South Australia: a tale of two authorisations
In this post, we look at the ACCC’s authorisation decision, and look for some lessons by comparing it to the decision in another recent authorisation application from South Australia, an application by metropolitan Adelaide councils to jointly procure waste management services, which was denied in December 2016.
Joint procurement and the authorisation process
Authorisation is a process that allows parties to engage in conduct that would otherwise contravene certain provisions of the Competition and Consumer Act 2010 (Cth) (CCA) on the basis that the public benefit from the conduct outweighs any public detriment (including from any lessening of competition).
This gives parties a way around the somewhat inflexible per se provisions of the CCA (such as the cartel provisions), which prohibit conduct regardless of its effect on competition, and allows parties to justify their conduct on the basis of public benefits (which might be pro-competitive effects, or other broader benefits such as transaction cost savings or other benefits or efficiencies).
The ACCC’s consideration of parties’ applications extends over a period of 6 to 12 months, before deciding whether to authorise the conduct (protecting the party from enforcement action) or deny authorisation.
Many joint procurement arrangements would normally fall foul of the CCA as being contracts, arrangements or understandings with the purpose, effect or likely effect of fixing, maintaining or controlling prices. This is why the prospective joint electricity purchasing group, and the group of metropolitan councils, made their applications to the ACCC.
Joint purchase arrangements might spark new electricity generation
The applicants in the electricity authorisation application included some of South Australia’s largest corporations and purchasers of energy. They proposed to place a single tender into the market for the supply of their combined electricity requirements in order to secure a competitive and reliable electricity supply. They submitted that the proposed arrangements would deliver public benefits including encouraging new electricity generation and improvements to power system security, with flow-on benefits to consumers, and efficiencies/transaction cost savings.
The application enjoyed significant support from a wide range of sources, including business and industry groups, politicians from the Government and Opposition, and local authorities in areas where the businesses operate.
The only submission made during the public consultation process that did not expressly support the application was a submission from electricity supplier Origin Energy Limited (Origin) that cast some doubt on the purported public benefits associated with the conduct (Origin questioned whether the collective purchasing in the circumstances would in fact be pro-competitive, as it would create no new demand).
The ACCC broadly accepted the applicants’ position on public benefits, and found that while there was hypothetical public detriment if the applicants were able to jointly “exercise market power to artificially depress prices for electricity”, the ability of the applicants to do so was limited. This is because their requirements constituted just 16% of South Australian aggregate load and less than 1% of the National Electricity Market.
Ultimately, in its final determination released on 17 May 2017, the ACCC was satisfied that the proposed conduct would likely result in public benefits that would outweigh the likely public detriment. Accordingly, it granted authorisation for the 11-year period sought by the applicants. Assuming no application for review is lodged in the Australian Competition Tribunal, the immunity conferred by the authorisation will take effect on 8 June 2017.
This was in stark contrast to the application by Council Solutions and five metropolitan Adelaide councils for authorisation of proposed arrangements for the joint procurement of waste management services, which was denied by the ACCC on December 2016.
In that case, the applicants pointed to a number of anticipated public benefits, including transaction cost savings, other efficiencies, stimulation of supply-side competition and improved environmental outcomes. In this case, however, the ACCC did not accept the majority of these benefits. For example, the ACCC considered that, on the basis of consultation with interested parties, the complexity of the proposed arrangements would result in an increase in transaction costs (i.e. preparing tenders) for some suppliers and a decrease for others, such that there was no net public benefit. The ACCC only accepted a number of ‘small improvements’ as being the relevant public benefits that would result from the conduct.
By way of contrast to the electricity application, the ACCC considered that there were a number of public detriments likely to result from the conduct, including deterring potential suppliers from tendering (due to the complexity in the RFP process proposed to be used by the applicants), and reductions in long-term competition for the supply of waste services to both participating and non-participating councils.
In a 66-page determination (a full analysis of which is beyond the scope of this post) the ACCC considered that the proposed conduct would likely result in public detriments that would outweigh any likely public benefits, and accordingly denied the application.
The recent South Australian experience with joint procurement authorisation applications tells a number of cautionary tales to parties considering applying for authorisation of joint purchase/supply arrangements. First, and foremost, the determinations reinforce the fact that the ACCC is not afraid to vigorously test parties (and consult with interested third parties) on their assertions about the public benefits expected to flow from otherwise prohibited conduct.
Secondly, it is worth noting that each application requires an analysis of public benefits beyond just general efficiencies and reduced transaction costs. The electricity purchaser applicants were able to point to public benefits such as the potential for new entry into the market, and improvements to power system security – these broader public benefits appear to have been important to the ACCC’s decision. Similarly, while the ACCC accepted “small” public benefits in the waste management authorisation in relation to certain environmental and educational matters, these were not sufficient to overcome the public detriments put forward by opposing parties and accepted by the ACCC.
Finally, it reinforces the importance of contextualising changes in bargaining power that may result from the proposed arrangements. In some cases, increasing bargaining power on one side of a commercial relationship can be an important public benefit in the ACCC’s consideration of an application for authorisation of joint supply/purchase arrangements. However, as the ACCC noted in its determination in the electricity matter, there can be a public detriment where bargaining power is strengthened to the point of allowing the parties acting jointly to distort prices.