairy co-operatives – New Zealand Co-operative Dairy Company Limited and Kiwi Co-operative Dairies Limited – into Fonterra Co-operative Group Limited (Fonterra), and the resulting ownership by Fonterra of all the shares in the New Zealand Dairy Board. As this resulted in an entity with a substantial degree of market power in a number of key domestic New Zealand dairy markets, the DIR Act was designed and implemented to mitigate the risks of Fonterra’s market power.

The DIR Act allows for contestability in the New Zealand raw milk market and provides for access to other dairy goods or services supplied by Fonterra to be regulated if necessary. The Raw Milk Regulations require Fonterra to supply up to 600 million litres of raw milk per season to independent processors, with a 250 million litres cap to New Zealand Dairy Foods Limited, and interconnected body corporates and a 50 million litres cap to any other independent processor.

Previous Part 4 price control inquiries

The Commerce Commission last conducted a price control inquiry in 2003, into gas pipelines services on the request of the Minister of Energy. The inquiry recommended regulatory control of gas pipeline services. The Commerce Commission enforces this regulatory regime.

The only other previous price control inquiry was completed in 2002, following a request from the Minister of Commerce, into whether the supply of airfield activities at Auckland, Wellington and Christchurch International Airports should be controlled. The inquiry recommended regulation, however, the recommendation was not implemented by the Minister.