The ACCC has the power to review mergers and acquisitions under the Competition and Consumer Act. Most acquisitions are voluntarily notified to the ACCC through an informal clearance process, which allows the parties flexibility and a swift decision. If the ACCC has no concerns, it will grant informal clearance through a non-binding letter of comfort. For more complex cases, the parties may negotiate undertakings with the ACCC to resolve any competition issues.

1. MINING AND RESOURCES
Competition and
access in mining
and resources
Dr Martyn Taylor
Partner
martyn.taylor@nortonrose.com
August 2012
1

2. Overview
1. Competition issues in mining & resources
2. Australian Competition & Consumer Commission
3. Acquisitions of assets and shares
Dr Martyn Taylor
Partner
4. Long-term supply contracts and exclusivity +61 2 9330 8056
martyn.taylor@nortonrose.com
5. Joint ventures and co-ordinated conduct
6. Access to essential infrastructure
7. Sectoral access regimes – National Gas Law
2

3. MINING AND RESOURCES
What are the
competition
issues in mining
& resources?
3

4. Objectives of competition law
• Competition law is principally contained in the Competition
and Consumer Act 2010 (Cth).
• The Competition and Consumer Act:
– relevantly, has the objective of enhancing the welfare of
Australians through the promotion of competition;
– applies on a generic basis to all markets in Australia;
– gives effect to National Competition Policy; and
– is administered and enforced by the Australian Competition
and Consumer Commission (ACCC).
• Competition law is underpinned by economic theory: competition is
a necessary condition for the efficient operation of markets so they
can allocate society‟s resources optimally to their most valued uses.
4

5. Structure of competition law
• Misuse of market power
Single party
• National access regime
conduct
• National Gas Law (gas pipelines)
• Anti-competitive agreements
Competition Multi-party • Restraints of trade
regulation conduct • Cartel conduct
• Exclusive dealing
• Exclusionary provisions (boycotts)
Mergers and • Anti-competitive acquisitions
acquisitions
„Per se‟ prohibition „Rule of reason‟ prohibition
• Conduct is considered so harmful it is • Conduct is considered harmful only if it
deemed to be anti-competitive has an anti-competitive effect
• Example: price fixing by cartel • Example: acquisition of an asset
5

6. Where can competition issues arise ?
• Mining project acquisition (tenements, shares, assets, contracts)
• Contingent acquisitions and options (eg Farm-in arrangements)
Early • Structuring of exploration joint ventures
phase • Long-term mining leases and infrastructure tenements
• Third party access requirements in State agreements
• Access to third party infrastructure, including rail, ports
• Exclusive procurement contracts
Pre- • Long-term sale and offtake contracts
production • Structuring of production joint ventures
• Collective bargaining authorisations
• Structuring of marketing joint ventures
• Requests by competitors for access
Operations • Risks of price and output co-ordination
• Regulatory investigations
• Anti-competitive provisions in contracts
• Sale of assets
Exit • Sale of shares
strategies • Restraints of trade
• IPO disclosures
6

7. Illustrative list of recent competition issues
Single party Multi-party Mergers and
conduct conduct acquisitions
• Long-running litigation over rail • ACCC authorisation of joint gas • ACCC clearance of APA‟s
access in the Pilbara region marketing by North West Shelf acquisition of Hastings Fund
between Fortescue Mining, Gas Project producers. (gas transmission pipelines).
BHP Billiton and Rio Tinto.
• Collective bargaining approval • ACCC clearance for Arrow
• 15 year „no coverage‟ for Surat coal producers for Surat Energy acquisition of Bow
application for Australia Pacific Basin rail links. (wholesale gas for LNG).
LNG Gladstone Pipeline.
• Collective bargaining approval • Caltex acquisition of Mobile
• Access regulation of Roma to for Bowen/Galilee coal producers assets at Port of Gladstone
Brisbane gas pipeline. for Hay and Abbot Point rail links. (fuel terminal infrastructure).
• Access regulation for Amadeus • Authorisation of Hunter Valley rail • Proposed iron ore joint venture
gas pipeline. network and export coal chain. between BHP Billiton and Rio
Tinto in Western Australia.
• Certification of Dalrymple Bay • Collective bargaining approval
Coal Terminal access regime. for Wiggin Island coal producers • Chinalco acquisition of various
for Gladstone Port rail links. assets of Rio Tinto.
• Investigation of Santos
regarding access to oil storage • ACCC authorisation of joint gas • ACCC opposition to Santos‟
facility at Port of Brisbane. marketing by Gorgon Gas proposed acquisition of QGC.
Project producers. 7

8. The Australian
Competition &
Consumer
Commission
(ACCC)
8

9. What is the ACCC’s role ?
• The Australian Competition & Consumer Commission (ACCC) is
responsible for administration of the Competition and Consumer
Act (as well as other legislation containing competition obligations).
• ACCC promotes competition to benefit consumers, business and
the community. ACCC also regulates national infrastructure.
• Specifically, its performance plan requires it to promote “lawful
competition, consumer protection, and regulate national
infrastructure markets and services through regulation”
• The ACCC‟s role includes investigation, enforcement, industry
and consumer education, price monitoring and determining
the terms of access to infrastructure services.
• The ACCC also have an important role in screening and
authorising certain conduct that may be anti-competitive.
• The ACCC also provides advice and assistance to parliamentary
inquiries and government agencies for the development of
competition policy and legislation.
9

