CEDA conference: Looking forward to 2014

Speakers: 
Mr Rod Sims, Chairman
Conference: 
CEDA, Sydney
21 February 2014

Chairman, Rod Sims, announces the ACCC's priorities for 2014. Issues discussed include drip pricing, disruption of scams, "discounts off what?" in the energy and telco sectors, emerging consumer issues in the online marketplace, and credence claims.

Transcript: 

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Thank you for welcoming me back to speak at CEDA. The Australian Competition and Consumer Commission (ACCC) has developed a truly productive relationship with CEDA over the past three years and I enjoy the annual opportunity to speak at this forum.

The synergies our organisations share in our collective championing of strong, efficient and effective markets means that events such as this provide the ideal forum to discuss the ACCC’s priorities for the year ahead.

As I usually say on these occasions the ACCC’s core role is to ensure our market economy works as it should to the long run benefit of all Australians. The profit motive is the great engine that drives our economic progress but it needs to work within boundaries largely set by the Competition and Consumer 2010 Act (the Act).

At a high level this Act prohibits cartels and agreements and mergers that substantially lessen competition, and prevents the misuse of market power for the purpose of damaging competition; it ensures consumers are not deceived by advertising, suffer unconscionable conduct or are sold unsafe goods; and, where competition cannot be effective, we have a role in regulating monopolies in communications, rural water, transport and energy (through the AER).

Today I will cover four topics:

  • First, I will outline our 2014 enforcement and compliance policies, and this will be my main focus today
  • Second, I will briefly focus on some merger activity
  • Third, I will, also briefly, look at our main regulatory focus for 2014
  • Finally, I will conclude with a few comments on the Root and Branch review of competition.

Enforcement and compliance policy for 2014

It is crucial that we do, and are seen to, enforce the law by taking matters to court. This is essential to our overall effectiveness.

We spend considerable time on compliance activity: from short films on cartels (The Marker) and indigenous consumer rights, to small business and consumer education. In this we are assisted by a wide range of professional advisors, mainly lawyers, who run important compliance and other programs for businesses. We are also greatly assisted by clever programs such as the ABC’s The Checkout.

In essence most of our effectiveness comes from what companies and individuals do not do; most know the law well and work within its letter and intent.

Each year the ACCC receives roughly 160,000 complaints and inquiries. From this pool we have to make a judgment on which matters merit an investigation. This process narrows our scope to about 500 initial investigations, around 140 of which are then conducted at an ‘in-depth’ level.

This activity directly or indirectly sends warnings that often instantly change behaviour. A simple call from the ACCC can be very effective.

From this activity we take around 35 cases to court each year, accept around 30 court enforceable undertakings and issue infringement notices in around 30 matters.

Such enforcement action is essential for two reasons.

First, and most important, enforcing the law in this way sends a powerful message of deterrence to businesses.

Put another way, sufficient court and other enforcement action is an essential requirement for effective compliance and education.

Second, and the lesser point, some of these cases help clarify the law and the level of penalties which may be imposed by the courts for particular conduct. I will mention some recent cases that have done this.

Since 2011, the ACCC has conducted an annual strategic review of consumer and competition issues to identify those areas we should focus on. Like any other APS agency, our resources are finite and we need to make important choices about where to allocate our attention.

The review involves a thorough assessment of information gathered by the ACCC from a wide range of sources. These include:

  • surveys of international agencies,
  • analysis of our own complaints and other information,
  • state and territory consumer and fair trading agencies, and
  • the various industry ombudsman services including energy ombudsman in the states and the TIO.

Importantly, we undertake this exercise with transparency and publish a revised Compliance and Enforcement Policy at the beginning of each year. The policy sets out our areas of focus and explains the factors we take into account when deciding whether or not to pursue particular matters.

This year the review confirmed many previously identified priorities but also revealed some new areas we intend to pursue. We have named these priorities in the 2014 edition of the ACCC’s Compliance and Enforcement policy, which I am releasing today.

Strategy is, or course, about choice. What to do and, more importantly, what not to do.

