Application by Co-operative Bulk Handling Limited (No 3)
[2013] ACompT 3
•19 April 2013
AUSTRALIAN COMPETITION TRIBUNAL
Application by Co-operative Bulk Handling Limited (No 3)
[2013] ACompT 3
Citation: Application by Co-operative Bulk Handling Limited (No 3) [2013] ACompT 3 Parties: APPLICATION BY CO-OPERATIVE BULK HANDLING LIMITED FOR A REVIEW OF THE GIVING OF A NOTICE BY THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION UNDER SECTION 93(3) OF THE COMPETITION AND CONSUMER ACT 2010 TO REVOKE NOTIFICATION N93439 File number: ACT 8 of 2011 Tribunal: MANSFIELD J (PRESIDENT)
GF LATTA (MEMBER)
R STEINWALL (MEMBER)Date of decision: 19 April 2013 Catchwords: NOTIFICATION – notification of conduct by wheat growers co-operative of conduct which may infringe s 47 Competition and Consumer Act 2010 (Cth) (previously Trade Practices Act 1974 (Cth)) – Australian Competition and Consumer Commission (ACCC) after investigation gave notice under s 93 to revoke Notification – application under s 101A to review notice of ACCC
REVOCATION OF NOTIFICATION – Application to review Notice of ACCC revoking Notification of conduct which involved the provision of transport services to use of grain receival and storage services – whether Tribunal satisfied that notified conduct does not and would not be likely to have effect of substantially lessening competition in the grain transport market – whether Tribunal satisfied that notified conduct has resulted or would be likely to result in benefits to public that outweigh detriment to public constituted by any lessening of competition.
EXCLUSIVE DEALING – grain growers’ co-operative owned and operated all grain receival sites in Western Australia – co-operative also operated all grain export ports, subject to fixed access regime – co-operative required all grain received by it to be transported to ports by transport arranged by co-operative – most grain transported by rail – co-operative contracted with above rail service provider after competitive tender for provision to co-operative of above rail transport services – whether competition for grain transport market sufficient to indicate no substantial lessening of competition in grain transport market – evidence of potential competition in grain transport market – evidence of marketers about prospects of using alternative grain transport providers – evidence of why grain transport markets and grain sales markets operated interstate – consideration of whether tied provision of services or grain transport market to receival and handling of grain in grain storage market had effect of likely effect of substantially lessening competition in grain transport market
PUBLIC BENEFIT – grain growers’ co-operative owned and operated all grain receival sites in Western Australia – co-operative also operated all grain export ports, subject to fixed access regime – co-operative required all grain received by it to be transported to ports by transport arranged by co-operative – most grain transported by rail – co-operative contracted with above rail service provider after competitive tender for provision to co-operative of above rail transport services – identification of potential public benefits – consideration of public benefits of notified conduct – review of claimed public benefits – weighing against public detriment by lessening of competition
Legislation: Competition and Consumer Act 2010 (Cth) ss 4G, 44ZZA, 102, 103, 46, 93, 101A, 47
Co-operatives Act 2009 (WA)
Bulk Handling Act 1976 (WA) ss 37, 42, 45, 11, 35A, 36, 38
Bulk Handling Regulations 1967 (WA) reg 26
Wheat Export Marketing Act 2008 (Cth) s 24
Commerce Act 1986 (NZ) s 36Cases cited: Re Queensland Co-operative Milling Association Ltd
Re Defiance Holdings Ltd (1976) 25 FLR 169
Re Tooth & Co Ltd and Tooheys Pty Ltd (1979) 39 FLR 1
Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38
Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] ATPR 41-783
Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 64 FLR 238
Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297
Telecom Corporation of New Zealand Ltd v Clear Communications Ltd [1995] 1 NZLR 385
Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53
Outboard Marine Australia Pty Ltd v Hecor Investments (No 6) Pty Ltd (1982) 66 FLR 120
Application by Chime Communications Pty Ltd (No 2) [2009] ACompT 2
Re Telstra Corporation Ltd (No 3) [2007] ACompT 3Date of hearing: 6-23 March 2012 and 7-8 May 2012 Place: Adelaide (via video link to Perth and Melbourne) Category: Catchwords Number of paragraphs: 365 Counsel for Co-operative Bulk Handling Limited: P Brereton SC and JA Arnott Solicitor for Co-operative Bulk Handling Limited: Corrs Chambers Westgarth Counsel for Australian Competition and Consumer Commission: M Moshinsky SC, M Borsky and T Glover Solicitor for Australian Competition and Consumer Commission: DLA Piper
IN THE AUSTRALIAN COMPETITION TRIBUNAL
ACT 8 of 2011
RE: APPLICATION BY CO-OPERATIVE BULK HANDLING LIMITED FOR A REVIEW OF THE GIVING OF A NOTICE BY THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION UNDER SECTION 93(3) OF THE COMPETITION AND CONSUMER ACT 2010 TO REVOKE NOTIFICATION N 93439
Applicant
TRIBUNAL:
MANSFIELD J (PRESIDENT)
GF LATTA (MEMBER)
R STEINWALL (MEMBER)DATE OF ORDER:
19 APRIL 2013
WHERE MADE:
ADELAIDE (VIA VIDEO LINK TO PERTH AND MELBOURNE)
THE TRIBUNAL DETERMINES THAT:
1.The Notice dated 29 June 2011 given by the Australian Competition and Consumer Commission to Co-operative Bulk Handling Limited pursuant to s 93(3) of the Competition and Consumer Act 2010 (Cth) in respect of Notification N 93439 is affirmed.
IN THE AUSTRALIAN COMPETITION TRIBUNAL
ACT 8 of 2011
RE: APPLICATION BY CO-OPERATIVE BULK HANDLING LIMITED FOR A REVIEW OF THE GIVING OF A NOTICE BY THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION UNDER SECTION 93(3) OF THE COMPETITION AND CONSUMER ACT 2010 TO REVOKE NOTIFICATION N 93439
JUDGES:
MANSFIELD J (PRESIDENT)
GF LATTA (MEMBER)
R STEINWALL (MEMBER)DATE:
19 APRIL 2013
PLACE:
ADELAIDE (VIA VIDEO LINK TO PERTH AND MELBOURNE
REASONS FOR DECISION
INTRODUCTION
This matter concerns an application by Co-operative Bulk Handling Limited (CBH) under s 101A of the Competition and Consumer Act 2010 (Cth) (CC Act).
The application is for a review of a decision of the Australian Competition and Consumer Commission (ACCC) to give notice pursuant to s 93(3) of the CC Act to revoke Notification N93439 (the Notification).
On 11 June 2008 CBH lodged the Notification with the ACCC pursuant to s 93(1) of the CC Act, giving CBH, in effect, statutory protection from legal action for engaging in the conduct specified in the Notification until the Notification was withdrawn or, relevantly, the ACCC gave notice to CBH under s 93(3) of the CC Act. The ACCC did not issue a notice under s 93(3) at the time of the lodgement of the Notification.
The Notification concerned conduct of a kind referred to in s 47(2) of the CC Act. In short, it involved offering to supply grain storage and handling facilities and services on the condition that growers or marketers of grain also acquire supply chain co-ordination services and transport services from CBH (the Notified Conduct).
In June 2010 the ACCC commenced a review of the Notification, apparently in response to complaints about the effect of the notified conduct. In December 2010, following its review, the ACCC released a draft decision proposing to revoke the Notification. On 29 June 2011 the ACCC gave its final notice to revoke the statutory protection afforded by the Notification (the ACCC Notice).
For the reasons set out below, the Tribunal has determined that it should affirm the ACCC Notice.
CBH, on 19 July 2011, filed an application in the Tribunal, pursuant to s 101A of the CC Act seeking a review of the ACCC Notice.
BACKGROUND
CBH
CBH was established in 1933 as a co-operative of growers. In January 2011, the board of CBH resolved to modernise the CBH constitution and transition the organisation from the previous legislative regime to the new Co-operatives Act 2009 (WA) (Co-operatives Act). On 4 May 2011, the members of CBH held an extraordinary general meeting and voted overwhelmingly in favour of modifying the constitution in order to register as a co-operative under the Co-operatives Act. Accordingly, as recently as May 2011, the growers comprising the CBH co-operative have voted in favour of it maintaining the co-operative corporate structure.
CBH currently has 4,697 members. In order to be eligible for active membership of CBH, a member must have delivered grain to the co-operative in either of the last two seasons, have an aggregate of all grain deliveries over the past three seasons of not less than 600 tonnes and an involvement in the actual production of the grain delivered and not merely the delivery of the grain. A person is not qualified to be admitted to membership of CBH unless there are reasonable grounds for believing the person will be an active member. Each of CBH’s members has one vote at meetings of the company.
CBH is governed by a board of directors that is primarily comprised of and elected by its members. The board of CBH is comprised of nine member directors and up to three independent directors, who are required to have special skills. No member of management is a director.
CBH has two main business activities. The first is the supply of grain at its receival sites and the delivery of the grain to ports or for domestic purposes, which is managed by the operations division of CBH. The second is grain trading and marketing, which is conducted by a subsidiary of CBH, CBH Grain. The CBH Grain business is subject to ring fencing arrangements that separate it from CBH’s operations division. The purpose and effect of the ring fencing is to ensure that information that CBH obtains through its operation of the grain supply chain is not used by CBH Grain to gain an advantage in grain trading and marketing over other grain marketers. The ring fencing arrangements were implemented as part of the Grain Express project (referred to below) and were included in CBH’s submission in support of the Notification in 2008. CBH’s ring fencing arrangements were audited in 2009 and 2010. Both audits confirmed the effectiveness of the ring fencing arrangements.
The ring fencing arrangements were put in place in order to satisfy the ACCC that the Notified Conduct would not substantially lessen competition in relation to grain trading and marketing. The main bulk handlers of grain in South Australia and New South Wales, Viterra Ltd (Viterra) and GrainCorp Operations Ltd (GrainCorp) respectively do not have in place ring fencing arrangements that separate their operations divisions from the grain trading and marketing divisions.
For the purposes of this review, CBH Grain is only of relevance as one of the grain marketers operating in Western Australia and elsewhere in Australia.