10. How does the ACCC operate ?
• The ACCC comprises an independent statutory Commission of Commission
seven full-time Members and four Associate Members.
Full
Commission
• Budget of roughly $150 million, roughly half of which is spent on
employee costs. The ACCC has a $25 million legal budget.
• Within „Treasury‟ portfolio in the Commonwealth Government. Sub-
Committee
• ACCC decisions are made through formal Commission meetings:
• Various Sub-Committees exist with delegated powers to make Staff
decisions on matters that are less significant.
Relevant
Division within
• Only the Full Commission itself can decide to start court action, ACCC
approve or oppose a major merger proposal, or authorise anti-
competitive behaviour where there is sufficient public benefit.
• The Commission is supported by around 800 staff structured into a A „staff paper‟ is
number of Divisions and Groups. confidential but can
sometimes be obtained
• The staff are responsible for investigating conduct and making via an FOI or in
recommendations to the Commission via a „staff paper‟. litigation discovery.
10

11. ACCC investigative powers
• Possible breaches of competition law come to the ACCC‟s attention
through complaints and information from members of the public, the
media, ACCC staff and other agencies.
• ACCC‟s Infocentre provides the initial response for all inquiries and
complaints. In 2011, it received 145,000 calls, 42,000 emails and
2,200 letters. Most of these were retail and consumer oriented.
• If a matter is sufficiently serious, the case is referred to the relevant
ACCC staff for investigation.
• The ACCC staff have formal powers under section 155 of the Act to:
• require persons to answer written questions and provide
documents (e.g., emails, board papers); and
• require persons to appear and provide evidence.
• In the last financial year, the ACCC issued around 270 of these
„section 155‟ notices. The compliance burden for recipients can be
very substantial indeed, including identifying any privileged documents.
11

12. ACCC enforcement powers
• ACCC may take enforcement action in the Federal Court seeking injunctions, court orders
and pecuniary penalties:
– The ACCC applies its compliance and enforcement policy.
– Criminal prosecutions are undertaken by the Director of Public Prosecutions
• Statutory remedies:
– Imprisonment for up to 10 years for individuals engaging in cartel conduct
– Substantial pecuniary penalties (firms and individuals) per contravention
– Disqualification orders against officers and directors
– Provisions of contracts may be unenforceable and must be severed from the contract
(which may affect the application of remainder of the contract)
• Other concerns
– Distraction of senior management
– Damage to reputation
– Private and class actions by injured parties for damages or other remedies
– Forfeiture of proceeds from criminal conduct under Proceeds of Crime Act
12

13. Change in approach at the ACCC
Graeme Samuel ended his eight year tenure as Chairman of the
ACCC in August 2011 and was replaced by Rod Sims:
• Rod Sims expects the ACCC to be strategic, not reactive.
• Rod Sims will continue to give priority to those areas that have
the greatest potential for consumer detriment or where market
structures need most support. Rod Sims, ACCC Chairman
• Rod Sims believes the ACCC should litigate more frequently. He
is prepared to take action even if the law is unclear and success
is not assured, suggesting a tougher enforcement approach.
Following the Metcash decision, the ACCC is testing the
commercial veracity of its competition theories to a higher degree.
Commentators have suggested that the ACCC under Rod Sims will
be more pragmatic and commercially nuanced in its analysis of
competition issues.
13

14. Pragmatic and commercial focus
The practical outcome of Metcash is that the Federal Court expects any
competition analysis to be pragmatic and commercially focussed.
• The Federal Court confirmed that economic theory must be linked to
commercial reality. Any competition analysis must apply theory in light
of actual market circumstances as supported by objective evidence.
• The ACCC subsequently issued a press release to confirm it would
undertake competition analysis based on commercially relevant facts,
assessments and evidence and not speculative possibilities.
A pragmatic and commercially focussed approach is fact intensive:
• A greater focus on ACCC information gathering to support any future
competition analysis.
• The ACCC may issue more statutory „section155‟ notices to compel
the disclosure of information.
• The ACCC could encourage third parties to substantiate their
submissions during the ACCC „market inquiry‟ consultation processes
so that the ACCC has cogent evidence of anti-competitive effects.
14

15. MINING AND RESOURCES
Mergers and
acquisitions
Acquisitions of
assets and
shares
15

16. Mergers and
The prohibition in section 50 acquisitions
Policy mischief:
• Firms with substantial market power (SMP) can raise prices
and reduce output to extract value from consumers.
• Firms can achieve SMP by acquiring their competitors.
Section 50 of the Competition & Consumer Act 2010 (Cth):
• A corporation/person must not directly or indirectly acquire: Statutory elements:
• shares in the capital of a body corporate/corporation; or: • Acquisition of shares or
• any assets of any corporation/person, assets
• if the acquisition would: • Actual or likely effect on
an Australian market
• have the effect; or
• be likely to have the effect, • Substantial lessening of
competition in market
• of substantially lessening competition in a market.
16

