Australian Competition and Consumer Commission v Cement Australia Pty Ltd [2013] FCA 909
| IN THE FEDERAL COURT OF AUSTRALIA | |
| QUEENSLAND DISTRICT REGISTRY | |
| GENERAL DIVISION |
THE COURT MAKES THE FOLLOWING INTERIM DECLARATIONS:
1. Entry into the Original Millmerran Contract by Pozzolanic Enterprises Pty Ltd (“Pozzolanic”), Pozzolanic Industries Limited and Millmerran Power Partners dated 30 September 2002 does not engage a contravention of s 46 of the Trade Practices Act 1974 (Cth) (the “Act”).
2. Entry into the Amended Millmerran Contract on 28 July 2004 does not engage a contravention of s 46 of the Act.
3. The conduct in relation to the second election to proceed by electing in March and April 2005 to deploy the capital for the purpose of installing processing facilities at Millmerran does not engage a contravention of s 46 of the Act.
4. Entry into the Original Millmerran Contract engages a contravention of s 45(2)(a)(ii) of the Act on the part of Pozzolanic and a contravention of s 45(2)(b)(ii) of the Act on the part of Pozzolanic and Queensland Cement Limited (“QCL”).
5. To the extent that the identified provisions of the Original Millmerran Contract had the effect or likely effect of substantially lessening competition in the relevant market upon inclusion of the pleaded provisions in making the contract, that effect or likely effect became dissipated by the end of 2003 with the result that any effect or likely effect upon competition was then attributable to the compromised quality of the Millmerran flyash rather than the effect or likely effect of the identified provisions.
6. Entry into the Amended Millmerran Contract engages a contravention of s 45(2)(a)(ii), as a substantial purpose, among other purposes, of entry into the amended provisions and the continuing affirmation of the Original Millmerran Contract provisions, as amended, was to prevent a rival of Pozzolanic and Cement Australia Pty Ltd from securing access to Millmerran unprocessed flyash and to prevent a rival from entering the South East Queensland concrete grade flyash with processed Millmerran flyash.
7. The conduct in relation to the second election to proceed in March and April 2005 does not engage a contravention of s 45 of the Act.
8. Entry into the Fly Ash Agreement between Tarong Energy Corporation Limited (“TEC”) and Pozzolanic of 26 February 2003 engages a contravention of s 45(2)(a)(ii) of the Act on the part of Pozzolanic and a contravention of s 45(2)(b)(ii) of the Act on the part of QCL.
9. Pozzolanic and Cement Australia contravened s 45(2)(b)(ii) of the Act by giving effect to the pleaded provisions of the Fly Ash Agreement between TEC and Pozzolanic of 26 February 2003 in relation to both the Tarong Power Station and the Tarong North Power Station.
10. Entry into the arrangements by Pozzolanic and Cement Australia to construct a classifier at the Tarong North Power Station does not engage a contravention of s 45 of the Act.
11. Pozzolanic and QCL contravened s 45(2)(b)(ii) of the Act by giving effect to the pleaded provisions of the Swanbank Contract of 1993 as amended by the letter of 9 September 1998 and the subject of the Agreement of 30 September 1998, in the period, relevantly for these proceedings, from the beginning of 2001 to 31 May 2003.
12. Pozzolanic and Cement Australia contravened s 45(2)(b)(ii) of the Act by giving effect to the pleaded provisions of the Swanbank Contract of 1993 as amended by the letter of 9 September 1998 and the subject of the Agreement of 30 September 1998, in the period, relevantly for these proceedings, from 1 June 2003 to 31 December 2004 and then from 31 December 2004 until 30 June 2005.
13. Pozzolanic and Cement Australia contravened s 45(2)(a)(ii) by entering into the extension arrangements until 30 June 2005 in relation to the Swanbank Contract.
14. The contentions that Mr Leon was knowingly concerned in particular contraventions of the Act are not made out.
15. The contention that Mr White was knowingly concerned in a contravention of s 45(2)(a)(ii) and s 45(2)(b)(ii) of the Act in relation to aspects of the Swanbank contractual arrangements is made out.
16. The contention that Mr White was otherwise knowingly concerned in contraventions of the Act is not made out.
THE COURT ORDERS THAT:
1. The parties are directed to prepare and submit formal orders for the consideration of the Court.
2. The costs of the proceeding are reserved.
3. The parties consider the extent to which any information contained in the reasons for judgment is confidential to a party or otherwise falls within orders for the preservation of confidentiality.
4. The parties are directed to confer concerning the matters at Order 3 with a view to enabling the matter to be re-listed to hear submissions concerning the question of the extent to which the reasons for judgment ought to be redacted or orders for confidentiality otherwise be addressed.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011
| QUEENSLAND DISTRICT REGISTRY | |
| GENERAL DIVISION | QUD 295 of 2008 |
| BETWEEN: | AUSTRALIAN COMPETITION AND CONSUMER COMMISSION Applicant |
| AND: | CEMENT AUSTRALIA PTY LTD ACN 104 053 474 First Respondent CEMENT AUSTRALIA HOLDINGS PTY LTD ACN 001 085 561 Second Respondent CEMENT AUSTRALIA (QUEENSLAND) PTY LTD FORMERLY QUEENSLAND CEMENT LTD ACN 009 658 520 Third Respondent POZZOLANIC ENTERPRISES PTY LTD ACN 010 367 898 Fourth Respondent POZZOLANIC INDUSTRIES PTY LTD ACN 010 608 947 Fifth Respondent CHRISTOPHER GUY LEON Sixth Respondent CHRISTOPHER STEPHEN WHITE Seventh Respondent |
| JUDGE: | GREENWOOD J |
| DATE: | 10 SEPTEMBER 2013 |
| PLACE: | BRISBANE |
REASONS FOR JUDGMENT
PART 1
1.1 Introduction
1 This proceeding concerns material known as flyash, its composition, where and how it is first produced and how it might be accessed and treated or further processed at the primary production site (on-site) and how it might be stored, transferred and handled on-site or off-site at points of intermediate storage. It concerns the contracts and arrangements for the acquisition of flyash from and by firms, and the contracts and arrangements for the supply of a particular kind, standard or quality of flyash and the field of actual and potential sellers and buyers of flyash of that kind, standard or quality.
2 It concerns whether there is a market for flyash, and if so, how the product is properly understood and defined by those actually or potentially engaged in rivalry for the product in a relevant market, whether there is a functionally separate market for the acquisition of raw or unprocessed flyash loosely described for present purposes as simply an upstream product market, and a functionally separate market for the sale of flyash of a particular kind, standard or quality exhibiting particular characteristics, loosely defined for present purposes as a downstream product market.
3 It concerns questions of how the market is, or markets are, to be defined in a practical applied sense having regard to the evidence of participants actually engaged (or potentially engaged or seeking to be engaged) in transactions probative of a field of rivalry exhibiting close competition and the economic principles to be applied in answering that question aided, where relevant, by expert economic evidence.
4 It concerns, having engaged in the process of market definition as a tool for determining whether a relevant respondent corporation enjoys market power (having regard to the particular factors actually in play including potential, but real, threats of entry informing whether the corporation is free from constraint in setting prices or dictating the terms of trade), whether that corporation has a substantial degree of power in a relevant market, and whether the corporation has taken advantage of that substantial degree of market power in taking an impugned conduct step such as entering into a particular contract for the acquisition of flyash on particular terms, conditioned by particular contextual circumstances. As the respondents observe at para 14.14 of their closing submissions in the quoted passage in the reasons of Heerey and Sackville JJ in Australian Competition and Consumer Commission (ACCC) v Australian Safeway Stores Pty Ltd (2003) 129 FCR 339 (“Safeway”) at [303] (in turn relying on the observations in Boral Besser Masonry Ltd (now Boral Masonry Ltd) v Australian Competition and Consumer Commission (ACCC) (“Boral v ACCC”) (2003) 215 CLR 374 at [140]), the question of market power is approached, consistent with s 46(3) of the Trade Practices Act 1974 (Cth) (the “Act”) by examining the “actual conduct of the alleged contravener in the market over the whole of the relevant period”.
5 The question of “taking advantage” also requires, before reaching the point of answering the question of whether one or more of the statutorily proscribed purposes subsisted, an examination of “not only what the firm did, but why the firm did it” [emphasis added] (Safeway at [329] and the quoted authorities). Having understood why the firm did what it did, an objective question then arises of whether such a firm so acting, in similar circumstances, in a hypothetical world in which such a firm did not enjoy a substantial degree of power in the relevant market, could have engaged in the impugned conduct step. In determining this question of whether there is a business rationale for the impugned conduct which explains conduct as other than as the expression of the use of market power, the respondents contend that these observations in Safeway are apt to mislead, as an analysis of the business rationale is directed to not only the actual matters considered by the decision-makers on the facts, but also, those matters (the full field or portfolio of business rationales) which could have been taken into account by a firm in the actual circumstances of the relevant firm or a firm in a hypothetically contestable market.
6 The proceeding thus concerns the resolution of that matter, an examination of whether any of the statutorily proscribed purposes under s 46(1) subsisted and whether the contended contraventions of s 46 are made out.
7 It also concerns questions of whether particular respondents made contracts or arrangements containing identified provisions which firstly, had the purpose of substantially lessening competition; secondly, had the effect of substantially lessening competition; or thirdly, would be likely to have the effect of substantially lessening competition, for the purposes of s 45(2)(a)(ii) of the Act, and whether a respondent corporation gave effect to an identified provision of particular contracts or arrangements where that identified provision (or one or more provisions taken together) has the purpose or has, or is likely to have, the effect of substantially lessening competition for the purposes of s 45(2)(b)(ii) of the Act. It concerns questions of how the identified provisions came to be included in the relevant contracts or arrangements and which actuating individuals held a particular purpose or purposes. It concerns assessments of the purpose, effect or likely effect of particular provisions of a contract or arrangement either alone or together with other identified provisions in that contract or arrangement, or in conjunction with other identified provisions of other contracts or arrangements.
8 In the alternative to s 45(2), contended contraventions of s 47 are said to have been made out.
9 Other respondents (corporations and individuals) are said to have caused a respondent to engage in a contravention of the Act and to have been knowingly concerned in the contraventions of others, or to have aided, abetted or counselled or procured the contraventions of others.
10 It is, of course, necessary to give precise content to the Commission’s claims.
11 The proceeding comprehends six primary and separate contended conduct contraventions (in effect, six separate cases over a primary period from 2001 to 31 December 2006) by one or more of the respondents together with a seventh case based upon the contention that the individual respondents were knowingly concerned in particular conduct contraventions of the relevant corporate respondents, and contentions are also made against particular corporate respondents inter se of being knowingly concerned in the contraventions of other corporate respondents. It involves many sitting days, a large number of documents, much affidavit and oral evidence, many spreadsheets of costs data and very extensive and detailed written submissions (1,132 heavily footnoted pages) and lengthy oral submissions. Having regard to the calculus of factors relevant to each of the integers engaged by ss 46, 45(2)(a)(ii), 45(2)(b)(ii) and 47, it seems to me important to identify the content of each of the contended contraventions by reference to the precise way in which the Commission has pleaded each case by reference to the Third Further Amended Statement of Claim (the “3FASOC”). This is particularly so as, for all practical purposes, every element within the calculus of factors relevant to each of the contended contraventions in each cluster of events. Moreover, it seems to me important to examine the contended conduct contraventions essentially, although not wholly, in a linear way by assessing the incremental aggregation of relevant factors present at the point on the continuum when each contravention is said to have occurred (whether exercising power, making contracts containing particular provisions or giving effect to them). Nevertheless, it is important to understand, for example, what were the features of the field of actual or potential rivalry on 30 September 2002 when the third respondent, Cement Australia (Queensland) Pty Ltd (“QCL”) and the fourth respondent, Pozzolanic Enterprises Pty Ltd (“Pozzolanic”), is said to have enjoyed a substantial degree of power in a relevant market, and what factors extant at that conduct event (or potentially engaged) determine whether QCL did something that used or took advantage of that market power, rather than doing something which is other than the expression of market power?
12 The six separate and primary contended conduct contraventions by one or more of the respondents engage these events:
1. entry into the Original Millmerran Contract on 30 September 2002;
2. entry into the Tarong Contract on 26 February 2003;
3. arrangements relating to an amendment in July 2004 to the Millmerran Contract giving rise to the Amended Millmerran Contract and what is called the “first election to proceed” with the Millmerran Contract;
4. entry into the Swanbank Contracts and Arrangements extending the terms of the Swanbank extension up to 31 December 2006;
5. entry into arrangements in March and April 2005 consisting of an approval of capital expenditure for the installation of a classifier at Millmerran under the terms of the Amended Millmerran Contract, described as the Millmerran Second Election to Proceed;
6. entry into arrangements in 2005 and, more particularly, in 2006 for the installation of a classifier at Tarong North, the installation and commissioning of that plant and consequent removal of reject flyash from the classifier into the Tarong North silo.
