COMPETITION REVIEW FEBRUARY 2014
WELCOME TO THE INAUGURAL COMPETITION REVIEW
The past year has shown that competition law is in a state of perpetual motion. It reshapes to the priorities of a new chair of the ACCC, to judicial decisions and to ad hoc legislative interventions to address perceived inequities between suppliers and consumers or between competitors themselves. While this helps keep competition law dynamic and relevant, there is also the risk that over time the Competition and Consumer Act 2010 (Cth) (CCA) will drift from the coherent set of economics principles which should underpin an effective competition law regime. Therefore, it is important to periodically undertake a bottomup review of the competition law and regulatory framework. While its genesis was largely a response to SME concerns, the new Coalition Government’s “root and branch” review proposes to be a wide ranging review of the CCA and beyond. It remains to be seen how the Expert Panel will approach the large task that it has ahead of them.
So, 2014 will be a landmark year for competition law and related industry-specific regulation in Australia. We thought that it would be useful to start the year with a publication that draws together insights from some key players (see the link to our Expert Insights’ interviews on page 4), both from within the ACCC and across industry sectors regulated by it. I would like to thank Rami Greiss, Marcus Bezzi, Michelle Groves and Tony Warren for agreeing to be interviewed and contributing their time so generously. I would also like to thank all the Gilbert + Tobin partners and staff who have contributed to this Competition Review, in particular Morelle Bull and Charles Coorey who took the role of editors. Finally, we would like to thank you for your support in 2013 and we look forward to working with you all in 2014.
Looking ahead, there is also likely to be major change across the industry sectors regulated by the ACCC. The NBN will need to be restructured to the Coalition Government’s FTTN model. The ACCC will need to grapple with how to simultaneously regulate on the legacy copper network and on the NBN. In energy, the AER and the ERA in Western Australia will make their first network revenue and pricing decisions under the new rules framework in 2014. The newly established Consumer Challenge Panel will also play a role in assisting energy regulators to consider how its decisions will impact on consumers.
Luke Woodward Group Leader Competition and Regulation
Editors: Morelle Bull | Charles Coorey
CONTENTS
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Expert Insights
Competition Enforcement
Energy
Root and Branch
Australian Consumer Law Enforcement
Telecommunications
Mergers
Access Regulation
EXPERT INSIGHTS 1 EXPERT INSIGHTS Gilbert + Tobin’s Competition & Regulation team spoke to experts in the industry to discuss some of the key issues that arose in 2013 and to discuss what is expected in 2014. You can view the full videos at: www.gtlaw.com.au/c+r
1 Mergers Gina Cass-Gottlieb’s interview with Rami Greiss, General Manager, Merger Investigations Branch, Australian Competition & Consumer Commission.
2. Australian Consumer Law Enforcement Charles Coorey’s interview with Marcus Bezzi, Executive General Manager, Enforcement & Compliance Division, Australian Competition & Consumer Commission.
3. Energy Geoff Peterson’s interview with Michelle Groves, Chief Executive Officer, Australian Energy Regulator.
4. Telecommunications Adelina Widjaja’s interview with Tony Warren, Group Executive of Corporate Affairs, Telstra.
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Expert Insights
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Competition Review | 5
ROOT AND BRANCH The “root and branch” review will be a comprehensive, national review of competition policy, which will dominate the policy discussion in competition law in 2014. We welcome the review as we consider that reform to Australia’s competition law is needed to bring Australia into line with international best practice. Below we discuss the scope and context for the review and how Gilbert + Tobin will be actively engaging in the review process.
Scope of review is broader than initially anticipated – the (aspiring) son of Hilmer ; not the son of Dawson Ahead of winning the election on 7 September 2013, the Coalition announced in its pre-election policy document – ‘The Coalition’s Policy for Small Business’ – that it would be conducting a full-scale review of competition law. In particular, the Coalition stated it: will initiate an arms-length and independent examination of the current competition and trade practices framework and tools. It will examine how they are applied and what their outcomes are, if they are keeping up with emerging trends, and whether outcomes are consistent with what is intended. The review soon became known as a “root and branch” review of the Competition and Consumer Act 2010 (Cth) (CCA) and commentators started labelling it as “the son of Dawson” (the Dawson Review in 2002–2003 was the last comprehensive review of Australian competition law).
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However, after the release of the draft Terms of Reference (TOR) on 11 December 2013, it became apparent that the review is likely to have a much more ambitious agenda – it not only seeks to cover the existing competition and trade practices framework but also broader competition issues including:
++ whether key markets are competitive and, if not, whether further prohibitions are required to address certain areas of concern in particular sectors (the TOR specifically mention groceries, utilities and automotive fuel, although the review does not need to be limited to these industries);
++ whether regulatory agencies (including the ACCC, AER and state regulators) are operating effectively in terms of transparency and efficiency, among other things; and
++ whether government business activities and services providers serve the public interest and promote competition and productivity, including a consideration of whether entities should be privatised, corporatised, subject to price regulation or vertically separated. Given its scope, the review should therefore more appropriately be called “the (aspiring) son of Hilmer” as the Hilmer Inquiry in 1993 was a wide-scale review of competition policy which led to the launch of the national competition policy reforms. Yet, with such an ambitious agenda, it remains to be seen what the review will actually achieve in the proposed 12 month timeframe.
Root and Branch
Context of review has also changed over time Initially, one of the main issues driving the root and branch review was the need to have a level playing field for small business, particularly in (small) business-to-business transactions. In this regard, the pre-election policy document made clear that: [o]ur root and branch review of the competition laws will ensure that both small and big businesses have a level playing field, assisted by helping small business better understand fair commercial conduct and a more effective Franchise Code. While the background section in the draft TOR continues to specify small businesses, the overall goal of the review appears to have broadened: …the Government is looking to further engage the engine of competition to broaden durable benefits for Australians, foster economic prosperity and enterprise that enables efficient business – including small businesses – to grow and prosper, promote Australian businesses, attract investment, and establish a footing for exports. With a broader context, the Expert Panel conducting the review will need to balance the competing considerations of overall economic efficiency and the need to ensure smaller businesses are given a “fair go.” We consider the Expert Panel will have to identify areas of priority in order to conclude the review in the 12 month period.
Reforms are required to bring Australia in line with international best practice It will be interesting to see how the Expert Panel will approach its task. One possible starting point is to review the existing competition law and policy framework and consider what provisions could be removed, what provisions could be changed and what provisions could be added. This is the approach that was taken in the Dawson Review.
Regardless of the approach, we consider that Australian competition law can be significantly rationalised. We consider there is a clear case to remove some of the per se offences, such as the resale price maintenance prohibition and the bank-specific price signalling prohibitions. In our view, these provisions have little (if any) grounding in economic theory. The price signalling prohibitions, in particular, are too broad in scope and the per se liability standard is inappropriate given the pro-competitive or benign nature of many disclosures. We also consider that changes to some of the existing prohibitions, such as substituting the per se third line forcing prohibition with a substantial lessening of competition prohibition and rationalising the provisions relating to joint ventures, would be beneficial. Such changes would bring Australia into line with international best practice and would make both enforcement and compliance a more efficient process.
Gilber t + Tobin will be actively engaging in the review Together with the Business Council of Australia, Gilbert + Tobin will host a discussion forum on the review. Professor Fred Hilmer will provide the keynote address. Tony Boyd (Australian Financial Review) will then moderate a panel of discussants, including Alan Kirkland (CEO, CHOICE), Jennifer Westacott (Chief Executive, BCA), Peter Strong (Executive Director, COSBOA), Professor Stephen King (Department of Economics, Monash University) and Luke Woodward (Partner, Gilbert + Tobin). In addition to our work with the BCA, we will provide submissions to the Expert Panel and attend the associated public forums.
However, given the wide policy mandate that requires the Expert Panel to look outside the existing competition law and policy framework, another possible starting point is to consider what prohibitions are needed to achieve the goals set out in the TOR.
