Competition and Access Issues in Mining And Resources


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Slide pack for lecture to LLM students for the LAWS 7805 (Mining and Natural Resources Law) class at the Law School of the University of Queensland.

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Competition and Access Issues in Mining And Resources

  1. 1. MINING AND RESOURCES Competition and access in mining and resources Dr Martyn Taylor Partner August 2012 1
  2. 2. Overview1. Competition issues in mining & resources2. Australian Competition & Consumer Commission3. Acquisitions of assets and shares Dr Martyn Taylor Partner4. Long-term supply contracts and exclusivity +61 2 9330 8056 martyn.taylor@nortonrose.com5. Joint ventures and co-ordinated conduct6. Access to essential infrastructure7. Sectoral access regimes – National Gas Law 2
  3. 3. MINING AND RESOURCES What are the competition issues in mining & resources? 3
  4. 4. Objectives of competition law• Competition law is principally contained in the Competition and Consumer Act 2010 (Cth).• The Competition and Consumer Act: – relevantly, has the objective of enhancing the welfare of Australians through the promotion of competition; – applies on a generic basis to all markets in Australia; – gives effect to National Competition Policy; and – is administered and enforced by the Australian Competition and Consumer Commission (ACCC).• Competition law is underpinned by economic theory: competition is a necessary condition for the efficient operation of markets so they can allocate society‟s resources optimally to their most valued uses. 4
  5. 5. Structure of competition law • Misuse of market power Single party • National access regime conduct • National Gas Law (gas pipelines) • Anti-competitive agreements Competition Multi-party • Restraints of trade regulation conduct • Cartel conduct • Exclusive dealing • Exclusionary provisions (boycotts) Mergers and • Anti-competitive acquisitions acquisitions„Per se‟ prohibition „Rule of reason‟ prohibition• Conduct is considered so harmful it is • Conduct is considered harmful only if it deemed to be anti-competitive has an anti-competitive effect• Example: price fixing by cartel • Example: acquisition of an asset 5
  6. 6. Where can competition issues arise ? • Mining project acquisition (tenements, shares, assets, contracts) • Contingent acquisitions and options (eg Farm-in arrangements) Early • Structuring of exploration joint ventures phase • Long-term mining leases and infrastructure tenements • Third party access requirements in State agreements • Access to third party infrastructure, including rail, ports • Exclusive procurement contracts Pre- • Long-term sale and offtake contracts production • Structuring of production joint ventures • Collective bargaining authorisations • Structuring of marketing joint ventures • Requests by competitors for access Operations • Risks of price and output co-ordination • Regulatory investigations • Anti-competitive provisions in contracts • Sale of assets Exit • Sale of shares strategies • Restraints of trade • IPO disclosures 6
  7. 7. Illustrative list of recent competition issues Single party Multi-party Mergers and conduct conduct acquisitions• Long-running litigation over rail • ACCC authorisation of joint gas • ACCC clearance of APA‟s access in the Pilbara region marketing by North West Shelf acquisition of Hastings Fund between Fortescue Mining, Gas Project producers. (gas transmission pipelines). BHP Billiton and Rio Tinto. • Collective bargaining approval • ACCC clearance for Arrow• 15 year „no coverage‟ for Surat coal producers for Surat Energy acquisition of Bow application for Australia Pacific Basin rail links. (wholesale gas for LNG). LNG Gladstone Pipeline. • Collective bargaining approval • Caltex acquisition of Mobile• Access regulation of Roma to for Bowen/Galilee coal producers assets at Port of Gladstone Brisbane gas pipeline. for Hay and Abbot Point rail links. (fuel terminal infrastructure).• Access regulation for Amadeus • Authorisation of Hunter Valley rail • Proposed iron ore joint venture gas pipeline. network and export coal chain. between BHP Billiton and Rio Tinto in Western Australia.• Certification of Dalrymple Bay • Collective bargaining approval Coal Terminal access regime. for Wiggin Island coal producers • Chinalco acquisition of various for Gladstone Port rail links. assets of Rio Tinto.• Investigation of Santos regarding access to oil storage • ACCC authorisation of joint gas • ACCC opposition to Santos‟ facility at Port of Brisbane. marketing by Gorgon Gas proposed acquisition of QGC. Project producers. 7
  8. 8. The AustralianCompetition & Consumer Commission (ACCC) 8
  9. 9. What is the ACCC’s role ?• The Australian Competition & Consumer Commission (ACCC) is responsible for administration of the Competition and Consumer Act (as well as other legislation containing competition obligations).• ACCC promotes competition to benefit consumers, business and the community. ACCC also regulates national infrastructure. • Specifically, its performance plan requires it to promote “lawful competition, consumer protection, and regulate national infrastructure markets and services through regulation” • The ACCC‟s role includes investigation, enforcement, industry and consumer education, price monitoring and determining the terms of access to infrastructure services. • The ACCC also have an important role in screening and authorising certain conduct that may be anti-competitive.• The ACCC also provides advice and assistance to parliamentary inquiries and government agencies for the development of competition policy and legislation. 9
