RBB Economics conference – response to keynote speech by ACCC Chair Rod Sims 21 November 2019

Thank you very much, George and RBB Economics, for inviting me to speak today. I am honoured to be responding to the ACCC Chair Rod Sims's speech at the ninth annual RBB Economics Conference.

As Rod indicated, the conference has become a fixture on the competition law calendar and Rod always uses the opportunity to give important insights into the current thinking of the Commission. Today was certainly no different.

When George asked me to speak today, he said it was an opportunity to give the 'Downesian' view of the state of competition law. Now, I did not study economics at university but rather majored in History and English. So this got me wondering if the Downesian view of competition law was in any way similar to the Dickensian view of competition law. Surprisingly it was;

• Great Expectations is a novel about the anticipation of a community awaiting the first new misuse of market power and concerted practices cases.
• Bleak House is perhaps a somewhat depressing dissertation on the passage by Parliament of the 'big stick' legislation.
• And dare I say Rod Sims would make a very good Oliver Twist – 'please sir, I want some more' powers and penalties for the ACCC.

Last year Caroline Coops addressed the role of the competition lawyer, the over-reliance on transparency to address market failure and the increasing expansion of the ACCC's role beyond its remit. A hard act to follow.¹

I would like to build on these themes and given the title of the conference today – 'What's next for competition law in Australia' – focus on the challenges and opportunities of the evolution of competition law (perhaps a more Darwinian than Dickensian theme) and the increased primacy of consumer outcomes.

Competition law in Australia seems to be under constant review and change. Legislators in Australia – unlike in other jurisdictions – have a habit, often encouraged by the ACCC, of changing the law constantly to address perceived 'failures'.

Most recently we have seen significant changes in relation to misuse of market power and concerted practices.² Only a couple of years on and further change is now mooted to be on the horizon – with discussion of changes to merger control, vertical arrangements, monopoly regulation and market study powers.

I am not going to touch on all the topics Rod raised but would like to look at each of these four areas of potential reform.

Mergers

Perhaps most important are the mooted potential changes to merger control that Rod has foreshadowed this morning.

What is the 'Simsian' view of the state of competition law here?

In his address to the Law Council of Australia two years ago, Rod expressed concern that the courts were placing over‑reliance on the evidence of merger parties in contested merger cases and indicated that the ACCC would move towards an approach which involved gathering substantially more evidence, similar to the US.³

Competition lawyers and clients can certainly attest to the fact that the ACCC has been more rigorous in its approach to collecting documents and evidence. However, it appears that this has not addressed the problem.

At this year's Law Council of Australia conference Rod repeated these concerns and stated that '[s]urely there is a problem when no contested merger hearing in the last 20 years has resulted in the Court or Tribunal blocking the merger?'⁴

Rod has again expressed a concern this morning that we are under-enforcing merger law to the detriment of our economy. The concern appears to be that Australian courts do not accept the 'conventional economic wisdom' that mergers resulting in high levels of concentration will usually reduce competition and that courts place too much weight on the testimony of executives of merger parties and too little on the incentives they have to merge.⁵

So what is the Downesian view of this issue?

I would argue that, to the contrary, merger law and the enforcement of it in Australia is very strong.

There have effectively only been three merger cases contested in court since the law was changed to a substantial lessening of competition test in 1993⁶ and another three authorisation applications in the Australian Competition Tribunal.⁷ However, as any good statistician would tell you, of the 300‑400 mergers the ACCC reviews each year,⁸ that is not a statistically significant number.

Rod has recognised the potential benefit to the economy of mergers and that mergers are not always self‑evidently anti‑competitive.⁹ While businesses are clearly motivated by profit, that is not their only motivation and profit can also be achieved without raising prices or involving negative consumer outcomes.

Merger parties are usually pretty well-advised and any practitioner will tell you that there are many potential mergers that come across our desk each year where we give parties fairly low prospects of obtaining ACCC clearance. Generally those mergers don't proceed or go anywhere near the ACCC. Unfortunately there are no public statistics on this – if there were it may give Rod Sims some comfort.

