Chairman's address to CEDA WA

Speakers: 
Mr Rod Sims, Chairman
Conference: 
CEDA WA
24 August 2017

Chairman Rod Sims outlines the role of the regulator in a changing economy, including recent actions the ACCC has taken on infrastructure pricing, against cartel conduct and to improve consumer protection.

Transcript: 

Check against delivery

Good morning ladies and gentlemen.

It’s a pleasure to be in Perth, a city I have visited hundreds of times, and to have the opportunity to update you personally on some of the recent work the ACCC has undertaken.

As many of you will be aware, the ACCC has a meaningful presence in Western Australia, with 25 permanent staff in our Adelaide Terrace office who are responsible for vitally important enforcement investigations work.

We’ve dealt with a number of significant West Australian issues in recent years, including:

  • the Seven West-Sunday Times acquisition
  • access to grain transport services provided by CBH
  • the application of the mandatory wheat export code to Bunbury port
  • the purchase of Covs Auto Parts in regional WA by GPC Asia Pacific
  • current court actions against WA-based franchisors Pastacup and Geowash.

Western Australia is also well represented in our consultation with the business community which includes work with organisations such as Curtin University, the WA government’s Small Business Development Corporation and Fremantle-based NGO Business Foundations – all of whom are members of our national Small Business & Franchising Consultative Committee.

Western Australia has been and always will be a vital part of the Australian economy and therefore necessarily in the work of the national competition and consumer authority.

This morning I will be focussing on five topics that have recently occupied an enormous amount of the ACCC’s time and effort, but have either yielded great results for Australian consumers, or almost certainly will in the near future:

  1. An update on some of our Government-directed inquiries
  2. Broadband speed monitoring
  3. Consumer protection around new cars
  4. The ACCC’s work to investigate and prosecute cartel behaviour
  5. The recent Federal Court decision on infrastructure pricing at the Port of Newcastle.

1. An update on some of our Government-directed inquiries

In the past year, the ACCC has seen its ambit significantly broadened to encompass, among other things, banking and energy.

In the recent Federal Budget, it was announced that the ACCC would hold an inquiry into the financial sector. Our first task in this inquiry is to assess to extent to which the Major Bank Levy (Levy) influence the pricing of residential mortgage products by the banking industry in Australia.

This will see the ACCC ensure that banks fully and openly account for their decisions and the way banks balance and prioritise the needs of borrowers, savers, shareholders and the wider community.

This inquiry is well underway.

In June 2017, the ACCC issued statutory notices under s95ZK requiring information and documents from the banks affected by the Levy. Among other things, the banks will be required to explain their decision-making processes in relation to pricing of residential mortgage products, including by providing their relevant internal documents. Responses from the banks have started to be produced in tranches.

The final tranches are currently due at the end of August 2017. 

The second issue I would like to briefly touch on is energy; most of which is focussed on the east coast. As I am sure you are aware, we on the east coast of the country are in the midst of an energy affordability crisis. 

As part of the Government’s plan to resolve this crisis, in April we were directed to conduct a wide-ranging inquiry into the supply of, and demand for, wholesale gas in Australia.

This will build on the considerable work the ACCC and AER have undertaken to identify issues in the market which have resulted in significant energy price rises over the past few years.

The inquiry will examine how gas suppliers will make more gas available to Australian industry and other domestic gas users, and the effect this has on overall market dynamics. The ACCC will also work with other market bodies and organisations to recommend longer-term transparency measures in the east coast gas market.

Another measure the Government has taken to improve the supply of gas to consumers and businesses is the introduction of the Australian Domestic Gas Security Mechanism (ADGSM). The objective of the ADGSM is to ensure there is a sufficient supply of gas to meet the forecast demand by requiring, if necessary, LNG projects which are drawing gas from the domestic market to limit exports or find offsetting sources of new gas.

The ACCC will submit a report in late September which will feed into the Minister for Resources’ decision whether to impose export licence controls under the ADGSM.

