On 4 December 2024, the Federal Court delivered judgment in [2024] FCA 1382 dismissing the proceedings brought by Stillwater Pastoral Company Pty Ltd (Stillwater) in which it plead that Stanwell Corporation Ltd (Stanwell) and CS Energy Ltd (CS Energy) had misused their market power in contravention of s 46 of the Competition and Consumer Act 2010 (Cth) (CCA). Derrington J found that Stanwell and CS Energy did not have a substantial degree of market power and dismissed the proceedings.
What you need to know
While this matter was decided under the old misuse of market power test (which operated until 6 November 2017), it offers key takeaways that remain relevant to the current misuse of market power prohibition:
Big isn’t always bad: a large market share does not necessarily or automatically mean a firm has a substantial degree of market power. While Stanwell and CS Energy both had significant share of generation of all electricity supplied into the Queensland Region of the National Energy Market (QRNEM) (between 32.19% and 37.29% and between 25.56% and 30.82% respectively), the Court found that they were nevertheless competitively constrained by relevant market dynamics, including the contractual position of all firms in the market.
Getting through the gate is hard: the threshold for liability in a misuse of market power case is establishing that the respondent firm actually has a substantial degree of market power. This case is one of several cases showing that proving this to a Court’s satisfaction is difficult.
Market power requires staying power: firms often have a significant degree of pricing power at various times, however establishing that a firm has a substantial degree of market power requires more than demonstrating it had fleeting or intermittent pricing power. Instead, it must be shown that the firm was able to exercise pricing power in a non-transient manner.
Substance over speculation: without direct documentary or testimonial evidence, courts are reluctant to infer an anti-competitive strategy or intent solely from conduct alone, such as trading patterns and price spikes or based on abstract economic theory. Justice Derrington concluded that the mere prevalence of a strategy among multiple market participants does not warrant an inference of an anti-competitive purpose.
Misuse of market power
This is the only judgment handed down so far this year in relation to s 46, although there are several other private misuse of market power cases currently before the courts (those being Epic Games v Apple, Epic Games v Google, Dialogue Consulting v Instagram, Engage Marine v Tasmanian Ports Corporation, Brickworks v BGC Australia, Sinclair v Sony Interactive Entertainment and the new class action filed against Google on 16 December 2024).
The proceedings relate to conduct up to 6 June 2017 and, as such, the old s 46 test applies. The difference between the old test and the current test are as follows:
The old test prohibited a firm with substantial market power taking advantage of that market power for a prohibited purpose, including eliminating or substantially damaging a competitor, preventing entry into a market, or deterring or preventing a person from competing.
The current test is broader than the old test and prohibits a firm with a substantial degree of market power engaging in conduct that has the purpose, or has or is likely to have the effect, of substantially lessening competition (SLC) in any market that the firm operates in.
Despite this, much of the case law made under the old test will be relevant in applying the new test.
Facts of the case
On characteristically hot Queensland summer days, electricity demand skyrockets in the late afternoon as people switch on air-conditioners. At times of high demand, the ‘spot’ price for wholesale electricity will tend to increase and there can be very large price spikes. This means that, for electricity generators in Queensland, there is good money to be made in periods of peak demand such as on hot summer days.
Stanwell and CS Energy are Queensland state-owned corporations and the two largest generators in the QRNEM. Stillwater alleged that, between January 2015 and January 2021, Stanwell and CS Energy developed strategies to boost their revenue in the summer months by creating profitable price spikes in the market. It was alleged that the price spikes could be manufactured by Stanwell and CS Energy submitting ‘rebids’ at very high prices just prior to closure of the bidding window for a trading interval (at the relevant time, a 30minute interval for which QRNEM prices were set). Because other generators had no time to adjust their bids or ramp up supply at lower prices, the market clearing price jumped significantly, resulting in short but sharp price spikes to the benefit of Stanwell and CS Energy.
This strategy is referred to as ‘short-notice rebidding’ and Stillwater alleged that Stanwell and CS Energy’s conduct amounted to a prohibited misuse of market power in contravention of s 46 of the CCA. In particular, Stillwater’s case was that:
Stanwell and CS Energy each enjoyed advantages, relative to other potential suppliers of wholesale electricity in or into the QRNEM, that translated to a substantial degree of market power for each of them; and
Their short-notice rebidding strategy was engaged in for the substantial purpose of deterring or preventing other generators from submitting a responsive rebid which would have placed a competitive constraint on their ability to cause and profit from the price spikes.
