ACCC v Cement Australia

Justice Greenwood

The ACCC alleged that four exclusive contracts to acquire flyash,* which were entered into by Cement Australia (via subsidiaries including Pozzolanic) with four power stations in South East Queensland, involved a misuse of market power contrary to s 46 of the Act and also had the purpose or effect of substantially lessening competition with the result that they contravened s 45. The ACCC alleged that there was no commercial rationale for entering into and extending these contracts ; in particular, that they exceeded Cement Australia's actual and forecast demand for flyash.

Justice Greenwood, in a 940 page judgment, held that s 45 had been contravened but that there had been no misuse of market power.

Misuse of market power

Justice Greenwood found that Cement Australia had a substantial degree of power in the downstream market for concrete grade fly ash in South East Queensland and that it had the substantial purpose of preventing a rival securing access to unprocessed flyash (with the result that it foreclosed entry of a potential competitor in the downstream market). However, his Honour did not consider that the 'taking advantage' element of s 46 was satisfied; even without market power a company in Cement Australia's position could profitably enter into the same contract. In assessing the take advantage element, his Honour stated:

[1899] ... I ask whether a profit maximising firm operating in a workably competitive market could in a commercial sense profitably engage in the conduct in question having regard to the business reasons identified by the witnesses, assuming such a firm is confronted with similar circumstances to those confronting Pozzolanic ...

[1900] In answering that question, a practical judgment must be brought to bear having regard to the identified so-called legitimate or ordinary business rationale informing the decision-making of the firm in question in all the circumstances. Those similar circumstances in which a hypothetical firm might be called upon to decide the questions confronting Pozzolanic will, however, reflect a hypothetically competitive market in which all aspects or sources of Pozzolanic’s substantial degree of market power are stripped away so as to neutralise its market power. In all other respects, the hypothetical market will reflect the circumstances of the actual market:

[1901] In such a hypothetically competitive market, Pozzolanic would be confronting rivalrous supply of flyash in the concrete grade flyash market in South East Queensland. ... the point is that in a hypothetical, workably competitive market, judgments about such a firm engaging in the conduct must be made in circumstances where a profit maximising firm would need to take account of the constraints imposed by workable competition.

[1902] The question, put simply, is whether a firm profitably could have engaged in the conduct in question in the absence of a substantial degree of power in the relevant market. Because that question involves a hypothetical construct it must be answered by applying an objective test but one which takes into account the legitimate business reasons identified by the firm for engaging in the conduct ...

Section 45 - anti-competitive agreement

The contracts had the effect of substantially lessening competition because they prevented competition which would otherwise have been possible if a rival had been able to obtain flyash. In reaching this finding his Honour set out the process for determining an effect of SLC:

[3013] In determining whether a provision in the contract or arrangement has or is likely to have the effect of substantially lessening competition in the relevant market, the Court, asks three questions. First, what would the future field of actual and potential rivalry with its substitution possibilities look like with the provision in place (the factual hypothesis), and what would it look like without the provision in place (the counter-factual hypothesis)? Second, to what extent is the future field of rivalry diminished or lessened or the competitive process compromised or impacted upon by the provision? Third, is the measure of that effect substantial, actually or potentially, in the sense of being “meaningful” or “relevant” to the competitive process? The competitive “process”, with its rivalry and field of actual and potential substitution possibilities, protects the interests of consumers by competing away inefficient costs and constraining prices. The effect, and its substantiality or otherwise, is measured as an effect upon the process of competition not individual competitors. To the extent that impacts upon particular competitors are analysed, it is done so only for the purpose of assessing the effect of that impact upon broader rivalrous conduct, potential or actual, within the market.

[3014] The effect may be “relevant” to the competitive process in the sense of being “material” to rivalrous conduct even though only small competing volumes of flyash might have been brought into a future SEQ concrete grade flyash market without the relevant provision (if it be the fact or likely fact), and a future SEQ concrete grade flyash market was without that contestable volume with the provision in place and being given effect to.

[3015] Whether a provision of a contract or arrangement would be likely to have the effect of substantially lessening competition depends upon whether there is a “real chance” or real possibility of the effect. The method of assessment is to look to the date of inclusion of the provision when making the contract or the date when effect is given to the provision and ask was it likely (a real chance) at that date, based on the circumstances prevailing at that time, that the conduct would bring about a substantial lessening of competition in the relevant market. ...

