Minority report
Senator Nick Xenophon
The Joint venture reduces competition
The bulk of the evidence before the committee is that the joint
marketing arrangements of the North West Shelf Joint Venture are
anti-competitive. In the absence of an authorisation from the ACCC, they would
appear to be a breach of the Trade Practices Act. The committee was not
told of any practical or logistical reasons for maintaining joint selling.
An independent legal opinion was offered by Associate Professor
Zumbo:
In my opinion, there is a breach of section 45 of the Trade
Practices Act. It can be through price fixing—and we know there is price-fixing
conduct. Also there is conduct that is likely to have the effect of
substantially lessening competition.[1]
The Venture clearly has the effect of substantially
lessening competition in the Western Australian gas market because of the lack
of import competition, the very high barriers to entry of the market, high
levels of market concentration and the lack of countervailing power of gas
buyers.[2]
The Joint Venture reduces the number of significant sellers from seven to two.[3]
In terms of whether its purpose is to substantially lessen competition:
...you have to ask: what is the goal they are seeking to achieve
by engaging in joint marketing? I would submit that there is only one goal, and
that is to maintain or raise prices above competitive levels. If that is the
case, then they would have the purpose of substantially lessening competition.[4]
Once it is established that the purpose and effect of the joint
selling is to substantially lessen competition, there is a basis to
'investigate and possibly institute proceedings' for breaches of the TPA. Associate
Professor Zumbo cites two European precedents in which the European Commission
settled cases involving the joint marketing of gas in the Norwegian and Danish
gas markets.
It is arguable that the joint venture was justified when first
introduced as the producers were effectively facing the government as a vertically
integrated monopsony buyer. But the subsequent deregulation and privatisation
of the domestic gas market means this justification no longer holds.
The individual companies in the Joint Venture are all large and
profitable. The profitability of the joint venture project itself was not
disclosed. At one point, the Joint Venture's CEO said 'the joint venture is not
an incorporated entity. It does not have profits per se', which seemed
inconsistent with her later claim that 'through what I call "the lean
years" of the nineties this project was far from highly profitable'.[5]
There was no convincing evidence presented that the viability
of the North West Shelf gas project would be compromised if the joint
activities in the local gas market were restricted to exploration and
development.
There is some irony in the Venture's argument that their
joint marketing arrangement must continue because the Western Australian gas
market is 'immature'. It is a vicious circle as the joint marketing
arrangements are themselves an impediment to the maturing of the market. It is
a bit like the classic economic argument about protecting 'infant industries'
who then never grow up. If the Venture's partners were able to market their
products independently to consumers, the various factors cited by the Venture
as signs of the market's immaturity would be overcome.
This point was made by Associate Professor Zumbo:
...you will never get the market to develop to a fully mature
status until you remove the joint marketing arrangements, because the joint
marketing arrangements are an impediment to the development of all the factors
you pointed out. Until you have separate marketing, all these additional
facilities will not develop. There is no incentive to develop them because you
essentially have a very dominant player, it being the North West Shelf project.[6]
The puzzle of the lifting of the authorisation
Chapter 1 of the majority report notes
that in December last year, the Venture applied to the ACCC to have its
authorisation for joint selling revoked. Ms Howell claimed the authorisation
was no longer necessary and may not have been needed at all (see paragraph
2.7). Associate Professor Zumbo questioned this strategy:
My advice to any person in the position of the joint
venture—given the considerable risk, given the size of the venture—is: if you
have an authorisation you keep it, and if you do not have an authorisation you
get one. It is just far too risky. The penalties under the Trade Practices Act
could be 10 per cent of turnover or 10 million [dollars, if greater] per
offence. They are very significant penalties. There is a real question as to
why they sought to revoke that authorisation. If it is there, you keep it. Why
give it up?... what I still cannot understand is: if the benefits that the
joint venture believe they are contributing outweigh the cost—that is, the
reduction in competition—why don’t they seek an authorisation? That would put
the issue beyond doubt.[7]
Associate Professor Zumbo speculated before the committee that
the ACCC may have given the joint venturers 'a level of comfort' that the
arrangements are not in breach of the Act and that no action would be taken. He
stressed that if an understanding along these lines had been reached, it is
important for that to be made public.[8]
Conclusion
The North West Shelf Joint Venture's arguments for maintaining
joint selling arrangements are flimsy and unconvincing. All of the arguments
put to the committee in defence of joint selling were soundly rebutted.
Further, the arguments that the arrangements stunted the competitive
development of the Western Australian gas market are cogent and well founded.
Having had its authorisation for joint selling revoked, the Venture seems to be
in breach of section 45 of the Trade Practices Act. Whatever the legal
ramifications of current practices, there is no reason why joint selling
arrangements should be allowed to continue.
If there has been an understanding between the Venture and the
ACCC that the joint selling arrangement is protected on the basis of matters
other than the provisions of the Act, then these details must be made
public. If the ACCC decides as an outcome of its investigation that the Venture
is complying with section 45, the basis of this finding must be made public.
Ending the North West Shelf Joint Venture is a crucial
requisite for deregulating the upstream gas market in the State and ensuring
that the welfare of domestic gas consumers is maximised.
Recommendation
The ACCC should either abolish the joint marketing arrangements on
the North West Shelf or provide clear, publicly stated reasons as to why the
current arrangements should be permitted within the provisions of sections 45
and 76C and 76D of the Trade Practices Act.
Senator Nick Xenophon
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