REASONS FOR JUDGMENT
1 On 15 December 2014 a pecuniary penalty hearing, which is set down for five days, will commence.
2 Although the Australian Competition and Consumer Commission (the "Commission") also seeks findings of "ancillary contraventions" of the Trade Practices Act 1974 (Cth) (the "Act") by the first respondent, Cement Australia Pty Ltd ("Cement Australia") and by the second respondent, Cement Australia Holdings Pty Ltd ("CAHPL"), the principal matter to be determined in the upcoming hearing is the extent of any order the Court may make under s 76(1) of the Act having regard to contraventions of ss 45(2)(a)(ii) and 45(2)(b)(ii) of the Act found against the relevant respondents for the reasons identified in Australian Competition and Consumer Commission (ACCC) v Cement Australia Pty Ltd (2013) 210 ALR 165; [2013] FCA 909. Although, of course, the relevant legislation is now the Competition and Consumer Act 2010 (Cth), the relevant legislation at the time of the contravening conduct was the Act as earlier described.
3 I will say something further about the contraventions later in these reasons.
4 Section 76(1) as it stood at the material time provides, relevantly, that if the Court is satisfied that a person has contravened a provision of Part IV, the Court may order that person to pay to the Commonwealth such pecuniary penalty in respect of each act or omission by that person to which, in this case, s 45 applies, as the Court determines to be appropriate having regard to "all relevant matters including the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omission, the circumstances in which the act or omission took place" and whether the person has, put simply, been found by the Court to have engaged in similar conduct contraventions (the s 76(1) factors).
5 On Friday, 21 November 2014 at 3.00pm two matters came before the Court for determination. The first matter concerns whether a subpoena issued to Sunstate Cement Ltd ("Sunstate") issued on the application of the first to fifth respondents (which, for present purposes, I will simply call the respondents) requiring the production of all of Sunstate's documents containing "data underlying each of the assertions" contained in an affidavit of Mr Ramankutty (the General Manager of Sunstate) affirmed on 10 October 2014, ought to be set aside on the application of Sunstate on a number of grounds including oppression. Mr Ramankutty's affidavit, filed on behalf of the Commission for the purposes of the pecuniary penalty hearing, deposes to details of Sunstate's volumes of fine grade flyash supplied by it in the financial years ending 30 June 2012, 2013 and 2014, details of the prices at which Sunstate supplied fine grade flyash in those financial years and details of the cartage rates applicable to Sunstate's activities in those financial years.
6 During these financial years, Sunstate sold fine grade flyash to its customers on both an "ex-works" and a "delivered" basis.
7 The documents sought by the subpoena are described as those documents containing data underlying each of the assertions made by Mr Ramankutty including but not limited to six categories of documents which disclose the identity of each customer, the location of each batching plant supplied by Sunstate, the prices applicable to each batching plant in the relevant financial years, the volume of flyash supplied to each batching plant at each price, whether delivery to each batching plant was made at Sunstate's negotiated rates or arranged by the customer separately, and the delivery or cartage costs applicable to each of the relevant batching plants.
8 A number of things are said by Sunstate having regard to the affidavits of Mr Fox, affirmed on 17 November 2014 and 21 November 2014 and the affidavit of Mr Reitano affirmed on 21 November 2014, concerning the difficulty Sunstate confronts in complying with the subpoena.
9 I will return to that matter later in these reasons after addressing the second matter raised for determination which concerns whether three affidavits filed by the Commission in reply to the affidavits of the respondents filed in response to the Commission's additional principal affidavits in chief ought not be admitted into evidence in the penalty hearing. The three affidavits in question in reply are the affidavits of Mr Cooper (the General Manager of Nucrush Pty Ltd and, in effect, Nucon Pty Ltd ("Nucon")) sworn 10 October 2014, the affidavit of Mr Heffernan (the Company Secretary and administrator of Independent Flyash Brokers Pty Ltd ("IFB")) sworn 10 October 2014, and the affidavit of Mr Ramankutty affirmed 10 October 2014. The entirety of Mr Cooper's affidavit is opposed. Mr Heffernan's affidavit is opposed save for paras 1-10 and 28-30. Mr Ramankutty's affidavit is opposed save for paras 1-7 and 11 and para 3 of confidential annexure RR-1.
