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1 Competition and access in mining and resources Dr Martyn Taylor Partner martyn.taylor@nortonrose. com August 2012 MINING AND RESOURCES

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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Page 1: Competition and Access Issues in Mining And Resources

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Competition and access in mining and resources

Dr Martyn [email protected]

August 2012

MINING AND RESOURCES

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Overview

1. Competition issues in mining & resources

2. Australian Competition & Consumer Commission

3. Acquisitions of assets and shares

4. Long-term supply contracts and exclusivity

5. Joint ventures and co-ordinated conduct

6. Access to essential infrastructure

7. Sectoral access regimes – National Gas Law

Dr Martyn TaylorPartner +61 2 9330 [email protected]

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What are the competition

issues in mining & resources?

MINING AND RESOURCES

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• 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.

Objectives of competition law

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Structure of competition law

Competition regulation

Single party conduct

Multi-party conduct

Mergers and acquisitions

• Misuse of market power• National access regime• National Gas Law (gas pipelines)

• Anti-competitive agreements • Restraints of trade• Cartel conduct• Exclusive dealing • Exclusionary provisions (boycotts)

• Anti-competitive acquisitions

‘Per se’ prohibition• Conduct is considered so harmful it is

deemed to be anti-competitive• Example: price fixing by cartel

‘Rule of reason’ prohibition• Conduct is considered harmful only if it

has an anti-competitive effect• Example: acquisition of an asset

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Where can competition issues arise ?

Early phase

Pre-production

Operations

Exit strategies

• Mining project acquisition (tenements, shares, assets, contracts)• Contingent acquisitions and options (eg Farm-in arrangements)• Structuring of exploration joint ventures • 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• Long-term sale and offtake contracts• Structuring of production joint ventures• Collective bargaining authorisations

• Structuring of marketing joint ventures• Requests by competitors for access• Risks of price and output co-ordination• Regulatory investigations• Anti-competitive provisions in contracts

• Sale of assets• Sale of shares• Restraints of trade• IPO disclosures

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Illustrative list of recent competition issues

Mergers and acquisitions

Multi-party conduct

Single party conduct

• ACCC authorisation of joint gas marketing by North West Shelf Gas Project producers.

• Collective bargaining approval for Surat coal producers for Surat Basin rail links.

• Collective bargaining approval for Bowen/Galilee coal producers for Hay and Abbot Point rail links.

• Authorisation of Hunter Valley rail network and export coal chain.

• Collective bargaining approval for Wiggin Island coal producers for Gladstone Port rail links.

• ACCC authorisation of joint gas marketing by Gorgon Gas Project producers.

• Long-running litigation over rail access in the Pilbara region between Fortescue Mining, BHP Billiton and Rio Tinto.

• 15 year ‘no coverage’ application for Australia Pacific LNG Gladstone Pipeline.

• Access regulation of Roma to Brisbane gas pipeline.

• Access regulation for Amadeus gas pipeline.

• Certification of Dalrymple Bay Coal Terminal access regime.

• Investigation of Santos regarding access to oil storage facility at Port of Brisbane.

• ACCC clearance of APA’s acquisition of Hastings Fund (gas transmission pipelines).

• ACCC clearance for Arrow Energy acquisition of Bow (wholesale gas for LNG).

• Caltex acquisition of Mobile assets at Port of Gladstone (fuel terminal infrastructure).

• Proposed iron ore joint venture between BHP Billiton and Rio Tinto in Western Australia.

• Chinalco acquisition of various assets of Rio Tinto.

• ACCC opposition to Santos’ proposed acquisition of QGC.

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The Australian Competition &

Consumer Commission

(ACCC)

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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.

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How does the ACCC operate ?

• The ACCC comprises an independent statutory Commission of seven full-time Members and four Associate Members.

• 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.

• ACCC decisions are made through formal Commission meetings:

• Various Sub-Committees exist with delegated powers to make decisions on matters that are less significant.

• Only the Full Commission itself can decide to start court action, 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 number of Divisions and Groups.

• The staff are responsible for investigating conduct and making recommendations to the Commission via a ‘staff paper’.

Sub- Committee

Relevant Division within

ACCC

Full Commission

Commission

Staff

A ‘staff paper’ is confidential but can sometimes be obtained via an FOI or in litigation discovery.

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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.

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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

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Change in approach at the ACCC

Graeme Samuel ended his eight year tenure as Chairman of the ACCC 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 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 the commercial veracity of its competition theories to a higher degree.