  10. 10. How does the ACCC operate ?• The ACCC comprises an independent statutory Commission of Commission seven full-time Members and four Associate Members. Full Commission • Budget of roughly $150 million, roughly half of which is spent on employee costs. The ACCC has a $25 million legal budget. • Within „Treasury‟ portfolio in the Commonwealth Government. Sub- Committee• ACCC decisions are made through formal Commission meetings: • Various Sub-Committees exist with delegated powers to make Staff decisions on matters that are less significant. Relevant Division within • Only the Full Commission itself can decide to start court action, ACCC approve or oppose a major merger proposal, or authorise anti- competitive behaviour where there is sufficient public benefit.• The Commission is supported by around 800 staff structured into a A „staff paper‟ is number of Divisions and Groups. confidential but can sometimes be obtained• The staff are responsible for investigating conduct and making via an FOI or in recommendations to the Commission via a „staff paper‟. litigation discovery. 10
  11. 11. ACCC investigative powers• Possible breaches of competition law come to the ACCC‟s attention through complaints and information from members of the public, the media, ACCC staff and other agencies.• ACCC‟s Infocentre provides the initial response for all inquiries and complaints. In 2011, it received 145,000 calls, 42,000 emails and 2,200 letters. Most of these were retail and consumer oriented.• If a matter is sufficiently serious, the case is referred to the relevant ACCC staff for investigation.• The ACCC staff have formal powers under section 155 of the Act to: • require persons to answer written questions and provide documents (e.g., emails, board papers); and • require persons to appear and provide evidence.• In the last financial year, the ACCC issued around 270 of these „section 155‟ notices. The compliance burden for recipients can be very substantial indeed, including identifying any privileged documents. 11
  12. 12. ACCC enforcement powers• ACCC may take enforcement action in the Federal Court seeking injunctions, court orders and pecuniary penalties: – The ACCC applies its compliance and enforcement policy. – Criminal prosecutions are undertaken by the Director of Public Prosecutions• Statutory remedies: – Imprisonment for up to 10 years for individuals engaging in cartel conduct – Substantial pecuniary penalties (firms and individuals) per contravention – Disqualification orders against officers and directors – Provisions of contracts may be unenforceable and must be severed from the contract (which may affect the application of remainder of the contract)• Other concerns – Distraction of senior management – Damage to reputation – Private and class actions by injured parties for damages or other remedies – Forfeiture of proceeds from criminal conduct under Proceeds of Crime Act 12
  13. 13. Change in approach at the ACCCGraeme Samuel ended his eight year tenure as Chairman of theACCC in August 2011 and was replaced by Rod Sims:• Rod Sims expects the ACCC to be strategic, not reactive.• Rod Sims will continue to give priority to those areas that have the greatest potential for consumer detriment or where market structures need most support. Rod Sims, ACCC Chairman• Rod Sims believes the ACCC should litigate more frequently. He is prepared to take action even if the law is unclear and success is not assured, suggesting a tougher enforcement approach.Following the Metcash decision, the ACCC is testing thecommercial veracity of its competition theories to a higher degree.Commentators have suggested that the ACCC under Rod Sims willbe more pragmatic and commercially nuanced in its analysis ofcompetition issues. 13
  14. 14. Pragmatic and commercial focusThe practical outcome of Metcash is that the Federal Court expects anycompetition analysis to be pragmatic and commercially focussed.• The Federal Court confirmed that economic theory must be linked to commercial reality. Any competition analysis must apply theory in light of actual market circumstances as supported by objective evidence.• The ACCC subsequently issued a press release to confirm it would undertake competition analysis based on commercially relevant facts, assessments and evidence and not speculative possibilities.A pragmatic and commercially focussed approach is fact intensive:• A greater focus on ACCC information gathering to support any future competition analysis.• The ACCC may issue more statutory „section155‟ notices to compel the disclosure of information.• The ACCC could encourage third parties to substantiate their submissions during the ACCC „market inquiry‟ consultation processes so that the ACCC has cogent evidence of anti-competitive effects. 14
  15. 15. MINING AND RESOURCES Mergers and acquisitions Acquisitions of assets and shares 15
  16. 16. Mergers andThe prohibition in section 50 acquisitionsPolicy mischief:• Firms with substantial market power (SMP) can raise prices and reduce output to extract value from consumers.• Firms can achieve SMP by acquiring their competitors.Section 50 of the Competition & Consumer Act 2010 (Cth):• A corporation/person must not directly or indirectly acquire: Statutory elements: • shares in the capital of a body corporate/corporation; or: • Acquisition of shares or • any assets of any corporation/person, assets• if the acquisition would: • Actual or likely effect on an Australian market • have the effect; or • be likely to have the effect, • Substantial lessening of competition in market• of substantially lessening competition in a market. 16
  17. 17. Mergers andHow many acquisitions raise concerns? acquisitions Acquisitions reviewed in 2010-1162% No concerns or need for public review 29% Unconditionally cleared after public review Withdrawn Allowed to proceed with undertakings Confidentially opposed Publicly opposed (including Metcash) 4% 3% 1% 1%Of the 377 acquisitions considered for compliance by the ACCC in 2010-11, only 3 were publicly opposed. 17
