Only the second time pecuniary penalties have been imposed for an anti-competitive merger
The facts
GasNet operates a reticulated gas network in the Whanganui-Manawatu region of the North Island and in 2016 was looking to expand into the Bay of Plenty. GasNet secured two contracts with residential developers in Papamoa and began to construct a gas distribution network in that area.
First Gas provides reticulated gas transmission and gas distribution services in more than 40 North Island cities and towns. First Gas, which was also looking to expand in Papamoa, made 3 offers to purchase GasNet’s assets in Papamoa, while also taking steps to duplicate these assets & compete rigorously with GasNet in the area. GasNet accepted First Gas’ 3rd offer.
The resulting sale & purchase agreement included a restraint of trade prohibiting GasNet from operating in the Bay of Plenty for a 5 year period.
First Gas did not appreciate that there were competition implications with the acquisition. However, as gas transmission and distribution networks are regulated under Part 4 of the Commerce Act, the parties jointly informed the Commerce Commission (Commission) of the acquisition (on 23 December 2016).
The sale & purchase agreement went unconditional on 1 February 2017, and the Commission contacted First Gas and GasNet with its competition concerns on 8 February 2017. First Gas requested that GasNet extend the date for completion in light of the Commission’s concerns – GasNet advised that it would be exercising its right to proceed with final completion, which occurred on 13 February 2017.
Why the acquisition breached the Commerce Act
Section 47 of the Commerce Act prohibits business acquisitions with the effect or likely effect of substantially lessening competition in a relevant market (SLC). The High Court held that the acquisition breached section 47 because it had the effect and/or likely effect of SLC in the market for construction of distribution networks in new subdivisions in specific geographic areas. When First Gas and GasNet were competing in that market, residential developers were offered benefits that they had not previously been offered (and have not been offered following the acquisition).
The High Court also held that the restraint of trade breached section 27, which prohibits agreements with the purpose or (likely) effect of SLC, because it removed future potential competition between First Gas and GasNet, and had the purpose or (likely) effect of substantially lessening competition between the parties, at least for the period of the restraint.
The High Court’s judgment was based on agreed facts and penalties.
Key learnings
Commission interested in non-notified mergers
This case highlights the Commission’s priority of investigating non-notified mergers and taking enforcement action where appropriate, even when those mergers have already taken place.
The Commission’s case register shows 11 mergers have been investigated since 2008 – over 50% of these investigations have been opened since early 2018. (“Investigations” in this context mean official investigations published on the case register and can be contrasted with inquiries which are not often publicised.)
Mergers in regulated industries can have competition concerns
While a merger between adjacent monopolies in a regulated industry might not appear to raise significant competition concerns, the relevant market was defined narrowly as “the construction of distribution networks in new subdivisions in one or more of the following areas: the areas served by the Papamoa 2 delivery point; the areas served by all delivery points in Papamoa and Mt Maunganui; the Bay of Plenty.” During the period where First Gas and GasNet competed in this market, each offered benefits to subdivision developers that had not been previously offered.
First Gas contrasts with the Commission’s 2002 decision on a proposed merger between Natural Gas Corporation Holdings and United Networks, two geographically discrete gas distribution monopolies (the decision is at this link). In that case the Commission stated, “due to the relatively small numbers of customers in the areas where duplication of distribution pipelines occurs, the absence of switching, and the fact that distribution prices in those areas of overlap are consistent with those across the wider region, compared to the counterfactual, it is likely the current proposal will have no, or a de minimis, effect on competition in the market for gas distribution in Whangaparoa.” The Commission also stated that any loss of cross-border competition would be minimal at most.
In that decision the Commission drew an analogy to the (now repealed) section 48, which permitted a technical acquisition of dominance when it was effectively a bare transfer of dominance, with no resulting increase in market power.
The facts in First Gas differ in that competition had been occurring for the construction of gas distribution networks in new subdivisions in specific geographic areas.
Significant pecuniary penalties
This is the second time pecuniary penalties have ever been imposed under section 47 of the Commerce Act – the first was in Commerce Commission v New Zealand Bus Limited in 2008. In that case the penalty imposed was $500,000 – but, as the High Court pointed out in First Gas, the conduct in NZ Bus was less serious as the acquisition ultimately did not proceed and came about in “unusual circumstances.”
In First Gas the starting point for penalties was approximately 75% of the maximum penalty available. The High Court also noted the $3.4M sum was appropriate because “the penalty together with the purchase price mean that the assets acquired will not be profitable over their life time.”
The Commission did not seek a divestment order – First Gas retained the assets and continues to operate as a regulated monopoly in the market.
Accessory liability
Seeking clearance is a purchaser’s responsibility. GasNet (the vendor) was not prosecuted as an accessory. The Commission’s submissions “acknowledge[d] that First Gas ultimately sought to delay completion after the Commission raised concerns and it was GasNet who chose to proceed, but its view is that GasNet’s decision must be seen within the wider circumstances.”
In NZ Bus the vendor was held liable as an accessory by the High Court (although no pecuniary penalty was imposed), but the Court of Appeal overturned this decision. The test, as set down by the High Court in that case, is broadly that the Commission must show the alleged accessory (a) intentionally participated in the act that formed a breach of the Commerce Act (ie the acquisition); and (b) knew the “essential facts” that lead the Court to conclude that the acquisition was likely to substantially lessen competition.