Luke Woodward Partner
Paula Gilardoni Partner
Morelle Bull Lawyer
Competition Review | 7
MERGERS 2013 was another year of important ACCC merger reviews. The ACCC reviewed a number of “3 to 2” mergers closely as well as a number of local market acquisitions, particularly in industries that it considers to be concentrated, such as the grocery, liquor and energy industries. In addition, the ACCC’s approach to international transactions was clarified in its new Informal Merger Review Process Guidelines (Process Guidelines) and was applied in several matters in 2013. Over the past few years, timeframes for public merger reviews have steadily been increasing (although, in 2010, the ACCC introduced a quicker internal review process for non-contentious matters). One of the reasons given by the ACCC for the extended timeframes is the requirement to adopt a “commercially realistic” assessment of mergers by undertaking a detailed investigation of the commercial context and considerations for a particular merger, in light of the Full Federal Court’s decision in Metcash. The current approach to timeframes as well as other aspects of the ACCC’s clearance process are set out in the ACCC’s revised Process Guidelines. In his interview with Gilbert + Tobin partner, Gina-Cass Gottlieb, for this publication, Rami Greiss, the General Manager of the Merger Investigations Branch at the ACCC, acknowledged that in 2014 the ACCC would continue to develop its “commercially realistic” approach to assessing mergers. As we move through 2014, we consider that the continued use of a “commercially realistic” approach may have implications from a timing and information gathering perspective in some transactions. We consider, however, that in taking this approach, the ACCC has already made, and will continue to make, more appropriate decisions in merger matters.
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“3 to 2” mergers continued to be a high priority area In late 2012, ACCC Chairman Rod Sims indicated that “3 to 2” mergers would be an area of focus: … when a merger reduces the number of key players in a market from three to two – the parties should not be surprised that the ACCC would want to carry out a full review. With only two principal players remaining in a market, each will learn to anticipate the actions and reactions of the other. In these circumstances, the ability of the two remaining firms to raise prices or reduce quality for consumers generally increases. While “3 to 2” is a shorthand phrase for transactions which result in a reduction from 3 to 2 “key players” in a market, the competition assessment for such transactions is not always straightforward. There may be a strong competitive fringe of smaller players, there may be import competition, there may be cost and demand pressures, such that a competitive market may not sustain three key players, so that it cannot simply be assumed that a “3 to 2” merger will substantially lessen competition.
Mergers
The focus on “3 to 2” mergers continued in 2013. Table 1 below summarises four transactions that could be considered to be a “3 to 2”. Each of these involved the publication of a Statement of Issues and, following the ACCC’s decision, the publication of a Public Competition Assessment. One of the most interesting “3 to 2” mergers was the Virgin Australia/Tiger Australia Airways joint venture. In this case, Virgin Australia proposed to acquire 60% of Tiger Australia, an Australian domestic low cost carrier, which was then to be run as a joint venture between Virgin Australia and the former parent, Tiger Airways (based in Singapore). Virgin Australia and Tiger Airways submitted that Tiger Australia had not established itself as a strong and viable third competitor, was unlikely to provide meaningful competition to either Virgin Australia or Qantas as the two domestic full service carriers, and lacked the scale and local expertise and public support to provide meaningful competition against Jetstar (the Qantas-owned low cost carrier). The ACCC cleared the acquisition, accepting that Tiger Australia was unlikely to be a viable competitor in the future. We consider that this decision is a good example of the benefits of the ACCC taking a more commercially realistic approach to its decision making. We anticipate the ACCC will continue to focus on “3 to 2” mergers in 2014.
Table 1: “3 to 2” mergers in 2013
Transaction
Outcome
Summary
Virgin Australia – proposed acquisition of 60% of Tiger Airways Australia
Not opposed
The proposed joint venture to operate Tiger Australia could be considered to be a 3 to 2 in the market for domestic air passenger transport services given the major players in that market are Qantas (including Jetstar), Virgin Australia and Tiger. The ACCC did not oppose the acquisition.
Woolworths - proposed acquisition of a site in Glenmore Ridge
Opposed
Woolworths proposed to purchase land that had been zoned for the construction of a supermarket. The “third” competitor was a potential third party, with Woolworths and Aldi being the other two existing and potential competitors. The ACCC decided to oppose the transaction as it considered Woolworths’ acquisition would prevent or hinder competition that would likely otherwise have been brought to the local market by an alternative supermarket operator.
Heinz – proposed acquisition of Rafferty’s Garden
Opposed
The proposed transaction involved baby food, with the two companies together making up 80% and 70% of the wet and dry infant food markets respectively. The ACCC considered other competitors to be weaker brands, or only present in niche areas. The ACCC opposed the transaction as it considered it would remove a close competitor of Heinz in a concentrated market which was characterised by high barriers to entry.
Gallagher Group – proposed acquisition of Country Electronics
Not opposed, subject to undertakings
The proposed acquisition involved the markets for energisers and weigh scales. Gallagher and Tru-Test (in which Gallagher was a shareholder) together had the largest market share. Country Electronics was the next largest competitor. Postacquisition, the merged entity would account for more than 90% of sales in the relevant market. To resolve the ACCC’s concerns, Gallagher proposed, and the ACCC accepted, a s 87B Undertaking requiring Gallagher was to divest its shareholding in Tru-Test.
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MERGERS Local market analysis was a feature of mergers assessed in 2013 Several of the 51 mergers that were subject to a public informal review in 2013 involved local market analysis. The majority of these mergers involved a retail dimension (including liquor licences and supermarkets) and were in industries that the ACCC identified in its 2012-13 annual report as concentrated (including grocery, fuel and energy). Woolworths’ proposed acquisition of a site in Glenmore Ridge, NSW, was one such transaction. In relation to this transaction, Mr Greiss observes in his interview with Gina Cass-Gottlieb that: … the nearest supermarkets that could have been in competition [with Woolworths] were in Penrith, there were physical barriers across the M4 and we felt that the acquisition by Woolworths actually prevented competition by stopping someone else acquiring that site. Also we didn’t feel that those Penrith supermarkets would be a substitute in the event that Woolworths, being the primary supermarket in the area, didn’t provide either the same level of price or service or quality to its customer base and so our decision is essentially the same analysis it is just that it takes place in a small geographic area. The ACCC’s Public Competition Assessment noted that, in general, most acquisitions of greenfield sites would not raise competition concerns. However, the ACCC noted it is more likely to have concerns with the acquisition of a greenfields supermarket site where:
++ the proposed supermarket operator already has a significant presence in the local market;
++ an alternative competitive supermarket would be likely to open on the site, if the proposed supermarket did not open; and
++ the site is in an area where there is limited availability of alternative sites for potential competitors in the local market. In 2014, we will watch greenfields site acquisitions with interest to see if the above factors arise and if the ACCC’s approach develops further.
The ACCC’s approach to international transactions was clarified in the Process Guidelines and applied in several matters in 2013 The Process Guidelines provide a more detailed description of the ACCC’s approach in the context of international transactions. In addition to observing that the ACCC expects to be given the same notice as overseas competition agencies of mergers and any potential remedies (with simultaneous lodgement of submissions where possible), the Process Guidelines also recognise that:
++ if a transaction is being reviewed by agencies overseas, the ACCC may suspend its review in order to consult with those agencies or, in some circumstances, pending the outcome of those reviews; and
++ where the ACCC and overseas agencies are liaising closely on substantive competition issues or proposed remedies, and the merger raises issues in Australia that are of a global nature and there are no issues that are unique to Australia, the timeline may be adjusted to coordinate with the timing of overseas reviews so the ACCC may take into account relevant information received from overseas agencies. The ACCC has continued to closely coordinate with a range of overseas competition agencies in relation to multijurisdictional transactions and generally requires the parties to provide waivers to allow cross-border exchange of the parties’ confidential information between the agencies. The Random House-Penguin joint venture is one example of such multijurisdictional coordination. The Process Guidelines clarify a significant policy of the ACCC regarding multijurisdictional transactions where competition concerns raised by other competition agencies are sought to be resolved by remedies. If the ACCC also considers that a lessening of competition in a market in Australia is likely to result from the proposed transaction, the Process Guidelines note that the ACCC will generally require separate court-enforceable statutory undertakings be provided to it to address those issues in Australia and to ensure that the ACCC has the ability to enforce the remedies in an Australian court, even if substantively similar remedies have been given to an overseas competition agency. While the ACCC may have in the past relied on a global remedy offered to another agency to address any competitive concerns in Australia, the ACCC’s current approach is to require the provision of “mirror” undertakings. This approach was reflected in 2013 in the undertakings accepted by the ACCC in
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Mergers
relation to Thermo Fisher Scientific Inc’s proposed acquisition of Life Technologies Corporation and Baxter International Inc’s proposed acquisition of Gambro AB. We anticipate that the ACCC will continue to adopt this approach in its consideration of undertakings relating to international transactions in 2014.