10 This second matter of whether the reply affidavit material is to be received into evidence in the penalty hearing is logically addressed before the challenge to the subpoena served upon Sunstate, as forensic access, by subpoena, to Sunstate's documents on volumes supplied, prices and cartage costs (rates) for the financial years 2012, 2013 and 2014 is said by the respondents to be made necessary only in order to enable the respondents to answer what is said to be an unpleaded case of market harm now made against them concerning market events which occurred in those later financial years.
11 Apart from the respondents' proposition that events in those financial years, which are now said to be relevant, are events not reflected in material facts pleaded in the proceeding, the respondents say that matters as to price (particularly) ought to have been the subject of the Commission's evidence in chief and the Commission ought not be allowed to split its case in this way.
12 If the reply affidavits are not received into evidence, access to Sunstate's documents in every practical sense falls away although Sunstate's application would remain to be addressed.
13 The respondents and IFB have reached arrangements about the subpoena to Mr Heffernan which is now the subject of a consent order.
14 Nucon has not challenged the subpoena served upon it.
15 The background matters relevant to the question of whether the reply affidavits (in the relevant respects) ought to be admitted into evidence (or not) are these.
16 Apart from the substantial body of material put in evidence in the primary trial of the contended contraventions and propositions said to derive from findings made in the course of the judgment on those matters, the Commission filed evidence in chief in the pecuniary penalty hearing on 17 April 2014. The Commission relies upon the affidavit of Mr Christopher Steger affirmed on 17 April 2014. Annexures CMS-17 to CMS-20 comprise copies of submissions made by the respondents to the Commission in support of an application for authorisation of a flyash supply contract made between Stanwell Corporation Limited ("Stanwell"), Pozzolanic Enterprises Pty Ltd ("Pozzolanic") and Tarong North Pty Ltd dated 19 November 2010 which was authorised on 14 July 2011 subject to conditions reflected in a Deed of Variation dated 12 August 2011.
17 The submission in support of authorisation identifies a material differentiating circumstance relevant to the proposed contractual arrangements, as compared with circumstances which prevailed under the terms of the earlier 2003 arrangements. The material differentiating circumstance which was said to render authorisation of the new arrangement appropriate (in the sense of satisfying the relevant criteria) was the proposition that "the competitive landscape" had "fundamentally altered since the 2003 Agreement was entered into". The particular matters speaking to that fundamentally altered competitive state since entering into the 2003 Agreement were said to be that IFB had, since 2008, been supplying fine grade flyash from Millmerran Power Station at significant volumes, Sunstate had since early 2007 been supplying fine grade flyash from Tarong North at significant volumes and Nucrush (through Nucon) had bid for and had been awarded an agreement to obtain guaranteed quantities of flyash from Tarong Power Station.
18 The respondents, by Pozzolanic, said that as a result of these factors, Pozzolanic's market share for fine grade flyash supplied into the south-east Queensland and northern New South Wales region had reduced, since 2006, by a nominated (and substantial) percentage: see CMS-17 at paras 30 to 34.
19 The Commission contends that annexures CMS-17 to CMS-20 show or suggest that the respondents' market share for fine grade flyash and sales of fine grade flyash to non-tied parties between 2008 and 2010 had significantly reduced from the position prevailing between 2002 and 2006 which, of course, is the pleaded period the subject of the controversy addressed in the proceeding. The respondents note that the Commission, in submissions dated 20 May 2014, said that it was seeking to raise and place emphasis upon the respondents' loss of volume (loss of sales) but that it was not seeking to engage in an analysis of pricing in the relevant market in the period reflected in the period of lost sales/volume.
