AUSTRALIAN COMPETITION TRIBUNAL
Australian Wool Growers Association Ltd [1999] ACompT 4
Trade Practices Act – Wool growers, wool brokers, wool processors and wool buyers in Australia – review of determination made by the Australian Competition and Consumer Commission – determination granting authorisation to the Business Rules of the Australian Wool Exchange Limited – whether public benefit outweighed public detriment – whether lessening of competition – scope of authorisation – whether barriers to entry – structure of fee - rules regarding transfer of ownership of greasy wool - Trade Practices Act 1974 (Cth)
Trade Practices Act 1974 (Cth): s 4D, s 45, s 88(1), s 90(6) & s 90(8), s 101, s 102
Re Media Council of Australia Authorisation; Re Australian Consumers’ Association’s Application (1987) 88 FLR 1 cited
Re Queensland Stock and Station Agents Association (1989) 95 FLR 250 followed
Re 7‑Eleven Stores, Australian Association of Convenience Stores Incorporated and Queensland Newsagents Federation (1994) ATPR 41‑357 applied
Re Queensland Independent Wholesalers Ltd (1995) ATPR 41‑438 cited
Re Media Council of Australia and others (1996) ATPR 41‑497 cited
Re AGL Cooper Basin and Natural Gas Supply Arrangements (1997) ATPR 41‑593 cited
Re Application by Concrete Carters Association (Victoria) (1977) 31 FLR 193 applied
RE: APPLICATIONS BY AUSTRALIAN WOOL GROWERS ASSOCIATION LIMITED, FIBRES (AUSTRALIA) PTY LTD, NEW SOUTH WALES FARMERS ASSOCIATION, MICHAEL A NICHOLLS, AUSTRALIAN WOOL PROCESSORS COUNCIL INC & PRIVATE TREATY WOOL MERCHANTS OF AUSTRALIA INC
Matter Nos 1, 2, 3, 4, 6 & 7
GOLDBERG J, MR R C DAVEY & MR G F LATTA
MELBOURNE (Heard in Sydney)
3 SEPTEMBER 1999
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RE: |
APPLICATION FOR REVIEW OF THE DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 30 DECEMBER 1998 GRANTING AUTHORISATION IN RELATION TO APPLICATION No: A30185 (BUSINESS RULES OF THE AUSTRALIAN WOOL EXCHANGE LIMITED)
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BY: |
AUSTRALIAN WOOL GROWERS ASSOCIATION LIMITED FIBRES (AUSTRALIA) PTY LTD NEW SOUTH WALES FARMERS ASSOCIATION MICHAEL A NICHOLLS AUSTRALIAN WOOL PROCESSORS COUNCIL INC PRIVATE TREATY WOOL MERCHANTS OF AUSTRALIA INC Applicants
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DATE OF DETERMINATION: |
3 SEPTEMBER 1999 |
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WHERE MADE: |
THE TRIBUNAL DETERMINES THAT:
The Determination of the Australian Competition and Consumer Commission made on 30 December 1998 granting authorisation to the Business Rules of the Australian Wool Exchange Limited (“the Wool Exchange”) is varied and that authorisation to the Business Rules of the Wool Exchange be granted for a period of three years from the date of this determination pursuant to s 101 of the Trade Practices Act 1974 (Cth) on and subject to the following conditions:
1. The Wool Exchange shall bring to the attention of the Australian Competition and Consumer Commission any changes in its rules or procedures that may have competition implications or which may materially affect the circumstances relating to the grant of authorisation.
2. The authorisation does not cover or apply to Business Rules 2.1, 3.2, does not cover or apply to Business Rule 3.1 to the extent to which the reasonable directions referred to in it are directions to observe or comply with rules of the Wool Exchange other than the Business Rules and only covers and applies to Business Rules 3.3, 6.4 and Schedule 2 to the Business Rules to the extent to which those rules and that schedule cover and apply to breaches of the Business Rules.
3. The Wool Exchange shall divide the trading fee referred to in Business Rules 2.5 and 2.6 into two components, namely a trading fee and a common fee and shall:
(a) set the common fee for 1999 at 0.2¢ (two‑tenths of one cent) per kilogram on all first hand wool purchased direct from a grower by a member, or sold on behalf of a grower by a member, whether through a Wool Exchange managed trading facility or elsewhere;
(b) set the trading fee for 1999 at 0.1¢ (one‑tenth of one cent) per kilogram on all first hand wool sold or offered for sale through a Wool Exchange managed trading facility.
4. The Wool Exchange shall:
(a) complete a review of all service charges based on user pays principles by 30 November 1999;
(b) reassess what should constitute an appropriate common fee and trading fee in the light of such review;
(c) apply any changes to the common fee and trading fee resulting from such review from 1 January 2000 provided that the trading fee is set at an amount which generates revenue which shall only be used to fund the expenses and costs incurred in conducting the Wool Exchange managed trading facilities and not the provision of other services supplied by the Wool Exchange;
(d) maintain a Board sub‑committee to consult with industry on the revision of the Wool Exchange’s services and charging structures for its services.
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APPLICATION FOR REVIEW OF THE DETERMINATION OF THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION MADE ON 30 DECEMBER 1998 GRANTING AUTHORISATION IN RELATION TO APPLICATION No: A30185 (BUSINESS RULES OF THE AUSTRALIAN WOOL EXCHANGE LIMITED)
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BY: |
AUSTRALIAN WOOL GROWERS ASSOCIATION LIMITED FIBRES (AUSTRALIA) PTY LTD NEW SOUTH WALES FARMERS ASSOCIATION MICHAEL A NICHOLLS AUSTRALIAN WOOL PROCESSORS COUNCIL INC PRIVATE TREATY WOOL MERCHANTS OF AUSTRALIA INC Applicants
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MEMBERS: |
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DATE: |
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PLACE: |
REASONS FOR DECISION
1 There are six applications for review before the Tribunal, by Australian Wool Growers Association Limited (“Australian Wool Growers”), Fibres (Australia) Pty Ltd, New South Wales Farmers Association, Michael A Nicholls, Australian Wool Processors Council Inc and Private Treaty Wool Merchants of Australia Inc. Each application is made pursuant to the provisions of s 101 of the Trade Practices Act 1974 (Cth) (“the Act”) to review the determination of the Australian Competition and Consumer Commission (“the Commission”) dated 30 December 1998 granting authorisation to the Business Rules of the Australian Wool Exchange Limited (“the Wool Exchange”) for a period of five years. The authorisation was expressed to be conditional on:
“[the Wool Exchange] bringing to the Commission’s attention any changes in its rules or procedures that may have competition implications or which may materially affect the circumstances relating to the grant of authorisation. The proposed authorisation does not provide any protection in relation to other rules of the Wool Exchange nor to clauses 2.1 and 3.2 of the Business Rules.”
Business Rules 2.1 and 3.2 in substance require members to comply with the Wool Exchange’s Memorandum and Articles of Association, other rules of the Wool Exchange and, when selling wool, to abide by Wool Exchange directives to ensure compliance with rules of the Wool Exchange which are necessary to ensure the quality of the wool offered for sale.
2 The Wool Exchange carries on the business of facilitating the promotion and sale of wool in Australia and the development and management of wool selling systems. Approximately 80% of first hand wool produced in Australia is sold through the Wool Exchange’s auction system. Australian Wool Growers is an Australia wide body representing the interest of wool growers. Fibres (Australia) Pty Ltd is a wool grower and broker and a member of the Wool Exchange. New South Wales Farmers Association represents farmers in New South Wales and approximately 60% of professional wool growers in New South Wales. Mr Michael Nicholls is a wool grower who sells wool through the Wool Exchange system and also directly through Wool Exchange members. Australian Wool Processors Council Inc represents wool processors who buy wool at auction and directly from wool growers. Private Treaty Wool Merchants of Australia Inc represents buyers of wool who buy wool at auction and directly from wool growers. National Council of Wool Selling Brokers of Australia Ltd, which was given leave to intervene in each application for review, represents wool brokers who sell approximately 60% of the national wool clip for grower clients. It supports the grant of authorisation.
3 On 29 August 1994 the Commission granted an authorisation (which came into force on 20 September 1994) in respect of the Wool Exchange’s Articles of Association, Code of Conduct and Business Rules for three years, subject to a number of conditions. On 31 July 1997 the Wool Exchange lodged an application with the Commission pursuant to s 88(1) of the Act for authorisation of the Wool Exchange’s Articles of Association, General Trading Rules (comprising rules relating to Wool Selling, Clip Preparation and Packaging, Weighing Sampling Testing and Certification and Standard Product Description), Code of Conduct and Business Rules. In May 1998 the Wool Exchange limited its application to authorisation of its Business Rules and did not pursue authorisation of its Articles of Association, General Trading Rules and Code of Conduct. Accordingly it is only the Business Rules which are the subject of an application for authorisation before the Tribunal. The applications before the Tribunal do not require a review of concerns raised before the Commission about the Wool Exchange’s operations generally, for example, its role in relation to the closure of certain wool selling centres, or the merits of sale by description that is being developed by the Wool Exchange.