“Commercially realistic” merger assessments may have implications from a timing and information gathering perspective in 2014 In his interview with Gina Cass-Gottlieb, Mr Greiss observes that, “at the end of the day…one must make a judgement about commercial reality…” when considering whether a merger substantially lessens competition. Mr Greiss also indicates that economic analysis – either analysis that is prepared by the merger parties or prepared internally by the ACCC’s dedicated economics unit – can provide further support for a view or can help identify an area to explore further but it cannot, in and of itself, answer the question of whether a merger substantially lessens competition. The importance of “commercial reality” was also highlighted in a comment made by Mr Sims, noting that as a consequence of the Full Federal Court’s decision in the Metcash matter, “we have sometimes felt an increased need to be vigilant to ensure that all our decisions are grounded in commercial realities. As a result, we may be taking longer to gather the necessary commercially relevant facts and evidence in some contentious cases”. This approach is likely to have implications in relation to the time it takes the ACCC to assess mergers, and the use of s 155 notices to compel production of information in the merger context, in 2014.
“at the end of the day…one must make a judgement about commercial reality…” Rami Greiss, ACCC
Merger assessment timeframes As Mr Greiss noted in his interview, the revised Process Guidelines now indicate timeframes that reflect ACCC practice and experience in relation to informal merger reviews. Specifically, the revised Process Guidelines anticipate that most matters will be decided within a 8–14 week period while more complicated matters will take an additional 6–12 weeks. These indicative timeframes are in our experience more reflective of recent experience than the indicative timeframes in the 2006 Process Guidelines (which estimated that matters would generally take between 2–8 weeks, and those that required secondary market inquiries would be completed within 12 weeks of the start of the public review process). Further to this, in the media release announcing the revised Process Guidelines, Mr Sims observed that, “while the Guidelines indicate a move away from setting standard periods for all public reviews, the ACCC expects that the majority of merger reviews in which substantive competition concerns do not arise will still be completed within eight weeks.” This indicates that in circumstances where substantive competition concerns do arise, the timeframes involved may be lengthier than in the past. Practically speaking, the time between the beginning and end of the ACCC’s consideration of a transaction is also likely to be longer than the ACCC’s anticipated timeframes in circumstances where parties request the timeline be suspended to allow them to provide additional information to the ACCC. Nevertheless, the ACCC has demonstrated its ability to work quickly within commercial timeframes when the parties provide sufficient data upfront and respond promptly to ACCC information requests, as evidenced in the ACCC’s consideration of Westpac’s acquisition of the Lloyds International business, where the ACCC’s public review process was conducted in just under 8 weeks from the commencement of market enquiries to a decision not to oppose the acquisition, without conditions.
Use of s 155 notices Under s 155 of the CCA, the ACCC may issue notices to compel production of documents, information and testimony. Such notices may be used in relation to any case where the ACCC suspects a breach of the CCA, including in relation to mergers and enforcement.
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MERGERS The ACCC’s use of its compulsory information gathering powers under s 155 has increased sharply in the last financial year to 358 notices (following a decreasing trend over the last three financial years from 300 in 2009–10, 268 in 2010–11 and 175 in 2011–12). From the data available, it is difficult to determine whether the number of notices issued in the mergers context has increased as the ACCC reports refer to the number of matters in which s 155 notices are issued. The number of merger matters in which s 155 notices are issued has, however, remained constant at 9 over time in 2010–11, 2011–12 and 2012–13 (rising incrementally from 8 matters in 2009–10).
The year ahead
In a change of emphasis from the 2006 Process Guidelines which said that s 155 notices were “not generally issued in merger matters” but that the ACCC might determine that issuing such notices would be appropriate “from time to time”, the current Process Guidelines indicate that the ACCC will use its s 155 powers “where appropriate” and “only when it considers it will be the most effective and / or efficient way of gathering the information necessary for the ACCC to make its decision.”
We will continue to monitor developments in the ACCC’s approach with interest in 2014.
While Mr Greiss’ comments in his interview do not suggest that the incidence of s 155 notices, or the timeframes involved in informal merger review will necessarily increase, they do indicate the importance for the ACCC of obtaining all necessary information in order to make decisions that are grounded in commercial realities. Parties operating on a tight commercial timeframe should therefore be co operative and pro-active in their approach with the ACCC so that lengthy extensions of the review timeframe are not required.
In his interview, Mr Greiss comments that the ACCC will use a s 155 notice when a matter is complex and when the ACCC has “identified that it needs certain information.” In particular, Mr Greiss states that: [t]he issue of a notice shouldn’t be taken to mean there is a lack of trust by the Commission of their engagement of a party. It is simply a discipline that the Commission feels is useful in the matter and so it may often have good engagement with a party but decides that certain materials are best provided under a compulsory notice…[w]hile parties feel that there is an additional burden to a s 155, the Commission’s view is that the searches that are needed to be conducted should just be reasonable and the same standard as you would expect to be employed in a voluntary request, and on that view, it shouldn’t amount to a higher burden.
Gina Cass-Gottlieb Partner
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Elizabeth Avery Partner
Emma Ringland Lawyer
Mergers
“[t]he issue of a notice shouldn’t be taken to mean there is a lack of trust by the Commission of their engagement of a party. It is simply a discipline that the Commission feels is useful in the matter and so it may often have good engagement with a party but decides that certain materials are best provided under a compulsory notice…[w]hile parties feel that there is an additional burden to a s 155, the Commission’s view is that the searches that are needed to be conducted should just be reasonable and the same standard as you would expect to be employed in a voluntary request, and on that view, it shouldn’t amount to a higher burden.” Rami Greiss, ACCC
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COMPETITION ENFORCEMENT The clear message from ACCC Chairman Rod Sims in recent years has been that the ACCC will increase its level of enforcement activity in competition matters, and in doing so, will take on higher risk matters. At the start of 2013, Rod Sims reinforced this message: I made it clear that we expected to increase our rate of intervention in competition matters. The ACCC has continued to prioritise enforcement in cartel conduct, anticompetitive agreements, and misuse of market power matters throughout 2013, being conduct which it considers most detrimental to consumer welfare and the competitive process. The choice of investigations initiated and pursued, as well as the commencement of certain enforcement proceedings, demonstrates the ACCC’s willingness to take on more complex investigations and challenge the boundaries of appropriate commercial behaviour.
ACCC delivers on investigations into key focus areas The ACCC commenced the year announcing that it had 30 in-depth competition investigations into anticompetitive behaviour underway. Consistent with its published Enforcement Policy, 2013 saw the ACCC expend considerable resources and place a priority on concentrated markets, particularly the supermarket and fuel sectors, conducting extensive investigations into both. Throughout 2013 the ACCC conducted a widely publicised investigation into the major supermarket chains and suppliers. Its investigation focussed on two distinct issues. First, a concern that the major supermarkets may have been engaging in unconscionable conduct in respect of their agreements with suppliers. Secondly, a concern that the major supermarkets
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may be misusing their market power by discriminating in favour of their own home brand products. The ACCC’s investigation is ongoing. The ACCC also continued its investigation into information sharing arrangements in the fuel industry in respect of the privately operated “Informed Sources” platform. The ACCC outlined concerns with the real-time nature of the information sharing, in which competitors can view how other competitors’ prices are moving, which may result in signalling between competitors and the sort of behaviour that could lead to higher prices for consumers. Again, the ACCC’s investigation is ongoing. An 18 month investigation by the ACCC into the fuel shopper docket discounts offered by Woolworths and Coles to supermarket customers in respect of their fuel retailing businesses was the subject of an agreed resolution between the two supermarket chains and the ACCC in December 2013. Both supermarkets maintained that there had been no contravention of the CCA, but offered undertakings to the ACCC restricting their ability to continue to offer fuel “shopper docket discounts” to supermarket customers in excess of 4 cents a litre, including undertaking that any discounts will be funded by the fuel retailing operations of each company. Discounts in excess of 4 cents per litre may be offered to customers for purchases made at the service stations, but, as with the supermarket offers, the discounts would need to be funded by the fuel retailing operations. The ACCC’s investigation into the alleged comments of James Packer, Chairman of Crown, in respect of casino operations in New South Wales and Queensland, involving Chairman of Echo Entertainment, Mr John O’Neil, proved fruitless but evidenced the vigilance of the ACCC in pursuing potential cartel
Competition Enforcement
matters. The investigation related to a comment by John O’Neil repeating an alleged comment by James Packer which was said to have potentially evidenced a market sharing agreement between the two businesses.