17. Mergers and
How many acquisitions raise concerns? acquisitions
Acquisitions reviewed in 2010-11
62% No concerns or need for public review
29%
Unconditionally cleared after public review
Withdrawn
Allowed to proceed with undertakings
Confidentially opposed
Publicly opposed (including Metcash)
4%
3%
1% 1%
Of the 377 acquisitions considered for compliance by the ACCC in 2010-11, only 3 were publicly opposed.
17

18. Mergers and
Voluntary pre-notification acquisitions
• Notifying a merger to the ACCC is voluntary in Australia, although
most countries operate mandatory pre-notification regimes.
• ACCC expects to be notified in any of the following circumstances:
• merger would result in the Acquirer achieving an Australian An Australian market
market share, by any measure, of 20% or more; share of 20% is the
„notification threshold‟.
• merger would result in a substantial conglomerate effect;
• merger would result in significant increase in vertical
integration;
• complaints to the ACCC by third parties are likely; or
• ACCC has previously notified the parties, or the industry
generally, that the ACCC expects to be notified.
• All Foreign Investment Review Board (FIRB) submissions are
automatically notified to the ACCC by FIRB.
• The ACCC may also self-initiate a review if it becomes aware of a
merger that is likely to raise concerns.
18

19. Mergers and
Different merger strategies acquisitions
The Acquirer in a merger has a number of potential merger strategies: Almost all mergers
notified to the ACCC
1. „Do nothing‟ and proceed with the merger, normally only where there involve either a
are no competition concerns. courtesy notification
or a request for
informal clearance.
2. Courtesy notification, typically in the form of a letter to the ACCC
explaining the merger and identifying there is no section 50 issue.
The formal
3. Informal clearance, normally where the ACCC expects to be notified clearance process
or there are any material competition issues. has never been used
given its inflexibility.
4. Formal clearance, involving a statutory merger review procedure
with appeal rights, granting statutory immunity.
Declaratory relief
was sought by AGL
5. Authorisation, involving a request for statutory immunity from the when acquiring an
Tribunal on the basis that there are net public benefits. interest in the Loy
Yang power station.
6. Declaratory relief, involving an application for a court declaration to
the effect that there is no contravention of section 50.
Metcash sought to
7. Force an injunction, by threatening to proceed with a merger that is force an
opposed by the ACCC, running the risk of penalties and divestiture. injunction, a high
19
risk strategy.

20. Mergers and
Informal clearance acquisitions
If clearance is granted, the Acquirer obtains a non-binding “letter of Three types of reviews:
comfort” from the ACCC that it will not oppose the acquisition but
reserves the right to do so should new information come to light Confidential review
takes 2-4 weeks, results
in a highly qualified view.
Informal clearance provides significant procedural flexibility: Becomes a basic review
once the merger enters
• The procedure is documented in the ACCC‟s Merger Review the public domain.
Process Guidelines but has no formal statutory basis
Basic review
• Application involves Acquirer providing the ACCC with a detailed takes 2-6 weeks, results
in a letter of comfort or a
written submission. Vendor normally comments on the draft. statement of issues.
• For more difficult submissions, executives of Acquirer and Vendor and Comprehensive review
their lawyers may meet with the ACCC to answer questions. takes as long as is
necessary and may
• If ACCC has concerns, greater scope for parties to make involve negotiation of
submissions and negotiate undertakings to resolve concerns. undertakings, but results
in a letter of comfort or
an expression of ACCC
• No appeal rights from ACCC‟s decision, so a decision is normally
opposition to merger.
swift (compared to other jurisdictions) and is final.
20

21. Mergers and
Informal clearance procedure acquisitions
Stage 1
Public informal Confidential informal
clearance application clearance application
submitted submitted
Confidential
review
Decision not to No concerns ACCC staff initial ACCC staff provide
oppose and informal competition an
clearance granted assessment indicative, confidenti
al view
Concerns
No concerns
Basic Mergers Committee Staff paper
review Market inquiries and
or full Commission
public consultation Once merger is public, ACCC
decision
commences market inquiries
Stage 2 Concerns
Further market
Statement of issues
inquiries and
Comprehensive published on ACCC
negotiation of any
review website
undertakings
Staff paper
Decision not to No concerns Concerns Decision to oppose
Full Commission
oppose and informal and informal
decision
clearance granted clearance not granted
21

22. Mergers and
Merger guidelines and methodology acquisitions
Merger guidelines identify how the law will be applied to the facts:
• Merger analysis is highly complex and involves a particular
methodology as well as theories of competitive harm.
• Merger guidelines provide transparency in the ACCC‟s analysis
and assists parties to identify any competition issues.
Methodology for merger analysis:
1. Identify the relevant markets and any competitive overlap.
2. Identify the theory of competitive harm and the key issues.
3. Apply the statutory factors. Merger analysis is not
intended to be a „tick
4. Identify any other relevant factors. the box‟ exercise: the
analysis is complex
5. Undertake a forward-looking comparison of the factual (with the and highly fact specific.
merger) and the counterfactual (without the merger) to determine
if any lessening of competition is substantial.
22

