Divestment powers: Truly draconian or last resort?

Next week the Federal Government is expected to introduce its self-titled “big stick” legislation in an attempt to address power prices. The “truly draconian”[i] legislation would allow the Treasurer to order the divestiture of assets or securities provided this is likely to result in a benefit to the public.

Divestiture powers have been considered by numerous reviews into competition policy and rejected. So why was divestiture not considered an appropriate response in those reviews, which include the Hilmer and Harper reviews, as well as a Liberal chaired Senate committee assessment as recently as 2015, and the Australian Competition and Consumer Commission’s (ACCC) consideration of divestment powers in its report on the electricity market[ii]? We take a look at what some of the reviews found.

Unpredictable Consequences

The current bill to go to Parliament will be the second time since 2014 that proposed legislation has been put forward with a view to introducing forced divestment powers.

Former independent Senator Nick Xenaphon proposed the Consumer and Competition Amendment (Misuse of Market Power) Bill 2014 and said that it was designed to give the ACCC and the Courts another option when it comes to tackling misuse of market power. Its focus was the supermarkets.

Nick Xenaphon in his second reading speech said: “The provisions in this Bill will allow the ACCC, or any other person, to make an application to the Court for a divestiture order. The Court can choose to apply this order when a corporation has breached Section 46 of the Competition and Consumer Act.”

He also commented that the need for the Bill was “painfully obvious. The amount of power that Woolworth and Coles have over our food industry is genuinely frightening, with the two chains holding around 80% of the dry grocery market”.

The legislation was considered by the Liberal chaired Senate Economics Legislation Committee, which recommended that it not be passed in February 2015. That committee found that a convincing case had not been made and that “evidence has not demonstrated that the potential advantages of such a power would outweigh the likely disadvantages”. It also stated that “The committee is concerned that court-ordered divestiture would risk significant disruption and economic damage, with unpredictable consequences for competition”[iii] and noted that the 2015 Harper Review provided an opportunity for a thorough and holistic examination of competition policy.

The Law Council of Australia noted in its submission on the Xenaphon bill that previous reviews of Australia's competition laws and policy had considered the question of whether Australian law should include a power to require divestiture by a firm which has misused substantial market power.  “Each of the Dawson review, the Hilmer review, the Cooney Committee and the Griffiths Committee came to the conclusion that no such power should be introduced.”

The Law Council also commented that “a divestiture power involves:

• a serious risk that it will create several less efficient businesses, and/or involve divesting a part of a business which cannot then be a competitive operation itself imposing on-going, supervising behavioural orders on the firm(s) involved, which are necessary to give effect to the divestiture order (such as orders in relation to how the divested businesses may deal with one another and/or their former parent);
• industry "engineering" with uncertain wider competitive impacts across the relevant market(s) – which may result in other firms acquiring substantial market power; and
• in the absence of a clear and direct nexus between the contravention and the assets to be divested, the divestiture not appropriately addressing the conduct which contravened s46.”

Harper Review

The Harper Review of Competition Law considered that forced divestment would have broader effects on a company’s efficiency and could potentially harm consumers. ”It is also possible that divested parts of a business might be unviable”.[iv]

That review also pointed to the earlier Hilmer and Dawson reviews which also considered proposals for a specific divestiture remedy (to be used in circumstances other than mergers) to address competition concerns about businesses with significant market power. Those reviews did not recommend its adoption because of the potentially broad nature of such a remedy and difficulties in targeting the conduct of concern[v].

More recently in The Australian[vi] Ian Harper was critical of the “hasty” introduction of a new divestment power targeting the energy sector, “arguing that the aim of market intervention should be to “block anti-competitive conduct, not to restructure the industry”.

Overseas Experience

In the US, divestiture is available as a remedy for violations of section 2 of the Sherman Act, which is aimed at monopolies and monopolistic behaviour.  Divestiture has only been used rarely and the last major use of the divestiture remedy was the 1982 and even that was via a consent decree that broke up the American Telephone and Telegraph Company.