Market definition
The first step in a misuse of market power case is to determine the market in which the substantial degree of market power is said to be held. The parties disagreed on the appropriate market definition. Stillwater contended that it was each of the 9,211 dispatch intervals in which the Queensland region was price-separated and the interconnectors to New South Wales were bound, effectively treating these isolated intervals as separate markets. Stanwell and CS Energy contended for a broader market definition, encompassing at least the wholesale supply of electricity to the Queensland region together with inflows from New South Wales as appropriate. Justice Derrington concluded that the relevant market for the purpose of assessing whether or not Stanwell and/or CS Energy had substantial market power is the wholesale supply of electricity to the QRNEM, including inflows from other regions of the National Electricity Market (NEM) on the basis that the narrower definition focusing on transient, price-separated intervals did not align with the orthodox principles of market definition, as it failed to reflect the commercial realities of a dynamic and interconnected NEM where competition and rivalry extend beyond isolated, short-term constraints.
Whether Stanwell and CS Energy had a substantial degree of market power
Market power can be broadly defined as the ability of a firm (or firms acting in concert) to ‘charge more and/or give less’, in a manner that is profitable due to a lack of constraint from competitors or other features of the market. Measuring the degree of market power requires looking at the existence and extent of constraints on a firm.
Stillwater argued that Stanwell and CS Energy had a substantial degree of market power on the basis that:
There were high barriers to entry for new generators and high barriers to expansion for the production capacity of existing generators in the market.
Stanwell and CS Energy had physical advantages over their competitors because they owned or controlled more power-generating units and greater overall capacity than any other single producer. As such, they could produce electricity from many different power plants, meaning they had lower productions costs and could offer cheaper electricity.
Accordingly, Stanwell and CS Energy could submit low-price, high-volume offers at virtually any forecast demand level, ensuring that the NEM dispatch engine would select them for dispatch and thereby preserve their financial viability. They could also ramp up production more quickly than almost every other competitor due to owning and controlling multiple generating units with superior ramp rates, further strengthening their market position.
In addition to this, Stillwell argued that there were no other constraints, or alternatively only limited constraints, on Stanwell and/or CS Energy’s engaging in short-notice rebidding during the relevant period because of their size, ability to offer high volume at low prices and typical receipt of the most (or second most after one another) direct financial benefit from any increase in the spot price and less risk to Stanwell and/or CS Energy in engaging in short-notice rebidding.
Justice Derrington concluded that neither Stanwell nor CS Energy had a substantial degree of power in the market, noting:
While Stanwell and CS Energy had significant market share, a large market share does not necessarily mean there is a substantial degree of market power. Although Stanwell and CS Energy supplied large volumes of electricity, they didn’t have more influence over when their electricity was used compared to other generators. All generators were limited by their contract positions (in general terms, the amounts of energy to which their contracts relate for the period), preventing Stanwell and CS Energy from having unique control.
There was no proof that Stanwell and CS Energy faced fewer restrictions when changing their electricity offers at the last minute. This means they didn’t have a special advantage over other generators in their bidding strategies.
While Stanwell and CS Energy could occasionally cause price spikes by adjusting their electricity output, these instances were rare and short-lived, which is inconsistent with the proposition that they had a substantial degree of market power.
Her Honour referred to the decision in Australian Gas Light Company (AGL) v Australian Competition and Consumer Commission (Loy Yang) [2003] FCA 1525; 137 FCR 317, where French J drew a distinction between “transient market power” and “persistent but intermittent” market power. Similar to the alleged conduct of Stanwell and CS Energy, that case had focused on an opportunistic rebidding strategy by the Loy Yang A power station in Victoria, leading to price spikes in that region of the NEM. In Loy Yang, French J found that the successful deployment of this strategy did not indicate the existence of substantial market power, but rather looked like “well informed betting on the market”.
Echoing the conclusions of French J in Loy Yang, Justice Derrington found that the existence of transient and infrequent price spikes could not support a conclusion that either Stanwell or CS Energy held substantial market power.
Her Honour also found that Stanwell and CS Energy were not ‘related entities’ within the meaning of s 4A of the CCA, and as such, their conduct should not be considered jointly.
Findings as to taking advantage for a proscribed purpose
The finding that Stanwell and CS Energy did not have a substantial degree of market power was fatal to Stillwater’s case. However, Her Honour considered the other elements of the former s 46 test, being whether Stanwell and CS Energy took advantage of the substantial degree of market power, and whether this was done for a proscribed purpose. While these elements are no longer in the current s 46 test, the Court’s findings are still particularly relevant for analysing a corporation’s purpose and when a purpose can be inferred from conduct.
