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Competition and Consumer Amendment (Misuse of Market Power) Bill 2017

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2016

 

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

 

 

 

HOUSE OF REPRESENTATIVES

 

 

 

Competition and Consumer Amendment

(Misuse of market power) bill 2016

 

 

 

EXPLANATORY MEMORANDUM

 

 

 

 (Circulated by authority of the

Treasurer, the Hon Scott Morrison MP and

Minister for Communications, Senator the Hon Mitch Fifield)



Table of contents

Glossary.............................................................................................................. 1

General outline and financial impact............................................................ 3

Chapter 1               Misuse of market power....................................................... 5

Chapter 2               Telecommunications industry.......................................... 15

Chapter 3               Regulation impact statement: Misuse of market power 23

Chapter 4               Statement of Compatibility with Human Rights............ 31

Index................................................................................................................. 33



The following abbreviations and acronyms are used throughout this explanatory memorandum.

Abbreviation

Definition

Act

Competition and Consumer Act 2010

ACCC

Australian Competition and Consumer Commission

Harper Review

Competition Policy Review

Review Panel

The Competition Policy Review Panel, chaired by Professor Ian Harper 

RIS

Regulation Impact Statement

Telstra

Telstra Corporation Limited

Vertigan Review

Statutory Review under section 152EOA of the Competition and Consumer Act 2010



Misuse of market power

Schedule 1 to this Bill amends the Competition and Consumer Act 2010 (the Act) to strengthen the prohibition of the misuse of market power by corporations and better target anti-competitive conduct by corporations with a substantial degree of market power.

Date of effect The amendments will take effect from a date to be fixed by Proclamation. If any provisions do not commence within six months from the date of Royal Assent, then they take effect from the date after that period ends. 

Proposal announced :   The proposal was announced by the Prime Minister, Treasurer and Assistant Treasurer on 16 March 2016.

Financial impact Nil.

Human rights implications :  Schedule 1 to this Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights  - Chapter 4.

Compliance cost impact $2.5 million per year over the next 10 years.

Telecommunications industry

Schedule 2 to this Bill makes consequential amendments to repeal the telecommunications-specific anti-competitive conduct provisions in Division 2 of Part XIB of the Act, and the competition notices and exemption order regime in Division 3 of Part XIB. The Part XIB provisions are no longer necessary or appropriate given the strengthening of the prohibition of the misuse of market power (as proposed by Schedule 1 to this Bill), which is applicable to all industry sectors.

These amendments will ensure that the competition rules for telecommunications market are aligned, to the fullest extent practicable, with general competition law.

Date of effect The amendments will take effect from a date to be fixed by Proclamation. If any provisions do not commence within six months from the date of Royal Assent, then they take effect from the date after that period ends. 

Financial impact Nil.

Human rights implications :  Schedule 2 to this Bill does not raise any human rights issue. See Statement of Compatibility with Human Rights  - Chapter 4.

Compliance cost impact : Nil. 

Summary of regulation impact statement (Misuse of market power)

Regulation impact on business

Impact :  An increase of $2.5 million per year over the next 10 years.

Main points :

•        The Government has been informed of the regulatory impacts of various reform options by the findings of the Competition Policy Review (the Harper Review), previous independent reviews and inquiries, thorough public consultations and targeted consultations with industry stakeholders at multiple stages.

•        The Harper Review found that the current section 46 is deficient and unfit for purpose, misdirected as a matter of competition policy and undermines confidence in the effectiveness of the law.

•        The additional regulation impact is expected to result from businesses seeking legal advice to ensure their practices are compliant with the rewritten section 46. Following this transitional assessment, it is expected that any ongoing additional regulation impact will be minimal.



Chapter 1                                                                                                                  

Misuse of market power

Outline of chapter

1.1                   Schedule 1 to this Bill amends the Act to strengthen the prohibition of the misuse of market power by corporations and better target anti-competitive conduct by corporations with a substantial degree of market power.

Context of amendments

Operation of the misuse of market power law

1.2                   Section 46 of the Act prohibits a corporation with a substantial degree of power in a market from taking advantage of that power for one of three specific purposes. These purposes focus on damaging an actual or potential competitor. Subsection 46(6A) sets out considerations that may be taken into account in determining whether a corporation has ‘taken advantage’ of its substantial market power.

1.3                   Section 46 also expressly prohibits certain conduct, such as predatory pricing (subsection 46(4A)).

The Harper Review

1.4                   In 2014, the Government commissioned a ‘root and branch’ review of Australia’s competition framework: the Harper Review. A key focus of the Harper Review was to identify impediments across the economy that restrict competition and reduce productivity. 

1.5                   A number of submissions to the Issues Paper, Draft Report and Final Report of the Harper Review outlined concerns with the operation of section 46. Submissions focused on whether the section sufficiently deterred anti-competitive conduct by firms with substantial market power, and whether it created commercially predictable outcomes.

1.6                   The Harper Review concluded that while the concepts, prohibitions and structure of the Act are sound, some provisions, including section 46, are unfit for purpose, unnecessarily complex and impose costs on the economy and burdens on business.

1.7                   The Harper Review recommended re-framing section 46 to prohibit a firm with a substantial degree of power in a market from engaging in conduct with the purpose, effect or likely effect of substantially lessening competition in any market.

1.8                   In its response, released on 24 November 2015, the Government noted the importance of the issue for businesses and the level of contention surrounding the recommendation. The Government committed to consult further on options to strengthen the misuse of market power law. A Discussion Paper on section 46 was released on 11 December 2015. The Treasurer noted that the Government was seeking to ‘ensure section 46 offers a commercially and legally robust, yet practical, approach to preventing the misuse of market power’.

1.9                   The Government received a further 86 submissions in response to the Discussion Paper. On 16 March 2016, the Prime Minister, Treasurer and Assistant Treasurer announced that the Government would adopt in full the Harper Review recommendation relating to the misuse of market power. In their joint announcement, they noted that the change ‘uses existing legal concepts from within the competition law - such as “substantially lessening competition”  - and ensures the focus of the provision remains only on those firms that have substantial market power’.