CBH’s purpose is to create and return value to its grower members. CBH measures how well it is returning value to growers through a performance indicator called “grower value return on capital”.
Over time, CBH says it has created value by building and investing in infrastructure and operating it so as to provide the growers with a supply chain. The efficiency of the system is very important to growers. For instance, there is a risk to growers during the harvest in that they need to harvest and get into storage as quickly as possible their crop so as to avoid any risk of weather damage.
As part of its grain storage and handling activities CBH owns and has operated approximately 193 “up-country” grain receival, storage and handling facilities throughout Western Australia. Not all receival points are opened in each grain season, and the evidence suggests that 17 of them are no longer in use. CBH also owns and operates the Metro Grain Centre (MGC), a large intermodal bulk handling and distribution centre near Perth that has rail access and provides bulk handling facilities and storage for grains. It also owns and operates all four grain export terminals in Western Australia (Grain Export Ports), located at Albany, Esperance, Kwinana and Geraldton.
In addition to its grain storage and handling activities, CBH undertakes research and development within the Australian grains industry directed to the development of new techniques, new infrastructure and improved grain quality.
Under the Bulk Handling Act 1967 (WA) (BH Act) and the Bulk Handling Regulations 1967 (WA) (BH Regs) CBH must receive all grain tendered to it that meets the requisite standards: BH Act s 42. CBH must deliver the grain to the receival point or port in Western Australia as required by the person who is entitled to the grain under a warrant issued pursuant to BH Act s 37(1). The holder of such a warrant must take delivery by 30 September of the year following the receival of the grain by CBH. If the warrant holder does not take delivery by that date CBH can sell the grain, deduct its costs from the proceeds and pay any net proceeds from the sale to the holder of the warrant: BH Act ss 45(1) and (2); BH Regs reg 26. All grain under its custody and control must be insured by CBH: BH Act s 11.
CBH does not operate at a profit. Rule 42(a) of the Rules of CBH prevents CBH from distributing any income or profit of CBH to its members. Similarly, no part of any income or property of CBH shall be, directly or indirectly, paid or transferred as a profit, by way of a dividend or bonus or otherwise, to any member of CBH: BH Act s 35A(a). Rule 42(b) of the Rules provides that all income and property of CBH shall be applied towards the objects of CBH as set out in rule 3.2 of its Rules and not otherwise. Similarly, all income and property of CBH shall be applied, subject to the BH Act, towards the objects of CBH as set out in clause 2 of its Memorandum of Association (now rule 3 of the Rules) and not otherwise: BH Act s 35A(b).
CBH submits that one of the mechanisms by which it returns value to its grower members is by having lower fees for both storage and handling and for port services. CBH submits that benchmarking demonstrates that the storage and handling and port charges levied by CBH are significantly less than its peers in other states and territories. A survey of growers carried out by CBH at the time of its review of its corporate structure in 2011 indicated that growers considered the most important way in which CBH should return value to it is by providing the best storage and handling services at the lowest cost.
As a non-distributing co-operative, the principal way in which CBH returns value to its grower members is through ensuring that the charges that the growers pay for the services provided by CBH are kept as low as possible while at the same time ensuring that sufficient revenue is obtained so as to maintain the sustainability of CBH’s business and allow it to invest in its system on an ongoing basis. CBH also seeks to ensure that the charges that it levies on marketers are kept as low as possible because these charges are ultimately passed on to the growers.
CBH submits that its status as a co-operative is relevant to the proceeding before the Tribunal because it explains an important distinction between the structure of the industry in Western Australia compared with other States. CBH contends that it is appropriately characterised as being the means by which the growers have organised themselves so as to undertake storage and handling activities at receival sites, bulk handling of grain to port and the operation of port terminal facilities to allow the export of that grain from Western Australia. According to CBH, its incentives are aligned with the interests of the growers. The ownership structure of CBH is likely to have some relevance to the assessments of both competition and public benefits. This is because the ownership structure will have important effects on the incentives and motives of CBH.
CBH submits that, because of its ownership base and co-operative structure, regardless of whether it could increase prices above a competitive level, it has no incentive to do so. CBH contends that any market power of CBH is constrained by the countervailing power of its customers, the growers, who have the capability, knowledge and incentive to nip in the bud any attempt at an exercise of market power by CBH.
In his second report, Dr Fisher sought to make criticism of the co-operative model operated by CBH, including that growers did not have access to analyst reports or management presentations, which he asserted they would if CBH was a publicly listed company. Dr Fisher asserted that the only information in the public domain about CBH’s operations was its annual reports. That assertion was incorrect. Dr Fisher accepted in cross-examination that growers would have access to information about the operation of CBH through regular growers’ meetings and that there would be a variety of informal and formal communications between growers and CBH. Dr Fisher was also taken to examples of individualised letters that CBH had sent to growers which identified the activities of CBH, how it had performed that year and the value in use that CBH had returned to growers in the form of savings and Quality Optimisation.
The ACCC submits that CBH’s structure as a not-for-profit co-operative does not ameliorate the competition and efficiency problems and associated public detriment arising from the Notified Conduct. Indeed, the ACCC submits that the co-operative structure might even exacerbate some of these problems.
The ACCC submits that CBH’s constitution is not a substitute for market pressures. In the absence of competition, the imperative for CBH to service its customers better and to lower costs is significantly weakened. Absent competition, a co-operative with substantial market power can make decisions different from those it would be forced to make if the market were competitive.
The ACCC further submits that co-operatives such as CBH may be subject to principal/agent issues. This occurs where there is an asymmetry of information between management and owners that allows management to pursue strategies and decisions that do not reflect the interests of the owners.
A related problem can be management pursuing “quiet life” goals, resulting in padded costs (x-inefficiency). Dr Philip Williams accepted that there can be productive efficiency problems with non-profit co-operatives, as management might pursue “quiet life” goals, resulting in x-inefficiency. He also acknowledged that one reason for this may be a lack of competitive pressure.
Growers are not a single, homogeneous group and some of them might wish to make alternative transport arrangements which better suit their individual interests. The evidence of Mr Bradley demonstrates that some growers would like to have the choice to arrange their own transport of grain from CBH’s up-country storages to port. Whilst CBH’s objectives might align with those of the “average grower”, they do not necessarily align with the objectives of particular growers or groups of growers.
The ACCC also submits that social policy or political considerations may enter into CBH’s pricing and other decisions, including the freight rates it sets. The ACCC contends that the co-operative structure together with the Notified Conduct give rise to the possibility of transfers or cross-subsidies with consequential allocative inefficiencies. The ACCC submits that in a competitive market CBH would risk losing as customers those growers who are net contributors to the transfer or cross-subsidy. Under the Notified Conduct, the CBH co-operative is insulated against this risk in relation to its grain transport service and able to prevent growers from switching to a rival offering a better service.
Additionally, the ACCC submits that CBH is immune from external market discipline on management since memberships are not tradeable. The threat of takeover and the discipline of market share trading to which for-profit businesses are subject is therefore lacking.
The Western Australian Grain Industry
Grain growers in Western Australia predominantly produce wheat. They also produce barley, coarse grains (sorghum, oats, maize and triticale), oilseeds (canola and soy) and pulses (lupins, field peas and chick peas).
In Western Australia, the majority of grain is produced in the south western grain belt, which runs in a broad band from north of Geraldton to east of Esperance. The Western Australian grain belt is roughly divided into four zones, each of which is served by a port. The Geraldton zone comprises the area surrounding the Geraldton port and includes the regional centres of Mingenew, Mullewa and Morowa. The Kwinana zone comprises the largest area of the Western Australian grain belt, stretching from Kwinana in the west to Southern Cross in the east, and from Narrogin in the south to Wubin in the north. The Albany zone covers the south-west corner of the Western Australian grain belt from Hyden and Newdegate in the north-east to Albany in the south and Bunbury in the west, and includes the regional centres of Katanning, Lake Grace and Albany.
As in the rest of Australia, growers in Western Australia are required to pay, directly or indirectly, for the supply chain costs of moving grain from the point of production to the point of export (or domestic sale).
The amount of grain received by CBH in Western Australia was, or was estimated to be, approximately 12.3 million tonnes in the 2008/09 harvest season, 11.1 million tonnes in the 2009/10 harvest season and 6.5 million tonnes in the 2010/11 harvest season. The largest grain harvest received by CBH in Western Australia was 14.7 million tonnes in the 2003/04 harvest season. The grain harvest in Western Australia usually accounts for between 33 and 40% of the total national grain harvest. Production is characterised by significant seasonal variability, which affects the amount produced and the percentage of total national production.
Around 90-95% of the grain harvested in Western Australia is exported. The remaining production is sold domestically. The amount of grain sold domestically remains relatively constant in absolute terms from season to season, at around 1 million tonnes. As such, the percentage of a particular harvest that is sold domestically varies, depending on the size of each harvest. Approximately 90% of grain harvested in Western Australia is exported through CBH’s grain export port terminals and five percent is exported in containers.
There is around 22 million tonnes of grain storage capacity in Western Australia. CBH’s total grain storage and handling capacity in Western Australia exceeds 20 million tonnes. Australian Bureau of Statistics data indicates that as at 30 June 2010 there is 2 million tonnes of on-farm grain storage capacity in Western Australia. A significant proportion of this on-farm storage capacity is required for on-farm use and is not used for the storing of grain for commercial sale.
The supply chain for grain in Western Australia broadly follows the following process. Growers produce grain and following harvest either store or accumulate it at their farms or arrange for the grain to be transported by road to a receival point. At present, all receival points are under the control of CBH. The grain is then unloaded at the receival point and sampled, analysed, weighed, graded and stored until it is to be transported. CBH operates a significant number of up-country receival sites for grain in Western Australia. It has over time developed those receival sites in response to the grain growers’ requirements, but it chooses to “open”, that is to receive grain, at such sites as it considers appropriate in each season depending upon the size of the harvest including localised demand. The grain is transported by rail or road from the receival points to the port in time for shipment, the container loading facility or the domestic market destination. Export grain is either stored in receival points or at the port until it is loaded onto a ship for export.
