The shape of things to come?

Last month the Economic Development, Science and Innovation Select Committee produced its report on the Commerce (Promoting Competition and Other Matters) Amendment Bill, which "amends the Commerce Act 1986 to modernise and strengthen competition settings". The marked-up Bill from the Committee, incorporating its report, can be found here. 

In principle the recommendations could be over-ridden by the whole House, and I frankly don't know how often that happens. But my guess is that given that the recommendations were unanimous, a complete overhaul is rather unlikely (that said, the Committee recommended "by majority" rather than unanimously that the Bill be passed, so I may be overdoing the degree of political harmony). In all likelihood, though, I think we have a decent steer on what the ultimate Act will look like.

By and large the Committee endorsed the thrust of the Bill as it stood, though it made a substantial number of amendments to various proposed sections. Only two elements of the Bill were thrown overboard: the proposal to allow the Commerce Commission to carry out market studies of pro-competitive regulation, and the proposal to repeal s46 of the current Act.

Giving the heave-ho to pro-competition market studies wasn't because the Committee didn't like the idea, but rather because it reckoned the existing market studies power in Part 3A of the Act already allows the Commission to do them. And just to be totally clear about it, it proposed incorporating, after the existing s51B(3), a new subsection 3A, "To avoid doubt, the [market study] recommendations may, without limitation, be made for the purpose of (a) reducing regulatory barriers to competition; or (b) the development of regulation to promote competition".

Junking the unnecessary new kind of market study power also dealt to one of its more questionable elements. Originally the Bill would have allowed the Commission to require third parties "(a) to prepare and produce forecasts, forward plans, or other information and provide them to the Commission; and (b) to apply any methodology specified by the Commission in the preparation of forecasts, forward plans, or other information". The Committee didn't like the sound of that, and neither had I in my submission: the Committee asked me about it in my Zoom session. In the end the Committee said that "Some submitters opposed enabling the Commission to compel parties to create new information, such as forecasts, describing it as overly intrusive and inconsistent with established disclosure principles. We are also concerned that this proposed information-gathering power may not be justified".

The other proposal to get the chop was repeal of s46. In the Committee's own words, "Section 46 is one of a number of provisions that provide for exceptions to the application of Part 2 of the Act (Restrictive trade practices). It draws a bright-line boundary by providing that acquisitions of assets of a business or shares are dealt with through the merger regime in Part 3 (Business acquisitions) rather than also being able to be challenged under Part 2 ... A number of submitters argued that repeal of section 46 would expose ordinary merger activity to Part 2 scrutiny, chilling legitimate commercial activity. We recognise that submitters value a clear and statutory boundary. We therefore recommend deleting clause 8 of the bill, to retain section 46".

Otherwise the proposed changes went through, albeit with some amendments. Here are my personal highlights.

There will be a new statutory notification regime to better support collaboration between businesses, and along similar lines the Commerce Commission will be able to grant class exemptions for categories of low-risk conduct, staring with collective bargaining by small firms (the Committee set $3 million in annual revenue per firm as the 'small' criterion) and retail price maintenance. 

The Bill proposes introducing corrective action orders for contravention of Part 2 of the Act (restrictive trade practices). I couldn't agree more. As I said in my submission (p3), "This is a splendid idea and frankly I’m surprised that we all hadn’t thought of it long ago. Fines (the current penalty) are a deterrent and a punishment, but I’m perfectly sure that what consumers would value most is a putting right of the rort they were exposed to". The Committee clarified that private parties, and not just the Commission, will be able to apply for these orders.

The merger control regime is being beefed up in a number of significant ways. 

While there will still be a voluntary merger notification system, the Commission will (if it hears of one) be able to "call in" a merger that might be of concern, and require the parties to suspend it and to hold the businesses separate for 40 working days. 

The concern over "killer" acquisitions - allegedly buying out prospective competitors before they become a real issue for incumbents - is addressed by expanding the definition of a post-merger "substantial lessening of competition" (SLC) to include "creating, strengthening, or entrenching a substantial degree of market power" (I'd guess the 'strengthening' and, especially, 'entrenching' limbs will be doing the heavy lifting). This new SLC definition is in play only for the merger bits of the Act: the Committee said that "We consider that applying the clarification across the Commerce Act [as a whole] may create uncertainty about legitimate competitive responses, because such conduct could be framed as "strengthening" or "entrenching” a firm’s position".

And the concern about "creeping acquisitions" - allegedly where an incumbent quietly hoovers up market influence in successive bite-sized chunks - is addressed by allowing the Commission to look at a new merger in the context of acquisitions over the past three years, and not just from a standalone perspective. The Committee clarified that they can't be any old acquisitions but must involve "the same, substitutable, or otherwise competitive goods or services".

All of these changes can be seen as a toughening up of the merger regime, to prevent anti-competitive mergers sneaking through the cracks. But there was one recommendation that can be thought of as a liberalisation, and that's the proposal to allow the Commission to accept "behavioural undertakings" as part of a merger approval. 

For those new to it, currently (from my submission, p2), "s69A [of the Commerce Act] allows the Commission to accept only one kind of undertaking from an applicant for a merger clearance or authorisation – an undertaking "to dispose of assets or shares specified in the undertaking", i.e. a promise to divest some assets so that a post-merger competitor can acquire them and act as a more effective competitive constraint on the merged entity. The Commission is specifically forbidden in s69A(2) from accepting any other kind of undertaking, even if some other kind of behavioural, rather than divestment, undertaking would solve any competition issues".

"This", I concluded (and a fair few of the folks in the competition game have the same view), "doesn’t make a lot of sense, and isn’t standard international practice". So behavioural undertakings will now be acceptable in principle, and the scope for the Commission to accept them has been widened a bit. They could kick in where, for example, divestments of the scale needed to address competition concerns are simply not reasonably practicable.

And finally there's predatory pricing. which is proposed as a new s36C of the Act and which involves anyone with market power "(a) pricing below Average Variable Cost or Average Avoidable Cost (b) pricing above Average Variable Cost or Average Avoidable Cost but below Long-run Average Incremental Cost or Average Total Cost if the pricing is for an exclusionary purpose", with all these cost  terms defined in the proposed Act. 

I can see why this has been proposed: I'm still ambivalent about its necessity or practicability. We'll see. In any event it may crop up again: the Labour and Green members of the Committee, in a "differing view" at the end of the report, said that "The proposed use of long run average cost as an objective benchmark was consistent with established international competition practice and would have been a small step forward". I read that as saying they would have preferred a cost test that would have led to more prices being found predatory, but if predatory pricing is your main thing, maybe you should read Russell McVeigh's commentary on the Committee's report as they see it as reflecting some debate within the committee about whether to go with predatory pricing or not. 

Those members would also have liked to have seen industry-specific codes of practice brought in - so would I - and also wanted to see "amendments ... that would have provided contractors initiating collective bargaining with a safe harbour from retaliatory conduct by contractees, despite concerns raised during submissions that without such protections the right to collectively bargain may exist in theory but not in practice". So while we are undoubtedly nearer the end of our lengthy and rather slow competition reform journey, there's probably a bit more change still to come.