Summary of new law

1.10               Schedule 1 to this Bill amends section 46 of the Act to prohibit a corporation with a substantial degree of market power engaging in conduct that has the purpose, effect or likely effect of substantially lessening competition in:

•        that market; or

•        any market in which the corporation itself, or a related body corporate, supplies or acquires goods or services or is likely to supply or acquire goods or services; or

•        any market in which the corporation indirectly supplies or acquires goods or services or is likely to supply or acquire goods or services.

1.11               Schedule 1 to this Bill also rewrites section 46 to simplify the provision and make it easier to navigate.

1.12               Schedule 1 to this Bill also makes equivalent changes to Schedule 1 to the Act, as applied to persons.

Comparison of key features of new law and current law

New law

Current law

Section 46 only applies to corporations with substantial market power.

Section 46 only applies to corporations with substantial market power.

The conduct must have the purpose, effect or likely effect of substantially lessening competition.

The conduct must have one of three specific purposes, related to damaging an actual or potential competitor.

The conduct must occur in a market where there is an actual or likely supply or acquisition of goods or services, by the corporation or another prescribed entity. 

The conduct may occur in any market.

The conduct does not need to ‘take advantage’ of substantial market power.

The conduct must ‘take advantage’ of substantial market power.

There is a general provision only, with no specific prohibition on predatory pricing or other forms of conduct (however described).

Predatory pricing and other specific forms of conduct are expressly prohibited.

Certain pro-competitive and anti-competitive factors must be taken into account when considering a substantial lessening of competition.

‘Substantial lessening of competition’ is not an element of section 46.

Detailed explanation of new law

Objective of the misuse of market power provision

1.13               The objective of section 46 is to prevent firms from engaging in unilateral conduct that harms the competitive process. This requires distinguishing between vigorous competitive activity which is desirable, and economically inefficient monopolistic practices that may exclude rivals and harm the competitive process.

1.14               Despite the objective described above, the focus of the current provision is on prohibiting damage to a competitor . The Harper Review noted that this was inconsistent with the overriding objective of the Act, which is to protect competition rather than individual competitors.

1.15               The amendments reframe section 46 to focus the provisions and tests on the competitive process rather than individual competitors. The competitive process is harmed, and competition is lessened, when actual or potential competitors are prevented or deterred from competing on their merits. However, the objective of section 46 is not to shield inefficient competitors from the natural effects of strong competition in a market.

1.16               As is the case with the current section 46, under the new section 46, a firm does not misuse its market power merely because it competes to acquire, retain or grow its market power. The new section 46 is not intended to unnecessarily constrain the ordinary decision-making of corporations with substantial market power, or to prevent such firms from undertaking competitive activities. Not all actions by firms with substantial market power will be a misuse of that power.

1.17               To better target anti-competitive conduct, and make it clear that the rewritten section 46 is not intended to prevent pro-competitive conduct, section 46 lists mandatory factors that must be considered when determining whether conduct has the purpose, effect or likely effect of substantially lessening competition.

Prohibition on the misuse of market power

1.18               A corporation with a substantial degree of power in a market must not engage in conduct that has the purpose, or has or is likely to have the effect of substantially lessening competition in:

•        that market; or

•        any other market in which that corporation, or a body corporate that is related to that corporation:

-       supplies goods or services, or is likely to supply goods or services; or

-       supplies goods or services, or is likely to supply goods or services, indirectly through one or more other person; or

•        any other market in which that corporation, or a body corporate that is related to that corporation:

-       acquires goods or services, or is likely to acquire goods or services; or

-       acquires goods or services, or is likely to acquire goods or services, indirectly through one or more other person. [Schedule 1, item 1, subsection 46(1)]

Substantial degree of power in a market

1.19               Section 46 only applies to corporations with a substantial degree of power in a market. This test applies under the current section 46 and the retention of this test was supported by the Harper Review.

1.20               Subsections 46(3) to 46(8) set out the circumstances and provide guidance about when a corporation has a substantial degree of market power for the purposes of section 46. These subsections remake and simplify the former parallel subsections 46(3) to 46(4). This simplification is not intended to change the meaning or operation of the relevant subsections. [Schedule 1, item 1, subsections 46(3) to 46(8)]

Purpose, effect or likely effect

1.21               The rewritten section 46 prohibits a corporation that has a substantial degree of power in a market from engaging in conduct with the ‘purpose, effect or likely effect’ of substantially lessening competition in particular markets. [Schedule 1, item 1, subsection 46(1)]

1.22               The ‘take advantage’ element of the current section 46, which was interpreted to require an analysis of whether a corporation could have engaged in the same conduct if it did not possess substantial market power, is removed. The ‘proscribed purposes’ in the current section 46, which generally refer to damage to an actual or potential competitor, are also removed.

1.23               The concept of the purpose, effect or likely effect of substantially lessening competition is new to section 46. This concept already exists in a number of provisions in Part IV of the Act, and it is intended that the existing jurisprudence will inform the application of this concept in the context of section 46.

1.24               The rewritten section 46 does not limit the manner in which the existence of a purpose may be established. Purpose is primarily a subjective enquiry as to the direct effect which the corporation intended to achieve through its conduct.

1.25               However, the enquiry is not limited only to subjective factors. The fact that the purpose of the corporation is ascertainable only by inference does not prevent a finding, where appropriate, that the corporation acted with the purpose of substantially lessening competition.

1.26               Section 4F of the Act sets out that it is sufficient to establish that the purpose of substantially lessening competition is a substantial purpose for engaging in the conduct, even if it is not the sole purpose.

Substantially lessening competition

1.27               ‘Substantially lessening competition’ is an existing concept within the competition law, and the jurisprudence that has developed under other provisions of Part IV of the Act will inform the application of this test to section 46. However, while the test itself is not new to the Act, section 46 requires the application of the test to unilateral conduct, rather than to bilateral or multilateral conduct as in other provisions.

1.28               In light of this change in context, subsection 46(2) provides guidance in the form of a list of factors that must be taken into account when assessing whether conduct has the purpose, effect or likely effect of substantially lessening competition.