4 The Wool Exchange also lodged with the Commission a notification in respect of the Wool Exchange’s requirements that:
· wool sold through it be classed by a person registered with it;
· any person wishing to class wool for sale through it, must be registered.
The Commission decided not to remove the protection afforded to those requirements by the notification. That decision is not the subject of any of the applications before the Tribunal.
5 Shortly prior to the commencement of the hearing, the Wool Exchange reached an agreement with four of the applicants (New South Wales Farmers Association, Mr Michael Nicholls, Australian Wool Processors Council Inc and Private Treaty Wool Merchants of Australia Inc) and with the intervener, the National Council of Wool Selling Brokers of Australia Ltd. By that agreement the Wool Exchange agreed to divide the fee provided for in its Business Rules into two components – a trading fee and a common fee. It agreed:
· to set the common fee for 1999/2000 at 0.2¢ per kilogram on all First Hand Wool purchased direct from a grower by a member or sold on behalf of grower by a member, whether through an Exchange Managed Trading Facility or elsewhere; and
· to set the trading fee for 1999/2000 at 0.1¢ per kilogram on all First Hand Wool sold or offered for sale through an Exchange Managed Trading Facility.
The agreement to divide the trading fee into two components followed from a resolution of the Wool Exchange in June 1999 to introduce a two‑tiered fee. In the agreement, the parties noted that the effect of these changes is to ensure that all charges relating to the use of an Exchange Managed Trading Facility (an auction conducted under the supervision of the Wool Exchange or an electronic selling system developed by the Wool Exchange) are levied only on wool traded through that facility, while the common fee, payable on all First Hand Wool sold, whether or not through a Managed Trading Facility, funds the Wool Exchange’s non‑trading activities which are conducted for the common good of the industry.
6 The Wool Exchange also agreed:
· to complete, by 30 November 1999, a review of all service charges based on user pays principles;
· in light of the review, to reassess what should constitute an appropriate common fee and trading fee;
· to apply any resulting changes to those fees from 1 January 2000;
· to maintain a Board sub‑committee to consult with the industry on the revision of the Wool Exchange’s services and charging structure for its services.
The four applicants agreed to withdraw their grounds for review other than to ask for the period of authorisation to be three years to which period the Wool Exchange and National Council of Wool Selling Brokers of Australia Ltd agreed. The Tribunal was informed in the course of final addresses that the intention of the agreement, notwithstanding ambiguity in relation to the period for which the fees were fixed, was that these fees were to be set for the remainder of 1999 and that any alteration resulting from the review and re‑assessment would commence on 1 January 2000.
7 At the commencement of the hearing the representative for the four applicants sought leave to withdraw from the proceedings on the basis of the agreement reached with the Wool Exchange. Accordingly, the determination of those four applications was stood over whilst the Tribunal heard the two remaining applications for review. The four applicants and the intervener did not otherwise take any part in the proceedings. Because there were still two live applications for review the implementation of the agreement pursuant to s 101(1A) of the Act was deferred until a decision was reached on the two outstanding applications for review.
Legislative scheme
8 The application for authorisation appears to be predicated upon potential contraventions of s 45 of the Act which prohibits a corporation from making or giving effect to a contract or arrangement or arriving at an understanding if the contract, arrangement or understanding contains an exclusionary provision or has the purpose or has or is likely to have the effect of substantially lessening competition. Section 4D of the Act provides that a provision of a contract, arrangement or understanding shall be taken to be an exclusionary provision if the contract, arrangement or understanding was made or arrived at between persons any two or more of whom are competitive with each other and the provision has the purpose of preventing, restricting or limiting the supply of goods or services or the acquisition of goods or services from particular persons or classes of persons and in particular circumstances or conditions.
9 The Commission is empowered by s 88(1) of the Act, upon the application of a corporation, to grant an authorisation to the corporation to make a contract or arrangement or arrive at an understanding where a provision of the proposed contract, arrangement or understanding would be, or might be, an exclusionary provision or would have the purpose, or might have the effect, of substantially lessening competition within the meaning of s 45 of the Act and to give effect to such a provision. However, there is a limitation on the Commission’s powers under s 88(1). By virtue of the provisions of s 90(6) of the Act the Commission cannot make a determination granting an authorisation under s 88(1) in respect of a provision (not being a provision that is or may be an exclusionary provision):
“unless it is satisfied in all the circumstances that the provision of the proposed contract, arrangement or understanding … would result, or be likely to result, in a benefit to the public and that that benefit would outweigh the detriment to the public constituted by any lessening of competition that would result, or be likely to result if:
(a) the proposed contract or arrangement were made or the proposed understanding were arrived at, and the provision concerned were given effect to;
(b) …
(c) …
as the case may be.”
10 A similar provision is found in s 90(8) of the Act whereby the Commission cannot make a determination granting an authorisation under s 88(1) in respect of a provision of a proposed contract, arrangement or understanding that is or may be an exclusionary provision:
“unless it is satisfied in all the circumstances that the proposed provision or the proposed conduct would result, or be likely to result, in such a benefit to the public that the proposed contract or arrangement should be allowed to be made, the proposed understanding should be allowed to be arrived at, or the proposed conduct should be allowed to take place.”
Although s 90(6) and s 90(8) are couched in different terms the Tribunal has observed in earlier decisions that the tests are substantially the same: Re Media Council of Australia Authorisation; Re Australian Consumers’ Association Application (1987) 88 FLR 1, 9; Re Queensland Stock and Station Agents Association (1989) 95 FLR 250, 266; Re 7‑Eleven Stores; Australian Association of Convenience Stores Incorporated and Queensland Newsagents Federation (1994) ATPR 41‑357 at 42,654.
11 It is important, for the purposes of applying s 90(6) and s 90(8) to remember that those provisions are concerned with determining whether there is any public detriment constituted by any lessening of competition not with determining whether there is any anti‑competitive detriment. As the Tribunal pointed out in Re 7‑Eleven Stores (supra at 42,654):
“It is important to note (as the Tribunal pointed out in Media Council (No 2) at 48,418‑9) that conduct which answers the statutory description of anti‑competitive lessening of competition does not necessarily constitute anti‑competitive detriment for the purposes of s 90. It is erroneous to equate anti‑competitiveness with detriment. Anti‑competitive behaviour may in certain circumstances be a benefit.”
12 The Tribunal’s jurisdiction in these matters to review the determination of the Commission is found in s 101 of the Act. On the review the Tribunalcan make a determination affirming, setting aside or varying the determination of the Commission and for the purposes of the review can perform all the functions and exercise all the powers of the Commission: s 102(1).
13 In short, although the Tribunal proceeds by way of reviewing the Commission’s determination, it does so by way of rehearing and is obliged to apply the tests laid down by s 90(6) and s 90(8): s 101(2). The reasoning process of the Commission is not the subject of examination: Re 7‑Eleven Stores (supra) at 42,654. The guiding principles which apply to the authorisation test were summarised by the Tribunal in Re Queensland Stock and Station Agents Association (supra) at 267 in the following terms:
“· First, it is for the parties seeking authorisation to satisfy the Tribunal that benefit to the public is likely and that there will be sufficient public benefit to outweigh any likely anti‑competitive detriment;
· Secondly, since the likely benefits and detriments to be considered are those that would result from the proposed conduct, the Tribunal is required to consider the likely shape of the future both with and without the conduct in question; and
· Thirdly, that task will generally entail an understanding of the functioning of relevant markets with and without the conduct for which authorisation is sought.”
14 The issues in the present proceedings are what are claimed to be the benefits to the public and the lessening of competition and detriments to the public arising out of the Wool Exchange’s Business Rules, and in particular, Rules 2.4, 2.5 and 2.6 (to which we shall refer shortly). There was no issue between the parties as to the identification of the relevant market within which the Business Rules were to be considered and little attention was addressed to this issue. The Tribunal takes the view that the relevant market is the market for the supply of services to facilitate the sale and purchase (or the transfer of ownership) of greasy wool.
15 The Tribunal has to undertake a balancing or weighing exercise in relation to the matters of public benefit and public detriment although it has to reach an affirmative view that there is a resultant benefit to the public which would outweigh any detriment to the public that would result from any lessening or likely lessening of competition before it can determine to grant authorisation. This essentially involves a prospective view so that the Tribunal is obliged to compare the position which would exist, or would be likely to exist, in the future if the Business Rules were not operative and in force with the position which would exist, or would be likely to exist, in the future if the Business Rules were operative and in force. This approach has been called the “future with and without test” which the Tribunal has consistently applied in previous decisions: Re Queensland Independent Wholesalers Ltd (1995) ATPR 41‑438 at 40,928, 40,960; Re Media Council of Australia (1996) ATPR 41‑497 at 42,241; Re AGL Cooper Basin and Natural Gas Supply Arrangements (1997) ATPR 41‑593 at 44,175. The expressions “benefit to the public” and “detriment to the public” found in s 90(6) have been defined broadly by the Tribunal. For example, in Re 7‑Eleven Stores (supra) at 42,677 the Tribunal said:
“Public benefit has been, and is, given a wide ambit by the Tribunal as, in the language of QCMA (at 17,242), ‘anything of value to the community generally, any contribution to the aims pursued by society including as of one of its principal elements (in the context of trade practices legislation) the achievement of the economic goals of efficiency and progress’. Plainly the assessment of efficiency and progress must be from the perspective of society as a whole: the best use of society’s resources. We bear in mind that (in the language of economics today) efficiency is a concept that is usually taken to encompass ‘progress’; and that commonly efficiency is said to encompass allocative efficiency, production efficiency and dynamic efficiency”.