In relation to purpose

[3144] The question ... is not simply whether there were good business reasons for Pozzolanic wanting to secure a contractual relationship with TEC. I am satisfied that the business objective of Pozzolanic in entering into the contract was to have concrete grade flyash to sell in SEQ. However, the real question is whether the adoption of the identified particular provisions in the contract were included for a substantial purpose of preventing others from entering the SEQ concrete grade flyash market, and in aid of that purpose, a purpose of preventing others from obtaining access to unprocessed Tarong flyash for processing, for entry into the SEQ concrete grade flyash market, and thus a substantial purpose of substantially lessening competition in those markets.

[3152] I am satisfied that not only did Mr Ridoutt and Mr Wilson pursue the quite natural and rational objective (and thus have the purpose) of winning the Tarong Contract to secure a continuing source of Tarong concrete grade flyash to enable the flyash business to continue to function and supply the company’s customers, but a further substantial subjective purpose in including the terms earlier described was to “creatively” or otherwise (in light of the loss of exclusivity) secure a position where “provisions” would be adopted that gave Pozzolanic (and in effect, QCL) contractual control over access to the total volume of raw flyash produced from both power stations for the life of the contract for priority processing through its own plant for the priority extraction, as it chose, of all concrete grade flyash capable of being extracted from the raw flyash at both stations. ...

[3153] ... I am satisfied that the ubiquity in the scope of the rights provision was included for a substantial purpose of preventing or discouraging a rival from obtaining access to Tarong and Tarong North raw flyash for processing ... and to prevent a rival entering the SEQ concrete grade flyash market with processed Tarong or Tarong North flyash. Thus, a substantial purpose of the formulation and inclusion of [the relevant clauses] was a substantial purpose of substantially lessening competition in each market. ...

[3232] I am satisfied that a substantial purpose of entry into the Original Millmerran Contract on 30 September 2002 was to prevent a rival entering into a contract with MPP for access to unprocessed flyash and to prevent a rival from entering the SEQ concrete grade flyash market with the supply and sale of Millmerran processed ash. I am satisfied that although Pozzolanic sought to risk manage its exposure to a loss of a contract with TEC in the tender process, and thus a loss of its historical source of supply of flyash, nevertheless a substantial purpose of entry into the Millmerran Contract was each of the two purposes I have described. More importantly, however, those purposes were purposes of the identified provisions of the Millmerran Contract as discussed in these reasons and particularly the provisions by which Pozzolanic was entitled to a substantial volume of concrete grade flyash from the Millmerran Power Station processed out of raw ash produced at that station, each year.

[3236] I am satisfied that Pozzolanic entered into the Original Millmerran Contract and adopted the identified provisions for at least a substantial purpose of preventing rival entry as earlier described, and I am satisfied that the provisions had the effect or likely effect of substantially lessening competition from 30 September 2002 until about the end of 2003.

In relation to the effect or likely effect

[3162] I am satisfied that [the relevant clauses] of the contract as they relate to the Tarong Power Station had the effect when the contract was made, and would be likely to have the effect of discouraging, hindering or preventing a third party from seeking to establish processing facilities ... at the Tarong site (or off-site) so as to collect and take raw unprocessed flyash from Zones 1, 2 or 3 into a processing facility for processing and extracting or winning concrete grade flyash for supply into the SEQ concrete grade flyash market.

...

[3165] The only question (as to this limb, s 45(2)(a)(ii)) is whether the identified provisions had the effect or would be likely to have the effect, viewed at the date of making the contract, of substantially lessening competition in a relevant market.

[3166] ... the provisions had that effect and would, as to the future, be likely to have that effect because the immediate scope, and the likely future scope, of rivalry characterising the competitive process in the SEQ concrete grade flyash market, was and would continue to be diminished by the operation and effect of the provisions ...

[3178] ... the provisions of the Tarong Contract of 26 February 2003 as they applied to access to unprocessed flyash from the Tarong Power Station, had the effect, and the continuing likely future effect, of substantially lessening competition in the market for the supply and acquisition of unprocessed flyash and the effect, and continuing likely future effect, of substantially lessening competition in the SEQ concrete grade flyash market because, first, the provisions operated to discourage and thus hinder and prevent third party entry into a supply arrangement at Tarong Power Station with TEC for raw flyash for processing for entry into the SEQ concrete grade flyash market, and discouraged and hindered and prevented third party entry into the SEQ concrete grade flyash market with processed Tarong concrete grade flyash. In addition, other SEQ raw flyash sources were not available to a third party

[3179] Second, an assessment of the future scope of rivalry and the competitive process in each market with the identified Tarong Power Station provisions in place, reveals an immediately diminished future competitive process in each market upon the making of the contract, by operating to discourage, hinder and prevent third party entry at Tarong thus removing any immediate future potential constraint upon Pozzolanic’s discretionary conduct (arising out of effective third party access to Tarong Power Station ash, and the potential entry of third party Tarong concrete grade flyash into the SEQ concrete grade flyash market), as compared with the future scope of the competitive process without the identified provisions and third party entry and contestability.