CBH also operates four port terminals for the export of grain in Western Australia at Geraldton, Kwinana, Albany and Esperance (the ports). As the grain is exported to a range of countries principally for Australia to the Northern Asian, South East Asian and Middle Eastern regions, it is exported in competition with other international exporting regions – in particular North America and Europe. The bulk grain trade is international. The buyers of grain in the international market are liquid and price is a function of the global supply and demand. Hence, Australian exporters of grain fall into the description of “price takers” rather than “price makers”. It follows that the supply chain costs from farm to export affect the price at which marketers will sell bulk grain for export, and that in turn affects the price that the marketers will pay to the growers.
CBH’s supply chain for bulk export grain is currently vertically integrated. It has three functional levels: bulk export grain receival, storage and handling, transportation of bulk export grain from a receival point to a CBH Grain Export Port terminal, and Grain Export Port terminal operations.
CBH presently organises its supply chain by dividing the Western Australian grain belt into four zones, each of which is served by a port terminal:
(1)the Geraldton zone comprises the area surrounding the Geraldton port and includes the regional centres of Mingenew, Mullewa and Morawa;
(2)the Kwinana zone comprises the largest area of the Western Australian grain belt, stretching from Kwinana in the west to Southern Cross in the east, and from Narrogin in the south to Wubin in the north;
(3)the Albany zone covers the south-west corner of Western Australia from Hyden and Newdegate in the north-east, to Albany in the south and Bunbury in the west, and includes the regional centres of Katanning, Lake Grace and Albany; and
(4)the Esperance zone comprises the south-east grain belt, the area north of Esperance and surrounding Salmon Gums.
As noted, CBH offers grain receival services for particular grains at particular receival sites. Not all receival sites will be set up to receive all grains or grades of grain each harvest season or at all times during a harvest season. Some receival sites do not operate at all in some years; this is dependent on the size of the harvest and its distribution throughout the grain belt. CBH plans and configures its receival sites ahead of the commencement of each harvest season using crop estimate information provided by growers, information obtained through consultation between grower-elected receival site representatives and growers locally and the information provided by marketers regarding their forward shipping plans. By way of example, it may be projected that a particular geographic area will predominately produce barley and canola at one stage of the harvest season and produce wheat at a later stage. The site or sites serving that geographic area may therefore be set up so as to initially receive barley and canola and then later in the harvest receive wheat, but not offer a receival service for lupins at any stage during the harvest, because of a lack of demand or storage space within the receival site. In such an instance, growers in the area who have produced lupins would be informed in advance of the harvest of the nearest receival site to them that is set up to receive lupins.
Grain is stored at CBH receival sites in bulk by reference to the type and grade of grain. All grain within a storage class is co-mingled and it is not possible to take out the precise parcel of grain which a particular grower has deposited. It is not practicable to store each load of grain delivered by a grower in a distinct, segregated parcel. This is because each of the storage facilities has a large capacity and is designed for the bulk handling of grain. For this reason, CBH stores grain in common “stacks” or “segregations”.
Any requirement for separation creates the inherent potential for lost capacity. This is due to the space required between parcels in horizontal or bulkhead storage, and the lost capacity of the remainder of the silo. This lost capacity in CBH’s storage facility is referred to as “loss by division”. It represents a substantial potential inefficiency (or potentially an inability to receive the grain harvested in the catchment area of the receival site) for CBH if its infrastructure is underutilised due to unnecessary division. If growers or marketers were able to require the movement of particular parcels of grain to occur in an ad hoc or uncoordinated fashion there would be increased incidences of wasted storage capacity.
Grain is segregated in the storage facilities according to grain type (such as wheat, barley, canola or lupins) and recognised grade standards (which are defined by the quality or attributes specifications within each grain, which, for example, for wheat are: Australian Hard, Australian Premium White and Australian Standard White. This means that when a grower delivers grain of a particular type and grade, it is stored in bulk with grain of the same type and grade. Accordingly, a truckload of grain, once delivered to storage at a CBH receival site, is comingled with other loads of similar grade grain already received into storage.
It is neither efficient, nor possible for the person entitled to any grain held by CBH to insist that CBH deliver the same grains to that person at the receival site or at port or at any other location as were delivered by the grower at the receival site. The BH Act provides for this in the following way. Section 36 provides that, on receipt of grain, CBH shall cause it to be weighed, its grade determined and a uniquely numbered weighbridge ticket issued for the grain. Section 37 provides that CBH shall issue a unique warrant in respect of grain received. s 38(2) provides that each warrant is a negotiable instrument transferable by endorsement. Section 44 provides that the holder of a warrant is entitled to receive an equivalent weight of grain of the type corresponding with, and of a grade at least equal to, that in respect of which the warrant was issued.
As can be seen, the role of CBH in the receival, transport and dispatch of grain in Western Australia is a very significant one. In the area of grain marketing, its role through CBH Grain is less significant.
Marketers of grain act as intermediaries between the growers of grain and the ultimate users. The main marketers in Western Australia are CBH Grain, Cargill Australia Ltd (Cargill) which in December 2010 acquired the Australian Wheat Board Ltd (AWB) grain trading business, Viterra, Glencore Grain Pty Ltd (Glencore), Alfred C Toepfer International (Australia) Pty Ltd and Emerald Group Australia Pty Ltd. They also include Louis Dreyfus Commodities Australia Pty Ltd (Louis Dreyfus) and Gavilon Grain Australia Pty Ltd.
Marketers generally fall into three categories:
(a)grain processers, such as flour millers, who acquire for their own use and trade any surplus stocks or run a trading business as a related business, an example being Cargill;
(b)originator traders who have interests in grain production or storage and handling in their countries of origin, examples of which are Viterra and CBH through CBH Grain; and
(c)pure commodity traders, who have limited vertical integration and focus mainly on marketing and trading grain in international markets, an example being Glencore.
Growers in Western Australia sell their grain to marketers by way of the transfer of the warrant issued by CBH. That is, they do not sell their grain directly to marketers, but instead sell to marketers the right to receive from CBH grain of the type and grade specified in the warrant.
The Grain Express system
The Grain Express supply chain operated by CBH was developed by CBH following the experience of the partial deregulation of grain marketing in the 2006-2007 and 2007-2008 seasons. It was developed, from the view of CBH, to meet the requirements of marketers who export grain, and domestic users of grain, and to service its member growers.
In Western Australia, prior to the introduction of the Wheat Export Marketers Act 2008 (Cth) (Wheat Act), AWB, as the monopoly exporter of bulk wheat, contracted with transport service providers to transport grain from receival points to port. As noted, prior to the commencement of the Wheat Act, and in anticipation of the dismantling of the single desk, CBH devised an integrated and coordinated grain supply chain system which it called ‘Grain Express’ (Grain Express). CBH has operated Grain Express since 2008.
In describing the system, it is important to bear in mind that the Grain Express system is not itself the Notified Conduct. Grain Express is a bundled supply chain service provided by CBH, combining storage and handling services, transport services and port receival services. The Notified Conduct is the tie of the Grain Express system to the storage and handling services, so that growers using the storage and handling services must use the CBH supply chain coordination services and its transportation services.
Growers produce grain and during harvest either store it at their farms or (in most cases) arrange for their grain to be transported by road to one of the up-country receival sites. Grain is sampled and analysed for quality, weighed, graded, unloaded and then stored at the receival site until it is to be transported.
On receipt of the grain, the grower is issued with a weighbridge ticket recording the quantity, type and grade of grain that they have delivered. In addition, an electronic record is created in CBH’s stock management system, IBIS, which is available for access by growers within 15 minutes of the delivery (from most sites) through an internet-based front end system operated by CBH which is accessible to growers called LoadNet. LoadNet lists all of the deliveries that the grower has made, and each delivery’s quantity, type and grade. The system also records CBH’s estimated freight charges to those destinations (in the period October to February) and the finalised freight charges (which are posted in February when CBH calculates its freight charges based on the quantity of grain received and its distribution throughout the CBH receival network). The grower can then use the LoadNet system to nominate portions of their grain to particular marketers in response to particular product offers. LoadNet therefore provides a virtual marketplace for growers and marketers to interact. Provided delivery is made by December, growers have from the date of delivery until 30 September of the following year to make their marketing decisions and nominate their grain without incurring any additional charges. This permits the grower to delay any marketing decisions until after they have completed their harvest.
When a grower, using LoadNet, makes a nomination, the marketer becomes entitled to outturn grain but only at the nominated destination site. If a grower chooses to warehouse grain, he or she may, subject to meeting various charges and conditions, outturn grain from a receival point.
When Grain Express was introduced, growers and marketers using LoadNet were able to choose from amongst 15 destination sites, including CBH’s Grain Export Port terminals, to outturn grain from CBH’s custody. CBH uses the road or rail transport services it acquires to move grain in its custody between the receival point and the destination sites.
Once a grower has nominated a marketing option, CBH arranges transport to the nominated destination site and invoices the grower for its services to that point. A marketer who has received a nomination of grain under the LoadNet system acquires an entitlement to that grain at the destination site. The marketer then advises CBH that it intends to outturn an amount of grain onto a vessel. CBH checks that the marketer has entitlement to that quantity of grain in CBH’s system and CBH outturns the grain onto the vessel. CBH invoices the marketer for storage and handling services it provides in relation to the grain at the destination site.
If a grower does not nominate an acquirer and destination site but instead chooses to warehouse their grain at a receival point, the grower can either nominate an acquirer at a later date through the LoadNet system or, subject to CBH’s consent and the grower’s payment of the relevant fees, outturn the grain from CBH’s storage.
Not all grain is exported or sold domestically in the year following its harvest. Approximately two to three million tonnes of grain per annum are carried over from each season. This grain remains in CBH’s storage facilities and is one reason that the total storage capacity in WA exceeds the largest ever harvest.
CBH sets it fees in such a way as to ensure that the total revenue from all operations is sufficient to fund the operational expenses and capital expenditure of the business as a whole. The fees are not determined on an activity cost basis, but do, to a certain extent, reflect the costs of providing the service.
