(LAWFUEL) – Proceedings brought by the Commerce Commission have resulted in the Auckland High Court imposing a $1,050,000 penalty on Schneider Electric SA after the company admitted participating in a price-fixing and bid-rigging cartel in the gas insulated switchgear industry. Schneider must also pay $50,000 in costs to the Commission.
“This successful prosecution demonstrates the Commission’s determination to take action against international cartels which target New Zealand,” said Commerce Commission Chair Paula Rebstock.
“Globally this cartel raised the cost of components used in the transmission of electricity. The costs of such components are passed on to ordinary consumers in the form of higher electricity prices and also hurt the competitiveness of businesses and the economy.”
“This was a covert, sophisticated and long-running cartel which took considerable efforts to hide from regulators and affected consumers. The Commission’s investigation was made possible by the Commission’s leniency policy, where a member of the cartel receives leniency in return for exposing the cartel. Cartels are the very worst kind of anti-competitive behaviour and the leniency policy is our best tool to fight them,” said Ms Rebstock.
“The penalty imposed was lower than would otherwise be the case because the relevant conduct took place before 2001 from which time the applicable penalties were doubled. The Commission expects future penalties for similar conduct to be much higher,” Ms Rebstock said.
Ms Rebstock said the High Court’s penalty would also have been substantially higher if Schneider had not admitted the breach at an early stage of the proceedings and agreed to cooperate with the Commission’s case against other defendants, factors which contributed to a significant discount off the penalty that would otherwise have been payable. In his judgment, Justice Rodney Hansen agreed with the Commission’s submission that a penalty in the order of $1.25 to $1.75 million would have been appropriate had Schneider unsuccessfully defended the case at a trial.
Schneider admitted its involvement in the cartel until it was excluded by the other participants in December 2000. It admitted breaching the Commerce Act by giving effect to the cartel in New Zealand. The key features of the cartel were:
§ All tenders for Gas Insulated Switchgear (GIS) were considered by the cartel, which determined who would carry out the work and at what price. A complex system of job reporting was set up within the cartel and committees made up of cartel members made decisions on tenders and pricing;
§ Cartel members were also obliged to report general enquiries from potential customers about the sale of GIS, and if the enquiries were not specifically discussed by the cartel, quote prices in reply from a schedule agreed and established by the cartel.
Projects potentially affected by Schneider’s participation in the cartel included work by Mercury (now Vector) on its Liverpool Street substation and the potential use by Transpower of GIS in Huapai.
Ms Rebstock noted that High Court proceedings are continuing against other corporate defendants in this case and it is not appropriate to comment on the ongoing proceedings.
Cartels are groups of businesses or executives who, instead of competing against each other to offer the best deal, secretly agree to work together and keep prices high. Cartels harm competitors by sharing customers with other cartel members, rigging bids, agreeing to charge higher prices than they would be able to charge in a competitive market, restricting volumes and by squeezing non-cartel members out of the market. Cartels harm the New Zealand economy by making consumers and other businesses pay inflated prices for goods. This also results in exports being more expensive and thus less competitive in overseas markets.
The relevant parts of the Commerce Act prohibit contracts, arrangements or understandings between competitors which have the effect of substantially lessening competition and in particular understandings between competitors which have the effect of fixing, maintaining or controlling prices.
The penalty fixed by the Court represented a significant discount from a likely after-trial penalty to reflect the company’s early admission and assistance with the Commission’s case against the other defendants.
Schneider ceased participation in the cartel prior to Parliament doubling the maximum penalties that can be imposed on companies for breaching these provisions. In 2001 the maximum penalty per offence for companies was doubled from $5 million to the greater of $10 million or three times the commercial gain involved (or, if the gain cannot be readily ascertained, 10% of the turnover of the body corporate and its interconnected bodies corporate) . For individuals, the maximum penalty is $500,000. Other defendants whose involvement is alleged to have continued past 2001 could face significantly higher penalties
Gas Insulated Switchgear (GIS)
GIS is used to control the flow of electricity in substations. It is a system of circuit breakers (measuring and control devices to switch electric currents) using a high-pressure gas called sulphur hexafluoride to insulate the live elements of the switch. Customers for GIS units include electricity generators, transmission and distribution companies, and power retailers. Those customers operate substations to convert electricity from high voltages, which are most efficient for transmission over long distances, to low voltages, at which electricity is consumed by end users. In New Zealand, there are seven electricity substations using GIS. Substations in the North Island using GIS technology are Bream Bay, Liverpool, Rangipo, Motonui and Wilton. In the South Island substations at Clyde and Tiwai use the technology.
Operation of the cartel
This global cartel ran from 1988, when a written agreement between the members was adopted, until 2004, when it was discovered by competition regulators. In January 2007 Schneider was fined €8.1 million by the European Commission as part of €750 million in total fines imposed on the participants for their role in the cartel in Europe.
As part of the cartel,GIS suppliers informed each other of calls for tender for GIS and co-ordinated their bids in order to secure projects for the cartel members according to their respective cartel quotas. Alternatively, they would agree to respect minimum bidding prices.
Members of the cartel met regularly at management level to discuss strategic issues, and at a lower level to divide projects and to prepare sham bids by the companies not supposed to win the tender, in order to leave an impression of genuine competition.
The GIS cartel agreement was set out in considerable detail in a written document known as the ‘GQ Agreement’, the key features of which were:
§ Regular meetings (originally every two weeks, later once a month) to discuss and allocate projects, fix prices and deal with the day-to-day running of the cartel (known as Working Group meetings);
§ Regular meetings as required to determine how much each cartel member would bid for a particular tender, to ensure that the outcome was pre-determined (known as ‘job meetings’);
§ Annual or bi-annual meetings of senior staff of cartel members to agree on its continuance (known as Steering Committee meetings);
§ A cartel secretary responsible for administering and overseeing the cartel, including bids worldwide by cartel members;
§ Agreement as to how much work each cartel member would undertake in a given year, and careful assessment of the value of each tender allocated to ensure those agreed market shares were not departed from;
§ Punishment of cartel members who departed from the cartel by denying them future work.
As the European Commission found, members of the cartel took sophisticated measures to keep their communications secret. Code names were used for both companies and individuals. In the last years of the cartel they relied on anonymous e-mail addresses for communication and used encryption for sending messages. According to a message sent by one cartel organiser to another, it was strictly forbidden to have “access to your [e-mail] from your home personal computer or any computer that can be easily linked to you. This will jeopardize the whole [cartel] network safety. Absolutely prohibit e-mails sending from your company computer to any AMB [i.e. anonymous mailbox]. This will also put the whole network security at risk”.
Schneider Electric SA has been penalised in New Zealand for its conduct between 1998 and 2000 when it was excluded from the cartel. In New Zealand, Schneider’s GIS business was carried on through an ultimately wholly-owned subsidiary of Schneider, Schneider Electric (NZ) Limited. That company was unaware of the existence or implementation of the cartel.
The cartel proceedings continue against a number of foreign companies. No date has been set for trial.
Leniency and Cooperation
The Commission began this investigation in May 2004, triggered by a leniency application.
The Commission encourages participants in cartels to approach the Commission as soon as possible to admit liability. The first company or individual who brings a cartel to the Commission’s attention and fully cooperates automatically gains immunity from Commission prosecution through the Commission’s Leniency Programme. Companies or individuals who wish to admit liability once the Commission has started to investigate a cartel can cooperate with and assist the investigation in return for a lower level of enforcement in the form of discounts on penalties, subject to the endorsement of the High Court.