Unusually, three significant developments occurred in Australian competition law last week:
- On Monday, AGL applied to the Australian Competition Tribunal for the authorisation of its proposed acquisition of Macquarie Generation. This is only the second application for a merger authorisation since the authorisation regime was amended in 2006. An interesting twist is that AGL is seeking authorisation notwithstanding express ACCC opposition to the acquisition.
- On Thursday, the Commonwealth Government announced the panel membership and terms of reference for its comprehensive 'root and branch' review of Australian competition law and policy. The terms of reference remain ambitious and the panel members are of a high quality, lead by Professor Ian Harper. The review is now being referred to as the 'Harper Review'. A discussion paper will be released shortly.
- On Friday, Flight Centre was subjected to a fine of AUD 11 million in respect of five attempts to contravene the Competition and Consumer Act 2010 (Cth). The fine is unexpectedly high, particularly for attempted contraventions, increasing the risk profile for certain distribution arrangements. The fine indicates that Australian courts are now taking anti-competitive conduct very seriously indeed.
Each of these developments are discussed in further detail below.
AGL applies to the Australian Competition Tribunal for authorisation of its proposed acquisition of Macquarie Generation
On 24 March 2014, AGL Energy Limited (AGL) quelled speculation as to its likely response to the ACCC's opposition of its proposed acquisition of Macquarie Generation. AGL took the rare step of applying to the Australian Competition Tribunal for a public benefit authorisation. This is one of the first times that an authorisation has been used to attempt to circumvent express ACCC opposition to an acquisition.
AGL is one of three major energy retailers operative in Australia. It also owns significant generation capacity in Victoria and South Australia. AGL was the successful bidder for the currently State-owned Macquarie Generation portfolio (which accounts for 27 per cent of the New South Wales electricity generation capacity), conditional upon ACCC approval.
AGL had applied to the ACCC for an informal clearance for the acquisition. AGL had also proposed detailed behavioural undertakings to address potential ACCC concerns. These undertakings sought to provide ongoing accessibility of competitive hedge contracts to competitive retailers.
Notwithstanding the undertakings, the ACCC opposed the acquisition on 4 March 2014 on the basis that it would allow significant further vertical integration by AGL whereby "the three largest retailers in NSW would own a combined share of 70 to 80 per cent of electricity generation capacity or output". This would result, the ACCC commented, "in significant reduction both in hedge market liquidity and the supply of competitively priced and appropriately customised hedge contracts to second tier retailers", thereby raising barriers to entry and expansion. The ACCC identified that there would be likely to be a substantial lessening of competition if the acquisition occurred.
What strategy does one follow if the ACCC opposes a merger?
Following the ACCC's opposition, there were essentially four alternatives open to AGL if it wished to proceed with the acquisition:
- Declaratory relief (colloquially known as the "Loy Yang" route), which refers to a previous acquisition by AGL in 2003 in which declaratory relief was sought from the Federal Court that no breach of section 50 of the Act would occur if the relevant acquisition proceeded.
- Contest an injunction (colloquially known as the "Metcash" route), which refers to a previous acquisition by Metcash in 2011 in which Metcash indicated it would proceed with an acquisition despite the fact that the ACCC had denied informal clearance. The ACCC was, in effect, forced to injunct that acquisition and that injunction was then challenged by Metcash in the Federal Court.
- Authorisation, involving a formal application for authorisation to the Australian Competition Tribunal. Such an approach was previously attempted in December 2013 by the Murray Goulbourn dairy co-operative but did not proceed.
- Formal clearance, involving an application to the ACCC for formal clearance and then appealing the ACCC's adverse decision. The formal clearance procedure has not yet been used in Australia.
Of these four potential strategies, AGL opted for authorisation.
Application for Authorisation
An application to the Australian Competition Tribunal for authorisation permits an assessment of the transaction on a broader set of criteria than that which the ACCC is permitted to consider under its informal merger assessment process. The Tribunal must not grant an authorisation unless it is satisfied that the proposed acquisition would result, or be likely to result, in such a benefit to the public that the acquisition should be allowed to occur.