  18. 18. Mergers and Voluntary pre-notification acquisitions• Notifying a merger to the ACCC is voluntary in Australia, although most countries operate mandatory pre-notification regimes.• ACCC expects to be notified in any of the following circumstances: • merger would result in the Acquirer achieving an Australian An Australian market market share, by any measure, of 20% or more; share of 20% is the „notification threshold‟. • merger would result in a substantial conglomerate effect; • merger would result in significant increase in vertical integration; • complaints to the ACCC by third parties are likely; or • ACCC has previously notified the parties, or the industry generally, that the ACCC expects to be notified.• All Foreign Investment Review Board (FIRB) submissions are automatically notified to the ACCC by FIRB.• The ACCC may also self-initiate a review if it becomes aware of a merger that is likely to raise concerns. 18
  19. 19. Mergers andDifferent merger strategies acquisitionsThe Acquirer in a merger has a number of potential merger strategies: Almost all mergers notified to the ACCC1. „Do nothing‟ and proceed with the merger, normally only where there involve either a are no competition concerns. courtesy notification or a request for informal clearance.2. Courtesy notification, typically in the form of a letter to the ACCC explaining the merger and identifying there is no section 50 issue. The formal3. Informal clearance, normally where the ACCC expects to be notified clearance process or there are any material competition issues. has never been used given its inflexibility.4. Formal clearance, involving a statutory merger review procedure with appeal rights, granting statutory immunity. Declaratory relief was sought by AGL5. Authorisation, involving a request for statutory immunity from the when acquiring an Tribunal on the basis that there are net public benefits. interest in the Loy Yang power station.6. Declaratory relief, involving an application for a court declaration to the effect that there is no contravention of section 50. Metcash sought to7. Force an injunction, by threatening to proceed with a merger that is force an opposed by the ACCC, running the risk of penalties and divestiture. injunction, a high 19 risk strategy.
  20. 20. Mergers and Informal clearance acquisitionsIf clearance is granted, the Acquirer obtains a non-binding “letter of Three types of reviews:comfort” from the ACCC that it will not oppose the acquisition butreserves the right to do so should new information come to light Confidential review takes 2-4 weeks, results in a highly qualified view.Informal clearance provides significant procedural flexibility: Becomes a basic review once the merger enters• The procedure is documented in the ACCC‟s Merger Review the public domain. Process Guidelines but has no formal statutory basis Basic review• Application involves Acquirer providing the ACCC with a detailed takes 2-6 weeks, results in a letter of comfort or a written submission. Vendor normally comments on the draft. statement of issues.• For more difficult submissions, executives of Acquirer and Vendor and Comprehensive review their lawyers may meet with the ACCC to answer questions. takes as long as is necessary and may• If ACCC has concerns, greater scope for parties to make involve negotiation of submissions and negotiate undertakings to resolve concerns. undertakings, but results in a letter of comfort or an expression of ACCC• No appeal rights from ACCC‟s decision, so a decision is normally opposition to merger. swift (compared to other jurisdictions) and is final. 20
  21. 21. Mergers and Informal clearance procedure acquisitions Stage 1 Public informal Confidential informal clearance application clearance application submitted submittedConfidentialreview Decision not to No concerns ACCC staff initial ACCC staff provide oppose and informal competition an clearance granted assessment indicative, confidenti al view Concerns No concerns Basic Mergers Committee Staff paper review Market inquiries and or full Commission public consultation Once merger is public, ACCC decision commences market inquiries Stage 2 Concerns Further market Statement of issues inquiries and Comprehensive published on ACCC negotiation of any review website undertakings Staff paper Decision not to No concerns Concerns Decision to oppose Full Commission oppose and informal and informal decision clearance granted clearance not granted 21
  22. 22. Mergers and Merger guidelines and methodology acquisitionsMerger guidelines identify how the law will be applied to the facts:• Merger analysis is highly complex and involves a particular methodology as well as theories of competitive harm.• Merger guidelines provide transparency in the ACCC‟s analysis and assists parties to identify any competition issues.Methodology for merger analysis:1. Identify the relevant markets and any competitive overlap.2. Identify the theory of competitive harm and the key issues.3. Apply the statutory factors. Merger analysis is not intended to be a „tick4. Identify any other relevant factors. the box‟ exercise: the analysis is complex5. Undertake a forward-looking comparison of the factual (with the and highly fact specific. merger) and the counterfactual (without the merger) to determine if any lessening of competition is substantial. 22
  23. 23. Mergers andMarket definition acquisitionsFirst stage in merger analysis is to define the markets and identify anycompetitive overlap between the Acquirer and Target businesses. Heineken• Not intended to be „hard and fast‟, rather intended as a tool to assist analysis of sources of market power. Premium beer• Four dimensions: product, functional, geographic, temporal (PFGT) Beer• Smallest PFGT area within which monopolist could profitably sustain a small but significant (5%) non-transitory increase in price (SSNIP). Alcoholic beverages• Most important consideration is product substitutability. Products that Beverages are substitutes are in the same market.• Substitutability can also be applied to determine the geographic and functional boundaries, for example • good in Sydney not easily be substituted for a good in Perth; • crate of apples sold at wholesale cannot be easily substituted for single apple sold at retail (although other factors are also used to determine functional markets, such as vertical efficiencies) 23