CBH considers both the demand profile as revealed through discussions with the marketers and the results of the auction of port slots, and the supply side, and in particular whether the supply of grain into particular receival sites is likely to exceed the capacity of that receival site and therefore require essential movements of grain in order to maintain capacity at the site. CBH then prepares a model of the logistics task for the harvest season and puts in place transport plans with its road and rail providers. The harvest occurs from late October or early November and is concluded by December or January each year. At the conclusion of the harvest, the number of staff present at each of CBH’s receival sites is reduced and many are no longer manned, as staff are no longer required to receive grain from growers. At this time, CBH aggregates the information regarding the quantities, types and grades of grain received at each of its receival sites and updates its logistics plans to begin moving that grain to its destination, which is predominately the port terminals serving each of the four zones of the grain belt.
Grain movements are planned to occur on a bulk basis, with the maximum amount of stock taken by rail or, where rail is not feasible or available, by road, at a given time so as to obtain economies of scale in the out-loading of grain. Grain is transported by rail or road from the receival sites to either the port terminal (for the approximately 90% that is exported in bulk) in time for shipment, the container loading facility (for the approximately 5% that is exported in containers) or the domestic market destination (for the approximately 5% sold domestically). Export grain is stored at the port terminal until it is loaded onto a vessel for export.
The Grain Express system functions in a very similar fashion for both export grain and grain that is to be sold domestically. The domestic sites are very similar to the export port terminals in the manner in which they form part of the Grain Express system.
There are exceptions to these processes. Some growers, particularly growers who grow grain in areas that are relatively close to the port terminals in Geraldton, Albany and Esperance, deliver their grain directly to the port terminals for storage by CBH at the port terminal in preparation for export. Approximately 23% of all grain is delivered directly to port or near port storage by growers.
As part of the arrangements to implement the Grain Express system, CBH created the Freight Pool. CBH uses the Freight Pool to achieve, and give transparency to, its aim to ensure that the amounts paid by growers for freight are approximately equivalent to the costs that CBH incurs in providing freight, and therefore to freight to growers on a not-for-profit basis. The Freight Pool achieves this by containing all of the transactions which represent the revenue and costs of providing grain freight. CBH sets freight rates with the intention that revenue and costs will be approximately equivalent. Any surplus remaining in the Freight Pool, in theory, is returned to growers at the end of the harvest as a rebate or kept in the Freight Pool to reduce freight costs in the next harvest. The retention of funds in the Freight Pool is further discussed later in these reasons. Separate accounts are produced for the Freight Pool and these accounts are then the subject of an audit by external independent auditors.
Concurrently with the transport planning process, CBH prepares a schedule of port capacity to be allocated at each of its port terminals. Since the port congestion experienced during the 2008/2009 harvest season, CBH uses capacity auctions to allocate available capacity at port (with one of the factors taken into consideration being the ability of the land-based supply chain to deliver grain to the port terminal). The slots obtained through the auction process can be and are traded in a secondary market.
The bulk export grain receival, storage and handling level has three components.
First, the receival of grain, delivered from farms, at receival points. CBH charges a $10.50 per tonne up-country “receival fee”. Once grain is delivered to a receival point or bulk grain storage facility located at a Grain Export Port terminal it enters CBH’s custody.
Secondly, storage of bulk export grain at a receival point or bulk grain storage facility located at a Grain Export Port terminal until such time as it is outloaded or outturned. While many of the bulk handlers elsewhere in Australia charge time-based storage fees, CBH does not. Evidence was given that the $10.50 receival fee, along with the export fee discussed below, are calculated so as to, jointly and on average, recover the time dependent costs of storage. It was indicated that it is likely that a proposal to introduce an explicit time based storage fee may go to the board of CBH in the near future.
Thirdly, outloading and outturning of bulk export grain from up-country receival points. The expression “outloading” refers to the process of removing grain from a receival point, for transport to another receival point or Grain Export terminal, where the grain does not leave CBH’s custody. CBH does not charge an additional fee for outloading of bulk export grain. The expression “outturning” is used to describe the process of removing bulk export grain from a receival point, for transport to a Grain Export Port terminal or another destination such as outturn site, where the grain leaves CBH’s custody. Outturned grain is loaded, using CBH’s handling equipment, onto non-CBH transport arranged by the acquirer of the outturn service, being the grower or marketer. CBH currently charges a fee of $8.50 per tonne for outturn by road and $11.55 for outturn by rail. This outturn of grain is referred to as “domestic outturn”.
The transportation of bulk export grain involves, for outloaded grain, transportation by or arranged by CBH, using either road or rail. For outturned grain, the transportation of bulk export grain involves transportation by a non-CBH transport provider using either road or rail. The charges for transportation services vary depending on the mode of transport and distance travelled.
Hence, as CBH said, there were complexities and perceived inefficiencies in the supply chain caused by the increased number of marketers from about 2008, including with some marketers acquiring smaller quantities of grain from a number of receival sites and then wishing them to be assembled at port for a larger export sale. The nature of those concerns, and their significance, is addressed later in these reasons for decision. It was to meet those concerns and to ensure its systems operated well in the interests of growers and marketers that CBH developed the Grain Express system.
The transport arrangements of CBH in the period leading up to the Wheat Act, and for a few seasons thereafter, are reflected in the Western Australian Export Grain Transportation and Handling Agreement (the ARG Agreement). Australian Railroad Group Pty Ltd (ARG) sold its above rail assets to Queensland Rail (now Queensland Rail National) (QR) in 2006 and in the same year it sold its below rail assets (through Westnet Rail Pty Ltd) to Babcock & Brown and then they were sold to Brookfield Infrastructure Partners LP in a subsidiary Brookfield Rail. QR continued to use the ARG name until July 2011. At all times while QR provided above rail transportation services to CBH, it did so under the ARG Agreement, as varied and extended from time to time, including for the Grain Express system.
In 2010, CBH conducted a tender process for the provision of bulk grain rail transport services. It was dissatisfied to some degree with the services and prices of QR.
The Request for Proposals was issued on 8 March 2010. It allowed for three packages: provision of grain rail services in the northern narrow gauge section servicing the Geraldton and Kwinana port terminals; provision of grain rail services in the standard gauge section servicing the Kwinana and Esperance port terminals; and provision of grain rail services for the southern narrow gauge section servicing the Kwinana and Albany port terminals and the Merredin transfer line. Various proposals were received and assessed.
As a result of this tender process, CBH entered into a 10 year contract, commencing on 1 May 2012, with Watco Companies Inc (Watco), a US based company, for the provision of “a comprehensive rail logistics planning service including train planning and scheduling, tracking, maintenance, inventory control and crew management”. Watco does not supply the rolling stock. The rolling stock is to be owned by CBH, and provided to Watco. A Rail Services Agreement was executed on 28 August 2011. CBH then proceeded to acquire the 22 locomotives and 570 wagons for use by Watco. Obviously that was at considerable capital cost.
CBH also acquires road transport services by means of a tender process. The tenders are organised based on the port zones. There are many prospective suppliers of road transport services to CBH. Often more than one provider is chosen in each zone.
CBH charges growers for the transportation of grain pursuant to a schedule of rates for freight from each receival site which is published each year.
Not all grain is delivered to CBH receival sites. A significant proportion of grain is delivered by growers to storage sites at or near one of CBH’s four ports. The quantity that is delivered to port, as this sort of delivery is commonly described, varies from season to season, but has averaged approximately 17% of the harvest over the past 10 years. The principal factor that determines the percentage delivered to port is the size of the harvest. According to Colin Tutt, the General Manager, Operations, for CBH, in a season in which the harvest is small, growers are under less pressure to harvest their grain swiftly and, thus, may be willing to truck the grain longer distances in order to avoid transport fees. In large harvests, however, growers often find themselves under great pressure to harvest their grain swiftly, for example to harvest the grain before adverse weather materialises. Thus, in seasons in which the harvest is large growers are more likely to deliver their grain to their nearest receival site so as to expedite the harvesting process.
In CBH’s Grain Export Port terminal operations, bulk export grain is transported to one of CBH’s four Grain Export Port terminals where it is loaded onto vessels for export by marketers who have acquired the entitlement to the grain. CBH charges an “export outturn” or port fee for loading the grain onto a vessel of $17.10 per tonne.
On 1 July 2008 the Wheat Act commenced operation. The Wheat Act led to significant changes in the way in which bulk wheat is exported from Australia. In particular, the Wheat Act resulted in the dismantling of the “single desk”, being the monopoly marketing of wheat by the AWB between 1939-1999 and later AWB’s subsidiary, AWB International, from 1999-2008. The single desk encompassed both domestic and export wheat sales but from 1999, only wheat export sales.
The Wheat Act requires bulk wheat exporters to be accredited by Wheat Exports Australia. There are currently approximately 26 accredited wheat exporters (marketers) in Australia, 13 of which operate in Western Australia. The exporting of non-bulk wheat (which is typically exported in containers) and other types of grains is not subject to regulation by the Wheat Act.
As both a marketer and the operator of the four Grain Export Port terminals, CBH is required by s 24 of the Wheat Act to satisfy the “access test”. A port terminal access undertaking (Access Undertaking) for wheat is in force in relation to CBH’s port terminals pursuant to s 44ZZA of the CC Act. The Access Undertaking was accepted by the Australian ACCC on 29 September 2009 and expired on 30 September 2011. CBH submitted a proposed access undertaking to the ACCC, intended to replace its current undertaking, on 31 March 2011. The proposed access undertaking is currently being assessed by the ACCC.
ISSUES
In determining an application under s 101A of the CC Act the Tribunal has all the powers of the ACCC: CC Act s 102(1). The Tribunal must either set aside the notice or make a determination affirming the ACCC Notice: CC Act s 102(4).
If the Tribunal is satisfied by CBH that the Notified Conduct does not and would not have the purpose, and does not and is not likely to have the effect, of substantially lessening competition (within the meaning of s 47(13) of the CC Act) or alternatively is satisfied that the Notified Conduct has resulted or is likely to result in a benefit to the public and that benefit outweighs or would outweigh the detriment to the public constituted by any lessening of competition that has resulted or is likely to result from the Notified Conduct, it must set aside the ACCC Notice: CC Act s 102(4)(a).