Some point to the West Australian Government’s policy of requiring domestic reservations in gas in respect of North West Shelf development as ensuring a plentiful supply of gas in WA and with it prices substantially lower than on the east coast. Greater separate marketing and less supplier concentration also represent different competitive dynamics than those on the east coast, particularly in the south. 

With gas prices in WA reported as being half that observed on the east coast, it is clear that West Australian consumers, particularly industrials, are not facing the very difficult operating environment their east coast counterparts are.

For example, one company recently renegotiated for gas for its plant in WA with at least four different parties, and reached a three-year deal at around the $4 per gigajoule mark.  This is in stark contrast to what it's experiencing on the east coast.

The introduction of the ADGSM, and the Minister for Resources’ decision to determine whether 2018 will be a domestic shortfall year, demonstrate that the Federal Government is also considering the merit of retaining some Australian-sourced gas for domestic users.

And while some attribute WA’s current plentiful supply of gas and lower prices to its reservation policy, I also want to note that the WA Government has not put in place blanket moratoria and other regulations that prevent further gas exploration and development. This has allowed gas markets to work much more effectively and, to be quite explicit, has not closed off the ability for gas producers or new market entrants to respond to high price signals by bringing on more supply.

Although, for completeness, I should note AEMO has observed that WA’s gas supply may face some challenges from 2022, if North West Shelf gas declines and in the absence of new projects.

Beyond the supply of gas, there are a number of impediments to the efficient supply of electricity and these seem to be shared on the east coast and west coast alike: barriers to entry, some of which may limit competition; the impact of vertical integration; in addition, the east coast faces retail offer complexity and high standing or default offers; and regulatory issues to name a few.

The ACCC has been directed by the Government to investigate all of these issues in the east coast and develop recommendations to make a real difference to the prices paid for electricity by Australian households and businesses. We very much welcome a long overdue sole focus on electricity affordability. 

The impact of higher electricity prices goes right across the economy, of course, including WA – but it’s not a sudden shock – it’s actually been growing for a while: electricity prices have nearly doubled on top of inflation in the last decade in most parts of Australia.

The east coast has seen some benefit from a deregulated retail market for some customers but the benefits have not extended far enough.

In Sydney, for example, you have significant dispersion in pricing. For a typical household of four people the bill range will be $2029 to $4039. This is in contrast to a typical bill for a household of four people in Perth which is roughly $2276. So on the best market offer a Sydney household could be about $250 better off than an equivalent Perth household. But for those on standing offers in Sydney they could well be much worse off than the equivalent Perth household (by nearly $1800). The median market and standing offers for Sydney are $2561 and $2703 respectively, so both higher than the regulated WA bill for equivalent households.

The ACCC is expected to produce a preliminary report assessing these issues by the end of September 2017, with a final report due in 30 June 2018.

2. Broadband speeds

Few enabling industries are more important to the modern economy than telecommunications; few years have been more challenging than 2017.

A major problem we have identified for consumers in this market is the credibility gap between what consumers are told they’re getting and what they actually get.

With our limited resources, we are using three related strategies to ensure consumers get the broadband services they are after:

First, we are setting up our broadband monitoring program.

Second, we are providing updated guidance to industry about truth in advertising and assisting their customers make properly informed purchasing decisions.

Third, we are investigating and expect to be taking action on misleading conduct around broadband speeds, including practices that fail to meet the consumer guarantees provided under Australian Consumer Law.

Combined, these three strategies will be game changers. Let me explain.

Earlier this year the ACCC put out a call for volunteers to participate in the monitoring scheme. We sought 4000 volunteers across Australia within particular categories.

To date, more than 7400 households have registered. Australians are passionate about this issue.

We believe the fact that speed performance will be public is already encouraging providers to lift their game and will ensure the market operates effectively by encouraging retailers to compete on performance, as well as price, by provisioning sufficient capacity to meet their consumers’ expectations.