Commentators have suggested that the ACCC under Rod Sims will be more pragmatic and commercially nuanced in its analysis of competition issues.

Rod Sims, ACCC Chairman

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Pragmatic and commercial focus

The practical outcome of Metcash is that the Federal Court expects any competition 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.

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Mergers and acquisitions

Acquisitions of assets and

shares

MINING AND RESOURCES

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The prohibition in section 50

Policy 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:

• shares in the capital of a body corporate/corporation; or:

• any assets of any corporation/person,

• if the acquisition would:

• have the effect; or

• be likely to have the effect,

• of substantially lessening competition in a market.

Statutory elements:

• Acquisition of shares or assets

• Actual or likely effect on an Australian market

• Substantial lessening of competition in market

Mergers and acquisitions

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How many acquisitions raise concerns?

63%

29%

4%3%

1%1%

Acquisitions reviewed in 2010-11

No concerns or need for public review

Unconditionally cleared after public review

Withdrawn

Allowed to proceed with undertakings

Confidentially opposed

Publicly opposed (including Metcash)

Of the 377 acquisitions considered for compliance by the ACCC in 2010-11, only 3 were publicly opposed.

Mergers and acquisitions

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Voluntary pre-notification

• 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 market share, by any measure, of 20% or more;

• 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.

An Australian market share of 20% is the ‘notification threshold’.

Mergers and acquisitions

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Different merger strategies

The Acquirer in a merger has a number of potential merger strategies:

1. ‘Do nothing’ and proceed with the merger, normally only where there are no competition concerns.

2. Courtesy notification, typically in the form of a letter to the ACCC explaining the merger and identifying there is no section 50 issue.

3. Informal clearance, normally where the ACCC expects to be notified or there are any material competition issues.

4. Formal clearance, involving a statutory merger review procedure with appeal rights, granting statutory immunity.

5. Authorisation, involving a request for statutory immunity from the Tribunal on the basis that there are net public benefits.

6. Declaratory relief, involving an application for a court declaration to the effect that there is no contravention of section 50.

7. Force an injunction, by threatening to proceed with a merger that is opposed by the ACCC, running the risk of penalties and divestiture.

Almost all mergers notified to the ACCC involve either a courtesy notification or a request for informal clearance.

The formal clearance process has never been used given its inflexibility.

Declaratory relief was sought by AGL when acquiring an interest in the Loy Yang power station.

Metcash sought to force an injunction, a high risk strategy.

Mergers and acquisitions

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Informal clearance

If clearance is granted, the Acquirer obtains a non-binding “letter of comfort” from the ACCC that it will not oppose the acquisition but reserves the right to do so should new information come to light

Informal clearance provides significant procedural flexibility:

• The procedure is documented in the ACCC’s Merger Review Process Guidelines but has no formal statutory basis

• Application involves Acquirer providing the ACCC with a detailed written submission. Vendor normally comments on the draft.

• For more difficult submissions, executives of Acquirer and Vendor and their lawyers may meet with the ACCC to answer questions.

• If ACCC has concerns, greater scope for parties to make submissions and negotiate undertakings to resolve concerns.

• No appeal rights from ACCC’s decision, so a decision is normally swift (compared to other jurisdictions) and is final.

Three types of reviews:

Confidential review takes 2-4 weeks, results in a highly qualified view. Becomes a basic review once the merger enters the public domain.

Basic review takes 2-6 weeks, results in a letter of comfort or a statement of issues.

Comprehensive review takes as long as is necessary and may involve negotiation of undertakings, but results in a letter of comfort or an expression of ACCC opposition to merger.

Mergers and acquisitions

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Informal clearance procedure

Public informal clearance application

submitted

Confidential informal clearance application

submitted

ACCC staff provide an indicative,

confidential view

Once merger is public, ACCC commences market inquiries

ACCC staff initial competition assessment

Decision not to oppose and informal

clearance granted

Concerns

Market inquiries and public consultation

Mergers Committee or full Commission

decision

Staff paper

Concerns

Statement of issues published on ACCC

website

Further market inquiries and

negotiation of any undertakings

Decision to oppose and informal

clearance not granted

Full Commission decision

Staff paper

No concerns

No concerns

Concerns

Decision not to oppose and informal

clearance granted

No concerns

Stage 1

Stage 2

Confidential review

Basic review

Comprehensive review

Mergers and acquisitions

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Merger guidelines and methodology

Merger 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.

4. Identify any other relevant factors.

5. Undertake a forward-looking comparison of the factual (with the merger) and the counterfactual (without the merger) to determine if any lessening of competition is substantial.