Our competition and consumer strategies take different approaches. With competition enforcement, we focus on key parts of the Act, and conduct that causes significant detriment and often has wider implications.

Consumer enforcement priorities are more focussed on particular sectors and types of behaviour.

Competition enforcement

Turning to competition issues, our Compliance and Enforcement policy emphasises that some forms of conduct are so detrimental to consumers and competition that the ACCC will always assess them as a priority. It does not matter which sector of the economy the activity occurs.

The enduring priorities for the ACCC include:

  • cartel conduct
  • anti-competitive agreements, and
  • misuse of market power.

In addition, competition and consumer issues in highly concentrated sectors, in particular the supermarkets and fuel sectors, remain a priority for the ACCC.

In the supermarket sector, we have been investigating claims that major supermarkets may have engaged in unconscionable conduct and may have misused their market power when dealing with suppliers.

This complex investigation reflects the challenges associated with gathering evidence while being conscious of the business relationship witnesses have with the supermarket chains. We expect to conclude a key part of this matter around the end of March this year.

Our two investigations involving anti-competitive conduct in the fuel sector have also attracted a high degree of public interest.

As you may recall last year, we looked very carefully at the issue of escalating shopper docket petrol discounts. Large shopper docket discounts may provide short term benefits to a small number of consumers, however, in our view they increase petrol prices for other consumers and can cause longer term harm to the fuel retailing sector.

In December 2013, we accepted court enforceable undertakings from Coles and Woolworths to stop fuel saving offers which are wholly or partially funded by any part of their business other than fuel retailing. This undertaking also limits fuel discounts, which are linked to supermarket purchases, to a maximum of four cents per litre.

We accepted these undertakings because they address the ACCC’s principal competition concerns and allowed the matter to be resolved quickly and efficiently.

Recently the ACCC has received further complaints about shopper docket discounts by Coles and Woolworths in excess of four cents per litre. This is of serious concern to the ACCC and we are currently examining if the current offers comply with the Court enforceable undertakings.

You may recall the ACCC is also concerned about petrol price information sharing arrangements. These allow for the private and very frequent exchange of comprehensive retail price information between the major petrol companies through the Informed Sources’ OPW Service.

The key issue here is subscribers knowing that their prices, on a site basis, are being received and observed by their major competitors on a very frequent and timely basis. This knowledge may reduce the incentive for subscribers to compete as aggressively on price as otherwise would be the case.

This investigation is complex and involves extensive evidence gathering and legal and economic analysis. The investigation is nearing completion and I hope to have more to say about this before the end of the April.

Cartels

When dealing with cartels our investigations will focus on anti-competitive conduct that causes detriment in Australia.

As I mentioned earlier, cartels are an enduring priority.

In 2013 we instituted proceedings against Koyo and NSK for alleged cartel conduct relating to the supply of ball and roller bearings for use in motor vehicles and industrial applications.  In another case, the Federal Court ordered a penalty of $1.35 million against Japanese cable supplier Viscas Corporation for bid rigging and price fixing conduct.

Our most recent cartel proceedings were instituted in December last year, when we took action in the Federal Court against Colgate-Palmolive Pty Ltd, PZ Cussons Australia Pty Ltd, a former Colgate employee and Woolworths Limited.

In this case we allege that:

  • Colgate and Cussons engaged in cartel conduct by manipulating the price and supply of laundry detergent products in Australia during 2008 and 2009,
  • the alleged conduct applied across the range of laundry products sold by Colgate, Cussons and Unilever and had a significant effect on competition in an industry valued at almost $500 million, and
  • that Woolworths, and a former employee of Colgate, were knowingly concerned in the conduct.

It is alleged by the ACCC that in a meeting with a retailer, one of the manufacturers involved estimated that, without the conduct, the value of the laundry detergent market would be $146 million lower over 2009-13.  In our view, this is one measure of the potential detriment to consumers flowing from the conduct alleged by the ACCC.

Unilever and its relevant employees have been granted conditional immunity from legal proceedings by the ACCC after Unilever came forward with information about the alleged conduct.