1.29               Given the wide range of conduct which may have a purpose, effect or likely effect of substantially lessening competition and the wide range of circumstances in which the conduct may occur, it is not possible to prescribe specific forms of conduct which always will or will not contravene section 46. In some markets, a particular type of conduct may substantially lessen competition, while in other markets the same conduct may have little or no effect on competition.

1.30               Rather than requiring a determination of whether conduct fits within detailed technical descriptions, the mandatory factors provide for a principled, holistic assessment of the conduct and its purpose, effect or likely effect in the particular circumstances of the market in question. This ensures that section 46 is flexible and may be applied to new forms of anti-competitive conduct as they arise.

1.31               Subsection 46(2) requires consideration of the extent to which the conduct has the purpose, effect or likely effect of decreasing competition in the market, and the extent to which the conduct has the purpose, effect or likely effect of increasing competition in the market. The requirement to consider both anti-competitive and pro-competitive conduct emphasises that section 46 is not intended to capture conduct that is pro-competitive overall.

1.32               Subsection 46(2) provides additional guidance by listing several particular factors which indicate pro-competitive conduct, as well as several particular factors which indicate anti-competitive conduct. The requirement to consider each of these factors ensures that pro-competitive aspects of conduct, if present, are not left out of a holistic analysis of the conduct. 

Pro-competitive factors

1.33               Factors indicating a purpose, effect or likely effect of increasing competition in a market include enhancing efficiency, innovation, product quality or price competitiveness. [Schedule 1, item 1, paragraph 46(2)(a)]

Anti-competitive factors

1.34               Factors indicating a purpose, effect or likely effect of lessening competition in a market include preventing, restricting or deterring the potential for competitive conduct or new entry into the market. [Schedule 1, item 1, paragraph 46(2)(b)]  

1.35               This ensures that section 46 better targets anti-competitive conduct by requiring consideration of the competitive process.

Consideration of the factors

1.36               The factors in subsection 46(2) are not exhaustive, but each of them must be considered in determining whether the conduct has the purpose, effect or likely effect of substantially lessening competition. The factors are intended to provide guidance about the typical effect of these types of conduct on competition in a market.

1.37               Given the wide range of markets and circumstances in which conduct may occur, it is not possible to prescribe how any particular factor will be weighted in reaching a determination as to the overall purpose, effect or likely effect of conduct. How the factors are weighted will depend on the particular circumstances of the conduct.

1.38               In particular circumstances, it is possible that one anti-competitive factor is so significant as to outweigh one or more pro-competitive factors. Similarly, one pro-competitive factor may be so significant as to outweigh one or more anti-competitive factors. In some circumstances, a factor which is not listed in subsection 46(2) may nevertheless be of significant weight.

Relevant markets

1.39               Subsection 46(1) prohibits a corporation with a substantial degree of power in a market from engaging in conduct that has the purpose, or has or is likely to have the effect of substantially lessening competition in:

•        that market; or

•        any other market in which that corporation, or a body corporate that is related to that corporation:

-       supplies goods or services, or is likely to supply goods or services; or

-       supplies goods or services, or is likely to supply goods or services, indirectly through one or more other person; or

•        any other market in which that corporation, or a body corporate that is related to that corporation:

-       acquires goods or services, or is likely to acquire goods or services; or

-       acquires goods or services, or is likely to acquire goods or services, indirectly through one or more other person. [Schedule 1, item 1, subsection 46(1)]

1.40               The Harper Review recommended reframing section 46 to prohibit a firm with a substantial degree of power in a market from engaging in conduct with the purpose, effect or likely effect of substantially lessening competition in any market. However, extensive consultation with stakeholders revealed a concern that the reference to ‘any market’ made section 46 excessively broad in scope.

1.41               To address this issue, the scope of section 46 is limited to those markets in which the corporation’s conduct is most likely to have a purpose, effect or likely effect of competition concern. In practice, it is unlikely that a corporation’s conduct will have a purpose, effect or likely effect of substantially lessening competition in an unrelated market without also having that purpose, effect or likely effect in one of the markets described in subsection 46(1). The provisions within subsection 46(1) limit the scope of section 46 to situations where there is an actual or likely supply or acquisition of goods or services, by the corporation or another prescribed entity.

1.42               Subparagraphs 46(1)(b)(i) and 46(1)(c)(i), respectively, apply to markets in which the corporation itself, or a related body corporate, supplies or acquires goods or services or is likely to supply or acquire goods or services. Section 4A of the Act details when one body corporate is considered to be related to another body corporate.

1.43               Sub-paragraphs 46(1)(b)(ii) and 46(1)(c)(ii), respectively, apply to markets in which the corporation is indirectly supplying or acquiring goods or services or is likely to supply or acquire goods or services. This is intended to apply to situations where the corporation itself is not supplying or acquiring goods or services in a particular market, but the corporation or a related body corporate is doing so indirectly through an entity that does not fall within the section 4A definition of related bodies corporate. An example of such a situation is where a corporation has substantial market power in one market, and is supplying goods in another market, through an arrangement with an independent distributor or a franchisee, over which the corporation has a degree of influence. It is not necessary that the corporation’s influence over the other person amounts to control, nor that their arrangement is one of agency.

1.44               This allows for the application of section 46 to increasingly common situations in which a corporation does not act through a related body corporate, but nonetheless exercises a degree of influence or control, such as through contractual or intellectual property rights, over another entity which itself is directly engaged in activities in an upstream or downstream market. The phrase ‘indirectly through one or more persons’ includes situations where a corporation is indirectly supplying or acquiring in a single market through multiple other persons. This phrase also includes situations where the relevant indirect supply or acquisition takes place in multiple markets.

1.45               However, subparagraphs 46(1)(b)(ii) and 46(1)(c)(ii) are not intended to apply to situations where the corporation and the ‘other person’ are genuinely acting independently of one another and without any influence, pressure or collusion. In determining the nature of the relationship between the corporation and the other person, the focus should be on the substance of the relationship rather than the form.   