.

Merger analysis is not intended to be a ‘tick the box’ exercise: the analysis is complex and highly fact specific.

Mergers and acquisitions

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Market definition

First stage in merger analysis is to define the markets and identify any competitive overlap between the Acquirer and Target businesses.

• Not intended to be ‘hard and fast’, rather intended as a tool to assist analysis of sources of market power.

• Four dimensions: product, functional, geographic, temporal (PFGT)

• Smallest PFGT area within which monopolist could profitably sustain a small but significant (5%) non-transitory increase in price (SSNIP).

• Most important consideration is product substitutability. Products that 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)

.

Heineken

Premium beer

Beer

Alcoholic beverages

Beverages

Mergers and acquisitions

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Porter ‘5 Forces Model’ (1979)

Competition analysis involves a two stage process to simplify a complex analysis involving many variables.

First, a market is defined to identify key competitors with the Supplier and the field of immediate competitive rivalry.

Second, the market is used to identify the sources of potential competition and additional constraints on the market power of the Supplier.

Merger analysis essentially follows this general approach.

.

Mergers and acquisitions

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Theories of competitive harm

  Additional factors relevant to unilateral effects

Horizontal mergers

Significance of the merger parties to competition

Closeness of the merger parties

Rival’s responses

Vertical mergers

Incentive and ability to foreclose

Likely effect of any foreclosure

Access to commercially sensitive information

Barriers to entry at all levels of vertical supply chain

Conglomerate mergers

Bundling and tying of products

Formerly separate markets becoming single market

• 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.

.

Horizontal mergers focus on the removal competitive overlap.

Vertical mergers focus on issues of vertical foreclosure.

Conglomerate mergers focus on bundling and tying issues

Mergers and acquisitions

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Statutory criteria

In order to determine the effect of a merger, the ACCC applies statutory factors to identify the levels of market power of the parties:

• the actual and potential level of import competition in the market;

• the height of barriers to entry to the market;

• the level of concentration in the market (see next slide);

• the likelihood that the acquisition would result in acquirer being able to significantly and sustainably increase prices or profit margins;

• the extent to which substitutes are available in the market or are likely to be available in the market;

• the dynamic characteristics of the market, including growth, innovation and product differentiation;

• the likelihood that the acquisition would result in the removal from the market of a vigorous and effective competitor; and

• the nature and extent of vertical integration in the market.

Identifies ease of market entry by potential competitors

Identifies actual level of competitive rivalry within and between the relevant markets

Identifies unique features of target

Identifies market changes over time

Mergers and acquisitions

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Market concentration (HHI Index)

Herfindahl-Hirschman Index (“HHI”):

• Sum of the squares of the market shares.

• Market shares may be calculated by reference to capacity, sales volumes and/or sales values

ACCC unlikely to have horizontal competition concerns if:

• post-merger HHI is < 2000; or

• post-merger HHI is ≥ 2000 with a delta < 100

HHI is consistent with approach used in US and EU.

Not determinative of ACCC’s view, just one of many factors

Entity Share Square

A 50% 2500

B 30% 900

C 20% 400

Pre-merger HHI 3600

Entity Share Square

A 50% 2500

B+C 50% 2500

Post-merger HHI 5000

Post-merger HHI 5000

Pre-merger HHI -3600

HHI delta 1400

Mergers and acquisitions

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Section 87B undertakings

ACCC may decide not to oppose the merger on the condition that the parties 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 court by the ACCC, including via compliance orders and damages.

.

Mergers and acquisitions

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Example

• 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 ?

Hypothetical example

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Long-term supply contracts and exclusivity

Multi-party conduct

MINING AND RESOURCES

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• Section 45 of Competition and Consumer Act (CCA) applies to any provision in a contract, agreement or understanding.

• 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.

• Types of provisions that may give rise to issues include:

– co-ordination between competitors, particularly prices

– information exchanges between competitors

– market division or sharing, including non-competes

– collective boycotts and refusals to supply or acquire

– foreclosure of competition via long-term contracts

• 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.

The key prohibition in section 45

Conduct that may SLC

Cartel provisions

Exclusionary provisions

Exclusive dealing

Venn diagram

Multi-party conduct

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Key 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.

Substantial lessening of competition Multi-party conduct

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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).

• 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 lessen competition (SLC):

– In a vertical context, the SLC analysis normally focussed on ‘market foreclosure’ – including aggregated over many contracts.