We currently have over 15 in depth cartel investigations underway, and I would expect at least 2-3 of these to be before the courts this year.

Agreements that substantially lessen competition

Late last year saw considerable activity in this area. We received judgement in relation to both Cement Australia and Flight Centre.

In September 2013 Cement Australia was found to have contravened section 45 of the Act in numerous ways by entering into flyash contracts with four major power stations in South East Queensland.

In December 2013 the Federal Court held that on 6 occasions Flight Centre attempted to enter into arrangements with airlines that sought to eliminate differences in air fares so as to fix, control or maintain Flight Centre’s margin. A decision on penalty is due by the end of March; this is the first substantive matter under the new penalty regime in Part IV and so will signal the level of deterrence provided under the Act.

Perhaps the major case, that may have been run, was in relation to the shopper docket discounts discussed earlier. The other significant matter under investigation, and also mentioned earlier, is in relation to petrol price information sharing.

Secondary boycotts

Just like other forms of anti-competitive conduct, secondary boycotts can be extremely detrimental to businesses, consumers and the competitive process. Where the ACCC becomes aware of possible secondary boycott conduct, it will investigate.

We have had some recent incidents where the harm from secondary boycott activity was significant. While the ACCC was proactive, we have seen reluctance by some business to provide the evidence we need to get matters before the courts, given their continuing relationships with the unions involved.

This is unfortunate, but it is quite common in relation to this particular breach of our Act.

We currently have up to 10 in depth investigations under way in relation to anti-competitive agreements, and anticipate that there will be further proceedings issued this year.

Misuse of market power

When I became Chairman in August 2011 I said we would put more focus on such cases, and we have.

I acknowledge these are difficult cases as they necessarily involve large companies, and the behaviour in question often is central to the strategy of the business. They are hard fought and extremely resource intensive.

But we must take them on. And we have, and we will.

In February 2013 the ACCC commenced proceedings against Visa alleging a misuse of market power and exclusive dealing in relation to dynamic currency conversion services.

Last week we instituted proceedings in the Federal Court against Pfizer for alleged misuse of market power and exclusive dealing in relation to the supply of Atorvastatin to pharmacies.  Atorvastatin is a pharmaceutical product used to lower cholesterol.  Pfizer’s originator brand, Lipitor, was for a number of years Australia’s highest selling prescription medicine under the PBS with annual sales exceeding $700m.

We currently have around 15 in depth investigations underway into alleged misuse of market power, with one further matter likely to be before the courts soon. And no, it does not involve supermarkets or petrol.

Addressing consumer problems

The consumer protection priorities set out in the Competition and Enforcement Policy

Telecommunications and energy

Consumer protection in the telecommunications and energy sectors remains a priority for the ACCC.

Our scrutiny of the telecommunications industry’s advertising and sales practices continues. In relation to this, we were pleased with the High Court’s decision last year to reinstate a $2 million penalty against TPG.

This was an important decision for two reasons. First, by reinstating the $2 million fine, the High Court affirmed the importance of deterrence in assessing penalties under the ACL. Secondly, the ruling reinforced the importance of adequately disclosing the full cost to consumers of bundled offers.

In the energy sector our focus in 2013 was on addressing unlawful door-to-door sales conduct by energy retailers. AGL and APG were ordered to pay penalties greater than $1 million, and our proceedings against Energy Australia and Origin Energy are still before the Federal Court.

Our next area of focus in the energy sector is misleading discount claims. The ACCC is increasingly concerned about possible misleading conduct by energy retailers in their promotion of energy plans. These concerns relate to the promotion of discounts and savings off energy use and/or supply charges under those plans. We refer to this new focus of our energy work as “discounts off what?”

This new focus will not come as a surprise to the sector. In August 2013 the ACCC wrote to energy retailers about our concerns. In December 2013 the ACCC commenced legal action against AGL South Australia for allegedly misleading residential consumers in South Australia about electricity discounts.

There will soon be further court action.

Emerging consumer issues in the online marketplace

We have recently taken action in relation to misleading online group buying practices with, for example, a $1 million pecuniary penalty being ordered, by consent, against Scoopon. More action will follow.