If the Tribunal is not satisfied of the matters set out in the preceding paragraph, it must make a determination affirming the notice: CC Act s 102(4)(b).
Section 47(13) relevantly provides:
(b)a reference to competition, in relation to conduct to which a provision of this section other than subsection (8) or (9) applies, shall be read as a reference to competition in any market in which:
(i)the corporation engaging in the conduct or any body corporate related to that corporation; or
(ii)any person whose business dealings are restricted, limited or otherwise circumscribed by the conduct or, if that person is a body corporate, any body corporate related to that body corporate;
supplies or acquires, or is likely to supply or acquire, goods or services or would but for the conduct, supply or acquire, or be likely to supply or acquire, goods or services.
As to the definition of competition for the purposes of the CC Act, regard should also be had to the decision of the Trade Practices Tribunal in Re Queensland Co-operative Milling Association Ltd; Re Defiance Holdings Ltd (1976) 25 FLR 169 at pages 187 to 188.
The ACCC does not contend that CBH had or has the purpose of substantially lessening competition. It is therefore necessary to focus only on:
(1)whether CBH has satisfied the Tribunal that the Notified Conduct does not and would not be likely to have the effect of substantially lessening competition within the meaning of s 47; and
(2)if it is not so satisfied, whether CBH has satisfied the Tribunal that the Notified Conduct has resulted in or would be likely to result in a benefit to the public that outweighs the detriment to the public constituted by any lessening of competition.
Those are the two relevant matters decided by the ACCC in the consideration required by s 93(3), and decided adversely to CBH so that the ACCC Notice was given.
They are the two relevant matters which the Tribunal is required by s 103(4) to address on this review.
In order to address those matters, it is first necessary to identify the markets of concern. This is reflected in the definition of competition found in s 47 of the CC Act.
A market should be defined to contain the maximum range of business activities and the widest geographic area within which, if given a sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another: Re Tooth & Co Ltd and Tooheys Pty Ltd (1979) 39 FLR 1 at 38.
It was agreed between CBH and the ACCC that there were three markets that may be relevant for this matter. These may be described as:
(5)a Western Australian market for the provision of grain receival, storage and handling services (Grain Storage Market);
(6)a Western Australian market for the provision of grain transport services (Grain Transport Market); and
(7)a Western Australian market for grain trading services (Grain Trading Market).
There may be some debate as to whether there is, relevantly, one market for grain transport in Western Australia or two, being the market for transport of grain by rail and the market for grain transport by road. Rail and road transport of grain are clearly substitutes and may also be complements. The proper determination of this application does not require the resolution of this matter.
Although there are three markets that may be affected by the Notified Conduct, it is agreed between CBH and the ACCC parties that only the Grain Transport Market is relevant to the question whether there has been or is likely to be a substantial lessening of competition as a result of the Notified Conduct.
In assessing whether the Notified Conduct has or is likely to result in a substantial lessening of competition the Tribunal must consider the state of competition in the market both with and without the Notified Conduct: Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] FCA 38 at [113] (Stirling Harbour) affirmed on appeal: Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] ATPR 41-783; Dandy Power Equipment Pty Ltd v Mercury Marine Pty Ltd (1982) 64 FLR 238 at 259. This method of evaluation has come to be referred to as the factual and counterfactual test: see, for example, Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297 at 326 [148] (Yates J, Finn and Buchanan JJ agreeing).
The effect of the Notified Conduct is that, if a participant in the process of exporting bulk quantities of grain from Western Australia wishes to use CBH’s up-country receival and storage sites as well as one of the ports (currently the only ports in Western Australia from which bulk grain may be exported are operated by CBH) there is only one means of arranging transport from a receival site or sites to port. As far as a grower as user of the CBH receival sites and ports is concerned, CBH is a monopoly provider of grain transport services to the ports.
The Notified Conduct does not prevent anyone, be they a grower, a marketer or any other participant, from utilising transport other than that organised by CBH provided they do not use both CBH’s up-country receival sites and CBH’s ports. For example, as noted, growers may deliver their grain directly to port by way of transport organised themselves. As it stands about one fifth of the annual grain crop reaches port in this fashion. Similarly, there is no proscription on the development of independent up-country receival sites or ports. Thus, currently, that is in the world with the Notified Conduct, there exist opportunities for growers dissatisfied with the terms and conditions of CBH’s transport services to transport grain for export by delivering it by truck to one of the ports, so long as one of the receival sites of CBH is not utilised. In addition, although it has not yet occurred, another entity – be it a grower, a marketer or an independent company could establish an up-country receival site or sites, and arrange for such transport of grain from that site or those sites to port as that entity wishes to arrange.
A distinction was made, in particular by the expert economists, between competition in the market for transport services on the one hand, and competition for the market for transport services on the other. The method by which CBH allocates transport contracts was said, at least by CBH, to give rise to very substantial competition for the market. That is, the tender process engaged in by CBH by which it sought to encourage potential providers of transport services for the market to compete fiercely with each other, thus giving rise to competitive outcomes. These reasons will address that distinction below.
It is also important in assessing what public benefits arise from the Notified Conduct to distinguish between the Grain Express system itself and the Notified Conduct. It will not be an important factor to the determination of this matter if the Grain Express system has great public benefits and if those benefits would continue to be available despite the cessation of the Notified Conduct.
SPECIFIC ISSUES AND FINDINGS
Before turning to the primary issues of whether the Tribunal is satisfied Notified Conduct will not or will not be likely to cause a substantial lessening of competition and, if it has such an effect, whether the public benefits accruing from the Notified Conduct outweigh its anti-competitive detriments, it will be useful to address some specific issues. These issues will inform the likely effects of the Notified Conduct.
The Eastern States
The Tribunal received a substantial amount of evidence about the grain industry in the Eastern States of Australia, being New South Wales, Queensland and Victoria.
Characteristics of the grain industry in the Eastern States
The grain industry in the Eastern States comprises over 10,000 growers, producing an average of 15 to 17 million tonnes of grain per annum but ranging year to year from 8 to 24 million tonnes, comprising wheat, barley, canola and other oilseeds, pulses and sorghum.
Most of the grain produced in the Eastern States is consumed domestically, with any surplus grain being exported. The average volume of domestic consumption is 9 to 10 million tonnes.
Grain receival and storage services are provided by various parties. These include GrainCorp, Cargill, ABA, others such as Louis Dreyfus and Glencore, local grain merchants and on-farm storage facilities owned by growers themselves. GrainCorp estimates there is over 40 million tonnes of storage capacity in the Eastern States.
A number of transport service providers transport grain from up-country storage to port. Marketers are heavily involved in the planning of the process for transporting their grain from storage facility to the required destination.
There are a number of grain marketers and traders, including accredited wheat exporters and local grain merchants. Throughout the course of any year, the ownership of grain may change hands many times, including whilst it is in storage. For grain that is exported, marketers frequently trade grain in the over-the-counter “paper” market. Marketers also frequently engage in “stock swaps” in order to ensure that they have sufficient grain at specific sites.
The market participants
GrainCorp is an ASX-listed agribusiness entity which has bulk export grain handling operations in the Eastern States. These bulk handling operations include up-country receival, storage and handling services provided to over 10,000 growers and over 100 traders from 280 up-country storage sites. GrainCorp also manages between three and four million tonnes of above rail capacity on a ‘take or pay’ basis and over one million tonnes of road transport every year. GrainCorp operates seven port elevators, which handle up to 80% of bulk grain exports from the Eastern States.
In addition to the 280 receival sites mentioned above, GrainCorp owns between 350 and 400 receival sites which it no longer operates, although around 20 or 30 of these sites can be opened if necessary. The number of receival sites which GrainCorp opens each year depends on the size of the harvest and varies from around 150 in a drought year to up to about 300 in a peak year.
Some of GrainCorp’s receival sites were established as early as 1918 and most of its older infrastructure was established in the 1960s. GrainCorp’s receival sites vary in terms of the capacity they hold from 4,000 tonnes to 120,000 tonnes, and some are in very remote locations. The decision whether to open a site each year is made in conjunction with the local growers. If there is unlikely to be sufficient volume of grain brought to the receival site to justify it opening, GrainCorp would not open the site and would direct growers to another site nearby.
As mentioned, GrainCorp has a large number of receival sites and has capacity which was anticipated to exceed the largest harvest. However in recent harvest seasons GrainCorp has needed to construct additional receival capacity to meet the demands of the seasons.
Grain received at a GrainCorp up-country storage facility is co-mingled on receipt, according to type of grain and grade. In 2011, GrainCorp had 200 different segregations according to grade. The Eastern States generally have tended to have far more grades of grain than in WA, because of the larger protein spread. GrainCorp operates a process called “dynamic binning” by which grain can be upgraded on receival and binned into a higher grade. This may be thought of as a less formalised version of CBH’s “Quality Optimisation” program.
GrainCorp up-country sites receive approximately 50-60% of grain harvested in the Eastern States. Approximately 30% of grain is stored on farm and 10-20% is stored in third party storages (including Cargill, Glencore, Louis Dreyfus and ABA).
GrainCorp’s grain storage and handling services, grain transport services and port terminal services are supplied to its customers on a standalone contracted basis. Unlike CBH, and Viterra through its Export Select service, GrainCorp does not offer a bundle of these services. In other words, it is the responsibility of the owner of the grain to arrange transport services from GrainCorp up-country sites to port or to a domestic customer.
Where GrainCorp is the supplier of transportation services, those services are contracted separately from the provision of GrainCorp’s receival, storage and handling services on the one hand, and port terminal services on the other.
The actual costs incurred by GrainCorp in receiving grain vary from site to site depending on the site’s characteristics, the volume of grain received at the site, the speed at which grain is delivered to a site and any disruptions caused by weather. The costs to GrainCorp of storing grain will also differ between receival sites depending on a number of factors, including quality arrangements in place at the site and the equipment that the site has installed. GrainCorp’s practice is to have the same prices apply across its receival site network, even though some sites and some storage elements within those sites may have different costs from other sites and storage elements.