23. Mergers and
Market definition acquisitions
First stage in merger analysis is to define the markets and identify any
competitive overlap between the Acquirer and Target businesses.
Heineken
• Not intended to be „hard and fast‟, rather intended as a tool to assist
analysis of sources of market power. Premium
beer
• Four dimensions: product, functional, geographic, temporal (PFGT) Beer
• Smallest PFGT area within which monopolist could profitably sustain a
small but significant (5%) non-transitory increase in price (SSNIP). Alcoholic
beverages
• Most important consideration is product substitutability. Products that
Beverages
are substitutes are in the same market.
• Substitutability can also be applied to determine the geographic and
functional boundaries, for example
• good in Sydney not easily be substituted for a good in Perth;
• crate of apples sold at wholesale cannot be easily substituted for
single apple sold at retail (although other factors are also used to
determine functional markets, such as vertical efficiencies) 23

24. Mergers and
Porter ‘5 Forces Model’ (1979) acquisitions
Competition analysis involves
a two stage process to
simplify a complex analysis
involving many variables.
First, a market is defined to
identify key competitors with
the Supplier and the field of
immediate competitive rivalry.
Second, the market is used to
identify the sources of
potential competition and
additional constraints on the
market power of the Supplier.
Merger analysis essentially
follows this general approach.
24

25. Mergers and
Theories of competitive harm acquisitions
• ACCC classifies type of merger based on whether it is horizontal, vertical or conglomerate.
• Merger Guidelines identify the particular concerns and factors to be considered when
analysing each of these different types of mergers.
• ACCC analyses each merger type with regard to unilateral and co-ordinated effects.
. Additional factors relevant to unilateral effects
Horizontal mergers
Horizontal Significance of the merger parties to competition
focus on the removal
mergers Closeness of the merger parties competitive overlap.
Rival‟s responses
Vertical mergers focus
Vertical Incentive and ability to foreclose
mergers
on issues of vertical
Likely effect of any foreclosure foreclosure.
Access to commercially sensitive information
Barriers to entry at all levels of vertical supply chain Conglomerate mergers
focus on bundling and
Conglomerate Bundling and tying of products tying issues
mergers Formerly separate markets becoming single market
25

26. Mergers and
Statutory criteria acquisitions
In order to determine the effect of a merger, the ACCC applies statutory
factors to identify the levels of market power of the parties:
• the actual and potential level of import competition in the market;
Identifies ease of
market entry by
• the height of barriers to entry to the market;
potential competitors
• the level of concentration in the market (see next slide);
• the likelihood that the acquisition would result in acquirer being able Identifies actual level
to significantly and sustainably increase prices or profit margins; of competitive rivalry
within and between
• the extent to which substitutes are available in the market or are the relevant markets
likely to be available in the market;
• the dynamic characteristics of the market, including growth,
Identifies market
innovation and product differentiation;
changes over time
• the likelihood that the acquisition would result in the removal from
Identifies unique
the market of a vigorous and effective competitor; and
features of target
• the nature and extent of vertical integration in the market. 26

27. Mergers and
Market concentration (HHI Index) acquisitions
Herfindahl-Hirschman Index (“HHI”): Entity Share Square
A 50% 2500
• Sum of the squares of the market shares.
B 30% 900
• Market shares may be calculated by reference to C 20% 400
capacity, sales volumes and/or sales values
Pre-merger HHI 3600
ACCC unlikely to have horizontal competition concerns if: Entity Share Square
A 50% 2500
• post-merger HHI is < 2000; or
B+C 50% 2500
• post-merger HHI is ≥ 2000 with a delta < 100 Post-merger HHI 5000
Post-merger HHI 5000
HHI is consistent with approach used in US and EU.
Pre-merger HHI -3600
Not determinative of ACCC‟s view, just one of many factors HHI delta 1400
27

28. Mergers and
Section 87B undertakings acquisitions
ACCC may decide not to oppose the merger on the condition that the
parties comply with court-enforceable undertakings.
• Undertakings are voluntary and typically involve the restructuring
of the merger to address the ACCC‟s competition concerns.
• ACCC favours structural solutions (such as divestiture of assets)
rather than behavioural undertakings (such as price and service
guarantees), as the latter can be inflexible and difficult to monitor.
• ACCC will consider the effectiveness of the remedy, how difficult it
will be to administer, the ability of the firm to deliver the required
outcomes, and monitoring and compliance costs.
• ACCC normally undertakes market inquiries on proposed
undertakings.
Section 87B undertakings are public. They may be enforced in court
by the ACCC, including via compliance orders and damages.
28

29. Hypothetical example
Example
• Origin Energy Limited (ASX:ORG) makes an off-market takeover bid for 100% of the
shares in Santos Limited (ASX:STO), conditional on ACCC clearance.
Issues
• What is the business rationale for the acquisition ?
• What are the relevant markets and areas of actual or potential competitive overlap ?
• What is the likely impact of the acquisition on competition in each market ?
• Do market concentration, or other vertical, horizontal or conglomerate competition
issues, arise such that informal or formal clearance should be sought from the ACCC ?
• If so, when and how should the ACCC be approached, given confidentiality issues and
ASX takeover processes?
• Can undertakings be offered to the ACCC to address any adverse issues and secure a
regulatory clearance ?
• If clearance by the ACCC is unlikely, should an authorisation be sought and, if so, what
public benefits arise ?
29

