The market power test that New Zealand wants to copy gets tested in Australia. What can we learn?

There is currently a Bill before Parliament to repeal New Zealand's existing misuse of market power prohibition and replace it with the relatively new Australian market power prohibition. That Australian prohibition prohibits firms with a substantial degree of market power from engaging in any conduct that has the purpose, effect, or likely effect of substantially lessening competition in a market¹. While that prohibition was introduced in Australia in 2017, there remains significant uncertainty about how it will be applied in practice – including because until last week, there were no court findings under that new prohibition.  

However, that changed last week with the Federal Court of Australia making its first declaration under that Australian market power prohibition.

That declaration has been greeted with fanfare by the Australian Competition and Consumer Commission (ACCC), with ACCC Chair Rod Sims noting “[t]his is an important decision because […] this is the first time a corporation has been declared to have breached the revised misuse of market power law”.²

However, can we learn much from this case about how New Zealand's proposed new market power prohibition, if adopted, would be applied in New Zealand? And, if so, what can we learn?

What happened in Australia?

The Australian case in question saw the state-owned enterprise Tasmanian Ports Corporation Pty Limited (TasPorts) come under scrutiny for its conduct. TasPorts is responsible for the operation and management of all but one of Tasmania's ports, Port Latta, which is privately owned by a mining company, Grange Resources Limited (Grange). TasPorts had previously been the sole supplier of pilotage and towage services across all of Tasmania's ports, including Port Latta. However, in July 2018, Grange notified TasPorts of its intention to switch to a new provider of towage and pilotage services, Engage Marine Tasmania Pty Limited (Engage Marine). Engage Marine had been providing such services in other Australian states and was attempting to expand into the Tasmanian market. In response to Grange's move to switch to a new provider, TasPorts imposed a new marine precinct tonnage charge (Tonnage Charge) on Grange for vessels calling at Port Latta.

The ACCC alleged that the implementation of the Tonnage Charge had the likely effect of substantially lessening competition in the markets for towage and pilotage services, and therefore breached the market power prohibition. This finding was on the basis that:

• TasPorts first sought to charge the Tonnage Charge after Grange had notified TasPorts of its intention to switch to Engage Marine for its towage and pilotage services;
• There was a real commercial likelihood that if Grange agreed to pay the Tonnage Charge, this would raise Grange's future costs of acquiring services from Engage Marine;
• TasPorts had no legal right to require Grange to pay the Tonnage Charge; and
• TasPorts sought to impose the charge without conducting any assessment of the costs of providing the services it would need to provide Grange.

Ultimately, the case was settled by TasPorts providing the ACCC with a court-enforceable undertaking that TasPorts:

• Would only charge Tonnage Charges that were reasonable and did not discriminate against the use of towage suppliers other than TasPorts;
• Would provide reasonable access to Engage Marine to berth space for tug boats on reasonable commercial terms; and
• Would ensure Engage Marine had access to relevant port communications systems required to provide towage services in the Tasmanian ports.

The TasPorts case is very similar to a decision made under New Zealand's previous "cease and desist order" regime. Introduced in 2001 (and since repealed) this regime permitted cease and desist orders to be issued to a party ordering them to stop behaviour that was a prima facie breach of the Commerce Act, provided urgent action was necessary. In 2006, such an order was issued to Northport, after a competing port services company complained that Northport had given its joint venture an exclusive licence that made it uneconomic for other companies to marshal cargo at Marsden Point port³. Northport subsequently allowed competitors to marshal at the port, so the NZCC decided not to take any penalty action.

What can we take from this case?

The value of this case as a precedent is somewhat limited given that it concluded with a settlement agreement between TasPorts and ACCC, and, in any event, the behaviour at issue appears to be the type of conduct that would likely also have been caught under New Zealand's existing prohibition. However, the case does serve to demonstrate the difference in the method of analysis of breach, as between the new Australian prohibition and the existing New Zealand market power prohibition.

If decided under New Zealand's existing prohibition, the test would ask whether TasPorts would have implemented the Tonnage Charge at the proposed rate if it did not have a substantial degree of market power. This assessment involves considering a hypothetical scenario where TasPorts faces an increased level of competition to contemplate what, if any, Tonnage Charge they would charge and then comparing that to their conduct in practice.

Under the Australian prohibition, the court looks at whether the implementation of the Tonnage Charge had the purpose, effect, or likely effect of substantially lessening competition by making it harder for Grange to switch providers to a new entrant. The determinative factor, in this case, appeared to be that TasPorts had no legal right to impose the Tonnage Charge and had not undertaken a full assessment of the cost of providing pure access services to Grange⁴. In short, the ACCC's case was that it had no legitimate business justification for the conduct and that seems to have been determinative to the outcome.

However, given the facts of this case and the fact it was settled without a contested court process, this case should not be regarded as precedent that having a legitimate business justification is a defence to a market power action under that new Australian prohibition.

Implications for New Zealand

If New Zealand introduces a similar market power prohibition to Australia, we have long submitted that there needs to be a statutory exception for conduct with a legitimate business justification so that businesses are not pursued for legitimate and ordinary course business conduct.

Even if (as currently suggested by the government) businesses can rely on a sensible regulator to not bring actions where there is a legitimate business justification, that would not stop disaffected competitors bringing an action against conduct with a legitimate business justification⁵. It is, therefore, critical that a legitimate business justification exception is included in clear and transparent terms in the legislation, rather than leaving that to enforcer discretion.

Next steps

The Commerce Amendment Bill is currently in the Select Committee stage. Submissions on the Bill have now closed, and the Select Committee's report is due on 16 September 2021. Russell McVeagh has made several recommendations in our submission. Our key concerns include Parliament's willingness to adopt a provision that remains largely untested, and the lack of an express legitimate business justification exception (which is a feature of similar tests in the leading competition law jurisdictions internationally).

Russell McVeagh is looking forward to further discussing its submission with the Select Committee later this week.  

If you would like to discuss how this proposed amendment may affect your business, or you would like assistance in considering your options for responding to these proposals, please get in touch with one of our experts listed below.