Taking advantage
The Court concluded that Stanwell and CS Energy (separately) did not use their substantial power to make the impugned rebids, considering the following factors:
Price-cost test: No Queensland generators, including Stanwell and CS Energy, have been able to sustain prices above competitive levels during the Conduct Period, nor even to sustain prices that would enable recovery of forward-looking capital and operating costs.
Profitability: Stillwater’s expert witness, Dr Ledgerwood, did not consider whether short-notice rebidding would be profitable absent substantial market power. Derrington J held that evidence as to CS Energy’s profitability (and by analogy, Stanwell’s profitability) was inconsistent with any hypothesis that prices are high relative to costs during the period when the relevant conduct occurred. Stanwell and CS Energy’s experts agreed that if Stanwell and CS Energy had substantial market power, and it was profitable to exercise it by short-notice rebidding, they would have engaged in it more frequently.
Independence: The ability of Stanwell and CS Energy to engage in short-notice rebidding was unrelated to substantial market power. Similar conduct was engaged in by almost every other generator – of the eleven generators that competed against Stanwell and CS Energy (including one another), nine engaged in high-priced rebidding causing price spikes.
Proscribed purpose
Stillwater had no direct evidence of the proscribed purpose and asked the Court to infer the purpose from the nature, frequency and effect of the implementation of the alleged trading strategy. Stillwater alleged that Stanwell and CS Energy engaged in short-notice rebidding strategy for the substantial purpose of deterring or preventing a responsive rebid.
The Court concluded that there was no evidence capable of supporting an inference that Stanwell and CS Energy deliberately engaged in the strategy as pleaded by Stillwater. Justice Derrington held there was no direct evidence, documentary or otherwise, of the alleged trading strategy and did not accept that the only competitive response from participants in the NEM was to rebid in an attempt to mitigate a price spike. Her Honour found that the documents tendered at trial demonstrated that the strategies developed by Stanwell and CS Energy were directed at attempting to make profit in the summer months when conditions were ripe to do so. Her Honour also concluded it was “wholly unrealistic” to suggest “both Stanwell and CS Energy had identical, unlawful, strategies which were communicated orally and never reduced to writing”.
The Court concluded that, given Stillwater’s failure to prove the existence of the alleged trading strategy, the allegation of the proscribed purpose failed. Further, the frequency of the rebids did not support Stillwater’s case because, more broadly, Stillwater was unable to prove the frequency of the impugned conduct across the relevant period. Rather, Her Honour held that it did no more than identify categories of rebids for investigation.
The court also disagreed with Stillwater’s submission that the inference as to ‘effect’ can be drawn from the fact of the timing of the rebids, considered with the “inadequacy of … reasons” for the rebids, relative to the alleged price spikes, because Dr Ledgerwood’s screens selected only for proximity to a price spike. They could not, and did not plan to, select for intention. The Court also found that Stillwater’s evidence of a counterfactual price was of little assistance.
Instead, the Court “readily accept[ed]” that the purpose in engaging in “late” rebidding was that Stanwell and CS Energy traders “hoped” they would be able to cause price spikes over the summer period in accordance with their respective strategies, in order to improve price-volume trade-offs and increase contract prices (at [759]). Justice Derrington emphasised that “a hope is not the same as an intention or an expectation” (at [759]).
Rather, the evidence established that throughout the relevant period price spikes were an intended and ubiquitous feature of the NEM, anticipated and expected by traders, generators, retailers and regulators. Justice Derrington referred to statements made by the Australian Energy Market Commission acknowledging that transient price increases are to be expected in periods of high demand. Indeed, periods of high prices are likely to be necessary to allow generators to recover both their variable and fixed costs and to provide signals for investment in new generation capacity.
Justice Derrington also accepted Stanwell’s submission that it is the antithesis of substantial market power that an entity said to have it is unable to exercise it. She concluded that the pervasiveness of other generators’ engagement in the impugned conduct also supports the proposition that Stanwell and CS Energy’s alleged substantial market power did not foreclose firms from the relevant market. There was, in any event, no evidence that competitors suffered harm such as lower sale volume, loss of market share or profits due to the conduct.
Conclusion and next steps
The proceedings were dismissed and the matter is adjourned to a date in March 2025 for the determination of costs.
As outlined above, there is one ACCC case on foot and six private section 46 cases currently before the Courts. The next judgment will likely be in Epic Games’ action against Apple and Google following the completion of the hearing on 5 July 2024 in the Federal Court. This blockbuster trial was the first contested s 46 case under the new provision. It will be interesting to see whether Epic Games is able to establish a misuse of market power under this new test.