20 The Commission contends that its submission about not seeking to engage in an analysis of market pricing was directed to the relevance of the annexures (CMS-17 to CMS-20) which seemed to be directed to contentions as to loss of volume and thus, as to the annexures, the question was simply one of volume. The Commission says that its contentions as to penalty and the evidence going to the relevant factors are reflected in the outline of 17 April 2014 which it served on the respondents when serving its evidence in chief on penalty. The outline set out the matters the Commission expected to contend for in making its closing submissions. The Commission's detailed submissions were filed on 28 October 2014. The Commission says that the outline included a detailed description of findings and evidence drawn from the liability hearing on which the Commission would rely in support of a submission that the contravening conduct, as found, caused higher prices.
21 The respondents had resisted admission of annexures CMS-17 to CMS-20 on grounds of relevance and also on the footing, based on Ms Carver's affidavit of 16 May 2014, that should those annexures be admitted into evidence, it would be necessary for the respondents to examine the price per tonne of concrete grade flyash sold by Cement Australia and third parties in the relevant south-east Queensland market between the end of the period the subject of the proceeding, namely December 2006, to a period ending in 2013. Since the question in issue raised by the annexures was one of the weight to be attributed (if any at all) to the particular differentiating market circumstance the respondents had identified themselves, of a decline in volumes due to the intervening activity of IFB and Sunstate, the Court was not persuaded that a detailed analysis of the price per tonne of fine grade flyash supplied in the relevant market in the period between 2006 and 2013 was made necessary by the volume factor put by the respondents to the Commission in the authorisation proceeding for the new contract having regard to market changes since the 2003 to 2006 period.
22 These matters were addressed in Australian Competition and Consumer Commission v Cement Australia Pty Ltd (No 2) [2014] FCA 689.
23 The respondents were unsuccessful in excluding annexures CMS-17 to CMS-20. However, orders were made on 15 July 2014 directing the respondents to make any application for third party discovery arising out of any of the matters raised by annexures CMS-17 to CMS-20 by a particular date. The respondents were directed to file any further evidence relating to matters arising out of those annexures by 19 September 2014. The respondents filed their evidence in chief on the penalty hearing on 16 May 2014.
24 On 19 September 2014 the respondents filed and served three affidavits pursuant to the orders of 15 July 2014. They were the affidavit of Mr Savory sworn 19 September 2014, (his third affidavit) an affidavit of Mr Ramankutty and an affidavit of Mr Ryan. The Commission contends that those affidavits were accompanied by a covering letter and a document entitled "Corporate Respondents' Outline of Evidence" in which the respondents said that the three affidavits are relevant to the topic of "loss or damage". The respondents also filed a further affidavit (his fourth affidavit) sworn by Mr Savory on 28 October 2014.
25 In Mr Savory's third affidavit he talks about Cement Australia's costs and revenues as recorded in SAP software and information extracted from that primary accounting system. Confidential exhibit KMS-A is a spreadsheet Mr Savory has extracted showing total volume of concrete grade flyash supplied by Cement Australia to customers in south-east Queensland in the calendar years 2011 to 2013 inclusive, and confidential exhibit KMS-B is a spreadsheet showing Cement Australia's average delivered price per tonne for concrete grade flyash supplied in SEQ for the calendar years 2011 to 2013 inclusive. The material put on by the respondents for the period 2011 to 2013 thus concerns the total volume of sales by Cement Australia and its average delivered price per tonne for the relevant product in the relevant market for those years.