Merger authorisations are very rare. AGL has lodged only the second application to the Tribunal under the current merger authorisation regime that has been in place since 2007, the first being the application for authorisation by the Murray Goulbourn Co-operative in December 2013.
AGL's application effectively argues that compared to the alternative (where the Macquarie Generation assets remain State-owned), the competition impacts would not be so significant as to outweigh the efficiency benefits and other benefits that would flow from the proceeds of the sale being invested by the Government elsewhere.
AGL's application therefore seems heavily dependent on AGL being able to demonstrate that the State Government of New South Wales will not otherwise sell the Macquarie Generation asset if AGL is not allowed to acquire it. Ultimately, this may be an interesting question of fact for the Australian Competition Tribunal.
AGL continues to offer up conditions similar to those offered to the ACCC in the form of behavioural undertakings to forestall competition concerns.
The Tribunal will conduct hearings and must make a decision within the next six months.
Harper 'root and branch' review of Australian competition policy formally commenced
The Government's 'root and branch' review of competition policy now has a name, the "Harper Review". A high quality review panel has been announced. Ambitious terms of reference have been finalised (with only minor changes relative to the draft terms of reference).
As we identified in our client alert of February 2014, the review could potentially result in the greatest regulatory reforms in 20 years. A formal discussion paper will be released in the coming weeks, including a timeline for the review process and submissions.
The review panel comprises Professor Ian Harper, one of Australia's best known economists, Peter Anderson, previous CEO of the Australian Chamber of Commerce, Su McCluskey, an expert on regulation and small business, and Michael O'Bryan, one of Australia's most respected competition barristers. The calibre of the panel demonstrates the government is taking the review seriously.
Importantly, the review could provide a blueprint for the next wave of sectoral deregulation and reform. The scope of review extends well beyond a review of Australia's competition laws. The objective of the review is to improve economic welfare by removing impediments to competition, including excessive regulation. Some have commented that the scope of the review may be too ambitious, so it will be interesting to see how key issues will be prioritised.
A critical issue is how the review will balance the interests of small and big business. The genesis of the review is in the small business portfolio. The review panel was announced by the Minister for Small Business, suggesting an emphasis by the Government on small business concerns. The review may well consider the extension of Australia's unfair contract and unconscionable conduct prohibitions to protect small business. Yet any greater protection of small business will need to be carefully balanced against the objectives of competition policy and the need to avoid increasing the regulatory burden overall.
The review could recommend institutional reforms. While some have speculated on reform of the ACCC, the ACCC is widely recognised as one of the best competition agencies in the world. A more likely focus will be on fixing some ACCC processes, including the formal merger review process – still unused after eight years.
Beyond the ACCC, Australia's competition policy institutions arguably require reinvigoration. Some have proposed a high-powered policy review and development entity to independently advise government and review regulation. Such reforms could involve an enhanced role for the National Competition Council, the expansion of the Productivity Commission, or even the integration of these entities.
There is welcome scope to fine tune our competition laws. A substantive redraft is unlikely - our competition laws are world leading. The review is more likely to scrutinise those provisions that regularly attract criticism: the controversial 'Birdsville' prohibitions, which regulate powerful businesses from pricing below cost; our over-zealous third line forcing prohibitions, which regulate the bundling of goods and services by different businesses, and our inconsistent joint venture defences.
Some reform proposals in the public domain are already controversial. The ACCC has called for the extension of the price signalling provisions in the banking sector so that they apply universally. The provisions were ostensibly introduced to prevent banks colluding by way of press release. Senator Nick Xenophon has tabled private member's legislation giving the ACCC the ability to ask a court to break up powerful firms that abuse their market power. The review may also revisit recommendations from previous reviews, including the nature of exemptions for intellectual property and liner shipping.
There are opportunities to prevent future 'knee-jerk' regulation. Some industry sectors have been singled out for specific attention, including shipping, e-commerce, groceries, utilities, automotive fuel, technology, and infrastructure. Rather than focus on the detail, the review panel is more likely to identify key principles – potentially leading to a more harmonised, principled and predictable approach to sectoral regulation.