Simplification elements of section 46

1.46               The amendments remove the specific prohibition against predatory pricing from section 46. The reframed section 46 focuses on damage to the competitive process and so specific prohibitions are not required. [Schedule 1, item 1, section 46]

1.47               Despite the removal of specific prohibitions, section 46 continues to prohibit such conduct. As discussed above at paragraphs 1.24-1.25, although ‘purpose’ is a primarily subjective enquiry, it may be informed by objective factors. Some forms of conduct, such as predatory pricing, are inherently anti-competitive and will almost invariably constitute a misuse of market power. If the circumstances are appropriate, and in the absence of strong evidence to the contrary, the fact of inherently anti-competitive conduct may allow a determination that the only plausible purpose for such conduct is to substantially lessen competition.

1.48               The amendments also remove the additional provisions providing guidance on the meaning of ‘take advantage’ from section 46. This is because the rewritten section 46 replaces the former ‘take advantage’ test with a test of the purpose, effect or likely effect of conduct. [Schedule 1, item 1, section 46]

Schedule version of Part IV

1.49               This Bill amends Schedule 1 to the Act, to ensure that the amendments to the Act are mirrored in the Competition Code and apply to persons. [ Schedule 1, item 2, section 46 of Schedule 1 to the Act]

Application and transitional provisions

1.50               Schedule 1 to this Bill commences on a day or days to be fixed by Proclamation. However, if any of the provisions in Schedule 1 do not commence within the period of 6 months beginning on the day the Bill receives Royal Assent, they commence on the day after the end of that period. 



Chapter 2                                                                                                                  

Telecommunications industry

Outline of chapter

2.1                   Part 1 of Schedule 2 to this Bill deals with the repeal of Divisions 2 and 3 of Part XIB to the Act.

2.2                   Part 2 of Schedule 2 to this Bill deals with consequential amendments to Part XIB and other provisions in the Act as a result of the changes made in Part 1 of Schedule 2.

Context of amendments

2.3                   Part XIB of the Act was introduced in 1997 to facilitate the transition to open competition in the telecommunications market. At that time, competition in the sector was in its infancy and Telstra Corporation Limited (Telstra) possessed significant market power due to its incumbency and high degree of integration.

2.4                   Division 2 of Part XIB of the Act sets out a telecommunications-specific competition rule. The competition rule provides that a carrier or carriage service provider must not engage in anti-competitive conduct (section 151AK). Section 151AJ defines anti-competitive conduct for the purposes of Part XIB of the Act.

2.5                   Division 3 of Part XIB sets out the competition notices and exemption order regime. Under this Division, the ACCC may issue two types of competition notices (Part A competition notices and Part B competition notices). Competition notices were designed to enable the ACCC to quickly respond to a breach of the competition rule. Part A competition notices can give rise to substantially higher pecuniary penalties compared to general competition law and Part B competition notices reverse the onus of proof in court proceedings. Since the introduction of Part XIB, the ACCC has only issued five Part A competition notices, with the last issued in April 2006, and only one Part B notice which was later withdrawn by the ACCC.

The Reviews

2.6                   The Statutory Review under section 152EOA of the Competition and Consumer Act 2010 , July 2014 (Vertigan Review) recommended that the telecommunications-specific anti-competitive conduct regime in Part XIB of the Act be reviewed to assess the effectiveness of its provisions. The Government, in its response to the Vertigan Review, stated that it would undertake a review of Part XIB. The review was deferred pending the outcome of the Harper Review.

2.7                   In 2015, the Harper Review noted that its proposed amendments to section 46 would obviate the need for the telecommunications-specific anti-competitive conduct provisions in Part XIB of the Act.

2.8                   The anti-competitive conduct provisions in Part XIB of the Act were intended to be a transitional regime for the telecommunications sector. The Explanatory Memorandum for the Trade Practices Amendment (Telecommunications) Bill 1996 that provided for the Part XIB provisions indicated on page 7 that the intention was that the competition rules for telecommunications would eventually be aligned, to the fullest extent practicable, with general competition law.

2.9                   In September 2016, the Department of Communications and the Arts, on behalf of the Minister for Communications, conducted a review of the future of the telecommunications-specific anti-competitive conduct regime in Part XIB of the Act, in the context of the Government’s decision to amend section 46. A Discussion Paper, Review of the Part XIB telecommunications anti-competitive conduct provisions , was released seeking feedback on the ongoing operation of Part XIB given the interlinkages with section 46. The review was conducted simultaneously with the Government’s consultation on the exposure draft Bill.

2.10               The Department received seven submissions in response to the Discussion Paper, including a submission from the ACCC. The submissions varied in the extent of support for reform of Divisions 2 and 3 of Part XIB. The ACCC was supportive of Divisions 2 and 3 being repealed in full.

2.11               In light of the review, the Government concluded that Divisions 2 and 3 of Part XIB are no longer necessary or appropriate given the proposed amendments to section 46 and should be repealed. The amendments to section 46 will include a broader effects-based test which will supersede the effects-based test in Division 2 of Part XIB and will better target anti-competitive conduct.

2.12               In addition, given the strengthening of section 46, the Government considers it is unreasonable and inappropriate that the severe and onerous consequences that attach to competition notices (significantly higher penalties than under general competition law and reversal of the onus of proof in court proceedings) under Part XIB continue to apply to carriers and carriage service providers.

2.13               To the extent competition issues may arise in the telecommunications sector, the ACCC will be able to use its powers under general competition law, including those under the new section 46, as it would in relation to other sectors of the economy. In addition, the ACCC will retain its powers under the telecommunications access regime in Part XIC of the Act and Part 33 of the Telecommunications Act 1997 relating to the structural separation of Telstra. The ACCC will also retain its record-keeping rule and record disclosure powers under Part XIB.

Summary of new law

2.14               Schedule 2 to this Bill repeals Divisions 2 and 3 of Part XIB of the Act, and makes a number of consequential amendments following the repeal.

Comparison of key features of new law and current law



New law

Current law

The misuse of market power by carriers and carriage service providers is dealt with under section 46 of the Act.

The misuse of market power by carriers and carriage service providers is dealt with under section 151AJ, which imports section 46 and includes a separate telecommunications-specific anti-competitive conduct rule.

The ACCC does not have the power to issue competition notices. The ACCC will continue to have its general competition law enforcement powers and telecommunications access regime powers to address competition issues in the sector.

