PUBLIC VERSION ISSN NO. 0114-2720 J6822 Commerce Commission Decision No 540 Determination pursuant to the Commerce Act 1986 in the matter of an application for clearance of a business acquisition involving: VECTOR LIMITED and NGC HOLDINGS LIMITED The Commission: P R Rebstock D R Bates QC D F Curtin Summary of Application: Vector Limited or an interconnected body corporate has sought clearance to acquire, whether directly or indirectly, up to and including 100% of the shares in NGC Holdings Limited Determination: Pursuant to section 66(3) (a)/(b) of the Commerce Act 1986, the Commission determines to give clearance to the proposed acquisition. Date of Determination: 10 December 2004 CONFIDENTIAL MATERIAL IN THIS REPORT IS CONTAINED IN SQUARE BRACKETS 2 TABLE OF CONTENTS THE PROPOSAL ....................................................................................................................4 STATUTORY FRAMEWORK..............................................................................................4 ANALYTICAL FRAMEWORK............................................................................................4 THE PARTIES.........................................................................................................................5 Vector....................................................................................................................................5 NGC.......................................................................................................................................5 PREVIOUS DECISIONS........................................................................................................6 THE INVESTIGATION .........................................................................................................6 MARKET DEFINITION ........................................................................................................7 Introduction..........................................................................................................................7 Relevant Trading Activities ................................................................................................8 The Markets for the Distribution of Gas...........................................................................9 Electricity Metering Markets ...........................................................................................10 Electricity Meter Product Markets ..................................................................................10 Geographic Markets ........................................................................................................12 Conclusion on Electricity Metering Market Definition ...................................................12 The Gas Transmission Market .........................................................................................12 Gas Retailing ......................................................................................................................12 Summary of Relevant Markets.........................................................................................13 COMPETITION ANALYSIS...............................................................................................13 Substantially Lessening Competition...............................................................................13 The Counterfactual............................................................................................................14 Competitive Impacts of the Acquisition...........................................................................14 COMPETITIVE IMPACTS IN METERING MARKETS ...............................................14 Introduction........................................................................................................................14 Existing Competition in the Metering Market................................................................15 Conclusion on Existing Competition ...............................................................................16 Potential Competition in the Metering Market ..............................................................16 Introduction......................................................................................................................16 Barriers to Entry in the Metering Market........................................................................17 Conclusion on Potential Competition in the Metering Market........................................18 Countervailing Power........................................................................................................18 Conclusion on Countervailing Power..............................................................................19 3 Conclusion on Metering Markets.....................................................................................19 COMPETITIVE IMPACTS IN THE GREATER AUCKLAND GAS DISTRIBUTION MARKET................................................................................................................................19 COMPETITIVE IMPACTS IN OTHER GAS DISTRIBUTION MARKETS - IMPLICATIONS OF THE FINDINGS OF THE GAS CONTROL INQUIRY .............20 The Gas Control Inquiry...................................................................................................20 Issues Raised by the Conclusions Reached in the Gas Inquiry .....................................21 Limitations on Constraints Which Might be Considered ..............................................23 Consideration of Behaviour ..............................................................................................23 COMPETITIVE IMPACTS OF VERTICAL INTEGRATION.......................................24 Introduction........................................................................................................................24 The Ability of Vector to Foreclose Competition Post-Acquisition................................25 Industry Concerns............................................................................................................25 Vector’s Response to These Specific Concerns ...............................................................26 Gas Governance and Regulatory Regime........................................................................27 Analysis............................................................................................................................28 Incentives to Foreclose.......................................................................................................28 Constraints on Foreclosure...............................................................................................28 Evidence from Other Vertically Integrated Gas Supply Situations..............................29 Impact on Bypass Competition.........................................................................................29 Conclusion on Vertical Integration..................................................................................30 OVERALL CONCLUSION..................................................................................................30 DETERMINATION ON NOTICE OF CLEARANCE......................................................31 4 THE PROPOSAL 1. A Notice under s 66(1) of the Commerce Act 1986 (the Act) was registered on 11 August 2004. The notice was an application for clearance (the Application) for Vector Limited (Vector) to acquire up to and including 100% of the shares in NGC Holdings Limited (NGC). 2. Section 66(3) of the Act requires the Commission either to give clearance or to decline to give clearance in respect of a notice under s 66(1) within 10 working days, unless the Commission and the person who gave notice agree to a longer period. Two extensions of time were agreed between the Commission and Vector. Accordingly, a decision on the Application was required by 10 December 2004. 3. The Applicant sought confidentiality for specific aspects of the Application. A confidentiality order was made in respect of the information for up to 20 working days from the Commission’s Notice of Determination. When that order expires, the provisions of the Official Information Act 1982 will apply. 4. The Commission’s approach to analysing this proposed Acquisition is based on principles set out in the Commission’s Merger and Acquisition Guidelines.1 STATUTORY FRAMEWORK 5. Under s 66 of the Act, the Commission may grant clearances for acquisitions where it is satisfied that the proposed acquisition would not have, or would not be likely to have, the effect of substantially lessening competition in a market. The standard of proof that the Commission must apply in making its determination is the civil standard of the balance of probabilities.2 6. The Commission considers that, to find a substantial lessening of competition, it is necessary to identify a real lessening of competition that is not minimal.3 Competition must be lessened in a considerable and sustainable way. For the purposes of its analysis, the Commission is of the view that a lessening of competition and creation, enhancement or facilitation of the exercise of market power may be taken as being equivalent. 7. When the impact of market power is expected to be predominantly upon price, for the lessening, or likely lessening, of competition to be regarded as substantial, the anticipated price increase relative to what would otherwise have occurred in the market has to be both material, and able to be sustained for a period of at least two years.