The Law Council of Australia notes that while the divestiture powers in the US have only been used sparingly “(other than by consent) no such order has been made by the 1960's; similarly, while divestiture powers exist in the EU and Canada they have never been used”[vii].

Extraordinary

Legal firm Ashurst provided advice to the Australian Energy Council on the proposed measures and stated that the power to make a Divestiture Order “is an extraordinary and invasive power”.

“It gives the Treasurer the power to punish a business that the ACCC considers has (but has not proven) breached the law by requiring it to divest assets”.

Consistent with what competition reviews have found before it warned that divestiture could fundamentally change the structure of a business and could lead to a situation where an energy company is not fully compensated for rthe value of the divested asset “as the price achieved on a forced divestiture may not reflect market value, or the value of the asset to the energy company”[viii].

It could operate in effect as a form of punishment for “alleged wrongdoing”.  Its view was that if the “quasi-judicial” powers contemplated by the legislative framework were introduced “then they should be exercised independently so that the decision-making process is not influenced by the potential political interference (or the appearance of political interference)”.

Court-Applied

Previous reviews have considered the divestment powers in the context of being given to the Courts to determine, but even here they have not recommended this option.

Professor Allan Fels, the former head of the ACCC, has stated that while he is supportive of divestment powers, they should be general and not just targeted at the energy sector and be court-applied.  “It is better to have a standard court-applied power and only where there’s been a clear abuse of market power.”[ix] He also commented that “the power should be applied sensibly after a court hearing and investigation” and that there could be unintended consequences.

Currently divestiture can be recommended if it is concluded that a takeover would lead to a substantial lessening of competition – this is an unwinding of a transaction and “divestiture has never been a remedy under the abuse of market power provisions of consumer law for splitting a company that has expanded organically”[x].

ACCC

In reviewing the electricity market and in particular the wholesale market, the ACCC notes that requiring the divestiture of privately owned assets “is an extreme measure”.

“While the way in which concentration has developed in the wholesale market is clearly contributing to current high prices, the ACCC considers that the other recommendations made in this report will, if implemented, be a better means to restore competition to a level which serves consumers well.

“For these reasons…. the ACCC does not believe it would be appropriate to intervene to unwind the way in which the market has evolved across the NEM”.

Conclusion

The risks and concerns about introduction of a divestment power have been broadly canvassed over numerous reviews. The introduction of divestment powers has been repeatedly rejected. The Federal Government claims such powers would only be used as a “last resort” what happens with future governments? Once the powers are put into law it is difficult to foresee how they might be used in future and and as noted by David Uren[xi] “today it is energy that is in the eye of the political storm but tomorrow it could be banking, petrol retailing, supermarkets, toll roads or media. Granting an elected official such arbitrary power over the structure, contracting and pricing of a business is an attack on the rights of investors”.

[i] Libs will be judge, jury and executioner on power, The Australian, 29 November 2018

[ii] Restoring electricity affordability and Australia’s competitive advantage, ACCC, June 2018

[iii] https://www.australiancompetitionlaw.org/reports/2014mmp.html

[iv]http://competitionpolicyreview.gov.au/files/2015/03/Competition-policy-review-report_online.pdf

[v] Ibid, page 346

[vi] Competition tsar pans new power, The Australian, 21 August 2018

[vii] file://slam.virtual/SLAMData/ESAA/home/Carl.Kitchen/Downloads/140630-Submission-2848-Competition-Consumer-Amendment-Bill-2014.pdf

[viii] Advice on Electricity Price Monitoring and Response Legislative Framework, Ashhurts, 7 November 2018.

[ix] https://www.abc.net.au/radio/programs/am/former-accc-boss-says-divestiture-powers-should-include-banks/10146416

[x] Libs will be judge, jury and executioner on power, The Australian, 29 November 2018

[xi] Libs will be judge, jury and executioner on power, The Australian, 29 November 2018