“I made it clear that we expected to increase our rate of intervention in competition matters.” Rod Sims, Chairman, ACCC
ACCC ver y active in car tel enforcement The ACCC’s year in cartel enforcement has been mixed, although the ACCC was successful with two settled proceedings, the Koyo ball and roller bearings cartel ($2m penalty) and the Viscas cable supplier cartel ($1.35m penalty), the Federal Court also dismissed proceedings commenced by the ACCC against ANZ bank for alleged price fixing conduct involving its agent mortgage brokers. Shortly after the ANZ decision was released in November 2013, the Federal Court handed down its decision in the Flight Centre case. Despite the Flight Centre case involving a strikingly similar ACCC case theory to the ANZ case, the Federal Court controversially came to the opposite conclusion, finding that Flight Centre had contravened the CCA. In the ANZ case, the Court found there was contravention as ANZ was found not to be in competition with its agent mortgage brokers, however in the Flight Centre case, Flight Centre, a travel agent selling airfares on behalf of various airlines, was found to have been in competition with the airlines and to have attempted to engage in price fixing conduct with them. Whilst a notice of appeal has been lodged in the ANZ case, no notice of appeal has been lodged in the Flight Centre case at the time of writing, although one is expected. The two decisions appear to demonstrate a targeted attempt by the ACCC to address anti-competitive conduct which it considers arises out of supply arrangements where there is direct and agency-based distributor arrangements. The ACCC’s approach challenges vertical arrangements which have historically been considered at relatively low-risk of raising competition concerns.
The ACCC’s ongoing pursuit of a number of airlines for alleged cartel conduct in the air cargo industry culminated at the start of the year in a contested hearing of the matter between the ACCC and Air New Zealand Ltd and Garuda Indonesia. With Qantas having settled in 2008, the remaining airlines pursued by the ACCC had, over the course of 2012, made limited admissions in respect of certain conduct in a series of settled proceedings, with the exception of Air New Zealand Ltd and Garuda Indonesia who went on to contest the allegations. The total amount of penalties awarded as a result of the settled proceedings in these matters alone is $98.5 million (see Table 1). The judgment in respect of the hearing is yet to be released. The ACCC’s proceedings against Supagas for cartel conduct, commenced in August 2012, and remain on foot with a hearing set down September 2014. The ACCC saw out the year by announcing the filing of proceedings in relation to an alleged cartel in respect of laundry detergent products. The arrangements are alleged to have applied across a range of laundry products sold by Colgate, Cussons and Unilever, including popular brands like Cold Power, Radiant and Omo. Woolworths is also alleged to have been knowingly concerned in the alleged breaches. The unearthing of the alleged cartel is the result of an immunity application by Unilever, made under the ACCC’s Immunity Policy for Cartel Conduct and follows a recent review of the policy by the ACCC conducted throughout 2013 with the objective of streamlining the processes of granting civil and criminal immunity. The ACCC is expected to publish a revised immunity policy in early 2014. We note that the CDPP is still yet to instigate any criminal proceedings in respect of cartel matters under the criminal cartel provisions.
Misuse of market power cases are still risky business for the ACCC Despite its stated priority to pursue misuse of market power cases, only one s 46 related matter was filed by the ACCC in 2013. In February, the ACCC commenced proceedings against Visa Inc (Visa) and related entities alleging contraventions of the CCA in relation to dynamic currency conversation services (DCC).
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COMPETITION ENFORCEMENT Visa is alleged to have misused its market power for the purpose of preventing the expansion of DCC to new merchant outlets in Australia, such as retail stores, and preventing businesses in Australia from supplying DCC services on ATMs in competition with Visa’s own currency conversion service. The matter has been the subject of various amended pleadings and strike out applications, and so it would appear, is being hotly contested. Despite the Visa case, the ACCC had only one other s 46 litigation matter on foot in 2013, being the proceedings against Cement Australia Pty Ltd (Cement Australia), which commenced in 2008. The ACCC had alleged that Cement Australia had a substantial degree of market power in the market for concrete grade fly ash in South East Queensland and had taken advantage of that market power for the purpose of locking out competitors. Fly ash is a by-product of coal-fired power generation. Certain grades of fly ash can be used as a partial replacement for cement in the manufacture of concrete. The ACCC’s s 46 case was essentially a predatory bidding case. It alleged that Cement Australia used its market power during a fly ash tender process in order to win exclusive supply of a product to foreclose competitors. Despite establishing market power in respect of the three s 46 allegations, and establishing purpose in respect of two, the Federal Court failed to find in favour of the ACCC on the question of “taking advantage” in relation to all three allegations. The ACCC was, however, successful in establishing that the same alleged conduct resulted in prohibited anti-competitive agreements which had either the purpose or effect of “substantial lessening of competition” in a market. Given the evidential complexity and factual density of s 46 cases, the lack of proceedings in respect of misuse of market power may be attributable to the length and depth of the investigation the ACCC is required to embark upon prior to commencing proceedings. If the ACCC is following through with its stated intention to instigate more high risk litigation, we may see more s 46 cases sooner rather than later.
Bradken to pay approximately $25 million in damages. The decision provided further clarification in relation to the extraterritorial application of the new cartel prohibitions with a finding that the prohibitions apply to sale processes conducted overseas where the parties carried on business in Australia. Although the decision was to be appealed, the matter was settled prior to the appeal. The continuance of the class action proceedings for the air cargo cartel matter against numerous airlines, and the bank fees matter against eight Australian banks (under unconscionable conduct provisions of the TPA) also demonstrate that private enforcement applicants are willing to take on the big companies, and that litigation funding in Australia has a secure foothold. Finally, the ACCC closed out the year by achieving a $2.2 million penalty against Mitsubishi Electric for four breaches of the resale price maintenance prohibitions. The penalty orders against Mitsubishi were ordered by consent and represent a penalty of $500,000 for each breach. In his reasons, Justice Mansfield accepted that deterrence was of paramount importance in this case with significant penalties necessary to deter large corporations from engaging in such conduct.
What is in store for 2014? Rod Sims has already outlined that the fuel sector will continue to be a focus of the ACCC in 2014, and that the investigation into the major supermarket chains and their suppliers is set to be completed by March 2014. Whilst the progress of the “root and branch” review is likely to be the focus of the majority of public debate in respect of competition policy in 2014 (see pages 6-7), the ACCC will remain focussed on delivering on its objective of increased intervention.