Our interest in the online marketplace will now turn to comparator websites and drip pricing.

Comparator websites are an important marketing tool for businesses. They allow consumers to compare offers from providers and are popular in the energy, travel and insurance sectors. These websites can improve transparency and promote competition; however, the information displayed on them can on occasion mislead consumers in significant ways. We will be working with industry to improve standards around comparator websites, and will take enforcement action where appropriate.

Drip pricing involves the incremental disclosure of fees and charges over an online booking process. It causes both competition and consumer detriment.

Consumers see a ‘headline’ price advertised at the beginning of the booking process but when they progress to the payment phase, additional fees and charges have been added.  Consumers purchasing airfares or sporting event tickets are all too familiar with this practice.  Drip pricing involves a lack of transparency which may mislead consumers, and it can also make it difficult for businesses to compete on a level playing field.

There will also shortly be enforcement action in this area.

Disruption of scams

For the past two years, the ACCC’s InfoCentre has received around 80 000 contacts about scams. In 2012, consumers reportedly lost over $93 million. These statistics are very concerning and yet represent just the tip of the iceberg when it comes to the financial impact of scams.

The ACCC, as the national consumer protection agency, has an important role in helping protect Australians from scams. In the past we have focused on empowering consumers to spot a scam and how to avoid being scammed.

This year we are prioritising some level of scam disruption. We will seek to identify and contact scam victims in order to stop money being sent to scammers. We will also be working with money remitters, for example Western Union, to stop fraudulent funds transfers.

Given the size of the problem, this is not something that we can tackle alone. We will be working collaboratively with state and territory consumer agencies, many of which are already doing excellent work in this area.

Complexity and unfairness in consumer or small business contracts

Last year, we looked closely at unfair contract terms. Following the ACCC’s intervention, a range of businesses amended their standard form contracts, removing potentially unfair terms.

In March, we released a public report on unfair contract terms. This report highlighted the ACCC’s key issues of concern in the telecommunication, hire car, domestic airline, online shopping and fitness sectors.

Publication of this report marked the end of the compliance emphasis of the ACCC’s unfair contract terms work and the beginning of an enforcement oriented approach.

In its first judgment on unfair contract terms, the Federal Court deemed that a number of clauses in the standard form consumer contract for Bytecard Pty. Limited were unfair. Specifically, the court found that if these standard clauses were applied they would cause detriment to ByteCard’s customers.

There is more work for us in relation to unfair contract terms and we will be taking further enforcement action.

Credence claims

In 2013 food industry credence claims were on our radar.  Our actions in this area do not just benefit consumers. There is a competition side to credence claims as well; businesses should be able to compete on their merits. Misleading credence claims tilt the playing field away from suppliers who are innovating and doing the right thing. A supplier may lose its competitive advantage or unique selling point if others are making misleading claims.

We have taken action alleging a range of misleading claims, including:

  • poultry and egg production claims — eg Free range; Free to Roam
  • food premium claims — Baked Fresh; Extra virgin olive oil
  • Country of Origin — Australian Made

There are a number of matters currently before the Federal Court dealing with these important consumer issues.

This year we will be particularly interested in representations, including marketing and labelling, that portray large manufacturers as small niche businesses. This type of behaviour has the potential to mislead consumers, particularly those who prefer to support Australia’s small business community.

These issues go to the heart of market efficiency. If consumers become sceptical as to claims concerning how products are made (eg free range) or niche products, then innovation and competition will suffer.

Consumer guarantees with a focus on extended warranties

Our campaign to promote and enforce consumers’ guarantee rights under the ACL will continue. Following a number of successful proceedings in 2013 with, for example, a $3 million penalty being ordered, by consent, against Hewlett Packard, our focus this year will shift to the sale of extended warranties.

Some suppliers or manufacturers offer optional extended warranties to lengthen the coverage of their manufacturer's warranty.

The ACCC is concerned that consumers may be misled into thinking that they are required to pay for rights that are automatically provided by the consumer guarantees.

