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The dead hand of regulation


Friday 21st March 2003

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The Commerce Commission is the latest state agency to move from light-handed regulation to the dead hand of government intervention.

Its behaviour toward Powerco ­ intervening to control the energy distributor's prices, margins and quality of service ­ is the surest proof that remnants of the departed command economy live on.

The commission, of course, claims right on its side ­ an amendment to the Commerce Act last year provided for "targeted price control" ­ but stupid laws result in stupid outcomes. The amendment to the Commerce Act is one of the more stupid.

The commission does not require evidence of a monopoly profiteering to intervene; there simply have to be "incentives" for a monopoly to overcharge to trigger state meddling.

The burden of proof for alleged price-gouging, unlike in criminal law where it rests with the prosecution (the state), has been conveniently overlooked by the commission.

Monopolies are assumed to be prospective profiteers in the absence of evidence or suspicious behaviour. Just being there is enough.

Even the civil test of balance of probability has been put to one side.

If the Commerce Commission is allowed to intervene in business in such a crass and undemocratic way, then investors will take flight.

Ratings agency Standard & Poor's, careful about what it says about government policy or state agencies, has been blunt about the effect of the commission's decisions on Powerco and two other companies, Vector and Transpower New Zealand.

It said last month the range of options presented by the Commerce Commission to the energy companies would "weaken the business and the financial profile of the ... companies" and potentially weaken the power industry's investment appeal.

"Overly harsh determinations [from the Commerce Commission] benefit no one in the long term, leading to low equity returns,
underinvestment, poor operational reliability and high prices for the end user."

What makes the commission's action deplorable is that it is based on the false beliefs that price control and heavy-handed regulation can bring about market fairness.

A similar misjudgment on regulation is being made by the Securities Commission in the draft disclosure rules for investment advisers.

Far from protecting naive investors, the regulations risk adding another layer of bureaucracy to an already paper-swamped investment market.

They also go against the irrefutable evidence that regulation can prevent fraud or make insolvent companies solvent.

The most regulated part of business, the legal profession ­ under various sorts of quasi-state since the 1850s ­ has recorded more defalcations among its members than any other.

This is not because lawyers are more dishonest than other professionals but more a reflection on the downside of state-directed protection and control.

Financial planners and investment advisers, subject largely to self-regulation, have committed far fewer sins than lawyers yet, if the Securities Commission and the government has its way, they will be licensed along the Australian model.

Regulation extends the dead hand of the state into the private sector. New Zealand went down this route for 50 years and the economy suffered accordingly.

Free commerce might not be perfect but choice and competition appear better deliverers of consumer gains and market fairness than bureaucracy.

Regulation is the killer of enterprise, the destroyer of business confidence and the refuge of those ignorant of business.

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