Fur ther developments in enforcement actions Another development in enforcement this year was the private enforcement proceedings involving Australian firm Bradken Limited (Bradken). The Bradken case, commenced by Norcast S.ár. L against Bradken, was the first proceeding determined under the new cartel provisions which came into effect in 2009. The Federal Court found that Bradken, an Australian based mining company, had engaged in bid rigging and ordered
16 | Gilbert + Tobin
Simon Snow Partner
Genevieve Rahman Lawyer
Competition Enforcement
Table 1: Penalties in 10 most recent cases under Part IV of the CCA
Case
Contravention
Penalty
ACCC v Koyo Australia Pty Ltd
Price fixing
$2 million
ACCC V Prysmian Cavi E Sistemi Energia Srl
Bid rigging
$1.35 million
ACCC V Mitsubishi Electric Australia Pty Ltd
Resale price maintenance
$2.2 million
ACCC v Thai Airways International Public Company Ltd
Price fixing
$7.5 million
ACCC v Singapore Airlines Cargo
Price fixing
$8 million
ACCC v Cathay Pacific Airways
Price fixing
$7.25 million
ACCC v Eternal Beauty Products Pty Ltd
Resale price maintenance
$80,000
ACCC v Emirates
Price fixing
$10 million
ACCC v Malaysian Airline System Berhad & Anor
Price fixing
$6 million
ACCC v Ticketek
Misuse of market power
$2.5 million
Competition Review | 17
ACL ENFORCEMENT In 2013 there was a clear move by the ACCC to ramp up its enforcement of the Australian Consumer Law (ACL). Not only did the ACCC continue to bring misleading or deceptive conduct cases, it moved from an initial awareness campaign to enforcement proceedings in relation to consumer guarantee regimes. While the ACCC achieved considerable success in its ACL proceedings, it still retained its outcome-focussed approach to enforcement, as the undertaking it accepted from Apple at the end of 2013 demonstrates. In 2014, we expect the ACCC to continue to take a tough stance on ACL enforcement, particularly in relation to big business.
Enforcement priorities for 2013 set early and followed through with escalating action As has been the practice for some time now, the ACCC Chairman, Mr Rod Sims, began 2013 by identifying the ACCC’s enforcement priorities for the year. The 2013 priorities, reflected in the ACCC’s “Compliance and Enforcement Policy” published in February 2013 (Policy), included the following ACL matters:
++ consumer protection in the telecommunications and energy sectors;
++ the ACL consumer guarantees regime;
++ online consumer issues; ++ credence claims; ++ unfair contract terms; ++ carbon price claims; and ++ consumer protection issues impacting on Indigenous communities.
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Two aspects of this list of enforcement priorities are worth noting in particular. The first is just how closely the ACCC tracked its enforcement action in 2013 against these priorities – for each priority area the ACCC either commenced court proceedings or conducted other enforcement activity. Some of this activity is summarised in Table1. In taking these actions the ACCC has sent a clear message that businesses operating in its priority areas should consider themselves as being put on notice that the ACCC is watching their conduct closely. Secondly, the ACCC publicly stated that in 2013, following an initial awareness campaign, it would move to enforcement of the consumer guarantees regime. As explained by Marcus Bezzi, the Executive General Manager of the ACCC’s Enforcement and Compliance Division in his interview with Charles Coorey from G+T, as the consumer guarantees were a new area of law, the ACCC initially wanted to work with businesses to educate them on their new obligations under the ACL and initially took a “softer” compliance approach. However, the ACCC was not prepared to take that approach for very long as its view is that once the law is in place corporations should be complying with it. What this approach means is that if the ACCC now finds that businesses are still not complying with their consumer guarantee obligations, it will take a “harder” approach and move to enforcement. Perhaps the best example of this in 2013 was the ACCC’s successful proceedings against Hewlett Packard where the Federal Court imposed penalties of $3 million on Hewlett Packard for making false or misleading representations to customers and retailers regarding consumer guarantee rights.
ACL Enforcement
The ACCC’s successful move to enforcement in this area is consistent with the approach described in its 2010 ACL guide – “Compliance and enforcement: How regulators enforce the Australian Consumer Law” (Guide). As the Guide states, compliance measures must be supported by a range of “escalating enforcement options” that can be used if a corporation fails to comply with its ACL obligations as ACL regulators have a range of enforcement remedies at their disposal.
The ACCC’s cour t success should reinforce the impor tance of the ACL to corporations In increasing its enforcement of the ACL in 2013, the ACCC has achieved a great deal of success with various courts imposing significant penalties on corporations found to have contravened the ACL (see Table 1).
Table 1: The ACCC’s enforcement priorities mapped against enforcement action – 2013
Priority area
ACCC action
Outcome
Consumer protection in the telecommunications and energy sectors
Australian Competition and Consumer Commission v TPG Internet Pty Ltd
Orders of Full Federal Court set aside and first instance penalty of $2 million restored by High Court
AGL Sales Pty Ltd and AGL South Australia Pty Ltd (judgment pending)
Penalties of $1.55 million imposed
Consumer guarantees regime
ACCC v HewlettPackard Australia Pty Ltd
Penalties of $3 million imposed
Online consumer issues
ACCC v Scoopon Pty Ltd
Penalties of $1 million imposed
Credence claims
ACCC v Turi Foods Pty Ltd
Penalties totalling $520,000 imposed
Unfair contract terms
ACCC v Bytecard Pty. Limited
Court declaration that a number of clauses in ByteCard’s standard form consumer contracts were unfair and therefore void
The significant penalties imposed by the various courts for ACL contraventions in 2013 continued the trend from 2012 which included:
++ the $3.61 million penalty imposed against SingTel Optus Pty Ltd for engaging in misleading advertising in relation to its broadband plans (initially the penalty imposed was $5.26 million but this was reduced on appeal);
++ the $2.25 million penalty imposed on Apple Pty Ltd (Apple Australia) for engaging in misleading advertising in relation to its “iPad with WiFi + 4G”; and
++ the $1.95 million penalty imposed on Energy Watch Pty Ltd for misleading advertising relating to the nature of the Energy Watch service and the savings consumers would make using Energy Watch.
Apple under taking an example of ACCC maintaining outcome-focussed approach The Guide describes how the ACCC takes an “outcomefocussed approach” to its enforcement activities which can “go beyond just punishing wrongdoing.” An example given is the use of an enforceable undertaking as a means of stopping a pattern of continuing conduct and deterring future conduct. Consistent with the approach set out in the Guide, in December 2013 the ACCC accepted an enforceable undertaking from Apple Australia following an investigation into Apple Australia’s consumer guarantees policies and practices, and representations about consumers’ rights under the ACL. The ACCC was concerned that Apple Australia had made a number of false or misleading representations to a number of consumers regarding their consumer guarantee rights, including that Apple Australia was not required to provide a refund, replacement or repair to consumers in circumstances where these remedies were required by the consumer guarantees in the ACL.
“Our focus is on the larger companies, that is where the biggest detriment is…we want to make sure that they are taking consumer laws very seriously.” Rod Sims, Chairman, ACCC
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ACL ENFORCEMENT The undertaking requires Apple Australia to:
++ provide its own remedies equivalent to those remedies in the consumer guarantee provisions of the ACL at any time within 24 months of the date of purchase;
++ not make representations to consumers which the ACCC was concerned were contrary to the ACL;
++ continue to offer a consumer redress program in which consumers potentially affected by the alleged conduct can go to Apple Australia to have their claims re-assessed by Apple Australia in accordance with the ACL;
++ continue to implement an Apple Australia program to improve ACL compliance which includes improved training for Apple Australia sales staff and management staff and all Apple Australia call centre representatives who have contact with Australian consumers;
Secondly, to minimise the risk of contravention it is necessary for corporations to have a well-resourced ACL compliance program in place and to ensure that there are appropriate incentives for staff to comply with it. As Mr Bezzi explains in his interview, it is not sufficient for corporations to simply have implemented a compliance program because the ACCC regards as “critical” the “spirit” in which the program is adopted and embraced by managers and the business. If the ACCC considers that there are not “real incentives” for managers and staff to comply with the compliance program and that the corporation has not put “proper resources” into ACL compliance, then the ACCC will take the view that the corporation’s compliance program “is not worth anything at all.”
++ continue to monitor and review its ACL compliance going forward to ensure the conduct of concern to the ACCC does not occur again;
++ maintain a webpage aimed at providing information and clarifying the differences between the coverage provided by the ACL and Apple Australia’s voluntary limited manufacturer’s warranty; and
++ continue to make available in its retail stores in Australia copies of the ACCC’s “Repair, Replace, Refund” brochure. As the ACL does not specify the period for which the consumer guarantees will apply to particular goods and services, the undertaking requirement for Apple Australia to provide its own remedies equivalent to those in the ACL for a period of 24 months after purchase is likely to be of particular interest to a number of manufacturers and suppliers.