The ACCC may issue competition notices to carriers and carriage service providers to address competition issues in the sector. This is in addition to the ACCC’s general competition law enforcement powers and telecommunications access regime powers.

New law

Current law

There is no procedure to exempt conduct from the scope of the anti-competitive conduct provisions in Part XIB as it is no longer needed.

A person may apply to the ACCC to exempt specified conduct from the anti-competitive conduct provisions in Part XIB.

Detailed explanation of new law

Repeal of Division 2 of Part XIB

2.15               Part 1 of Schedule 2 to this Bill repeals Division 2 of Part XIB of the Act in its entirety. [Schedule 2, item 1, Division 2 of Part XIB]  

2.16               Division 2 of Part XIB of the Act sets out a telecommunications-specific competition rule. The competition rule provides that a carrier or carriage service provider must not engage in anti-competitive conduct (section 151AK). Section 151AJ defines anti-competitive conduct for the purposes of Part XIB of the Act.

2.17               In Division 2, a carrier or carriage service provider engages in anti-competitive conduct if it:

•        has a substantial degree of market power in a telecommunications market and takes advantage of that power in any market (including by engaging in conduct or a pattern of conduct) with the effect or likely effect of substantially lessening competition in a telecommunications market; or

•        engages in conduct that contravenes section 46 (or other provisions in Part IV of the Act) and that conduct relates to a telecommunications market.

2.18               The repeal of Division 2 of Part XIB is justified because the misuse of market power law in section 46 will be broader than the present telecommunications-specific test in Division 2 of Part XIB. Following the repeal of Division 2 of Part XIB, carriers and carriage service providers will remain subject to the general competition laws in Part IV, including the strengthened section 46, and the penalties in Part VI of the Act.

Repeal of Division 3 of Part XIB

2.19               Part 1 of Schedule 2 to this Bill also repeals Division 3 of Part XIB of the Act in its entirety. [Schedule 2, item 1, Division 3 of Part XIB]

2.20               Division 3 provides for the ACCC to issue competition notices. Competition notices are designed to enable the ACCC to quickly respond to a breach of the competition rule. After investigation of alleged anti-competitive conduct, the ACCC can issue a competition notice in relation to a carrier or carriage service provider if the ACCC has reason to believe that it is engaging or has engaged in conduct that breaches the competition rule in Division 2 of Part XIB.

2.21               There are two types of competition notices: Part A competition notices (section 151AKA) and Part B competition notices (section 151AL). Part A competition notices only require the ACCC to specify the kind of anti-competitive conduct rather than any particular instance of anti-competitive conduct (subsection 151AKA(5)). Part B competition notices require the ACCC to include particulars of the contravention that the ACCC believes has occurred or is occurring (paragraph 151AL(1)(b)).

2.22               Under Part XIB, potential penalties for contravention of the telecommunications competition rule accrue on a daily basis from the issue of a Part A Competition Notice (subsection 151BX(3)). A Part A competition notice can attract higher pecuniary penalties relative to those under general competition law. Penalties for breach of a Part A competition notice can be as high as $31 million plus $3 million per day if the contravention continues for longer than 21 days from the date that the notice is issued (paragraph 151BX(3)(a))

2.23               A Part B competition notice is prima facie evidence of the matters in the notice, and can reverse the evidentiary onus of proof in court (subsection 151AN(1)). The reversal of the ordinary onus of proof represents a significant deviation from the ordinary position that applies in court proceedings.

2.24               Division 3 also allows a person to apply to the ACCC for an order exempting specified conduct of the person from the scope of the anti-competitive conduct provisions in section 151AJ in Division 2 of Part XIB (section 151AS).

2.25               Without amendments to Divisions 2 and 3 of Part XIB, the scope of conduct in respect of which the ACCC may issue competition notices would be expanded as Division 2 directly imports section 46 as actionable anti-competitive conduct. Given the severe consequences attached to competition notices, their availability for use by the regulator would not be reasonable or appropriate for the sector in light of the broadening of section 46. No other industry is subject to the competition notices regime.

2.26               Given the repeal of Division 2 of the same Part and the competition notices regime, the exemption order regime in Division 3 of Part XIB can be repealed because it no longer has any function to perform.

Consequential amendments                                    

2.27               Part 2 of Schedule 2 to the Bill sets out a series of minor consequential amendments which are necessary as a result of the repeal of Divisions 2 and 3 of Part XIB [Schedule 2, Part 1, item 1] .  

2.28               Items 2-4 remove references to ‘section 151AJ’ from various provisions in section 6 of the Act that relate to the extended application of the Act to persons who are not corporations. These changes represent consequential amendments which are necessary as a result of the repeal of section 151AJ by item 1 of Schedule 2 .

2.29               Item 5 amends the title to Part XIB in recognition of the removal of the competition rule provisions. The new title is, The Telecommunications Industry: Tariff filing, record-keeping rules and other matters.

2.30               Item 6 updates the simplified outline of Part XIB to remove the summary points relating to the anti-competitive conduct rules and the competition notices and exemption order regime.

2.31               Item 7 repeals eight definitions from section 151AB. Six of the definitions were specific to Divisions 2 and 3. These definitions are no longer required as a result of the repeal of those divisions. The definitions of the ‘ACMA’ and ‘eligible partnership’, which are not specific to Divisions 2 and 3, are repealed because they are not used in Part XIB.

2.32               Item 8 repeals subsection 151AE(3), which deals with an extended operation of subsections 151AJ(2) and (3) relating to conduct taking place in the course of trade or commerce between Australia and outside Australia, amongst States and within a Territory, between a State and a Territory and between Territories and supply of goods or services by the Commonwealth or a Commonwealth instrumentality. As subsections 151AJ(2) and (3) are being repealed, this provision is no longer required.

2.33               Item 9 updates paragraph 151BU(4)(a) which addresses the Commission’s record keeping rules power in order to ascertain whether the competition rule was, or is, being complied with. The item replaces the reference to the ‘competition rule’ with the specific provisions of Part IV of the Act which represent the second form of the competition rule in subsection 151AJ(3), namely, sections 44ZZRJ, 44ZZRK, 45, 45B, 46, 47 and 48 of the Act. This will ensure that the ACCC continues to have the ability to make recording keeping rules in respect of compliance with the aforementioned provisions in Part IV.