  24. 24. Mergers andPorter ‘5 Forces Model’ (1979) acquisitionsCompetition analysis involvesa two stage process tosimplify a complex analysisinvolving many variables.First, a market is defined toidentify key competitors withthe Supplier and the field ofimmediate competitive rivalry.Second, the market is used toidentify the sources ofpotential competition andadditional constraints on themarket power of the Supplier.Merger analysis essentiallyfollows this general approach. 24
  25. 25. Mergers andTheories of competitive harm acquisitions• ACCC classifies type of merger based on whether it is horizontal, vertical or conglomerate.• Merger Guidelines identify the particular concerns and factors to be considered when analysing each of these different types of mergers.• ACCC analyses each merger type with regard to unilateral and co-ordinated effects.. Additional factors relevant to unilateral effects Horizontal mergersHorizontal Significance of the merger parties to competition focus on the removalmergers Closeness of the merger parties competitive overlap. Rival‟s responses Vertical mergers focusVertical Incentive and ability to foreclosemergers on issues of vertical Likely effect of any foreclosure foreclosure. Access to commercially sensitive information Barriers to entry at all levels of vertical supply chain Conglomerate mergers focus on bundling andConglomerate Bundling and tying of products tying issuesmergers Formerly separate markets becoming single market 25
  26. 26. Mergers andStatutory criteria acquisitionsIn order to determine the effect of a merger, the ACCC applies statutoryfactors to identify the levels of market power of the parties:• the actual and potential level of import competition in the market; Identifies ease of market entry by• the height of barriers to entry to the market; potential competitors• the level of concentration in the market (see next slide);• the likelihood that the acquisition would result in acquirer being able Identifies actual level to significantly and sustainably increase prices or profit margins; of competitive rivalry within and between• the extent to which substitutes are available in the market or are the relevant markets likely to be available in the market;• the dynamic characteristics of the market, including growth, Identifies market innovation and product differentiation; changes over time• the likelihood that the acquisition would result in the removal from Identifies unique the market of a vigorous and effective competitor; and features of target• the nature and extent of vertical integration in the market. 26
  27. 27. Mergers andMarket concentration (HHI Index) acquisitionsHerfindahl-Hirschman Index (“HHI”): Entity Share Square A 50% 2500• Sum of the squares of the market shares. B 30% 900• Market shares may be calculated by reference to C 20% 400 capacity, sales volumes and/or sales values Pre-merger HHI 3600ACCC unlikely to have horizontal competition concerns if: Entity Share Square A 50% 2500• post-merger HHI is < 2000; or B+C 50% 2500• post-merger HHI is ≥ 2000 with a delta < 100 Post-merger HHI 5000 Post-merger HHI 5000HHI is consistent with approach used in US and EU. Pre-merger HHI -3600Not determinative of ACCC‟s view, just one of many factors HHI delta 1400 27
  28. 28. Mergers andSection 87B undertakings acquisitionsACCC may decide not to oppose the merger on the condition that theparties comply with court-enforceable undertakings.• Undertakings are voluntary and typically involve the restructuring of the merger to address the ACCC‟s competition concerns.• ACCC favours structural solutions (such as divestiture of assets) rather than behavioural undertakings (such as price and service guarantees), as the latter can be inflexible and difficult to monitor.• ACCC will consider the effectiveness of the remedy, how difficult it will be to administer, the ability of the firm to deliver the required outcomes, and monitoring and compliance costs.• ACCC normally undertakes market inquiries on proposed undertakings.Section 87B undertakings are public. They may be enforced in courtby the ACCC, including via compliance orders and damages. 28
  29. 29. Hypothetical exampleExample• Origin Energy Limited (ASX:ORG) makes an off-market takeover bid for 100% of the shares in Santos Limited (ASX:STO), conditional on ACCC clearance.Issues• What is the business rationale for the acquisition ?• What are the relevant markets and areas of actual or potential competitive overlap ?• What is the likely impact of the acquisition on competition in each market ?• Do market concentration, or other vertical, horizontal or conglomerate competition issues, arise such that informal or formal clearance should be sought from the ACCC ?• If so, when and how should the ACCC be approached, given confidentiality issues and ASX takeover processes?• Can undertakings be offered to the ACCC to address any adverse issues and secure a regulatory clearance ?• If clearance by the ACCC is unlikely, should an authorisation be sought and, if so, what public benefits arise ? 29
  30. 30. MINING AND RESOURCES Multi-party conduct Long-term supply contracts and exclusivity 30
  31. 31. The key prohibition in section 45 Multi-party conduct• Section 45 of Competition and Consumer Act (CCA) applies to any provision in a contract, agreement or understanding. Conduct that may SLC• An entity must not enter into, or give effect to, any such provision if it has the purpose, effect or likely effect of substantially lessening competition (SLC) in any market. Cartel provisions• Types of provisions that may give rise to issues include: – co-ordination between competitors, particularly prices – information exchanges between competitors Exclusionary provisions – market division or sharing, including non-competes – collective boycotts and refusals to supply or acquire – foreclosure of competition via long-term contracts Exclusive dealing• Many of these issues are also addressed by other more specific provisions of the CCA. Section 45 is the catch-all „rule of reason‟ prohibition. Particular conduct may be prohibited on „per se‟ basis. Venn diagram 31