The monitoring scheme will highlight, and customers will notice, whether companies are providing a quality service that delivers what they have been promised.

This will make it easier for consumers to shop around and check that they are receiving what they pay for.

Importantly, the broadband monitoring program will also draw out whether issues are being caused by the performance of the NBN, or by ISPs not buying sufficient capacity.

It will also provide ISPs with independent performance information to draw on.

We are aiming to begin publishing speed and performance data later this year.

This leads me to our second strategy, which involves giving clear guidance to industry on how to provide meaningful, accurate information in a way that takes into consideration the Australian Consumer Law.

The move to the NBN and consumers now having a choice of speeds on their broadband plans mean retailers need to dramatically re-think their marketing practices and ensure consumers are presented with the information they need.

There has never been a more important time to make confident and informed broadband purchasing decisions. The information consumers are currently provided with does not make this possible.

We want the industry to be a part of creating good outcomes for consumers, and so as the regulator, we’re making clear our view on what we think is and isn’t acceptable.

This is a very unusual step. But with the forced migration to the NBN we are facing unusual times.

We believe there are six principles that retailers should follow when advertising broadband speeds. To summarise, they are:

  • consumers should be given accurate information about typical speeds that they can expect to receive during busy periods
  • theoretical speeds taken from technical specifications should not be advertised unless the typical busy period speeds are also included
  • information about the performance of promoted applications of the service should be accurate
  • any factors known to affect service performance should be disclosed
  • performance information should be presented in a manner that is easily comparable by consumers
  • retail service providers should have systems in place to diagnose and resolve broadband issues.

This guidance was released earlier this week. We will now be taking a very close look at advertising in the market. This will include conducting compliance sweeps to assess whether advertising practices have improved significantly and following this with appropriate enforcement action where problematic conduct is still occurring.

Importantly, what we want to see is retailers moving away from unhelpful, easily misconstrued and inconsistently applied claims like ‘up to’, ‘boost’ and ‘superfast’, and from advertising and/or providing information about theoretical maximum speeds that are based on wholesale inputs.

Too often we see speeds presented only in terms of the maximum speed of the access link that the retailer is purchasing, and not what the retailer itself can deliver over its end-to-end network during the busy periods, which is paramount since this is when most consumers are online.

We want to see consumers presented with information based on the realistic speeds they can expect to experience during busy evening periods – not just best-case scenarios.

We think including a labelling system will help consumers get this information, as they will be able to easily compare plans between broadband providers.

We have outlined a common set of descriptive labels that reflect the four tiers of speed plans that are commonly sold to consumers. Importantly, these labels will reflect a minimum speed a consumer can typically expect from that service during the busy evening period.

The label names are: ‘basic evening speed’, ‘standard evening speed’, ‘standard plus evening speed’ and ‘premium evening speed’.

For the last three labels, the minimum typical busy period speeds are 15 Mbps, 30 Mbps and 60 Mbps respectively.

For example, a service that was labelled ‘standard evening period’ would have to operate at a minimum of 15 Mbps during the busy evening period.

Its off-peak speed could be based on a number on NBN product speed tiers – such as the 25/5, 50/20 or 100/40 products.

The third strategy is self-evident: providers in this sector must comply with their obligations under the Australian Consumer Law.

We are investigating whether retailers are offering or have sold broadband services to consumers at maximum or off-peak speeds they cannot deliver, because we recognise the damaging impact these practices can have on consumers and on an evolving market.

Broadband is an ACCC compliance and enforcement priority this year and we expect to have taken enforcement action before the year is out.

We believe these three strategies will see dramatically improved advertising practices, better informed consumers and much improved consumer experiences.

3. Consumer and competition issues with new cars

In the past two years, cars have become a focus for the ACCC as consumer complaints have been growing louder. For example, manufacturers of new cars appeared in our top 10 most complained about traders in 23 of the past 24 months.