2.34               Item 10 adds a reference to Part IV into subparagraphs 151BUA(2)(b)(i), 151BUB(2)(b)(i) and 151BUC(2)(b)(i). This amendment ensures that the ACCC’s existing powers under the disclosure direction regime relating to the above-mentioned Part IV provisions (currently reflected in the second limb of the competition rule) are continued.

2.35               Items 11-15, 20, 21 and 23 make consequential amendments to several provisions in Division 7 of Part XIB to remove references to ‘the competition rule’ occurring in the various section headings or provisions.

2.36               Items 16, 18, 19, 22, 24, 27, 28 and 30 repeal various sections which are no longer required as a result of the repeal of Divisions 2 and 3 of Part XIB.

2.37               Item 17 amends the text of paragraph 151BX(4)(b) to recognise that the only remaining alternative option in the list under subsection 151BX(4) will be the contravention of tariff filing directions, as a result of the removal of Division 2.

2.38               Item 25 updates subsection 151CG(1) by removing references to the exemption order application and section 151BG submissions to revoke exemption orders. This change follows from the repeal of the competition notices and exemption order regime under Division 3 of Part XIB.

2.39               Items 26 and 29 make updates to paragraphs 151CG(2)(a) and (b), and paragraphs 151CJ(1)(a) to (d) in recognition that the competition notices and exemption order regime will no longer exist.

2.40               Item 31 is a minor consequential change as a result of the removal by item 32 of the second note at subsection 151DA(1). That note reminds readers of subsection 151AJ(10), a provision which will no longer exist as a result of the repeal of Division 2.

2.41               Item 33 omits from subparagraph 155AAA(21)(c)(i) the reference to section 151AU.

2.42               Item 34 removes the reference to section 151AZ from paragraph 162(1)(b), as that provision which will no longer exist as a result of the repeal of Division 3.



Chapter 3                                                                                                                  

Regulation impact statement: Misuse of market power

 

3.1                   Prior to the 2013 Federal Election, the Government committed to a ‘root and branch’ review of competition laws and policy. This review was designed to examine the broader competition framework, to increase productivity and efficiency in markets, drive benefits to ease cost of living pressures and raise living standards for all Australians.

3.2                   The Prime Minister and the Minister for Small Business announced a review of competition policy on 4 December 2013. On 27 March 2014, the Minister for Small Business released the final Terms of Reference following consultation with the States and Territories and announced the Review Panel, chaired by Professor Ian Harper.

3.3                   The Review was conducted over the course of 12 months, and concluded with the release of the Final Report on 31 March 2015. The Harper Review made 56 recommendations, one of which was to reframe section 46 of the Act to prohibit a corporation with a substantial market power from engaging in conduct with the purpose, effect or likely effect of substantially lessening competition. The Harper Review further recommended that the legislation prescribe factors to assist courts in weighing the pro-competitive and anti-competitive aspects of conduct.

3.4                   The Government released its response on 24 November 2015, noting the recommendation on the misuse of market power. In light of the importance of the issue for business and consumers, the Government committed to consult further, and on 11 December 2015 released a Discussion Paper on options to strengthen the misuse of market power provision.

3.5                   On 16 March 2016, the Prime Minister, the Treasurer and the Assistant Treasurer announced that, following careful consideration of all submissions, the Government would adopt in full the Harper Review recommendation relating to the misuse of market power.

3.6                   On 15 November 2015, Treasury certified that the independent Harper Review constituted a process and analysis equivalent to a Regulation impact statement (RIS). As the Government decided to adopt the Harper recommendation on section 46 in full, no further certification or RIS was required.

3.7                   On 3 November 2016, the Department of Communications and the Arts was granted an exemption from the requirement to complete a RIS, on the basis that the amendments to Part XIB of the Act are in response to the amendments to section 46 and that the impacts are not significant.

3.8                   The Australian Government Guide to Regulation identifies seven questions that a RIS should address. Following is a summary of the analysis of these questions that occurred as part of the independent reviews and stakeholder consultation process in relation to the misuse of market power.

Problem

3.9                   The Harper Review Draft Report and Final Report discuss, in detail, the problem with section 46.

3.10               The Harper Review was the first comprehensive review of Australia’s competition framework in more than 20 years. The Review Panel examined whether Australia’s existing competition settings were ‘fit for purpose’, especially in light of the persistent forces for change that will shape the Australian economy now and into the future.

3.11               Many submissions to the Harper Review commented on section 46. Following consideration of these submissions as well as significant section 46 cases, the Harper Review found that the current section 46 does not adequately prohibit the misuse of market power, for two key reasons.

3.12               Firstly, the ‘take advantage’ element of section 46 was found by the Harper Review to be poorly adapted to distinguishing competitive from anti-competitive unilateral conduct and thereby identifying a misuse of market power. The test has also given rise to substantial difficulties in interpretation, as revealed in decided cases.

3.13               Specifically, ‘taking advantage’ of market power has been interpreted to mean engaging in conduct that could not be undertaken by a firm without substantial market power. The Harper Review viewed that conduct should not be immunised merely because it is often undertaken by firms without market power. Conduct can be competitively benign when engaged in by firms without market power, but may raise competition concerns when engaged in by a firm with market power.

3.14               The Harper Review considered that the introduction of supplementary provisions prohibiting predatory pricing had not advanced the policy intent of section 46. The Harper Review further noted that these provisions are difficult to interpret and apply in practice.

3.15               Secondly, the Harper Review found that the focus on showing the purpose of damaging a competitor was inconsistent with the overriding policy objective of the Act, to protect competition and not individual competitors. As part of the competitive process, vigorous competitive conduct may result in harm to less efficient competitors.  

Need for government action

3.16               The Harper Review Draft Report and Final Report explain why government action is needed.

3.17               Section 46 of the Act has been the subject of a number of independent reviews and parliamentary inquiries. Since 1976, 12 reviews have considered amendments to section 46, including the Harper Review.