– Concerns will arise if exclusivity prevents third parties from competing to supply or acquire goods or services over a significant period of time (say >2 years) where this is significant relative to the overall level of competition in the market.

• “Third line forcing” (3LF) is not subject to an SLC test, but is rather a ‘per se’ contravention of the CCA.

– 3LF: Supplying only if the acquirer also acquires goods and services from a third party, or refusing to supply if the acquirer does not do so.

Supplier

Acquirer

Exclusive dealing occurs when one

person trading with another

imposes some restrictions on the other’s freedom to choose with

whom, in what, or where they deal.

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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.

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• 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.

Restraint of trade Multi-party conduct

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Example

• 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 ?

Hypothetical example

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Joint ventures and co-ordinated

conduct

Multi-party conduct

MINING AND RESOURCES

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Multi-party conductCartel provisions

1. Competition condition

Are two or more parties to a contract, arrangement or understanding (CAU) in competition with each other?

2. Purpose/effect condition

Does the provision of the CAU have the purpose or effect of fixing prices?

2. Purpose condition

Does the provision of the CAU have the purpose of:

(a) preventing, restricting or limiting production, capacity or supply ?

(b) allocating customers, suppliers or territories?

(c) rigging bids?

or

The provision is a cartel provision and hence there is a ‘per se’ contravention.

Criminal offence if…

• an intention to make or give effect to such an agreement; and

• knowledge or belief that the agreement contains a cartel provision.

• 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.

Yes

Yes

May also be subject to pecuniary penalties in the civil jurisdiction. For corporations this is up to $10 million per contravention (or 3 times value of benefit received if this is greater, or 10% of annual turnover if benefits cannot be estimated)

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Multi-party conductExclusionary provisions

1. Competition condition

Are two or more parties to a contract, arrangement or understanding (CAU) in competition with each other?

2. Purpose condition

Does the provision of the CAU have the purpose of preventing, restricting or limiting the supply of goods or services to or from particular persons or classes of person?

Does the restrictive effect apply to the same goods or services in respect of which the parties are in competition in element #1?

The provision is an exclusionary provision and

hence there is a ‘per se’ contravention.

Unlike the cartel provisions, this is not a criminal offence.

However, may be subject to the same pecuniary penalties in the civil jurisdiction.

• 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.

Yes

Yes

Exclusionary provisions can be avoided by using the cross-overlap exemption between ss 45 and 47. If drafted as exclusive dealing (but with no SLC), the provision is not an exclusionary provision.

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Multi-party conductJoint venture defence

Has the corporation made or given effect to a cartel provision?

Is the provision in a contract?Is the provision for the purposes of the relevant JV?

The joint venture defence applies

Is the relevant JV for the production and/or supply of the goods or services?

Is the relevant JV carried on jointly, either by the parties or the incorporated JV entity?

Yes

Yes

Yes

Yes

Yes

• Whether the same volume/timing/price of product would be economically and technically feasible in the absence of the JV;

• Whether the provision is reasonably necessary and proportionate to the needs of the relevant JV;

• Whether less restrictive alternatives could realise the volume/timing/price of the product in order to meet demand.

Often a conceptually tricky issue for marketing JVs: is the provision “for the purposes of” the relevant production and/or supply JV?

IMPORTANT: Even if the JV defence applies, the conduct must still not SLC under section 45. This can be problematic if supply by the JV constitutes a substantial proportion of the market.

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Incorporated Joint Venture

Party A Party B

Special Purpose Vehicle

Incorporated Joint Venture

Joint Venture Shareholders

Agreement50%

Owns JV assets

Operator

50%

Multi-party conduct

• Participants– hold shares in a limited liability

company, rather than direct interest in the assets

– make financial contribution by debt or equity

– not directly liable for debt and liabilities of the joint venture

• The company– is a separate legal entity and the

vehicle of the joint venture– carries on the business and

owns the assets– can borrow money and grant

security over assets– profits returned as dividends

• Management– board of directors

• Documentation– Constitution and Shareholders

Agreement

Contractual arrangements

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Unincorporated Joint Venture

Party A SPV

Party B SPV

Unincorporated Joint Venture

Joint Venture Agreement

50% owner of assets as tenant in common

Multi-party conduct

Contractual arrangements

50% owner of assets as tenant in common

• Participants: – contractual relationship with each

other, not agency or partnership– each participant takes share of

product and sells individually– no separate legal personality for

the joint venture – parties own undivided interest as

tenant in common in all of the assets of the business

– make financial contribution for purposes of the JV as required

– liability is several rather than joint

• Management– management committee made

up of representatives of participants

– generally one party is the operator of the joint venture

– may utilise management coy

• Documentation– Joint Venture Agreement

Management Company as Agent

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When negotiating JVs:

• Document JVs with competitors up front

• When negotiating JV, document intention to enter into a formal agreement and set guidelines

• MoU clause stating no cartel provision created or given effect to until fully fledged JV agreement executed

• Document a binding contract to negotiate

• Be cautious about associated collusive behaviour not caught by the JV exception

Consider authorisation for JV:

• Application to ACCC

• Immunity from contravening TPA for conduct authorised

• Public benefit outweighs anti-competitive detriment

Practical tips for joint ventures Multi-party conduct

Informal arrangements:

• Caution with arrangements with competitors such as

– consortium bidding;

– entering into teaming arrangements; or

– other collaborative arrangements,

• Could lead to an agreement that the parties will not compete genuinely with each other

– bid rigging

– market sharing

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Example

• 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?

Hypothetical example

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Single party conduct

Access to essential

infrastructure

MINING AND RESOURCES

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Single party conduct

Policy mischief:

• Firms with substantial market power (SMP) can raise prices and reduce output to extract value from consumers.

Misuse of market power (section 46 of the CCA):

• Not all conduct by firms with market power is regulated.

• In order to contravene the Act:

• a firm must have a substantial degree of market power

• it must take advantage of that market power (conduct inconsistent with competitive firm)

• it must has the purpose of harming competitors or preventing them competing.

Generally, to avoid contravening section 46, a firm must act in a manner consistent with a competitive firm . Generally, this requires a firm’s conduct to have a legitimate commercial rationale.

Misuse of market power

Examples:

• Denial of access to essential port or pipeline infrastructure

• Pricing output below cost for a sustained period to harm competitors (known as ‘predatory pricing’).

• Where competitors are using essential infrastructure, increasing prices to ‘price squeeze’ them.

• Requiring exclusivity from customers to foreclose supply by competitors.

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National Access Regime Single party 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.

• 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.  

Professor Fred Hilmer

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Application of National Access Regime Single party 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 out the terms (including price) on which access will be provided.   

• Effective access regimes: State and Territory governments may create access regimes for infrastructure services.  Government can apply to National Competition Council (NCC) to have regime certified.

• NCC makes recommendation to Federal Treasurer. Once certified, the regime regulates access to the infrastructure.

 

Where an access undertaking is accepted or an effective access regime exists, an application for declaration cannot be made

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Declaration and negotiate/arbitrate

First stage, declaration of service:

• Any person, or the Federal Treasurer or a State Minister may apply to the National Competition Council (NCC) seeking declaration of a service provided via facility (e.g., access to rail services provided over rail lines).

• NCC considers 5 key statutory questions, namely: (i) does access promote competition; (ii) is the facility uneconomic to duplicate; (iii) is the facility of national significance; (iv) is there no existing access regime; and (v) is increased access contrary to the 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.

Single party conduct

Declaration criteria:

• Competition

• Bottleneck

• National

• Unregulated

• Public interest

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Fortescue - rail access in the Pilbara

• 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.

Single party conduct

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Example• 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)?

Hypothetical example

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Single party conduct

Sectoral access regimes

(National Gas Law)

MINING AND RESOURCES

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• 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).

Single party conductThe National Gas Law

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Gas market supply chain Single party conduct

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Gas pipeline infrastructure

Source: AER

Single party conduct

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The National Gas Law (NGL) applies different levels of economic regulation to gas 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.

Single party conductEconomic regulation of gas pipelines

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• 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.

Single party conductGreenfield pipeline developments

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Conclusions

MINING AND RESOURCES

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Structure commercial transactions

• Structure commercial transactions within the permitted parameters of the law and exemptions.

• Take care with provisions in joint ventures, particularly when they involve pricing and marketing.

Consider pro-active regulatory solutions

• Authorisations and notifications.

• Informal clearances and regulatory approvals.

• Pro-active regulatory exemptions.

Minimise anti-competitive effects

• When meeting commercial objectives, prefer conduct which has a less restrictive effect on competition.

• Ensure that any restraints are justifiable and proportional to their intended commercial purpose.

Ensure conduct has legitimate purpose

• Ensure that the conduct is motivated by a legitimate and defensible commercial purpose, not a purpose of restricting competition or harming competitors.

Practical tips to mitigate risk

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Questions?

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Disclaimer

The 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, Norton Rose 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 of Norton 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 a 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 LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates.

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