The ACCC’s draft report of our current market study report which we released last week made three key observations:

  • car manufacturers’ complaints handling systems and policies are preventing consumers from obtaining the remedies to which they are entitled under Australian Consumer Law
  • a mandatory scheme should be introduced for car manufacturers to share technical information with independent repairers
  • buyers of new cars need more accurate information about new cars’ fuel consumption and emissions.

Two of these three issues are reflected in specific action we have pursued recently against:

  • Ford for alleged false or misleading representations and unconscionable conduct when dealing with customer complaints about faulty vehicles
  • Volkswagen and Audi where we allege that these companies engaged in conduct liable to mislead the public and made false or misleading misrepresentations in relation to their diesel emissions claims.

This latter case is well known and globally significant so I won’t say more, other than to note that the first stage hearing is listed for October this year to determine whether the vehicles had a defeat device installed. 

The Ford issue is less well known at this stage, but raises the issues relevant to our first observation.

There were substantial numbers of customer complaints about Ford’s Focus, Fiesta and EcoSport vehicles supplied in Australia between 2011 and 2016 which featured a type of transmission known as PowerShift Transmission (PST).

In our proceedings against Ford, we allege that about half of the 70,000 vehicles sold had at least one repair relating to the PST.

Customers made complaints to Ford and its dealers about their car’s excessive shuddering and jerking when accelerating, loss of gear selection, and sudden loss of power and/or excessive noisiness from the PST.

In response, from 2011 to May 2015, we allege that Ford generally refused to provide a refund or replacement vehicle to consumers, even after their vehicles had undergone multiple repairs that had not fixed the issue.

In general terms, our concern expressed in our report is that vehicle manufacturers tend only to deal with consumer problems with new cars through their warranties, and do not have regard to the consumer guarantees in the Australian Consumer Law. 

There are two problems.

First, within the warranty period manufacturers will tend to keep repairing vehicles even if, as we allege in the case of Ford, the vehicle repeatedly suffers the same fault.

Second, beyond the warranty period, manufacturers tend either not to provide remedies, or to do so as an act of “good faith” when consumers may be entitled to a remedy under the ACL.

We are seeking to change industry behaviour. And we are hoping a recent court enforceable undertaking we have accepted from Holden will set an industry benchmark. It provides an interesting industry counterpoint.

Holden has acknowledged that in dealing with consumers who had a faulty car, it misrepresented to some consumers that it had discretion to decide whether the vehicle owner would be offered a refund, repair or replacement for a car with a manufacturing fault, and that any remedy was a goodwill gesture.

Holden has also accepted that some consumers were told that a remedy would not be provided because the vehicle had not been serviced by a Holden dealer or with sufficient regularity, or as the vehicle was purchased second hand.

Let there be no mistake: Australian Consumer Law includes consumer guarantees that provide remedies for major and minor faults in motor vehicles.

Moreover, consumer guarantees operate separately from the manufacturer’s warranty, and cannot be modified to require consumers to have their vehicles serviced by authorised dealers in order to obtain a remedy.

In other words, you are not bound to dealer servicing.

Holden accepted that its conduct is likely to have contravened the consumer law.

In response, Holden has offered an undertaking that goes beyond ensuring compliance with the current consumer guarantee obligations and commits to measures in line with recommended changes to the law.

Holden has committed to:

  • amend its dealer policies and procedures to ensure they comply with the ACL in relation to consumer guarantees
  • engage an external reviewer to consider complaints since 1 January 2016, and provide a remedy to consumers where appropriate
  • provide consumers with the ability to obtain information about any issues with their vehicle by contacting Holden and giving their vehicle identification number
  • clarify its internal compliance training program so that multiple minor failures of a vehicle may constitute a major failure
  • offering consumers who purchased a new vehicle a refund or replacement without the need to demonstrate a major failure, if a defect prevents a vehicle from being driveable within 60 days of the date of purchase.