  32. 32. Substantial lessening of competition Multi-party conductKey concepts:• Market definition – what is the relevant market in Australia ? – Product, geographic and functional boundaries of a market – Example: wholesale gas market in Queensland• Nature of „arrangements‟ and „understandings‟ – Not limited to written contracts, also includes informal arrangements and verbal understandings (although evidential issues in proving this). – Understandings may be inferred by a court in certain circumstances• Identification of anti-competitive effects – A „future with and without‟ or „future counterfactual‟ analysis is applied. – The state of competition in the entire market in the foreseeable future is identified assuming that the relevant provision applies (i.e., the „factual‟) and this is contrasted against a hypothetical future scenario where the provision does not apply (i.e., the „counterfactual‟). – The two situations are contrasted to determine if any lessening of competition is „substantial‟ relative to competition in the entire market.• „Substantial‟ can be a relatively low threshold – meaningful or relevant. 32
  33. 33. Exclusive dealing and market foreclosure Multi-party conduct• Section 47 of the CCA regulates „exclusive dealing‟, which regulates exclusivity in vertical supply contracts (vertical restraints). Supplier• Section 47 is complex and covers a number of different supply and acquisition permutations (e.g., supply on condition of no re-supply).• Most permutations are only anti-competitive if they substantially Acquirer lessen competition (SLC): – In a vertical context, the SLC analysis normally focussed on „market foreclosure‟ – including aggregated over many contracts. Exclusive dealing – Concerns will arise if exclusivity prevents third parties from occurs when one competing to supply or acquire goods or services over a person trading significant period of time (say >2 years) where this is significant with another relative to the overall level of competition in the market. imposes some restrictions on the• “Third line forcing” (3LF) is not subject to an SLC test, but is rather a other‟s freedom „per se‟ contravention of the CCA. to choose with – 3LF: Supplying only if the acquirer also acquires goods and whom, in what, or services from a third party, or refusing to supply if the acquirer where they deal. does not do so. 33
  34. 34. Long-term supply contracts Multi-party conduct• Development of natural resources is often underpinned by long-term contracts. Long-term contracts are well suited to pioneering, large scale, long-lived, „sunk‟ investments.• Most contracts have a foreclosing effect: if property is supplied to X, the same property cannot be supplied to Y. Competition concerns can arise where this is taken to extremes: – A contract (including when aggregated with other contracts) removes a significant fraction of supply or demand from the “market”, hence competition is diminished as the opportunity to engage in certain transactions is denied to competitors. – The contract is for an abnormally long term, so there is little opportunity for competitors to compete „for‟ the supply in periodic renewals.• More importantly, duration can exacerbate the effect of other provisions that are potentially anti-competitive (eg take-or-pay, MFN clauses, or first & last rights of refusal).• A long-term contract may be justified on the basis that the natural resource would not be developed in the absence of the contract. However, the CCA applies on a continuing basis over the term of the contract, hence circumstances may change over time.• It may therefore be necessary to seek public benefit „authorisation‟ from the ACCC to protect against changes in circumstances during the term of the contract, yet authorisations are costly to obtain and may have a term less than the contract term. 34
  35. 35. Restraint of trade Multi-party conduct• The common law doctrine of restraint of trade continues to apply to contracts in Australia, notwithstanding the existence of the CCA.• The doctrine requires that any restraint on trade must be justifiable, reasonable and proportionate to the commercial interests to be protected. The key issues are therefore: – What commercial interests are protected ? – Is the scope and duration of the restraint reasonable and proportionate to those interests ?• Severance clauses are important where a restraint of trade is included, including „ladder clauses‟ that cover different permutations.• Restraints are commonly encountered in the following circumstances: – restraining vendors in a business sale and purchase contract; – restraining key employees or consultants, particularly where they have contributed critical knowledge or intellectual property. 35
  36. 36. Hypothetical exampleExample• Santos enters into a 30 year contract to supply all of AGL‟s wholesale gas requirements in Australia. AGL must acquire all of its wholesale gas exclusively from Santos.Issues• What is the business rationale for the 30 year duration and exclusivity?• What are the relevant markets affected by the contract ?• What is the likely impact of competition in each market ? – What competitors and potential competitors are foreclosed and is this foreclosure material relative to the size of the Australian wholesale gas market ? – What percentage of gas supply in the wholesale market is foreclosed over the contract term and is this material? – Are there other similar Santos contracts that also have a foreclosing effect ?• Is there a „substantial‟ lessening of competition on a future „with and without‟ test?• If so, is there sufficient net public benefit that may enable authorisation to be sought from the ACCC ? 36