16 The Tribunal’s role in examining any benefit to the public and any detriment to the public constituted by any lessening of competition must be made in the context in which the Wool Exchange applies the Business Rules. As the Tribunal said in Re Concrete Carters Association (Vic) (1977) 31 FLR 193 at 202:
“The assessment of any benefit to the public and of any lessening of competition which would, or would be likely to, result from the proposed conduct can only be made in the overall context of the function performed by the applicants, of the industry in which they operate, and of the market or markets which would be affected by such conduct.”
The Business Rules
17 The Wool Exchange’s Business Rules are in six parts and can be summarised as follows.
Part 1: Interpretation This Part provides definitions for various words and phrases used in the Business Rules. Relevant definitions are:
“(a) ’Rule’ means a rule of the Wool Exchange or the Code of Conduct.
…
(f) ‘Managed Trading Facility’ means:
(i) an auction conducted under the supervision of the Wool Exchange; or
(ii) an electronic selling system or systems developed by the Wool Exchange declared by the Board to be a Managed Trading Facility.”
Part 2: General Membership Rules The General Membership Rules provide for a number of obligations to be observed by members. The first six rules are in the following terms:
“2.1 All Members shall comply with the Wool Exchange:
(a) Memorandum and Articles of Association; and
(b) Rules.
2.2 Members shall take all reasonable steps to ensure that the Wool Exchange is kept informed of any change in the nature and scope of their business that is likely to be relevant to the operations of the Wool Exchange.
2.3 A Member shall advise the Wool Exchange of any circumstance, whether specified in the Business Rules or not, that may have an adverse effect on the continuing ability of the Member to comply with the Business Rules or the Code of Conduct.
2.4 Only Members may have direct or indirect access to Managed Trading Facilities for buying or selling wool.
2.5 When First Hand Wool is sold on behalf of a grower by a Member, or a Related Body Corporate of a Member, that Member shall pay a trading fee established by the Board from time to time.
2.6 When First Hand Wool is purchased direct from a grower by a Member, or a Related Body Corporate of a Member, that Member shall pay a trading fee established by the Board from time to time.”
The remaining general membership rules provide for the time for payment of trading fees, interest on late payments, the provision of an independent audit of such fees and the right of the Wool Exchange to charge for a service it provides.
Part 3: The Wool Trading Rules are in the following terms:
“3.1 Members wishing to use Managed Trading Facilities shall comply with reasonable directions given by the Wool Exchange relating to those facilities.
3.2 All Members selling wool shall abide by any directive of Wool Exchange staff, or appointed representatives, to ensure compliance to the Rules of the Wool Exchange which are directly or indirectly necessary to ensure the quality of the wool offered for sale by Members.
3.3 If a Wool Exchange Ruling is required to be made under these Rules, that ruling:
(a) will be made:
(i) by a person authorised by the Wool Exchange to make such rulings; and
(ii) according to the procedures determined by the authorised person; and
(b) shall be accepted and followed by the relevant parties.”
Part 4 provides for the Wool Exchange to request information from a member, requires the Wool Exchange not to disclose such of that information as is confidential and also provides for specific information to be supplied by a member selling or buying first hand wool.
Part 5 provides for arbitration of disputes arising in relation to an agreement in which the parties have agreed to submit such disputes to the Wool Exchange for arbitration.
Part 6 provides for the establishment of a Review Committee and an Appeals Committee to consider and rule on decisions which affect members. A procedure is laid down in respect of the hearing and determination of complaints of breaches of rules by members, fines are specified and a procedure is laid down for appeals to the Appeals Committee from decisions of the Review Committee.
18 Schedule I to the Business Rules provides for maximum fines which may be imposed by the Review Committee or the Appeals Committee. Schedule 2 describes the two categories of offences as follows:
· Category I: a breach of the Code of Conduct which may bring the Wool Exchange or its members into disrepute;
· Category II: a breach of the Business Rules (section 4) or Trading Rules (section 5, 5.1, 6, 7 and 8) which interferes or is likely to interfere with the efficient transfer of ownership of wool.
19 The Business Rules are only one part of the documents found in the Wool Exchange’s Manual. Other documents in the manual are a statement of the Wool Exchange’s goals and functions, its Articles of Association, its Code of Conduct (standards for ethical trading) and General Trading Rules. There are also other documents governing the Wool Exchange’s operations which prescribe:
· rules for wool classer registration;
· rules for wool classer house registration;
· a code of practice for classing houses;
· rules for appraiser accreditation; and
· a code of practice for preparation of Australian wool clips.
The creation of the Wool Exchange
20 In the early 1990s the wool industry faced a major crisis. The Australian Wool Corporation (“AWC”) was buying most of the wool which was being offered for sale. It was rapidly building up a stock pile in excess of 4,000,000 bales (around one year’s supply) under a program intended to even out the flow of wool onto the market and to even out significant price variations. The Federal Government decided that it would no longer have a statutory role in wool industry issues and it looked to the wool industry to establish a mechanism for self management of functions previously undertaken through the AWC. In 1993 the report of the Wool Industry Review Committee “Wool Structuring for Global Realities” (“the Garnaut Report”) made recommendations for industry changes including the combining of the AWC and the Wool Research and Development Corporation into the Australian Wool Research and Promotion Organisation and the divesting by that organisation of a number of industry functions including wool selling and quality issues. The Government adopted most of the Garnaut Report recommendations.
21 The major industry groups, comprising growers, brokers, private treaty merchants, exporters and processors, combined to establish the Wool Exchange, the Articles of Association of which provided for classes of membership for each of these groups. The Wool Exchange was to take responsibility for a number of the functions divested by the Australian Wool Research and Promotion Organisation.
Methods of sale of greasy wool
22 Over the years various methods of selling wool have been adopted but by far the most popular method is by auction. Approximately 80% of wool offered for sale in Australia has been sold at auction. A number of growers sell directly to mills or participate in programs that process their wool and the wool of others and then sell it as “top”, that is to say as wool which forms part of the starting material for the worsted and certain other drawing systems. Prior to the 1970s wool was sold on the basis of being shown to buyers to appraise before auction and no objective measurement was available. As a result of the development of better techniques for testing wool for yield, vegetable matter base and mean fibre diameter, sale by sample was adopted whereby test results were displayed together with a sample for appraisal of other characteristics of the wool. Almost all of the wool now sold at auction is sold in this way.
23 In the 1997/1998 season 81% of wool was sold by auction, 15.3% was sold by private treaty and 3.7% was sold directly to the mill. When using the auction system, growers have their sheep shorn and the wool classed according to general industry clip preparation standards and packed into bales of about 174kg. The wool is then consigned to a broker’s store where it is sampled.
24 The detail of each sale lot , which is comprised of a number of bales from the grower’s clip, is catalogued by the broker and the display sample put on show for prospective buyers.
25 Wool auctions are rostered over a number of selling centres throughout the year - sales being held in two or three of the selling centres on one, two, three or four days of every week (excluding Christmas, Easter and a mid-year break). Buyers (generally known as “exporters”) attend the auctions to study the catalogues and samples with a view to purchasing wool to fulfil orders from overseas and, in some cases, from local processors. Some local processors also bid at the auctions in competition with the exporters.
26 In its November 1998 submission to the Commission the Wool Exchange provided the following figures showing that the average cost (exclusive of shearing and wool preparation costs) of sale per bale incurred by a grower in 1996/1997 was $80, when the average bale price was $560.
$
- transport to store 8.00
- insurance (sheep’s back to store) 0.66
- warehousing 18.45
- agents’ fee selling 7.32
- insurance (marine) 1.00
- wool testing 7.04
- wool tax 28.23
- brokers’ buyer service charge 8.75
- Exchange trading fee 0.53
79.98
27 There is presently a proposal before the Wool Exchange to adopt a different method of sale namely, sale by description. This is apparently a controversial proposal and was the subject of considerable criticism by the witnesses and representatives of Australian Wool Growers and Fibres (Australia) Pty Ltd. There was also criticism of the product description which the Wool Exchange requires parties participating in its auctions to adopt. The standard product description used by the Wool Exchange is certified test results together with what is called “AWEX‑ID”. This is the description of certain non‑measured characteristics of wool.
28 This AWEX‑ID standard product description is found in the rules relating to Standard Product Description which form part of the Wool Exchange’s General Trading Rules. These rules do not form part of the Business Rules which are the subject of the application for authorisation and the proposal for the adoption of a sale method of sale by description is not part of, nor is it governed or regulated by, the Business Rules. Accordingly the Tribunal is of the view that the issues relating to AWEX‑ID and the offering of wool for sale by sale by description, although no doubt important for participants in the industry, are not relevant matters for the Tribunal to consider in determining whether authorisation should be granted in respect of the Business Rules. More particularly is this so when the Wool Exchange is not seeking authorisation of rules 2.1 and 3.2 of the Business Rules which require members to comply with the General Trading Rules to which we have referred.
Current industry structure
29 There are six main participants in the wool industry – growers, brokers, exporters, private treaty merchants, processors and test houses.
30 Apart from the commercial organisations there are four major grower funded or regulatory bodies operating in the Australian wool industry:
· Australian Wool Research and Promotion Organisation;
· IWS International Pty Limited;
· Wool International;
· The Wool Exchange.
Australian Wool Research and Promotion Organisation is responsible for Australian wool research and development, raw wool and early stage processing activities, the promotion of interior textiles and the conduct of promotion in the Australian market. It provides funding to IWS International Pty Limited and is itself funded primarily through a compulsory 4% wool tax plus a contribution to research and development from the Federal Government.
31 IWS International Pty Limited is responsible for increasing, through promotion, the international demand for wool. Wool International is the manager of the wool stock pile and the industry debt resulting from the collapse of the reserve price scheme. It is not expected to continue its operations after the year 2000 and the industry service activities provided by it such as market reporting will be progressively phased out. The Wool Exchange was established to assume those roles of the AWC and the various committees concerned with facilitating the efficient marketing of Australian wool and safeguarding and improving its quality.
32 The economic significance of woolfor Australia was described by the Wool Exchange in a submission in support of its 1997 application for authorisation in the following terms:
· wool provides 4.6% of Australia’s export income;
· the wool industry is the third largest exporter earner;
· wool contributes in the order of $3.6 billion to Australia’s export earnings with 90% of the clip going offshore either in greasy or semi-processed form;
· there are approximately 55,000 (now approximately 46,300) enterprises growing wool in Australia of which some 18,000 are specialist producers dependent on wool for their sole source of income;
· the wool industry employs around 165,000 individuals full time, 130,000 on a contract basis and up to 300,000 people indirectly.
Structure and Activities of the Wool Exchange
33 The objectives of the Wool Exchange, as set out in its Manual, are to:
· maintain, administer, conduct and facilitate efficient, innovative and informed wool selling systems;
· establish, monitor and administer the rules of wool selling of the Wool Exchange;
· establish and maintain facilities to gather and disseminate pre and post sale market information;
· contribute and maintain recognised quality assurance standards for wool sold in Australia.
In general terms the Wool Exchange provides services to facilitate the exchange of ownership of wool, the provision of market information, the provision of quality management services and research and development.
34 The Wool Exchange informed the Tribunal that at the date of the hearing there were two hundred and forty membersof the Wool Exchange made up as follows:
· Growers 100
· Brokers 40
· Exporters 70
· Private merchants 21
· Processors 9
Apart from a drop in grower membership (down from 148) these figures are substantially in line with the membership as at the date of the Commission’s determination. According to the Wool Exchange there are in Australia approximately 46,300 growers, 50 brokers, 71 exporters, 30 private treaty merchants and 19 processors.
35 The broker sector is dominated by two brokers, namely, Elders Ltd and Wesfarmers Dalgety. Between them they account for approximately 57% of all wool received into brokers’ stores. Twenty‑nine brokers have less than 1% market share.
36 There are currently seventy wool exporters in Australia. Like the brokers, a small number account for a large proportion of wool traded at auction - ten purchase 55% of auction traded wool; twenty account for 80%.
37 The Wool Exchange’s Board, determined in accordance with its Articles of Association, consists of the following nine directors:
· two growers’ representatives;
· two brokers’ representatives;
· two exporters’ representatives;
· one processors’ representative;
· a Managing Director; and
· a Chairperson.
38 Members’ voting rights are also determined in accordance with its Articles of Association. The total number of votes which may be cast is 700. The number of votes members may cast depends on the class to which they belong, as follows:
· grower members have 100 votes between them. (the Woolgrowers Council of Australia does, however have a minimum of 40 votes and a maximum of 100 depending on the number of growers who join the Wool Exchange);
· broker members have 200 votes between them;
· exporter members have 200 votes between them;
· private treaty merchant members have 100 votes between them;
39 Members are required to pay a joining fee, $4000 for brokers and other trading members and $100 for growers. Members pay an annual fee, $550 for brokers and other trading members and $55 for growers. Prior to the resolution of the Wool Exchange in June 1999 to introduce a two‑tiered fee, the trading fee applicable worked out at 53¢ per bale of wool sold.
40 When the Wool Exchange was established it was proposed that it would provide services to facilitate:
· the exchange of ownership of wool;
· the provision of market information services
· the provision of quality management services
· research and development.
Some of these services had previously been funded by the wool tax and were viewed as free services. The groups who procured the establishment of the Wool Exchange agreed that while it would be charging a fee for the services which it provided wherever possible, there would be a number of services which could only be funded from a fee levied on all wool traded by members. This led to the trading fee concept which was included in the 1994 authorisation. Initially the trading fee contributed approximately 60%, and fees charged for services contributed approximately 40%, of the Wool Exchange’s revenue. By 1998 that position had been reversed as the Wool Exchange was moving to charging fees for the services it rendered wherever possible. In 1998, of the Wool Exchange’s revenue, 60% came from fees for service, 30% came from trading fees and 10% came from membership fees, interest and other income.
41 The following table provided by the Wool Exchange sets out the growth in fee for service income:
Fees for Service as a proportion of total revenue |
||||
|
|
1995 |
1996 |
1997 |
1998 |
|
Fees ($000) |
1239 |
2303 |
2567 |
3548 |
|
Percentage of revenue |
41% |
57% |
54% |
60% |
42 The following table provided by the Wool Exchange sets out the services provided by the Wool Exchange and the allocation of the cost of those services between the various sources of revenue budgeted for the 1998/1999 year.
|
Allocation of Costs of Services (1998/99) |
|||
|
Service |
Cost ($000) |
Fee for Service |
Trading Fee |
|
Trading System |
1460 |
720 |
740 |
|
Market Information, Quality &IT |
2911 |
2231 |
680 |
|
R & D |
182 |
- |
182 |
|
Total |
4553 |
2951 |
1602 |
43 This table shows that to the extent that a fee for service is insufficient to meet the fee for that service, the service is funded by the trading fees imposed by clauses 2.5 and 2.6 of the Business Rules. This subsidisation of the provision of services by the trading fee has now been eliminated by the June 1999 resolution of the Board of the Wool Exchange to introduce the two‑tiered fee structure.
44 While in unit terms the trading fee may only be small (currently 0.53¢ per bale, around 0.09% of the average sale price per bale), in total revenue terms it is significant (an estimated $1,602,000 for 1998/1999). It was estimated that in 1998/1999 the trading fee subsidised:
· more than half of the estimated cost of operating the Wool Exchange’s trading system ($1,460,000 in 1998/1999 of which $740,000 was to be funded by the trading fee);
· just under a quarter of the estimated cost of the Wool Exchange’s market information, quality and information technology services ($2,911,000 of which $680,000 was to be funded by the trading fee);and
· all of the Wool Exchange’s estimated research and development costs of $182,000.
However, the Wool Exchange is moving more and more to a fee‑for‑service basis. As we have already observed, in June 1999 its Board resolved to split the trading fee into a two‑tiered fee comprising:
· a common fee, applicable to all wool regardless of how it is sold; and
· a trading fee applicable to all wool sold through a Wool Exchange Managed Trading Facility.
45 The services provided by the Wool Exchange fall into four general categories:
(a) Quality controls, including the development of standards and codes of practice, accreditation to standards, training programs, audit and inspection, information feedback and quality development.
(b) Market information services including market prices, statistical data base services, wool production forecasts and wool availability details.
(c) Research and development including electronic bale ID systems, packaging standards, non-contamination and sale by description.
(d) The provision of trading facilities including trading rules, a code of conduct, arbitration and dispute settlement procedures and the provision of information technology support and infrastructure.
46 Following its establishment, the Wool Exchange assumed responsibility for wool industry quality standards that had been developed by the AWC, for example, clip preparation codes and standards, wool pack standards and management of contamination issues. It was a condition of the Commission’s 1994 determination that the Wool Exchange establish independent advisory committees to assist it in resolving issues that arose in the industry from time to time. The Quality Advisory Committee was established to consider quality issues in the wool industry. Quality issues that have been addressed by the Quality Advisory Committee have included:
(a) competency standards for wool classers and the development of retraining programs to enable them better to apply quality management to their work;
(b) the development and maintenance of key clip preparation codes and other codes of practice;
(c) developing initiatives for implementation by the Wool Exchange to reduce contamination of greasy wool caused by poor handling practices and unsatisfactory packaging; and in particular the development of a non‑contaminating packaging standard that has been adopted by the industry.
While the Wool Exchange’s standards and codes are critical to the integrity and success of its auction system, they are also applied extensively to wool sold otherwise than through that system. For example, at the time of shearing and clip preparation growers may be unsure whether they will sell by private treaty, auction, direct to mill or in some other way and therefore prepare their wool using the Wool Exchange’s standards to ensure its acceptance if it is ultimately sold through the auction system. Also, wool that initially may be sold privately may often be resold at auction or combined with wool so sold, in which case processors would expect all the wool to comply with the Wool Exchange’s standards.
47 The Wool Exchange also assumed responsibility for wool industry market reports that had previously been provided by Wool International. The Wool Exchange has developed a comprehensive set of market reports and data services that are offered in a variety of forms, including email and the internet. Growers generally (whether or not they are members of the Wool Exchange) are able to benefit from these reports as ABC country edition reports are based on them as are Reuters and AAP reports that may be published in the rural newspapers. The industry generally has come to rely on the Wool Exchange’s auction market reports to value wool whether or not it is sold through the auction system. For example, the Wool Exchange’s auction market report is used to set some futures contract prices. Wool Exchange reports embracing such matters as wool received, wool sold and total wool in store unsold provide a useful tool for growers, buyers and brokers and promote the efficient marketing of wool.
48 The Wool Exchange allocates approximately 4% of its budget to research and development projects. An example of such a project is the Interwool Project which has as its object the development of a bale identification system using bar code or scanning technology to assist in data management and logistics control. Wool Exchange research and development is also addressing contamination issues which are estimated to cost in excess of $100m per annum. Another project is addressing the question of chemical residues in greasy wool which the Wool Exchange has identified as likely to be a major issue in the near future.
49 These services provide a foundation for the Wool Exchange’s trading facilities. The fact that approximately 80% of wool offered for sale in Australia is sold through the Wool Exchange’s auction system provides an indicator of the significance of its auction systems. The Wool Exchange is also developing alternative methods of selling wool. For example, it has established a committee to evaluate the merit of electronic trading and the committee has been demonstrating electronic trading systems in the course of consultations with potential users.
The competing cases
50 The Wool Exchange’s case is that the Business Rules, and in particular rules 2.4, 2.5 and 2.6 do not lessen competition in the market for the sale and purchase of wool because membership of the Wool Exchange is voluntary and its auction facilities are available to non‑members. The Wool Exchange submitted that the significant public benefits which arise from the rules are:
(a) the creation of an efficient trading system to transfer ownership of wool involving the provision of an open cry auction system for members, and auction facilities for non‑members, together with a Code of Conduct, trading rules and arbitration disputes settlement procedures;
(b) the maintenance of quality standards through the development of standards and codes of practice, training programs, auditing, inspection procedure and information feedback;
(c) the provision of market information services including wool production forecasts, wool availability details, market prices and statistical data base services; and
(d) the provision of research and development for the benefit of the industry as a whole.
It was contended by the Wool Exchange that these benefits provide confidence to the international wool trading community and enhance the overall global demand for Australian wool. The Wool Exchange submitted that the public benefit from the rules outweighs any detriment constituted by any lessening of competition brought about by the rules although the Wool Exchange contended that there is not any lessening of competition or any such detriment.
51 The Wool Exchange initially contended that the trading fee provided for in rules 2.5 and 2.6 provided funds to enable the supply of services which benefit the industry as a whole. It was contended that the cost of services provided by the Wool Exchange which are not covered by a charge for services were properly covered by a trading fee and that to the extent that the fee for service was insufficient to meet the cost of a particular service or where a fee for service is inappropriate as in the case of research and development the service should be funded by the industry as a whole. However, prior to the hearing the Board of the Wool Exchange resolved that for the 1999 year a two‑tiered fee would apply so that the cost of using the Wool Exchange auction facilities will be borne solely by those who use the facilities and that no contribution towards those costs would be included in the common fee paid by members who do not use the Wool Exchange auction system. The result is that the common fee will contribute solely to the costs of the non‑commercial services provided by the Wool Exchange. This position is reflected in the agreement which has been reached between the Wool Exchange and four of the applicants for review.
52 The Wool Exchange submitted that rule 2.4 (the requirement that only members could participate in Wool Exchange auctions) was directed to the core of the structure of the Wool Exchange as members are required to abide by all the rules of the Wool Exchange including the Code of Conduct and other rules which impose certain prudential obligations on members. The Wool Exchange said that it was by limiting participation in Wool Exchange auctions to members that it could ensure that quality requirements were complied with, that information required for reporting purposes was provided and that participants in auctions meet the prudential requirements. The Wool Exchange submitted that, in any event, rule 2.4 did not lessen competition as non-members are free to join the Wool Exchange so long as they accept the obligations of membership and that the eligibility requirements and fees do not inhibit entry to membership.
53 The cases advanced by Australian Wool Growers and Fibres (Australia) Pty Ltd were somewhat discursive and in a number of respects related to matters not properly the subject of a review of a determination to grant authorisation to the Business Rules. For example Australian Wool Growers contended that the Wool Exchange is an oligarchy and that the Wool Council of Australia should not be entitled to membership of the Wool Exchange. It contended that a proposal by the Wool Exchange for wool to be sold by “sale by description” would materially disadvantage wool growers and Australian export earnings. These matters are not relevant to the issues before the Tribunal and do not arise for consideration upon an application for the grant of an authorisation to the Business Rules. As members of the Tribunal pointed out from time to time during the hearing, the Tribunal was not investigating the merits and demerits of the Wool Exchange as such but was confining itself, as it is obliged to do, to a consideration of the effect and consequences of the operation of the Business Rules.
54 More relevantly Australian Wool Growers submitted that rules 2.4, 2.5 and 2.6 were anti-competitive as they limited access to the Wool Exchange’s auction facilities and inhibited the development of alternative selling facilities. A particular issue addressed by Australian Wool Growers was that authorisation of the Business Rules would by implication de facto authorise all the activities of the Wool Exchange. In particular, reference was made to rule 3.3 in relation to the scope of subject‑matter that would be covered by a Wool Exchange Ruling. The Tribunal has ensured in its determination that it is made quite clear that it is only the Business Rules which are the subject of the grant of the authorisation and not the Wool Exchange’s Articles of Association, Code of Conduct or other General Trading Rules.
55 Australian Wool Growers contended in substance that the Business Rules do not provide any public benefit and that the benefits relied upon by the Wool Exchange cannot be sustained. Although Australian Wool Growers contended that AWEX‑ID and sale by description and their associated prescriptive rules have a detrimental effect on the price received for wool, the Tribunal does not consider that such matters are a proper subject for examination in the present application. The rules under which AWEX‑ID is prescribed are the rules relating to Standard Product Description and they are not the subject of an application for the grant of authorisation. As noted earlier there is no prescription in the Business Rules that wool be sold by “sale by description” and in any event, at the present time that subject is a proposal only.
56 Fibres (Australia) Pty Ltd also raised a number of issues which are beyond the scope of the current application. Mr Milton Smith, a director of Fibres (Australia) Pty Ltd who appeared on its behalf complained about the process by which the proposal to introduce sale by description was being considered and evaluated. He also complained about an investigation instituted by the Wool Exchange in relation to the offering for sale by auction of a bale which was under the weight prescribed by the Clip Preparation and Packaging rules. Neither of these issues is relevant to the issues which arise on a review of a determination to grant authorisation to the Business Rules. Fibres (Australia) Pty Ltd also contended that the requirement in rules 2.5 and 2.6 that fees be charged on non‑auction sales is anti‑competitive in that non‑members are disadvantaged because of an inability to obtain commercial use of the Wool Exchange’s auction facility.
Evidence of public benefit and public detriment under the rules
57 The Wool Exchange filed a witness statement by Dennis Teasdale, the national manager, technical services for the Wool Exchange. Unfortunately Mr Teasdale passed away on the day his witness statement was signed and filed. The Wool Exchange called Mr Gary MacFarlane, a management consultant who in the course of his practice has advised organisations such as the Wool Exchange and the International Wool Secretariat. He was involved in the establishment of the Wool Exchange. He verified the matters referred to in Mr Teasdale’s statement. When the Tribunal refers to Mr MacFarlane’s evidence it is including matters referred to in Mr Teasdale’s witness statement which were verified and, in effect, adopted by Mr MacFarlane as his evidence. Mr MacFarlane said that the public benefit arising from the Wool Exchange’s activities which were funded by the trading fee related to the provision of an open and informed market and the provision of quality systems and codes such as a code of practice, preparation codes and standards and wool pack standards. Under its quality systems and codes the Wool Exchange has been involved in the development of competency standards for wool classers, codes for clip preparation, standards in relation to dealing with contamination and standards for wool packs.
58 The applicants for review led evidence to the effect that contamination was still occurring and that the quality control implemented by the Wool Exchange was not effective. Although a number of particular incidents were referred to, the Tribunal is not satisfied and is not prepared to find that the quality controls and systems put in place at the Wool Exchange have not been effective in raising quality standards. In any event, the Tribunal is satisfied that the provision of quality standards and a regime to implement them is better than no standards at all and provides a positive public benefit.
59 Market reporting is a significant issue in the wool industry and it is apparent that it is important for both buyers and sellers to be informed fully in relation to the nature of wool offered for sale and sold and the prices it has achieved. The Wool Exchange has developed a comprehensive set of market reports and the Tribunal is satisfied that these reports provide a public benefit by disseminating relevant information to interested parties. Participants in the wool industry rely on the Wool Exchange auction market reports for the purposes of valuing wool sold through other selling systems.
60 The Wool Exchange called Mr Donald McDonald, an experienced wool broker and wool grower. He was a director of the Wool Exchange between 1994 and 1996. He confirmed the range of services provided to the Australian wool industry by the Wool Exchange which, in his opinion, were of benefit to the Australian wool industry. He referred, for example, to the independent marketing reports published by the Wool Exchange and confirmed that a number of the services provided by the Wool Exchange such as quality control, market reporting and the wool description system could not be funded on a user pays basis.
61 In his witness statement Mr McDonald had compared the charges levied on wool growers by the AWC with the charges made by the Wool Exchange and had concluded that the charge levied by the AWC was a much greater cost than the Wool Exchange trading fee. Under cross‑examination it became apparent that Mr McDonald was not comparing like with like because the 8% charge imposed upon wool growers by the AWC covered more matters than the matters which were covered by the Wool Exchange trading fee. Nevertheless the Tribunal accepts Mr McDonald’s evidence on the benefits derived from the quality control provisions introduced and administered by the Wool Exchange.
62 Similar evidence was given on behalf of the Wool Exchange by Mr Alan Grace, a wool grower and a former general manager, wool operations at Nissho Iwai Australia Ltd which in 1996/1997 was the fifth largest purchaser of Australian wool. He had also been a Wool Exchange director from 1995 to 1997. He regarded the Wool Exchange quality control provisions as very important. He also was of the opinion that the quality of market reporting provided by the Wool Exchange could not be provided by anyone else in the same way. He said that although wool brokers might provide the information the independence of the market reporting would be brought into question. As with Mr McDonald he did not compare like with like when comparing the amount of wool growers’ income which previously funded the services with the charge for the services which the Wool Exchange now performs. Nevertheless, the Tribunal accepts Mr Grace’s evidence as verifying the public benefits relied upon by the Wool Exchange.
63 The Wool Exchange called Dr Robert McEwin, a consulting economist who expressed the opinion that the composition of the membership of the Wool Exchange precluded any exercise of market or monopoly power because of the heterogenous nature of its membership. The Wool Exchange membership comprises six classes namely, exporters, brokers, growers, private treaty merchants, processors and associates and therefore comprises persons from all stages of the production chain whose interests are diverse. He was of the opinion, which the Tribunal accepts, that there are no barriers to entry into the market of providing services to facilitate the selling and buying of greasy wool. In support of his conclusion he noted the fact that wool auctions are often carried out at leased premises for the duration of the auction and that there is no shortage of auctioneers. He said that the only difficulty which he did not regard as a barrier to entry would be establishing sufficient numbers of buyers and sellers.
64 It was put to Dr McEwin in cross‑examination that there was a barrier to entry because of the joining fee and annual fee charged to brokers by the Wool Exchange. Dr McEwin took the view that the joining fee was not a barrier to entry because he defined a barrier to entry as a cost a new entrant faces that an incumbent in the market does not. The joining fee was paid by all current members of the Wool Exchange. Accordingly the charge for membership is not a barrier to entry as it is not used, and has not been used, for anti-competitive reasons. When it was put to Dr McEwin that the fact that 28% of brokers and 81% of private treaty merchants elected not to be members of the Wool Exchange in effect demonstrated that there were entry barriers, his response was that there was no such message and that it meant that there was a healthy degree of competition in the industry because people were operating in different selling and buying regimes.
65 Dr McEwin considered that rules 2.5 and 2.6 provided a rational way to overcome what he called a “free‑riding” problem which could undermine the benefits provided by the Wool Exchange’s ancillary services in the area of market reporting, quality control and research and development which benefit all industry participants. Participants could obtain the benefits of these services whilst placing little wool for sale through the auction system. Fees for service are difficult to set in areas such as market reporting, quality control and research and development short of charging a fee across all wool sold by whatever means. However the alteration of the trading fee to a two‑tiered fee has largely rendered this evidence and analysis moot.
66 The evidence led by Australian Wool Growers (upon which Fibres (Australia) Pty Ltd relied) covered a number of matters which the Tribunal does not consider to be relevant to the issue to the grant of authorisation to the Business Rules of the Wool Exchange. For example, Mr John Enderby, an experienced wool broker and member of the Exchange, was critical of the Wool Exchange’s Standard Product Description rule 3.3.1 which required the AWEX‑ID to be made available to the Wool Exchange at the same time as auction catalogues became available. He was also critical of the Wool Exchange’s proposal to commence sales on the basis of sale by description. These matters are not the subject of any rule in the Business Rules and the authorisation of the Business Rules proposed by the Tribunal does not involve an authorisation of any other rules of the Wool Exchange. Similarly Mr Enderby’s reference to the recommendation of the McLachlan Task Force Report that the Wool Exchange should be disbanded is not matter for consideration by the Tribunal.
67 Mr Enderby drew attention to what he called the damage caused by rule 2.4 in effect prohibiting small operators in the auction rooms, but that evidence misstates the effect of rule 2.4. Small operators can become members. Although it was suggested in Mr Still’s statement that the Wool Exchange fees and charges were such that he could not bear the additional cost of becoming a member, there was no evidence as to the nature and extent of Mr Still’s business, Betta Wool Handlers Pty Ltd. Mr Still said he was compelled to offer his grower clients wool for sale by tender because he could not bear the additional cost of becoming a member of the Wool Exchange and that the offer from the Wool Exchange for non‑member brokers to use the auction facilities was not practical because it came at a prohibitive cost and at a time when there would be no buyers present. For the reasons to which we shall refer the Tribunal is not satisfied that a $4000 joining fee for wool brokers is so great that it effectively excludes small operators from access to the Wool Exchange auction floor.
68 In any event for the reasons to which we shall refer, the Tribunal does not consider that rule 2.4 leads to a lessening of competition because there are other avenues open for the sale and purchase of greasy wool other than through the Wool Exchange’s auction system. Although 80% or thereabouts of the wool clip is sold through the Wool Exchange it is apparent that there are other avenues for the sale of wool thereby contributing to a competitive environment. Reference was made in the evidence to sales by private treaty merchants, the electronic auction system established by the Australian Wool Testing Authority which system is now commercially available, the South Australian company, E‑Wool which conducts an electronic sale system and the fact that groups of wool growers are selling directly to processors through an organisation known as Fibre Direct. Mr Enderby also gave evidence that his company performed various services for a number of wool broking and trading companies including Betta Wool Handlers Pty Ltd (Mr Still’s company) at his premises where those organisations displayed their clients’ wool for sale.
69 Dr Paul Swann was called by Australian Wool Growers. He has had substantial experience in the wool textile area and he was critical of the Wool Exchange’s proposal to introduce sale by description . This is not a matter for consideration by the Tribunal on these applications for review as it does not arise under the Business Rules and in any event it has not yet been implemented. He argued that the introduction of sale by description would reduce significantly buyer confidence and would have the result of forcing brokers and buyers to apply conservative valuations to cover the increased risk associated with purchase by description thereby reducing the price of raw wool at auction.
70 Witness statements were filed on behalf of Australian Wool Growers by two growers who were not cross-examined. Mr Inwood was critical of the Wool Exchange’s proposal for sale by description and the representation of wool growers on the Wool Exchange. Those matters are not proper subjects for consideration in these applications as they do not arise under the Business Rules. Mr Inwood said that the Wool Exchange’s fees were unreasonably high for small operators but apart from asserting that proposition no evidence was led to support it. Mr Massy said that the Wool Exchange, as an organisation was a road block to the modernisation of the Australian wool industry and its capacity to be innovative. This is not an issue proper for consideration on these applications to review the Commission’s determination.
Do the Business Rules result in a benefit to the public
71 The Tribunal is satisfied that the Business Rules, and in particular rules 2.4, 2.5 and 2.6 will result in a benefit to the public. Rules 2.4, 2.5 and 2.6 underpin the Wool Exchange’s auction system, quality control procedures, market reporting and research and development activities as they provide a framework within which the auction system can be funded and implemented with proper prudential supervision and within which the essential services of quality control and supervision, independent market reporting and research and development can be provided to the participants in the wool industry as a whole. As the wool industry makes such a significant contribution to Australia’s export earnings and provides a source of income and employment for many persons in Australia the Tribunal is satisfied that it is a benefit to the public that there be provided in the market place a properly supervised and controlled facility for the offering of wool for sale in a competitive environment such as is provided by the Wool Exchange.
72 The Tribunal is also satisfied that it is a benefit to the public that there be administered, as part of the process of offering wool for sale, a system of quality control and quality assurance whereby quality standards can be propounded, supervised and controlled by an entity such as the Wool Exchange whose standards and controls are recognised throughout the industry. The fact that in particular instances these standards and controls may not be as effective as the applicants would wish does not, in the Tribunal’s view, derogate from the benefit of having a system of such standards and controls in place which provide a quality regime within which participants in the industry are encouraged to participate.
73 The Tribunal is further satisfied that it is a benefit to the public in a market as important as the market for the sale and purchase of greasy or first hand wool that there be an independent system of market reporting and information available to all participants in the industry so that all participants may have the ability to be informed fully and quickly of sale prices and price movements of the differing categories and types of wool offered for sale as well as historical date. The Tribunal has reached a similar conclusion in relation to the Wool Exchange’s research and development into matters such as electronic systems to support and provide sale mechanisms and packaging and sale standards.
74 Although there was some suggestion in the evidence and submissions that these services might be provided even if the Wool Exchange did not provide them the Tribunal is not satisfied that this would occur if the Wool Exchange bowed out of the industry and in particular, the provision of auction facilities. Having regard to the history of the wool industry and, in particular, the restructuring which occurred in the early 1990’s, the Tribunal does not consider that the facilities and services provided by the Wool Exchange would be provided by a similar independent body if the Wool Exchange abandoned the provision of its auction facilities, and the provision of its quality control services, market reporting services and research and development services.
75 Applying the future with and without test the Tribunal is satisfied that if the Business Rules, and in particular rules 2.4, 2.5 and 2.6 were not operative and in force in the future it is unlikely that the facilities and services offered by the Wool Exchange would be available in the market to the participants in the wool industry and the public as efficiently and effectively as they are available at the present. Conversely if the Business Rules, and in particular rules 2.4, 2.5 and 2.6 are operative and in force in the future the Tribunal is satisfied that the benefits to the public, already referred to, will continue to exist and be available within the wool industry.
76 It was submitted by Mr Hespe, who appeared for Australian Wool Growers, that the Business Rules of the Wool Exchange in their terms provided no public benefit because the public benefits claimed by the Wool Exchange arose by reference to matters which were not the subject of the Business Rules but were rather the subject of other rules for which the Wool Exchange did not seek authorisation. For example, what was being submitted was that the provisions in relation to quality assurance were found in the General Trading Rules. The Tribunal rejects this submission. It is the Business Rules which provide the regime for the funding which pays for and defrays the costs and expenses of the auction facilities and the ancillary services which the Wool Exchange supplies which are said by the Wool Exchange to result in a public benefit. It is the Business Rules which impose the obligation upon members to pay the fees which are used to provide the services which provide benefits for all participants in the wool industry.
Does rule 2.4 lessen competition?
77 Having found that the Business Rules, and in particular rules 2.4, 2.5 and 2.6 will result in a benefit to the public, it is necessary to proceed to the next level of enquiry and ask whether any lessening of competition will result, or would be likely to result, if the Business Rules were implemented and rules 2.4, 2.5 and 2.6 were operative and in force.
78 Rule 2.4 denies non‑members access to the auction floor and to any electronic selling system conducted by the Wool Exchange. However membership is not restricted and is open to any interested persons on payment of the joining fee and annual fee. The joining fee is not in the Tribunal’s view, a barrier to entry. Although two witnesses for Australian Wool Growers were critical of the joining fee (Mr Still and Mr Inwood) there was other evidence, which the Tribunal accepts, that from a commercial point of view the fee was not excessive. Mr McDonald said that a broker who sold only 1500 bales or thereabouts per year would probably recoup the $4000 joining fee within two years and that a number of small broking companies have joined the Wool Exchange and have been viable since joining. Mr McDonald said that he recouped the joining fee within six months of joining but of course the ability to recoup the joining fee depends upon the amount of wool sold. It would obviously take a smaller broker longer to recoup the joining fee. The Tribunal is not satisfied that the joining fee is so excessive that it acts as a positive deterrent to small brokers joining the Wool Exchange. Although there is always the potential for joining fees and membership fees to act as commercial barriers to small operators joining an organisation, the Tribunal is satisfied that the level of joining fee and annual fee for brokers and other trading members is not such as to cause a lessening of competition because of the level of the fees.
79 Even if the Tribunal were to conclude that the joining fee might deter some smaller brokers from joining the Wool Exchange, there is another basis for concluding that there is unlikely to be any consequent lessening of competition. The Tribunal is satisfied that non‑members of the Wool Exchange have other opportunities and facilities available to them to sell their wool in competitive circumstances. There are wool selling services and facilities available to non‑members of the Wool Exchange in addition to those facilities and services offered by the Wool Exchange. It must be remembered that the Tribunal is concerned to determine whether there is a lessening of competition, not a lessening of competitors. The Tribunal heard evidence about a number of these alternative wool selling facilities and services. Mr Grace referred to an Adelaide company E‑Wool which sells wool on a tender system using information technology and facsimile transmission. E‑Wool is not a member of the Wool Exchange. E‑Wool acts as a broker and the wool is stored in the stores of other organisations whose staff are accredited appraisers with the Wool Exchange. The appraisers value the sample of the wool and each night E‑Wool puts out an offer sheet in a catalogue form showing relevant information, a bid price and a reserve price. Potential purchasers receive the information overnight by e‑mail or facsimile transmission and bid on the wool the next morning. All the information which is sent out is based on AWEX‑ID, the Wool Exchange’s standard product description (in accordance with its rules).
80 There was also evidence of other forms of selling wool outside the Wool Exchange’s auction system. The evidence established that although the bulk of Australian wool sold in the 1997/1998 year (81%) was sold by auction, 15.3% of the wool clip was sold by private treaty merchants and 3.7% was sold directly to mills. There are also tender systems offered by brokers at the end of sale weeks so that wool which may not have been sold at auction is put up for tender. The Australian Wool Testing Authority has had in place an electronic selling system for some time and it has now announced an electronic auction system which is commercially available. There is also in place an arrangement between Elders Ltd and G H Michell & Sons (a large wool processor) whereby growers are provided with competitive direct to processor wool contracts. This is an alternative to the auction system.
81 A number of smaller groups of wool growers are selling wool directly to processing mills, thereby working outside the auction system. Reference was made to a company called Fibre Direct. There was evidence that non‑member brokers make arrangements with a member broker to sell their wool at auction for the non‑member broker. Although this may involve an additional cost it does not appear that such a cost is a disincentive to such a method of selling wool. Mr Enderby said that his company performed selling facilities for other wool brokers by providing sale facilities for them and that his company had client companies which sold wool through his company as a broker.
82 It is apparent that notwithstanding the fact that of the order of 80% of the wool clip is sold by auction, there are presently existing and likely to continue in the future, other services and facilities available for the sale of wool outside the Wool Exchange’s auction system. The Tribunal is therefore satisfied that the existence of rule 2.4 does not result in any lessening or likely lessening of competition either in what the Tribunal considers to be the relevant market for the provision of services to facilitate the sale and purchase of wool, or in the market for the sale and purchase of wool generally. The Tribunal is also satisfied that there is no detriment to the public, whether or not there is any lessening or likely lessening of competition, resulting from the operation of rule 2.4 having regard to the matters to which we have referred, in particular the availability of other avenues of offering wool for sale.
83 The Tribunal is accordingly satisfied that the operation of rule 2.4 will result in benefits to the public which would outweigh any detriment to the public constituted by any lessening of competition that would be likely to result if the Business Rules were given effect to and rule 2.4 was operative.
Do rules 2.5 and 2.6 lessen competition
84 The complaint about rules 2.4 and 2.5 was that because a full trading fee (that is the fee before it was structured into a two‑tiered fee) has to be paid by members in respect of sales made outside the auction system there is a disincentive and an inhibition on members selling through alternative facilities. This is because if a member sells wool elsewhere, the member has to pay not only any costs or fees incurred in selling elsewhere but also a cost based upon the cost incurred if the member had sold the wool through the Wool Exchange’s auction facility. It was said that this extra cost burden would operate as an impediment to participants moving to other selling facilities or services and would then drive people back to the Wool Exchange’s auction system.
85 The trading fee (un‑restructured) has funded two aspects of Wool Exchange activities. First, the costs and expenses of running the wool auctions and, secondly, it contributes to the costs and expenses of funding the ancillary services to the extent to which they are not fully funded on a user pays basis. If members sell wool outside the Wool Exchange they still receive the benefit of the ancillary services such as the market reports, quality systems and research and development but they do not get the benefit of the auction facilities.
86 The Tribunal was initially of the view that the trading fee (un‑restructured) would be likely to lessen competition because it acted as a disincentive to the establishment and use of other facilities and services for the sale and transfer of wool outside the auction system and, also, had the potential to make it more costly for sellers to go outside the auction system.