3.18               As described above at paragraphs 3.9 to 3.15, the Harper Review found that section 46 was deficient and misdirected as a matter of competition policy.

3.19               The Harper Review discussed a number of significant cases on section 46, which illustrated the difficulties in interpreting and applying the ‘take advantage’ test and determining whether specific business conduct does or does not involve taking advantage of market power.

3.20               The Harper Review made it clear that the focus was not on whether the outcomes of such cases were ‘right’ or ‘wrong’ from a competition policy perspective, but rather on whether the ‘take advantage’ limb of section 46 was sufficiently clear and predictable in interpretation and application to distinguish between pro-competitive and anti-competitive conduct. The Harper Review found that section 46 was deficient in this regard.

3.21               Government intervention is justified and necessary because, for the reasons detailed above in this Chapter, section 46 was found to be unfit for its purpose and the difficulties with the provision have undermined confidence in the effectiveness of the law. In addition to section 46 not being reliably enforceable, the lack of focus on competition as a process meant that the provision permitted anti-competitive conduct and failed to benefit the consumers, businesses and the economy to the fullest extent possible.

Policy options

3.22               The Harper Review Final Report considered and discussed a range of options to enhance competition policy settings in Australia. The benefits of reforms were considered, with a preference for reforms that enhance the long-term interests of Australians.

3.23               The Issues Paper, published early in the Review process, provided an initial forum for stakeholders to raise policy options. The Draft Report weighed stakeholder views, considered the benefits of potential reforms, made a range of draft recommendations and invited further submissions in response to those recommendations. The Final Report again weighed stakeholder views, considered the benefits of potential reforms and made final recommendations which were considered to be the best options for reform.

3.24               The Harper Review examined the Act to assess whether Australia’s competition laws remained fit for purpose having regard to consumer and business experience with the laws, changes that have occurred in the Australian economy and that are anticipated, and relevant international developments.

3.25               The Government Response noted the Harper Review’s recommendation and committed to consult further. The Discussion Paper, Options to strengthen the misuse of market power law , was released on 11 December 2015. The Discussion Paper invited submissions on each element of the Harper Review’s proposal, as well as potential alternative options, without limiting discussion to the options presented.  

3.26               The options considered were:

•        A - Making no amendment to the current provision;

•        B - Amend the existing provision by removing the words ‘take advantage’;

•        C - Amend the existing provision by removing the words ‘take advantage’, including a ‘purpose of substantially lessening competition’ test, making authorisation available, and the ACCC issuing guidelines regarding its approach to the amended provision;

•        D - Amend the existing provision by removing the words ‘take advantage’, including a ‘purpose of substantially lessening competition’ test, including mandatory factors for the courts’ consideration, making authorisation available, and the ACCC issuing guidelines regarding its approach to the amended provision;

•        E - Amend the existing provision by removing the words ‘take advantage’, including a ‘purpose, effect or likely effect of substantially lessening competition’ test, making authorisation available, and the ACCC issuing guidelines regarding its approach to the amended provision; and

•        F - Amend the existing provision by adopting the full set of changes recommended by the Harper Panel.

Analysis of costs/benefits

3.27               The Review process sought to ensure that the competition law provisions of the Act: focus on enhancing long-term consumer wellbeing; protect competition rather than individual competitors; appropriately balance prohibiting anti-competitive conduct and not interfering with efficiency, innovation and entrepreneurship; and are as clear, simple and predictable as possible.

3.28               In the case of section 46, the Government undertook a further consultation process to analyse the costs and benefits of each element of the Harper Review’s recommendation as well as alternative options proposed in the Discussion Paper. Each of these options to enhance the effectiveness of section 46 were benchmarked against the status quo.   

3.29               Option A represented the status quo. As detailed above at paragraphs 3.9 to 3.15, the Harper Review considered that the current section 46 is unfit for purpose and is imposing costs on consumers, businesses and the economy.

3.30               Importantly, each of the remaining options involved removing the ‘take advantage’ requirement. As detailed above at paragraphs 3.12 to 3.13, the ‘take advantage’ element is the source of most of the costs associated with the current provision.

3.31               Each of the remaining options also introduced a ‘substantially lessening competition’ test. As detailed above at paragraph 3.15, the focus on damage to an actual or potential competitor allowed for anti-competitive conduct. The Harper Review recommended re-focusing section 46 on harm to the process of competition, and it was considered that the addition of ‘effect or likely effect’, as contained in options E and F, furthered this goal. The inclusion of this existing competition law concept has the additional benefits of minimising transitional costs as well as more consistently defining anti-competitive conduct across the economy.

3.32               The Harper Review recognised that all changes to the law will involve some transitional costs as firms become familiar with the new provisions and as courts develop jurisprudence on their application. The Harper Review recommended a number of measures to reduce uncertainty, including the ACCC issuing guidelines on its approach to the amended section 46 and the inclusion of mandatory factors for the courts’ consideration. Options C to F involve different combinations of these measures to reduce uncertainty. However, it was considered that each of these measures held significant benefits for users of the misuse of market power law.

3.33               Overall, it was considered that the full set of changes recommended by the Harper Panel represented the best option for strengthening the law whilst also including measures specifically designed to help businesses manage transitional costs. 

Consultation

3.34               The amendment to section 46 has been the subject of extensive consultation. The 12-month review process provided all interested stakeholders with opportunities to comment on proposed changes to competition policies, laws and institutions. The Harper Review process commenced with the release of an Issues Paper on 14 April 2014, followed by an eight week consultation period, including written submissions and meetings with local businesses in a number of locations, arranged through representative business groups.

3.35               A Draft Report was released on 22 September 2014, followed by an eight week consultation period including written submissions and public forums held in Perth, Adelaide, Melbourne, Sydney, Brisbane, Canberra, Darwin and Hobart. On 23 24 October 2014, the Review Panel hosted an International Conference, to draw on international and domestic expertise to consider and review the recommendations in the Draft Report.

3.36               Over the course of the Harper Review, the Panel hosted more than 150 meetings with stakeholders and received almost 1,000 written submissions (almost 350 in response to the Issues Paper and around 600 in response to the Draft Report).