  37. 37. MINING AND RESOURCES Multi-party conduct Joint ventures and co-ordinated conduct 37
  38. 38. Cartel provisions Multi-party conduct • Relatively new set of provisions in the Competition and Consumer Act, directed at „hard core cartels‟, which can result in imprisonment for up to 10 years for individuals. • In a mining and resources context, these types of provisions can be found in unincorporated JV agreements and incorporated JV shareholder agreements, but a JV defence applies.1. Competition condition 2. Purpose/effect condition Yes The provision is a cartel provision and hence thereAre two or more parties to a Yes Does the provision of the is a „per se‟ contravention.contract, arrangement or CAU have the purpose orunderstanding (CAU) in effect of fixing prices?competition with each other? or May also be subject to 2. Purpose condition pecuniary penalties in the civil jurisdiction. For Does the provision of the corporations this is up Criminal offence if… CAU have the purpose of: to $10 million per • an intention to make or contravention (or 3 (a) preventing, restricting or give effect to such an times value of benefit limiting agreement; and received if this is production, capacity or • knowledge or belief supply ? greater, or 10% of that the agreement annual turnover if contains a cartel (b) allocating benefits cannot be provision. customers, suppliers or estimated) 38 territories?
  39. 39. Exclusionary provisions Multi-party conduct • Exclusionary provisions are commonly encountered whenever two or more competitors agree not to supply goods or services to, or acquire goods or services from, a third party. • Again, in a mining and resources context, these types of provisions are commonly found in JV agreements, but a JV defence applies.1. Competition condition 2. Purpose condition Yes The provision is an exclusionary provision andAre two or more parties to a Yes Does the provision of the hence there is a „per se‟contract, arrangement or CAU have the purpose of contravention.understanding (CAU) in preventing, restricting orcompetition with each other? limiting the supply of goods or services to or from particular persons or classes Unlike the cartel of person? Exclusionary provisions provisions, this is not a can be avoided by using Does the restrictive effect the cross-overlap criminal offence. apply to the same goods or exemption between ss 45 However, may be subject services in respect of which and 47. If drafted as to the same pecuniary the parties are in competition exclusive dealing (but penalties in the civil in element #1? with no SLC), the jurisdiction. provision is not an exclusionary provision. 39
  40. 40. Joint venture defence Multi-party conductHas the corporation made or Is the provision in a contract? Yesgiven effect to a cartel Yesprovision? Is the provision for the purposes of the relevant JV? YesIMPORTANT: Even if the JV Is the relevant JV for thedefence applies, the conduct production and/or supply ofmust still not SLC under the goods or services? Yessection 45. This can beproblematic if supply by the Is the relevant JV carried onJV constitutes a substantial jointly, either by the parties or The joint venture defenceproportion of the market. the incorporated JV entity? Yes appliesOften a conceptually tricky • Whether the same volume/timing/price of product would beissue for marketing JVs: is economically and technically feasible in the absence of the JV;the provision “for the • Whether the provision is reasonably necessary andpurposes of” the relevant proportionate to the needs of the relevant JV;production and/or supply JV? • Whether less restrictive alternatives could realise the volume/timing/price of the product in order to meet demand. 40
  41. 41. Incorporated Joint Venture Multi-party conduct • Participants Incorporated – hold shares in a limited liability Party A Party B company, rather than direct Joint Venture interest in the assets – make financial contribution by Joint Venture debt or equity 50% Shareholders 50% – not directly liable for debt and Agreement liabilities of the joint venture • The companyOwns JV Special Purpose Vehicle – is a separate legal entity and the assets vehicle of the joint ventureOperator – carries on the business and Contractual arrangements owns the assets – can borrow money and grant security over assets – profits returned as dividends • Management – board of directors • Documentation – Constitution and Shareholders Agreement 41
  42. 42. Unincorporated Joint Venture Multi-party conduct • Participants: Unincorporated – contractual relationship with each Joint Venture other, not agency or partnership – each participant takes share of Party A Party B product and sells individually – no separate legal personality for SPV SPV Joint Venture the joint venture Agreement – parties own undivided interest as tenant in common in all of the 50% 50% assets of the business owner of owner of – make financial contribution for assets as assets as purposes of the JV as required tenant in Contractual tenant in arrangements – liability is several rather than joint common common • Management Management – management committee made up Company as Agent of representatives of participants – generally one party is the operator of the joint venture – may utilise management coy • Documentation – Joint Venture Agreement 42
  43. 43. Practical tips for joint ventures Multi-party conductWhen negotiating JVs: Informal arrangements:• Document JVs with competitors up front • Caution with arrangements with• When negotiating JV, document intention competitors such as to enter into a formal agreement and set – consortium bidding; guidelines – entering into teaming• MoU clause stating no cartel provision arrangements; or created or given effect to until fully fledged – other collaborative arrangements, JV agreement executed • Could lead to an agreement that the• Document a binding contract to negotiate parties will not compete genuinely with• Be cautious about associated collusive each other behaviour not caught by the JV exception – bid rigging – market sharingConsider authorisation for JV:• Application to ACCC• Immunity from contravening TPA for conduct authorised• Public benefit outweighs anti-competitive detriment 43