26 Mr Savory then explains the relevance and impact of blast furnace slag which is ground to form slag. Flyash and slag can be used as a substitute for cement when making concrete. The use of slag gives rise to cost savings and improved durability. Slag can be used as a substitute for up to 30 per cent of cement when making concrete. Mr Savory says that slag and flyash each have different properties and advantages when used as a substitute for cement in making concrete. He says that the concrete mix adopted by any given customer is "largely driven by the cost of the cementitious materials" and this cost driver is particularly relevant when a customer is choosing whether to use a higher proportion of slag in the mix as compared with flyash. Mr Savory says that if a price for flyash in a particular region increases substantially he would expect to see customers increase the proportion of slag used in their concrete mix. He also says that this consideration has a proportionately greater effect on flyash volumes because slag can often replace cement on a "one for one" basis whereas flyash often has a replacement ratio below that ratio (70 per cent in the case of Tarong flyash and 60 per cent in the case of Millmerran flyash). He says also that these considerations mean that in many applications sales of slag "cannibalise" sales of flyash where there is a cost advantage to the customer in using a particular proportion of slag in its concrete mix rather than flyash.
27 Mr Savory says that Cement Australia produces both composite blend cement (where slag is already ground with cement) and "neat" slag that can be mixed with cement and other materials by the customers themselves. He says that historically slag was not commonly used as a cement substitute, and until 2009 neither Cement Australia nor any of its competitors to the knowledge of Mr Savory, supplied neat slag in the south-east Queensland geographic market. He says that Cement Australia began marketing neat slag in 2009. Marketing efforts in turn led to demand by customers for neat slag and since 2009 Cement Australia has "observed a strong uptake of slag as a cement substitute". Mr Savory says that he understands that Sunstate now also supplies neat slag as well as a composite blend. Mr Savory exhibits at confidential exhibit KMS-C a spreadsheet showing the volume of neat slag supplied by Cement Australia to customers in south-east Queensland between 2009 and 2013.
28 As to the contractual arrangements with Tarong, Mr Savory observes that the extended 2010 contract (made with Stanwell rather than Tarong Energy Corporation as a result of the coming into effect of the Government Owned Corporations (Generator Restructure) Regulation 2011 (Qld)) expired on 31 July 2014 and the respondents have not collected any flyash from Tarong or Tarong North since that date.
29 In Mr Savory's fourth affidavit (of 28 October 2014) he observes that confidential exhibit KMS-A contains the actual volumes of flyash supplied in south-east Queensland in the period 2011 to 2013 inclusive and that when that data is compared with forecast volume data in CMS-17 it emerges that the actual volumes supplied were lower than the forecast volumes. As to confidential exhibit KMS-B which contains Cement Australia's average delivered price per tonne of the product in south-east Queensland for the years 2011 to 2013, the exhibit actually refers to Cement Australia's average selling price which is different to its average delivered price. He says that in most cases all sales of concrete grade flyash are used to calculate the average selling price (including "ex-works" sales) whereas only those sales made on an "as delivered" basis are used to calculate the average delivered price. Mr Savory attaches as confidential exhibit KMS-E an updated version of KMS-B which excludes a small volume of ex-works sales made from the Tarong Power Station during the period 2011 to 2013. He says that the price now shown in KMS-E is accurately identified as an "as delivered" price. All of the pricing data contained in KMS-B and KMS-E is exclusive of GST.
30 As to the contraventions, I repeat (with the same qualifications) what I said in Australian Competition and Consumer Commission v Cement Australia Pty Ltd (No 2) [2014] FCA 689 at [11] to [26] which was this:
[11] Put simply, and relevantly for present purposes, the Court found (using the terms adopted in the principal reasons) that Pozzolanic [Enterprises] had contravened s 45(2)(a)(ii) of the Act by entering into the Millmerran Contract on 30 September 2002 as buyer, with MPP as seller, because the contract contained provisions (which came to be included in the Millmerran Contract in the way described in the principal reasons) which had the substantial purpose of preventing a rival of Pozzolanic from securing access to unprocessed flyash in the SEQ unprocessed flyash market, and preventing a rival of QCL from entering the SEQ concrete grade flyash market (a market for fine grade concrete grade flyash), and those purposes were the expression of a purpose of substantially lessening competition in each market. Apart from that matter, the Millmerran Contract was found to contain provisions which had the likely effect of substantially lessening competition in the way described and also had the effect of substantially lessening competition in the way described. However, as to the effects question, the Court found that, put simply, the anti-competitive likely effect and effect had dissipated by 31 December 2003 for the reasons extensively set out in the principal judgment.