Allan Johns, the Chief Development Officer of GrainCorp, gave evidence during cross-examination that GrainCorp does not seek to set its fees for receiving and storing grain to reflect the different costs incurred at different sites. The approach adopted by GrainCorp is to look at the total cost of operating its up-country receival network and then prepare a fee structure against that total cost. Many of the costs associated with the network are not possible to quantify in advance. GrainCorp’s experience is that the cost of running a silo, whether large or small, is fairly similar. It is a mistake, in GrainCorp’s experience, to assume that large sites are necessarily more efficient than smaller sites. In fact, GrainCorp’s experience is that some of its larger silos are actually more expensive to operate per tonne than some of its smaller storage facilities.
In order to set its receival fees, GrainCorp works out the average cost across the network. GrainCorp does this because it is GrainCorp’s choice which type of storage a grower’s grain is deposited in, not that of the grower, and setting differing fees for differing sites or types of storage would disadvantage some growers as a result of decisions made by GrainCorp.
The cost to GrainCorp of out-loading grain varies depending on a number of factors, including the number of tonnes that are out-loaded. GrainCorp seeks to manage this by imposing minimum tonnage restrictions on any out-loading. If a request is made to outturn less than 200 tonnes, GrainCorp would not permit the outturn from the site unless it could be coordinated or consolidated with a larger order. GrainCorp takes the same approach as CBH that if it is outturning grain from a particular site at a particular time then it will permit smaller quantities of outturned from that site on the same occasion.
The terms and conditions on which GrainCorp supplies storage and handling are set out in the Country Storage and Handling Agreement. Under clause 5.23 of that Agreement, the customer acknowledges that GrainCorp can swap a grade of grain with the same grade of grain between GrainCorp storages within a port zone for “Operational Reasons”. This term is defined to mean delays or grain unavailability due to weather problems, grain infestation or fumigation, grain quality problems, inaccessible grain, mechanical failure, rail availability or delays, last of grain storage being out-loaded and failure to accumulate cargo at a port terminal in a timely manner. Where GrainCorp undertakes a stock swap GrainCorp charges the customer the freight differential between the site at which the customer had the entitlement and the site at which GrainCorp outturns the grain. For export grain, that is, grain destined for one of the GrainCorp port terminals, GrainCorp charges the differential in the location differentials developed by Grain Trade Australia (GTA), the industry body for grain marketers, for the two port terminals. Accordingly, if grain is outturned by GrainCorp at port or at a site closer to port from the site at which the customer holds entitlement, GrainCorp charges the GTA location differential as a proxy for the freight costs of moving the grain between the receival site and the outturning site, even if the grain does not physically move.
In order to accommodate its fumigation schedule, GrainCorp must undertake a series of transfers of ownership between storage sites in order to ensure the grain can be outturned to customers. Despite these steps, on occasion situations arise where grain is under fumigation and grain of an equivalent quality, grade or quantity is not available and therefore there is a mismatch between the demand for grain and export bookings.
Cargill is an international provider of food, agricultural and risk management products and services. Cargill’s “GrainFlow” operations commenced in 1999 under the ownership of AWB. Cargill operates 18 grain storage facilities across the Eastern States as well as 4 grain storage facilities in SA. These facilities are known as “GrainFlow centres”. They were built by AWB over a period from 1999 to 2004. GrainFlow centres have a “consistent configuration”, with the exception of the Dimbulah GrainFlow centre, and use “[v]ery consistent technology”.
Cargill provides receival, warehousing, storage and handling, and outturn services to growers and “acquirers” of grain at its GrainFlow centres. Growers are able to “warehouse” their grain at a GrainFlow centre free of charge until after harvest, when storage charges begin. Similarly to the GrainCorp system, the fees charged by Cargill for outturning grain from a GrainFlow centre are the same regardless of whether transport is arranged by Cargill or separately arranged by the acquirer. Cargill enters into arrangements with rail and road transport service providers, primarily for the purpose of transporting grain it owns, but on-sells approximately 10% of its contracted rail capacity to third parties.
Under certain circumstances, the outturn fee charged by Cargill can substantially increase to reflect the inefficiency of a particular outturn. For wheat, the price charged by Cargill for outturning to rail or road is $4.20 per tonne for the 2011/2012 harvest season. In addition to this fee, Cargill imposes what it describes as outturn efficiency fees under certain circumstances. For example, if the outturn request is for less than 80 tonnes per day, an additional charge per tonne of $3.00 is levied and if the total order is less than 200 tonnes, an additional $3.00 per tonne is levied. These fees are cumulative so if the order is less than 80 tonnes then the total additional charges would be $6.00 per tonne. If an order was made to outturn less than 80 tonnes in a day on a weekend, the total outturn fee would be $12.20 per tonne. Cargill also has outturn efficiency fees with respect to late arrival or notification and a failure to outturn in accordance with an order. These additional charges are indicative of the additional significant costs imposed on a bulk handler for outturning grain in small quantities or outside of its regular operating parameters.
Cargill’s experience is that the cost of out-loading grain incurred by a bulk handler can vary depending on a large range of considerations including the amount outturned, whether the outturn occurs on a public holiday or a weekend and in relation to the amount outturned. Generally the smaller the amount is, the higher the cost on a per tonne basis. The nature and configuration of the receival site can also affect the cost.
CBH submitted that the systems in the Eastern States provide limited assistance to the Tribunal, because the marketplace on the East Coast is primarily domestic focussed, which creates different issues and solutions compared with an export-focussed supply chain. It said the system operated in South Australia is the closer comparator to Western Australia, particularly in the areas where the grain that is produced is predominantly exported. It also said that the status of CBH as a co-operative provides an important distinction between the structure of the grain industry in Western Australia from that in the Eastern States and in South Australia.
Those differences must be accepted. But it is, on the other hand, too simple a proposition to say that, because CBH as a co-operative represents the growers’ self-arrangement and therefore best reflects the growers’ interests, no regard should be had to practices elsewhere in Australia. Indeed, CBH did not put its position that strongly. It accepted that some regard could be had to the interstate practices. It may also be observed (as is discussed in more detail later in these reasons) that, while it is undoubtedly true that CBH does operate in a way which it regards as representing the best interests of the growers in Western Australia, the interests of all growers are not necessarily equally well served by the decisions of CBH on their collective behalf. There are growers with very different production levels, different geographical positions and growers who would have different transport options (but for the Notified Conduct); a substantial grower closer to a rail line might choose its economic interests to arrange its own rail or road transport even though that grower may wish to use a CBH receival facility. In addition, whilst its decisions through its board are no doubt made in good faith and on the best judgment of those involved, it is not routinely obvious – for example – that all growers would support the way the Freight Levy is applied, or more accurately any surplus after each season, or their capital as co-operative members being used and tied up in very significant expenditure on locomotives and rolling stock.
It should also be noted that there is evidence that the major exporters or marketers are investing (or considering investing) in their own supply chain capabilities in the Eastern States. That has led to competition between supply chains in the Eastern States. GrainCorp considers on farm storage to constitute part of its competition, as a grower has the choice of delivering to a GrainCorp receival site or storing the grain on farm. Whilst the differences pointed out by CBH are not insignificant, the Tribunal does not simply discount the evidence about the Eastern States. It has some relevance. Amongst other things, it demonstrates in the context of the Eastern States vigorous and open competition in the Grain Transport Market, as well as in the other markets referred to above. That aspect is further discussed below.
Glencore’s practices were explained by James Maw, Senior Trading Manager of Glencore. Mr Maw said that, in the site entitlement system that operates in the Eastern States, Glencore acquires each year grain from many growers which is stored in hundreds of different receival sites throughout the Eastern States. When Glencore wishes to export a cargo, its starting point is to book a shipping slot in one of the ports in the Eastern States. Glencore then seeks to work out how it can best get grain from a multitude of receival sites to the port terminal in time for shipping. Mr Maw accepted that it was more advantageous for Glencore to use a smaller number of sites but sometimes it had no option but to accumulate from a larger number of sites.
Mr Maw stated that Glencore does not always have a choice in the arranging of transport from up-country receival sites to port terminals because sometimes the bulk handler responsible for the receival site in which grain Glencore has acquired is stored would have already transported grain to port and Glencore will swap that grain and pay the freight costs to the bulk handler. These freight rates are typically based on the GTA location differentials.
In the Eastern States, Louis Dreyfus also acquires grain at a number of sites. However, the sites from which it acquires grain that it then transports to port for export are very limited. Louis Dreyfus aims to acquire grain for export from around two to three sites for transport by rail and up to four to six sites for transport by road. The grain that it acquires at other sites in the Eastern States are required to either supply the domestic market or for hedging purposes.
Louis Dreyfus publishes each day a list of the price that it pays for various grades and types of grain at the various ports in Australia. The amount that it will pay a grower is its list price less the published freight differential between the port terminal and the receival site at which the grower’s grain is stored. The freight location differentials are published by GTA. The location differentials are set by the Transport Storage and Handling Committee of GTA on a yearly basis. As GTA makes clear, the locations differentials are not freight rates and do not reflect the actual cost of providing freight between two locations. Nevertheless, these are the amounts which are deducted from the amounts paid by Louis Dreyfus to the growers from which it acquires grain. Providing marketers with control over transport may also allow them to apply a margin to the provision of that transport which is deducted from the amount paid by growers. Philip Coffin, the General Manager, Grains of Louis Dreyfus acknowledged that marketers do attempt to make a margin on the various storage and handling services that they provide to growers.
Eastern States experience
The ACCC submitted that the experience in the Eastern States demonstrates that an unbundled service is able to be provided without significant disruption to the task of moving grain to port for export. For example, the ACCC submitted that GrainCorp manages the issue of outturning small volumes of grain by moving an order of less than 200 tonnes to another site which is already open for outturning other orders or consolidating that order with others from the same customer.
The grain industry in the Eastern States is, in the ACCC’s submission, also illustrative of the dynamic efficiency gains that may result from competition for grain transport services. By way of example the ACCC pointed out that Cargill has invested in “belt weighing” infrastructure at its GrainFlow facilities which, Mitchell Morison (the General Manager of Commercial and Risk Management of Cargill) considers, gives Cargill a “distinct advantage” over other bulk handlers.