13 I will set out in some detail the essential pleaded facts and contentions of the Commission going to each of these events and the factors in issue. Before doing so, it is convenient to note that these reasons are arranged in the following way:
SCHEDULE OF CROSS-REFERENCES
| PART | HEADING | PAGES | PARAGRAPHS |
| PART 1 | Introduction and identification of the elements of each of the claims made by the Commission; Schedule of Cross-References | 1-51 | [1] to [187] |
| PART 2 | A brief summary of the respondents’ contentions in answer | 51-56 | [188] and [189] (and sub-parts) |
| PART 3 | Flyash and aspects of the evidence of Dr Nairn | 56-73 | [190] to [253] |
| PART 4 | The respondents and other relevant ownership entities; Aspects of the evidence of Mr Blackford; Aspects of the evidence of Mr Clarke; Aspects of the evidence of Mr Arto and Mr Maycock | 73-89 | [254] to [322] |
| PART 5 | Tarong and Tarong North Power Stations; The evidence of Mr Huskisson; the contractual history; Aspects of the evidence of Mr Collingwood; Production volumes and contended constraints on production of concrete grade flyash at Tarong and Tarong North; Mr Druitt’s evidence; The Tarong facilities; The production constraints at Tarong; The Tarong North facilities; The production constraints at Tarong North; Bottlenecks; The production records; Aspects of Ms Boman’s spreadsheets; The criticisms of Mr Druitt’s evidence; A comparison of Mr Druitt’s evidence with the sales and production data; | 90-154 | [323] to [622] |
| PART 6 | Swanbank Power Station; The contractual history; Mr Christy’s evidence; | 154-170 | [623] to [698] |
| PART 7 | Variability of the Swanbank flyash and aspects of the evidence of Mr Blackburn | 171-180 | [699] to [713] |
| PART 8 | Millmerran Power Station; Aspects of the evidence of Mr Hunt; Aspects of the evidence of Mr Gamble | 180-196 | [714] to [780] |
| PART 9 | Gladstone Power Station | 196-205 | [781] to [821] |
| PART 10 | Callide B and Callide C | 205-207 | [822] to [832] |
| PART 11 | Stanwell Power Station | 207-208 | [833] and [834] |
| PART 12 | Flyash Australia Pty Ltd and the New South Wales Power Stations; Aspects of the evidence of Mr Clarke | 208-223 | [835] to [902] |
| PART 13 | Sunstate Cement Ltd and the evidence of Mr Ward | 223-229 | [903] to [928] |
| PART 14 | The relevant terms of the Millmerran Ash Purchase Agreement | 229-239 | [929] and [930] |
| PART 15 | The relevant terms of the Tarong Energy Fly Ash Agreement | 238-245 | [931] |
| PART 16 | Illustrative Maps (Annexed at “A” to “G”) | 246 | [932] to [938] |
| PART 17 | The organising principles to be applied in identifying relevant markets and determining whether a corporation has a substantial degree of power in a relevant market | 246-260 | [939] to [983] |
| PART 18 | Descriptions and references adopted by one or more of the respondent companies concerning the market within which the relevant actors perceived they were operating; Mr O’Callaghan’s views; The March 2001 Ash Report; Pozzolanic’s description of itself and the market in which it operates contained in the EOI submitted to TEC; The supporting Capability Statement; FAA’s views; Adelaide Brighton’s views; Pozzolanic’s Presentation to TEC in support of the EOI; The TEC tender process; The QCL 14 November 2001 Board meeting and the 2002 QCL Group Consolidated Budget; The propositions put by Pozzolanic to Millmerran as part of that tender process; Transpacific’s view; Pozzolanic’s view of the ash market; Mr Wilson and Mr Ridoutt’s Presentation to MOC; FAA’s view put to MOC; Pozzolanic’s assessment of its market position in the Business Plan analysis of 9 November 2001; Mr Ridoutt’s email of 26 September 2003; Pozzolanic’s tender to TEC; Mr Hunt’s assessment of the tenders; Mr Arto’s assessment of the market and market dynamics with major buyers; Mr Arto’s characterisation of the geographic market; Mr Maycock’s macro view; Mr Wilson’s briefing email of 4 March 2002; The Ash Market in SEQ Board paper of March 2002; Mr Klose’s email of 2 April 2002; The January/February 2002 Board Report; The Ash Market in SEQ September 2002 Board paper | 261-306 | [984] to [1146] |
| PART 19 | Logistics, transport costs, direct delivery to customer’s batching plant from the power station, indirect delivery through intermediate storage to the customer’s batching plant and the evidence of Ms Deborah Reich; The logistics task and its functions; Ms Reich’s references to categories of cost; Ms Reich’s further assessment of categories of transport costs; Ms Reich’s references to a logistics costs model; Ms Reich’s data in relation to average transport costs to particular customers from particular sites; Intermediate storage and direct delivery; Gladstone movements into South East Queensland; Stock-outs; The contingency plan; The spreadsheet data in relation to “actual chargeback costs” and “intermediate delivery costs” | 306-344 | [1147] to [1301] |
| PART 20 | Direct delivery of flyash and particular pricing transactions; Pricing, margins and production costs; Price increases notified by QCL in its delivered pricing; Pricing, revenue, EBIT and OPAT statistics; Further considerations | 344-362 | [1302] to [1362] |
| PART 21 | Other participant evidence: Nucon Pty Ltd; Aspects of Mr Neumann’s evidence | 362-375 | [1363] to [1425] |
| PART 22 | Aspects of the evidence of Mr Michael Cooper | 375-408 | [1426] to [1576] |
| PART 23 | Wagner Investments Pty Ltd | 408-417 | [1577] to [1621] |
| PART 24 | Transpacific Industries Pty Ltd | 417-426 | [1622] to [1671] |
| PART 25 | Independent Flyash Brokers Pty Ltd and the evidence of Mr Alan Forbes | 426-442 | [1672] to [1734] |
| PART 26 | The Neilsen Group of Companies and the evidence of Mr Panuccio | 442-445 | [1735] to [1748] |
| PART 27 | The Queensland Department of Transport and Main Roads and the evidence of Mr Vanderstaay | 446-449 | [1749] to [1761] |
| PART 28 | Market Definition; Consideration of aspects of the expert evidence of Mr Houston and Professor Hay; The upstream market and the downstream market | 449-468 | [1762] to [1834] |
| PART 29 | Market Power; Considerations going to the question of whether a substantial degree of power in a relevant market subsisted in any party; Consideration of the aspects of uncertainty discussed by Professor Hay; Consideration of the principles to be applied; Consideration of s 46(3) | 468-490 | [1835] to [1893] |
| PART 30 | Taking advantage of market power, the organising principles and related considerations | 490-497 | [1894] to [1913] |
| PART 31 | Professor Hay’s opinion evidence concerning the “legitimate business reasons” going to the question of whether a party took advantage of any subsisting substantial degree of market power | 497-504 | [1914] to [1946] |
| PART 32 | An analysis of the value of the bids for the Millmerran and Tarong Contracts and aspects of the chronology of the bidding; Aspects of the events leading up to execution of the Millmerran Contract Aspects of the events leading up to execution of the Tarong Contract | 504-518 | [1947] to [2002] |
| PART 33 | The evidence of Mr Philippe Arto; The consideration of Mr Arto’s affidavit evidence and his oral evidence | 518-579 | [2003] to [2248] |
| PART 34 | The assessment of Mr Arto’s evidence | 579-593 | [2249] to [2303] |
| PART 35 | The evidence of Mr Maycock | 593-626 | [2304] to [2397] |
| PART 36 | The assessment of Mr Maycock’s evidence | 626-632 | [2398] to [2416] |
| PART 37 | Entry into the Amended Millmerran Contract; The relevant events; A consideration of the evidence of Mr Clarke, Mr Zeitlyn and Ms Collins; Market power at June 2004; Findings | 633-722 | [2417] to [2694] |
| PART 38 | The second election to proceed at Millmerran and issues in relation to Tarong and Tarong North; The factual matters; Assessment of the evidence and the documents; Assessment of the evidence of Mr White; The Commission’s contentions in relation to the second election to proceed | 722-776 | [2695] to [2863] |
| PART 39 | The installation of a classifier at Tarong North and further aspects of the evidence of Mr White | 776-810 | [2864] to [2951] |
| PART 40 | The Jones v Dunkel principles to be applied both generally and in relation to specific aspects relating to Part 38 and otherwise | 810-814 | [2952] to 2964] |
| PART 41 | Conclusions in relation to the second election to proceed at Millmerran | 814-824 | [2965] to [2997] |
| PART 42 | The organising principles in relation to s 45 | 824-831 | [2998] to [2016] |
| PART 43 | Section 45 and the inclusions of the provisions in the Original Millmerran Contract; An assessment of the events giving rise to the inclusion of the particular provisions in issue; Consideration of aspects of Professor Hay’s evidence concerning the effect or likely effect of entry into the contract containing the provisions in issue | 831-867 | [3017] to [3069] |
| PART 44 | Conclusions as to s 45 in relation to purpose of the Millmerran provisions | 867-875 | [3070] to [3088] |
| PART 45 | Section 45 and entry into the Tarong Contract of 26 February 2003; An assessment of the events giving rise to the inclusion of the particular provisions in issue | 875-889 | [3089] to [3136] |
| PART 46 | Conclusions in relation to s 45, on purpose concerning the Fly Ash Agreement of 26 February 2003 between Pozzolanic and TEC | 889-895 | [3137] to [3154] |
| PART 47 | Conclusions in relation to s 45, as to effects and likely effects, concerning the Pozzolanic and TEC Agreement of 26 February 2003 | 895-904 | [3155] to [3183] |
| PART 48 | Further Millmerran events | 904-913 | [3184] to [3214] |
| PART 49 | Swanbank considerations | 913-917 | [3215] to [3230] |
| PART 50 | The ultimate conclusions | 918-929 | [3231] to [3277] |
1.2 The facts and contentions as pleaded by the Commission
1.2.1 Flyash, products and markets
1.2.1.01 Flyash
14 Flyash is a fine powder formed from the mineral matter in coal and is a by-product of the combustion of black coal.
15 Flyash is defined by an Australian Standard 3582.1-1998 (“AS 3582.1”) as the “solid material extracted from the flue gases of a boiler fired with pulverised coal” and does not include ash that drops to the bottom of the boiler (“bottom ash”). Flyash is produced by coal-fired electricity generating power stations combusting pulverised coal (to create steam to drive turbines that generate electricity). It consists of particles that are generally less than 100 microns in size. When of suitable quality, flyash is able to be used as a partial substitute for cement in the making of concrete.
1.2.1.02 Fineness
16 AS 3582.1 defines the “fineness” of flyash as the percentage by mass of flyash passing through a 45 micron sieve. AS 3582.1 provides for four grades of flyash suitable for use as cementitious material in concrete and mortar. Those grades are Fine Grade flyash in which a minimum of 75% by mass of the flyash particles pass a 45 micron sieve; Medium Grade having a fineness of 65%-75% so passing; Coarse Grade having a fineness of 55%-65% so passing and Special Grade having a minimum fineness of 75% and a particular “relative strength” quality. Each of these grades of fineness, under the Standard, possess qualities other than the degree of fineness.
17 Flyash that meets the requirements of AS 3582.1 (particularly as either Fine, Medium or Coarse Grade flyash) is “concrete-grade flyash” (para 27). Fine grade flyash is flyash that possesses 75% fineness as a minimum degree of fineness (para 27A).
1.2.1.03 Collection
18 The combustion of coal at a coal-fired power station liberates exhaust gases (flue gas) in which flyash particles are suspended. The flue gas passes through devices, either electrostatic precipitators or fabric filters (baghouses) or a combination of both, which separate particulate matter including flyash from the exhaust gas stream. The separated flyash is collected in hoppers. If not removed from the hoppers (by transfer to sale or storage), it must be disposed of as waste material.
19 Flyash collected in hoppers is “unprocessed flyash” although in its unprocessed state so collected, the particle size may be such that some of it is “concrete-grade flyash” (ie, within one of the grades within AS 3582.1) “and, or alternatively, fine grade fly ash” (paras 28, 29). Throughout the pleading, the Commission asserts the existence of a product (apart from unprocessed flyash) described as concrete-grade flyash or alternatively a separate product described as fine grade flyash. For ease of reference, I will sometimes describe concrete-grade flyash as “cgfa” and fine grade flyash as “fgfa”.
1.2.1.04 Classification
20 Plant or equipment used to separate flyash particles into flyash of higher levels of fineness (then called “processed flyash”), as distinct from unprocessed flyash as collected in hoppers, is called a “classifier”. Unprocessed flyash that is not cgfa (or alternatively fgfa) but which is suitable for processing in a classifier, can be processed to produce cgfa or fgfa.
1.2.1.05 Sources
21 As to the unprocessed flyash market, flyash is produced at four power stations all located in a geographic area called south-east Queensland: Swanbank which has operated since the 1960s and is immediately proximate to Brisbane (near Ipswich); Tarong which has produced flyash since 1984 and is located 180 kilometres north-west of Brisbane; Millmerran which has produced flyash since 2002 and is located 206 kilometres west of Brisbane; and Tarong North which has produced flyash since 2003 and is located adjacent to the Tarong Power Station. These distances seem to be the expression of “direct line” distances.
1.2.1.06 SEQ region and an unprocessed flyash market
22 The Commission pleads that at all material times there has been demand, by suppliers of concrete-grade flyash (or fine grade flyash) operating in south-east Queensland and areas of north-east New South Wales adjacent to the Queensland border (an area described as “the SEQ region”), for the acquisition (and corresponding supply) of unprocessed flyash so as to produce concrete-grade flyash or fine grade flyash (para 34). By reason of the geographic distances and transport costs involved, unprocessed flyash produced or supplied in places outside the SEQ region was not, in the period of the conduct in question, economically substitutable for unprocessed flyash produced or supplied in the SEQ region (para 35).
23 There was, in the period of the conduct in question, a market for the supply and acquisition of unprocessed flyash in the SEQ region, described as the SEQ Unprocessed Flyash Market (para 36).
1.2.1.07 Functional partial substitutes
24 Concrete-grade flyash (or alternatively fgfa) may replace between approximately 20% to 30% of cement by weight in the manufacture of concrete but is not otherwise a substitute for cement in producing concrete. Although ground granulated blast furnace slag (“slag”) is a functional substitute for cgfa (or alternatively fgfa), its availability in Queensland in the relevant conduct period, was too limited to be an economic substitute for either version of the product. In the relevant conduct period, there was demand in the SEQ region for the supply of cgfa or fgfa to customers who used cgfa (or fgfa) in the production of pre-mix concrete and concrete products (“concrete producers”) and to on-sellers or intermediaries re-supplying either cgfa or fgfa (para 40). In the relevant conduct period, by reason of the geographic distances and transport costs involved, cgfa produced or supplied in places other than the SEQ region was not an economic substitute for cgfa produced or supplied in the SEQ region. Alternatively, as to fgfa, the same proposition prevailed (para 43).
1.2.1.08 The SEQ cgfa market or SEQ fgfa market
25 In the relevant conduct period there was a market for the supply of cgfa in the SEQ region described as the SEQ Concrete-grade Flyash Market (“SEQ cgfa market”) or alternatively a market for the supply of fgfa described as the SEQ Fine Grade Flyash Market (“SEQ fgfa market”).
1.2.2 The share ownership structure of some of the respondents up to 30 May 2003
26 Until 30 May 2003, the issued share ownership structure of some of the respondent corporations (all trading corporations) was this:
27 Although not expressly pleaded, QCL was ultimately owned and controlled by an entity described as Holcim Ltd, a multi-national cement company and the interests described at [26] represent the Holcim interests as at 30 May 2003.
28 Until 30 May 2003, QCL engaged in the business of supplying cgfa in the SEQ cgfa market (or supplying fgfa in the SEQ fgfa market). It also supplied cement to customers in the SEQ region; had an established customer base for cgfa (or fgfa) and cement; was the supplier of cgfa (or fgfa) to all major customers in the SEQ cgfa market (or the SEQ fgfa market); was the only supplier in those markets of cgfa (or fgfa) sourced from power stations in the SEQ region; supplied cgfa (or fgfa) on only a delivered basis for a product price per tonne including delivery; and offered volume discounts for combined purchases of cement and cgfa (or fgfa).
29 From 31 May 2003, a particular set of arrangements, documented by a suite of agreements, was put in place between the Holcim partners (and the entities in that ownership chain) and entities described for present purposes as the Readymix partner (Rinker) and entities described as the Hanson partner (Hanson), which had the result that 100% of the shares in QCL would be held by an entity called Cement Australia Holdings Pty Ltd (the second respondent, formerly known as Australian Cement Holdings Pty Ltd) and the shares in that entity would be held by the Holcim, Readymix and Hanson interests 50%, 25% and 25% respectively. These pleaded arrangements, to be further mentioned shortly, concern the conduct allegations in the period after about 1 June 2003.
1.2.3 The first contended conduct contravention of entry into the Original Millmerran Contract on 30 September 2002 and related contextual circumstances
30 In the period up to the signing of (ie. entry into) the Original Millmerran Contract on 30 September 2002 by Pozzolanic as buyer, by its holding company Pozzolanic Industries as guarantor, and by Millmerran Power Partners (“MPP”) for the power station (the first contended conduct contravention), Pozzolanic had entered into contracts, arrangements or understandings for the acquisition from power stations in the SEQ region of cgfa (or fgfa) produced “directly” by those power stations, or by Pozzolanic “through classification of unprocessed flyash” produced by those power stations. Pozzolanic supplied cgfa (or fgfa) in the SEQ cgfa market (or the alternative SEQ fgfa market) to QCL or to the customers of QCL (and continued to do so until about 1 June 2003) (para 47).
1.2.3.01 Swanbank
31 As to Swanbank (as one of those sources in the period, for the moment, up to 30 September 2002), Pozzolanic in 1993 entered into a contract with the owner for the purchase and removal of flyash from Swanbank for a five year period commencing on 1 January 1994 which was extended on 30 September 1998 for four years from 1 January 1999 to 31 December 2002, and otherwise varied. Under the 1998 variation, Pozzolanic had the first option to purchase and remove flyash from Swanbank; the owner would not supply third parties but would refer third party requests to Pozzolanic; Pozzolanic would not unreasonably refuse to supply third parties subject to an “adverse affect” test (upon Pozzolanic) and Pozzolanic would have an option to extend the contract from 1 January 2003 to 31 December 2004 should it purchase at least 48,000 tonnes of flyash over 12 consecutive months during the period 1 January 1999 to 31 December 2002. On 11 July 2002, Pozzolanic exercised the option to extend the contract to 31 December 2004 (paras 63 to 68).
1.2.3.02 Tarong
32 As to Tarong, as the other of those SEQ regional sources up to 30 September 2002, Pozzolanic had acquired unprocessed flyash on a first rights basis under a contract with the owner dated 6 December 2000 and had installed, on site, a classifier, storage silos, weighbridge and other infrastructure necessary to process and take flyash (para 82).
33 By 30 September 2002, Pozzolanic and the owner of Tarong had been, since at least May 2002, engaged in a process of drafting a contract ultimately signed by the parties on 26 February 2003 giving Pozzolanic the right to acquire from Tarong all concrete-grade flyash extracted by Pozzolanic from Tarong on particular royalty terms adopting a payment structure that gave volume discounts to Pozzolanic for taking larger volumes of flyash from Tarong (paras 74.3.1, 83 and 84). By 30 September 2002, Pozzolanic and QCL “knew that Pozzolanic was likely to conclude a contract with [Tarong] giving Pozzolanic the rights to acquire flyash from [Tarong]” (para 74.3.2) [emphasis added] and “knew that it was likely that any contract … giving Pozzolanic the rights to access flyash from [Tarong] would include [the royalty payment structure]” (para 74.3.3) [emphasis added]. By 30 September 2002, Pozzolanic and QCL intended Tarong to be their principal source of cgfa (or fgfa) and were pursuing a contract with Millmerran, in addition to, and not as an alternative to, Tarong (para 74.3.4).
34 Between 2001 and 30 September 2002 (as to that part of the conduct period relevant to the contended first conduct contravention) Pozzolanic had the benefit of supply contracts for unprocessed flyash from Swanbank (extended on 11 July 2002 to 31 December 2004) and Tarong (together with an engaged process of drafting a new contract for a further five years) under which Pozzolanic was entitled to acquire “all or virtually all of the concrete-grade flyash [or fgfa] that was available in the SEQ region” (para 48).
35 Between early 2002 and 30 September 2002 (focusing for the moment on the period in 2002 up to 30 September 2002 within the pleaded period of 2002 to 2006) small quantities of cgfa (or fgfa) were acquired from Bayswater Power Station in the Hunter Valley of New South Wales and transported by road for use in the SEQ region (para 42.1). Between 2001 and 30 September 2002 (again focusing on the first conduct period), no person other than Pozzolanic had a contract to acquire unprocessed flyash from Swanbank or Tarong (para 49).
1.2.3.03 Factors confronting an entrant
36 In the period up to 30 September 2002 (and thereafter as pleaded), a person seeking to carry on business as a supplier of cgfa (or fgfa) required an agreement with a power station operator for ongoing and consistent access to unprocessed flyash; investment in very particular plant and equipment at, or proximate to, a power station; substantial capital investment in a classifier, where unprocessed flyash required processing; alternatively, supply of cgfa from an on-seller intermediary; supply agreements with buyers (concrete producers); and, a logistics and distribution network if supply was to be on a delivered basis (paras 45 and 45A). In this period (and up to 31 December 2006), operators of power stations in the SEQ region preferred to have a single entity engaging in on-site classification of flyash at their power station (para 46).
1.2.3.04 Pozzolanic and QCL’s distribution and storage system
37 Up to June 2003 (and thus up to 30 September 2002), Pozzolanic and QCL operated a “distribution and storage system” for cgfa (or fgfa) which maximised the amount of flyash potentially available to Pozzolanic at Swanbank and Tarong. That system took account of production variables at power stations (such as unit operation levels, generating loads and coal source); Pozzolanic and QCL’s established common distribution and logistics network to supply cement and cgfa (or fgfa) on a delivered basis to end-users at concrete batching plants; the use of pneumatic pressurized tankers capable of delivering either cement or cgfa (or fgfa) although not mixed; daily collection and delivery to customers thus minimizing the use of intermediate storage capacity; the absence of any adaptable rival distribution network; Pozzolanic’s “exclusive or first rights [in effect]” to its daily requirements of unprocessed flyash at each power station; and Pozzolanic’s limited additional investment in on-site and off-site storage capacity at or near power stations (para 56).
