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Standing Committee on Economics
Australian Competition and Consumer Commission annual report 2016

BEZZI, Mr Marcus, Executive General Manager, Competition Enforcement, Australian Competition and Consumer Commission

DE GRUCHY, Ms Rayne, Chief Operating Officer, Australian Competition and Consumer Commission

GREGSON, Mr Scott, Executive General Manager, Consumer Enforcement, Australian Competition and Consumer Commission

GRIMWADE, Mr Tim, Executive General Manager, Consumer, Small Business and Product Safety Division, Australian Competition and Consumer Commission

MAYBURY, Mr Peter, Chief Finance Officer, Australian Competition and Consumer Commission

RIORDAN, Mr Sean, General Manager, Industry Structure and Compliance, Australian Competition and Consumer Commission

SIMS, Mr Rod, Chairman, Australian Competition and Consumer Commission

Committee met at 11:29

CHAIR ( Mr Coleman ): I declare open this hearing of the House of Representatives Standing Committee on Economics. I welcome representatives of the Australian Competition and Consumer Commission to appear before the committee. This is our first hearing with the ACCC in 2017 and our second hearing with the regulator in this parliament. At the last public hearing with the ACCC in October, we discussed issues related to the effects tests in Australia's competition law, the current powers, sectors of concern and resourcing of the ACCC. We also discussed at some length competition in the banking sector.

Since the previous hearing with the ACCC, the government has responded to the first report of the committee's review of the four major banks. In response to recommendation 3, the government will provide the ACCC with $13 million over four years to establish a dedicated unit to undertake regular in-depth inquiries into specific financial system competition issues. The committee will examine some of these topics today.

I remind you all that, although the committee does not require you to give evidence under oath, the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. Giving false or misleading evidence is a serious matter and may be regarded as contempt of parliament.

Mr Sims, would you now like to make an opening statement before we proceed to questions?

Mr Sims : I'd be delighted just to go straight to questions, thank you, Chair.

CHAIR: Terrific. Let's get to it. As I mentioned a moment ago, one of the key issues out of our inquiry into the banks was the apparent lack of regulatory responsibility for some competition issues in the financial sector. As a consequence of our recommendation, the government has moved to establish the new Financial Services Unit within the ACCC. My understanding is that part of this work has a mandate to commence, particularly in relation to any attempt by the banks to increase interest rates as a consequence of the major bank levy. The ACCC is effectively empowered to be working on these issues now. Could you please update us on those issues, the Financial Services Unit and the ACCC's activities in that area.

Mr Sims : Thank you, Chair. I guess we should thank you for giving us this extra role and facilitating the resources and the people to do the task. I certainly well remember our discussion last time. We have established the unit. We've pretty well fully staffed it. We've had a lot of consultation with a lot of people—obviously the banks but also the financial sector regulators. Most importantly, we have got our section 95ZK notices out. When we're asked to do an inquiry, that's the funny name of the section we use to put out compulsory information notices, which must be complied with. Let me step back.

As you said, we've been set up to look at, on a continuing basis, competition in the banking sector, but the first year is a bit different. The first year we have been given a specific task—to see to what extent and why the bank levy may be passed through. So obviously we're mainly focused on that, but being focused on that also sets a fantastic platform to be able to pick up on our competition work from July next year, particularly following the Productivity Commission's review.

So what we've done so far is use our information notices to seek to understand how banks have made their interest rate decisions in the recent past, and that's going to be very helpful. First, for example, when the five banks are making decisions, that's going to help us understand if they are looking at each other, what assumptions they are making about what their competitors are doing and, importantly, how much they are looking at the small regional banks. Just understanding the competitive environment when they're making those decisions will, I think, be really illuminating, because that's their most important competitive decision. There's a whole range of other decisions they make, but that's the most important one. That will be very helpful. Second, working out how much they've got an eye to what the RBA is doing with cash rates versus other influences—getting a good understanding of that. Many speculate about that, and there's much said about it, but we'll be able to fully understand that. And, third, interestingly, we'll be able to work out to what extent they're weighing the interests of their profitability versus the interests of their customers, be they depositors or borrowers—just how they go about weighing that up. You can see that all three of those factors I've mentioned really come together to help us understand how they make those decisions. With that base of information, we'll obviously be keeping a close eye on what they're doing. And this won't be the last notice. This is the first one to lay the base.

If I could jump to what happens after July, we are giving some thought to that, but our main focus is to, if you like, go the journey with the Productivity Commission. We've had a couple of chats to them. We know them very well. We've talked about some issues that they could look at, and we'll be seeing where they get to in terms of what issues they judge are most important in relation to competition. That will then give us a range of things to pick up. Having them do the high-level inquiry and identify where the issues are means we can come in and, in a very granular way, poke around those issues. We're around for a while; we're not going to solve every issue in competition in banking the first time we look at it. There's a huge array of issues, from entry barriers—the fundamental issue—to greater competition. That's just Economics 101; it's not really saying anything. Interestingly, understanding to what extent the very large focus on financial stability—which we talked about last time and that's why you were, I think, in part keen for us to have a look at this, because the other regulators have a particular focus—affects competition is an issue you can't get away from: how much effect not only the focus on stability but also the 'please do things this way' has on competition. Then, of course, there's customer stickiness—picking up that side of the equation. In this first year, we're looking for any pass-through of the levy. We're looking for their decision-making in relation to any pass-through of the levy, but, as I said, we'll build a base of knowledge that will be very useful going forward.

CHAIR: With the sort of documents that you're seeking from the banks under this new power, we're talking board minutes—are there subcommittees that make the interest rate decisions within banks? Is that the sort of documentation that you're requiring the banks to provide?

Mr Sims : I'll have a first shot at that and then let Mr Bezzi add to that. Certainly board minutes but also, crucially, documents from committees that make the decisions and then some of the decision-making documents that may even reside lower down.

Mr Bezzi : As an investigator, one of the delightful things is to deal with a bureaucratic organisation. Our experience dealing with the banks is that they seem to make minutes and record so many of their internal decisions and to justify and have debates about internal decisions. We've been seeking to understand exactly what each bank describes as the committee that is responsible for pricing and how that decision-making works within the banks. Do they have a pricing committee? Is it called a risk committee? Is it called something else? Does that reside in the Treasury? Does it reside somewhere else? What's the process for decision-making between Treasury and the line areas of the businesses? How do they attribute costs? What are the decision-making processes that go into attributing the costs?

We're really looking for two things in the first round of notices. We're firstly looking for evidence of what the process is so that we can understand it more fully than we currently do, but we're also looking for the actual decision-making documents that might, in a sense, open up the black box, the one that has always been quite hard for consumers to understand.

CHAIR: Indeed.

Mr Sims : This process is always a series of notices. We did consult with the banks before we issued the notices. Probably at least as importantly, we consulted with the financial regulators, and so we have a sense of what goes on. But only when we get the notices back will we know where the gaps are. It will be another round at least to fully unlock even what I've described to you.

Mr Bezzi : We've had a lot of very helpful assistance from the other regulators, who've had a lot of experience dealing with these issues, and they've given us insights into where they think we should look. As the chairman said, we also engaged with each of the banks before we issued the notices and said: 'This is what we're looking for. This is what we think we need to be asking for.'

CHAIR: Obviously, the banks provide public rationales for interest rate movements. As you go through your process, if you were to identify that perhaps the internal rationale, or the internal reason, was actually a different rationale to what had been provided publicly, what would that mean for you, the ACCC?

Mr Sims : I think our first response would be to find appropriate ways to make that transparent and bring it out. Obviously, the first port of call would just be to find out—'Well, you said that, but look at this document; what does that mean?'—and get them to explain. But ultimately it would be to bring that out and work out the 'so what?' of it. We're very much in an inquiry stage, as distinct from, 'Do we think they've entered into misleading behaviour that could be a breach of the ASIC Act?' Obviously, those consumer issues are ASIC issues. We're really trying to understand and we're really trying to provide transparency, so our first look would be to make that apparent and then work out what it meant: Why have they done what they've done? What implications might that have for the market, for consumers?

CHAIR: Okay. On the related issue of the so-called speed limits—targets effectively—that APRA has placed on growth, particularly on lending to investors, the banks have generally responded to that by raising rates.

Mr Sims : Yes.

CHAIR: It's obviously not the case that the only manner in which one could achieve APRA's goal is by increasing interest rates. It would be perfectly plausible for the banks simply to say, 'It's going to grow by 10 per cent and then it stops.'

Mr Sims : Correct.

CHAIR: Does the fact they have responded by effectively increasing price, and that APRA did not in any way require that to occur, say anything to you about the level of competition in the sector? Does that give you any pause for concern?

Mr Sims : I think it does perhaps reaffirm our concerns about competition in the sector. It's hard to say more until we get their documents, but you'd have to say the banks reacting in the same way to something where they could have gone this way or that way is always indicative of the general concerns we've got.

CHAIR: Yes, because presumably the banks would have systems in place where, if they were trying to reduce exposure to a particular area, industry or whatever, they would just say, 'Okay, well, we're only going to provide this much.'

Mr Sims : That's right.

CHAIR: They could've done that here but they didn't. They said, 'We'll increase interest rates.' It does seem to me that this is unfortunately consistent with the theme, which we saw in our inquiry, of interest rate movements generally being to the detriment of the customer.

In terms of the inquiry you're doing at the moment, is it too early to say when you would envisage publishing any results of that inquiry or anything of that nature? Is it a bit too early to say?

Mr Sims : Two things—yes, it is too early to have a definitive view. We are in early-stage musing about whether it would be appropriate to put something out before the end of the year. That would certainly be the earliest. My instinct is it would be early in the new year, simply because my experience says the number of rounds we need—we want to come out with something to say as distinct to speculating on things. We have an obligation to report every year. We're here to see, for this first year, whether the levy's being passed through. My own instinct would be that it wouldn't be very helpful to wait and only produce a report at the end of that year. I think we need to be doing things through the year. Once we do our first report, we may then come out and say things on a continuing basis. But I think we need to have a very firm basis for that first report. So I would suggest early in the new year.

CHAIR: Just so everyone in the sector is clear, would it be fair to say that, on an ongoing basis, these issues about how interest rate decisions are arrived at is something of ongoing interest now to the ACCC?

Mr Sims : Yes.

CHAIR: And it would be reasonable for any executives or committees who are involved in those processes to be cognisant that this is something the ACCC is very focused on?

Mr Sims : Absolutely. As I say, early in the new year is when I think we'll be running at full pelt with a lot of knowledge, but—absolutely.

CHAIR: I have a couple of other questions before I pass over to Mr Thistlethwaite. I have a broad question about—we have a division. We will suspend the hearing now, and we will reconvene shortly.

P roceedings suspended from 11:46 to 11:53

CHAIR: I have a final question. Mr Sims, can you give us an overview of the change to the banning of payment surcharges for small businesses, which I understand will come in on 1 September? Could you explain where the ACCC is at in terms of administering that process?

Mr Sims : We are fully involved. I should get Mr Gregson to give you the best answer.

Mr Gregson : You are familiar with the fact that the prohibition has been current for the last nine months—so 12 months in total it will be for large businesses—and we have been monitoring, work with industry, dealing with complaints, and addressing issues where they arise. Many of the matters reported to us involve small businesses, not large businesses, and we've been working with those businesses to draw their attention to the imminent changes—from 1 September. We have been trying to put industry on notice—that is, I guess, all small businesses who may surcharge. We provided some guidelines earlier this year, we have issuing media releases and we have been working through our stakeholder network to bring them up to speed with these provisions. Importantly, we've been working with financial institutions—so, the banks. A big part of the information that small businesses will need to know that they're not actually excessive surcharging is the bank statements that the system provides, so we have been working with the banks to make sure they are actually reaching out and having the right systems in place to provide that information to all businesses.

From 1 September, we will continue to deal with complaints. We are expecting an upsurge in those, given that the prohibition will expand from a small target set at the moment of large businesses into all businesses. We have systems in place to work beyond the team we currently have to review, triage and escalate complaints, where we need to. In most circumstances, when we have a new provision we take a balanced approach. We don't necessarily say that we have to enforce every matter that comes to our attention. We will work with those small businesses to educate them and provide them with the information they need to change. That's not to say, though, that where there's not problematic conduct, intentional behaviour, or impacts that need to be sanctioned that we will not take enforcement action with businesses. I'm happy to answer any more specific questions about where we're up to. We otherwise have a team in Brisbane and systems in place to escalate around the country.

CHAIR: Okay, that's fine.

Mr THISTLETHWAITE: I would like to ask some questions about the NBN and the speed monitoring project that the ACCC is undertaking. I understand that you went out to tender for this on 30 May this year and the tenders are now closed. Could you give us an update on where that process is up to and when you expect that speed monitoring tender to be announced publicly?

Mr Sims : I will get Mr Riordan to talk about the mechanics of that.

Mr Riordan : The closing date for the tenders was 26 June. A number of tenders were received—going through a standard assessment process for the tenders, under a strict probity type regime. That is ongoing. We would hope to get through the assessment process quite quickly, but I think the soonest that could be, in a practical sense, would be the end of this month. But, again, this is all subject to exigencies and a variety of people being comfortable with the information that's been received and the assessment that's being undertaken.

Mr Sims : But the key point is that we are aiming for our first public reports towards the end of the year. That's our goal.

Mr THISTLETHWAITE: That was going to be my next question—so that saves us some time! Under the documents that have been issued by your organisation, who will be responsible for analysing the data collected by the speed monitoring hardware and for producing the products?

Mr Riordan : The tendered services include the provision of the data by the testing service provider, with the data having been cleaned—that is to look for obvious errors, to look for incomplete records and to present the data in a way that there's great assurance that the data being presented is clear and accurate on its face. There also will be some collation of the data by the testing service provider, but when it comes to actually publishing the reports that would be the responsibility of the ACCC.

Mr THISTLETHWAITE: They will do the work on it and you will publish it?

Mr Sims : They are not putting out a report and we are stamping it. They're giving us the data and we're working with them to make sure we think it's clean and appropriate and then the team will put together a report. It will come through the Communications Committee, on which there are myself and three other commissioners, and we'll work out how best to communicate what we've got. We won't just be putting out raw data. It will be very much the 'so whats' about it.

Mr THISTLETHWAITE: Has the ACCC done this sort of analysis before? Do you have this expertise?

Mr Sims : I'll let Sean comment on that in a second, but we are the economic regulator for communications. We've been monitoring—if I could just step back for a second and then I will pass the direct question to Sean—the NBN for a number of years now. We've got a three-part process in place for trying to, frankly, drastically change performance—and partly that's the broadband monitoring scheme, partly that's better advertising guidance so that firms are giving consumers useful information such that, when they're selling the product, they're telling them what speeds they can expect at peak times—and we'll be taking enforcement action. So I know I'm not directly answering your question, but we've been all over this issue for some time. Sean?

Mr THISTLETHWAITE: Just so we're clear: who will analyse the data and produce the report?

Mr Sims : Look, Sean can correct me, but my understanding is the tester will give us the raw data. We will work with them to test the tester as to what we think of that data and whether it's robust, and then we'll put the report together.

Mr Riordan : We will be the ones who design the report. We'll be the ones who'll be scoping out the data that will be presented, the format it will be presented in and the overall messaging that accompanies the report. So I think the ownership and the authorship of the report itself is with us. The detail I've been giving you about the assurance process that we'll go through to make sure the data is accurate will need to rely upon some of the skills, specialist skills, that the testing service provider brings to the table. We'll be looking to make sure the data is reliable and robust, such that we can report confidently.

Mr THISTLETHWAITE: I just want to be clear: who's going to do the analysis of the data? You're going to get all this data come in—is it the ACCC that does the analysis or the successful tenderer?

Mr Riordan : It may be helpful to think about what sort of analysis will be undertaken. If it's a matter of looking to see what the average speeds were over time on a particular class of service, that'll be something which we can calculate. It'll be done based on the raw data that's being presented to us by the testing service provider.

Mr Sims : So that's analysis we would do.

Mr THISTLETHWAITE: Okay, so it's the ACCC.

Mr Sims : No, we're not subcontracting out either the analysis or the thrust of the report and, as I say, it'll go through four commissioners before it sees the light of day. I can assure you: commissioners will make some changes as well—I don't know what they will be, but we always do.

Mr THISTLETHWAITE: One of the stated objectives of the trial is to differentiate between the underlying factors that may be causing slow speeds. That would seem to imply that there's going to have to be a level of engineering analysis, wouldn't there? Does the ACCC have the expertise to do that?

Mr Sims : We have an engineering section inside, because we are the economic regulator for telecommunications. We have people who've spent 30 to 40 years of their lives as telecommunications engineers. Inevitably, they've come from the telco companies but they are complete and utter telco engineers. I don't know how else to put it, but that's what they do. There are various layers of this—and, again, I'll get Sean to add—but one layer is simply looking at, if you're in a particular area for a particular service and all the telcos aren't doing very well, I think we'd start to understand how much it's an NBN problem. If some of them are providing a high level of service and others aren't, obviously, we'll look to their CVC provision and get to understand that. Going down to level you're asking about, which is some people getting a bad performance, yes, we have the ability to understand how far that may be away from the node, whether there are basement problems and so forth. So we absolutely have that expertise. Anything you want to add, Sean?

Mr Riordan : I think that sums it up, Rod. The reporting we do is in the broad, in the global, and typical performance that the RSP brings to the table. It's not a fault diagnosis type service. It's still up to the RSPs themselves to look into the results. Where there is a need to improve, they're the ones that need to bring their engineering expertise to the table to solve the situation for the consumers. We're signposting and shining a light. We feel we have the sufficient expertise to do that, but the actual improvement of the situation for consumers will be reliant upon industry's response to the reports.

Mr Sims : Again, what makes this different to any other consumer work we do is we're also the telco regulator, so we've got a great depth of telco experience.

Mr THISTLETHWAITE: I will move onto another issue: the CVC bandwidth issue and slower speeds. Does the ACCC currently collect data on the amount of CVC bandwidth at different points of interconnection for each service provider on the NBN?

Mr Sims : I'm not sure we do. Sean?

Mr Riordan : We do collect aggregated data at present, which is broken down into each RSP at each point of interconnection. It gives us a view as to the average consumed over particular time periods in a day over a three-month period. So it's very aggregated, but it does give us a sense, from a market perspective, as to how much CVC is being purchased and how much of that is being consumed, on average, over a three-month period.

Mr THISTLETHWAITE: Do you seek that information from the NBN Co or from the retailer?

Mr Riordan : We collect it from the central point, which is the NBN Co. It's being collected under a legal instrument, an obligation to supply on a quarterly basis.

Mr THISTLETHWAITE: Okay, given that you collect that data, do you have a view on how much CVC bandwidth should be purchased on average per user to support the traffic demand on the NBN?

Mr Riordan : I would advance a personal opinion that it should be a little more, but, again, that's just in general, and only when comparing it back to the reports that we receive through the press and from consumers directly that they're disappointed with their evening speeds. The limitation of the data, and a consultation that we have on foot as to whether we can embellish it and get a better view of that, is that the three-month average does mask a lot of situations where the CVC can be fully exhausted over a 15-minute period within any given day. We're not getting visibility about how many occasions the CVC demand actually exceeds supply.

Mr Sims : But the combination of our monitoring program with the speed guidance we're going to be giving, which is going to hopefully see the companies put out their speeds that they're selling during peak or busy hours, which is something they're not doing now, would be a massive change. Also, some of the targeted enforcement we're doing, plus the use of the record-keeping rule that Sean just mentioned, is going to allow us to triangulate around this. We're going to be stepping into this arena in a big way as the year progresses.

Mr THISTLETHWAITE: Is it fair to say, Mr Riordan, that retail providers on the NBN have acquired their current customers at certain price points based on an expected margin and the amount of CVC that they would buy? Is it the way it's operating?

Mr Riordan : I don't have full visibility over exactly how the business decisions are happening within the RSPs, but in general terms the proposition you're putting does sound reasonable in that you do have a price point that you wish to sell into the market at, and you, as a commercial enterprise, wish to make a certain return on your effort and your investment. You may feel that you're constrained to the amount that you're willing to pay for your costs, but as to whether or not what people have at the moment is sustainable or not sustainable—

Mr Sims : We're seeing two things. Firstly, some companies are putting people on a very basic 12/1 plan. You didn't need to build the NBN to put people on a 12/1 plan. We're very concerned about how they're selling that. They're selling that sometimes as being a fast service, when it's a basic plan. And, secondly, when they're selling them on the higher speed plans, we're concerned they're not giving them enough, they're not provisioning enough CVC—particularly for those busy periods. The behaviour of the industry needs to change considerably, which is why we've got those three initiatives going on. When they come together, I personally and firmly believe they will change behaviour in the industry.

Mr THISTLETHWAITE: Customers across the nation are complaining about the slower speeds. You've been overseeing this from day one. How could you not have a view about how much CVC the retailer should be purchasing for traffic trends that we're seeing?

Mr Sims : Well, as I say, we think, as to the problems that people are confronting at the moment, a fair chunk of it is that people are being sold into basic plans that really were never going to provide them with much speed anyway, and, secondly, we think that the plans that are being sold, particularly at 25 megabits per second, don't have enough CVC. So, as Sean said earlier, we're clearly of the view that there needs to be more CVC. Until we get our monitoring and other work coming together, we won't have a view on how much extra. Our total focus is on the broadband monitoring scheme and the advertising guidance putting them in a position where they really have to buy more CVC—and we're already seeing them doing that, because they know that the broadband monitoring scheme is coming and they won't want to look as if they're the outlier underperformer.

Mr THISTLETHWAITE: Has the ACCC put this to the NBN Co and the retailers?

Mr Sims : We've certainly put it to the retailers, but we've had a lot of discussions with the retailers about the fact that they should be letting consumers know how much peak speed they can get, and we've had discussions with retailers about the fact that they don't seem to be provisioning enough CVC. So we have had those discussions.

Mr THISTLETHWAITE: How much CVC revenue per user does NBN Co's price forecast assume?

Mr Sims : On that, I'm going to have to pass to Sean, or we can take it on notice.

Mr Riordan : Yes, I can take it on notice. Just the broader numbers for today: there's a forecast average revenue per user, across both the AVC and the CVC, of around $52 per end user, and I think we're currently at $43 per end user, with the difference forecast by the company to come from the introduction of higher value business services and eventual migration of customers towards the higher spend AVC plans.

Mr Sims : But the bulk of the 43 would be AVC.

Mr Riordan : Yes; okay—

Mr THISTLETHWAITE: Is that something you might like to come back to us on?

Mr Sims : Yes.

Mr Riordan : Sure, but we do have those numbers.

CHAIR: Thank you, Mr Thistlethwaite. Mr Hogan.

Mr HOGAN: Mr Sims, you've been at the ACCC now for about five or six years.

Mr Sims : Six years now.

Mr HOGAN: This might be very difficult, but I would like you to rank the result you're proudest of—the result for consumers and competition in this country since you've been there.

Mr Sims : I was ready for a range of questions, but not that one; I'll give you an answer nonetheless. I think it would be with our consumer work—focusing our consumer enforcement work much more on larger companies than we did before and particularly the misleading claims of those larger companies.

Mr HOGAN: Could you give us an example?

Mr Sims : I could give you quite a few. We have successfully won a case, for example, against Dulux for selling paint that was supposed to reduce the heat in your house; we won that case. A few months back, we instituted proceedings against Heinz for selling products to one- to three-year-olds which they were saying were healthy products when, we allege, they're 68 per cent sugar. That, you can see, is a very important matter.

Mr HOGAN: So I suppose the theme you've pointed to is big companies—you're really going for those.

Mr Sims : That's where we think the widest detriment comes from, and I could give you a list of 10 or 20—

Mr HOGAN: The chair's told me I've only got seven minutes, and I've got four questions, so I'll keep moving.

Mr Sims : Go for it.

Mr HOGAN: What do you think is an area that you'd like to do more work in? What do you see as the biggest challenge right now for your organisation in improving the results for consumers and competition in this country, if you had to rank the most important where you think you need to do work right now?

Mr Sims : I'm afraid I have to give you more than one answer, because I'd be deceiving you if I didn't. I think the work we're doing on criminal cartels will help move the dial on cartels and cartel conduct in this country considerably, and we have several cases with the CDPP and we expect a flow of criminal cartel cases. I think that's important.

Mr HOGAN: Can you give us some areas of those cartels?

Mr Sims : No, I'm afraid I can't. I'd love to, but I can't. Good question. The inquiries we've got going into electricity and gas at the moment are, I think, hugely important for consumers. Residential consumers, small business consumers and large companies are suffering incredibly through high electricity and gas prices. We've been asked to, in different ways, give advice as to how to bring those prices down, and that, I think, is hugely important for consumers. I would put the broadband-monitoring work we've got coming together in that category also.

Mr HOGAN: That's interesting, because one of my four questions was on energy. Obviously there are allegations some of those companies run close to monopolies, whether it be in generation or in distribution, and obviously price gouging has been alleged in some cases, so I'm glad you see that as one of the major areas to work on.

Mr Sims : Absolutely.

Mr HOGAN: The other one is really a follow-up question from last time. I live in a regional community, and we don't have a lot of public transport options in some of the smaller communities, so petrol prices are of concern to everybody. The one thing I can never explain—and I think last time I said it's one of the wonders of the world—is petrol prices. I have the community of Casino almost smack bang in the middle of my electorate. All the refuellers and tankers have to drive through many other communities to get to Casino, and Casino seems to have the cheapest prices. People will often say to me, 'Kevin, why is that so?' Can you help me answer that question?

Mr Sims : When we've looked at this in various locations, it's a function of two things, really. Sometimes smaller towns have higher prices because the service stations don't have the throughput, and so it's just an economy-of-scale issue. But, when you're comparing towns outside the metropolitan area and you see some smaller towns having cheaper prices than larger towns, really it comes down to two factors. One is how much competition is there, and the second is the behaviour of some of the players. There is the Cairns study we did recently. Cairns has consistently had higher prices than other regional areas in Queensland. As soon as a United station opened up, they, much more so than others, priced at competitive levels, and that helped reduce the prices. So it's got a lot to do with the players.

Mr HOGAN: So, to point the finger somewhere, if we could, you're saying that the competition has to be at the retail level on the ground in the town?

Mr Sims : Correct. That's the key driver—and, I guess, the business approach. So it's not just competition; it's also the business approach of the players. The more competitors you have, the better, but sometimes you can have the same number of competitors in the same town but you'll have lower prices because someone decides they would prefer to get more volume and not as high a price. We just see this again and again.

Mr HOGAN: Thank you.

CHAIR: Ms King isn't with us this morning, so I'm going to give a little bit of additional time to Mr Keogh.

Mr KEOGH: Thank you, Chair. I've got a few questions. I'm going to ask if you can indulge me by trying to keep the answers as short as possible.

Mr Sims : Yes, I'll do my best.

Mr KEOGH: They're all on the one topic, though. When was the ACCC first notified about the issue with the Takata airbags?

Mr Sims : I'm going to pass that to Tim. As I say, we'll keep the answers brief.

Mr Grimwade : Yes, I'll endeavour to do that. The voluntary recalls in Australia were announced as early as 2009, but, in the last two years, about 2.2 of the 2.35 million vehicles were then recalled. The ACCC has been—

Mr KEOGH: Sorry. My question was: when was the ACCC first notified of the issue?

Mr Grimwade : It would have been in 2009.

Mr KEOGH: And which company first alerted the ACCC to the problem?

Mr Sims : I must jump in: keep in mind it's the Department of Infrastructure and Regional Development.

Mr KEOGH: I'm aware of that.

Mr Sims : DIRD is an appalling acronym. We get our information from them because they handle the recalls on motor vehicles.

Mr Grimwade : If I could just clarify, that's absolutely correct: DIRD are responsible for monitoring the recalls. But we have a website on which all product recalls, whether they're therapeutic goods, motor vehicles or consumer goods, are identified.

Mr KEOGH: There was a progress report released by ministers McCormack and Fletcher on Monday which indicated that DIRD would assess and respond to additional information requests from car companies on 24 July. That was three weeks ago. Have you received any of that requested information, or has that all gone to DIRD?

Mr Grimwade : Yes, we've seen the responses from the car companies to the letters from the two ministers. The ACCC has commenced a safety investigation. It's escalated. We have a task force of eight dedicated staff involved in an investigation where we're making our own inquiries.

Mr KEOGH: So you have received the information?

Mr Grimwade : We've received that information.

Mr Sims : And we've also issued our own notices to get our own information as a follow-up.

Mr KEOGH: When will you receive that information? When do those notices require the information to be provided?

Mr Grimwade : We issued those notices last week and we've required that the information be provided to us by Wednesday next week. We have had some responses from car companies which have requested extensions and we're considering whether or not to grant those extensions.

Mr KEOGH: In very short form, what's the nature of the information you have requested?

Mr Grimwade : We're seeking to identify a number of things, but, in short form, it is the number and type of airbag and airbag technology that these companies are using in their cars, the rate at which they're recalling, the rate at which they're remedying cars, what they're communicating to consumers at the time they invite and instruct consumers to come in with a recall, what they're communicating to customers after an airbag has been replaced, and we're looking at the type of airbag that is replaced in a vehicle once the defective airbag is removed—a whole host of questions.

Mr KEOGH: Further to that last point that you made, I understand that, at least in some instances, the same type of airbag is being used to replace the airbags that have caused the recall in the first place. Is that your understanding?

Mr Grimwade : That's correct. So we're seeking information as to what type of airbag is being replaced in what type of model and what type of vehicle. There are three types: like for like, where a Takata airbag was previously in a vehicle and is being replaced with a new Takata airbag; a Takata airbag with a desiccant, and what type of desiccant, which is designed to resolve some of the issues associated with the degradation of the ammonium nitrate propellant; and then there are non-Takata airbags, which are also being replaced in some vehicles.

Mr KEOGH: Where they're going down that path of replacing like for like or with a desiccant, isn't that just buying time on the issue, as opposed to actually fixing the problem?

Mr Grimwade : Yes. From our point of view, it appears that that's correct. We're relying quite heavily on a lot of research and scientific studies conducted by our equivalent regulator in the United States. We're still getting more data and information from them, but their advice is that a replacement Takata airbag is not likely to degrade for at least six years, but it could be longer. But we're seeking to find more information in relation to that.

Mr KEOGH: Which then makes it a problem for someone in six years time.

Mr Sims : And that concerns us, so we're thinking about how to respond to that.

Mr Grimwade : Yes. In particular, what does concern us is the communication provided to consumers, because there appears to be none in relation to the life of an airbag.

Mr KEOGH: Particularly when it will likely be a different owner of the vehicle in that time period.

Mr Sims : That's the concern—absolutely the concern.

Mr KEOGH: Do manufacturers have to have a percentage of replacement stock available to do this work before they send those notices out to consumers? And does that effect a delay? Before they say, 'Hey, there's a problem. You need to bring your car in,' do they have to build up a stock around the country to start that replacement work?

Mr Grimwade : Yes. Our understanding was that, for some period of time, there was a global shortage of stock. There were 100 million vehicles being recalled around the world and Takata went into liquidation. We understand there was a global shortage of airbag stock. The manufacturers advised the department of infrastructure and the working group that they considered there was sufficient stock available to replace airbags. That's another line of inquiry we're making, because we're still receiving complaints and reports that consumers are having to wait for their airbag replacement on the basis that there isn't enough stock.

Mr KEOGH: Being a voluntary recall process, I presume there are no requirements around the regulatory of updates or the nature of information that has to be broadcast or published in order to conduct such a voluntary process. Is that right?

Mr Grimwade : The voluntary recall, as I understand it, has been conducted under the FCAI Code of Conduct, which requires regular monthly reporting to the Department of Infrastructure and Regional Development.

Mr KEOGH: Is that a voluntary code?

Mr Grimwade : It's a code that relates to recalls and motor vehicles.

Mr KEOGH: Does it have some statutory force?

Mr Grimwade : No.

Mr KEOGH: Is it your view that that code has been complied with?

Mr Grimwade : Our investigation is directed to determining whether the voluntary recall is sufficiently remedying and addressing the safety risks to consumers. We'll be forming a view as to whether or not that voluntary recall is sufficiently effective, and other regulation may not be required.

Mr Sims : The alternative, of course, is a mandatory recall.

Mr KEOGH: Yes; I might get to that. There were some revelations made by Choice yesterday regarding a significantly more dangerous alpha airbag being in cars manufactured by Honda, Toyota, Lexus, Nissan and BMW. When did you become aware of these alpha airbag issues?

Mr Grimwade : The US regulator identified two populations of airbags about a year ago, the alpha and the beta bags. The alpha bags are a population of Takata airbags that were not manufactured as intended. They came from factories in Central and North America and manufactured between 1999 and 2003. The US did some testing and about a month ago the US put on its website, National Highway Traffic Safety Administration, that it considered the alpha bags to be such high risk that drivers should take them to their nearest repairer and have them remediated.

Mr KEOGH: Given that, should that not be, at least in respect of those, be a mandatory recall process?

Mr Grimwade : On our website, we've said exactly the same thing: that it's critical that the alpha airbags be replaced immediately. And, yes, we're certainly having regard to whether a mandatory recall is required to expedite the recall of the remaining 49,000 of those alpha bag vehicles.

Mr Sims : To be mandatory, we have to form a view that the performance under a mandatory recall will be significantly better than under a voluntary. As this issue unfolds, you could argue that that's a judgement that you could easily form. But then, of course, you've got to work out exactly what, in a mandatory recall, you want people to do. Working that out does take a bit of time and a bit of thinking.

Mr KEOGH: What time frame are we looking at?

Mr Grimwade : There's a particular process to engage in mandatory recall. The minister would have to put out a proposed notice. There has to be a consultation period, a conference, and then a final notice. And there may need to be regulatory impact statement as well as part of that process.

Mr KEOGH: In an afternoon or does it take a week?

Mr Grimwade : No, it doesn't happen in an afternoon. But having said that—

Mr Sims : We are hopeful that we can be in a position to provide advice on that mid-next month. But it is the decision of the minister.

Mr KEOGH: On your recommendation.

Mr Sims : The minister is, I think, tapping the table, waiting for the relevant information.

Mr Grimwade : Could I just make one point? We have been in the media and we have recommended the minister issue a safety warning notice. So we're doing everything we can to highlight the danger and the risks associated with all the Takata airbags, and in particular the alpha airbags.

Mr KEOGH: Is there a cost or a financial burden to your organisation if there's a mandatory recall issued?

Mr Sims : In a sense, we're already incurring a bit of that cost, since in the last three or four weeks we've put together a—

Mr KEOGH: Is there an additional burden to your oversight of voluntary?

Mr Grimwade : I think the answer is yes, because mandatory recalls could be quite complicated. There could be a number of requirements associated with a mandatory recall that could direct everything from advertising to the provision of assistance to rural and remote communities. It could require remediation within a particular time frame.

Mr Sims : You'd have to check that everything you were requiring was getting done. We've already got, what, a seven-person team on this full-time?

Mr Grimwade : We've now eight persons.

Mr Sims : We've put that together in the last few weeks. If I could go back to the previous question, and I'm indulging a bit, but this is arguably as important as any issue for consumers.

Mr KEOGH: Is the ACCC able to take any action that would actually result in some penalties against a company that conducts a voluntary recall in a way that you're not satisfied with or that takes too long?

Mr Grimwade : It would be much easier to take action in relation to noncompliance with a mandatory recall. A voluntary recall is that: it's voluntary.

Mr KEOGH: So, effectively, no.

Mr Grimwade : Well, unless in that voluntary recall they have misled consumers in some way, and we have an eye to that. Our main purpose is to get those airbags out of those cars, but we are also looking at whether there has been any misleading behaviour, so we don't rule out that there could be action later on.

Mr KEOGH: Do you think, given that's the limited scope of action in the context of a voluntary recall, that that is a regulatory gap—that you need some enhanced powers that you can use to, if you like, enforce or buttress a voluntary recall program without having to jump to the step of a mandatory recall?

Mr Grimwade : As part of the ACL review that's being considered by ministers at the end of this month, there are a number of proposed reforms to the product safety administrative regime, including enabling the commission to streamline compulsory recalls, amongst other proposals. So, yes, there is some scope, I think, to reform some of the product safety laws.

Mr Sims : There's also consideration of whether or not to make it illegal to sell an unsafe good, which of course would also have ramifications for what you're asking.

Mr KEOGH: Is that something you would support?

Mr Grimwade : It is—

Mr Sims : I think we would, but exactly how they do it would need to be thought through and what they need to have done to satisfy themselves. But, yes, at a high level, we would support that.

Mr KEOGH: Just quickly, what are the additional tools that you'd have at your disposal if this did become a mandatory recall?

Mr Grimwade : We would have penalty powers. We would be able to enforce non-compliance with any aspect of the compulsory recall.

Mr KEOGH: Which you've set as part of that compulsory recall?

Mr Grimwade : That's correct.

Mr KEOGH: I think you might have gone to this in part of your earlier answer, Mr Sims: is this, if not the biggest, one of the biggest consumer safety issues that have been dealt with in the history of the ACL in terms of the potential number of people that may be affected and the quantum involved?

Mr Grimwade : It is the largest recall in history. And, given there are so many Takata airbags in cars being driven by Australian consumers where there is a risk of misdeployment, it is a very significant product safety issue.

Mr KEOGH: I understand humidity and some external conditions have an impact. Are you concerned about whether the issues with these airbags will be more prevalent in, say, the northern climes of Australia or the more humid or harsher climactic parts of Australia? Is there additional work that should be done to promote this recall in those areas?

Mr Grimwade : Yes, that's absolutely—

Mr KEOGH: Are you seeing that occur?

Mr Grimwade : The answer to the first question is yes; to the second question, no. There are three criteria that go to the particular risk of the airbag. One is the length of time. The other is variability in temperatures—so exposure to high and low temperatures. But the third is humidity, because it's the moisture getting into the propellant that degrades the propellant and creates the safety risk. So, yes, I would think that vehicles with older Takata airbags in, say, Far North Queensland and the Northern Territory—

Mr KEOGH: And Western Australia?

Mr Grimwade : yes—are subject to higher risk than elsewhere.

Mr Sims : But I think the mandatory recall may well have slightly different nuances, as to what people need to do. So I think the answer to your question is yes, there will be different requirements.

Mr KEOGH: But at the moment there is no difference in the way the voluntary process is being done?

Mr Grimwade : No. That's correct.

Mr Sims : That's right.

Mr KEOGH: Thank you.

Mr CRAIG KELLY: Mr Sims, I understand your inquiry into the electricity sector is underway. Maybe I could just make a comment, and you could give us a brief rundown on how it's going. Is the concept of a retail electricity market in itself a complete illusion? The electrons that come into my house as a consumer are the same, irrespective of which retailer I buy from. It's almost like going to a supermarket: there's one supermarket but three or four different check-outs, and I'm buying the same good through a different check-out. It's almost like going to a supermarket, but in the one supermarket there are three or four different checkouts and I'm buying the same good through different retailers. It just seems to be the old concept of a retail market in the sector is a complete abstract.

Mr Sims : You're still selling a product. There still could be the possibility of a market. You've still got—

Mr CRAIG KELLY: But the product being delivered to me is still exactly the same. It's not even the same generic product; it's the same physical product, irrespective of what retailer I buy it from.

Mr Sims : Obviously, you're right. But I think one thing we're disappointed by is that the electricity companies don't seek to differentiate themselves a little bit more. For example, they can, more than they do now, give you a different rate for a bit of demand management on some of the electricity uses you have. So, in a sense, we would have hoped there would be more innovation by the retailers. So, I think there is scope for that. And, of course, if you had a properly competitive market—and I agree the market is not as competitive as it should be—hopefully they would be straining to cut costs and lower prices to consumers. We're not seeing as much of that as we'd like either.

Mr CRAIG KELLY: I have a quote. I think this was correctly reported. You were critical of the New South Wales government's decision to allow AGL to buy both Macquarie and Liddell.

Mr Sims : Yes.

Mr CRAIG KELLY: And you have concerns about the vertical integration in the market, with retailers acting as generators and vice versa. Would you make a few comments on that?

Mr Sims : There's a national market, but there are also state-based, regional markets, because that's how the product is, in essence, priced. And you had three dominant retailers in New South Wales. You had two of those retailers owning generation and a third one that didn't. But you had therefore independent generation in Macquarie and Liddell that was government-owned at the time. And it did allow, other than the big three companies, some to particularly play in the hedge market and put together different offerings in the hedge market, particularly to retailers other than the big three. You had a more competitive market. When the New South Wales government sold Macquarie Generation and Liddell—Macquarie Generation was the name of the company but it was Macquarie and Liddell units—to AGL, that was 33 per cent of generation capacity going to AGL. It meant that the three retailers, the three vertically integrated players, had 85 per cent of the generation and 85 per cent of the retail. It made it much harder for other players, and we believe it's had the effect of increasing electricity prices.

Mr CRAIG KELLY: Right. Which is substantially lessening competition?

Mr Sims : Well, we lost the case in the competition—

Mr CRAIG KELLY: So, you actually fought that—

Mr Sims : We opposed the transaction. We told them we opposed it. The New South Wales government, despite our strong protests at many levels, went ahead with the sale. We were very critical, privately and publicly. They didn't like our criticism publicly, but we felt very strongly about it. They went ahead with the sale, and I guess if they were sitting here they'd say they won the case so we are wrong. We don't agree with that.

Mr CRAIG KELLY: But you would now say the subsequent evidence shows that you were correct and actually vindicated by what's happened?

Mr Sims : We would say, unfortunately, yes. Having said that, proving what's going to happen down the track is a tricky thing to do in these court cases. That's why our merger analysis is always—you're guessing what's going to happen, and proving it in court is different—

Mr CRAIG KELLY: But in this case, your guess was correct?

Mr Sims : Well, we think so. I'm sure if you had AGL here, they might have a different view. But we think so, yes. We think what we were worried about has actually transpired.

Mr CRAIG KELLY: Is there a case, because this is such a unique market, for separating the retailers and the generators?

Mr Sims : We prefer a market where you don't have that complete level of vertical integration. Prior to that sale, if you think about Queensland, New South Wales and Victoria, in each of those markets you had generators that weren't really much aligned with retailers. Obviously, there were the two Queensland government-owned ones. There used to be three, and that was a better world. But they weren't retailers. And in New South Wales, you had Macquarie Generation and Liddell, and they weren't retailers. And in Victoria you had a couple of generators that were largely generators. They had small retail businesses, but they had extra capacity they wanted to sell to all sorts of retailers, so it made a more competitive market. I don't mind a bit of vertical integration. What I'm concerned about is when you have three players that are fully vertically integrated in a market. It makes it very hard for anybody else to get in.

Mr CRAIG KELLY: You also mentioned that South Australia is particularly concentrated, with AGL having more than 50 per cent?

Mr Sims : AGL is a very concentrated market. The other issue you've got with South Australia is it is very concentrated, because AGL has a very large capacity. Of course, with the closure of Northern, that's just increased their position. And the other problem you've got is that they own Torrens Island, which is a very valuable asset. Whoever owns that was always in a strong position. But, yes, South Australia has a very concentrated market.

Mr CRAIG KELLY: So, the closing of Northern actually increased, substantially, the value of Torrens Island?

Mr Sims : The closure of Northern increased the concentration in South Australia. The closure of Hazelwood increased the concentration in Victoria.

Mr CRAIG KELLY: To the advantage of other generators in those markets?

Mr Sims : Correct.

Mr CRAIG KELLY: So, those other generators had an interest in that generation capacity closing down in Northern and Hazelwood?

Mr Sims : Absolutely, they did. The major generators have been calling for the closure of some of their plant for some time. And everyone—

Mr CRAIG KELLY: But they're calling for the closure of competitors—

Mr Sims : They all wanted less plant. And they all wanted someone else to do it. So, when Northern and Hazelwood did it, that was a very good day for them.

Mr CRAIG KELLY: Is there anything that you could use under the existing competition laws, in your misleading and deceptive conduct provisions—I know it is a question whether it is in trade or commerce or in a political debate. Is there anything you could use where some of these retailers argue publicly for a certain position of view, which would lead to another retailer closing, or the government implements some policy that forces another retailer to close?

Mr Sims : I totally understand the question. But I don't think we could, because there's always some element of what they're saying which can be justified.


Mr Sims : The message might not be, but—

Mr CRAIG KELLY: So, it's more a political message rather than a message in trade or commerce.

Mr Sims : Look, I think that there's an element of that, but also part of what they're saying is probably not misleading. It's a question of the words versus the message.

Mr CRAIG KELLY: Just quickly, I think this is your quote correctly: you were concerned about the stunningly overgenerous green schemes and the costs being smeared over all electricity consumers as a straight subsidy. Have you had a chance to put any quantum on that?

Mr Sims : We're doing that now. The key thing we're doing with our electricity study is saying, 'Look over 10 years.' Over 10 years, electricity prices have more than doubled, after inflation. Why has that occurred? Part of that is due to higher network costs. Part of it's due to that concentration we've just been discussing. And part of it's due to those green schemes.

Mr CRAIG KELLY: The Grattan Institute estimated the subsidies for solar are about $10 billion added to consumers' costs. So, would you be making an independent assessment and putting a number on that as well in your report?

Mr Sims : What we'll be doing is working out, looking at 10 years ago and now, what has contributed to each increment of the rise in prices. So part of that increment will be for the green schemes.

Mr CRAIG KELLY: And when is that report due?

Mr Sims : We have an interim report out in September, which I hope will have all that information. We're scrambling to get the information from the players.

Mr BANDT: Just continuing on the same topic. Have you had a chance to look at the independent review into electricity and gas in retail markets in Victoria that was released a few days ago?

Mr Sims : Yes.

Mr BANDT: I have just a couple of things on that.

Mr Sims : I can't say I've read it all. But I think I have absorbed its key recommendations.

Mr BANDT: On the green schemes point, as I read it, they put the cost of federal, environmental and Victorian environmental costs at somewhere, on their average, of around $180 or $190 out of a close to $3,000 power bill. So, that is substantially less than maybe when we had 60 cents an hour feed-in tariffs. It's massively dropped. Is that kind of figure, less than $180 out of a $3,000 power bill, broadly sitting with where you understand things are in Victoria at the moment?

Mr Sims : Can I answer it this way: it wouldn't surprise me if that's the number, but, until we get the numbers, I really don't know and wouldn't want to mislead. Of course, when I talk about overly generous green schemes, it is that 60c that I very much had in mind.

Mr BANDT: Yes, which you don't get in many places around the country anymore.

Mr Sims : No.

Mr BANDT: Sticking with Victoria for a moment, the report, which is consistent with other reports that have been released, suggests that the retail component of the bills that they're looking at—certainly sticking with residential—was somewhere around about 30 per cent of the bill on average. For some, it's substantially higher. That seems to be much higher than most other states around the country. Are you finding that, in states like Victoria where there's a completely deregulated retail market, the retail component of the bill that customers are paying is much higher than in those states or territories where it's regulated?

Mr Sims : That's the information we're gathering together. It's literally coming to us this week, and we're ploughing through it right now. That's absolutely the hypothesis that everybody has and that we're working to test. But, until we get across the data, I'm afraid I can't give you the inside answer from our point of view.

Mr BANDT: From what you know so far, on the retail side of it, would you say—I'm just sticking with retail because I'm going to talk about networks in a moment—that there's effective competition in Victoria, for example?

Mr Sims : Again, I don't mean to be difficult, but we just need to get hold of the information. We are running like mad to go through that information now, and I'm conscious that other people have come out and said things. We've got access to the data—

Mr BANDT: I appreciate that. One of the things that seems to be coming through is that there's a big difference, on the retail front, between the states and territories that regulate and the states that don't.

Mr Sims : I understand that.

Mr BANDT: So, in that context, I'm just wondering whether the question of regulation versus deregulation in the retail price market, which was called for in this report—a version of it—is something that you're considering as part of this review?

Mr Sims : Until we get the data, it's unclear exactly where we'll go. But we're not ruling anything out.

Mr BANDT: As well as the behaviour of particular companies, are you looking at the rule settings that are in play within the Australian energy market at the moment? I ask this because the Australian Energy Market Commission, which sets the rules, said in their Retail energy competition review last year:

In relation to retail electricity margins, we reviewed recent studies that examined retail margins across the NEM. No evidence presented in these studies would lead us to conclude that retail margins in Victoria, or indeed any other jurisdiction with deregulated prices, are inconsistent with effective competition.

This is the rule setter in the electricity market, and they're saying, 'We don't think things are happening that are inconsistent with effective competition,' yet in Victoria we're paying 30 per cent of our power bills in the retail component, and that's much, much higher than elsewhere. That just seems, to me, to be an astounding statement to make, given what we know. I'm wondering whether you (a) agree with it—and you might not be able to answer that yet given that you don't know the data—and (b) if that's what our rule maker is saying, are considering suggestions for changes to the rules as well as the way companies behave?

Mr Sims : The first thing I have to say is: a whole lot of people—and you've said it—have said, 'We know that they're 30 per cent.' Until we come out with our numbers, we don't know whether they're 30 per cent. Every report, including the Victorian one and, certainly, the AEMC report and the Grattan Institute report, has said, 'Let's get the ACCC to actually get the real data.' We'll do that. Hopefully we'll do it by September. But, if we don't do it by September, we'll keep beavering away until we get absolute transparency over that so we'll all know that. I accept that it's the prevailing hypothesis, and I suspect that it could well be true, but let's get that data. In terms of rules, our job is to focus on affordability, and, if we think there are rule changes that are needed to promote that, we will certainly put them forward. We're not going to go through methodically and assess all the rules; we're just going to see what's important for affordability.

Mr BANDT: Sticking with that for a moment but shifting to talk about networks as opposed to retailers—so we're talking about transmission and distribution at the moment—again, the picture that seems to emerge is that, whether network operators are publicly or privately owned, the way that the rules have been set up allows them to get a return when the regulator ticks off a certain investment that they're able to make. That's either a replacement investment or new investment. The rate of return has averaged at around six per cent in recent years, and sometimes it's been higher. There's been criticisms that that encourages a business model where they make their return by coming up with ideas for investment and then get the tick off. There have been some good suggestions, such as abolishing limited merits review, which might make a difference. But there's still the overall question, which is, 'Do we have the settings right,' thinking about someone's power bills, just for the moment, 'when it comes to the way that the transmission and distribution operators get rewarded for their investment?' Do you have a view on that yet?

Mr Sims : I have an overwhelming view that the rules under which the AER had to work, that were set about 10 years ago, were extremely bad and have cost consumers a lot of money and forced up network charges way more than they needed to be. This is both because they allowed expenditure that shouldn't have occurred and because they allowed high rates of return much higher than they should have been.

Those rule changes have now been made a lot better, but we'll still look at that area. So the answer to your question is: yes. Talking about the current rules and the problems they cause—and we'll look at them and there may well be good changes we can come up with—they will pale compared to the disastrous changes of 10 years ago, which cost consumers an enormous amount of money.

Mr BANDT: Do you think that the profit margins that network companies have enjoyed and continue to enjoy are fair?

Mr Sims : We'll get the data on that. My starting hypothesis is: a lot of network companies, be they electricity or otherwise, make very high margins in Australia.

Mr BANDT: Doesn't it all invite the conclusion that electricity, essentially, is a natural monopoly, especially when you're looking at the transmission and distribution components of it and is not something that is suited to being treated as a market in the way that we have for the last 10 or so years?

Mr Sims : I have the fortunate or unfortunate position of having been around a very long time. When they were vertically owned and government owned, back when you had the SECV and civic power or whatever it was called, they operated pretty badly. Those Victorian brown-coal generators and some of the New South Wales ones were getting operated at about 80 per cent. As soon as they were privately owned, within six months, they were operating at 95 per cent.

If you had inefficient bureaucracy—the world wasn't good when they were vertically integrated and publicly owned. We've got to be careful when thinking about—my personal view is we've made a lot of mistakes in electricity. Loosening the rules on the network companies was a disaster and that's cost us a lot of money. Some of the reliability settings we've put in place over recent years have added to gold plating. The Macquarie Generation. And the 60-cent feed-in. You even got it on the power you consumed yourself. It's just all added to costs that should not have been there. So we just want to step back and say, 'What's caused the price increases? What can we do about it?' There are many things that have contributed.

Mr BANDT: Hazelwood was old and had passed its use-by date, and its life had been extended a couple of times. It was a pretty reasonable decision for its operator to close it down. It may not have been about gaining market share or others gaining market share. We've got an ageing coal-fired power fleet that either environmentally or, at least, economically a lot of people don't want to keep operating.

Mr Sims : I understand that. Whether different regimes would have made for a slower closure, whether it could have happened with a bit more notice to the market so that people would have had time to adjust, all those things could have been, perhaps, a little better.

Mr BUCHHOLZ: During the line of questioning with the banks, I pursued, hopefully, a benefit for consumers in and around lower credit card rates and why the banks had such high credit card rates. As a result of those hearings we saw two of the banks shift their rates to low, no-frills cards—the establishment, ANZ and Westpac—and yet two of the banks had a disregard for their clients and claimed it was consumer choice or something. Do you have an opinion on whether or not there's enough competition in the market, and on why banks all move in lockstep with each other on every other movement of the rate, but the spread on credit cards on that low-frill rate to some of the other banks is remarkably wide?

Mr Sims : I think it's fair to say that until we get all the data we're seeking from the banks—I'll get Mr Bezzi to give a view as well—from where I sit, I'm not sure we have enough information to give you a comment that would be helpful. I have to say that it is, though, a bit hard to criticise the banks for all doing the same thing and then criticise them for doing different things. We understand the credit card issue. We intend to get right to the bottom of that. But we've got to focus on the levy at the moment.

Mr BUCHHOLZ: I probably hid this in the beginning of my question, but the question was: is there enough competition in that credit card space?

Mr Sims : My personal view is that's just a subset of 'is there enough competition in the whole banking sector?' But I accept that the credit card issue is a submarket of its own that we need to look at. But, until we get to that point, I don't think we've got enough information to give you a helpful view. We need more information as we get into this role.

Mr Bezzi : There is a lot of choice in the credit card market, and there are low-rate offers in that market from smaller banks and smaller institutions.

Mr BUCHHOLZ: Can you explain to me what they look like?

Mr Bezzi : They're generally no-frills offers. They generally aren't associated with points systems. They are very much low-frill products. But I think that the really interesting issue is: why don't customers switch? What are the barriers to switching? That's one of the really fascinating questions from a competition point of view. In a market where there are lots of choices and we don't see lots of switching, I think we need to understand why. That's one of the issues that I think is becoming a focus of our work in the Financial Services Unit.

Mr BUCHHOLZ: Do you know if CBA and National Australia Bank have a no-frills card?

Mr Bezzi : No, I don't. I know that Aussie had a no-frills card, but they no longer do as I understand it—or it's not as no-frills as it was. It was a low-cost card, before the Commonwealth Bank took over Aussie. They no longer offer that product.

Mr BUCHHOLZ: My perspective would be—and I'm interested in your comment—that, if there's an absence of a no-frill card with two of the banks and there's a new product there for the other two, and if there's the argument of: 'No, we don't want to have a no-frills card because our research tells us that people don't migrate. They'd prefer to stay on the 19 per cent because it has additional benefit', where's the commercial downside if they have the card and no-one migrates to it anyway? Where's the commercial disincentive of having that in your product suite?

Mr Bezzi : That's a question you'd have to ask the banks.

Mr BUCHHOLZ: The new business entrant market is very aggressive. You would think that most of the banks will drop their interest rates to zero per cent to bring new entrants to their credit card. There's a degree of an aggressive marketing strategy and offering incentives to migrate. Why do you think those incentives don't exist in helping people migrate from internal products?

Mr Sims : This is why we're excited to do the inquiry that you've—

Mr BUCHHOLZ: I'm excited for you to arm me with some information!

Mr Sims : I've got to say: the learning curve is steep. We're hopeful that by early in the new year we'll have information and that we'll be in a much better position to answer the questions, and we'll be delighted to do so.

Mr BUCHHOLZ: Thank you, Mr Sims. It just feeds into the whispering about energy prices and cost-of-living pressures. Not everyone in the state of Queensland has an overdraft. Not everyone has a business loan. Not everyone has a mortgage. But near on most of the consumer base in my state has a credit card. Now, if we can offer them some financial relief then I think that becomes a good day for what we've all been able to achieve as regulators.

Mr Sims : We understand the importance of the issue. And we're sitting back slightly from a lay point of view, as baffled as you are, but we're looking forward to—

Mr BUCHHOLZ: It is a perplexing and, it would appear, on occasions, gouging issue. I understand the difference in the product differential but I'm interested to see what the future unfolds.

Ms BANKS: Welcome, and thank you for your time. Mr Sims, I want to talk about the Thermomix recall. Thermomix clearly failed in their mandatory reporting requirements back in 2014. Obviously, we're now in 2017 and you've issued Federal Court proceedings in this regard, and in relation to misleading conduct as well. How did this come to your attention—that they'd failed?

Mr Sims : I think that I know the answer, but I'll make sure that I have the right answer by referring to Scott Gregson.

Mr Gregson : Thank you. The matter came to our attention both through consumer complaints and also from agencies—organisations such as Choice. There were multiple sources of information that we took onboard.

Ms BANKS: Right. So when did it come to your attention first? When did the spike in consumer complaints arise?

Mr Gregson : I might have to take those dates on notice, but just stepping back through our investigation frame I think it was in 2015.

Ms BANKS: Does the ACCC conduct random audits in relation to mandatory reporting requirements? Because you don't know what you don't know—I guess that's what I'm saying.

Mr Gregson : Let me share that with my colleague Mr Grimwade who is responsible for the mandatory reporting. We take those reports in, obviously, as we're required to under legislation. We will also then check if we see information out there, such as coroner's reports or other public reports and complaints, to see whether in fact they have complied. It's not uncommon for us to check against that. I think it's not really possible to have broader auditing, because you're looking for things that you don't know might exist. I think that's the right answer for the mandatory reporting?

Mr Grimwade : It is, and we will see 2,000 to 3,000 mandatory injury reports on top of thousands of complaints in relation to product defects and product safety issues that are then triaged within the commission from a product safety perspective. But in addition to that, if there are consumer issues they'll also be considered.

Mr Sims : And we can certainly use our compulsory information-gathering powers, because it eventually gets to the stage where we are conducting an investigation. So we would have used those as well and that would have given us a lot of information.

Ms BANKS: Right. Indeed, it was 105,000 Thermomix units affected by the recall? Is that correct?

Mr Gregson : Certainly around the 100,000, that's right.

Ms BANKS: So in terms of ensuring that the Thermomix organisation had written to every purchaser of that machine: I guess that the ACCC had powers to ensure that that communication in fact took place?

Mr Gregson : Again, it's important to differentiate here the two streams of activity we had. There was our monitoring role in relation to the voluntary recall, that our product safety area did, and then there was our investigations from an enforcement perspective into whether there was misleading conduct or whether there was a failure to report, which we looked at from an enforcement front. And we've also made allegations about the nondisclosure clauses that were used in this matter.

So in relation to the voluntary recall, yes, there's extensive engagement with traders in relation to many recalls. I'm familiar with this because we did things as joint teams, and so I can speak for Mr Grimwade a little, that that was checking against exactly what had happened under that voluntary recall, pressing as to whether enough had been done and getting some further notices out to consumers about exactly what was happening with that recall.

Ms BANKS: But it's a voluntary recall? It's not a mandatory recall—

Mr Gregson : Sure.

Ms BANKS: so you're relying on the voluntary nature of the organisation to make sure that they do comprehensive communication.

Mr Gregson : Sure.

Mr Sims : I might just mention that I know that people mention this voluntary versus mandatory as if, 'We'll do it if we want to, but we won't if we don't' versus the mandatory, 'You must do it'—

Ms BANKS: I understand: I worked in FMCG for 25 years, so I understand the difference.

Mr Sims : Right, okay! Thank you, I have had to explain that to others.

Ms BANKS: I guess what I'm getting at is the point I made earlier, which is that you don't know what you don't know. If they haven't complied with the mandatory reporting requirements then, in the interests of the Australian consumer, we're assuming that the voluntary recall process happens efficiently. I'm just trying to identify and diagnose whether there's a gap in there so that, when people do breach the provisions of mandatory reporting, the ACCC is reliant on social media or the media to a certain extent because it has triggered a lot of attention. Is there anything you believe could stop gap that measure?

Mr Gregson : I wouldn't overstate our reliance only on those sources—and, again, Mr Grimwade might want to jump in—but we have quite extensive intelligence-gathering links with, for example, coroners' reports and hospital reports. We try and get a fair bit of information to inform whether we need to undertake further product safety investigations or whether there's a potential breach of the mandatory reporting guidelines. I'm not sure we're saying there's a particular gap there, other than that we're always trying to increase the amount of intelligence we have available to us.

Mr Grimwade : There is one additional factor to mention, which is not specific to Thermomix. We have a very close relationship with state and territory consumer law regulators, and we very regularly exchange information on product safety and consumer issues.

Mr Sims : Because they have equal accountability for it.

Mr Gregson : Reflecting on my earlier answer, it may have been as early as 2014. The recall commenced around 2014, so we may have started to get complaints around that period rather than in 2015. We can give you specific information.

Ms BANKS: Okay. Indeed, the matter's currently before the Federal Court.

Mr Gregson : That's right.

Ms BANKS: I'd like to go to Takata airbags. I know the Turnbull government has issued their comprehensive report this week, which includes establishing a taskforce that has been asked to look into the management of this and, potentially, ordering a mandatory recall. In terms of that recommendation, obviously there's an impetus and sense of urgency around this, particularly given recent tragic incidents. What is your view of the timing of this recommendation that may come from the taskforce in relation to whether or not you recommend a mandatory recall?

Mr Sims : We're thinking the middle of next month, but that's not that far away. We have to get the responses back from the compulsory notices so that we get a good sense of what they are doing and not doing so we can think about whether there are extra things and what those things are. If you do decide to do a mandatory recall, you've got to actually specify what you ask them for. Getting that information is crucial. Then you have to engage, because you don't know what you don't know, to use your phrase earlier. So there are various processes to go through, but we're hopeful it will be the middle of next month. We're not nailing ourselves, but we're—

Mr Grimwade : Yes, certainly, we're dedicating a lot of resources to getting it done as quickly as possible. I should say the investigation is not just into those who have voluntarily recalled and are subject to a particular voluntary recall regime; we'll be investigating whether there are other car manufacturers who are using Takata airbags as well that haven't been recalled as part of the investigation. That could feed into any subsequent recommendations.

Ms BANKS: To follow up on that, I have one last question. This recall is unprecedented, as we know, and it's been going on since 2009. The big risk is cars being onsold. In the interests of the Australian consumer of those motor vehicles in the second-hand—and the third-hand by now—market, will there be any consideration as to a general communication? Because there won't be that traceability component, if the cars are onsold privately, will there? Will there be a general communication about the models of cars that are affected?

Mr Grimwade : You mean now or subsequently?

Ms BANKS: Now or as a result of the task force.

Mr Grimwade : I should say that, on our website—and for some time—we've had a list of all of the models and the VIN numbers so individuals can check whether their car is recalled or not. You're right: the manufacturers make contact using various databases to ascertain who has the vehicles. For instance, they use the NEVDIS database and others to trying and track down who has the affected vehicle. We will be considering other mechanisms on two fronts: (1) to encourage or mandate that suppliers trace vehicles, whether they're second hand or third hand; (2) we'll look at mechanisms to nudge consumers towards getting their car remedied, because you can have a mandatory recall or a voluntary recall, but it's still up to the consumer.

Mr EVANS: My first question is a follow-up to your work, Mr Gregson, relating to the new credit card surcharging rules. Has your team conducted any audits or checks, or do you have any benchmarks in terms of compliance rates generally around those surcharging rules, or are you proposing to do anything like that around September or there after?

Mr Gregson : With respect to the current provisions that apply from last year for large businesses, that gave us greater capacity to understand exactly who might be impacted—not completely. There were some key industries, so we work quite closely with key industries such as airlines to make sure that they were actually changing. In fact, we started that engagement prior to the provisions coming into effect and we saw some positive moves there, such that the concerns we might have had moved on from those industries.

Mr EVANS: I realise that there's a fair bit of concentration with the power with the airlines and cabs and areas like that. I'm thinking more about hotels and hospitality where the interests are a little bit more diverse and where you probably only could do audits of industries to check overall compliance.

Mr Gregson : We don't rely solely on complaint or report data, but it always does tell us where hot spots are. We've had, in the period since the law came into effect, between 1,000 and 2,000—I think last time I looked it was around 1,500—complaints or reports. Yes, there was some gathering of those reports in respect of, for example, hotels. Across the board, when we concentrate on those matters reported to us, a large majority aren't matters that raise concerns, either because they involved small businesses or because what was being charged wasn't actually a surcharge; it was something quite different. Alternatively, there was some confusion in the mind of the reporter that surcharging may have been banned, per se, as opposed to excessive surcharging.

CHAIR: Sorry to interrupt, Mr Gregson. That appears to be a division, which means that we're going to have to go.

Proceedings suspended from 13:12 to 13:19

CHAIR: We'll reconvene the hearing. Noting that we do need to finish by 1.30, I will ask Mr Evans if he has any final questions.

Mr EVANS: Thank you, Chair. There's nothing like running up a few flights of stairs before you have to ask a question!

Mr Sims : You've done well!

Mr EVANS: Mr Sims, you previously put on the record your views and concerns about the previously proposed merger of the two Queensland state-owned generation companies. Has the ACCC or the AER expressed views about the complaints of energy user groups and consumer groups about the potential for those two generator companies to be gaming the NEM and gouging profits for their shareholders?

Mr Sims : I can't speak for the AER, but I certainly have. We were very disappointed when the three generators became two. The AER have done the analysis of this, and their analysis shows that this hasn't been an issue of rebidding; it has simply been that at times of high demand they know they need to be dispatched because they're two-thirds of Queensland capacity, so they can bid high. They did, and that pushed up wholesale prices in Queensland. The evidence of the fact that they have market power and can do that is that as soon as the Queensland minister told them to bid less aggressively, they pulled back and prices came straight down.

Mr EVANS: So you accept that that's basically what's been happening until that recent direction?

Mr Sims : It has happened at some times, that's right.

Mr EVANS: I understand in the last week there's been news to say that the instructions were only given by the Queensland to one of those two generation companies. Have you heard that and do you have any understanding as to why that might be the case?

Mr Sims : Why it's only one? I certainly heard that the instruction went to Stanwell and not to CS. I honestly don't know why that was the case. We'll have more information in future, but I don't know why. I think CS may have been more fully contracted, but that's a guess.

CHAIR: Sorry to interrupt. We have another division. We are going to conclude the hearing now because we won't have time to get back. Thank you all very much for your attendance at the hearing today.

Resolved that these proceedings be published.

Committee adjourned at 13:21