[3180] Third, an assessment of the likely scope of future rivalry and the competitive process in each market over the life of the Agreement with the identified Tarong Power Station provisions in place reveals a real and meaningful likelihood of a diminished future competitive process in each market upon the making of the contract. In the absence of the provisions as framed, the real likelihood was that third parties would have sought access to Tarong ROS flyash (as they attempted to do) and secured an agreement for access to Tarong ROS flyash for processing for the extraction of concrete grade flyash for supply into the SEQ concrete grade flyash market ...

[3233] I am satisfied that upon entry into the Original Millmerran Contract containing the identified provisions, the effect and likely future effect of the provisions would be to substantially lessen competition in the SEQ concrete grade flyash market as that contract, with those provisions, would have the immediate effect of discouraging third party regular and consistent access to Millmerran unprocessed ash for processing.

[3234] However, the effect and likely effect of the provisions would, like the effect of entry itself into a contract per se, dissipate as information flows emerged in the market which made it plain to market participants that a problem had emerged in the quality of the Millmerran ash of the kind extensively discussed in these reasons. At that point, the provisions, prima facie, did not operate to have the effect or likely effect of substantially lessening competition, in the with and without sense already discussed. The effect or likely effect upon competition in connection with the utility and possible use of the Millmerran flyash was an effect or likely effect of the compromised quality of the Millmerran ash itself. As I have found, the quality problems with the ash in terms of its colour and variability were not a confected or manufactured problem. They were real and enduring problems. ...

[3238] ...I am not satisfied that the provisions of the Amended Millmerran Contract otherwise carrying forward the identified provisions of the Original Millmerran Contract had the effect or likely effect of substantially lessening competition because, at that point, the effect upon competition was a function of the uncertainty surrounding the quality of the ash itself ...

The contraventions

[3256] As to entry into the Original Millmerran Contract, Pozzolanic contravened s 45(2)(a)(ii) of the Act by entering into the contract in circumstances where the contract included the identified provisions which had as a substantial purpose each of the purposes earlier described and in circumstances where those provisions had the effect or likely effect of substantially lessening competition. Pozzolanic contravened s 45(2)(b)(ii) by giving effect to those provisions of the contract and particularly by making the relevant take or pay payment. ..

[3257] As to entry into the Tarong Contract on 26 February 2003, Pozzolanic contravened s 45(2)(a)(ii) of the Act by entering into the contract in circumstances where the contract included the identified provisions which had, as a substantial purpose, each of the purposes earlier described and in circumstances where those provisions had the effect or likely effect of substantially lessening competition. Pozzolanic contravened s 45(2)(b)(ii) by giving effect to the provisions ...

[Note, these extracts do not deal with all of the relevant conduct; more detail to follow]

* Flyash is defined by Justice Greenwood as "a fine powder formed from the mineral matter in coal and is a by-product of the combustion of black coal" (para 14). If of suitable quality it may be used as a partial substitute for cement in the making of concrete (para 15)

** An interlocutory hearing was held on 20 May.

Articles

• Caroline Coops, 'A fly in the ointment for the ACCC? Implications of the Cement Australia decision for the interpretation of section 46' (2015) 23(2) Australian Journal of Competition and Consumer Law 83

• Martyn Taylor and Claire Forster, 'Predatory buying to corner a market: ACCC v Cement Australia' (2014) 22 Australian Journal of Competition and Consumer Law 146

• Tom Bridges and Patrick Barkachi, 'Establishing a Quantifiable Benefit or Detriment When Setting Pecuniary Penalties: ACCC v Cement Australia Pty Ltd' (2017) 25 Australian Journal of Competition and Consumer Law 65

Conference papers

• Caroline Coops, 'A fly in the ointment for the ACCC - implications of the Cement Australia decision for the interpretation of section 46' (Paper, 2014 Competition Law Conference, 24 May 2014)

Firm briefings

• Sar Katdar, 'Tying up the market - when your contracts cumulate into anti-competitive conduct' (Johnson Winter & Slattery Lawyers, February 2014)

• George Raitt, 'Power without glory: ACCC v Cement Australia' (Piper Alderman, Competition and Consumer News, December 2013)

• Elizabeth Richmond and Alexia Smyth-Kirk, 'ACCC v Cement Australia: another ACCC misuse of market power case turns to ash' (Clayton Utz Insights, 5 December 2013).