38 By reason of this distribution and storage system operated by Pozzolanic together with QCL, Pozzolanic’s actual daily requirements for unprocessed flyash were potentially significantly higher than its average daily needs, calculated over a year, for unprocessed flyash and the amount of remaining unprocessed flyash potentially available from the power station to an alternative purchaser could vary substantially from day to day.
1.2.3.05 Other high barriers to entry
39 Up to 30 September 2002 (and pleaded as enduring factors to December 2006), apart from incumbency and the features of Pozzolanic and QCL’s distribution and storage system, there were high barriers to entry into the SEQ cgfa market (or the fgfa market) due, first, to Pozzolanic’s contracts with power stations; second, Pozzolanic’s capacity to produce “substantially more [cgfa], or alternatively, [fgfa] than demand in the SEQ region”; third, the substantially large volumes of unprocessed flyash in excess of that required to meet the demand for cgfa (or fgfa); and, fourth, the high costs of transporting cgfa (or fgfa) from locations outside the SEQ region into the SEQ region (paras 51, 52, 58.1 to 58.4).
40 Up to June 2003 (and thus up to 30 September 2002), QCL faced only limited competition in the supply of cgfa (or fgfa) in the SEQ region. It was the only supplier in the SEQ region of cgfa (or fgfa) sourced from power stations in the SEQ region. It was able to sell cgfa (or fgfa) at “prices largely free from the constraint of competition” in the supply of such products (paras 59.1, 59.2 and 59.3). In this period, QCL faced less commercial risk than its potential competitors of being unable to sell cgfa (or fgfa) it acquired (through its ultimately 100% owned subsidiary, Pozzolanic) from power stations in the SEQ region (para 59.4). By reason of these matters (at paras 59.1 to 59.4), QCL “was commercially able to fund its 100% owned subsidiary Pozzolanic to offer higher prices to power stations in the SEQ region for unprocessed flyash than any competitor or potential competitor of Pozzolanic for such acquisition” (para 59.5).
1.2.3.06 QCL’s substantial degree of market power
41 By reason of the wholly owned status of Pozzolanic; and the requirements a person wishing to carry on business as a supplier of cgfa (or fgfa) would need to meet described at [36]; and the preference of power station operators to have a single on-site entity carrying on classification activity; and the factors described at [30] to [40], QCL in the period up to June 2003 (and thus in the period up to 30 September 2002), had a substantial degree of power in the SEQ Concrete-grade Flyash Market or, alternatively, the SEQ Fine Grade Flyash Market (paras 62.1, 9, 45 to 53, 56 to 59). So too did Pozzolanic by operation of s 46(2) of the Act (para 62.1).
1.2.3.07 The relevant provisions of the Original Millmerran Contract
42 On 30 September 2002, Pozzolanic, Pozzolanic Industries and MPP entered into the Original Millmerran Contract allowing Pozzolanic to take flyash from Millmerran. The particular terms of relevance identified by the Commission are these.
70.1 pursuant to clause 10.1, the contract had a term of seven years from 30 September 2002;
70.2 pursuant to clauses 6.1, 6.2 and 7, Pozzolanic would pay MPP a minimum of $1,323,500 per annum indexed to CPI (“guaranteed minimum payment”);
70.3 pursuant to clause 5.1, MPP was obliged to make available to Pozzolanic a minimum of 135,000 tonnes of concrete-grade flyash per annum (“guaranteed minimum quantity”);
70.4 pursuant to clause 6.3, Pozzolanic would pay MPP $10.10 per tonne for every tonne of concrete-grade flyash it took in excess of 135,000 tonnes;
70.5 pursuant to clause 2.1, Pozzolanic was obliged to undertake testing of the quality of flyash produced by Millmerran Power Station;
70.6 pursuant to clause 2.1, Pozzolanic was obliged to determine whether flyash produced by Millmerran Power Station met the requirements of AS 3582.1 for concrete-grade flyash and met the “Fly Ash Critical Limits” defined in Schedule 2 of the contract (“Acceptable Range”);
70.7 pursuant to clause 2.2, Pozzolanic was obliged to notify MPP within a certain period of time as to whether flyash produced by Millmerran Power Station met the requirements of Acceptable Range;
70.8 pursuant to clause 2.3, if Pozzolanic notified MPP that flyash produced by Millmerran Power Station did not meet the requirements of Acceptable Range, MPP was entitled to have the flyash produced by Millmerran Power Station independently tested to determine whether it met the requirements of Acceptable Range;
70.9 pursuant to clause 2.6, if MPP accepted Pozzolanic’s determination that flyash produced by Millmerran Power Station did not meet the requirements of Acceptable Range or independent verification demonstrated that flyash produced by Millmerran Power Station did not meet the requirements of Acceptable Range, either party was entitled to terminate the contract within 14 days of the acceptance of the determination or independent verification;
70.10 subject to the determination that the flyash met the requirements of Acceptable Range, pursuant to clause 3, Pozzolanic was obliged to construct facilities capable of enabling it to take delivery of flyash (“flyash facilities”) at Millmerran Power Station that would be ready for operation by 1 May 2004 in performance of the contract;
70.11 pursuant to clause 40.12(b), Pozzolanic had the right to assign its rights under the contract with the written consent of MPP, which could not be unreasonably withheld;
70.12 pursuant to clause 26.4, Pozzolanic could terminate the contract after 31 December 2006 upon 60 days notice and payment of a termination payment;
70.13 pursuant to clause 35.1, Pozzolanic Industries was the guarantor of Pozzolanic.
43 By reason of a particular arrangement, Pozzolanic effectively increased, in October 2002, its monthly payments to Millmerran by $900,000 over 72 months ($12,500 per month) for the purposes of the Agreement (para 71).
1.2.3.08 QCL’s causative and controlling conduct
44 Pozzolanic’s entry into the Original Millmerran Contract was caused by QCL, as QCL funded the cost of entry, and managed and controlled Pozzolanic (para 72).
1.2.3.09 The substantial purposes for Pozzolanic’s entry and QCL causing Pozzolanic’s entry into the Original Millmerran Contract
45 A substantial purpose of Pozzolanic in entering into the contract, and of QCL in causing Pozzolanic to enter, was: (a) to prevent any other person from acquiring unprocessed flyash from Millmerran; (b) to prevent any person entering into the SEQ Unprocessed Flyash Market as an acquirer of unprocessed flyash; (c) to deter or prevent persons from engaging in competitive conduct in the SEQ unprocessed flyash market; (d) to prevent any other person from supplying cgfa in the SEQ cgfa market (or, alternatively, supplying fgfa into the SEQ fgfa market); (e) to prevent any person entering into the SEQ cgfa market (or, alternatively, the SEQ fgfa market); and, (f) to deter or prevent persons from engaging in competitive conduct in the SEQ cgfa market (or the SEQ fgfa market) (para 73).
46 The Commission pleads that on 30 September 2002, Pozzolanic did not need flyash from Millmerran to meet the demand of QCL’s actual or potential customers (para 74.1) for cgfa or fgfa. Also, at 30 September 2002, the supply of unprocessed flyash available to Pozzolanic from other SEQ region power stations (Swanbank and Tarong) and the volume of cgfa (or fgfa) that “could potentially be generated from that supply”, each year, substantially exceeded the demand for cgfa from customers in the SEQ cgfa market (or fgfa in the SEQ fgfa market) as at 30 September 2002, and substantially exceeded the forecast demand during the term of the Millmerran Contract (para 74.2).
47 At 30 September 2002, “Pozzolanic and QCL” did not wish to use, and had no commercial reason to use, flyash obtained from Millmerran in preference to Tarong flyash, for these reasons: first, Pozzolanic and Tarong had been in a state of negotiation since at least May 2002 for a contract giving Pozzolanic the rights to acquire flyash from Tarong; second, Pozzolanic and QCL “knew that Pozzolanic was likely to conclude a contract with [Tarong] giving Pozzolanic [those rights]”; third, Pozzolanic and QCL knew that it was likely that any such contract would include a royalty payment structure that gave volume discounts to Pozzolanic for taking larger volumes of flyash from Tarong; and, fourth, Pozzolanic and QCL intended Tarong to be their principal source of cgfa or fgfa and “were pursuing the [Millmerran] contract in addition to, and not as an alternative to, the [Tarong] contract”.
48 At 30 September 2002, neither QCL nor Pozzolanic had identified any demand (actual or potential) for cgfa in the SEQ cgfa market (or fgfa in the SEQ fgfa market) that QCL was not able to supply sourced from Swanbank or Tarong (para 74.4). Neither company had identified “any commercial need” for entering into the Millmerran Contract (para 74.5), and QCL “would not have caused, and would not have had any commercial reason to cause” Pozzolanic to enter into the contract if QCL did not have a substantial degree of power in the SEQ cgfa market (or the SEQ fgfa market) (para 74.6).
1.2.3.10 QCL takes advantage of its substantial degree of market power
49 The conclusionary assertion at para 75 is that by causing Pozzolanic to enter into the Millmerran Contract on 30 September 2002, QCL took advantage of its substantial degree of power in the SEQ cgfa market (or, alternatively, the SEQ fgfa market), for the pleaded proscribed purposes at [45].
1.2.3.11 The identified provisions and the “substantial purposes” of “those provisions”
50 Apart from the contended s 46 contravention by QCL, by causing Pozzolanic to enter into the Millmerran Contract on 30 September 2002, the Commission identifies eight clauses of the Millmerran Contract (clauses 10.1, 6.1, 6.2, 7, 5.1, 6.3, 3 and 26.4, that is, those clauses pleaded at 70.1, 70.2, 70.3, 70.4, 70.10 and 70.12 and recited (among others) at [42]) which have, as a substantial purpose, first, the purpose of preventing any other person from acquiring unprocessed flyash from Millmerran; second, the purpose of hindering or preventing any other person from supplying cgfa in the SEQ cgfa market (or its alternative product in the alternative product market); third, the purpose of substantially lessening, hindering or preventing competition in the SEQ unprocessed flyash market; and fourth, the purpose of substantially lessening, hindering or preventing competition in the SEQ cgfa market (or the alternative SEQ fgfa market) (para 77).
51 The first of these substantial purposes (of preventing the acquisition of unprocessed flyash) is said to be grounded upon the factors of: (a) depriving a potential entrant into the cgfa market of an agreement for ongoing access to unprocessed flyash for classification or a market proximate source of ongoing quantities of cgfa from another cgfa supplier (with a corresponding contention in relation to access to unprocessed flyash for classification or a proximate source of fine grade flyash); (b) the likelihood of Millmerran being practically unwilling or unable to enter into an agreement with any other person allowing ongoing access to unprocessed flyash by reason of Pozzolanic’s guaranteed minimum quantity entitlement; (c) piecemeal or irregular supply of unprocessed flyash to another person (seeking to carry on business as a cgfa supplier) would be uncommercial for that other person; (d) Pozzolanic’s ability to terminate the contract on 60 days notice after 31 December 2006 created a “strong incentive for [Millmerran] not to supply flyash to a third party” as that event might give rise to termination (and the end of the minimum royalty payment); and (e) “Pozzolanic and MPP knew of [each of the above matters]” (para 77.15).
52 The second substantial purpose (of preventing others from supplying cgfa or fgfa in the pleaded markets) is also grounded on these same five factors, and also, (f) the unavailability of alternative sources of unprocessed flyash out of Swanbank by reason of Pozzolanic’s extension of the Swanbank contract to 31 December 2004 on 11 July 2002, and (g) “the likely contract between [Tarong] and Pozzolanic” (para 77.2).
53 The third substantial purpose is also grounded upon the five factors at [51].
54 The fourth substantial purpose is grounded upon the five factors at [51] and the two further factors at [52].
1.2.3.12 The effect or likely effect of the identified provisions in the Original Millmerran Contract
55 At para 78, the Commission contends that the effect, or likely effect, of cl 5.1 of the Millmerran Contract (the guaranteed minimum quantity clause of 135,000 tonnes per annum) either on its own or taken together with one or more of the clauses pleaded at para 70 ([42]) was:
78.1 to prevent any other person from acquiring unprocessed flyash from [Millmerran];
78.2 further or alternatively, to hinder or prevent any other person from supplying concrete-grade flyash in the SEQ Concrete-grade Flyash Market [or fgfa in the SEQ fgfa market];
78.3 [to] substantially lessen, hinder or prevent competition in the SEQ Unprocessed Flyash Market;
78.4 [to] substantially lessen, hinder or prevent competition in the SEQ Concrete-grade Flyash Market [or fgfa in the SEQ fgfa market].
56 The first effect or likely effect is said to be grounded upon the outworking of the first three factors described at [51]. The second effect or likely effect is said to be grounded upon those three factors plus factors (f) and (g) described at [52]. The third effect or likely effect is based upon the first three factors described at [51] and the fourth effect or likely effect is based upon the first three factors at [51] and factors (f) and (g) described at [52].
1.2.3.13 QCL “gives effect” to the identified provisions
57 The Commission contends that by funding Pozzolanic’s entry into the Millmerran Contract on 30 September 2002, QCL gave effect to the provisions of that contract at clauses 10.1, 6.1, 6.2, 7, 5.1, 6.3, 3 and 26.4 (being those pleaded at 70.1, 70.2, 70.3, 70.4, 70.10 and 70.12) where those provisions had the pleaded purposes ([50] to [54]), and by themselves or together with one or more of the provisions of the contract pleaded in para 70, had the effect or likely effect set out at [55] and [56].
1.2.3.14 Pozzolanic “gives effect” to provisions of the Original Millmerran Contract
58 The Commission also contends that in the period 30 September 2002 until July 2004, by not taking any Millmerran flyash for commercial use (or installing facilities) and by making the annual guaranteed minimum payments of $1,323,500 (indexed to CPI), Pozzolanic gave effect to “provisions of the Original Millmerran Contract” (paras 79, 156.4).
1.2.3.15 The alternative s 47 point
59 The Commission also contends, in the alternative to the purpose and effect or likely effect contentions, that, by entering into the Millmerran Contract (and varying the price terms and making the annual guaranteed minimum payment of $1,323,500) for the purposes earlier described, or alternatively, having the effect or likely effects earlier described, Pozzolanic “offered to acquire unprocessed flyash from Millmerran power station from MPP at a particular price, on the condition that MPP not supply unprocessed flyash from Millmerran power station to another person” (para 81) [emphasis added].
1.2.3.16 The first conduct contraventions summarised by reference to paras 156, 155 and 157
60 As to the first conduct contravention relating to entry into the Millmerran Contract (and the identified provisions) the Commission says this.
61 First, Pozzolanic contravened s 46 of the Act by entering into the Millmerran Contract.
62 Second, in the alternative to that proposition, Pozzolanic was “knowingly concerned” in, or party to, and aided, abetted, counselled or procured (which I will describe simply as “in the relevant statutory sense”), QCL’s contravention of s 46, as pleaded, by reason of the conduct described at [41] to [49].
63 Third, Pozzolanic contravened s 45(2)(a)(ii) of the Act by entering into the Millmerran Contract having regard to the identified provisions at [50] (and [42]) where those provisions had the substantial purposes described at [50], based on the factors described at [51] to [54], and where, the contract contained cl 5.1 (in the context of any one or all of the para 70 clauses ([42])) and the effect or likely effect of those provisions was that described at [55] and [56].
64 Fourth, Pozzolanic contravened s 45(2)(b)(ii) by giving effect to provisions of the Millmerran Contract by the conduct described at [58].
65 Fifth, in the alternative to the third and fourth propositions, Pozzolanic contravened s 47 by reason of the conduct said to give rise to those earlier contraventions (and having regard to [59]).
66 Sixth, QCL contravened s 46 by causing Pozzolanic to enter into the Millmerran Contract (having regard to the factors described at [41] to [49]).
67 Seventh, in the alternative to the sixth proposition, QCL was knowingly concerned in the relevant statutory sense in Pozzolanic’s contravention of s 46 (as earlier described at [42] to [48]).
68 Eighth, QCL was knowingly concerned in the relevant statutory sense in Pozzolanic’s contravention of s 45(2)(a)(ii) of the Act or, alternatively, Pozzolanic’s contravention of s 47 of the Act as earlier described.
69 Ninth, QCL contravened s 45(2)(b)(ii) by giving effect to the provisions of the Millmerran Contract (at paras 70.1, 70.2, 70.3, 70.4, 70.10 and 70.12) by reason of the conduct of funding Pozzolanic’s entry into the contract in circumstances where the provisions had the purpose, effect or likely effect as described at [50] to [56], or, in the alternative, was knowingly concerned in the relevant statutory sense in Pozzolanic’s contravention of s 45(2)(b)(ii), by reason of the conduct described at [58] or, alternatively, s 47 by reason of the conduct described at [59].
70 Tenth, Pozzolanic Industries was knowingly concerned in the relevant statutory sense in Pozzolanic’s contraventions of s 46 or, alternatively, QCL’s contraventions of s 46 as described at [62].
71 Eleventh, in the alternative to the tenth proposition, Pozzolanic Industries was knowingly concerned in the relevant statutory sense in Pozzolanic’s contraventions of s 47 as earlier described at [59].
1.2.4 The second contended conduct contravention relating to entry into the Tarong Contract on 26 February 2003
72 The Commission’s general alternative contention throughout as to a separate product described as fgfa and a separate market described as the SEQ fgfa market is now readily apparent. In the course of describing the remaining contended conduct contraventions, I will not necessarily repeat each contention framed in the alternative way by reference to fgfa and the SEQ fgfa market. The Commission puts its case throughout, on that alternative basis. The respondents take issue with such an approach both on the facts and as a question of method.