30. MINING AND RESOURCES
Multi-party
conduct
Long-term
supply contracts
and exclusivity
30

31. The key prohibition in section 45 Multi-party
conduct
• Section 45 of Competition and Consumer Act (CCA) applies
to any provision in a contract, agreement or understanding.
Conduct that
may SLC
• An entity must not enter into, or give effect to, any such
provision if it has the purpose, effect or likely effect of
substantially lessening competition (SLC) in any market. Cartel
provisions
• Types of provisions that may give rise to issues include:
– co-ordination between competitors, particularly prices
– information exchanges between competitors Exclusionary
provisions
– market division or sharing, including non-competes
– collective boycotts and refusals to supply or acquire
– foreclosure of competition via long-term contracts Exclusive
dealing
• Many of these issues are also addressed by other more
specific provisions of the CCA. Section 45 is the catch-all
„rule of reason‟ prohibition. Particular conduct may be
prohibited on „per se‟ basis. Venn diagram
31

32. Substantial lessening of competition Multi-party
conduct
Key concepts:
• Market definition – what is the relevant market in Australia ?
– Product, geographic and functional boundaries of a market
– Example: wholesale gas market in Queensland
• Nature of „arrangements‟ and „understandings‟
– Not limited to written contracts, also includes informal arrangements
and verbal understandings (although evidential issues in proving this).
– Understandings may be inferred by a court in certain circumstances
• Identification of anti-competitive effects
– A „future with and without‟ or „future counterfactual‟ analysis is applied.
– The state of competition in the entire market in the foreseeable future is identified
assuming that the relevant provision applies (i.e., the „factual‟) and this is contrasted
against a hypothetical future scenario where the provision does not apply (i.e., the
„counterfactual‟).
– The two situations are contrasted to determine if any lessening of competition is
„substantial‟ relative to competition in the entire market.
• „Substantial‟ can be a relatively low threshold – meaningful or relevant. 32

33. Exclusive dealing and market foreclosure Multi-party
conduct
• Section 47 of the CCA regulates „exclusive dealing‟, which regulates
exclusivity in vertical supply contracts (vertical restraints). Supplier
• Section 47 is complex and covers a number of different supply and
acquisition permutations (e.g., supply on condition of no re-supply).
• Most permutations are only anti-competitive if they substantially
Acquirer
lessen competition (SLC):
– In a vertical context, the SLC analysis normally focussed on
„market foreclosure‟ – including aggregated over many contracts.
Exclusive dealing
– Concerns will arise if exclusivity prevents third parties from occurs when one
competing to supply or acquire goods or services over a person trading
significant period of time (say >2 years) where this is significant with another
relative to the overall level of competition in the market. imposes some
restrictions on the
• “Third line forcing” (3LF) is not subject to an SLC test, but is rather a other‟s freedom
„per se‟ contravention of the CCA. to choose with
– 3LF: Supplying only if the acquirer also acquires goods and whom, in what, or
services from a third party, or refusing to supply if the acquirer where they deal.
does not do so.
33

34. Long-term supply contracts Multi-party
conduct
• Development of natural resources is often underpinned by long-term contracts. Long-term
contracts are well suited to pioneering, large scale, long-lived, „sunk‟ investments.
• Most contracts have a foreclosing effect: if property is supplied to X, the same property
cannot be supplied to Y. Competition concerns can arise where this is taken to extremes:
– A contract (including when aggregated with other contracts) removes a significant
fraction of supply or demand from the “market”, hence competition is diminished as
the opportunity to engage in certain transactions is denied to competitors.
– The contract is for an abnormally long term, so there is little opportunity for
competitors to compete „for‟ the supply in periodic renewals.
• More importantly, duration can exacerbate the effect of other provisions that are
potentially anti-competitive (eg take-or-pay, MFN clauses, or first & last rights of refusal).
• A long-term contract may be justified on the basis that the natural resource would not be
developed in the absence of the contract. However, the CCA applies on a continuing
basis over the term of the contract, hence circumstances may change over time.
• It may therefore be necessary to seek public benefit „authorisation‟ from the ACCC to
protect against changes in circumstances during the term of the contract, yet
authorisations are costly to obtain and may have a term less than the contract term.
34

35. Restraint of trade Multi-party
conduct
• The common law doctrine of restraint of trade continues to apply to
contracts in Australia, notwithstanding the existence of the CCA.
• The doctrine requires that any restraint on trade must be justifiable,
reasonable and proportionate to the commercial interests to be
protected. The key issues are therefore:
– What commercial interests are protected ?
– Is the scope and duration of the restraint reasonable and
proportionate to those interests ?
• Severance clauses are important where a restraint of trade is
included, including „ladder clauses‟ that cover different permutations.
• Restraints are commonly encountered in the following circumstances:
– restraining vendors in a business sale and purchase contract;
– restraining key employees or consultants, particularly where they
have contributed critical knowledge or intellectual property.
35

36. Hypothetical example
Example
• Santos enters into a 30 year contract to supply all of AGL‟s wholesale gas requirements
in Australia. AGL must acquire all of its wholesale gas exclusively from Santos.
Issues
• What is the business rationale for the 30 year duration and exclusivity?
• What are the relevant markets affected by the contract ?
• What is the likely impact of competition in each market ?
– What competitors and potential competitors are foreclosed and is this foreclosure
material relative to the size of the Australian wholesale gas market ?
– What percentage of gas supply in the wholesale market is foreclosed over the
contract term and is this material?
– Are there other similar Santos contracts that also have a foreclosing effect ?
• Is there a „substantial‟ lessening of competition on a future „with and without‟ test?
• If so, is there sufficient net public benefit that may enable authorisation to be sought
from the ACCC ?
36