Our action in this area has already commenced with proceedings instituted against Fisher & Paykel. We allege false or misleading representations concerning consumers’ rights under the statutory guarantee regime in the course of offering an extended warranty. The matter is before the Court.

There will be further action in 2014 in relation to consumer guarantee rights against some quite large companies which should know better.

Consumer protection issues involving vulnerable consumers

Perhaps, the main case involving vulnerable consumers in 2013 was the Full Federal Court’s decision that Lux had engaged in unconscionable conduct in relation to the sale of vacuum cleaners.

Identifying and addressing consumer protection issues impacting on Indigenous communities also continues to be a priority for the ACCC, and for that matter other ACL regulators who have worked closely with us on many fronts.

Continuing to develop relationships with Indigenous communities and consumers is a key aspect of our work in this area. Our aim is to empower Indigenous consumers in their dealings with business and provide them with an avenue to report suspect behaviour.

Carbon tax repeal

A major focus in 2014, of course, will be the ACCC’s role in ensuring that prices, particularly in the energy sector, do not reflect the carbon tax if and when it is repealed.  This will be a high profile role, but it is a role we are confident we can perform so as to achieve the objectives given to the ACCC.

Product safety

As Australia’s product safety regulator we are always busy in this area.  For example, in 2012-13 some 174 matters were investigated for possible non-compliance with safety standards or bans.

We surveyed products from over 3,300 retailers, resulting in the removal from sale or seizure of over 29,000 products.

The ACCC also published details of 450 recalls, of which 91 were put in place by direct negotiation by the ACCC.

Product safety is a continuing priority for the ACCC.  This year we will, in particular, focus on low cost imported goods sold in our major stores

Merger activity

As usual we expect a number of mergers and acquisitions to raise challenging issues for the ACCC during 2014.  You will have seen press reports optimistically speculating on an increase in M&A activity in a range of markets including infrastructure, financial services and agriculture.  Whether these predictions are accurate remains to be seen.

We started 2014 getting ready for the first ever consideration of a merger authorisation application by the Australian Competition Tribunal. While the takeover of Warrnambool Cheese and Butter by Saputo meant the application was not finally determined by the Tribunal, the use of “national champion” arguments as part of Murray Goulburn’s public benefit submission was an interesting development. 

And even though the year is still only just beginning we are currently wrestling with a challenging decision about the proposed sale by the NSW Government of Macquarie Generation to AGL.

On 6 February 2014 we published a Statement of Issues outlining our preliminary view that the proposed acquisition by AGL is likely to result in a substantial lessening of competition in the market for the retail supply of electricity in NSW as a result of reduced access to competitively priced and customised hedge contracts.

We also expressed a preliminary view that the proposed acquisition may result in a substantial lessening of competition in one or more markets for the wholesale supply of electricity in NSW, Victoria and South Australia.

On Monday evening AGL offered the ACCC a proposed undertaking, which seeks to address the ACCC's competition concerns in relation to the retail supply of electricity in NSW. However, the undertaking does not seek to address the ACCC’s preliminary concerns in relation to the wholesale supply of electricity.

As you will no doubt be aware we previously indicated that we anticipate making a final decision in relation to the proposed acquisition on 4 March 2014, in part, to facilitate finalisation of the review within the commercial timing constraints of AGL and the New South Wales Government.

Given the extremely short timeframe for consideration of the proposed acquisition we took the unusual step of releasing AGL’s proposed undertaking for market consultation on Wednesday morning prior to internal ACCC review and consideration.

While we decided to commence market consultation in relation to the undertaking, I want to make it clear that the ACCC has yet to consider the detail of the proposed undertaking and has not formed any view on whether it is capable of resolving, or necessary to resolve, competition concerns arising from the proposed acquisition.

Looking to the rest of the year, possibly the most intense recent speculation has surrounded the potential merger of Myer and David Jones.

The ACCC has no idea whether such a transaction will eventuate, and we will only devote our scarce resources to it if it does proceed.  It does, however illustrate the complexity of merger analysis.  Indeed, were it to proceed, the ACCC would have several likely areas of focus for review.

