Competition and Market Regulation Update September 2009

ACCC takes court action

Collusive behaviour not constructive

The ACCC has instituted proceedings in the Federal Court against three Queensland-based construction companies and two of their managers, alleging that the companies engaged in price fixing and misleading or deceptive conduct and that the managers aided, abetted or were otherwise knowingly concerned in some of the price fixing conduct.

The ACCC alleges that between 2004 and 2007, T.F. Woollam & Son Pty Ltd, J.M. Kelly (Project Builders) Pty Ltd and Carmichael Builders Pty Ltd colluded on tender prices for various building contracts. Companies who did not intend to win the tender but still wished to be seen to bid allegedly tendered excessively inflated prices, in a practice known in the building industry as ‘cover pricing’.

The ACCC also alleges that the companies engaged in misleading or deceptive conduct in breach of section 52 of the Trade Practices Act 1974 (Cth) (Trade Practices Act), as the bids involved the companies warranting to clients that there was no collaboration in the relevant bid.

The companies involved are contracted for tens of millions of dollars worth of work under the Rudd government’s schools stimulus package, as well as in other state-funded construction projects. The Queensland Government has indicated that it will fully cooperate with ACCC investigations, and will take steps to recover any loss if a breach of the Trade Practices Act is proven.

As the alleged anti-competitive conduct occurred before the introduction of criminal offences for ‘cartel conduct’, the actions are not brought under the new (criminal) cartel laws.

A similar investigation by the UK Office of Fair Trading (OFT) recently resulted in a fine of STG ₤129.5 million against 103 UK construction firms for cover pricing. The OFT said that it had uncovered approximately 4,000 tenders that had been distorted by collusive tendering, in what was one of its largest competition-related investigations.

Cabcharge denies allegations of anti-competitive conduct

Cabcharge has now filed its defence in proceedings instituted against it by the ACCC, which we covered in our July edition of the Competition and Market Regulation Update.¹ The allegations made by the ACCC in the proceedings are that Cabcharge:

• misused its market power to damage, prevent or limit competition by refusing to deal with competitors seeking agreement with Cabcharge to allow Cabcharge payment instruments to be processed on the competitors’ electronic payment processing systems
• misused its market power to damage, prevent or limit competition by:
  • integrating Cabcharge’s payment system with Cabcharge meters and not allowing competitors taxi equipment to be integrated in the same way, and
  • supplying Cabcharge taxi meters and fare schedule updates either below cost or free of charge, and
• entered into a contract, arrangement or understanding with a taxi network operator in Queensland for the purposes of substantially lessening competition.

Cabcharge has denied these allegations in its defence. It says that its refusal to deal with competitors and its conduct in relation to Cabcharge meters was conduct designed to achieve legitimate business objectives and did not involve it taking advantage of its power in any of the alleged markets. In relation to the supply of meter updates without charge, it says that this was done without authority and without the knowledge or approval of the Cabcharge board.

Air freight price fixing prosecutions continue

The ACCC continued its investigation and prosecution of participants in an alleged cartel in the air cargo industry by commencing Federal Court proceedings against PT Garuda Indonesia Ltd (Garuda). The ACCC alleges that Garuda entered into various arrangements between 2001 and 2006 with other international air cargo carriers that had the purpose or effect of fixing the price of a fuel surcharge and a security surcharge that were applied to air cargo carried by Garuda and other airlines.

Garuda is the tenth airline that the ACCC has proceeded against for alleged price fixing in the air cargo industry. The Garuda proceedings follow court imposed penalties on airlines including Qantas, British Airways and Air France. Proceedings against Singapore Airlines, Cathay Pacific and Emirates continue.

ACCC to give green light to Gorgon gas project

The ACCC has issued a draft decision proposing to grant conditional authorisation to members of the Gorgon gas project joint venture for the joint marketing of natural gas to customers in Western Australia until 31 December 2015.

The Gorgon project is a proposed liquefied natural gas (LNG) and domestic gas development off the north-west coast of Western Australia. The members of the Gorgon gas project joint venture, which include Chevron Australia, Mobil Australia and Shell, had sought authorisation from the ACCC to jointly market and sell gas from the project for supply in Western Australia.

Although a number of purchasers of gas in Western Australia opposed the authorisation, arguing that separate marketing is commercially and practically feasible in the Western Australian market and that joint marketing would result in less competition and higher prices, the ACCC stated that the current features of the Western Australian domestic gas market present significant difficulties for separate marketing of gas. The ACCC formed this view having regard to the ‘lumpy’ demand profile of the market, driven by relatively few large customers and long term contracts and a lack of liquidity with little trading and no well developed secondary markets, coupled with very limited gas storage options.