37. MINING AND RESOURCES
Multi-party
conduct
Joint ventures
and co-ordinated
conduct
37

38. Cartel provisions Multi-party
conduct
• Relatively new set of provisions in the Competition and Consumer Act, directed at „hard core
cartels‟, which can result in imprisonment for up to 10 years for individuals.
• In a mining and resources context, these types of provisions can be found in unincorporated JV
agreements and incorporated JV shareholder agreements, but a JV defence applies.
1. Competition condition 2. Purpose/effect condition Yes The provision is a cartel
provision and hence there
Are two or more parties to a Yes Does the provision of the
is a „per se‟ contravention.
contract, arrangement or CAU have the purpose or
understanding (CAU) in effect of fixing prices?
competition with each other? or May also be subject to
2. Purpose condition pecuniary penalties in
the civil jurisdiction. For
Does the provision of the corporations this is up
Criminal offence if… CAU have the purpose of: to $10 million per
• an intention to make or contravention (or 3
(a) preventing, restricting or
give effect to such an times value of benefit
limiting
agreement; and received if this is
production, capacity or
• knowledge or belief supply ? greater, or 10% of
that the agreement annual turnover if
contains a cartel (b) allocating benefits cannot be
provision. customers, suppliers or estimated) 38
territories?

39. Exclusionary provisions Multi-party
conduct
• Exclusionary provisions are commonly encountered whenever two or more competitors agree not
to supply goods or services to, or acquire goods or services from, a third party.
• Again, in a mining and resources context, these types of provisions are commonly found in JV
agreements, but a JV defence applies.
1. Competition condition 2. Purpose condition Yes The provision is an
exclusionary provision and
Are two or more parties to a Yes Does the provision of the
hence there is a „per se‟
contract, arrangement or CAU have the purpose of
contravention.
understanding (CAU) in preventing, restricting or
competition with each other? limiting the supply of goods
or services to or from
particular persons or classes
Unlike the cartel of person? Exclusionary provisions
provisions, this is not a can be avoided by using
Does the restrictive effect the cross-overlap
criminal offence. apply to the same goods or exemption between ss 45
However, may be subject services in respect of which and 47. If drafted as
to the same pecuniary the parties are in competition exclusive dealing (but
penalties in the civil in element #1? with no SLC), the
jurisdiction. provision is not an
exclusionary provision.
39

40. Joint venture defence Multi-party
conduct
Has the corporation made or Is the provision in a contract? Yes
given effect to a cartel Yes
provision? Is the provision for the
purposes of the relevant JV? Yes
IMPORTANT: Even if the JV Is the relevant JV for the
defence applies, the conduct production and/or supply of
must still not SLC under the goods or services? Yes
section 45. This can be
problematic if supply by the Is the relevant JV carried on
JV constitutes a substantial jointly, either by the parties or The joint venture defence
proportion of the market. the incorporated JV entity? Yes applies
Often a conceptually tricky • Whether the same volume/timing/price of product would be
issue for marketing JVs: is economically and technically feasible in the absence of the JV;
the provision “for the
• Whether the provision is reasonably necessary and
purposes of” the relevant
proportionate to the needs of the relevant JV;
production and/or supply JV?
• Whether less restrictive alternatives could realise the
volume/timing/price of the product in order to meet demand.
40

41. Incorporated Joint Venture Multi-party
conduct
• Participants
Incorporated – hold shares in a limited liability
Party A Party B company, rather than direct
Joint Venture
interest in the assets
– make financial contribution by
Joint Venture debt or equity
50% Shareholders 50% – not directly liable for debt and
Agreement liabilities of the joint venture
• The company
Owns JV Special Purpose Vehicle – is a separate legal entity and the
assets vehicle of the joint venture
Operator – carries on the business and
Contractual
arrangements owns the assets
– can borrow money and grant
security over assets
– profits returned as dividends
• Management
– board of directors
• Documentation
– Constitution and Shareholders
Agreement 41

42. Unincorporated Joint Venture Multi-party
conduct
• Participants:
Unincorporated – contractual relationship with each
Joint Venture other, not agency or partnership
– each participant takes share of
Party A Party B product and sells individually
– no separate legal personality for
SPV SPV
Joint Venture the joint venture
Agreement – parties own undivided interest as
tenant in common in all of the
50% 50% assets of the business
owner of owner of – make financial contribution for
assets as assets as purposes of the JV as required
tenant in Contractual tenant in
arrangements – liability is several rather than joint
common common
• Management
Management
– management committee made up
Company as Agent
of representatives of participants
– generally one party is the
operator of the joint venture
– may utilise management coy
• Documentation
– Joint Venture Agreement
42