These are great commitments and will have a significant and positive impact on consumers. We hope it will raise the bar for manufacturers and, I hope, community expectations.

Frankly, I am alarmed by the extent of non-compliance with Australian Consumer Law identified in our report in such a large industry by such large players.

It is common for small companies to plead ignorance when they are notified of contraventions of Australian Consumer Law. Ignorance doesn’t wash for small companies and it certainly won’t wash for multinationals.

Our second observation was that there are problems with the detail and timeliness of technical information to service and repair cars available to independent repairers. This is despite a voluntary commitment made by car manufacturers in 2014 to provide independent repairers with the same information to repair and service new cars that they provide to their authorised dealers.

Manufacturers have the ability to limit competition in the repair and service sector by controlling access to the technical information required to repair and service cars.

Car manufacturers have an incentive to limit this access to steer service work to authorised dealers. Some manufacturers’ logbooks and service manuals also contain misleading statements that a new car needs to be serviced at a dealer to not void the warranty. The ACCC’s review of logbooks and service manuals found a number of representations that are likely to contravene the ACL. 

Our view is that manufacturers should be required by a mandatory scheme to share the same technical information with independent repairers that they provide to dealers on commercially fair and reasonable terms.

Independent repairers need access to electronic information and data produced by manufacturers to properly repair and service new cars and to efficiently and effectively compete in the sector. A lack of competition in this sector hurts new car buyers who have fewer options to get the best deal for repairs and servicing.

It’s important to note that Australia is not the only jurisdiction to have faced this issue.

In the US and the European Union, mandatory schemes have been introduced to require manufacturers to share technical information with the independent sector. Other jurisdictions are also looking to follow suit.

Our third observation is that buyers of new cars need more accurate information about new cars’ fuel consumption and emissions.

The ACCC found consumers are not receiving accurate information about the fuel consumption or emissions performance of new cars. These are often major purchasing factors for buyers when choosing their new car. We’re concerned that what new car buyers are told their car will achieve is very different from practice.

Research from the Australian Automobile Association indicates that real-world fuel consumption is on average 25 per cent higher than official laboratory test results that are provided on mandatory vehicle labels.

Car manufacturers and dealers must ensure the representations to consumers about fuel consumption and emissions are accurate and appropriately qualified. We also support introducing more realistic laboratory tests and an on-road ‘real driving emissions’ test to give people more accurate information before they buy.

Another automotive matter the ACCC is involved in relates to defective Takata airbags installed in approximately 1.5 million vehicles supplied in Australia.

Due to time restrictions I won’t delve deeply into this issue, I’ll just make this request: visit productsafety.gov.au and check whether your car is subject to a recall. If it is, take action to have the airbags replaced as soon as possible. 

People have died or been seriously injured from the faulty airbags – it is an issue every motorist needs to take seriously. The public response has been remarkable, but it’s a message worth repeating.

4. Cartels

The ACCC is often referred to as “the consumer watchdog” – a nickname we wear proudly.

But we’re also “the competition watchdog”.

Cartels are a pernicious example of anti-competitive conduct.

Over the last three years, the ACCC has built a substantial team of specialist criminal cartel investigators, representing a significant investment by the ACCC. The result being that we now have a strong capacity to conduct careful and thorough criminal investigations.

Indeed, we have now provided several briefs of evidence to the Commonwealth Director of Public Prosecutions on a number of matters. We look forward to them assessing those matters and determining whether there is a basis for commencing prosecutions against any of the parties we have identified.

Earlier this month (3 August), the Federal Court convicted Japanese shipping company Nippon Yusen Kabushiki Kaisha (NYK) of criminal cartel conduct and ordered it to pay a fine of $25 million; the second-highest penalty imposed in ACCC history.

The judgment marks the first successful prosecution under the criminal cartel provisions of the Competition and Consumer Act 2010 (CCA).