1.2.4.01 The Tarong Contract
73 On 26 February 2003, Pozzolanic and Tarong’s owner, Tarong Energy Corporation (“TEC”), entered into a contract (the “Tarong Contract”) allowing Pozzolanic to take flyash from Tarong Power Station for five years from 1 March 2003 (cl 2). TEC agreed to sell and Pozzolanic agreed to buy “all concrete-grade flyash extracted by Pozzolanic from the Tarong Power Station” (cl 3.1). Pozzolanic would pay annual amounts (indexed to CPI) which decreased according to increases in the volume of flyash removed commencing at $2.6M per annum if less than 50,000 tonnes of flyash was removed and decreasing to $2.1M per annum if 450,000 tonnes or more of flyash was removed each year (cl 12). Under the contract, Pozzolanic would also be entitled to take flyash produced by Tarong North Power Station (adjacent to Tarong) on this basis: as soon as possible after 1 March 2003 Pozzolanic was to determine whether Tarong North flyash was “suitable for use [with] portland cement” (cl 4.4); if it was, Pozzolanic would be required to install a classifier (cl 4.4); if not suitable, or if no classifier was installed, that circumstance would not give rise to any right to a reduction in the amount payable to TEC for Tarong flyash (cl 8.3); the owner would approve a point at Tarong North for Pozzolanic to take possession of flyash (cl 4.4); and, by reference to the definitions of “Ash Disposal System” and “Ash Transfer Points”, the owner agreed to sell, and Pozzolanic agreed to buy, all concrete-grade flyash extracted by Pozzolanic at Tarong North (cls 3.1 and 1.1): para 84.
74 Pozzolanic had the right to terminate the contract on giving 12 months notice to TEC after September 2004 (cl 17.1): para 84.6.
1.2.4.02 Other SEQ region power stations
75 By 26 February 2003, Pozzolanic had entered into the Original Millmerran Contract. It had also extended the Swanbank Contract until 31 December 2004. No other power station in the SEQ unprocessed flyash market was supplying or willing to supply unprocessed flyash to any person other than Pozzolanic: para 85.
1.2.4.03 The substantial purpose of the identified provisions
76 A substantial purpose of cls 2, 3.1, 12 and 17.1 (para 86) of the Tarong Contract was:
86.1 to prevent any other person from acquiring unprocessed flyash from [Tarong Power Station]
86.2 to hinder or prevent any other person from supplying concrete-grade flyash in the SEQ [cgfa market]
86.3 [to] substantially lessen, hinder or prevent competition in the SEQ Unprocessed Flyash Market
86.4 [to] substantially lessen, hinder or prevent competition in the SEQ [cgfa market]
77 The first substantial purpose is said to be grounded upon the factors of: (a) depriving a potential entrant into the cgfa market of an agreement for ongoing access to unprocessed flyash for classification or a proximate source of ongoing quantities of cgfa from another supplier of cgfa; (b) the likelihood that TEC would be practically unwilling or unable to enter into an agreement with any other person allowing ongoing access to unprocessed flyash by reason of the requirement to sell to Pozzolanic all cgfa that Pozzolanic could extract; (c) piecemeal or irregular supply of unprocessed flyash from Tarong to another person seeking to carry on business as a cgfa supplier would be uncommercial for that other person; (d) Pozzolanic’s ability to terminate the Tarong Contract on 12 months notice after September 2004 operated as a strong incentive for TEC not to supply flyash to a third party; and, (e) Pozzolanic and TEC knew each of the above four matters.
78 The second substantial purpose is also grounded upon the five factors at [77] and also, (f), the unavailability of alternative sources of unprocessed flyash as a consequence of the extension of the Swanbank Contract and Arrangements on 11 July 2002 to 31 December 2004; the Original Millmerran Contract of 30 September 2002; and the Tarong Contract of 26 February 2003.
79 The third substantial purpose is also grounded upon the five factors at [77]. The fourth substantial purpose is grounded upon the five factors at [77] and the further factor (f) described at [78].
1.2.4.04 The effect or likely effect
80 The effect, or likely effect, of cls 2, 3.1, 12 and 17.1 either by themselves or together with (or alternatively to) one or more of the other provisions of the Tarong Contract pleaded at para 84 ([73] and [74]) (the other pleaded provisions being cls 4.4, 8.3 and 1.1), or together with (or alternatively to) one or more of the provisions of the Swanbank Contract as extended to 31 December 2004, and one or more provisions of the Original Millmerran Contract (pleaded at para 70 and set out at [42]) was:
87.4 to prevent any other person from acquiring unprocessed flyash from [Tarong Power Station]
87.5 [to] hinder or prevent any other person from supplying concrete-grade flyash in the SEQ [Concrete-grade Flyash Market]
87.6 [to] substantially lessen, hinder or prevent competition in the SEQ Unprocessed Flyash Market
87.7 [to] substantially lessen, hinder or prevent competition in the SEQ Concrete-grade Flyash Market
81 Like the earlier formulations, the first effect or likely effect is said to be grounded upon the factors of: (a) depriving a potential entrant into the cgfa market of an agreement for ongoing access to unprocessed flyash for classification or a (market) proximate source of ongoing quantities of cgfa from another supplier of cgfa (with the corresponding fgfa contention) having regard to the para 45 factors (described at [36]): para 87.4.1; (b) the likelihood, having regard to the preference of power station operators in South East Queensland from 2002 to December 2006 to have a single entity undertaking on-site classification (para 46) and Pozzolanic’s distribution and storage system (paras 56 and 57), that TEC would be practically unable or unwilling to enter into an agreement with any other person allowing ongoing access to unprocessed flyash by reason of TEC’s requirement to provide Pozzolanic with “the first rights to all unprocessed flyash”: para 87.4.2; and (c) piecemeal or irregular supply of unprocessed flyash from Tarong by TEC to another person seeking to carry on business as a supplier of cgfa or fgfa would be uncommercial for that person: para 87.4.3.
82 The second effect or likely effect is based on the three factors described at [81] and also, (d), the unavailability of alternative sources of unprocessed flyash in the South East Queensland region due to the extension of the Swanbank Contract on 11 July 2002 to 31 December 2004 and the Original Millmerran Contract of 30 September 2002: paras 87.5.1, 87.5.2.
83 The third effect or likely effect is based on the factors described at [81]: para 87.6.
84 The fourth effect or likely effect is based on the factors described at [81] and the further factor (d) described at [82]: para 87.7.
1.2.4.05 QCL funds entry and performance by Pozzolanic
85 From March 2003, Pozzolanic acquired flyash from Tarong under the terms of the Tarong Contract. The Commission pleads that QCL, by funding Pozzolanic’s entry into the Tarong Contract, gave effect to cls 2, 3.1, 12 and 17.1, where those clauses had the substantial purposes described at [76] by reference to the factors described at [77] to [79] and had, by themselves, or together with one or more of cls 4.4, 8.3 and 1.1, the effect or likely effect described at [80] by reference to the factors at [81] to [84]: para 89.
86 The Commission also contends by its pleading that QCL (up to June 2003), by funding Pozzolanic’s performance of the Tarong Contract, gave effect to cls 2, 3.1, 12 and 17.1 in circumstances where the clauses had the purposes or had the effect or likely effect as described: para 90.
1.2.4.06 The s 47 point
87 In the alternative to the substantial purposes, effects or likely effects case, the Commission contends that Pozzolanic’s conduct, funded by QCL, of entry into the Tarong Contract on 26 February 2003, on the terms pleaded (cls 2, 3.1, 12, 17.1, 4.4, 8.3 and 1.1), and Pozzolanic’s acquisition of flyash from March 2003 on those terms was conduct which had the same purposes described at [76] based on the factors at [77] to [79] or had the effect or likely effect as described at [80] based on the factors at [81] to [84], and thus involved Pozzolanic acquiring or offering to acquire unprocessed flyash from Tarong (TEC) “at a particular price, on the condition that TEC not supply unprocessed flyash from Tarong Power Station to another person” in contravention of s 47 of the Act [emphasis added].
1.2.4.07 The second conduct contraventions summarised by reference to paras 156, 155 and 154
88 These considerations are said to give rise to a contravention by Pozzolanic first, of s 45(2)(a)(ii) by entry into the Tarong Contract; second, a contravention of s 45(2)(b)(ii) by giving effect to the provisions of that contract by acquiring flyash from March 2003 under the pleaded terms (cls 2, 3.1, 12, 17, 4.4, 8.3, 1.1); and third, in the alternative to proposition 1 and 2, a contravention of s 47.
89 QCL is said, first, to have been knowingly concerned in the relevant statutory sense in Pozzolanic’s contravention of s 45(2)(a)(ii) or s 47 by reason of the circumstances earlier described; second, to have contravened s 45(2)(b)(ii) by giving effect to the identified provisions by funding Pozzolanic’s entry and subsequent performance of the contract up to 1 June 2003; and third, in the alternative to the second proposition, QCL was knowingly concerned in the relevant statutory sense in Pozzolanic’s contraventions of s 45(2)(b)(ii) or alternatively s 47.
90 Cement Australia is said to have first, contravened s 45(2)(b)(ii) by giving effect to the provisions of the Tarong Contract by the conduct earlier described, second, in the alternative to the first proposition, was knowingly concerned in the relevant statutory sense of Pozzolanic’s contraventions of s 45(2)(b)(ii), and third, in the alternative to the third proposition, contravened s 47 by being knowingly concerned in the relevant statutory sense in Pozzolanic’s contraventions of s 45(2)(a)(ii).
1.2.5 The Holcim, Readymix Cement and Hanson Australia arrangements
91 On 31 May 2003, a Framework Agreement was entered into between a number of corporations reflecting the interests of Holcim, Readymix Cement and Hanson Australia that provided for the establishment of a partnership between these groups. The partnership would undertake the business of logistics, distribution and sales and marketing for cementitious products. A “Corporate Group” would be established with the second respondent Cement Australia Holdings Pty Ltd (“CA Holdings”) as the holding company. The first respondent, Cement Australia Pty Ltd would manage the day-to-day operations of the partnership and, as agent for the partnership, manage the Corporate Group.
92 On 31 May 2003, a Management Agreement was entered into between 23 companies in the CA Holdings Group of companies (including QCL, Pozzolanic and Pozzolanic Industries) and Cement Australia as agent for the partnership by which Cement Australia was engaged to provide management and consultancy services. On 31 May 2003, Cement Australia (for the partnership) and CA Holdings entered into a Cementitious Products Acquisition Agreement (the “CPA Agreement”) under which Cement Australia, as agent for the partnership, would purchase, and the CA Holdings Group of companies would sell, to Cement Australia all of the cementitious products (including flyash) produced by CA Holdings Group entities.
93 CA Holdings and its related entities would not sell cementitious products to any person other than Cement Australia without Cement Australia’s prior written consent and cementitious products would be supplied at cost plus 10%. The CPA Agreement was varied by a Terms Sheet of 27 September 2005.
94 The Commission contends that from 31 May 2003, Cement Australia managed the day-to-day operations of the CA Holdings Group of companies; Cement Australia and CA Holdings each had the sixth respondent, Mr Christopher Leon, as their Chief Executive Officer and Managing Director; the Board of Directors of Cement Australia was the same Board as the CA Holdings Board; CA Holdings oversaw the operation of Pozzolanic; and from 31 May 2003 Pozzolanic, under the new arrangements, supplied its product to Cement Australia rather than QCL (which, to that date, had been supplied with flyash by Pozzolanic).
1.2.6 The third contended conduct contraventions concerning the Amended Millmerran Contract (ie. the first election to proceed)
1.2.6.01 The variation and the 28 July 2004 letter
95 On 28 July 2004, MPP sent a letter to Pozzolanic and Pozzolanic Industries to evidence an agreement of the parties to amend the Original Millmerran Contract. On a particular date, Ms Sandra Collins on behalf of Pozzolanic and Mr Simon Lennon on behalf of Pozzolanic Industries, signed the 28 July 2004 letter. Pursuant to the 28 July 2004 letter, MPP and Pozzolanic varied the Original Millmerran Contract to provide that Pozzolanic was required to notify MPP by 31 July 2004 whether Millmerran flyash fell within the “Acceptable Range” for cgfa and could be “practically and economically converted” into cgfa (the cl 2.2 variation): para 94.1.
96 The date by which Pozzolanic was required to construct plant, on site, was varied from 1 May 2004 to 1 May 2005 (the cl 3.3 variation): para 94.2.
97 By cl 4, after construction of plant on site, Pozzolanic or MPP would be entitled to terminate the contract having regard to the following conjunction of things: Pozzolanic determines that Millmerran flyash does not meet Acceptable Range limits and cannot be practically and economically converted into cgfa; Pozzolanic gives notice to MPP of that position; MPP accepts that determination (or an independent determination is made to that effect) and, Pozzolanic gives notice of termination within 14 days of MPP’s acceptance. Upon those events, termination would take effect six months after the date of notice with only pro-rata payment of the lump sum payable under the contract to that date (unless termination occurred in 2005): paras 94.3, 94.4.
98 The term of the contract was varied to eight years (cl 42.1) and under cl 26.4, Pozzolanic could terminate the contract on 60 days notice after 13 December 2007 rather than 31 December 2006: paras 94.5 and 94.6.
1.2.6.02 The 30 July 2004 letter
99 On 30 July 2004, Pozzolanic wrote to MPP saying that Millmerran flyash did not meet Acceptable Range limits; Pozzolanic had not determined whether Millmerran flyash could be practically and economically converted into cgfa; Pozzolanic was willing to proceed with the Amended Millmerran Contract as if Millmerran flyash fell within the Acceptable Range limits and proceed as if Millmerran flyash could be practically and economically converted to cgfa.
1.2.6.03 Pozzolanic’s contended waiver
100 Thus, Pozzolanic is said to have waived its right to terminate the Amended Millmerran Contract and became bound to install a classifier at Millmerran by 1 May 2005 and pay $1,323,500 per year (indexed to CPI) until 30 September 2010 subject to these things: if Pozzolanic installed a classifier, made an adverse determination concerning Millmerran flyash, gave Millmerran notice of it, and Millmerran accepted the determination (or an independent determination), and Pozzolanic then gave notice of termination to MPP within time, the contract would terminate six months later with the pro-rata adjustment provision taking effect.
1.2.6.04 The Commission’s pleaded contentions
101 The Commission says this.
102 First, the 30 July 2004 letter, by itself or taken together with the amending of the Millmerran Contract by the 28 July 2004 letter, constituted an election (ie. conduct) by Pozzolanic to proceed with the Amended Millmerran Contract rather than terminate it, para 97.
103 Second, Pozzolanic’s entry into the Amended Millmerran Contract and election to proceed was conduct caused by Cement Australia, as first, Cement Australia was to fund the costs of the Amended Millmerran Contract; second, Pozzolanic would not have incurred the cost of the Amended Millmerran Contract or have elected to go on with it without Cement Australia’s “support and funding”; third, Cement Australia controlled CA Holdings and Pozzolanic; fourth, Cement Australia, through Mr Leon, approved entry into the Amended Millmerran Contract and the election to go on with it; fifth, Pozzolanic entered into the Amended Millmerran Contract “at the direction and with the consent of Leon” (and also Mr Shaun Clarke, Cement Australia’s General Manager, Sales and Distribution); and, sixth, Pozzolanic “was required by Cement Australia” to “secure” Millmerran Power Station (as a source of flyash) (para 98).
104 Third, Cement Australia caused Pozzolanic to enter into the Amended Millmerran Contract and engage in the conduct of electing to go on with it for these substantial purposes:
99.1 preventing any other person from acquiring unprocessed flyash from [Millmerran];
99.2 preventing the entry of any person into the SEQ Unprocessed Flyash Market as an acquirer of unprocessed flyash;
99.3 deterring or preventing persons from engaging in competitive conduct in the SEQ Unprocessed Flyash Market;
99.4 preventing any other person from supplying [cgfa] in the [SEQ cgfa market];
99.5 preventing the entry of any person into the [SEQ cgfa market]; and
99.6 deterring or preventing any person from engaging in competitive conduct in the [SEQ cgfa market].
105 Fourth, at 28 July 2004, Cement Australia did not need Millmerran flyash to meet actual or potential demand from customers for cgfa, and the supply (and volume) of unprocessed flyash available to Pozzolanic from SEQ region power stations under contract substantially exceeded the demand for cgfa from customers in the SEQ cgfa market at that date and substantially exceeded the forecast demand for the term of the Amended Millmerran Contract: para 100.2.
106 Fifth, at 28 Jul 2004, neither Cement Australia nor Pozzolanic had identified any demand for cgfa that was not able to be met with cgfa out of Tarong and Swanbank and nor had either company identified any commercial need for making the election to proceed: para 100.3.
107 Sixth, Cement Australia “would not have caused, and would not have had any commercial reason to cause, Pozzolanic to enter into the Amended Millmerran Contract and make the first election to proceed if it did not have a substantial degree of power in the [SEQ cgfa market]” [emphasis added]: para 100.6.
1.2.6.05 Cement Australia “takes advantage”
108 Thus, Cement Australia, it is said, by causing Pozzolanic to enter into the Amended Millmerran Contract and make the first election to proceed with it, took advantage of its substantial degree of market power in the SEQ cgfa market (or the SEQ fgfa market): para 101.