43. Practical tips for joint ventures Multi-party
conduct
When negotiating JVs: Informal arrangements:
• Document JVs with competitors up front • Caution with arrangements with
• When negotiating JV, document intention competitors such as
to enter into a formal agreement and set – consortium bidding;
guidelines – entering into teaming
• MoU clause stating no cartel provision arrangements; or
created or given effect to until fully fledged – other collaborative arrangements,
JV agreement executed
• Could lead to an agreement that the
• Document a binding contract to negotiate parties will not compete genuinely with
• Be cautious about associated collusive each other
behaviour not caught by the JV exception – bid rigging
– market sharing
Consider authorisation for JV:
• Application to ACCC
• Immunity from contravening TPA for
conduct authorised
• Public benefit outweighs anti-competitive
detriment
43

44. Hypothetical example
Example
• Companies A and B decide to jointly market their respective shares of LNG arising from
an LNG production joint venture. They also decide to jointly market domestic coal
seam gas and co-ordinate all gas pricing in the context of a joint venture.
Issues
• What is the business rationale for the arrangement?
• What are the relevant markets and areas of actual or potential competitive overlap ?
• Are there any „cartel provisions‟ in the joint venture arrangement?
• Are there any „exclusionary provisions‟ in the joint venture arrangement?
• Does the joint venture defence apply? Specifically, can the marketing and pricing
arrangements be legitimately considered to be “for the purposes of” a production or
supply joint venture.
• Do the arrangements have the effect of substantially lessening competition?
• If so, are the public benefits of the arrangement sufficient to outweigh any anti-
competitive detriments, such that a public benefit authorisation could be obtained?
44

45. MINING AND RESOURCES
Single party
conduct
Access to
essential
infrastructure
45

46. Misuse of market power Single party
conduct
Policy mischief: Examples:
• Firms with substantial market power (SMP) can raise prices • Denial of access to
and reduce output to extract value from consumers. essential port or
pipeline infrastructure
Misuse of market power (section 46 of the CCA):
• Pricing output below
• Not all conduct by firms with market power is regulated. cost for a sustained
period to harm
• In order to contravene the Act: competitors (known as
„predatory pricing‟).
• a firm must have a substantial degree of market power
• Where competitors are
• it must take advantage of that market power (conduct
using essential
inconsistent with competitive firm)
infrastructure,
• it must has the purpose of harming competitors or increasing prices to
preventing them competing. „price squeeze‟ them.
• Requiring exclusivity
Generally, to avoid contravening section 46, a firm must act in a from customers to
manner consistent with a competitive firm . Generally, this foreclose supply by
requires a firm‟s conduct to have a legitimate commercial competitors.
rationale.
46

47. Single party
National Access Regime conduct
• Negotiation is preferred means to determine terms of infrastructure access.
• If services are supplied in a competitive market, the access provider has
an incentive to provide reasonable access so regulation is unnecessary.
• However, if only one facility and uneconomic to duplicate, a 'bottleneck„
exists. The absence of competition can lead to unreasonable terms.
Professor Fred Hilmer
• The National Access Regime is set out in Part IIIA of the Competition and
Consumer Act and seeks to address such circumstances:
• Enacted 1995 following Hilmer Report into Australian competition policy.
• Objective of the regime is to facilitate access by third parties to essential
infrastructure on reasonable terms and prices.
• In the absence of the national access regime, access seekers would
otherwise need to rely on litigation under s 46 if an access provider were to
refuse to provide reasonable access
• Regime only applies in limited circumstances, including that the infrastructure
must be nationally significant and access must promote competition.
47

48. Single party
Application of National Access Regime conduct
• There are 3 principal means by which the National Access
Regime may be applied:
• Voluntary access undertaking;
• State/Territory access regime that is certified effective;
• Declaration, followed by negotiate/arbitrate.
• Access undertakings: Providers of infrastructure services may
voluntarily submit access undertakings to ACCC. An undertaking sets Where an access
undertaking is
out the terms (including price) on which access will be provided.
accepted or an
effective access
• Effective access regimes: State and Territory governments may regime exists, an
create access regimes for infrastructure services. Government can application for
apply to National Competition Council (NCC) to have regime certified. declaration cannot
be made
• NCC makes recommendation to Federal Treasurer. Once
certified, the regime regulates access to the infrastructure.
48

49. Single party
Declaration and negotiate/arbitrate conduct
First stage, declaration of service: Declaration criteria:
• Any person, or the Federal Treasurer or a State Minister may apply to • Competition
the National Competition Council (NCC) seeking declaration of a service
provided via facility (e.g., access to rail services provided over rail lines). • Bottleneck
• NCC considers 5 key statutory questions, namely: (i) does access • National
promote competition; (ii) is the facility uneconomic to duplicate; (iii) is the
facility of national significance; (iv) is there no existing access regime; • Unregulated
and (v) is increased access contrary to the public interest. • Public interest
• NCC recommends to Minister. Minister must decide to declare or not.
• Decisions of the Minister may be appealed to Competition Tribunal.
Second stage, arbitrated terms of access to service:
• If a party is unable to agree terms of access with service provider, it may
notify an access dispute to the ACCC on any terms of access.
• ACCC arbitrates the dispute and issues interim and final determinations.
• Decisions of the ACCC may be appealed to the Competition Tribunal.
49