87 The Tribunal is satisfied that the two‑tiered system resolved to be introduced in June 1999 by the Wool Exchange has the result that this likelihood of lessening competition is now removed. Members who wish to sell outside the auction system will now only pay a fee which is used to fund the ancillary services provided by the Wool Exchange. Members who sell outside the auction system still have the benefit of market reporting, quality systems and research and development. In particular, the Tribunal is satisfied on the evidence that when sales are made outside the auction system they are made on the basis of adopting and recognising the quality standards required by the Wool Exchange. As a result of the restructured two‑tiered fee when a member sells at an auction that member pays a fee towards the costs and expenses of the auction and also a fee to fund the ancillary services. When a member sells outside the auction system the member only pays the latter fee and does not pay any auction fee. Thus, there is no longer a disincentive for a member to sell outside the Wool Exchange’s auction facilities and a member is under no disadvantage by doing so. There is no longer an inhibition on the development of alternative selling systems and, as we have observed in our consideration of rule 2.4, alternative selling systems have already been developed and are likely to continue to develop.
88 It follows that there is no likely lessening of competition or any detriment to the public consequent upon the operation of rules 2.5 and 2.6, having regard to the two-tiered fee now implemented. The trading fee will only be used to fund auction facilities and services. The common fee payable in respect of all sales by members will be used to fund the other services provided by the Wool Exchange. The Tribunal is satisfied that the provision of market reporting services, the provision of quality assurance and quality control services and the carrying out of research and development in relation to the selling of wool and the establishment of a trading system are matters which enure for the benefit of all sellers and purchasers of wool and are of public benefit. As approximately 80% of the Australian wool clip is sold through Wool Exchange auctions, it is desirable that there be a regime for quality control, the ability to inform the market fully in relation to the availability of wool, the standard of the wool and its pricing generally. Although there was some criticism of the nature of the quality controls actually implemented (see for example, Dr Swann) the Tribunal is satisfied that the existence of a quality control regime of itself is a public benefit as it has the capacity to influence participants to conform to its standards.
89 The Tribunal is satisfied therefore that the operations of rules 2.5 and 2.6 will result in benefits to the public which would outweigh any detriment to the public contributed by any lessening of competition that would be likely to result if the Business Rules were given effect to and rules 2.5 and 2.6 were operative.
Scope of authorisation
90 In the course of final submissions the Tribunal pointed out to counsel for the Wool Exchange that rules 3.3 and 6.4 and schedule 2 to the Business Rules which specified categories of offences under rule 6.11 were sufficiently wide in their terms to cover rules of the Wool Exchange other than the Business Rules. As the Wool Exchange was not seeking authorisation in respect of any rules other than the Business Rules it seemed to the Tribunal that any authorisation of the Business Rules should make it clear that it was only the Business Rules which were the subject of the grant of authorisation. Counsel for the Wool Exchange informed the Tribunal that he had instructions that it had always been the intention of the Wool Exchange only to seek authorisation of the Business Rules and not other rules. He indicated that the Wool Exchange was prepared to amend its application for authorisation so as to exclude any suggestion that rules 3.3 and 6.4 and schedule 2 were the subject of any authorisation granted by the Tribunal. However the matter can be dealt with by the form of the Tribunal’s determination. The Tribunal considers that an authorisation of rules 3.3 and 6.4 and Schedule 2 would have the effect of granting an authorisation of rules of the Wool Exchange other than the Business Rules. Notwithstanding the reference in rule 3.3 to a Wool Exchange Ruling being required to be made under “these Rules”, that is to say the Business Rules, there is no provision in any of the Business Rules requiring a Wool Exchange Ruling to be made. However there are provisions in the Wool Selling Rules and the Auction Selling Rules which enable the making of a Wool Exchange Ruling so that it may be arguable that rule 3.3 is intended to cover a Wool Exchange Ruling required to be made under the Wool Selling Rules or the Auction Selling Rules. If this be the position, then the effect of rule 3.3 is to require a member to accept and be bound by the provisions of those rules. Thus, an authorisation of rule 3.3 is a defacto authorisation of those rules in such circumstances. It is therefore necessary to limit any authorisation granted to rule 3.3 to ensure that it applies only to the Business Rules and not any other rules of the Wool Exchange.
91 A similar position obtains in respect of rule 6.4 which provides:
“If a complaint is made to the Wool Exchange that a Member is in breach of a Rule the following procedures shall be followed.”
The definition of “rule” in the Business Rules means that rule 6.4 is activated by a breach of any rule of the Wool Exchange, whether a Business Rule or one of the General Trading Rules. If a complaint is made that a member is in breach of one of the General Trading Rules then, if authorisation is granted to rule 6.4, the procedure specified must be followed on the basis that that rule has been breached. An authorisation of rule 6.4 in such circumstances would have the result that the complaints procedure could be used, and a fine imposed, on the basis that a member was obliged to observe a rule in respect of which no authorisation had been specifically granted; yet the authorisation granted in respect of rule 6.4 would mean that the member would be precluded from challenging that rule under the Act even though it had not been the subject of specific authorisation. It is therefore necessary to limit any authorisation granted to rule 6.4 and schedule 2 to situations where that rule and schedule apply to a breach of the Business Rules.
92 Mr Hespe also submitted that an authorisation of rule 3.1 would cover a direction given under a Wool Exchange rule other than a Business Rule. Rule 3.1 requires members wishing to use managed trading facilities, which include auctions conducted by the Wool Exchange, to comply with “reasonable directions given by the Wool Exchange relating to those facilities”. Mr Hespe submitted that this rule had the effect of requiring members to comply with rules of the Wool Exchange other than the Business Rules, which were not the subject of the application for authorisation. Mr Hespe submitted, for example, that a reasonable direction could arise as a result of a breach of another rule. He pointed to rule 3.1 of the Auction Selling Rules which provides:
“All wool sold at auction shall be described by the seller using the Standard Product Description (see S 8).”
He submitted that if a broker was given a direction to submit a catalogue in that form it would be a reasonable direction given by the Wool Exchange and that if he did not comply with that direction he would be subject to the rules relating to sanctions.
93 The Tribunal accepts this submission. The Tribunal considers that a reasonable direction given by the Wool Exchange would include a direction to comply with a rule other than a Business Rule with a consequent sanction under the Business Rules if that other rule was not complied with.
Conclusion
94 The Tribunal is therefore satisfied that the statutory test required by s 90(6) of the Act has been satisfied, that is to say it is satisfied in all the circumstances that the provisions of the Business Rules, and in particular rules 2.4, 2.5 and 2.6 will result or will be likely to result in benefits to the public and that those benefits will outweigh any detriments to the public constituted by any lessening of competition that would be likely to result if the Business Rules were operative and rules 2.4, 2.5 and 2.6 were given effect. However, that conclusion is predicated on the Wool Exchange bringing into operation the two‑tiered fee in the terms referred to in the agreement reached with four of the applicants for review. The Wool Exchange now only seeks that the authorisation be granted for a period of three years and it is prepared to accept a condition similar to that required by the Commission, namely that it bring to the attention of the Commission any changes in its rules or procedures that may have competition implications or may materially affect the circumstances relating to the grant of authorisation. It should also be made clear that the authorisation does not cover or apply to Business Rules 2.1 or 3.2, does not cover or apply to Business Rule 3.1 to the extent to which the reasonable directions referred to in it are directions to observe or comply with rules of the Wool Exchange other than the Business Rules and only covers and applies to Business Rules 3.3, 6.4 and Schedule 2 to the Business Rules to the extent to which those rules and schedule cover and apply to breaches of the Business Rules.
95 As the terms of the authorisation are consistent with the terms of the agreement reached between the Wool Exchange, the intervener and the four applicants who sought leave to withdraw from the proceedings, there is no need to give separate consideration to the agreement reached as the authorisation granted has the effect of implementing the terms of the agreement.
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I certify that the preceding ninety‑five (95) numbered paragraphs are a true copy of the Reasons for Decision herein of Justice Goldberg, Mr R C Davey & Mr G F Latta. |
Associate:
Dated: 3 September 1999
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Counsel for the Australian Wool Exchange Limited: |
Dr R Patterson |
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Solicitor for the Australian Wool Exchange Limited: |
Minter Ellison |
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Counsel for the Australian Competition and Consumer Commission: |
Ms J S Gleeson |
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Solicitor for the Australian Competition and Consumer Commission: |
Australian Competition and Consumer Commission |
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Representative of Australian Wool Growers Association Limited: |
Mr F S Hespe |
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Representative of Fibres (Australia) Pty Ltd: |
Mr M S Smith |
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Representative for New South Wales Farmers Association, Michael A Nicholls, Australian Wool Processors Council Inc & Private Treaty Wool Merchants of Australia Inc: |
Mr P Morgan |
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Dates of Hearing: |
27, 28 & 29 July 1999 |
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Date of Judgment: |
3 September 1999 |