  44. 44. Hypothetical exampleExample• Companies A and B decide to jointly market their respective shares of LNG arising from an LNG production joint venture. They also decide to jointly market domestic coal seam gas and co-ordinate all gas pricing in the context of a joint venture.Issues• What is the business rationale for the arrangement?• What are the relevant markets and areas of actual or potential competitive overlap ?• Are there any „cartel provisions‟ in the joint venture arrangement?• Are there any „exclusionary provisions‟ in the joint venture arrangement?• Does the joint venture defence apply? Specifically, can the marketing and pricing arrangements be legitimately considered to be “for the purposes of” a production or supply joint venture.• Do the arrangements have the effect of substantially lessening competition?• If so, are the public benefits of the arrangement sufficient to outweigh any anti- competitive detriments, such that a public benefit authorisation could be obtained? 44
  45. 45. MINING AND RESOURCES Single party conduct Access to essential infrastructure 45
  46. 46. Misuse of market power Single party conductPolicy mischief: Examples:• Firms with substantial market power (SMP) can raise prices • Denial of access to and reduce output to extract value from consumers. essential port or pipeline infrastructureMisuse of market power (section 46 of the CCA): • Pricing output below• Not all conduct by firms with market power is regulated. cost for a sustained period to harm• In order to contravene the Act: competitors (known as „predatory pricing‟). • a firm must have a substantial degree of market power • Where competitors are • it must take advantage of that market power (conduct using essential inconsistent with competitive firm) infrastructure, • it must has the purpose of harming competitors or increasing prices to preventing them competing. „price squeeze‟ them. • Requiring exclusivityGenerally, to avoid contravening section 46, a firm must act in a from customers tomanner consistent with a competitive firm . Generally, this foreclose supply byrequires a firm‟s conduct to have a legitimate commercial competitors.rationale. 46
  47. 47. Single party National Access Regime conduct• Negotiation is preferred means to determine terms of infrastructure access. • If services are supplied in a competitive market, the access provider has an incentive to provide reasonable access so regulation is unnecessary. • However, if only one facility and uneconomic to duplicate, a bottleneck„ exists. The absence of competition can lead to unreasonable terms. Professor Fred Hilmer• The National Access Regime is set out in Part IIIA of the Competition and Consumer Act and seeks to address such circumstances: • Enacted 1995 following Hilmer Report into Australian competition policy. • Objective of the regime is to facilitate access by third parties to essential infrastructure on reasonable terms and prices.• In the absence of the national access regime, access seekers would otherwise need to rely on litigation under s 46 if an access provider were to refuse to provide reasonable access• Regime only applies in limited circumstances, including that the infrastructure must be nationally significant and access must promote competition. 47
  48. 48. Single partyApplication of National Access Regime conduct• There are 3 principal means by which the National Access Regime may be applied: • Voluntary access undertaking; • State/Territory access regime that is certified effective; • Declaration, followed by negotiate/arbitrate.• Access undertakings: Providers of infrastructure services may voluntarily submit access undertakings to ACCC. An undertaking sets Where an access undertaking is out the terms (including price) on which access will be provided. accepted or an effective access• Effective access regimes: State and Territory governments may regime exists, an create access regimes for infrastructure services. Government can application for apply to National Competition Council (NCC) to have regime certified. declaration cannot be made • NCC makes recommendation to Federal Treasurer. Once certified, the regime regulates access to the infrastructure. 48
  49. 49. Single partyDeclaration and negotiate/arbitrate conductFirst stage, declaration of service: Declaration criteria:• Any person, or the Federal Treasurer or a State Minister may apply to • Competition the National Competition Council (NCC) seeking declaration of a service provided via facility (e.g., access to rail services provided over rail lines). • Bottleneck• NCC considers 5 key statutory questions, namely: (i) does access • National promote competition; (ii) is the facility uneconomic to duplicate; (iii) is the facility of national significance; (iv) is there no existing access regime; • Unregulated and (v) is increased access contrary to the public interest. • Public interest• NCC recommends to Minister. Minister must decide to declare or not.• Decisions of the Minister may be appealed to Competition Tribunal.Second stage, arbitrated terms of access to service:• If a party is unable to agree terms of access with service provider, it may notify an access dispute to the ACCC on any terms of access.• ACCC arbitrates the dispute and issues interim and final determinations.• Decisions of the ACCC may be appealed to the Competition Tribunal. 49