50. Single party
Fortescue - rail access in the Pilbara conduct
• Fortescue Mining Group (FMG) originally planned to use existing
private Pilbara railway lines, owned and operated by BHP Billiton
and Rio Tinto, to develop its Cloud Break deposit.
• FMG applied to National Competition Council (NCC) in June 2004
for declaration of parts of the various railways. In November
2004, the NCC determined that it had jurisdiction, leading to
appeals to the High Court which were ultimately dismissed.
• The NCC recommended to the Commonwealth Treasurer that the
Robe, Hamersley and Goldsworthy rail lines be declared. The
Treasurer subsequently declared the Robe and Goldsworthy lines.
• Rio Tinto subsequently appealed the Treasurer‟s decision to the
Australian Competition Tribunal and subsequently the Full Federal
Court who held that the Robe line should not be declared. The
matter is currently on appeal to the High Court.
• In the meantime, FMG has spent AUD 2.5 billion to construct its
own private railway line.
50

51. Hypothetical example
Example
• A third party seeks access to privately owned LNG terminal facilities in a port. The
owner of the facilities denies access (or seeks a excessive price or unreasonable
terms and conditions for that access, so „constructively‟ refuses).
Issues
• Misuse of any substantial market power:
– Does the owner of the LNG terminal facilities have substantial market power?
– Is it profitable and commercially rational to provide access ?
– What is the owner‟s commercial purpose in denying access ?
• Application of the national access regime:
– Are the facilities of national significance?
– Can the „facility‟ be economically replicated ?
– Would access promote competition in upstream/downstream markets ?
– Is access to the LNG terminal facilities already regulated?
– Is provision of access in the public interest (costs outweigh benefits)?
51

52. MINING AND RESOURCES
Single party
conduct
Sectoral access
regimes
(National Gas
Law)
52

53. The National Gas Law Single party
conduct
• Gas transmission and distribution pipelines are regulated under State-
based sectoral access regimes rather than the National Access Regime:
• The National Gas Law (NGL) is a State-based access regime that is
certified as effective under the National Access Regime.
• The National Gas (South Australia) Act 2008 implements the National
Gas Law. Each of the States/Territories have enacted legislation to
adopt the law.
• The objective of the NGL is to promote efficient investment in, and efficient
operation and use of, natural gas services for the long term interests of
consumers of natural gas with respect to price, quality, safety, reliability
and security of supply of natural gas.
• The NGL applies to pipelines for the haulage of natural gas which is of
“consumption quality” (i.e., processed).
• Pipelines are classified into transmission pipelines (whose primary function
is to convey gas to a market) and distribution pipelines (whose primary
function is to reticulate gas within a market).
53

54. Gas market supply chain
Single party
conduct
14426139 54
54

55. Single party
Gas pipeline infrastructure conduct
55
Source: AER

56. Single party
Economic regulation of gas pipelines conduct
The National Gas Law (NGL) applies different levels of economic regulation to
gas pipelines depending on the level of competition over the pipeline route:
• „Covered pipelines‟ (CP) are subject to regulation, including a requirement
for an ex ante access arrangement with reference tariffs for key services.
• „Light regulation pipelines‟ (LRP) are also subject to regulation, but have
a reporting requirement instead of an ex ante agreement and tariffs.
• Pipelines that are not „covered‟ are not regulated.
The regulation applied to CP and LRP includes:
• general obligations not to hinder access and to supply information;
• „ring-fencing‟ requirements vis a vis related businesses;
• controls over contracts with associates that threaten competitive parity;
• queuing requirements to ensure non-discriminatory access;
• maintenance of a public register identifying spare pipeline capacity;
• dispute resolution by Australian Energy Regulator over terms of access.
56

57. Single party
Greenfield pipeline developments conduct
• A key difficulty with the application of economic regulation is that it
may deter investment in new infrastructure. Shareholder value will
be eroded by any infrastructure investment where IRR < WACC.
• In order to create incentives for investment, the NGL creates a
specific regime for „greenfield pipeline‟ developments, namely:
– a pipeline that is to be structurally separate from any existing
pipeline (whether or not it is to traverse the same route; or
– a major extension to an existing non-covered pipeline; or
– a major extension to a light-regulated pipeline if granted an
extension by the AER.
• The regime allows a service provider to apply for a legally binding
no-coverage determination of up to 15 years, providing certainty
that the pipeline will not be regulated over that period.
• International gas pipelines entering Australia can be exempted from
price regulation instead, but still subjected to non-price regulation.
57

58. MINING AND RESOURCES
Conclusions
58

59. Practical tips to mitigate risk
Structure commercial • Structure commercial transactions within the permitted
transactions parameters of the law and exemptions.
• Take care with provisions in joint ventures, particularly
when they involve pricing and marketing.
Consider pro-active • Authorisations and notifications.
regulatory solutions • Informal clearances and regulatory approvals.
• Pro-active regulatory exemptions.
Minimise anti- • When meeting commercial objectives, prefer conduct
competitive effects which has a less restrictive effect on competition.
• Ensure that any restraints are justifiable and proportional
to their intended commercial purpose.
Ensure conduct has • Ensure that the conduct is motivated by a legitimate and
legitimate purpose defensible commercial purpose, not a purpose of
restricting competition or harming competitors.
59

60. Questions?
60

61. Our international practice
Disclaimer
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61
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