Key messages for 2014 The ACCC’s enforcement activities over 2013 provide two clear messages for 2014. First, manufacturers and suppliers subject to the ACL need to take their obligations seriously as the risk of ACCC enforcement is real and the financial consequences of contravention are significant. The ACCC Chairman Rod Sims has already said this year that: Our focus is on the larger companies, that is where the biggest detriment is…we want to make sure that they are taking consumer laws very seriously. Simon Snow Partner 20 | Gilbert + Tobin
Charles Coorey Lawyer
ACL Enforcement
“…the spirit in which [a compliance program] is adopted is really critical. You can have a perfectly well crafted compliance program within your organisation...but if it isn’t actually embraced by managers, if it isn’t actually embraced by the business, if there aren’t real incentives within the business for complying with it, then it’s not worth anything at all…” Marcus Bezzi, ACCC
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ACCESS REGULATION Access regulation of key infrastructure in Australia over the past year has been scrutinised heavily by the Federal Government, resulting in a number of significant reviews and reforms. In particular, there have been substantive changes to the energy and telecommunications regulatory frameworks. In energy, some of the changes have been driven by a recognition of greater consumer engagement in the regulatory framework, while in telecommunications, the changes have been driven by the Government’s National Broadband Network (NBN) policy. The year ahead will see more changes being proposed – reforms to the National Access Regime are expected following the anticipated release of the final Productivity Commission’s (PC) inquiry report into Part IIIA of the Competition and Consumer Act 2010 (Cth) (CCA) in early 2014, while the change of government that occurred in September 2013 will have implications for telecommunications regulation. In energy, we will also start to see the effect of reforms that have already been implemented and be able to judge their effectiveness as the first round of energy network providers’ revenue proposals are submitted to the Australian Energy Regulator (AER).
General access regime In October 2013, the PC concluded its inquiry of the National Access Regime. The conclusion of the PC inquiry coincided with the 20th anniversary
22 | Gilbert + Tobin
of the Report by the Independent Committee of Inquiry on National Competition Policy (the Hilmer Report), a report which sparked fundamental reforms to the legal framework for access to essential infrastructure facilities, and created the National Access Regime. The 2013 PC inquiry was directed at examining the rationale, role and objectives of the National Access Regime and Australia’s overall framework of access regulation, 20 years on from the Hilmer Report. The PC’s draft report included recommendations to amend the declaration criteria in Part IIIA of the CCA and clarify the ACCC’s powers to direct expansion or extension of facilities when arbitrating access disputes. The PC’s final report on the National Access Regime was delivered to the Federal Government on 25 October 2013 and will be released publicly in early 2014, after it has been tabled in Parliament. Interestingly, the draft Terms of Reference (TOR) for the Government’s “root and branch” review (see pages 6-7) requires the Expert Panel to examine Part IIIA. However, we anticipate that the Expert Panel may rely on the reference in the TOR that it should not duplicate or revisit other recent comprehensive reviews and it may not therefore re-examine these complex issues.
Regulation and Access
Industr y-specific regulator y regimes There have also been important developments in several industry-specific regulatory regimes in 2013. These include:
++ energy (see Focus Area #1 below) – changes to the rules governing regulation of energy networks and the framework for merits review of regulatory decisions in that sector. These changes took place in an environment where there was significant public focus on rising energy prices and a need to involve consumers in regulatory processes;
++ telecommunications (see Focus Area #2 below) – the NBN again dominated the telecommunications regulatory landscape, and the Coalition’s win over the Labor Party in the federal election meant that a new vision of the NBN would be implemented and foreshadowed more regulatory uncertainty for telecommunications providers;
++ rail – lodgement and consideration by the QCA of Aurizon Network’s draft access undertaking for its below-rail operations in the central Queensland coal region, which (if accepted), would introduce significant changes to the framework for access and network expansion in that sector; and
++ financial services – in 2013, the Coalition Government announced a “root and branch” examination of the Australian financial system. The inquiry will make recommendations to foster an efficient, competitive and flexible financial system, consistent with financial stability, prudence, integrity and fairness. David Murray has been appointed as head of the inquiry, which is expected to report by the end of 2014. On the following pages we focus on the energy and telecommunications sectors as there have been particularly important reforms made in these sectors recently, with more to come in 2014.
Competition Review | 23
ENERGY REGULATORY FOCUS AREA #1: ENERGY
++ new requirements for the AER to publish guidelines
Over the past few years there has been growing public interest in regulation of the energy sector. Rising energy bills for consumers have led to greater scrutiny of the regulatory framework and its institutions, particularly the energy regulator, the AER, and the rule-making body, the Australian Energy Market Commission (AEMC).
++ changes to the regulatory process aimed at providing
As the recent energy price rises have been mostly driven by increases in network costs, public scrutiny has mostly focused on the framework for price and revenue regulation of network businesses (that is, transmission and distribution businesses). Network businesses operating within the National Electricity Market are regulated by the AER (with scope for review of these decisions by the Australian Competition Tribunal (Tribunal)), and the rules which govern the AER’s decisionmaking are made by the AEMC. Consequently, there have been a number of inquiries conducted and various reforms made to the regulatory frameworks applying to energy network businesses over the past two years. These have included changes by the AEMC to the network pricing and revenue rules, development of a suite of new guidelines by the AER and reform of the framework for review of AER decisions by the Tribunal. However, by and large, the impact of these reforms remains to be seen. Therefore, 2014 may well be the year in which the real impact of the recent reforms to these frameworks starts to become apparent.
Changes to the network pricing and revenue rules In November 2012, fundamental changes were made to the rules which govern the manner in which price and revenue determinations applying to energy network businesses are made. The changes made to the rules included:
++ introduction of a new framework for determination of the rate of return, which provides greater flexibility around both the choice of financial models which may be used to estimate the rate of return, and the process for determination of parameters within those models;
++ changes to the criteria for assessing operating and capital expenditure forecasts;
++ introduction of an ex-post capex review mechanism for electricity network businesses;
24 | Gilbert + Tobin
on various matters, including confidentiality, expenditure assessment, treatment of shared assets and the rate of return; for more effective engagement with consumer and user groups; and
++ complex transitional arrangements, which are aimed at ensuring that the new rules framework can be applied as soon as possible. Many of these changes were directed at addressing concerns raised by some stakeholders around incentives for network businesses to spend more than is efficient or necessary to maintain their networks (sometimes referred to as “gold plating”). In particular, the changes to the expenditure assessment criteria and introduction of an ex-post capex review mechanism are aimed at ensuring that the AER has the tools available to it to properly scrutinise businesses’ expenditure and make sure that only efficient expenditure may be recovered through network charges. The changes to the rules are also partly directed at promoting greater consumer engagement in the regulatory process. Under the new rules, there will be more opportunities for consumer and user groups to participate in the regulatory process, and stronger incentives for businesses to meaningfully engage with these groups in relation to their expenditure plans.
“…the process of developing these new guidelines has given the AER an opportunity to develop some of their regulatory thinking and capture it in one place.” Michelle Groves, AER
New guidelines for network and revenue regulation During 2013, the AER developed a series of new guidelines relating to various aspects of network price and revenue regulation, as required under the new rules framework.
Energy
“...[I] cannot over emphasise the importance of seeing the consumer at the centre of the energy market‌there is now a renewed focus on genuine engagement with consumers.â€? Michelle Groves, AER
Competition Review | 25
ENERGY In an interview with G+T lawyer Geoff Petersen, AER CEO Michelle Groves describes these new guidelines as a “regulatory handbook.” Ms Groves says that the process of developing these new guidelines has given the AER an opportunity to develop some of their regulatory thinking and capture it in one place.
making any decision to vary or set aside and remit a decision of the regulator, to be satisfied that to do so will, or is likely to, result in a decision that is “materially preferable” to the original decision in making a contribution to the achievement of the national electricity objective or national gas objective.