Interestingly, reforms may be considered for governmental businesses. An underlying concern is that excessive government involvement in business may 'crowd-out' private sector investment, impeding competition and productivity. The word "privatisation" in the terms of reference has already attracted disproportionate media comment.
One does not envy the task of the review panel. It will be required to maintain balance while walking a difficult political tight rope, under tight deadlines, in swirling political cross winds. As leader of the G20, Australia's domestic policy initiatives will be the subject of enhanced international attention. The final recommendations will no doubt be taken seriously by those in Canberra. Peter Harris, Chairman of the Productivity Commission, identified in November 2013 that the alternative is a "low growth scenario" for Australia.
It has been some 20 years since Australian competition policy was last comprehensively reviewed. The so-called 'Hilmer Review' had a profound impact on the Australian economy. In 2006, Australia was one of the most deregulated economies in the western world. Australia's policy reforms led the world and delivered Australia some of the strongest growth rates in the OECD.
As other nations have implemented reforms, Australia's competitive advantage has eroded. The review provides a real opportunity to chart the course of Australian competition policy in the 21st century, re-assert global economic leadership, and reap the corresponding economic rewards.
Flight Centre ordered to pay $11 million for attempted price fixing
On 28 March 2014, travel agency Flight Centre, was ordered by the Federal Court to pay AUD 11 million in penalties. This figure is unexpectedly high, particularly for conduct that amounted to an attempt to contravene the Competition and Consumer Act 2010 (Cth) (CCA). As such, the penalty sends a clear message that Australian courts will take any anti-competitive conduct very seriously indeed.
Specifically, the penalties were given in respect of six separate attempts (although one was time barred) by Flight Centre to procure the agreement of each of Singapore Airlines, Emirates and Malaysian Airlines (together, Airlines) that:
- they each would make available to Flight Centre any offering that was on their respective websites; and
- that the price they each would charge customers for an airfare would be no less than the total of the net fare plus the commission that Flight Centre would be entitled to be paid for supplying the fare to a Flight Centre customer.
It was alleged that if such an agreement had been entered into, it would have enabled Flight Centre to match the Airlines' prices while maintaining Flight Centre's commission.
The case has potentially broad implications for a business that makes use of multiple distribution channels. Justice Logan found that although Flight Centre did not compete with the Airlines in providing airline services, it did compete in providing associated intermediary services. Flight Centre was found to have attempted to engage in price fixing in breach of the cartel provisions of the then Trade Practices Act 1974 (Cth) (TPA) (now the CCA).
Importantly, this is one of the first cases that has been able to apply the stricter penalty regime that has existed since the beginning of 2007 under the CCA. Historically, the maximum penalty per offence had been AUD 10 million for a corporation. Under the new regime, the Court may impose the greater of the following penalties per contravention:
- AUD 10 million; or
- if the court can determine the total value of the benefit from the anti-competitive conduct, 3 times that total value; or
- if the court cannot determine the total value of those benefits—10% of the corporation's annual turnover during the 12-month period ending at the end of the month in which the corporation committed, or began committing, the offence.
Interestingly, the ACCC did not plead facts that allowed the Court to have regard to the second and third limbs in this instance. However, the significant penalty was partly attributable to the fact that there were five separate attempts that occurred within the six-year limitation period (giving rise to a potential maximum fine of AUD 50 million at AUD 10 million per contravention). The Court also pointed to Flight Centre's significant revenue and market share and what Justice Logan considered "flagrant" and "serious" conduct. The value of general and specific deterrence were also identified as of particular importance.
Justice Logan acknowledged that "Though the [CCA] specifies the same maximum penalty for an attempt to induce and for an inducement which has succeeded, there is a qualitative difference between the two. Nonetheless, so far as general deterrence is concerned, one purpose of the imposition of a penalty must be to discourage attempts and, instead, to encourage a culture of compliance with the contemporary standards of commercial behaviour which Parliament has prescribed in the TPA."
Flight Centre is expected to appeal both on the finding of legal contraventions and the quantum of penalty. Irrespective of the appeal, the Flight Centre decision indicates that the penalties that will be imposed in future by Australian courts for anti-competitive conduct are likely to be high.
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