Tuesday, 4 March 2014

The test for declaration under Part IIIA of the Competition and Consumer Act 2010 is dead, long live the new test!

The Australian Federal Government released the Productivity Commission's (PC) final report (Report) on 11 February 2014.  The Report proposes yet another test for the controversial "criterion (b)".  However it is not clear that the new test would have the effect that the PC envisages in circumstances such as those in the Fortescue cases.  The Federal Government has said that it will respond to the report following the upcoming "root and branch" review of competition policy.

My views in short:
  • The private test for whether a facility is uneconomical to duplicate (laid down by the High Court in Fortescue) will remain law for the foreseeable future.
  • Amending criterion (b) in the manner proposed by the PC would: 
    • Reintroduce a variant of the natural monopoly test to the National Access Regime; and
    • Reopen export infrastructure to the possibility of declaration. 
  • Many State based access regimes which were imposed pre Fortescue, under a natural monopoly test, will remain in legal limbo.  This may result in:
    • Infrastructure owners seeking review of State based regimes; 
    • States imposing access by fiat rather than under rule-of-reason declaration criteria.
The National Access Regime

The National Access Regime is contained in Part IIIA of the Competition and Consumer Act 2010 (CCA) (previously the Trade Practices Act 1974).

The National Access Regime provides a number of mechanisms by which third parties can gain access to certain nationally significant infrastructure facilities.  The most notorious of these mechanisms is declaration:
  • if the infrastructure and associated markets meet a number of criteria then the service provided by the infrastructure is "declared"; and
  • if the infrastructure is declared then an access seeker can force the infrastructure owner into negotiation with recourse to binding arbitration by the ACCC.

The High Court ruled on the declaration mechanism in the National Access Regime in 2012 in Fortescue (The Pilbara Infrastructure Pty Ltd vAustralian Competition Tribunal [2012] HCA 36 (14 September 2012)).

Variants of the declaration mechanism, using very similar criteria, are used in a number of State based access regimes (and the National Gas Law).  State based access regimes may be (and most are) certified as effective under the National Access Regime.  That certification precludes the operation of the declaration mechanism contained in Part IIIA, although a variant of the declaration mechanism in State legislation may still apply.  For example, the State based access regime applying to the Queensland coal rail network is certified as effective under the National Access Regime (and hence cannot be declared under Part IIIA) but is subject to the declaration provisions in the Queensland Competition Authority Act 1997.

Another mechanism in the National Access Regime is for infrastructure owners to give an access undertaking to the ACCC under Div 6, Part IIIA of the CCA.  These are sometimes called "voluntary" undertakings however there has not to date been a Part IIIA undertaking given voluntarily.  Rather these have generally been required under separate legislation (this is the case for the wheat export undertakings which are required under section 7 of the Wheat Export Marketing Act 2008).

A controversy - uneconomical to duplicate

The most controversial aspect of declaration under the National Access Regime is criterion (b).  Criterion (b) makes access conditional on (in part) whether it would be "uneconomical for anyone to develop another facility to provide the service".  Competing interpretations of criterion (b) go to the heart of one (often claimed) intention of the National Access Regime in relation to productive efficiency: is the National Access Regime intended to:

Policy option 1: Intervene to address inefficient duplication of significant infrastructure; or

Policy option 2: Let the market address inefficient duplication of significant infrastructure.

If policy option 1 is the intended purpose of the National Access Regime then criterion (b) should be a test comparing the costs of meeting demand by sharing the existing facility to the cost of meeting demand by duplicating the facility. 

If policy option 2 is the intended purpose of the National Access Regime then criterion (b) should be a test of whether it would be profitable for another person to provide duplicate infrastructure.  If it is profitable to duplicate then parties, realising that, would make a commercial deal to share if that was profitable; if it was not profitable to share then duplicate infrastructure would be developed.  The underlying intention of policy option 2 is that access should only be given if no potential third party user could profitably develop a duplicate facility.

The Report

The Federal Government started the PC's inquiry into the National Access Regime in October 2012.  Following initial public consultation the PC released its draft report in May 2013.  The PC undertook further public consultation before providing its final report to the Federal Government in October 2013.  The Federal Government released the final report on 11 February 2014.

The PC's key points in its final report are:
  • The National Access Regime should be retained, although some amendments are proposed.
  • Governments considering whether to regulate access should demonstrate that there is a lack of effective competition that is best addressed by access regulation.
  • The ACCC should have the power to direct infrastructure expansions and extensions but this power should be exercised subject to safeguards and ACCC guidelines.
The PC proposes two significant changes to the declaration criteria.  The first significant change is to criterion (b) which the PC proposes should be a variant of a natural monopoly test (Report, p160).  The differences between the PC's proposed test for criterion (b) and the natural monopoly test used by the Competition Tribunal in Fortescue are: that potential demand should measured by reference to the market demand for infrastructure services rather than demand for the particular facility; and that coordination costs should be included. 