The rate of return guideline process has attracted the most attention from stakeholders, generating many thousands of pages of submissions and expert reports and taking more than a year to complete. This guideline is seen as particularly important by many stakeholders because the AER’s decisions on the rate of return have such a significant impact on network charges. The final rate of return guideline was published on 16 December 2013 and will be an important guidepost for the AER’s decisions on the rate of return over the next three years.
Changes to the legal framework to be tested in 2014
Other guidelines developed during 2013 included expenditure forecast guidelines, expenditure incentive guidelines, shared asset guidelines, confidentiality guidelines and consumer engagement guidelines. These guidelines will set out how the AER intends to approach various aspects of its decisions in the energy sector in the future.
Amendments to the merits review framework The merits review frameworks in the National Electricity Law and National Gas Law provide an opportunity for review of certain AER network revenue and pricing decisions on points of merit (distinct from the judicial review framework which provides for review on points of law). These review frameworks have come under scrutiny in recent years following a series of successful appeals by network businesses which have led to further increases in network charges and, in turn, higher retail prices for gas and electricity. Some stakeholders have raised concerns that the merits review frameworks have allowed businesses to “cherry pick” AER decisions – that is, seek review only on those aspects of the AER decision that are unfavourable to them, while leaving other aspects of the decision undisturbed. In light of the growing policy concern around the use of merits review, an Expert Panel conducted a review of the framework in 2012. The review was chaired by Professor George Yarrow from Oxford University and recommended that a number of amendments be made to the merits review regimes. The amendments that were made in 2013 provide for changes to the determination thresholds and processes to be followed in merits reviews under the National Electricity Law and National Gas Law. Perhaps the most significant change is the introduction of an additional threshold which must be reached before the Tribunal can make a determination varying or setting aside decision of the regulator. The new threshold will require the Tribunal, before 26 | Gilbert + Tobin
Both the new rules framework and the new merits review regimes are yet to be applied in making network revenue and pricing decisions. 2014 will therefore be an important year for testing these new provisions. The first round of “transitional’ regulatory determinations under the new electricity rules will be made by the AER in 2014 and the first “full’ determinations under the new electricity rules will be made in early 2015. The first round of gas access arrangement reviews under the new rate of return rules will be undertaken by the Economic Regulation Authority in 2014. Any merits review taken in 2014 or 2015 will be subject to the new determination thresholds and process rules. In 2014, we are also likely to see a greater focus on consumer engagement in regulatory processes. As noted above, a number of the changes recently made to the network revenue and pricing rules were directed at promoting greater consumer engagement in the regulatory process. Additionally, in 2013, the AER established its new Consumer Challenge Panel, which sits within the AER and provides advice as part of the AER’s assessment of energy network businesses’ spending and regulatory proposals, with a particular focus on the likely impact of these proposals on consumer interests. The AER has also recently launched its “Energy Made Easy” website, which is designed to help consumers better understand the drivers of their energy bills and make more informed choices about their energy usage and choice of energy supplier. AER CEO Michelle Groves says that she cannot over emphasise the importance of seeing the consumer at the centre of the energy market and says that there is now a renewed focus on genuine engagement with consumers.
Catherine Dermody Partner
Geoff Petersen Lawyer
TELECOMMUNICATIONS REGULATORY FOCUS AREA #2: TELECOMMUNICATIONS The telecommunications competition and regulatory landscape in 2013 was again dominated by the NBN and two competing visions of how to improve broadband quality and availability across Australia (in particular, outside metropolitan areas) and enhance competition in telecommunications markets. The Coalition won the Federal election over the Labor Party in September 2013 and will now have an opportunity to implement its vision. However, as the Coalition looks under the NBN “hood”, it is finding there are numerous hurdles to overcome, as made all too clear by the independent assessment in the NBN Strategic Review (published in December). Despite the uncertainties surrounding the NBN, the ACCC has maintained its focus on implementing the current regulatory framework for the NBN. Its two-year long review of the NBN Co Special Access Undertaking (SAU) came to a close just a day after the publication of the NBN Strategic Review, with the ACCC accepting the price and non-price terms for accessing the NBN contained in the SAU. It has also been a busy year for the ACCC in regulating the existing fixed line incumbent, Telstra. In addition to monitoring Telstra’s structural separation, the ACCC kicked off inquiries on a range of Telstra regulated services and also closely scrutinised Telstra’s attempt to acquire an internet service provider in South Australia.
NBN Strategic Review With the Coalition’s election victory in September 2013, the Coalition’s vision of the NBN also won out. The Coalition’s vision centred around fibre-to-the-node (FTTN) technology with promised download speeds of between 25 and 100 megabits per second by the end of 2016 and 50 to 100 megabits per second by 2019 at less cost than the Labor fibre-to-the-premises (FTTP) model. But the Coalition will face challenges in implementing its policy ambitions with an independent assessment of the current NBN model identifying significant delays in the deployment and take-up of the NBN, and higher deployment costs and lower average revenue per user – all of which could impact the Coalition’s model as well. The NBN Strategic Review released publicly on 12 December 2013 by NBN Co presented the results of an independent assessment conducted by Deloitte, Boston Consulting and KordaMentha. The Strategic Review identified a range
of problems in relation to the operational, financial and organisational performance of NBN Co, the government business enterprise formed by the previous government to build the wholesale-only, open access NBN. The problems included:
++ slower deployment – as at September 2013, the NBN passed 227,483 premises, which is 48% behind the NBN Co Corporate Plan. When greenfields sites and the NBN fixed wireless and satellite solution is taken into account, the NBN passes 383,978 premises, but this puts NBN Co 55% behind the Corporate Plan. The number of premises that have activated NBN services is significantly lower – just 98,282. The revised end date of the fibre rollout is now end of June 2024, three years longer than indicated in the Corporate Plan. The revised outlook for brownfields premises passed by at June 2014 is 357,000 (compared with 1.129 million in the Corporate Plan);
++ lower revenues, higher costs – slower deployment and takeup of the NBN will result in $13-14 billion less revenue to FY21 (a drop from approximately $23.1 billion to $10 billion) and increased capital expenditure (from $37.4 billion to $55.9 billion); and
++ poor organisational performance – while NBN Co is wellfunded and resourced, it remains a start-up company that has been given the task of carrying out Australia’s largest ever infrastructure project. The financial and operational underperformance of NBN Co was attributed to a “deep lack of internal experience in complex infrastructure, construction projects and project management” in the organisation and insufficient consideration of operational construction constraints and costs when developing detailed designs. There was also a “relentless focus” on the premises passed measure as the most important determinant of success and “immature” end-to-end operational performance management metrics to manage significant queues in connections and activations. The review also undertook a comparative evaluation of five alternative scenarios and technology approaches to the current NBN model:
++ a radically redesigned FTTP model; ++ a fibre to the basement (FTTB) model with FTTN on short loop areas;
++ FTTP or FTTN outside the HFC footprint, and HFC within the footprint;
++ HFC in the HFC footprint with any gaps filled in and FTTN outside the footprint (though committed FTTP will still be rolled out); and
Competition Review | 27
TELECOMMUNICATIONS ++ an optimised multi-technology mix, which would require NBN Co to select which technologies to be rolled out on an area-by-area basis while delivering 50Mbps to approximately 90% of the fixed line footprint by the 2019 calendar year.