As with the system operated by Viterra in South Australia, it is undoubtedly true that unbundled grain storage and handling and transport services can be supplied. CBH accepts that. That fact, however, does not provide a simple answer for the Tribunal. The structure and history of the grain industry on the Eastern States is substantially different from that in Western Australia, limiting the ease with which comparisons can be made. For example, the fact that there are multiple transport providers and operators of storage and handling facilities in the Eastern States does not necessarily imply that such a scenario would eventuate in Western Australia should the Notification be removed. It is difficult to assess with any confidence the accuracy of the ACCC’s claim that the Eastern States’ experiences with operating outturn to third party transport providers at multiple sites without causing significant disruption can be transported to Western Australia. This is particularly the case when the system that may be the subject of disruption is a bundled one such as the Grain Express system. It is important to take account of those differences in reaching decisions on the primary issues for the Tribunal.
As CBH submitted, the Eastern States system has not been established with a bundled and unbundled service running side-by-side. The substantial differences between the systems in place in the Eastern States and the likely systems that CBH would implement were the Notification removed make the experience of the Eastern States of limited significance to these proceedings.
Comparison of fees
During the hearing the Tribunal heard some evidence comparing the storage and handling fees, and the freight fees, between States. CBH conducted a comparison of fees as a result of a “benchmarking exercise” conducted for the purpose of setting “grower value return on capital”. CBH benchmarked its storage and handling fees against bulk handlers in other States because it has no competitor in WA. In the case of both storage and handling fees and rail freight fees, CBH’s fees appear to be significantly below those of bulk handlers operating in other states (Viterra, GrainCorp and ABA).
The ACCC submitted that the comparison of fees by CBH is neither a like-for-like comparison, nor a measure of CBH’s relative performance or efficiency. In the ACCC’s submission, in order to undertake such a comparison it would be necessary to make various adjustments to the data to take account of differences in the costs of inputs between States and differing operating conditions, including geography, climate and homogeneity of grain. Accordingly, the ACCC submitted that the Tribunal does not have the requisite evidence before it to conduct a true like-for-like comparison of fees between States.
Given the substantial differences between the Eastern States and Western Australia mentioned above, the Tribunal accepts that it is not possible for it to come to a firm conclusion about the relative pricing or efficiencies of the two regions. Indeed, there is no evidence of any efficiency study in the Eastern States which would enable a meaningful comparison to be made, or at least one with sufficient certainty to act on it with confidence.
South Australia
The Tribunal was also taken to a large body of evidence about the grain industry in South Australia. The experience in that State was used as a comparator to that in Western Australia, by the ACCC in particular.
Approximately 80-85% of the grain harvested in SA is exported, with some variation from year to year. Grain grown on the Eyre Peninsula and to the west of the Spencer Gulf is predominantly exported, making it the region most similar to Western Australia.
The principal bulk handler in South Australia is Viterra. Viterra is a global agribusiness with headquarters in Canada. It has operations in Australia, New Zealand, the United States and Canada and has trading offices in Japan, Singapore, China, Switzerland, Italy, Ukraine, Germany and India. Viterra commenced operations in Australia in October 2009, when it merged with ABB Grain Limited.
The Tribunal heard considerable evidence about Viterra’s operations in SA. Viterra operates 106 receival sites in South Australia. Its network is significantly larger than any other bulk handler in South Australia, with a total capacity of approximately 10 million tonnes. The other operators are Cargill (which operates four sites in South Australia), GrainCorp (which operates one site in South Australia), Free Eyre Limited (which operates one site), and various other entities which have their own storage facilities and on farm storage. There are four marketers who export grain from South Australia, including Viterra. All four use Viterra’s supply chain services to export grain from South Australia.
In Application by Chime Communications Pty Ltd (No 2) [2009] ACompT 2 (Chime) at [48], the Tribunal (Finkelstein J, Mr R Davey and Professor D Round) set out, in a different context, relevant criteria for competition. These criteria were structural, conduct-based and performance-based. These criteria direct the assessor’s attention to the number of sellers in the market, the extent of inhibitions on entry to or expansion within the market, the prevalence of exclusionary tactics or collusion in the market and the efficiency of the firms and prices in the market. In the present matter, as has already been mentioned, the world with the Notified Conduct is likely to have significantly higher barriers to entry in the Grain Transport Market. The evidence before the Tribunal does not permit an assessment of the competitiveness of the prices and practices of CBH. While some comparison was made to operations interstate, there was not sufficient evidence of CBH’s costs to determine conclusively whether the fees and charges it levies were reflective of its costs, nor whether its costs were commensurate with those to be expected in a competitive market.
In attempting to reconcile differing views amongst economists as to the proper definition of barriers to entry, the Tribunal concluded that barriers to entry are both determined by market characteristics, like economies of scale, and the result of the incumbent’s behaviour: Chime at [53]. The Notified Conduct constitutes a strategic barrier to entry.
This analysis is not to be confused with the desire to ensure the greatest number of competitors. It is aimed at determining whether the Notified Conduct prevents the entry of efficient suppliers of services in the Grain Transport Market: see Re Telstra Corporation Ltd (No 3) [2007] ACompT 3 at [99].
It is therefore necessary to address the second of the two primary issues identified by the Tribunal.
PUBLIC BENEFITS
CBH submitted that the Notified Conduct has resulted or would be likely to result in benefits to the public which outweigh the detriment to the public by the lessening of competition. CBH claimed that there were a number of public benefits arising from the tie, although there was a degree of overlap between these. To an extent the Tribunal has addressed some of the claimed benefits and made findings about them. It is not necessary to repeat those discussions.
The claimed benefits have been assessed by the Tribunal. Their significance to the assessment of the ACCC Notice may be divided into several categories.
First, a number of the claimed benefits would, in the view of the Tribunal, persist in the world without the Notified Conduct. As such, these benefits are not ones that the Tribunal has placed much weight on in relation to weighing the public benefits and the detriments to competition of the Notified Conduct. The Tribunal’s view may be expressed in alternative ways. One way is to say that this group of claimed benefits are benefits of the Grain Express system, and not of the Notified Conduct. As the Grain Express system will continue to be operated by CBH, and is not itself a benefit of the Notified Conduct, there is no real weighting to be put in the scales as public benefits which might be lost if the Notified Conduct must cease. The alternative is to assume that this group of benefits is attributable to the Notified Conduct through the Grain Express system, but to conclude that because the Grain Express system will continue with the same benefits when the Notified Conduct ceases, the same benefits must be put on both sides of the scales and will cancel each other out.
The primary reason for the Tribunal considering that these benefits will persist is that the Grain Express system generally will continue independent of the tie. For the reasons already given, a very significant proportion of the grain deposited at an up-country receival site of CBH will be nominated to the Grain Express system, and growers will still have the opportunity to participate in its asserted benefits even in the world without the Notified Conduct. The Tribunal is not satisfied that a consequence of the ACCC Notice will be that the Grain Express system will be at risk, or will be reduced in the tonnage of grain it is asked to accept, to such an extent that it will no longer be economic to operate it or that the levels of benefit to growers (and to an extent marketers) will be materially diminished. That accords with the internal assessments of CBH and it reflects the practice in South Australia, where there is no complete tie of deposited grain to Viterra’s Export Select system although it does operate broadly except in selected receival sites. The Tribunal has addressed that comparison and other comparisons to the extent they are useful, earlier in these reasons.
The benefits that fall into this category include:
(1)the absence of any need to negotiate with growers or marketers who own entitlements to grain at certain sites before moving that grain to port;
(2)that grain can be moved from a receival site without waiting for a grower to nominate their grain to a marketer;
(3)that CBH can ensure its transport facilities are used at maximum capacity;
(4)that CBH can plan grain movements on a bulk basis, without reference to the nominal owners, with the maximum amount taken by rail or, where rail is not feasible, road so as to obtain economies of scale;
(5)efficiency in operation of delivery of grain to ports and storage at ports;
(6)the maintenance of grain quality;
(7)the ability of growers to deliver grain when it is convenient to them and delay nomination of a marketer;
(8)the management of grain grades in an optimal way;
(9)the facilitation of the Quality Optimisation program;
(10)the facilitation of crop insurance and fuel hedging.
There are a number of increased costs that CBH would face if forced to offer an untied system alongside the Grain Express system. Most of these costs, however, can be recovered by CBH through the imposition of outturn and other fees. If the untied system is still demanded by users despite the presence of such fees, this would be strongly indicative of the efficiency to those users of the untied service. If there is little demand, then the costs to CBH will be minimal. The costs that fall into this category are:
(1)increased equipment requirements;
(2)increased measuring and sampling requirements;
(3)any costs associated with no longer being able to empty an entire storage site at once;
(4)any costs associated with the increased operational requirements arising from having more than one rail transport provider, if untied grain is transported by rail;
(5)decrements to the storage efficiency, where these are quantifiable.
The ACCC submitted and the Tribunal accepts that several of the claimed benefits can be retained in the world without the Notified Conduct through the implementation of sensible business rules. These claimed benefits are:
(1)the ability to set fumigation schedules at efficient times and not have them interrupted;
(2)the absence of a need to have parallel systems in place for the Grain Express system and the untied system to prevent congestion, to avoid missed outturn times and to ensure coordination of rail transport;
(3)the increased efficiency of grain receival; and
(4)increased storage efficiency.
Several of the claimed benefits, in the Tribunal’s view, are not supported. The Tribunal does not accept that the removal of the tie will result in:
(1)increased uncertainty for CBH; or
(2)diminished use of rail, where such use would have been efficient.
As noted, the Tribunal does not accept that it is likely that sufficient quantities of grain will be transported in the untied system so as to render the Grain Express system unviable, unless the Grain Express system is not efficient or is seen by growers and marketers as not efficient. If that were the case, it cannot be a public benefit to compel use of an inefficient system. It should be observed, however, that the Tribunal did not conclude that the Grain Express system was inefficient.