The ACCC would look closely at the fact that David Jones and Myer are currently the only traditional or conventional department stores offering a variety of mid to high end range consumer goods in the Australian market, and therefore prima facie appear to be each other’s closest competitor.

While there are specialist retailers for products such as fashion, furniture, home wares, entertainment and electronics offering some of the same products as the department stores, the ACCC would examine whether specialty retailers exercise a meaningful competitive constraint on David Jones and Myer given the convenience aspect of the co-location of the separate product categories. We would also consider the likelihood of new entry by established overseas department stores into the Australian market.

Similarly, the ACCC would focus on the increasingly significant role of the online channel and whether consumers consider this a substitute for, or a complement to, the physical offering of department stores, bearing in mind that both David Jones and Myer are expanding their online offering as well.

Another consideration in any review would be the competition between David Jones and Myer to attract concession stand operators within their stores. They have both become a “house of brands” and appear to compete to attract businesses such as cosmetics retailers, fashion labels, eyewear and other specialities to operate concessions within their department stores.

The ACCC would also examine the competition between David Jones and Myer for key anchor tenancies in CBD and regional shopping centres and other prime retail space.

2014 regulation priorities

In 2014 on the regulatory side, the ACCC will continue its important work in various infrastructure sectors.   

A matter for decision has been Australia Post’s proposal to increase the price of its ordinary letter services, particularly stamps. Australia Post’s plan is to increase the basic postage rate from 60 cents to 70 cents from 31 March 2014.

The ACCC yesterday completed its assessment on this proposed price increase and decided not to object to it.

It’s important to note that the ACCC is not the decision maker in this matter. The Minister for Communications will have final say on the proposed price rise.

Access to bulk wheat port terminal services is set to be governed by a mandatory prescribed code of conduct from 1 October 2014, provided the code is approved by the Minister for Agriculture.  We are hoping that the code will be at least as effective as the undertaking regime it is replacing.

2014 shapes as a pivotal year for communications regulation as the industry in Australia is currently undergoing a long period of transition brought about by technological developments, changes in consumer usage and, most significantly, policy-induced structural change.

In a landmark decision in 2013, the ACCC accepted the varied Special Access Undertaking lodged by NBN Co. This Undertaking operates until 2040, setting the terms and conditions for access to the NBN and provides a broad framework to facilitate effective engagement between NBN Co and access seekers.

One focus this year will be on completing our review and pricing of Telstra’s fixed line services and transmission lines, and participating in the Vertigan Review.

The Vertigan review will examine, in particular, the competitive environment facing the NBN, and also future communications economic regulation arrangements.  It will be an extremely important review to which the entire communications sector will contribute.

Following the finalisation of the AER’s Better Regulation guidelines in 2013, the AER will consider regulatory proposals for 12 network businesses in 2014.

Additionally, building consumer confidence in retail energy markets will continue to be a priority, with the National Energy Retail Law having commenced in ACT, Tasmania (for electricity only), South Australia and New South Wales.

The Root and Branch Review

A highlight of 2014 will be the government’s broad ranging competition review.  In part it will assess the many impediments to competition in our economy; and in part it will assess the effective working of mainly Part IV of our Act.

This review will generate considerable debate, and the ACCC will actively contribute to both aspects.

There has been some comment about the focus on small business in the terms of reference and in the lead up to the Review.

We need to remember, however, that small businesses are an important driver of competition, innovation and economic growth. A core issue for the Review panel will be striking the balance between vigorous, competitive behaviour and exclusionary anti-competitive conduct.

We need to realise that opening new sectors to competition, and removing barriers to competition, usually sees many new businesses emerge.  We have seen this, for example, in energy, communications and transport.  The threats to established companies are often the opportunities for other, often smaller or even new, companies.

Competition enlivens existing companies and creates opportunities for others, which drives innovation. Those with most to lose are established, protected businesses which are unable or unwilling to change; those with most to gain are those who comprise the rest of the Australians economy.

Thank you for your time today.