The second significant change proposed by the PC is that criterion (f) become a full blown net public benefit test.  Under the PC's proposal the public benefit would have to be positively established.  This is in contrast to the, negatively framed, criterion (f) which requires that access "would not be contrary to the public interest.

Criterion (b) proposal: a logical disconnect?

So far so good.  However there appears to be a logical disconnect between the PC's recommendation for amending criterion (b) and the PC's view that the purpose of access regulation is not "to improve productive efficiency through avoiding wasteful duplication" of infrastructure (Report, p86). 

The PC is at pains to state that the purpose of the National Access Regime is to address a lack of competition (allocative efficiency), rather than productive efficiency that might arise from duplicating infrastructure.  In fact the PC approach proposes that access regulation should address competition issues in two distinct notional areas:
  1. markets for infrastructure services where there is an enduring lack of competition due to natural monopoly; and
  2. markets where competition is dependent on third parties gaining access to the above mentioned infrastructure services.
The problem with this approach is that the PC's proposed change to criterion (b) is a test for productive efficiency in the market for infrastructure services.  The PC's proposed criterion (b) does not address expressly the state of competition for the infrastructure services.

The educated reader might respond to this by saying that a test for natural monopoly infrastructure implies that there will be no competition for infrastructure services because it is generally not profitable for anyone to develop a second natural monopoly facility.

The problem with that response is that the facts in Fortescue had natural monopoly rail infrastructure that was profitable to duplicate.  It was profitable to duplicate because world prices for iron ore were well above the costs of production in the Pilbara (prices were set by the costs of marginal producers - Pilbara producers are "inframarginal" producers).  This arguably allowed Pilbara producers the luxury of some inefficiency in the form of duplicated natural monopoly infrastructure.

The PC is of the firm view that, on facts such as those in Fortescue, access should not be granted.  The Report's "stylised example" (Report at Box 2, repeated at Box 3.8) describes a vertically integrated miner who owns a rail line and produces iron ore where prices are set in world markets.  The PC states that access regulation is not warranted in that circumstance.  The problem is that it is not clear that the PC's proposed criterion (b) test, a variant of the natural monopoly test, would have stopped access being granted in that case (see Heydon's dissenting judgment in Fortescue which would have declared the Hamersley and Robe lines on the basis of a natural monopoly test).  It is clear however that the private test stopped Fortescue getting access (see the Fortescue decisions in the Full Court and Tribunal).

The private test may have its problems as the PC notes (Report pp157-158).  But the PC wants an access regime that picks up natural monopolies but carves out export facilities such as those in the Pilbara and other circumstances where natural monopoly characteristics only mean that duplication would be productively inefficient (but otherwise profitable).  The private test neatly achieves that carve out in practice.

Perhaps what troubled the PC is that the private test worked in practice but not in theory or that the PC sought to narrow declaration still further.  I would think that a better way to achieve that may be to leave criterion (b) unchanged (and carrying the High Court's private interpretation) but add its proposed natural monopoly variant as an additional criterion.

Criterion (f) proposal: a do-all criterion?

I also believe that the PC's proposed full public benefit test for criterion (f) has problems. 

The current criteria apart from criterion (f) require benefits of certain kinds (for example, promotion of a material increase in competition in at least one market).  Current criterion (f) allows a decision maker to check that, in spite of benefits accruing from the other criteria being satisfied, there is not some other matter that will weigh against the public interest. 

Under the PC's proposal, criterion (f) would become the main game before decision makers.  Anyone who has been involved in the full public benefit test elsewhere in the CCA can attest that it is a significant burden for an applicant to bear and a substantial task for decision makers to assess claimed benefits and counter claims. 

Government response

The Federal Government's response to the Report has been to put the National Access Regime on the list of matters to be considered in the upcoming "root and branch" review of Australian competition policy.  The root and branch review is due to be completed in December 2014.  The Government is, in effect, getting a second opinion and giving itself some further thinking time.

This and the Government's favourable stance toward the big miners suggests that the current private test (which the big miners favour) will remain law for the foreseeable future.


Given the issues with the Report that I have outlined above I believe that the Government is well advised to take the time and opportunity afforded by the root and branch review to give the National Access Regime some further thought. 

However in the meantime there are State based access regimes in legal limbo.  This is because the High Court's 2012 ruling that criterion (b) is a private test remains the law but a number of facilities declared under State law were declared earlier when criterion (b) was interpreted as a natural monopoly test.  I consider that some of those facilities would not satisfy the current private test and the owners could seek to have declaration revoked.  Putting off a decision on the National Access Regime makes it more likely that some owners will seek revocation of declaration.