It is possible that the tie assists CBH to benefit from economies of scale in the Grain Transport Market. However, both CBH and the ACCC agreed that neither rail nor road transport markets separately are natural monopolies, implying that the returns to scale peak at a volume of grain transport below the entire harvest. Further, given that the likely world without the Notified Conduct will still see a large majority of grain transported through the Grain Express system, any decrement to the economies of scale achieved is likely to be minimal.
The principal benefit of the Notified Conduct appears to be the avoidance of creating designing and implementing a system and procedures to enable untied grain to be outturned and returned to the ports. The benefit of the tied system arises if the quantity of grain transported in the untied system is insufficient to recover the costs of the establishment of the parallel system. CBH has estimated that the cost of establishing an untied system would be approximately [REDACTED], some of which has already been incurred.
CBH submitted that the tie was necessary to create competition for the provision of rail transport services. In particular, it was submitted, the tie was necessary to entice Watco, the successful tenderer, to enter the market. This submission was supported by the evidence of Mr McKechnie of Watco. The benefit of the tie to the tendering process was said to be that it increased the certainty with which the required transport volumes could be predicted, as well as the volumes themselves. It is possible that the tie may have induced greater participation in the tender process than would otherwise have been the case. However, no evidence was proffered to support the proposition that a lower price would have resulted if the Notified Conduct was not permitted. The Tribunal has commented on this aspect in greater detail earlier in these reasons. The potential benefit of increased competition for the market should be taken into account in the weighing process, but it does not weigh heavily for the reasons given. It should be noted, too, that this benefit pertains particularly to rail transport, due to the relatively high fixed costs of entry.
There is a real possibility of increased disputes between CBH and transport users, for example about how to deal with congestion or missed outturn slots. The avoidance of disputation is clearly a public benefit. While such a benefit is almost impossible to quantify, it should nevertheless be, and is, taken into account.
The Tribunal must also assess the extent of any public detriment resulting from the lessening in competition.
The primary detriment is that the tie restricts growers and marketers seeking out alternative transport arrangements for the transportation of bulk export grain from receival sites to port. The evidence is that there is strong interest among some marketers to explore alternative transport options which better suit their needs. The evidence also shows that there is a willingness on the part of some transport providers to offer such transportation. In these circumstances, the foreclosure of such mutually beneficial trade is allocatively and dynamically inefficient.
The ACCC contended that the Notified Conduct made it possible for CBH to cross-subsidise the freight rates.
The setting of freight rates by CBH is a complex process. Ultimately CBH estimates its total anticipated freight costs for a particular season, and determines freight rates to enable it to recover those costs from growers. CBH sets freight rates for different rail routes, having regard to the anticipated grain tonnage on those routes, but they do not reflect directly the transport costs incurred from individual receival sites. The Western Australian Government also has provided some funding under the “Transitional Assistance Package” (TAP) to subsidise the cost of freight on certain designated rail lines, apparently to ensure their continued use.
The evidence does not enable the Tribunal to conclude that the process of determining freight rates from different receival areas to port involves cross-subsidies, in the economic sense (as explained by the expert economist witnesses) where the price of the service is less than its marginal cost of production. It was not in dispute that, to some degree, CBH engaged in “transfers” between different freight routes. That is, different freight routes contribute a different proportion of the joint and common costs of offering the transport services. That is a not uncommon course to adopt. Obviously there are matters of degree.
With one reservation, the “averaging” undertaken by CBH on the evidence is not regarded by the Tribunal as indicative of inefficiency in the Grain Transport Market. However, on the other hand, the evidence tended to suggest that the “averaging” may have enabled some of the more remote or smaller receival sites to continue to be operated so that, whether it occurs by cross-subsidy or transfer or by the benefit of the TAP funding, there may well be efficiencies available in the Grain Transport Market which the present costing system of CBH does not expose. Subject to the one exception concerning the surplus in the Freight Pool, the Tribunal makes no finding about whether the freight rates fixed by CBH demonstrate that the Notified Conduct in that limited respect has led to conduct which is shown to be inefficient, or on the other hand has resulted in a public benefit which should be put into the scales when addressing the second of the two primary questions it must consider. There is however a significant and obvious possibility that the setting of freight rates by CBH works to the economic disadvantage of certain growers, perhaps the larger growers near to receival sites readily accessible by rail to ports, and a corresponding advantage to certain growers in other areas. The evidence does not enable that observation to be taken further. The one exception concerns the Freight Pool surplus, and the way that is dealt with by CBH. That has been the subject of separate consideration in these reasons for decision.
Consequently, the Tribunal does not accept the ACCC submission when cross-subsidies are defined in the economic sense. On the evidence, the Tribunal is not persuaded that there are any detrimental transfers between freight routes. It may be that, as the ACCC submitted, if the tie is removed CBH, in the face of competition will “unwind” any transfers, but it does not necessarily follow that the continuation of these transfers constitutes a net public detriment.
The ACCC also submitted that the Notified Conduct resulted, or would result, in public detriments beyond the grain transport market. In particular, the ACCC submitted the following further public detriments should be taken into account.
In the grain storage and handling market, there was evidence that a number of CBH’s storage facilities may not be economically viable on an individual basis, but that CBH continues to operate them. To the extent that the prices of transport under the Notified Conduct are not cost reflective, that is that some growers using transport services are the beneficiaries of transfers, the growers will be receiving the “wrong” signals about where to deliver their grain and could be encouraged inefficiently to deliver to receival sites that are more costly to operate. Similarly, growers facing the wrong signals about where most efficiently to deliver their grain may be encouraged to grow more grain near sites that are otherwise more costly to operate.
A rebalancing of rail freight rates in the world without the Notified Conduct could deliver a productive efficiency benefit by reducing or eliminating the use of sections of the below rail network that are not viable absent the Notified Conduct and “subsidies”.
The Notified Conduct prevents marketers from taking advantage of transport arrangements that might better suit their needs (both in price and non-price terms). The removal of the tie would enable them to try to find a better deal, and this may well result in marketers making better offers to growers in the Grain Trading Market.
Having addressed the claimed public benefits that are likely to result from the Notified Conduct, as well as the anti-competitive detriment also likely to result, the Tribunal must determine whether those benefits outweigh the detriments.
This task is particularly difficult where, as here, at least some of the benefits and detriments are not susceptible of reduction to quantitative values.
There are three public benefits that the Tribunal accepts are likely to result from the Notified Conduct. First, the avoidance of the need to establish alternative systems, rules and protocols in circumstances where the costs of doing so may be unrecoverable. This was estimated by CBH to cost approximately [REDACTED], some of which had already been incurred. Secondly, the avoidance of an increase in disputes between users of the transport systems and CBH. No precise value was attributed to this public benefit. Thirdly, the increase in competition for the rail transport market. Again, no precise value was put on this benefit.
The Tribunal is of the view that the third of the public benefits, the increase in competition for the rail transport market, will be substantially matched by the increase in competition in the market that would be possible in the world without the Notified Conduct. The Tribunal is not satisfied that the benefit to be gained by increased competition for the market is greater than the benefits of a similar nature gained from increased competition in the market.
While it may be desirable to avoid the cost of establishing the untied system, the fixed costs of this are small when compared to the turnover of CBH’s transport operations. Assuming the [REDACTED] estimate is accurate, it would equate to approximately [REDACTED] per tonne harvested in Western Australia, assuming the entirety of the cost were recovered in one, average, year and was evenly distributed across all grain. In assessing the importance of this benefit, it is to be borne in mind that these costs can be charged to users of the untied system. Such users can be expected to bear such costs if the volumes transported in the untied system are sufficiently large. Accordingly, the Tribunal does not view this benefit as substantial.
It is clear enough that time lost in dealing with disputes between users and CBH is a public detriment, the avoidance of which is desirable. The tie may well assist in this. Assuming CBH adopts sensible rules and protocols and does not behave unreasonably, there is no reason for the Tribunal to find that the size of the losses associated with increased disputation will be anything other than relatively minimal.
The potential for efficiency gains to be driven by increased competition in the grain transport markets are substantial. Whether such competition comes from small road transport providers transporting grain on an ad-hoc basis or marketers transporting their entire entitlements independently, there is considerable scope for mutually beneficial trade outside the tied system. It is important to note that such benefits may not necessarily be in the form of lower prices, though this may often be the case, but rather may derive from the ability for users to customise the transport system to their needs. While the Tribunal is not in a position to assess, quantitatively, the scope of these benefits it is satisfied that they are substantial.
The potential gains from innovation that may occur as the result of having more than one dominant participant in the grain transport market will also be foreclosed in the world with the Notified Conduct. This foreclosure constitutes a substantial detriment.
In the world without the Notified Conduct it is more likely that freight rates will be close to cost-reflective. Thus, in the world without the Notified Conduct, it is more likely that growers will be able to observe prices that reflect the true costs of delivering grain to specific receival sites and of growing grain in specific areas. In this way it sends the correct market signals on which investment decisions may be made. The clouding of this information is more possible in the world with the Notified Conduct and has the potential to substantially alter growing and delivery patterns in a detrimental way.
Overall, CBH has not satisfied the Tribunal that, in all the circumstances, the public benefits that are or would be likely to accrue from the Notified Conduct outweigh the anti-competitive detriment.
The Tribunal has reached its conclusion without considering the impact of the Notified Conduct, if it is allowed to continue, upon the Grain Trading Market. In the view of the Tribunal, that effect should also weigh in the scales as a public detriment. The Notified Conduct prevents marketers of grain from exploring, and taking advantage of, transport arrangements outside those offered through the Grain Express system. They cannot go to the participants or potential participants in the Grain Transport Market and seek competitive prices or other more suitable terms for transporting grain. Consequently, their capacity to compete in the Grain Trading Market is impaired and including by their potential capacity to make better offers to growers whether as to price or non-price terms.
CONCLUSIONS
The Tribunal is not satisfied of either of the two primary issues referred to so as to set aside the ACCC Notice. Accordingly, CBH’s application must be dismissed and the ACCC’s Notice should be affirmed.
I certify that the preceding three hundred and sixty-five (365) numbered paragraphs are a true copy of the Reasons for Decision herein of the Honourable Justice Mansfield (President), Mr GF Latta and Mr R Steinwall (Members). Associate:
Dated: 19 April 2013
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