[12] Other findings concerned the conduct of QCL in funding Pozzolanic's entry into the contract and Pozzolanic's giving effect to the provisions of the contract in the period from 30 September 2002 to 31 December 2003. Findings were also made in relation to the conduct of QCL in continuing to give effect to the provisions and conduct on the part of Pozzolanic Industries.
[13] By putting these findings in these terms, it ought to go without saying, obviously enough, that the precise content and detail of all of the substantial factual matters and findings need to be thoroughly examined and properly understood. The reasons in the principal judgment should be read in conjunction with these brief reasons.
[14] Apart from these matters, the Court made findings in relation to the Amended Millmerran Contract as well.
[15] More relevantly for present purposes, the Court found that Pozzolanic, by entering into the Tarong Contract on 26 February 2003, contravened s 45(2)(a)(ii) of the Act because that contract contained provisions (which came to be included in the Tarong Contract in the way described in the principal reasons) which had a substantial purpose of preventing a rival of Pozzolanic from securing access to unprocessed flyash in the SEQ unprocessed flyash market, and preventing a rival of QCL from entering the SEQ concrete grade flyash market, and those purposes were the expression of a purpose of substantially lessening competition in each market.
[16] Apart from that matter, the relevant provisions of the Tarong Contract were found to have the likely effect of substantially lessening competition in the way described and also the effect of substantially lessening competition in the way described.
[17] Thus, contraventions of s 45(2)(a)(ii) arose on the effects limbs of the section.
[18] Apart from those matters, findings were made in relation to the conduct of QCL, Pozzolanic and Cement Australia in relation to further aspects of s 45(2)(a)(ii) and more particularly s 45(2)(b)(ii), in terms of the relevant parties continuing to give effect to the impugned provisions.
[19] Findings were also made in relation to the matters in issue concerning the Swanbank Contract and the role and engagement of Mr White in respect of particular matters.
[20] In reaching findings as to contraventions of the Act predicated upon findings of fact about all matters in issue going to the integers of ss 45(2)(a)(ii) and 45(2)(b)(ii), the Court found that the relevant respondents (taken as a group) enjoyed a very substantial degree of market share (and also market power) in the relevant markets amounting to dominance of those markets largely by reason of their control of the Tarong and Tarong North sources of ash and the arrangements at least up to 30 June 2005 with respect to Swanbank (and no ash was available from Millmerran for the reasons discussed in the principal judgment). The Millmerran flyash did not enter either market in the period in issue in the proceedings. On the evidence, that result arose by reason of the compromised quality of the ash and the sequence of investigative steps undertaken to come to grips with the causes of colour variation in the ash and its commercial and practical suitability or utility for use as a partial substitute for cement in the making of concrete. Nevertheless, the impugned provisions of the Millmerran Contract were found to have had the relevant effect and likely effect from 30 September 2002 until 31 December 2003.
[21] Ultimately, on 20 October 2006, Pozzolanic and MPP entered into an agreement providing for the terms upon which the Millmerran Contract would come to an end.
[22] On 15 February 2007, MPP entered into an Ash Purchase Agreement with IFB.
[23] As to the Tarong provisions (and Tarong North), the Court found that the future face of rivalry in the relevant markets with the provisions in place was diminished as compared with the future face of rivalry without the provisions because, without the provisions, entry of a rival would have occurred and would have provoked rivalrous responses from Pozzolanic and Cement Australia with heightened contestability in the product/service offering which would have been expressed in contestable pricing, reduced margins enjoyed by Pozzolanic/Cement Australia and a loss of market share.