1.2.6.06 The substantial purpose of the identified provisions
109 A substantial purpose of the provisions pleaded in para 70 (see [42]) and cls 2.2, 3.3, 4, 42.1 and 26.4 (the amended provisions, para 94: [95] to [98]), was:
102.1 to prevent any other person from acquiring unprocessed flyash from [Millmerran]
102.2 to hinder or prevent any other person from supplying [cgfa] in the [SEQ cgfa market]
102.3 [to] substantially lessen, hinder or prevent competition in the SEQ Unprocessed Flyash Market
102.4 [to] substantially lessen, hinder or prevent competition in the [SEQ cgfa market]
110 The first substantial purpose, like the earlier formulations, is said to be grounded upon the factors of: (a) depriving a potential entrant into the cgfa market of an agreement for ongoing access to unprocessed flyash for classification or a market proximate source of ongoing quantities of cgfa from another supplier of cgfa (with a corresponding fgfa contention); (b) the likelihood that MPP would be practically unwilling or unable to enter into an agreement with any other person allowing ongoing access to unprocessed flyash by reason of the requirement to provide Pozzolanic with the guaranteed minimum quantity; (c) piecemeal or irregular supply of unprocessed flyash from Millmerran to another person seeking to carry on business as a cgfa supplier would be uncommercial for that other person; (d) Pozzolanic’s ability to terminate the Original Millmerran Contract upon 60 days notice after 31 December 2007 operated as a strong incentive for MPP not to supply flyash to a third party as that might have caused Pozzolanic to exercise its right to terminate; and, (e) Pozzolanic and MPP knew of each of the above matters.
111 The second substantial purpose is also grounded upon the five factors at [110] and also, (f), the unavailability of alternative sources of unprocessed flyash out of Swanbank (due to the extension to 31 December 2004) and out of Tarong due to the Tarong Contract.
112 The third substantial purpose is also grounded upon the five factors at [110]. The fourth substantial purpose is grounded upon the five factors at [110] and the further factor at [111].
1.2.6.07 The effect or likely effect
113 The effect or likely effect of the provisions of the Amended Millmerran Contract pleaded at paras 70.1, 70.2, 70.3, 70.4, 70.10 and 70.12 (ie, cls 10.1, 6.1, 6.2, 7, 5.1, 6.3, 3 and 26.4), and para 94 (ie, cls 2.2, 3.3, 4, 42.1 and 26.4, [95] to [98]) together; or further or alternatively, together with one or more of the other provisions pleaded at paras 70 and 94; or further or alternatively, together with the provisions of the Swanbank Contract as extended to 31 December 2004 and the provisions of the Tarong Contract (as pleaded); or further or alternatively, together with one or more of the provisions of the Swanbank Contract (as pleaded), the Tarong Contract provisions (as pleaded) and one or more of the provisions of the Amended Millmerran Contract pleaded at paras 70 and 94, was:
103.5 that no other person was practically able to obtain unprocessed flyash from [Millmerran]
103.6 [to] hinder or prevent any other person from supplying concrete-grade flyash in the SEQ [cgfa market]
103.7 [to] substantially lessen, hinder or prevent competition in the SEQ Unprocessed Flyash Market
103.8 [to] substantially lessen, hinder or prevent competition in the SEQ [cgfa market]
114 As to those effects or likely effects, much the same formulation has been adopted as to the factual foundation for these contentions.
115 In other words, as to the first effect or likely effect, the provisions would operate in that way because: (a) a person wishing to carry on business as a cgfa supplier required an agreement for ongoing access to unprocessed flyash for classification or alternatively a proximate source of ongoing quantities of cgfa from another supplier of cgfa; (b) MPP would be unlikely to be practically able or willing to enter into an agreement with any other person allowing ongoing access to unprocessed flyash by reason of the requirement to provide Pozzolanic with the guaranteed minimum quantity; and, (c) it would be uneconomical for any person wishing to carry on business as a cgfa supplier to enter into an agreement or arrangement with MPP for access to unprocessed flyash from Millmerran on a piecemeal or irregular basis.
116 The second effect or likely effect is grounded upon those same factors and also, (d), the unavailability of alternative sources of unprocessed flyash in the SEQ region as a consequence of the Swanbank Contracts and Arrangements to 31 December 2006 and the Tarong Contract.
117 The factors described at [115] are said to support the third effect or likely effect and the factors at [116] are said to support the fourth effect or likely effect.
118 The Commission contends that from 30 July 2004 to 31 December 2007 Pozzolanic did not take any flyash from Millmerran or install flyash facilities and it made the annual guaranteed minimum payment as pleaded. The Commission says that Cement Australia by funding Pozzolanic’s entry into the Amended Millmerran Contract gave effect to the pleaded provisions in the circumstances described and by funding Pozzolanic’s performance of the Amended Millmerran Contract as described, Cement Australia gave effect to the contract: para 104.
119 In the alternative, the Commission contends that Pozzolanic, in the circumstances described, offered to acquire unprocessed flyash from MPP out of Millmerran at a particular price on condition that MPP not supply unprocessed flyash out of Millmerran to another person: para 107.
1.2.6.08 The third conduct contraventions summarised by reference to paras 156, 153, 154 and 157
120 The Commission contends that Pozzolanic contravened s 45(2)(a)(ii) by entering into the Amended Millmerran Contract (as described); it contravened s 45(2)(b)(ii) by entering into the Amended Millmerran Contract and making the election to proceed (as described); it contravened s 45(2)(b)(ii) by giving effect to the provisions of the Amended Millmerran Contract (as described); and, in the alternative to these three propositions, Pozzolanic contravened s 47 (in the manner earlier described).
121 Apart from these contentions, the Commission says that Pozzolanic was knowingly concerned in or a party to, and aided, abetted, counselled or procured, Cement Australia’s contravention of s 46 of the Act.
122 As to Cement Australia, the Commission contends that it contravened s 46 by causing Pozzolanic to enter into the Amended Millmerran Contract and make the election to proceed (in the manner earlier described); it contravened s 45(2)(b)(ii) by causing Pozzolanic to enter into the Amended Millmerran Contract and make the election to proceed (as described) thereby giving effect to the identified provisions of the Original Millmerran Contract; in the alternative, Cement Australia was knowingly concerned in or a party to and aided, abetted, counselled or procured Pozzolanic’s contraventions of s 45(2)(b)(ii); Cement Australia contravened s 45(2)(b)(ii) by giving effect to the provisions of the Amended Millmerran Contract by funding Pozzolanic’s performance of the contract (as described), or was knowingly concerned, in the relevant sense, in Pozzolanic’s contravention of s 45(2)(b)(ii) by reason of the s 47 conduct.
123 Cement Australia is said to have been knowingly concerned, in the relevant sense, in Pozzolanic’s contravention of s 45(2)(a)(ii) of entering into and electing to proceed with the Amended Millmerran Contract.
124 CA Holdings is said to have been knowingly concerned, in the relevant sense, in Pozzolanic’s contravention of s 45(2)(a)(ii) of entering into and electing to proceed with the Amended Millmerran Contract.
125 Pozzolanic Industries is said to have been knowingly concerned, in the relevant sense, in Cement Australia’s contravention of s 46 of causing Pozzolanic to enter into the Amended Millmerran Contract, by reason of the pleaded corporate relationships and decision-making factors, and the conduct on 28 July 2004 relating to the variation letter.
1.2.7 The fourth conduct contraventions concerning the Swanbank Contracts and Arrangements
1.2.7.01 The four new Swanbank Contracts and Arrangements made to 31 December 2006
126 Although the Swanbank extension expired on 31 December 2004, Pozzolanic and the Swanbank owner (CS Energy) entered into an arrangement called the Early 2005 Swanbank Agreement under which Pozzolanic continued to acquire flyash from Swanbank from 1 January 2005 to 15 March 2005 on the same terms as the Swanbank extension to 31 December 2004: para 108.
127 Pozzolanic and CS Energy further agreed to extend the Swanbank extension terms for the period 15 March 2005 to 30 June 2005 (called the 2005 Swanbank Extension): para 109.
128 Pozzolanic and CS Energy agreed to further extend those terms from 1 July 2005 to 1 January 2006 (called the Late 2005 Swanbank Arrangement) and further agreed to extend those terms governing flyash acquisition and supply, from 1 January 2006 to 31 December 2006 (called the 2006 Swanbank Arrangement): para 110.
1.2.7.02 Cement Australia and Mr Leon’s role
129 Cement Australia from June 2003 funded the cost associated with Pozzolanic’s engagement in each of these four contracts and arrangements (para 112.1) and was the “manager and controller” of Pozzolanic with respect to each of them: para 112.2. Further, Mr Leon “directed, consented or agreed” to Pozzolanic making each of the arrangements (para 112.3) and thus Cement Australia “caused the making of [each arrangement]” and caused “Pozzolanic to give effect to the 2003/2004 Swanbank Extension” by operation of the four arrangements.
1.2.7.03 The substantial purpose carried into each of the four Swanbank Contracts and Arrangements and particular factors
130 A substantial purpose of the provisions of the 1998 Swanbank Contract, as pleaded, (which provisions were also provisions of each of the four pleaded contracts or arrangements), was:
113.1 to prevent any other person from acquiring unprocessed flyash from [Swanbank]
113.2 to hinder or prevent any other person from supplying [cgfa] in the [SEQ cgfa market]
113.3 [to] substantially lessen, hinder or prevent competition in the SEQ Unprocessed Flyash Market
113.4 [to] substantially lessen, hinder or prevent competition in the [SEQ cgfa market]
131 The factors said to support those four substantial purposes reflect the formulations earlier adopted. The first purpose is grounded upon the factors of: (a) depriving a potential entrant into the cgfa market of an agreement for ongoing access to unprocessed flyash for classification or a market proximate source of ongoing quantities of cgfa from another supplier of cgfa; (b) the likelihood that CS Energy would be practically unwilling or unable to enter into an agreement with any other person allowing ongoing access to unprocessed flyash by reason of the requirement to provide Pozzolanic with a guaranteed minimum quantity of unprocessed flyash; (c) the circumstance that piecemeal or irregular supply of unprocessed flyash from CS Energy to another person seeking to carry on business as a cgfa supplier would be uncommercial for that other person; and, (d) Pozzolanic and CS Energy “knew of” these considerations.
132 Again, the second purpose is said to be based upon the factors described at [131] and also, (e), the unavailability of sources of unprocessed flyash in the SEQ region as a consequence of the Amended Millmerran Contract and the Tarong Contract.
133 The third purpose is said to be based upon the factors described at [131] and the fourth purpose is said to be based upon the four factors described at [131] and the further factor described at [132].
1.2.7.04 The effect or likely effect
134 At para 114, the Commission contends that the effect and/or likely effect of the provisions of the 1998 Swanbank Contract as extended to 31 December 2004 and the four Swanbank Contracts and Arrangements, by themselves, and further or alternatively together with one or more of the provisions (as pleaded) of the Amended Millmerran Contract and one or more of the pleaded provisions of the Tarong Contract was:
114.1 to prevent any other person from acquiring unprocessed flyash from [Swanbank]
114.2 [to] hinder or prevent any other person from supplying [cgfa] in the [SEQ cgfa market]
114.3 [to] substantially lessen, hinder or prevent competition in the SEQ Unprocessed Flyash Market
114.4 [to] substantially lessen, hinder or prevent competition in the [SEQ cgfa market]
135 The factors said to support the effect and/or likely effect of the provisions are pleaded in the same familiar manner as like factors are pleaded concerning earlier contended contraventions, that is: (a) the need for an entrant into the cgfa market to secure ongoing access to unprocessed flyash for classification or a market proximate source of ongoing quantities of cgfa; (b) the practical unwillingness or inability of CS Energy to enter into an agreement with any other person allowing ongoing access to unprocessed flyash due to the obligations to Pozzolanic to supply a guaranteed minimum quantity of unprocessed flyash; and, (c) the uncommerciality of anyone seeking piecemeal or irregular supply of unprocessed flyash from CS Energy.
136 The second effect or likely effect is based upon the same factors described at [135] together with the further factor (d) of the unavailability of alternative sources of unprocessed flyash in the SEQ region as a consequence of the Amended Millmerran Contract and the Tarong Contract.
137 The third effect or likely effect is based upon the combination of factors at [135] and the fourth effect or likely effect is based upon that combination of factors and the additional factor mentioned at [136].
1.2.7.05 Cement Australia funds Pozzolanic’s entry into and performance of the four Swanbank extension arrangements
138 The Commission contends that Cement Australia, by funding Pozzolanic’s entry into the four Swanbank Contracts and Arrangements, gave effect to provisions of those contracts or arrangements (that is, the provisions giving Pozzolanic first option to purchase and remove flyash; Pozzolanic’s payment obligations linked to the volumes; and CS Energy’s obligation not to supply flyash to third parties but to refer any requests for third party purchases to Pozzolanic; the paras 66.1, 66.2 and 66.3 provisions) in the circumstances where the provisions had the substantial purposes described at [130] to [133] or had the effect or likely effect as described at [134] to [137]: para 115.
139 The Commission also contends that by funding Pozzolanic’s performance of the Swanbank Contracts and Arrangements up to 1 June 2003, QCL gave effect to the provisions of the Swanbank Contracts and Arrangements containing the terms described at [126] to [128] where those provisions had the purposes described at [130] to [133] and had the effects or likely effects described at [134] to [137]: para 116.
140 The Commission also contends that by funding Pozzolanic’s performance of the Swanbank Extension (after 1 June 2003) and the four Swanbank contracts and arrangements, Cement Australia gave effect to the provisions of the Swanbank extension and the four Swanbank contracts and arrangements as described which all contained the three provisions described at [126] to [128], where those provisions had the purposes and had the effects or likely effects as described: para 116.
1.2.7.06 The s 47 point
141 In the alternative to these propositions, the Commission contends that Pozzolanic contravened s 47 by offering, in the circumstances earlier described, to acquire flyash from CS Energy out of Swanbank at a particular price on condition that CS Energy not supply flyash from Swanbank to any other person: para 117.
1.2.7.07 The fourth conduct contraventions summarised by reference to paras 156, 153, 154 and 155
142 The Commission contends that Pozzolanic contravened s 45(2)(a)(ii) by entering into each of the four Swanbank Contracts and Arrangements and contravened s 45(2)(b)(ii) by giving effect to the provisions of the Swanbank Contracts and Arrangements to 31 December 2006 and each of the four Swanbank Contracts and Arrangements by which those provisions were given effect.
143 In the alternative to these propositions, the Commission contends that Pozzolanic contravened s 47 by the conduct earlier described.
144 The Commission contends that Cement Australia was knowingly concerned, in the relevant statutory sense, in Pozzolanic’s contravention of s 45(2)(a)(ii), or alternatively the contravention of s 47, and that Cement Australia contravened s 45(2)(b)(ii) by giving effect to the provisions of the four Swanbank Contracts and Arrangements or alternatively it was knowingly concerned, in the relevant sense, in Pozzolanic’s contravention of s 45(2)(b)(ii).
145 CA Holdings is said to have been knowingly concerned, in the relevant sense, in Pozzolanic’s contravention of s 45(2)(a)(ii) or alternatively its contravention of s 47.
146 The Commission contends that QCL contravened s 45(2)(b)(ii) by giving effect to the provisions of the Swanbank Contracts and Arrangements, or in the alternative, was knowingly concerned in the relevant statutory sense in Pozzolanic’s contraventions of s 45(2)(b)(ii).
1.2.8 The fifth contended conduct contravention concerning a “Second Election to Proceed” with the Millmerran Contract
1.2.8.01 The 2005 Millmerran Capex request
147 On 18 March 2005, Mr Leon sent a 2005 Millmerran Capex Request to the directors of CA Holdings requesting approval for capital expenditure of $2.52M to enable Pozzolanic to install a classifier at Millmerran under the terms of the Amended Millmerran Contract. The request assumed that the sale of Millmerran flyash would generate no incremental sales and would instead displace 20,000 tonnes of Tarong flyash sales: para 118.
148 The Board, including Mr Leon, approved the request some time between 30 March 2005 and 26 April 2005, and Pozzolanic and Cement Australia told MPP of the approval on 26 April 2005: paras 119 and 120.
1.2.8.02 Pozzolanic’s contended options at 26 April 2005
149 At the approval date, Pozzolanic could have sought to re-negotiate the terms of the Amended Millmerran Contract to reduce or eliminate the payment for flyash; it could have negotiated termination of the contract; or, it could have assigned its rights under the contract to another, under cl 40.12(b): para 121.
1.2.8.03 The second election to proceed
150 By granting the approval for the deployment of capital, CA Holdings “elected to continue with” the Amended Millmerran Contract. This election to continue with the Amended Millmerran Contract, is described as the “second election to proceed”: para 122.
1.2.8.04 No unsatisfied demand – higher royalty
151 At the approval date between March and April 2005, Cement Australia had not identified any demand from customers for cgfa that it was not able to supply with cgfa sourced by Pozzolanic from Tarong, Tarong North and Swanbank (or alternatively demand for fgfa). Further, if Pozzolanic reduced the volume of flyash acquired from Tarong, and instead acquired some of the flyash it required from Millmerran, it would by reason of cl 12 of the Tarong Contract be required to pay a higher royalty per tonne to TEC for flyash from Tarong. Clause 12 (para 84.4) sets out the annual payments to TEC linked to volume starting at $2.6M if less than 50,000 tonnes recovered, scaling down to $2.1M if 450,000 tonnes (or more) are removed.
1.2.8.05 The substantial purpose in not engaging other options
152 The Commission pleads, having regard to these factors, that the purpose of each of CA Holdings, Cement Australia and Pozzolanic in “not attempting to negotiate the termination or assignment of the Amended Millmerran Contract was to prevent any other person from acquiring unprocessed flyash from [Millmerran]”.