  50. 50. Single partyFortescue - rail access in the Pilbara conduct• Fortescue Mining Group (FMG) originally planned to use existing private Pilbara railway lines, owned and operated by BHP Billiton and Rio Tinto, to develop its Cloud Break deposit.• FMG applied to National Competition Council (NCC) in June 2004 for declaration of parts of the various railways. In November 2004, the NCC determined that it had jurisdiction, leading to appeals to the High Court which were ultimately dismissed.• The NCC recommended to the Commonwealth Treasurer that the Robe, Hamersley and Goldsworthy rail lines be declared. The Treasurer subsequently declared the Robe and Goldsworthy lines.• Rio Tinto subsequently appealed the Treasurer‟s decision to the Australian Competition Tribunal and subsequently the Full Federal Court who held that the Robe line should not be declared. The matter is currently on appeal to the High Court.• In the meantime, FMG has spent AUD 2.5 billion to construct its own private railway line. 50
  51. 51. Hypothetical exampleExample• A third party seeks access to privately owned LNG terminal facilities in a port. The owner of the facilities denies access (or seeks a excessive price or unreasonable terms and conditions for that access, so „constructively‟ refuses).Issues• Misuse of any substantial market power: – Does the owner of the LNG terminal facilities have substantial market power? – Is it profitable and commercially rational to provide access ? – What is the owner‟s commercial purpose in denying access ?• Application of the national access regime: – Are the facilities of national significance? – Can the „facility‟ be economically replicated ? – Would access promote competition in upstream/downstream markets ? – Is access to the LNG terminal facilities already regulated? – Is provision of access in the public interest (costs outweigh benefits)? 51
  52. 52. MINING AND RESOURCES Single party conduct Sectoral access regimes (National Gas Law) 52
  53. 53. The National Gas Law Single party conduct• Gas transmission and distribution pipelines are regulated under State- based sectoral access regimes rather than the National Access Regime: • The National Gas Law (NGL) is a State-based access regime that is certified as effective under the National Access Regime. • The National Gas (South Australia) Act 2008 implements the National Gas Law. Each of the States/Territories have enacted legislation to adopt the law.• The objective of the NGL is to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas.• The NGL applies to pipelines for the haulage of natural gas which is of “consumption quality” (i.e., processed).• Pipelines are classified into transmission pipelines (whose primary function is to convey gas to a market) and distribution pipelines (whose primary function is to reticulate gas within a market). 53
  54. 54. Gas market supply chain Single party conduct14426139 54 54
  55. 55. Single partyGas pipeline infrastructure conduct 55Source: AER
  56. 56. Single partyEconomic regulation of gas pipelines conductThe National Gas Law (NGL) applies different levels of economic regulation togas pipelines depending on the level of competition over the pipeline route:• „Covered pipelines‟ (CP) are subject to regulation, including a requirement for an ex ante access arrangement with reference tariffs for key services.• „Light regulation pipelines‟ (LRP) are also subject to regulation, but have a reporting requirement instead of an ex ante agreement and tariffs.• Pipelines that are not „covered‟ are not regulated.The regulation applied to CP and LRP includes:• general obligations not to hinder access and to supply information;• „ring-fencing‟ requirements vis a vis related businesses;• controls over contracts with associates that threaten competitive parity;• queuing requirements to ensure non-discriminatory access;• maintenance of a public register identifying spare pipeline capacity;• dispute resolution by Australian Energy Regulator over terms of access. 56
  57. 57. Single party Greenfield pipeline developments conduct• A key difficulty with the application of economic regulation is that it may deter investment in new infrastructure. Shareholder value will be eroded by any infrastructure investment where IRR < WACC.• In order to create incentives for investment, the NGL creates a specific regime for „greenfield pipeline‟ developments, namely: – a pipeline that is to be structurally separate from any existing pipeline (whether or not it is to traverse the same route; or – a major extension to an existing non-covered pipeline; or – a major extension to a light-regulated pipeline if granted an extension by the AER.• The regime allows a service provider to apply for a legally binding no-coverage determination of up to 15 years, providing certainty that the pipeline will not be regulated over that period.• International gas pipelines entering Australia can be exempted from price regulation instead, but still subjected to non-price regulation. 57
  58. 58. MINING AND RESOURCES Conclusions 58
  59. 59. Practical tips to mitigate riskStructure commercial • Structure commercial transactions within the permittedtransactions parameters of the law and exemptions. • Take care with provisions in joint ventures, particularly when they involve pricing and marketing.Consider pro-active • Authorisations and notifications.regulatory solutions • Informal clearances and regulatory approvals. • Pro-active regulatory exemptions.Minimise anti- • When meeting commercial objectives, prefer conductcompetitive effects which has a less restrictive effect on competition. • Ensure that any restraints are justifiable and proportional to their intended commercial purpose.Ensure conduct has • Ensure that the conduct is motivated by a legitimate andlegitimate purpose defensible commercial purpose, not a purpose of restricting competition or harming competitors. 59
  60. 60. Questions? 60
  61. 61. Our international practiceDisclaimerThe purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose LLP, NortonRose Australia or Norton Rose OR LLP on the points of law discussed. No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part ofNorton Rose Group (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to 61a partner or director is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose OR LLPor Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates.