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Competition Policy Reform Bill 1995



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House: Senate

Portfolio: Treasury

Commencement:The proposed Act specifies various commencement dates as follows:

Part 1 (Bill formalities), and Part 2 (expansion of provisions in the Trade Practices Act 1974, and the creation of the Competition Code), Division 2 of Part 5 (transitional rules), and Part 7 (miscellaneous), commence on the 28th day after the day on which this Act receives the Royal Assent.

Part 3 (establishment of new national Commission and advisory Council) commences on a day to be fixed by Proclamation. However, if part 3 does not commence by Proclamation within six months of this Bill receiving Royal Assent, then it commences the day after the end of the six month period;

Part 4 (amendments of Prices Surveillance Act 1983) commences immediately after Part 3 commences;

Division 1 of Part 5 (application of the legislation on a national basis) commences 12 months after this Bill receives Royal Assent;

Part 6 (feminine pronoun amendments) commences immediately after the commencement of Division 1 of Part 5.

Pur pose

To abolish the Trade Practices Commission and the Prices Surveillance Authority, and confer their powers, and additional powers, on a new body, the Australian Competition and Consumer Commission.

To provide for the constitution and operation of the Australian Competition and Consumer Commission, and a National Competition Council.

To amend the Trade Practices Act 1974 to extend the scope of the competition provisions of Part IV - Restrictive Trade Practices to business activity not presently covered by the provisions, including Commonwealth, State, and Territory government businesses.

To provide access by third parties to facilities of national significance, such as communications, power grids, rail and transportation.

Bac kgro und

(Note: specific references to Clauses in the Bill are found under , below)

The Development of Modern Trade Practices Legislation

Australia has a predominantly market economy. The market provides the main mechanism for the allocation of resources between buyers and sellers. In our economy, a market free of anti- competitive behaviour is considered to be the most effective way of allocating resources and of achieving maximum efficiency in resource use. Markets which allow restrictive trade practices such as monopolies or price discrimination produce distortions in an economy; those distortions disadvantage consumers. Australia's post- World War 2 economy saw a significant development of restrictive trade practices. National legislation in the form of the Trade Practices Act 1965 sought to address those anti- competitive practices.

The development of Commonwealth trade practices legislation in Australia has been accompanied by some significant High Court decisions on the validity of the legislation. Perhaps the most significant was the Concrete Pipes Case 1 which struck down the Trade Practices Act 1965 because in that particular case the Act was invoked to regulate intrastate activities of concrete manufacturers. In striking down the Trade Practices Act 1965, the High Court, however, pointed the way for a more effective use of the corporations power in the Constitution. The Trade Practices Act 1974 overcomes most of the limitations of the previous legislation.

Although the Trade Practices Act 1974 is one of the most important of our national laws, it is still subject to some Constitutional limitations. These restrictions basically confine its application to corporations engaged in trading and financial activities, and businesses which operate on an interstate basis. As a general rule, unincorporated businesses, such as local partnerships, small non- company businesses and professions, as well as some large bodies corporate (such as State government business enterprises and local government) do not fall within the scope of the national law. A State may, however, decide to bring business activities under the trade practices legislation. For example, New South Wales recently enacted the Legal Profession Reform Act 1993 which brought the legal profession in that State under the restrictive trade practices provisions of the Commonwealth's Trade Practices

Act 1974.

To provide some regulation of those private sector businesses which fall outside the national law, the States and the Territories have enacted Fair Trading laws which provide consumer protection at the State and Territory level. A significant level of State government business activities are, however, immune from regulation in terms of anti- competitive behaviour. In simple terms, many are just monopolies.

The fact that the national law is, at present, unable to cover all businesses (particularly professions) means that there is not one single set of competition rules which apply to the national economy. The fact that significant enterprises, such as State government businesses, operate with immunity from anti- competitive rules and are increasingly competing in a market place with private sector businesses which must comply with competition rules, means that there is an imbalance and lack of efficiency.

National Competition Policy: The Hilmer Report

In October 1992, the Government established an independent inquiry into a national competition policy, at the request of State and Territory Governments. The inquiry committee comprised Professor F. G. Hilmer (as Chairman), Mark Rayner and Geoffrey Taperell. In August 1993, the committee presented its report, National Competition Policy ("NCP") to the Heads of Australian Governments (referred to as COAG - Council of Australian Governments). The report contains far- reaching recommendations and is referred to as the "Hilmer Report". As stated in the Preface to the Hilmer Report, Australia has, for all practical purposes, a single integrated market exposed to both domestic and international competition.

The Hilmer Report provides guidance on how a NCP should be implemented so as to achieve free and open competition on a national basis. The elements of NCP are:

.limiting anti- competitive conduct of firms;

.reforming regulation which unjustifiably restricts competition;

.reforming the structure of public monopolies to facilitate competition;

.providing third party access to certain facilities that are essential for competition (e.g. telecommunications);

.restraining monopoly pricing behaviour; and

.fostering competitive neutrality between government and private business when they compete. 2

Under NCP, State and Territory boundaries become largely irrelevant. All sectors of the business community will, in principle, operate under the same set of competition rules. Exemptions from the rules will be limited and require authorisation by an independent national body. To achieve this goal, the Commonwealth, States and Territories have agreed that the Commonwealth will enact national legislation which will then, in turn, be applied in each jurisdiction in essentially the same way as the national Corporations Law is applied. This legislative approach will overcome the Constitutional limitations mentioned above. A set of inter- governmental agreements establishing a Conduct Code Agreement and a Competition Principles Agreement will also be settled. State and Territory legislation will commence within 12 months of the commencement of the Commonwealth's national legislation.

NCP Revenues: Returns To The States and Territories

The yielding by the States and Territories of their monopoly of certain significant business activities will require payment by the Commonwealth of some compensation. In addition, the States have effectively argued that the increased activity and business revenue generated by NCP will result in higher returns of revenue to the Commonwealth in the form of taxes. The States and Territories are also to share in this increase in revenue. The total return to the States and the Territories will be $4.2 billion over the period 1997- 98 to 2002- 03. The States had initially sought $1.5- 2 billion annually. According to the Industry Commission, Australian households will benefit by some $1500 annually from NCP. 3

The Structural and Legislative Approach for NCP

The key elements in the Competition Policy Reform Bill 1995 ("The Bill") are:

. the Trade Practices Commission ("TPC") and the Prices Surveillance Authority("PSA") will be abolished and replaced by a single new body, the Australian Competition and Consumer Commission ("the ACCC");

. a new advisory and research body, the National Competition Council ("the Council") will make recommendations in relation to access and pricing;

.a system to be known as the "access regime" will be established for the declaration of certain services/ facilities of national significance; this will establish a legal regime to facilitate third parties obtaining access to the services of certain essential facilities of national significance and which have natural monopoly characteristics such as gas and power lines; the access regime will also identify the means by which persons may seek access to those services;

. a set of national Competitive Conduct Rules ("the Rules") will be formulated and implemented;

.price surveillance or price monitoring will extend to State and Territory owned businesses; and

.the Commonwealth's existing Trade Practices Act 1974 will be the Principal Act for the implementation of NCP.

One of the main features of the Bill is the application of Part IV - Restrictive Trade Practices of the Trade Practices Act 1974 to businesses which hitherto were exempt from the Commonwealth law by virtue of constitutional limitations, or State immunity. To fully achieve this goal the Bill, as noted above, is part of the co- operative legislative scheme involving the Commonwealth, the States and Territories. To that extent, the Bill does not need to restate the detail of the very complex and important provisions in Part IV of the Trade Practices Act 1974.

As a simple overview, the following is a selection of the types of legislative provisions contained in Part IV of the Trade Practices Act 1974 which are aimed at combating anti- competitive behaviour in the market place and which will apply, in principle, to all businesses:

.contracts, arrangements or understandings restricting dealings or affecting competition ( e.g. traders get together and agree to limit the amount of discount they will offer);

.contracts, arrangements or understandings in relation to prices ( e.g. retailers meet and agree to raise and set the same prices);

.covenants affecting competition ( a covenant is usually a restriction which governs the use of land when either sold or leased);

.covenants in relation to prices ( e.g. price fixing);

.boycotts;

. misuse of market power ( e.g. predatory pricing ("price cutting"));

. exclusive dealing ( e.g. refusal to supply if a retailer stocks a competitor's products);

. resale price maintenance ( e.g. inducing a retailer not to advertise or sell a product at less than a certain price); and

.acquisitions or takeovers which would result in a substantial lessening of competition ( e.g. mergers that lead to a concentration in the market).

Digest Comments: Possible Emerging Issues

In principle, there is a great deal of attraction in a policy which is aimed at breaking down competition barriers and allowing all businesses to operate under the same rules of competition. There are, however, reservations about some aspects of NCP and some of the provisions in the Bill. These include:

.it has been suggested that the access regime contained in the Bill is complex, inflexible and lacking in time limits; 4 the proposed steps involved in seeking to obtain a declaration of an essential facility, then entering the negotiation stage, possible arbitration and finally a determination (by the ACCC) is layered and open- ended in terms of time limits such that business is unlikely to readily participate in the formal system but will prefer the course of voluntary private negotiation;

.the Bill allows the exemption of the mainstream activities of State marketing authorities which compulsorily acquire primary products (because such activities are not regarded as a "business" in the legal sense); 5

.domestic consumers may face higher prices for services previously supplied by public utilities (e.g. electricity and water) because, at present, these services operate in such a way that business is charged at a higher rate than domestic users ("cross- subsidies"); 6 there are existing inter- government arrangements where, for example, the Australian Capital Territory is charged a preferential tariff for the electricity supply it draws from the Snowy Mountains in New South Wales - that preference may be lost under NCP;

.existing public transport is subsidised for a variety of reasons including services for the elderly and the socially disadvantaged, to counter a drift towards increasing use of motor vehicles involving pollution and traffic congestion, and to service isolated suburbs; competition involving the aim of pushing down costs may see a reduction in some of these services (unless community service obligations are directly funded); and

.the States will have substantial discretion in setting reform agendas which may lead to an uneven application of NCP.

Mai n provisions

The Bill is divided into 7 Parts. Part 1 ( sections 1 and 2) is Preliminary, Parts 2 to 6 contain amendments commencing at the first to fifth commencement times respectively, and Part 7 ( section 87) provides for the making of regulations.

Part 2 - Amendments commencing at the first commencement time.

Clause 8 repeals section 45A(3) of the Act which exempted an agreement which maintained a price, from being deemed to substantially lessen competition, where there were more than 50 parties to the agreement. This Bill will prohibit such agreements. However, such agreements will continue to be able to be authorised by the ACCC.

Clause 12repeals section 49 which prohibits certain forms of price discrimination.

Clause 13 amends subsection 51(1) of the Act which essentially provides for exemptions for conduct authorised by Federal legislation (other than legislation relating to patents, trade marks, and copyrights), and State or Territory legislation. This clause inserts a new subsection 51(1B) which limits the exemptions in subsection 51(1) in several ways, the main one being that a law that purports to exempt conduct must expressly refer to the Act. Clause 29 provides transitional protection for 3 years for existing exemptions.

Clause 16 amends section 93 of the Act to extend the notification provisions to 'third line forcing', which is the conduct set out in subsections 47(6) and (7), and paragraphs 47(8)(c) and (9)(d) of the Act. 'Third line forcing' is a form of exclusive dealing whereby, in general terms, a corporation will only supply goods or services if the purchaser also acquires goods or services from a third party. Notification is a procedure whereby a corporation gives notice to the Commission of that corporation's conduct which may be in breach of the Act. With other forms of exclusive dealing, a corporation receives exemption from the time of notification, until the exemption is withdrawn by the Commission. With third line forcing an exemption is not given until the corporation's notice comes into force, which is after a prescribed period which allows the Commission an opportunity to consider the conduct described in the notice. The Commission will consider the conduct, and if it decides that the public benefit will not outweigh the public detriment, it can give a notice to that effect pursuant to subsection 93(3A). The conduct will then not be exempted from the prohibition in the Act.

Clause 19 inserts a new section 96A into the Act to include services in the prohibition of resale price maintenance, which presently only applies to goods.

Clause 20 amends section 101A to allow for a review by the Tribunal, of a decision by the Commission to issue a notice pursuant to subsection 93(3A).

Clause 23 inserts the new Competition Code as Part XIA of the Act. The Competition Code consists of the following:

A new Schedule to the Act (inserted by clause 27) which is a slightly modified version of Part IV of the Act which, for Constitutional reasons, applies only to corporations. As the Competition Code is to be supported by State and Territory application laws, the Competition Code is expressed to apply to persons;

The remaining provisions of the Act which relate to the sections contained in the new Schedule, except sections 2A, 5, 6, and 172; and

Regulations that relate to provisions in the Schedule, or the remaining provisions referred to above.

Clause 25 amends section 171 to require the Commission to include in its annual report, a cumulative list of all Commonwealth, State and Territory laws that pursuant to section 51(1) exempt certain conduct from provisions of the Act.

Clause 26 removes the ability for regulations made pursuant to subsection 172(2), to exempt conduct (by certain bodies - usually, Government) from the provisions of Part IV of the Act.

Clauses 29 and 30 provide transitional provisions. Clause 29 is mentioned above.

Clause 30 provides for existing contracts, (contracts made before 19 August 1994), and things done to give effect to existing contracts, to be disregarded to the extent that they would have been disregarded before these amendments, when considering whether there has been a contravention of Part IV of the Act.

Part 3 - Amendments commencing at the second commencement time.

Clause 32 amends the interpretation section of the Act. It changes the definition of Commission from the TPC to the ACCC, and the definition of Tribunal from Practices Tribunal to Australian Competition Tribunal.

Clauses 34 to 49 relate to the establishment and constitution of the ACCC. The ACCC is very similar to the existing TPC.

However, clause 35 adds a requirement that the Governor- General (who was also responsible for appointments to the TPC), must not appoint a person to the Commission unless a majority of the States and Territories that are parties to the Conduct Code Agreement support the appointment. Clause 35 also requires one of the appointments to the Commission to have knowledge of, or experience in, consumer protection.

Clause 36 reduces the maximum term of a member of the Commission from 7 years to 5 years, and removes the maximum age limit of 65 years.

Clause 45 inserts a provision that states that Part XI (deals with public authorities keeping accounts in a commercial form) of the Audit Act 1901 does not apply to the Commission.

Clause 47 provides for the Commission to engage consultants.

Clause 49 confers on the Minister more general powers than existed previously to give the Commission directions connected with performance of its functions. However, the clause also adds new Parts in relation to which the Minister must not give directions. They are Part IIIA, regarding Access to Services, and Part IV, regarding Unconscionable Conduct.

Clause 50 inserts a new Part IIA- The National Competition Council (the Council). New sections 29A to 29O provide for the establishment of the Council.

New section 29B sets out the Councils functions which include:

carrying out research into matters referred by the Minister,

providing advice on matters referred by the Minister, and

performing a function conferred on it by a law of a State or Territory.

New section 29C provides for the Council to consist of a President and up to 4 other Councillors, appointed by the Governor- General for up to 5 years.

New section 29K provides for the disclosure of conflicting interests by Councillors.

New section 29N provides for the engaging of consultants.

New section 29O requires the Councillors to give the Minister a report on the operation of the Council within 60 days of the end of the financial year.

Clause 52 provides that the Trade Practices Tribunal continues to exist as the Australian Competition Tribunal.

Clause 54 inserts a new Part IIIA- ACCESS TO SERVICES.

New section 44B contains the new definitions relating to this part. The most important definition is:

Service which is defined as a service provided by means of a facility and includes:

(a) the use of an infrastructure facility such as a road or railway line;

(b) handling or transporting things such as goods or people;

(e) a communications service or similar service;

but does not include:

(d) the supply of goods; or

(e) the use of an intellectual property right; or

(f) the use of an intellectual property process;

except to the extent that it is an integral part but subsidiary part of the service;

New section 44D defines designated Minister as the Commonwealth Minister except where in relation to declaring a service where the provider of the service is a State or Territory body. In that case the designated Minister is the responsible State or Territory Minister.

New section 44E provides that this Part binds the Crown in right of the Commonwealth, the States and Territories. However this section states that nothing in this Part makes the Crown liable to be prosecuted for an offence, but Commonwealth, State, or Territory authorities may be.

New section 44F is the beginning of Division 2 - Declared Services.

This Division is concerned with the decision of the Designated Minister to allow access to a service. Such a decision is called a Declaration.

The Designated Minister must declare a service or decide not to declare it, if he or she receives a recommendation about the service from the Council: new section 44H.

Any person can request the Council to make a recommendation in relation to a particular service: new section 44H.

New subsection 44G(2) provides that the council cannot recommend that a service be declared unless it is satisfied as to a number of matters which include:

that access would promote competition

that it would be uneconomical for anyone to develop another facility to provide the service;

that the facility is of national significance;

that access to the service is not already the subject of an effective access regime; and

that access would not be contrary to the public interest.

New subsection 44H(4) provides that the Designated Minister cannot declare a service unless satisfied as to a number of matters. Those matters are the same as for the Council to consider and are summarised above.

When deciding whether an access regime established by a State or Territory is an effective access regime the Designated Minister must apply the principles set out in the Competition Principles Agreement: new subsection 44H(5).

The Designated Minister must publish his decision: new subsection 44H(6)

A declaration must specify an expiry date: new subsection 44H(7).

New subsection 44H(8) provides that if Designated Minister does not make a decision within 60 days of receiving the recommendation, the Designated Minister is taken to have decided not to declare the service.

New section 44K provides for a review by the National Competition Tribunal of the Designated Ministers decision. The Tribunal has the same powers as the Designated Minister. The application for review must be made within 21 days of publication.

The Commission must maintain a public register of declarations: new section 44M.

Where a third party and the provider of a declared service, cannot agree as to the terms of access, either party may give notice of a dispute to the Commission: new section 44O.

New subsection 44T(1) the Commission will conduct an arbitration and when making a determination in relation to access, must take the following matters into account:

the legitimate business interests of the provider;

the public interest;

the interests of all persons who have rights to use the service;

the direct costs of providing access;

the value to the provider of extensions to the facility, the cost of which is borne by someone else;

requirements for the safe and reliable operation of the facility; and

the economically efficient operation of the facility.

The Commission may take into account other relevant matters: new subsection 44T(2)

New sections 44Vto 44ZJ deal with procedure in arbitrations.

An arbitration hearing is to be in private unless the parties agree to a public hearing: new section 44Z.

Parties are entitled to be represented: new section 44ZA.

Under new sections 44ZB, 44ZC and 44ZD the Commission has wide powers to regulate procedure which include, that the Commission is not bound by technicalities, legal forms, or rules of evidence, and may inform itself in any way it thinks appropriate.

Recommended Reading

Hilmer, F. et al, National Competition Policy, Report by the Independent Committee of Inquiry, Australian Government Publishing Service, Canberra, August 1993.

Kain, J., National Competition Policy: Overview and Assessment, Research Paper No. 1 of 1994, Parliamentary Research Service, Department of the Parliamentary Library, Canberra, February 1994.

Miller, R., Annotated Trade Practices Act, 16th Edition, The Law Book Company, Sydney, 1995.

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Endnotes

1. Strickland v. Rocla Concrete Pipes Ltd (1971) 124 CLR 468

2. Hilmer, F et al, National Competition Policy, Executive Overview, Report by the Independent Committee of Inquiry, August 1993: 3.

3. Henderson, Ian. 'Premiers drop barriers', The Canberra Times, 12 April 1995.

4. Turner, B. 'ACCI says access regime is unworkable', Australian Financial Review, 18 April 1995, and Meredith, H. 'Trouble ahead with competition law, says experts', Australian Financial Review, 11 April 1995.

5. Wyatt, S. 'Loopholes threaten marketing reform', Australian Financial Review, 18 April 1995.

6. Millett, M. and Davies, A. 'Hilmer deal to mean bigger bills for some', The Sydney Morning Herald, 13 April 1995, and Ellis, S. 'Price ups and downs as consumers wait for $9bn bonanza', Australian Financial Review, 12 April 1995.

Brendan Bailey (Background and Digest Comments) (06) 2772434

Gavin Lee (Main Provisions Clauses 1 to 54)

Bills Digest Service

Parliamentary Research Service

5 May 1995

This Digest does not have any legal status. Other sources should be consulted to determine whether this Bill has been enacted and, if so, whether the subsequent Act reflects further amendments.

Commonwealth of Australia 1995

Except to the extent of the uses permitted under the Copyright Act 1968, no part of this publication may be reproduced or transmitted in any form or by any means, including information storage and retrieval systems, without the prior written consent of the Parliamentary Library, other than by Members and Senators of the Australian Parliament in the course of their official duties.

Published by the Department of the Parliamentary Library, 1995.