1.2.8.06 The substantial purpose of causing the second election
153 The Commission contends that a substantial purpose of Cement Australia in causing the Board of Directors (including Mr Leon) of CA Holdings to make the second election to proceed was:
126.1 to prevent any other person from acquiring unprocessed flyash from [Millmerran]
126.2 to prevent the entry of any person into the SEQ Unprocessed Flyash Market as an acquirer of unprocessed flyash
126.3 to deter or prevent persons from engaging in competitive conduct in the SEQ Unprocessed Flyash Market
126.4 to prevent any other person from supplying [cgfa in the SEQ cgfa market]
126.5 to prevent the entry of any person into the [SEQ cgfa market]
126.6 to deter or prevent person from engaging in competitive conduct in the [SEQ cgfa market]
1.2.8.07 Cement Australia “taking advantage” of market power and the factors
154 Cement Australia is said to have taken advantage of its substantial degree of power in the SEQ cgfa market by causing the CA Holdings Board of Directors (including Mr Leon), to make the Millmerran Second Election to Proceed.
155 The factors informing that conclusion are pleaded as these: (a) Cement Australia did not have any or sufficient customers for cgfa produced by classification of unprocessed flyash from Millmerran to make that flyash profitable or, more profitable, than supplying those customers with cgfa obtained from another power station; (b) Cement Australia had not identified any or sufficient potential customers for cgfa derived from unprocessed flyash from Millmerran during the period of the contract to suggest that it was likely that obtaining Millmerran unprocessed flyash would be profitable, or more profitable, than supplying those customers with cgfa obtained from another power station; (c) neither Pozzolanic nor Cement Australia needed Millmerran flyash to supply existing or potential customers; (d) the supply of unprocessed flyash available to Pozzolanic and the volume of processed flyash that could be generated from that supply, substantially exceeded the demand for processed flyash from customers in the SEQ cgfa market; and, (e) Cement Australia could cause the making of the second election to proceed and thereby continue to pay for unprocessed flyash from Millmerran notwithstanding the shortage of demand, because Cement Australia enjoyed the “ability to charge supra-competitive prices in the [SEQ cgfa market]”: paras 127.1 to 127.5.
1.2.8.08 The effect or likely effect
156 The decision of the CA Holdings Board of Directors (including Mr Leon) to make the second election to proceed gave effect to cl 3.3 of the Amended Millmerran Contract (which required Pozzolanic to construct plant on site at Millmerran by 1 May 2005). That clause is said to have had the purpose and, further or alternatively, together with cl 5.1 of the Original Millmerran Contract (obliging MPP to make available to Pozzolanic a guaranteed minimum quantity of 135,000 tonnes of concrete-grade flyash), to have had the effect or likely effect of substantially lessening, hindering or preventing competition in the “SEQ Unprocessed Flyash Market” and the “SEQ [cgfa] Market” (para 128), or the SEQ-fgfa market.
157 That effect or likely effect is said to have arisen, further or alternatively, together with cls 2, 3.1, 12, 4.4, 8.3, 3.1, 1.1 and 17.1 of the Tarong Contract (the para 84 clauses), cls 10.1, 6.1, 6.2, 7, 5.1, 6.3, 3 and 26.4 of the Original Millmerran Contract (paras 103.1 and 103.2, including the para 94 clauses) and the variations to cls 2.2, 3.3 and 4 in 2004, and the terms of the 2005 Swanbank Extension (the para 109 provision: para 128).
1.2.8.09 A summary of the fifth conduct contentions by reference to paras 156, 153 and 154
158 The Commission contends that Cement Australia contravened s 46 by making or causing CA Holdings to make the Millmerran second election to proceed; it contravened s 45(2)(b)(ii) by causing the 2005 Millmerran Capex approval by CA Holdings, thereby giving effect to the provisions of the Amended Millmerran Contract (as pleaded), or alternatively was knowingly concerned, in the relevant statutory sense, in CA Holdings’ contraventions of s 45(2)(b)(ii); and it contravened s 45(2)(b)(ii) by causing Pozzolanic and CA Holdings to make the second election to proceed as described, thereby giving effect to the provisions of the Amended Millmerran Contract (as described), or was knowingly concerned, in the relevant statutory sense, in Pozzolanic and CA Holdings’ contraventions of s 45(2)(b)(ii).
159 As to CA Holdings, the Commission pleads that CA Holdings was knowingly concerned, in the relevant statutory sense, in Cement Australia’s contravention of s 46 by granting the 2005 Millmerran Capex approval and making the Millmerran second election to proceed and, it was knowingly concerned, in the relevant statutory sense, in Cement Australia’s contraventions of s 45(2)(b)(ii), by granting the 2005 Millmerran Capex approval and making the second election to proceed. In the alternative, CA Holdings is said to have contravened s 45(2)(b)(ii) by reason of the same conduct.
160 The Commission contends that Pozzolanic was knowingly concerned, in the relevant statutory sense, in Cement Australia’s contravention of s 46 and that it contravened s 45(2)(b)(ii) by making the second election to proceed thereby giving effect to the provisions of the Amended Millmerran Contract.
1.2.9 The sixth contended conduct contravention concerning the arrangements in relation to Tarong North
1.2.9.01 The Tarong North silo and off-takers
161 At Tarong North there is a silo for the storage of flyash.
162 From 1 February 2005 to 20 January 2006 unprocessed flyash was made available by TEC from the flyash silo to third parties subject to the rights of Pozzolanic to all flyash. Between 1 February 2005 and 20 January 2006, unprocessed flyash was taken from the silo by companies called, for present purposes, Nucon, Sunstate, Transpacific, Wagners and, until 31 March 2005, Global Cement.
1.2.9.02 The classification plant and its operation
163 On 2 November 2005, Mr White, for Pozzolanic, notified TEC that Pozzolanic proposed to establish classification plant at Tarong North to extract cgfa. On 14 November 2005, Mr White, for Pozzolanic, told TEC a number of things about the consolidation of its flyash operations at a few major preferred sites including Tarong and Tarong North subject to certain conditions: paras 131 and 132.
164 On 15 February 2006, Mr White for Pozzolanic and Cement Australia notified TEC by letter that Pozzolanic proposed to install a classifier at Tarong North and on 27 February 2006, Pozzolanic submitted the relevant plant plans for the classifier which provided for: (a) the installation of a classifier in a particular area close to the Tarong North plant, hoppers and flyash silo; (b) the transportation of unprocessed flyash by conveyor to the Tarong North silo or the classifier to be installed; and, (c) the transportation of reject flyash from the classifier to the Tarong North silo rather than to direct disposal.
165 The installation was complete by October 2006: para 137.
166 From then, Pozzolanic operated the classifier and acquired cgfa from Tarong North on the terms of the Tarong Contract previously described.
167 As a result of the operation of the classifier, unprocessed flyash not processed by Pozzolanic was transferred to the silo and reject flyash produced by the classifier was also transferred to the silo. Thus, the silo might contain unprocessed flyash, reject flyash or a mixture of both. As a consequence of reject flyash being mixed with unprocessed flyash in the silo, the fineness of the flyash in the silo was variable and exhibited a lower order of fineness than when the silo simply contained unprocessed flyash: para 139.
1.2.9.03 The Commission’s contentions
168 The Commission pleads that the variable and lower fineness of flyash contained in the silo made it uncommercial for competitors of Cement Australia or Pozzolanic to take flyash from the silo for the purpose of processing it into cgfa as the variability meant that a potential buyer could not know, or predict, the likely fineness of the flyash in the silo; variability meant that the properties of the flyash in the silo were inconsistent; and, there was no site available at Tarong North for another person to install a further classifier at Tarong North: para 140.
169 The Commission pleads that the conduct of installing the classifier and transportation system and so operating it, was caused by Cement Australia because it was funding the cost of construction and operation of the classifier; it was the manager and controller of Pozzolanic through CA Holdings; and, on or about 27 February 2006 the Cement Australia Board approved or caused the Board of CA Holdings to approve the expenditure for construction and operation of the classifier: para 141.
170 The Commission pleads that by installing and operating the classifier in the way described, Cement Australia, or alternatively, Pozzolanic, gave effect to cls 2, 3.1, 12, 4.4, 8.3, 1.1 and 17.1 of the Tarong Contract (the para 84 clauses) by that conduct which had the effect, or was likely to have the effect, of substantially lessening, hindering or preventing competition in the SEQ Unprocessed Flyash Market and/or in the SEQ cgfa market (or SEQ fgfa market).
171 At paras 84.5.1 to 84.5.5, the Commission pleads aspects of cls 4.4, 8.3, 3.1 and 1.1 concerning Pozzolanic’s entitlement to take flyash from Tarong North Power Station (see the clauses described at [73]). The effect or likely effect of these provisions (para 84.5) was:
144.5 to prevent any other person from acquiring unprocessed flyash from Tarong North Power Station
144.6 [to] hinder or prevent any other person from supplying concrete-grade flyash in the SEQ Concrete-grade Flyash Market (or, alternatively, from supplying [fgfa] in the SEQ Fine Grade Flyash Market
144.7 [to] substantially lessen, hinder or prevent competition in the SEQ Unprocessed Flyash Market
144.8 [to] substantially lessen, hinder or prevent competition in the SEQ Concrete-grade Flyash Market (or alternatively, in the SEQ Fine Grade Flyash Market)
172 The contended effect or likely effect of these clauses is said to arise by reason either, of these provisions alone, or alternatively, together with cls 2, 3.1, 12 and 17.1 of the Tarong Contract together with the provisions of the Swanbank Contract (pleaded at para 66.3 that CS Energy would not supply flyash to third parties but would refer requests to Pozzolanic) and cl 5.1 of the Original Millmerran Contract (that Millmerran make available to Pozzolanic 135,000 tonnes of cgfa per annum), or alternatively, together with any of the pleaded 1998 Swanbank contract terms (para 66) and any of the Original Millmerran Contract terms (pleaded at para 70 [42]), or alternatively, together with any of the Tarong Contract provisions (as pleaded), the Amended Millmerran Contract (amending cls 2.2, 3.3, 4, 42.1 and 26.4), the Late 2005 Swanbank Agreement (para 110) and the 2006 Swanbank Agreement (para 111) or, all of the above alternatives, taken cumulatively.
173 The first effect or likely effect of the cls 4.4, 8.3, 3.1 and 1.1, framed in the way described at [171], is based on the familiar formulation that: (a) a person wishing to carry on business as a cgfa supplier required an agreement for ongoing access to unprocessed flyash for classification or a market proximate source of ongoing quantities of cgfa; (b) TEC would be unlikely to be practically able or willing to enter into an agreement with another person allowing ongoing access by reason of Pozzolanic’s first rights to unprocessed flyash; (c) irregular or piecemeal supply of unprocessed flyash would be uncommercial for an acquirer; and, (d) a classifier installed at Tarong North under the provisions of the Tarong Contract would operate, or be likely to operate, in the manner described at [164] with the consequences for third party acquirers described at [167].
174 The second effect (concerning the effect upon supply of cgfa in the SEQ cgfa market) is grounded upon the four factors at [173] together with the pleaded effect or likely effect of cls 2, 3.1, 12 and 17.1 of the Tarong Contract (of preventing any other person from acquiring unprocessed flyash from the Tarong Power Station for treatment for re-supply), and the further factor, (e), of the unavailability of alternative sources of unprocessed flyash in the SEQ region by reason of the Swanbank Contracts and Arrangements and the Original Millmerran Contract.
175 The third effect is based upon the factors described at [173] together with the pleaded effect or likely effect of the para 87.4 provisions of the Tarong Contract (cls 2, 3.1, 12 and 17.1).
176 The fourth effect is based upon the factors at [173] and [174].
177 The Commission pleads, as to cl 4.4 (concerning Pozzolanic’s determination of the suitability of Tarong North flyash, the establishing of a classifier at Tarong North, and TEC’s obligation to approve a flyash transfer of possession point to Pozzolanic (all cl 4.4 matters)); the cl 8.3 matter of no reduction in amounts payable by Pozzolanic to TEC should Tarong North flyash be unsuitable or should no classifier ultimately be built; and the cls 3.1 and 1.1 matters of TEC’s agreement to sell and Pozzolanic’s agreement to buy all cgfa extracted by Pozzolanic from Tarong North (having regard to the definitions of Ash Disposal System and Ash Transfer Points), that the substantial purpose of these provisions was to prevent any other person from acquiring unprocessed flyash from Tarong North; to prevent any other person from supplying cgfa in the SEQ cgfa market; to substantially lessen, hinder or prevent competition in the SEQ unprocessed flyash market; and to substantially lessen, hinder or prevent competition in the SEQ cgfa market. The facts or grounds supporting each purpose is pleaded in the way earlier described.
178 By funding Pozzolanic’s installation of a classifier at Tarong North, Cement Australia gave effect to the Tarong North provisions of the Tarong Contract as earlier described where those provisions had the purpose, the effect or likely effect as pleaded: para 145.
179 At paras 146 to 150, the Commission pleads the state of knowledge of Cement Australia, CA Holdings, QCL, Pozzolanic and Pozzolanic Industries as to particular matters. At paras 151 and 152, the Commission pleads the state of knowledge of Mr Leon and Mr White.
1.2.9.04 A summary of the contentions by reference to paras 156, 153 and 154
180 The Commission contends that Pozzolanic contravened s 45(2)(b)(ii) by the conduct earlier described, thereby giving effect to the provisions of the Tarong Contract as earlier described.
181 The Commission contends that Cement Australia contravened s 45(2)(b)(ii) by reason of the installation and operation of the classifier in the circumstances earlier described thereby giving effect to the provisions of the Tarong Contract as earlier described, or was knowingly concerned, in the relevant statutory sense, in Pozzolanic’s contravention of s 42(2)(b)(ii).
182 The Commission contends that CA Holdings was knowingly concerned, in the relevant statutory sense, in Cement Australia’s contravention of s 45(2)(b)(ii) and Pozzolanic’s contraventions of s 45(2)(b)(ii).
183 I will separately address the state of knowledge of Mr Leon and Mr White concerning relevant events and the claims of accessorial liability made against them (the seventh case) later in these reasons.
184 In the course of extensive final written and oral submissions the Commission challenges the reliability of the evidence of a number of witnesses called by the respondents. In particular, I am invited not to rely upon the evidence of Mr Druitt on questions of annual production capacity over time at Tarong, Tarong North and Swanbank having regard to the nature of the power stations, the features of the ash collection plant and equipment, storage and handling facilities and contended limitations that constrain Pozzolanic’s capacity to realise or produce cgfa beyond certain maximum volumes. I am pressed to prefer references to volume capacity statistics reflected in the respondents’ documents where those documents conflict with Mr Druitt’s evidence. The evidence of Mr Arto is challenged in many respects, especially in relation to the quality of the business analysis or business case said to support the decision to enter into the Millmerran Agreement and whether it is true to say that Mr Arto was informed in his decision-making by a belief in the need for additional cgfa capacity at Millmerran to meet anticipated demand, and other matters.
185 The evidence of Ms Collins and Mr Clarke is also challenged and so too aspects of the evidence of Mr Maycock although not to the same extent. I have considered, in particular, in considerable detail, the evidence of all of these witnesses against the background of my trial notes and all of the documents. I have had the benefit of examining very extensively the transcript of the trial a number of times in reviewing the affidavit evidence-in-chief of all of the witnesses, their cross-examination and the documents upon which they place reliance as probative of matters in issue. Each of these contentious witnesses, and others, were subjected to often lengthy and vigorous cross-examination on many aspects of their evidence. I have a clear recollection of the demeanour, in particular of the controversial witnesses, and I have reflected upon my impression of them in evaluating the proper treatment of their evidence as a whole.
186 Mr Maycock gave his evidence-in-chief orally whereas all of the other witnesses gave their evidence-in-chief by way of affidavit and generally speaking, extensive affidavits.
187 I have also had the benefit of reviewing the very extensive body of documentation drawn both from the volumes comprising the applicant’s tender bundle and the volumes making up the chronological bundle provided by the respondents (and the confidential volumes). This process of reviewing the evidence by reference to my own trial notes, the affidavits, the documents, the chronology, the transcript and the submissions is reflected in the treatment of the evidence in these reasons. This process has also enabled me to make final rulings about evidence (paragraphs of affidavits given by a range of witnesses) admitted provisionally under s 57 of the Evidence Act 1995 (Cth). Because virtually all of the evidence-in-chief was given on affidavit, each witness was quickly confronting cross-examination. My practice during the trial was to have read each affidavit and what I perceived to be the principal documents in detail before each witness was called so that sense could be made, in the course of the trial, of the topics addressed in cross-examination. In reviewing the provisional admission of these various paragraphs, I have considered whether the evidence sought to be adduced is what it claims to be and whether it is relevant to questions in issue in the controversy. I have also had the benefit of very extensive detailed and heavily footnoted submissions from the parties including extensive further reply submissions from the applicant.
PART 2
The Respondents’ contentions in answer to the Commission’s case
188 Before examining that evidence and the evidence of the expert economists, I will set out in short summary form only, the respondents’ essential contentions that are said to answer the case made at trial framed by the Commission’s pleading.
189 The respondents contend that the Commission has failed, on all fronts, to make good its pleaded case for these reasons:
1. The evidence does not support and thus the Commission has failed to prove a contended downstream product market for a product described as concrete-grade flyash according to the formulation reflected in AS 3582.1, which recognises a grade of flyash comprised of particles in which only 55% of those particles pass a 45 micron sieve.
2. The respondents say the evidence demonstrates that at all relevant times Pozzolanic manufactured a flyash product that had very particular properties, namely, fineness exceeding (they say, far exceeding) fineness of 85%, a “loss on ignition” (“LOI”) factor of less than 2% (which is an unburned carbon characteristic) and other parameters.
3. Demand, they say, existed for this flyash product and other suppliers sought to approximate or better these features in contesting demand for such a product.
4. Flyash exhibiting features including a fineness of only 55% of the particles passing a 45 micron sieve was never a “strong substitute” in contesting demand for what might be called the Pozzolanic product, but which is properly understood as emblematic of the product dimension of the market.