3.37               Prior to releasing its Response, the Government consulted on the Harper Review’s Final Report, with around 140 submissions received.

3.38               The Government Response noted the recommendation of the Harper Review, and committed to further consultation in light of the importance of the issue for businesses and consumers. The Government then released a Discussion Paper on options to strengthen the misuse of market power provision on 11 December 2015, seeking views on the most appropriate approach. A further 86 submissions were received in response to the Discussion Paper, two roundtables were held with stakeholders, and Treasury met with a number of stakeholders one-on-one

3.39               The amendments to section 46 were released as Schedule 7 to the exposure draft of the Competition and Consumer Amendment (Competition Policy Review) Bill 2016. Submissions on Schedule 7 were received over a four week period from 5 September 2016. During this public consultation period, 34 submissions were received relating to section 46, of which three were confidential. A number of stakeholders raised concerns that the draft section 46 was excessively broad and would risk capturing pro-competitive conduct.

3.40               In response to these concerns, the Government amended the draft section 46 to narrow its scope to markets in which the purpose, effect or likely effect of a corporation’s conduct are of most competition concern.  

Agreed option

3.41               On 16 March 2016, following the Discussion Paper process, the Government announced that it would adopt in full the Harper Review’s recommendation on the misuse of market power.

3.42               A regulatory costing for the amendment to section 46 has been prepared, consistent with the Government’s Regulatory Burden Measurement Framework. These costs are summarised in Table 1.

3.43               It is expected that some businesses will expend additional legal costs during the initial transitional period, to ensure that their current practices are compliant with the rewritten section 46. Once businesses have factored the amended section 46 into their existing practices, it is expected that there will minimal additional regulatory costs.

3.44               As section 46 only applies to businesses with substantial market power, most of the businesses incurring these additional legal costs will be large businesses operating in concentrated markets. Many businesses will not incur any additional regulatory compliance costs as a result of the amendment to section 46. 

3.45               It is estimated that the increase in annual compliance costs for businesses as a whole will amount to $2.5 million per year, over ten years following commencement.

Table 1: Regulatory burden estimate (RBE) table

Average annual regulatory costs (from business as usual)

Change in costs ($ million)

Business

Community organisations

Individuals

Total change in costs

Total, by sector

-2.5

-

-

-2.5

 

Implementation and evaluation

3.46               Implementation of this amendment will be undertaken jointly by the Government and the Australian Competition and Consumer Commission (the ACCC).

3.47               Concurrently with the release of the exposure draft legislation, the ACCC consulted on a draft Framework for misuse of market power guidelines . The feedback from this consultation will inform the development of the ACCC’s final guidelines, which will detail its approach to the interpretation and enforcement of section 46 as amended. 



Chapter 4                                                                                                                  

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Competition and Consumer Amendment (Misuse of Market Power) Bill 2016

4.1                   This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 .

Overview

Schedule 1: Misuse of market power

4.2                   Schedule 1 to this Bill amends the Act to strengthen the prohibition of the misuse of market power by corporations and better target anti-competitive conduct by corporations with a substantial degree of market power.

4.3                   Section 46 of the Act is reframed to focus the prohibition and tests on the process of competition rather than individual competitors. This is achieved by introducing the concept of the purpose, effect or likely effect of substantially lessening competition in particular markets, and by removing three specific prohibited purposes which focus on damage to an actual or potential competitor.

4.4                   The prohibition is limited to markets to which the corporation is directly or indirectly related, which are likely to raise a competition concern, rather than to ‘any’ market. The assessment of a purpose, effect or likely effect of substantially lessening competition is to be guided by the mandatory consideration of both pro-competitive and anti-competitive factors, listed at subsection 46(2), in addition to existing jurisprudence on the test as it appears in other sections of the Act.

4.5                   Consistently with the current section 46, the rewritten section 46 will only apply to corporations with a substantial degree of market power.

Schedule 2: Telecommunications industry

4.6                   Schedule 2 to this Bill repeals Divisions 2 and 3 of Part XIB of the Act.

4.7                   Division 2 sets out a telecommunications-specific competition rule. The competition rule provides that a carrier or carriage service provider must not engage in anti-competitive conduct (section 151AK). Section 151AJ defines anti-competitive conduct for the purposes of Part XIB of the Act.

4.8                   Division 3 sets out a competition notices and exemption order regime. Competition notices were designed to enable the ACCC to quickly respond to a breach of the competition rule. Competition notices can give rise to substantially higher pecuniary penalties compared to general competition law and can reverse the onus of proof in court proceedings The anti-competitive conduct provisions in Part XIB were always envisaged as a transitional regime for the telecommunications sector.

4.9                   These Divisions are no longer necessary or appropriate given the strengthening of section 46 (in Schedule 1 to this Bill), which is applicable to all industry sectors. The amendments to section 46 will include a broader effects-based test which will supersede the effects-based test in Division 2 of Part XIB. Given the strengthening of section 46, the severe and onerous consequences that attach to competition notices are no longer considered reasonable or appropriate. The repeal of these Divisions mean the regulation of misuse of market power in the telecommunications sector will be dealt with by general competition law, in line with the treatment of other sectors of the economy.

Human rights implications

4.10               Schedule 1 to this Bill does not engage any of the applicable rights or freedoms.

4.11               Schedule 2 to this Bill does not engage any of the applicable rights or freedoms.

Conclusion

4.12               This Bill is compatible with human rights as it does not raise any human rights issues.

 

Schedule 1:  Misuse of Market Power

Bill reference

Paragraph number

Item 1, subsection 46(1)

1.21

Item 1, subsections 46(3) to 46(8)

1.20

Item 1, paragraph 46(2)(a)

1.33

Item 1, paragraph 46(2)(b)

1.34

Item 1, section 46

1.46, 1.48

Item 2, section 46 of Schedule 1 to the Act

1.49

Schedule 2:  Telecommunications industry

Bill reference

Paragraph number

Item 1, Division 2 of Part XIB

2.15

Item 1, Division 3 of Part XIB

2.19

Part 1, item 1

2.27