“When you have a monopoly, be it a vertically integrated monopoly or a ver tically separated monopoly, you still have a monopoly and you’re going to have to work out what the access price, the access terms and conditions need to be, the access products…and, to me, is going to be a significant issue for the ACCC going forward.” Tony Warren, Telstra
Chairman Rod Sims noted that while the task of regulating the NBN is more straightforward than regulating a vertically integrated operator like Telstra, the NBN “will still be a monopoly, with the usual incentives a monopoly has to charge excessive prices or offer inadequate service quality”. Dr Tony Warren, Telstra’s Group Executive of Corporate Affairs, in an interview with G+T lawyer Adelina Widjaja, echoes these sentiments: “When you have a monopoly, be it a vertically integrated monopoly or a vertically separated monopoly, you still have a monopoly and you’re going to have to work out what the access price, the access terms and conditions need to be, the access products,” says Dr Warren. “And that, to me, is going to be a significant issue for the ACCC going forward”. Mr Sims identified the NBN SAU as a key part of the regulatory framework that will apply to the NBN monopoly infrastructure. The SAU specifies the price and non-price terms for accessing the NBN fibre, fixed wireless and satellite networks, and other related services. The ACCC accepted the SAU lodged by NBN Co on 13 December 2013 after a two-year process during which NBN Co had to withdraw the first SAU it lodged after access seekers raised significant concerns and the ACCC required significant amendments to the second SAU lodged in order to produce a more balanced instrument. Among other things, the SAU accepted by the ACCC contains:
++ price controls to limit price increases for NBN products to The Strategic Review indicated a preference for the multitechnology mix model. However, even on an optimistic scenario, the Strategic Review concluded that this version of the NBN would cost over $40 billion, substantially more than the Coalition’s proposed $28 billion investment. Since its election in September, the Coalition Government has taken steps to deal with perceived organisational issues in NBN Co, appointing a new qualified board and management team that now includes former Telstra and Optus CEO Dr Ziggy Switkowski as Chair and former Vodafone Australia CEO Bill Morrow as CEO. In the coming year, it will have to grapple with the technological options for the ongoing NBN rollout and also renegotiate deals with Telstra and Optus, all of which will likely have cost implications.
The ACCC’s role in regulating NBN Co The other key stakeholder in the NBN project is, of course, the ACCC. The legislative framework established to facilitate the NBN put the ACCC front-and-centre in regulating the activities of NBN Co and approving a series of agreements between NBN Co and Telstra and Optus. In a speech to the telecommunications industry in November 2013, the ACCC 28 | Gilbert + Tobin
CPI-1.5% in any year over the period of the SAU; and
++ substantial ACCC oversight, including a role for the ACCC to determine NBN Co’s allowable revenues. Although the ACCC’s acceptance of the SAU came after the election and publication of the NBN Strategic Review, the ACCC’s view is that the commitments in the SAU are technology neutral and could accommodate any new directions from the changed Government. This position will need to be tested as the new version of the NBN emerges from the current set of Government reviews, which are looking into a range of issues including whether or not nationally averaged wholesale pricing will be retained.
Continued regulation of Telstra’s network A key part of the previous Federal Government’s reform of the telecommunications industry involved not just the rollout of the NBN but the structural separation of Telstra. Telstra submitted a structural separation undertaking in February 2012 in which it committed to structurally separating its retail and
Telecommunications
wholesale functions and provide access to regulated services on an equivalent and transparent basis during the NBN rollout. In 2013, the ACCC has continued to monitor Telstra’s compliance with its structural separation obligations. In addition, in 2013, the ACCC initiated or concluded the following inquiries into the regulation of certain Telstra services:
++ Fixed services review – the ACCC published a draft report on 13 December. The ACCC is proposing to extend the regulation of the Telstra network access services (unconditioned local loop service and line sharing service), resale services such as wholesale line rental (including removing existing exemptions that apply for CBD areas), and interconnection services for another five years. As part of the review, the ACCC will also review the price and non-price terms for the regulated services and wholesale broadband access services to apply from July 2014. However, in light of the different structure of the NBN, the ACCC is not proposing to regulate downstream supply of fixed services on the NBN such as wholesale line rental by Telstra and other providers;
++ Domestic transmission service – the ACCC published a draft report in relation to Telstra’s domestic transmission service on 13 December. As with the fixed line services, the ACCC is proposing to extend the regulation of the service for another five years. The ACCC’s view is that Telstra remains the dominant provider of domestic transmission services, particularly in regional areas; and
++ Wholesale broadband access determination – in May 2013, the ACCC issued a determination on the prices that Telstra can charge access seekers for wholesale broadband (ADSL) services if it cannot reach agreement with the relevant access seekers. The cost-based prices set by the ACCC will apply until 30 June 2014. The ACCC’s scrutiny of Telstra also extends to Telstra’s mergers and acquisitions activity. After the ACCC raised significant competition issues in relation to Telstra’s proposed acquisition of South Australian telecommunications provider Adam Internet at the end of 2012, in January 2013 Telstra sought additional time to respond to those concerns. Telstra withdrew its offer for Adam Internet and terminated the ACCC review in July 2013. The ACCC Chairman revealed to one of Australia’s major newspapers shortly after that one of the outstanding issues in the ACCC’s review of the deal related to the application of Telstra’s structural separation undertaking to Adam. He also indicated that any attempt by Telstra to acquire or build a lowcost broadband brand will face extra ACCC scrutiny. The ACCC’s message has been conveyed loud and clear, from Telstra’s perspective, “[Mr Sims] has been very explicit that
any…inorganic growth in the Australian market is going to be heavily scrutinised by the ACCC,” says Dr Warren. “We understand that. We do need to develop low cost channels. We’re doing that organically. We will continue to look at inorganic solutions but we are very cognisant that we need to address the concerns the ACCC have in that space.”
“[Mr Sims] has been very explicit that any…inorganic growth in the Australian market is going to be heavily scrutinised by the ACCC, we understand that. We do need to develop low cost channels. We’re doing that organically. We will continue to look at inorganic solutions but we are very cognisant that we need to address the concerns the ACCC have in that space.” Tony Warren, Telstra
The year ahead 2014 is likely to be dominated again by the NBN. The contractual arrangements between Telstra and NBN Co will need to be re-negotiated to accommodate an FTTN deployment model in which more of Telstra’s network (that is, the copper sub-loops and pillars) needs to be used. The legislative and regulatory reforms that were implemented in the last few years may also need to be reconsidered and potentially amended to implement the NBN model ultimately chosen by the Coalition Government. There may also be regulatory implications arising from the renegotiation of NBN Co’s deals with Telstra and Optus. Both deals were heavily scrutinised by the ACCC when they were initially put in place. The Coalition Government is likely to want “boots on the ground” rolling out its NBN by the time the next federal election is called – otherwise, it risks facing the same criticisms about delay it levelled at the previous Federal Government. To meet this objective, the complex exercise of renegotiation and revision of the current contractual and regulatory arrangements will need to be completed before the end of 2014, including any necessary ACCC review.
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TELECOMMUNICATIONS
Tony, what would you do if your were Minister for Communications for a day? “I think this is an industry that is very much ripe for reform across both the telecommunications portfolio and the media portfolio. It is clear that we’ve got an awful lot of legacy arrangements in place that don’t seem to be fit for purpose for the modern world and so I suspect it would take more than a day… “This is an industry, as is the media industry, that’s becoming very, very hooked on regulatory settings and changing regulatory settings to get some advantage one way or the other. I don’t think that’s a healthy place for any industry to be in…so I would look at the scope to wind back the opportunities for all firms, ourselves included, to utilise regulation as a way of getting competitive advantage in the market. “It’d be a long day, but I think it’d be a worthwhile day.”
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Telecommunications
In the meantime, given the uncertainties of the NBN, the ACCC’s regulatory team will likely take a “business as usual” approach to regulating Telstra’s telecommunications infrastructure. The ACCC states in its draft report in the fixed services review that it considers Telstra’s copper network “will remain an enduring bottleneck” until the NBN rollout is complete and, despite Telstra’s structural separation obligations, the ACCC has concerns that Telstra has an incentive to advantage its own retail operations. The ACCC’s fixed services and transmission services reviews are set to conclude in 2014 and likely to extend the regulation of Telstra services for another five-year period. The ACCC’s ongoing scrutiny of the broad spectrum of Telstra’s activities, particularly in relation to markets in which the ACCC considers Telstra has strong position, is also likely to continue into 2014. Lastly, the ACCC will spend part of 2014 focussing on the regulation of mobile terminating access services. Currently, mobile termination services are regulated and the ACCC is expected to continue that regulation. However, in 2014, the ACCC will also be considering the regulation of SMS termination services as evidence provided to the ACCC suggested that such services may be priced inefficiently and commercial negotiations have not resulted in SMS rates being lowered.
Peter Waters Partner
Simon Muys Partner
Adelina Widjaja Lawyer Competition Review | 31