5. Thus, the Commission has failed to prove a market for “concrete-grade flyash”.
6. The respondents also say that postulating an alternative product of fine grade flyash on the footing that fine grade flyash is understood as a sub-set of concrete-grade flyash or an alternative “fine grade” flyash product, fails to recognise the evidence about the very particular properties that characterise the product.
7. Because unprocessed flyash produced at a coal-burning power station naturally exhibits levels of fineness of 55% or more, flyash thus qualifying as concrete-grade flyash for the purposes of the downstream product market is also flyash in the unprocessed form and thus also falls within the contended upstream unprocessed flyash market, even though that flyash is yet to be subjected to a step which might otherwise be thought to be a differentiating processing step.
8. Thus, functional product separation is not made out.
9. Pozzolanic did not enjoy a “substantial degree of power” in a market for a flyash product ranging from 55% to greater than 85% fineness, falling within notions of both unprocessed flyash and downstream concrete-grade flyash, as power stations could elect to “forwardly integrate” into a separate functional activity (beyond generating electricity) of selling flyash.
10. Because the product dimension of the market is not made out, market definition fails.
11. Since market definition is undertaken as a tool for determining market power, the analysis of market power “becomes confused”.
12. Neither QCL nor Pozzolanic enjoyed market power in September 2002.
13. The lacuna for the Commission is said to be this.
14. The Commission says market power subsists because Pozzolanic had supply contracts with power stations in the SEQ region (Swanbank and Tarong) under which it was entitled to acquire all, or virtually all, of the cgfa available in the SEQ region (as pleaded) and yet the main source of that subsisting power was subject to a tender process at Tarong (and thus supply might imminently end), and a new source of flyash at Millmerran, was also subject to a tender process to find a buyer.
15. Both as a matter of principle, and in fact, Pozzolanic could not have taken advantage of power derived from existing supply contracts in circumstances where it was bidding to secure the two major contracts on an ongoing or forward-looking basis.
16. From 2002 or early 2003, Sunstate Cement Ltd (“Sunstate”) presented a real threat of resourced potential entry into any downstream market by deploying its grinding mills to grind and sell flyash to concrete manufacturers and, in fact, four years later in 2007, Sunstate actually entered the market.
17. The likely counter-factual to Pozzolanic’s entry into the Millmerran and Tarong contracts is that an entity called Flyash Australia Pty Ltd (“Flyash Australia” or “FAA”) would have won and entered into those contracts and there would then have been no change in the competition conditions. Thus, Pozzolanic’s entry made no competition difference.
18. Moreover, from November 2002, the merger between Holcim, Readymix Concrete and Hanson Australia began taking shape with the result that the factual and counter-factual, became one and the same and thus Pozzolanic’s entry did not, in a forward-looking way, substantially lessen competition as compared with the likely alternative.
19. To the extent that the respondents’ documents are said to support the Commission’s position, the respondents say that the Commission “lays much mistaken emphasis on infelicitous language in documents authored by employees at middle management level” which is rendered “as naught, unless they reach, and inform the decisions of, the directing minds of the Respondent companies” [emphasis added] and such documents (or at least the infelicitous comments in them) are “as naught in the face of direct and contradictory evidence from these directing minds” [emphasis added].
20. The Commission’s criticism of an absence of “detailed business cases” including projections of demand fails to come to grips with the extent to which business judgments are necessarily instinctive or intuitive according to very broad-brush assessments, and throughout its analysis, the Commission fails to give “careful attention” to the “commercial realities” of the flyash industry within the south eastern States of Australia.
21. As to s 45, the Commission fails to identify the parties responsible for including the identified provisions in the Tarong and Millmerran contracts. Nor is there any evidence of the purposes of the power stations in including particular provisions notwithstanding that the Commission called power station witnesses.
22. The Commission has failed to properly identify “any meaningful counter-factual” as part of the analysis of substantial lessening of competition said to occur as a result of the purpose and effects cases reliant on s 45.
23. The Commission has failed to properly identify the content of the conduct said to establish “knowing involvement” in particular contraventions by particular respondents (or place its closing submissions on a footing on this question consistent with the pleaded case”).
24. The Commission’s analytical method is to look back from assumed conclusions drawn from documents rather than identify foundation facts and conduct an orthodox forward-looking analysis of whether identified provisions had the effects or likely effects asserted. Emblematic of this approach, it is said, is the failure to address the evidence of Dr Nairn that Sunstate could have entered the contended downstream market at any time after 2002/2003, and sizeable competitive entry has now occurred with no material impact on price.
25. The Commission fails to demonstrate whether and when (due to the colour on variability issue) Millmerran flyash would have been a strong substitute for Tarong flyash at a competitive price and each conclusion reliant upon proof of that circumstance must necessarily fail.
26. Pozzolanic was not earning monopoly rents from the sale of Tarong flyash as Bayswater flyash was a close constraint and thus the geographic boundary of the market is not confined to the South East Queensland region.
27. As to s 46 (apart from the point recited at contention 12), Pozzolanic engaged in conduct in which a firm lacking market power could engage and Flyash Australia (a company which lacked SEQ region market power) did engage in the same bidding conduct.
28. Pozzolanic confronted a business imperative of securing (in the face of contractual uncertainty) an adequate supply of intrinsically variable waste flyash from power stations which (notwithstanding its variability) remained “a key input into the manufacture of concrete”. Failure to secure either the Millmerran or Tarong contract “effectively ensured business failure”.
29. Although Tarong was Pozzolanic’s preferred source, Millmerran simply came along first in time and Pozzolanic was required, for good business reasons, to enter into a supply contract with Millmerran.
30. Because Millmerran was new, unproven and untested in the market (and unknown in terms of its essential characteristics) Pozzolanic was required for good business reasons to pursue and secure the Tarong contract.
31. As to the first election to proceed, Sunstate’s threatened entry was “very real at this time” and thus represented constraining countervailing entry suggesting no substantial degree of market power.
32. As to taking advantage, although in July 2004 the possible loss of Tarong was no longer a continuing business explanation of the relevant conduct step, maintaining diversity and security of supply remained a key aspect of the decision, exaggerated by Cement Australia’s supply obligations and the sunk costs dedicated to the merger.
33. The “essence of the [first election to proceed] decision taken was effectively to stand by the decision of September 2002” [emphasis added]. The July 2004 decision was a rational one consistent with an absence of market power.
34. The Amended Millmerran Contract and the second election to proceed were decisions taken “for the purpose of complying with a contractual obligation … one consistent with the proper discharge of the duties of the directors” [emphasis added].
35. Apart from the implications of Flyash Australia being the only relevant counter-factual actor; the assimilation of the factual into the counter-factual; and, the deficiency in the Millmerran ash, rendering it not a product in any relevant sense, the evidence establishes that, in any event, third parties were able to secure flyash from Tarong, Tarong North and Swanbank.
PART 3
Flyash
190 Dr Jason Nairn gave evidence as to the chemistry and morphology of flyash.
191 Dr Nairn holds a Bachelor of Science and a PhD in Materials Engineering. Dr Nairn is a member of the Concrete Industry of Australia and was previously a member of the Cement National Technical Committee of the Cement & Concrete Association of Australia, which among other things, addresses technical standards. In 1996, Dr Nairn commenced employment with Pozzolanic Industries as Research and Development Manager. In 1998, Dr Nairn became responsible for product development for cement and other QCL Group products. Dr Nairn reported to Mr Ian Orchard. In March 2003, Dr Nairn was employed by Sunstate as “Production and Technical Manager” responsible for managing the cement production process and overseeing the supply and quality of raw materials including flyash, and the quality of Sunstate’s cement products. In March 2007, Dr Nairn commenced employment with Austrak, a concrete sleeper manufacturer, as “Product Design Manager”. Dr Nairn has a detailed knowledge and understanding of the technical properties of flyash and its production and supply in Queensland.
192 Dr Nairn swore an affidavit on 14 October 2009 (Ex-9) filed on behalf of the Commission which, among other things, taken together with his oral evidence in cross-examination, describes aspects of the properties of flyash and its production and features relevant to its use, particularly in the manufacture of concrete.
193 Dr Nairn says that based on his experience he can speak directly to matters in the period 2001/2002 to 2007 and since leaving Sunstate, he has continued to be a flyash customer and continues to specify flyash in his current role.
194 When employed by Pozzolanic Industries, Dr Nairn wrote a paper (Ex-9, JDN-1) entitled Research, Development and Extended Opportunities for Fly Ash. That paper was based upon Dr Nairn’s expertise in mineralogy, his personal knowledge and analysis of the results of testing carried out by his employer, and other documents and papers reporting on the results of research projects.
195 In December 2001, Dr Nairn presented a paper (Ex-9, JDN-2) to the Eighteenth Annual International Pittsburgh Coal Conference held at Newcastle, NSW, entitled Research and Development for Fly Ash, Opportunity or Alchemy. That paper was based (virtually entirely) on Dr Nairn’s earlier paper although the joint authors are Dr Nairn, Mr Michael Wilson, Manager, Pozzolanic and Mr Darryl Blackburn, Pozzolanic’s Ash Development Manager. A copy of this second paper was attached to Pozzolanic’s Expression of Interest (EOI) dated October 2001 lodged with TEC, the owner of Tarong Power Station, in response to documents sent to Pozzolanic (and others) by Mr Collingwood of TEC who had responsibility from 2001 for the process leading to the award by TEC of the important contract for the supply of flyash from the Tarong and Tarong North power stations, awarded to Pozzolanic and signed on 26 February 2003.
196 Dr Nairn recalls that he presented the December 2001 paper to TEC during the EOI period before the tender process by the shortlisted companies. Dr Nairn says that the December 2001 paper differed from the earlier paper in that the later paper was focused on major projects potentially representing alternative uses of flyash, that is, as an alternative to use in concrete manufacture as a partial substitute for cement.
197 In the December 2001 paper, Dr Nairn explains the following matters.
198 Flyash is produced as a by-product of the burning of fossil fuels for power generation. The combustion of coal liberates heat energy in boiler units at a power station to raise steam to drive turbines that generate electricity. In addition to the fossilised organic matter (which supplies the heat energy), coal contains an appreciable amount of inorganic material in the form of quartz, clay and fine grained minerals. For Australian bituminous (black) coals used in Queensland power stations, the main ash forming constituents are associated with the quartz and clay minerals and as a result, the ash deposits show high concentrations of Silica and Aluminium.
199 Flyash in Queensland is produced by burning pulverised coal in utility boilers (“boilers”). For these boilers, the coal is ground to a high fineness and injected into the boilers where combustion of the organic matter (volatile and fixed carbon) occurs. The coal burns at high temperature and the inorganic material melts and agglomerates into spheres. Upon leaving the combustion zone, the ash particles are cooled quickly and solidify. About 80% of the ash formed from the burned coal is carried out of the furnace chamber in flue gas and when extracted from the flue gas is known as flyash. The remaining coarser fraction falls to the bottom of the furnace where it sinters together to become “Furnace Bottom Ash”.
200 The structure, composition and properties of flyash particles depends upon the structure and composition of the coal and the combustion process by which the flyash is formed (see JDN-2, para 2.2).
201 Flyash can be regarded as a low cost “natural resource” or “industrial mineral” composed of alumino-silicate spheres; cenospheres consisting of lightweight hollow spheres filled with inert (chemically inactive) air or gas; iron-bearing particles; and, unburned carbon. Flyash has the following natural advantages or properties as a raw material: it is pozzolanic in nature in that it exhibits cementitious properties; it has a “suitable chemical composition” that enables it to be used in conjunction with other concrete-mix components; it has good particle-size distribution which means that it can be used as a “filler of the voids” between other materials in a concrete mix; it has consistent composition when derived from any given or particular coal source because the chemical properties of the flyash are largely influenced by the chemical content of the coal burned; and there are abundant reserves of flyash (Ex-9, para 8).
202 Dr Nairn says (JDN-2, para 2.1) that although one of the major disadvantages of flyash is its inherent variation in quality as a result of varying coal sources and changes in coal combustion processing, “[for flyashes] produced in Queensland, though, the consistency in composition and size is considered to be among the best in the world”. Because flyash has the natural advantages Dr Nairn describes, and Queensland ashes enjoy world best consistency in composition and size, the main buyers of flyash in Queensland are companies engaged in the concrete industry where flyash is used to “augment” cement as a “supplementary cementitious material” in the production of concrete (Ex-9, para 9). At para 9 of his affidavit, Dr Nairn affirmatively summarises aspects of his observations in his report (being a reference to the earlier report at JDN-1) where he observed that 90% of all concrete produced in Queensland contains flyash. The same observation is made in the December 2001 paper (Ex-9, JDN-2). In both JDN-1 (p ii) and JDN-2 (para 1), Dr Nairn said: “Over 90% of all concrete produced in Queensland contains flyash supplied by [Pozzolanic] resulting in a consumption of around 400,000 tonnes of [flyash] per annum”. Dr Nairn also observed, in this context, at JDN-2, that Pozzolanic enjoyed flyash removal contracts with five Queensland power stations (Swanbank, Tarong, Gladstone, Callide B and Stanwell).
203 These observations were made in the context of explaining that, of this “main market”, (as Dr Nairn describes it in JDN-2), or cohort of “main purchasers” (Ex 9, para 9), for supplementary cementitious material, “Two grades of flyash (‘fine’ and ‘coarse’) are generally produced through selection and processing to meet the requirements outlined in Table 1 of AS 3582.1-1998 Supplementary Cement Materials for use with Portland and Blended Cements Part 1: Fly Ash”. Although these two grades of flyash (fine and coarse) are generally produced, Dr Nairn says in the December 2001 paper (at JDN-2, para 1) that “Pozzolanic Enterprises had (up to the time of that paper) extracted and processed ‘fine’ fly ash in Queensland for the concrete industry” resulting in a consumption of over 400,000 tonnes of flyash per annum.
204 Dr Nairn also said this in the December 2001 paper (at JDN-2, para 1):
This use [as supplementary cementitious material] requires a “fine” grade of fly ash and according to Table 1 of AS 3582.1 the fly ash shall have fineness of not less than 75% passing a 45 [micron] sieve and a maximum loss on ignition of 4.0%. Pozzolanic Enterprises process the extracted fly ash to consistently produce a product that exceeds this standard and is typically supplied with a fineness of >88% passing a 45 [micron] sieve and a maximum loss on ignition of 2.0%.
In addition, “coarse” fly ash is produced according to the requirements specified in Table 1 of AS 3582.1 of a fineness of not less than 55% passing a 45 [micron] sieve and a maximum loss on ignition of 6.0%. Typically, “coarse” flyash is produced with a fineness of 55-70% passing a 45 [micron] sieve and a Loss [on] Ignition between 2 and 6%. This ash is currently used for the production of controlled low strength materials such as flowable fill and for the treatment and stabilisation of waste materials.
205 Dr Nairn also says this (at JDN-2, para 2.3) of the morphology of the flyash collected from power stations and ash collection techniques as illustrated at Tarong:
The size and morphology of the fly ash collected from the power stations are largely determined by the burning efficiencies (milling, furnace temperature), the ash composition (ash fusion point) and the type of dust collection (electrostatic precipitators, fabric filters). A series of electrostatic precipitators naturally classify the fly ash by collecting different size ranges. For example, at Tarong there are six electrostatic precipitator zones and the ash collected decreases gradually from a mean size collected in Zone 1 of about 25 [microns] to a mean size collected in Zone 6 of about 3 [microns]. The amount of ash collected in each successive zone also decreases continuously. Fabric filters do not classify the ash in different size ranges but are able to collect larger amounts of the very fine ash components (0-5 [micron] size) and have been added to existing electrostatic precipitator units at various power stations to decrease the amount of very fine fly ash that is emitted to the atmosphere.
206 As to the notion of waste, Dr Nairn says this (at JDN-2, para 3.3):
The Queensland Environment Protection Regulation 1998 specifically includes fly ash as a regulated waste. Its Schedule 1 lists “Environmentally relevant activities and licence fees”, in which power stations are included and Schedule 7 lists the Regulated Wastes. Fly ash is included in Schedule 7. Schedule 9 defines Regulated Waste as “… non-domestic waste mentioned in Schedule 7 (whether or not it has been treated or immobilised)” and includes any element or any chemical compound containing the element and anything that has contained the waste.
207 Dr Nairn says at para 11 of his affidavit that for flyash (and he must necessarily be talking about only “fine” grade flyash because of the loss on ignition figure mentioned) to be suitable for use as an added mineral component in concrete manufacture, the physical and chemical properties of the flyash must comply with these requirements of AS 3582.1: the moisture content must be no more than 1.0%; the LOI, a measurement of unburned carbon remaining in the flyash (and described by Dr Nairn as a critical characteristic of flyash in concrete applications), must be no more than 4.0%; the sulphite and magnesium oxide content must be no more than 3.0% and 4.0% respectively.
208 AS 3582.1-1998 (adopted by Standards Australia on 14 November 1997 and published by that body on 5 January 1998) was prepared by Committee BD/31 which addresses issues directed to the topic of “Supplementary Cementitious Materials for Use with Portland and Blended Cement”. The following interests were represented on Committee BD/31 in developing the 1998 edition of the Standard: Ash Development Association of Australia, The Association of Consulting Engineers Australia, Australian Slag Association, Australian Pre-Mixed Concrete Association, AUSTROADS, Bureau of Steel Manufacturers of Australia, Cement and Concrete Association of Australia, Cement Institute of Australia, CSIRO (Division of Building, Construction and Engineering), Department of Public Works and Services (NSW) and Pacific Power.