In addition, the States are likely to want a say in what happens to third party access law in Australia.  The National Access Regime was enacted in 1995 following agreement between Federal and State governments (see clause 6, Competition Principles Agreement, 1995).  The States, particularly Western Australia and Queensland, have taken a close interest in third party access law as it applies in their respective States.  Western Australia and Queensland have both sought to impose State based access regimes by executive decision and not subject to prolonged review by the judiciary (as happened under the National Access Regime in Fortescue).  Rather than follow the PC's advice, which would weaken the ability to bring or keep facilities under access regulation, the States might in future simply impose third party access by fiat rather than the rule of reason, criteria based approach in the National Access Regime (and currently in State based regimes).

Disclaimer:  I acted for Fortescue in the matters mentioned above in the Competition Tribunal, the Federal Court and the High Court. 

Monday, 3 March 2014

Some thoughts on competition law and economic regulation

Welcome to my blog about competition law and regulation.

I am an Australia based lawyer, specialising in competition law and economic regulation.  I focus particularly on access to infrastructure, mergers and cartels.

I began working in competition law and economic regulation in 2001 when I joined the New Zealand Commerce Commission as an economist.  I switched from economics work to practice as a lawyer 5 years later.  I have worked as a lawyer in private practice in Australia since early 2007.

I am a regular speaker at industry conferences on the topic of economic regulation, particularly as this applies to bulk supply chains.

Your own thoughts on any of my posts are welcome!  

David Peters

Tuesday, 21 January 2014

2014 Australian competition law outlook: it's reform season down under; from mining boom to dining boom

Australia elected a new government (Coalition Government)  in September 2013.  Accordingly, 2014 promises a number of reforms, including a "root and branch" review of Australia's competition law framework.  

Australian investment is in a transition from mining to food production, keeping in step with the economic transformation of China (Australia's largest trading partner) from developing to developed nation.  There are competition law implications, including food industry consolidation through mergers.

Root and branch review of competition law

December 2013, the Coalition Government issued terms of reference for a root and branch review of Australian competition law.  The review will examine current laws and also the broader competition framework.  

The root and branch review is the first major review of competition policy since the Hilmer Report was published in 1993.  The Hilmer Report was influential and resulted in significant legislative changes.  Those changes included the introduction of controversial rules providing for third party access to significant bottleneck infrastructure, important given Australia's reliance on the export of bulk minerals such as iron ore and coal which need such infrastructure.

The final report of the root and branch review is due in 12 months.  Whatever the report says, we consider it unlikely that the Coalition Government will make major changes to competition law.  The Hilmer Report followed close on the heels of an economic recession.  There is no such impetus for major changes currently - Australia has not been in recession since the early 1990s.

National third party access regime review

During 2013 Australia's Productivity Commission (PC) reviewed the operation of the third party access provisions in Part IIIA of the Competition and Consumer Act 2010 (CCA).  Part IIIA provides for third parties to get access to significant bottleneck infrastructure under certain circumstances.  The PC's final report was provided to the government in October 2013.  The government is expected to release the report shortly along with its views on which recommendations will be accepted and legislated.

Much of Australia's coal export infrastructure and some of its iron ore export infrastructure is subject to access rules that derive from Part IIIA.  During 2004 to 2012, mining majors BHP Billiton and Rio Tinto successfully fought off Fortescue Metals' attempts to bring their Australian iron ore rail infrastructure under Part IIIA.

We consider that the Coalition Government may face some difficult decisions on which of the PC's recommendations to accept.  In particular, should third party access be granted because a regulator decides that it would be efficient or because a third party can't profitably provide its own infrastructure?  The efficiency approach arguably involves some degree of central planning, the profitability approach suggests cross subsidisation of more marginal firms - neither may be palatable to the Coalition Government which considers itself business friendly.

From mining boom to dining boom

Australian investment is said to be in transition. Much of Australia's economic growth during the last decade stemmed from an expansion of mining, particularly for iron ore and coal.  Demand for these minerals was driven primarily by economic growth in China.

Mining investment in Australia is now tapering off, particularly for coal as world prices fall in response to increased global and regional supply.  Mining will continue to be important for Australia during 2014 however investors and policy makers are now looking to Australian food production as the next growth industry.  

The economic driver for the so called "dining boom' is the increasing demand for quality food products from China's growing middle class.  The example is New Zealand which has strong economic growth based on Chinese demand for its milk products.  This demand is strengthening the New Zealand dollar which is tipped to reach parity with the weakening Australian dollar in 2014 (for the first time in 40 years).