There are also a significant number of mergers that are blocked by the ACCC, accepted with undertakings or withdrawn by the parties following negative feedback from the ACCC during a review. By my calculations, somewhere between 2% and 5% of mergers reviewed by the ACCC over the past five years fall into one of these categories.¹⁰

Rod Sims himself has accepted that those cases that go to court tend to be the more marginal cases and given the time and expense of a court case the parties must have a pretty strong view of their prospects.¹¹ Courts are well-versed in assessing and weighing the merits of witnesses and other evidence – in competition cases as well as more generally. In Application for Authorisation of Acquisition of Macquarie Generation by AGL Energy Limited [2014] ACompT 1 the Tribunal commented that:

[T]he Tribunal appreciates the caution urged on it by the ACCC. The Tribunal looked carefully at all the evidence on the topic, including [the deponent's] evidence, and the ACCC's extensive submissions …¹²

Instead, I would argue that one of the flaws in our process is that, unlike some overseas jurisdictions,¹³ there is no speedy mechanism for a review of a merger decision, which is a disincentive to parties seeking them. However, there have been recent changes to the law, notably the introduction of the authorisation test,¹⁴ that provide an avenue for parties to obtain a simpler review of a merger decision and may over time give us a more statistically significant record to work with.

Having acted on the first authorisation under the new process,¹⁵ it is a workable process that, while informal clearance is likely to continue to be the dominant method of obtaining merger control, provides some benefits to merger parties. Engagement with the ACCC during the process was high, the ACCC treated the substance of the matter no differently to under an informal clearance process and was prepared to accept and consider undertakings offered in the course of the review.

One of the fundamental purposes of regulation and enforcement is deterrence, recognising that a regulator cannot detect and punish every contravention and instead seeks to encourage compliance. At this the ACCC has been extremely effective – more effective than it appears to realise. Reform should only be considered if there is evidence that these few losses have actually led to anti‑competitive effects – and as far as I am aware no real analysis of this has been undertaken.

Market studies

Turning now to another area of heightened activity and potential reform arising out of the concern that markets are failing consumers, the ACCC has conducted an increasing number of market studies and reviews over the past few years, with six ongoing inquiries and reviews as of today.¹⁶ However, Rod Sims has commented in other forums that the powers the ACCC has to conduct market studies are antiquated and inadequate.¹⁷

These powers were originally designed for price monitoring,¹⁸ but now are used for broader purposes such as proactively identifying risks to consumers and the competitive process that may require intervention and identifying any market failures and how to address them.

The ACCC has now called for its powers to be developed so that it can better fulfil these purposes.¹⁹ For example, the ACCC's power to compulsorily request information is limited to people who supply the relevant goods or services.²⁰ The ACCC has also suggested its compulsory information gathering power be expanded to parties who acquire those goods or services, parties who supply or acquire related goods or services or relevant third parties.²¹ There is a question whether the ACCC needs such expanded powers in this regard.

The increasing number of market inquiries – and particular industries have had more than one – leads to a heavy burden on business where there is no identified contravention of the law. For those of us who have been involved in market studies or inquiries where there is no suggestion of a business having engaged in any anticompetitive conduct, we have seen trailer loads of documents going to the ACCC at profound burden and cost.

Perhaps even more concerningly, the ACCC's market reviews may sometimes become unduly politicised. For example, the Federal Government has made use of the ACCC's electricity supply and prices inquiry report in its attempt to implement the 'big stick' energy bill, including divestiture powers.²² However, the Bill has been criticised for not addressing the issues raised by the ACCC and seeking to penalise firms by the government to 'look tough'.²³

While market studies can serve a worthwhile purpose – and we have heard from Rod on some of those this morning – and the ACCC does have an important role in examining the causes of market failure, we should caution against the expansion of the relevant powers and their overuse.

Monopoly regulation

Thirdly, we have heard the ACCC express concerns that the National Access Regime under Part IIIA does not effectively regulate vertically separated monopolistic infrastructure, and that new regulation may be needed for such monopolies.²⁴

The issue is said to arise because Part IIIA only applies where declaration of the infrastructure service will promote competition in dependent markets,²⁵ which is less likely to be the case when an operator of monopolistic infrastructure is vertically separated and therefore often has an incentive to provide access.