It is important to note that the $25 million fine against NYK could have been higher.

As Justice Wigney stated, the fine:

…incorporates a global discount of 50 per cent for NYK’s early plea of guilty and past and future assistance and cooperation, together with the contrition inherent in the early plea and cooperation: meaning that but for the early plea and past and future cooperation, the fine would have been $50 million.

In this case, the maximum penalty was calculated on the basis of 10 per cent of NYK’s annual turnover in connection with Australia, in the 12 months prior to the commencement of the offence.

This is a very clear warning to corporate Australia about the seriousness of cartel conduct, and our resolve to detect and take action against this harmful conduct. 

5. Port privatisation

I now turn to what has been a hot topic for the ACCC over the last few years: the privatisation of nationally significant assets.

As I have said on many occasions, the ACCC is not against privatisation.

Indeed, the private sector will generally run businesses more efficiently than government.

What the ACCC has been concerned about is governments seeking to boost one-off sale proceeds through privatisation at the expense of putting in place effective regulation to curb potential monopoly pricing. The long-term effect can be an effective ‘tax’ on Australian consumers and businesses.

All of this has been put under the spotlight with the Port of Newcastle, the world’s largest coal export port, which was privatised in 2014 without any effective regulatory regime.

Less than a year later, the new owner unsurprisingly increased some of its charges.

What was a surprise to many, however, was the magnitude of the increases – over 40 per cent for some users.

Glencore Coal was one of those users and sought to constrain Port of Newcastle Operations’ monopoly power by having certain services at the Port declared under Australia’s national access regime.

This would not set the prices but would even up the bargaining power as, if commercial negotiations broke down, users of the Port would have recourse to arbitration by the ACCC.

As many of you are no doubt aware, the Full Federal Court in a unanimous decision last week upheld the previous decision by the Australian Competition Tribunal to declare the Port, dismissing Port of Newcastle Operations’ appeal.

The Full Federal Court’s decision confirms a lower hurdle for declaration of other nationally significant monopoly infrastructure, like the Port of Newcastle, where effective regulation is not in place.

That said, the Government has proposed some amendments in the Harper reforms and there could conceivably be an application for leave to appeal to the High Court, so time will tell whether the threshold for declaration shifts from the current state.

I have no doubt several of you may be thinking about how this decision could impact Western Power and the Port of Fremantle. There is no impact on Western Power as it already has an effective regulatory regime in place. It could have an impact on the Port of Fremantle, however, which does not.

It goes without saying that the ACCC welcomes the decision by the Full Federal Court as it essentially puts in place a negotiate-arbitrate framework, which I have often said is the minimum standard for effective regulation of nationally significant monopoly infrastructure like the Port of Newcastle.

Port of Newcastle Operations has been widely reported as stating that the decision could have “wide-ranging implications for the profitability and value of nationally significant assets”.

Let me make two points on this.

First, any assessment of prices by the ACCC needs to consider the interests of the infrastructure owner and its users, which would include enabling the infrastructure owner to earn a reasonable return on its assets.

So the concern is really only about the inability to earn unfettered monopoly profits.

Second, governments should not be maximising the value of assets and thereby sale prices by giving monopoly infrastructure operators unfettered pricing power.

All of this serves to highlight the reasons the ACCC has been calling for governments to put in place appropriate and effective regulatory arrangements upfront in the privatisation process.

Doing so would lead to more efficient use of monopoly infrastructure while providing greater certainty to users and to bidders for privatised assets.

Closing remarks

The work of the ACCC is remarkably uniform: protecting consumer rights, protecting and promoting competition, and having competitively priced infrastructure. Only the industries change.

This is the most important ‘take away’ from today, whether or not you are directly involved in an industry I have mentioned or not: as a regulator the ACCC is a principle and evidence-based organisation. Our task as a regulator is made simpler by making these principles known and having companies do the right things voluntarily.

Thank you for your time today.