The increased commercial interest in food production is driving the proposed takeover by dairy coop Murray Goulburn of Warrnambool Cheese & Butter (WCB).  At time of writing the takeover is due to be assessed under Part VII of the CCA by the Australian Competition Tribunal.  A hearing is set down for February 2014.  Murray Goulburn will argue that any resulting lessening of competition in the purchase of raw milk from farmers will be offset by public benefits arising from the transaction.  If convinced, the Tribunal must authorise the transaction.  

Canadian dairy giant Saputo is also bidding for a controlling share of WCB.  Saputo does not currently compete with WBC and therefore does not need to get approval under competition law.  At time of writing Saputo looks increasing likely to win the bidding contest, in which case the Tribunal hearing would not proceed.  Nonetheless, we expect food industry consolidation will continue.

Other food industry happenings in 2014

The owners of wheat port export facilities in Australia are required to grant access to third party wheat exporters.  Access is currently granted under an undertaking given by owners of wheat port export facilities to the Australian Competition and Consumer Commission (ACCC) under Part IIIA of the CCA.  The Department of Agriculture, Fisheries and Forestry is currently consulting with industry to draft a mandatory code of conduct under Part IVB of the CCA that will govern third party access from October 2014.

Friday, 13 December 2013

Dominant message: the High Court comes out pro consumer on misleading and deceptive conduct

On Thursday the High Court gave its decision on misleading and deceptive conduct by Australian internet provider, TPG.  The High Court struck down findings of the Full Federal Court and set aside its orders that had set penalties at $50,000.  The High Court reinstated penalties of $2 million that were given at first instance.  The decision was a resounding victory for the ACCC.
David at the High Court in 2012 (not for the TPG case)

So how did the Full Court get it so wrong and what does the decision mean for advertisers?

Takeaways for advertisers:

  • The "dominant message" of an advertisement is critical in determining if it is misleading.
  • A tendency of an advertisement to mislead is not neutralised by attributing knowledge to the target audience.
  • An advertisement that tends to mislead a consumer merely into a negotiation with the advertiser will suffice to breach the statute.

The facts

In September and early October 2010 TPG advertised on national television stations and seven capital city radio stations, in a number of national and capital city newspapers, and on its own website and websites of two third parties.

On 4 October 2010, the ACCC was wrote to TPG to convey its concerns regarding the advertisements.  TPG did not accept that the ACCC's concerns were warranted, but made some amendments to the advertisements.  The amended advertisements were deployed more widely that the initial advertisements, including in cinemas and billboards.

Decision at first instance

The judge at first instance found that each advertisement (including the advertisements amended following the ACCC writing to TPG) had the dominant message: "Unlimited ADSL2+ for $29.99 per month". 

The judge found that an "ordinary or reasonable consumer taking in only the dominant message would have the impression that the entire cost of the service is $29.99 per month, with no other charges and no obligation to acquire another service". 

The judge found that TPG's qualifications to the dominant message, that a consumer would need to pay a one-off setup fee and an ongoing telephone line rental, were in most cases given insufficient prominence to counter the effect of the dominant message.

The judge ordered that TPG pay a penalty of $2 million.

The Full Court

The Full Court disagreed with the primary judge's view that the "dominant message" of the advertisements was of critical importance in determining whether they were misleading.

The Full Court gave greater regard to "the attributes of the hypothetical reader or viewer".  Those attributes included knowledge:
  • of the 'bundling' method of sale commonly employed by Internet service providers; and
  • that set-up charges are often applied.
Accordingly, the Full Court did not regard many of the advertisements as misleading and gave reduced penalties of $50,000.

The High Court - primary judge was correct

The majority of the High Court considered that the Full Court erred in:

  • holding that the primary judge was wrong to regard the "dominant message" of the advertisements as of crucial importance; and
  • in failing to appreciate that the tendency of TPG's advertisements to mislead was not neutralised by the Full Court's attribution of knowledge to members of the target audience.
The High Court considered it relevant that the advertisements were an unbidden intrusion on the consciousness of consumers and an attempt to arrest the attention of consumers. Therefore consumers cannot have been expected to pay close attention to the advertisement.  Rather many consumers would only absorb the general thrust of the advertisement.  In those circumstances perfunctory attention by consumers would not be a failure on the part of those consumers to take reasonable care of their own interests.

The High Court considered that the Full Court did not recognise, as it should have, that the tendency of the advertisements to mislead sufficed to be determined by asking whether the advertisements tended to bring consumers into negotiation with TPG rather than with one of its competitors on the basis of erroneous belief engendered by the dominant message.  It was not necessary to ask if the advertisement tended to induce consumers to enter into contracts with TPG.

The High Court agreed with the primary judge that it was relevant to penalties that TPB had previously given an statutory undertaking to the ACCC that it would not engage in misleading conduct.  The Full Court had erred in failing to consider that as relevant.

The High Court reinstated the $2 million penalty ordered by the primary judge and awarded costs to the ACCC.