Rod has therefore suggested that a new regulatory regime for vertically separated monopolies would be based on a 'market power' test, with the aim of limiting monopoly prices, rather than focusing on whether declaration would promote competition in dependent markets.²⁶

The underlying rationale for such a proposal is that reduction in infrastructure prices will promote economic efficiency and ultimately benefit consumers.²⁷

However, there is clearly a debate to be had here – particularly in circumstances where the Productivity Commission and National Competition Council have indicated that, in some cases, negotiate / arbitrate regulation of monopolistic infrastructure which does not promote competition in dependent markets may simply result in a transfer of wealth or income redistribution from the access provider to the access seeker – that is, from a port to a shipper or an airport to an airline – and that transfer may not be passed on to consumers in the form of lower prices.²⁸

We do not understand the ACCC to be suggesting that income distribution is an appropriate goal for competition law – in fact the ACCC has previously said that should not be so.²⁹ However, there is a potential shift in the ACCC's view on the pursuit of profit towards seeing it in itself as being potentially problematic, something alluded to by Rod this morning and on which Caroline Coops commented last year.³⁰

And I'm sure the views of the Productivity Commission are well‑respected by those within this room, although it was interesting to see media reports of a former Chair of the ACCC advocating for reform on behalf of the airlines, and referring to the Productivity Commission as a bunch of 'economic eggheads... sitting in their Collins Street tower'.³¹ If there are any economic eggheads in the room today – and there may well be – I would say welcome, and hope that you have thick shells for the debates to come.

Section 47

I would now like to be shamelessly inconsistent and advocate for change in one particular area – vertical arrangements and section 47.

This was an area of reform recommended by the Harper review once s46 was amended. The review stated that:

As a general principle, the Panel believes that the CCA should not interfere with trading conditions agreed between buyers and sellers in connection with acquiring and supplying goods and services, unless those conditions have the purpose, effect or likely effect of substantially lessening competition.³²

It further went on to say:

The Panel agrees with the view expressed in many submissions that section 47 is unnecessarily complex and therefore difficult for business to understand and apply. The section focuses attention on particular forms of vertical restraints and directs attention away from the central issue – whether the restriction is anti‑competitive.³³

Now that the Harper Panel changes have been implemented, the only use that s47 has is as an anti‑overlap provision for cartel conduct. Section 47 is a curious section with different rules for supply and acquisition which seem to have no real basis. I have been practising competition law for over 20 years and regularly need to consult the Act on advices around s47.

As Harper recommended, a much simpler anti‑overlap provision for genuine vertical arrangements could be implemented³⁴ – with of course such arrangements being subject to a substantial lessening of competition test.

The ACCC could also issue guidelines around its views of vertical arrangements that would fall within the anti‑overlap – similarly to guidelines in the EU and the useful guidelines the ACCC has put out on the repeal of the IP exemption.

In my role on the Law Council we will be working with the ACCC and Treasury to hopefully facilitate some changes in this regard. And perhaps I am not being shamelessly inconsistent here – if the goal of legislative change is to plug evidence‑based gaps or remove evidence‑based anomalies I would say we are on strong ground.

Consumer law as a complement to competition law/ a facilitator of competition

Finally I would like to say something about consumer law and the increasing importance of consumer outcomes to competition as well as consumer law.

When Rod Sims first came to the role he indicated that he was passionate about consumer law and one of his main goals was to elevate the status of consumer law within the business community and the competition law intelligentsia.³⁵ Rod, I for one was always as passionate about consumer law as I am about competition law, but I agree that was not the view expressed by all my colleagues.

Consumer law has always played an important role as a complement to competition law, for example by prohibiting companies from misleading consumers, which also facilitates a process of fair competition. However, this increased consciousness of consumer law has arguably led to an increased focus on consumer outcomes equal to economic efficiencies in more traditional competition law areas. There is also now an increasing convergence of consumer and competition law, particularly seen in the issues around data Rod has spoken about this morning.

This is an area which will obviously continue to develop and, Rod, I think we can safely say that it will be one of your many legacies that you have raised the awareness and role of consumer law in the minds of consumers, businesses and lawyers. It is certainly no longer the poor cousin.

Conclusion

So what's next for competition – and consumer – law? It seems potentially a lot.

But without risking sounding like a Scrooge too close to Christmas, I would caution against (too much) change and argue that under the helm of the ACCC and Rod Sims, competition – and consumer – law is enforced vigorously and is front of mind and, dare I say, feared by the business community.

Note: this paper represented the personal views of the author, and not those of Allens.