[24] In the principal reasons, extensive observations are made about the documents produced by senior executives of the relevant respondents concerning the market share of the respondents in the relevant markets, projections as to the volume of sales up to 2008, projections as to the likely threats to Pozzolanic's position as the dominant supplier in the SEQ concrete grade flyash market, strategic responses to those threats and perceptions as to the conduct and likely conduct of third parties in the market for the supply of concrete grade flyash either transactionally or on some more enduring basis. A great deal of material of this kind was examined in the principal reasons including in the course of cross-examination of Mr White. The effect upon rivalry and the competitive process of the provisions was found to be significant and substantial having regard to the importance entry would have played in markets where the relevant respondents enjoyed a very significant market share and one properly characterised, for all practical purposes, as dominance. The inability of a rival to secure continuity of access to unprocessed flyash from Tarong and Tarong North in the SEQ unprocessed flyash market throughout the life of the contract and enter the SEQ concrete grade flyash market with processed or classified Tarong (TN) ash, for all the reasons identified in the principal judgment, led to the findings on effect and likely effect so far as those findings relate to the Tarong (TN) Contract.
[25] Thus, there was a finding of a substantial lessening of competition. However, up to the end of calendar year 2006, rival third party entry into the relevant markets had not occurred in any systemic way having regard, fundamentally, to the operation of the impugned provisions of the Tarong Contract and Pozzolanic's position at Swanbank, for all the reasons discussed in the principal judgment. Up to this time, questions concerning the quality of the Millmerran ash remained to be resolved.
[26] The precise measure therefore of the likely diminution in the market share of the relevant respondents in percentage terms, the way in which contestable pricing may have actually played out in circumstances of rival third party entry and the precise measureable effect of rivalry upon margins and EBIT earnings of the relevant respondents was not the subject of particular findings in the principal proceeding (as in substance, in any enduring way, third party entry had not occurred). In the principal judgment, a finding was made that that result was brought about by operation of the impugned provisions of the Tarong Contract, in part at least.
[emphasis in original]
31 It seems to me that the proper course is this.
32 Although Mr Savory's affidavits predominantly go to seeking to demonstrate that loss of volume in the supply of fine grade flyash in the period from 2009 (and thus to 2013), is a function of the growth in demand for neat slag or blended slag or both (which seems to be put forward as an explanation in part or whole for the differentiated market circumstances mentioned in the authorisation submission notwithstanding that no mention is made of the growth of sales in neat or blended slag in the period from 2009), Mr Savory does put on confidential exhibit KMS-B and a correcting confidential exhibit KMS-E going to prices as explained by him in the period of the financial years 2011 to 2013. The applicant says that since the respondents have put on data as to prices in this period and the contention made by the respondents in the authorisation submission is that the "competitive landscape" has "fundamentally altered" since the 2003 arrangements due to IFB's entry in 2008 and Sunstate's supply of significant volumes of fine grade flyash since 2007, it may well be relevant to see what the impact on price and volume has been since the nominated entry of others into the market, notwithstanding that the particular rivalrous conduct is occurring in periods after December 2006. I remain to be persuaded that very much can be made of those post 2006 events but I accept that affidavit evidence going to these matters is at least relevant or not entirely irrelevant, having regard to the above factors.
33 It follows that the affidavits in reply are to be admitted into evidence in the proceeding.
34 It remains relevant therefore to ensure that the respondents have access to Sunstate's documents by subpoena (or agreement) whilst preserving the confidentiality of Sunstate's information.
35 I am satisfied that the subpoena as drafted operates in an oppressive manner and I accept the evidence put on by Sunstate as to that matter. The subpoena is to be set aside for that reason.
36 However, Sunstate has formulated a draft order exchanged in the course of negotiations about the scope of the subpoena and views have been put forward by Sunstate's lawyers about what might be possible in the form of a report. Having regard to ss 37M and 37P of the Federal Court of Australia Act 1976 (Cth), directions orders will be made to the effect that Sunstate produce a report as contemplated by the draft order as earlier mentioned and to the extent that Sunstate can reasonably do so, the report is to differentiate as between delivered and ex-works sales of fine grade flyash.
I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.