The proposed authorisation is conditional on the joint venture parties complying with ‘ring-fencing' arrangements to protect competitively-sensitive information controlled by the parties.

The ACCC now seeks further submissions on the draft determination before it makes a final decision.

Supermarket agreements open way for more competition

Supermarket giants Coles and Woolworths have voluntarily entered into court enforceable undertakings to stop demanding restrictive covenants in supermarket leases. Restrictive covenants may include requirements that if a rival supermarket moves into a shopping centre the rental rates of the incumbent will be cut, which has the potential of acting as a significant barrier for new entrants.

The agreement means that 602 out of 750 active restrictive leases involving Coles and Woolworths will cease immediately, with the remaining 20 per cent to be phased out within five years.

Graeme Samuel, Chairman of the ACCC, considers it ‘a major breakthrough for grocery competition in Australia’. The ACCC’s 2008 grocery industry report has fuelled a series of microeconomic and legislative reforms which aim to increase competition in the grocery retail sector, as well as empowering consumers through unit pricing laws which will become mandatory in the large supermarkets by December this year. (See our July edition of the Competition and Market Regulation Update²  for further information on unit pricing).

To reduce barriers to entry in the grocery retail sector, the government has planned additional reforms which include:

• relaxing foreign investment rules so that foreign owned supermarkets such as Aldi and Costco have an extended period of time to commence construction after receiving purchase approval, and
• reviewing state and territory government planning laws which currently hinder the ability of supermarkets to establish themselves in areas outside of the major shopping centres.

The ACCC has indicated that it will engage with other supermarket chains in a bid to remove restrictive covenants from their leases.

The ACCC’s investigation into restrictive covenants follows an April 2008 report from the United Kingdom competition regulator, the Competition Commission, which announced measures to prevent land agreements which restrict entry into grocery retailer markets. The agreements addressed by the Competition Commission were restrictive covenants and ‘exclusivity arrangements’, which provide that a landowner grants exclusivity to a grocery retailer and agrees not to allow another grocery retailer to operate from site(s) owned by the landowner. Measures implemented by the Competition Commission included:

• requiring certain large grocery retailers to release restrictive covenants
• prohibiting certain large grocery retailers from entering into new restrictive covenants, and
• requiring certain large grocery retailers not to enforce or seek the enforcement of other exclusivity arrangements after five years from the date of the report (30 April 2008) or five years from the opening of the store benefitting from the exclusivity arrangement.

Long-term solution for Hunter Valley coal exports

The ACCC has reinstated an interim authorisation—which had previously been revoked—in relation to coal handling and loading arrangements at the Newcastle port in New South Wales. The authorisation follows a Hunter Valley coal industry agreement in relation to ‘capacity framework arrangements’, which was made by the Newcastle Port Corporation (a statutory state-owned corporation responsible for managing and operating port facilities and services in the Port of Newcastle) and port terminal owners/operators Port Waratah Coal Services and Newcastle Coal Infrastructure Group.

The agreement is heralded as a long term solution to the capacity constraints and shipping queue problems which have hindered the effective operation of the port and the export of coal from the Hunter Valley. According to the ACCC, it results in terminal operators being able to ask producers to provide binding nominations for their long term terminal capacity requirements, allowing coal chain system capacity to be modelled and long term ship or pay contracts to be entered into for the first time, underpinning future investment and the efficient operation of the coal chain.

The interim authorisation commences immediately and remains in place until the ACCC’s final determination comes into effect. The capacity framework arrangements are expected to commence by January 2010.

Senate Committee’s verdict on new Australian Consumer Law

In a report issued in early September, the Senate Economics Legislation Committee recommended the passage of the Trade Practices Amendment (Australian Consumer Law) Bill 2009 (Bill) which, if passed, will introduce bans on the use of unfair terms in standard form business-to-consumer contracts. We covered the introduction of the Bill in our June edition of the Competition and Market Regulation Update.³

Only Senator Nick Xenophon recommended amendments to the Bill, although he expressed his broad support for the proposed new law.

The Bill is the first of two bills aimed at introducing a single national consumer law (the Australian Consumer Law) to replace the existing regime under which consumer protection laws vary from state to state.

While the Senate recommended that the Bill be passed without amendment so that the new regime may come into effect at the earliest possible time, it acknowledged various concerns expressed during its public consultation and in doing so made the following additional recommendations:

• the ACCC and ASIC issue a set of guidelines to assist businesses and consumers to understand their rights and obligations under the new regime, and
• extend the protection provided under the Bill to consumers of insurance contracts (the current version of the Bill excludes insurance contracts).

Although the government had hoped that the legislation would commence on 1 January 2010 the Bill has not yet been passed by either the House of Representatives (which referred the Bill to the Senate Committee for review) or the Senate. However, given the views expressed by the Senate Committee in its report that the legislation should be introduced at the earliest possible time, businesses who have not yet done so may wish to commence reviewing their existing contracts in preparation for the introduction of the new regime.

Federal Government seeks break up of Telstra

The Federal Government recently introduced the Telecommunications Legislation Amendment (Competition and Consumer Safeguards) Bill 2009 (Bill) into Parliament, which proposes significant changes to the telecommunications industry in Australia.

The Bill proposes to, amongst other things, improve competition in the telecommunications markets by addressing Telstra’s vertical and horizontal integration, and seeks to achieve this by:

• requiring Telstra to separate its network/wholesale and retail businesses (if it does not do so voluntarily), and
• preventing Telstra from acquiring additional spectrum for advanced wireless broadband unless it structurally separates and divests its cable network and interests in Foxtel. (The requirements to divest the cable network and Foxtel interests may be removed if the relevant minister is satisfied that Telstra’s separation addresses the concerns about the degree of Telstra’s power in the telecommunications markets).

• amend Part XIC of the Trade Practices Act to improve the efficiency of the telecommunications access regime and make it less vulnerable to procedural delays
• amend Part XIB of the Trade Practices Act to streamline the telecommunications anti-competitive conduct regime by allowing the ACCC to issue competition notices to carriers and carriage service providers without prior consultation, and
• strengthen consumer safeguard protections.

In other telecommunications news, the Australian Competition Tribunal (Tribunal) has confirmed it may wind back regulated access to Telstra's wholesale voice services in metropolitan and CBD areas where competition has sufficiently developed. The Tribunal has indicated that whether an exemption will apply in a particular area will depend on a number of factors, including the number of Telstra's competitors already using the Unconditional Local Loop Service in that area as well as the market share of the relevant competitor. Telstra will still be required to provide access to the Local Carriage Service, Wholesale Line Rental and PSTN Originating Access services in non-exempt areas.

EC explains decision to fine Intel for abuse of dominant power

As reported in the May 2009 edition of the Competition and Market Regulation Update,⁴ the European Commission (EC) fined Intel Corporation (Intel) a record €1.06 billion after finding that between 2002 and 2007 Intel held a dominant position in the market for x86 Central Processing Units (CPUs) and that it had abused its dominant position to foreclose competition in that market. The EC has now released detailed reasons for its decision.

The conduct

The EC found that Intel had engaged in a continuous strategy aimed at foreclosing competition in the relevant market through:

1. Conditional rebates: at various times Intel:
   • provided rebates to a number of computer manufacturers on the basis that these companies would purchase all or almost all the CPUs they required from Intel, and
   • made payments to a key computer retailer on the basis that that retailer would sell exclusively Intel-based PCs, and
2. Naked restrictions: Intel made payments to several computer manufacturers on the basis that those manufacturers would delay the launch of computers made with CPUs of Intel’s only significant competitor (AMD) and imposing additional restrictions on the distribution of those computers.

The amount of the fine

In determining the value of the fine imposed on Intel, the EC considered:

• the volume of sales arising directly or indirectly from Intel’s conduct
• the gravity of the infringement, including that the conduct
  • took place in a market of great economic importance
  • affected competition throughout the whole of the European Economic Area, and
  • was part of a continuous strategy aimed at foreclosing competition from Intel’s only significant competitor in a market where the high level of investment required made new entry difficult
• the infringement took place over a period of more than five years, and
• there were no mitigating circumstances justifying any decrease in the base amount of the fine.

This newsletter was prepared by Gillian McKenzie, Solicitor, Singapore, Damian Tarulli, Solicitor and Talia Pranskunas, Graduate, Melbourne.

Endnotes

1. Competition and Market Regulation Update July 2009
2. Competition and Market Regulation Update July 2009
3. Competition and Market Regulation Update June 2009
4. Competition and Market Regulation Update May 2009

More information

For information regarding possible implications for your business, contact a member of the Competition & Market Regulation team.