209 The 1998 edition of the Australian Standard introduced a special grade of flyash (cl 5.2); adopted grades of flyash reflecting limits on fineness, limits on LOI and uniform limits on moisture and sulphite content (Table 1); withdrew the requirement to determine magnesia content (as Australian flyash does not contain expansive periclase); increased the data to be provided on test certificates; and, adopted extensive changes to the frequency of testing.
210 The adoption of the Table 1 limits and the approach to relative strength testing is introduced with this Forward:
With the ever-increasing use of fly ash and the expansion of knowledge of its characteristics, this latest revision of the Standard is an important update. The specification of grades of fly ash to reflect use in concrete of materials from coal-fired power stations across Australia with different coal sources and firing and collection systems has been the subject of much investigation and debate. The resulting provisions as set out in Table 1 now provide for grades, with each having associated with it limits on fineness, limits on loss on ignition and uniform limits on moisture and SO3 content. The requirements on fineness and loss on ignition have been tightened.
…
There was much debate during the revision over requirements for relative water requirement and relative strength. While each of these tests may provide a means of comparing performance of ashes from within a power station, they are proving to be not necessarily so helpful in assessing the relative merits of ashes from different power stations. Based on data reported to the Committee the caution about the effects of cement on the results obtained with each of these two tests has been retained.
[emphasis added]
211 In AS 3582.1, flyash is defined as “solid material extracted from the flue gas of a boiler fired with pulverised coal” and expressly excludes bottom ash. Clause 5 of the Australian Standard addresses “Grading”. Flyash is graded as “normal grade” (cl 5.1) according to the requirements of Table 1. There are four requirements as follows:
TABLE 1
SPECIFIED REQUIREMENTS
| Grade | Fineness, by mass passing 45 [micron] sieve, % minimum | Loss on ignition, % maximum | Moisture content % maximum | SO3 content % maximum |
| Fine Medium Coarse | 75 65 55 | 4.0 5.0 6.0 | 1.0 1.0 1.0 | 3.0 3.0 3.0 |
| Reference test method | AS 3583.1 | AS 3583.3 | AS 3583.2 | AS 3583.8 |
212 Clause 6 of the Standard addresses those “requirements” and at cl 6.1 provides that flyash “shall comply with the requirements specified in Table 1 and [as to “special grade”] clause 5.2 where appropriate”.
213 Clause 5.2 recognises that in some areas of Australia there are limited quantities of “highly reactive fly ash [and where specified for an application] it shall comply with the requirements of Fine grade (see Table 1) and the relative strength shall exceed 105% when tested”.
214 Relative strength is to be tested according to AS 3583.6.
215 Apart from the four Table 1 requirements which determine the grade of flyash, five other properties are “reportable” (cl 6.2, Table 2: Available alkali content, Relative density, Relative water requirement, Relative strength and Chloride ion content). The frequency of testing of the four grading requirements under cl 5.1 and the five reportable properties under cl 6.2 is determined by Appendix B, Table B1, and is to be the subject of a Certificate under Appendix C.
216 I take Judicial Notice of the standing in the Australian commercial community of the industry and professional representative bodies represented on Committee BD/31. I infer that the adoption by Standards Australia of the Table 1 requirements arising out of Committee BD/31’s deliberations for determining three normal grades (apart from special grade) of flyash for use as cementitious material in concrete and mortar, on the express footing that these grades of flyash reflect actual use in concrete, strongly suggests that within the limits of the requirements set down for each grade each “normal grade” of flyash is used as a cementitious augmentation agent in concrete production. What point would there otherwise be in the peak bodies framing a Standard on the topic of grades of flyash “to reflect use in concrete of materials from coal-fired power stations” and Standards Australia adopting and publishing it as the applicable Australian Standard.
217 The prescription that flyash shall comply with the requirements specified in Table 1 “where appropriate”, however, leaves open the identification of the relevant appropriate circumstances. Those circumstances may be shown to involve a particular field of rivalry for a product in which the fineness of the flyash demanded is measured by, or understood by industry participants to mean, fine grade flyash according to AS 3582.1, or alternatively, flyash exhibiting a higher minimum percentage than 75% by mass passing a 45 micron sieve, in which circumstances, medium or coarse grade flyash may not be substitutes within the field of market rivalry, so understood, on either footing. In other words, the adoption of a Standard which by its scope (cl 1) sets out the requirements for flyash as a cementitious material for use in concrete, does not necessarily mean that the relevant appropriate circumstances involve a product called “concrete-grade” flyash of a fineness which includes either fine or medium or coarse grade flyash.
218 Australian Standard 1379 sets out limits and criteria for concrete performance including the compressive strength of concrete measured in megapascals (MPa) at 28 days from the batching and pouring of the concrete mix, although progressive tests usually begin from seven days. The concrete’s compressive strength required at 28 days is a characteristic that must be satisfied by 95% of the concrete made from any particular mix. The grades of compressive strength are described as “normal” and “special”. Normal grades are those with compressive strengths of 20, 25, 32, 40 and 50 MPa. Special grades, according to Dr Nairn, are those that do not meet normal grades and include grades in the range 80-100 MPa. The higher grades (such as 80 MPa) would typically be required of concrete in metropolitan projects involving high-rise buildings, the base and columns of buildings and like construction. The lower grades reflect grades of concrete used in domestic applications and smaller scale projects generally. Concrete exhibiting compressive strength of 20 MPa is typically used in house construction. Concrete exhibiting compressive strength of 32 MPa is typically used in some building structures and suspended slabs, and 40-50 MPa concrete is typically used in column structures and girders.
219 In his oral evidence on the topic of flyash, Dr Nairn also gave this evidence.
220 For grades of flyash from the same coal source (exhibiting therefore the same chemistry) the finer the flyash component, the greater the surface area for a given volume of material and, generally speaking, the more reactive the flyash component will be.
221 In Dr Nairn’s experience in the period between 2001 and 2007, when “industry participants” referred to “concrete grade fly ash” they tended to use that term to mean flyash “of the finest grade” and, in doing so, they were referring to flyash of a fineness “significantly higher than 75 per cent”. While the Standard specifies fineness as a measure of 75% of the particles passing a 45 micron sieve, “the typical average would be around 85 per cent mark”, according to Dr Nairn. Dr Nairn said that he certainly specifies flyash in that range for his own business purposes (namely, Austrak). Dr Nairn said it was his experience that “participants in the market sought to achieve that level of fineness” [85% passing].
222 Dr Nairn accepted that there were people in the market trying to sell to Sunstate, flyash with a lesser grade or level of fineness, but Sunstate was not interested in that product. Dr Nairn said that there are finer grades than 85% passing a 45 micron sieve and an example of that product would be fine grade Bayswater flyash which, in his view, could easily be as high as 97% passing a 45 micron sieve. Dr Nairn said that in his experience Boral certainly required flyash exhibiting fineness of at least 85%. As to Boral, Dr Nairn accepted that Boral has a very substantial segment of the concrete market in “Southern Queensland”.
223 Dr Nairn gave evidence that the greater the fineness of the flyash, the greater potential for the flyash component to replace an amount of cement in a concrete mix. Further, as to compressive strength, for example, in two examples of concrete made with two different flyashes both graded “fine”, concrete made using the finer ash of the two will reach a higher compressive strength at 28 days than the other, and will also exhibit some benefit in early increased strength during the curing process of the concrete.
224 In Dr Nairn’s recollection in the period 2001 to 2007, he was not aware of “anybody supplying medium grade flyash directly to [for] use in concrete” [emphasis added]. While employed within the QCL Group and also at Sunstate, Dr Nairn was involved in laboratory trials which he described as “significant trials” where the fineness of the flyash was changed and medium grade flyash was used in the batch mix. The performance of the concrete was measured. Dr Nairn was asked whether he agreed with the proposition that medium grade flyash is typically poor in terms of concrete strength development relative to fine grade flyash, all other things being equal, and accepted the proposition as quantifiable through the test work he had mentioned. Dr Nairn also accepted that such a proposition was even more pronounced in a comparison between fine grade flyash and coarse grade flyash.
225 Dr Nairn gave evidence of what is described as the “replacement” ratio. In other words, fine grade flyash will replace cement in the ratio one-to-one but the ratio is much less with coarser grades and the ratio decreases as the fineness of the flyash decreases. Apart from the commercial utility of a replacement ratio of one-to-one, Dr Nairn accepts that use of fine grade flyash (at the levels which he associates with the term concrete grade flyash, namely 85% or greater), enhances the “pumpability” of the concrete mix and the “workability” of the concrete mix.
226 Dr Nairn gave evidence that although AS 3852.1 does not limit the amount of flyash that might be present in concrete, concrete can only contain, in any practical sense, a maximum of 25% to 30% flyash (Ex-9, para 13). Above this range a “loss of reactivity occurs” which means, among other things, that the cementitious property of the flyash mix diminishes and the cost of adding more flyash to the mix outweighs the benefit of using flyash as a partial replacement for cement.
227 Although the issue will be addressed later in these reasons, it is convenient at this point to mention Dr Nairn’s perception of the quality of the flyash sourced by Pozzolanic from power stations in the period that Dr Nairn had responsibility at Pozzolanic Industries for research and then, at QCL, for technical matters relating to product development in the period 1996 to 2003. As to Swanbank Power Station, Dr Nairn says this. CS Energy, as the owner, originally operated the station with electrostatic precipitators comprising metal plates to which the flyash within flue gases would agglomerate. When the plates were hit forcefully, the dust particles would fall from the plates into a hopper which collected the flyash. This process collected 98% to 99% of the flyash produced during the combustion of coal. As a result of this process, it was possible to sometimes obtain fine grade flyash for use in concrete without needing to classify the flyash, by selecting run of station flyash from specific hoppers. In about 2000, Swanbank introduced “fabric retro-filters” in order to capture 100% of the flyash. This latter process meant that all flyash would fall into fabric filter bags and then into hoppers. Thus, there was an increase in the need for run of station flyash to be classified before it could be used in concrete (Ex-9, para 22.1).
228 As to Tarong, Dr Nairn said this. Tarong, having commenced operation in 1984, adopted the use of electrostatic precipitators to extract flyash. Tarong divides the flyash into “zones” resulting in natural classification of the ash. Therefore, it is possible to select a finer grade of flyash by extracting the ash from a particular zone with the result that some of the flyash produced does not need classification before it can be used in the production of concrete.
229 As to Tarong North Power Station, Dr Nairn observes that it was commissioned in 2003; uses fabric filter collection methods; and the flyash so collected needs classification before it can be used in concrete production.
230 As to the general assessment of the flyash, Dr Nairn says that based upon his expertise and his analysis of the quality of the flyash from each of the different zones of collection, Tarong flyash is a “good quality flyash”; Tarong North flyash is “very similar” to Tarong flyash; the quality of the “raw flyash” from Swanbank is not generally as high as that from Tarong although, because not all of the total flyash produced at Swanbank is removed, it is possible to be selective about which flyash is taken. Dr Nairn also says that the quality of the flyash from Callide B Power Station, and operated by CS Energy using electrostatic precipitators, is “high quality flyash” and Gladstone ash is “high quality flyash” (Ex-9, para 23).
231 Concrete can also contain slag which, like flyash, also reduces the amount of cement needed in a concrete mix. Because slag alters the properties of concrete, only 30% slag can be used in most ordinary concrete applications without significant disadvantages arising. A concrete made of 30% “slag blended cement” can still contain up to 20% flyash (a product described as a “triple blend”). More typically however, approximately 15% flyash would be used in concrete containing a 30% slag blended cement (Ex-9, para 15).
232 At para 32 of his affidavit, Dr Nairn says that AS 3582.1 also sets “relative strength” limits for different grades of flyash. The relativity is tested by measuring the strength of concrete containing cement (without any flyash) and concrete containing a mix of cement and the relevant grade of flyash. The mix of raw materials forming concrete for particular applications must react so as to give the concrete its required strength for that application and not fail. Greater technical expertise and precision in blending is required when blending slag and flyash blended cements as there is a greater risk of concrete failure. Cement blended with flyash containing more than 30% flyash risks the mix losing its cementitious properties and can cause concrete failure.
233 As to the utility of slag in a mix, it also improves handling and the durability of concrete. Concrete containing a high proportion of slag, however, does not reach its maximum strength at the same rate as concrete containing no slag or a lesser percentage of slag. Thus, in using slag at certain proportions, early strength is sacrificed in favour of long term durability. A slag blend containing higher proportions of slag (65%) is generally only used for marine-grade structures and applications where high durability is required (such as bridges) (Ex-9, para 41).
234 In domestic construction, contractors require concrete to set quickly to enable construction to proceed. Even though increasing slag beyond 30% lowers the cost by partially displacing cement costs, the delay in setting (even at 30% slag blend) might cause customers to prefer general purpose Portland cement (GP cement) instead.
235 Dr Nairn described some other advantages in using blended cement products. In March 2003, Dr Nairn joined Sunstate. He reported to the General Manager, Mr Jim Young. Dr Nairn says that he and Mr Young decided to promote Sunstate as a “blended cement supplier” offering, in particular, 30% and 65% slag blended cement, but also flyash blended cement. Dr Nairn explained that cement blends, apart from price, have the advantage, as compared with the supply of GP cement, of improved workability, pumpability and durability. Dr Nairn says that in his experience Boral, for example, purchased about half of all of the 30% slag blend cement produced by Sunstate as its primary cement product. Boral adopted the practice of adding 25% flyash to the slag cement blend to create a triple blend (Ex-9, paras 59, 61 and 62).
236 It is also convenient at this point to note aspects of Dr Nairn’s experience with flyash and cement and product development at Sunstate and the commercial focus of Sunstate adopted as a result of the “strategy” conceived by Dr Nairn and the General Manager of Sunstate, Mr Young, according to Dr Nairn. Dr Nairn joined Sunstate in March 2003. He ceased employment with Sunstate in January 2007 and commenced employment as the Production Design Manager with Austrak in March 2007. In his role as Production and Technical Manager for Sunstate, Dr Nairn managed the cement production process overseeing the supply to Sunstate (and quality of) raw materials used in that process including flyash and slag, and the quality of the cement produced by Sunstate. Sunstate imports the raw materials for manufacturing cement. It specialises in the manufacture of blended cement products at a site on Fisherman Island at the mouth of the Brisbane River. Dr Nairn reported to the General Manager of Sunstate prior to Mr Ward assuming that role in June 2006.
237 Unblended cement is produced by grinding feedstock called “clinker” with other components. Sunstate promoted the use of blended cement because the blended product incorporated materials, flyash or slag (or both), that cost less to acquire than the cost of grinding clinker to produce cement. Sunstate offered its blended products to concrete manufacturers at a price less than GP cement. Sunstate’s original undertaking, when established, was the operation of a “cement milling facility” to grind feedstock to produce cement. However, in order to “intergrind” the raw materials Sunstate imported, so as to manufacture Sunstate’s blended cement products, additional infrastructure was constructed at the front of the mill as an adjusted feeding system. Sunstate operated two identical cement mills fitted with “high efficiency separators”. When Dr Nairn commenced employment with Sunstate in 2003, only one mill was capable of producing flyash-blended cement due to the raw materials feeding system then in use. All other cement could be produced by both grinding mills. Intergrinding enabled all the cement ingredients and any blend ingredients such as flyash or slag to be ground together in the mill in the same process.
238 Intergrinding flyash reduced the flyash particles to a consistent size and, unlike classification, did not result in any reject flyash as the ash is ground until it reaches the suitable size. The flyash sourced by Sunstate for intergrinding, needed to meet the required LOI as intergrinding does not alter the LOI percentage of the ash. Classification, on the other hand, had the advantage of removing larger particles which were typically affected by higher LOI content. Classification thus reduced the LOI content of the classified flyash (Ex-9, paras 56 and 57).
239 During Dr Nairn’s period at Sunstate, Sunstate primarily manufactured GP cement; flyash-blended cement; 30% slag-blended cement; and, 65% slag-blended cement. Dr Nairn says that because Sunstate found it difficult to compete with Cement Australia in the sale of GP cement due to Cement Australia’s “local production of clinker” (operated by QCL prior to 1 June 2003) and “their highly efficient integrated facilities for clinker production”, Dr Nairn and Mr Young decided upon a strategy of promoting Sunstate as a supplier of blended cement products and, in particular, slag-blended cement. Also, Sunstate was constrained, according to Dr Nairn, by limited clinker storage facilities to produce GP cement whereas Sunstate had significant storage facilities for slag. Furthermore, promoting a slag cement blend reduced the amount of GP cement Sunstate required (Ex-9, para 60).
240 Typically, concrete is produced at “batching plants” where the components making up the specification for a particular concrete mix or batch required by customers of the concrete supplier are aggregated into the production mix. Smaller batching plants tend to purchase flyash blends due to limitations in the capacity to separately store flyash and cement. Operators of larger batching plants tend to buy flyash and cement separately; store each component on site; and blend the components when batching to the concrete specification to be met.
241 Customers of Sunstate used blended cement for the same uses adopted for GP cement. Blended cement is cheaper than GP cement but also offers improved workability, pumpability and durability.
242 Dr Nairn says that when he joined Sunstate in March 2003, Sunstate purchased classified fine grade flyash from Cement Australia (QCL) sourced from Tarong. Dr Nairn says that he was not satisfied with the price Sunstate was paying for flyash at $70 per tonne. Moreover, Sunstate did not require a high quality flyash because it had the capacity to intergrind flyash with other materials. Therefore, Dr Nairn negotiated arrangements with Cement Australia to commence sourcing run-of-station flyash from Swanbank Power Station for $50 per tonne for intergrinding.
243 In 2003, Dr Nairn began examining options to acquire flyash directly from power stations. Dr Nairn entered into discussions with CS Energy in relation to Swanbank flyash and TEC for the acquisition of Tarong North Power Station flyash. Those matters will be examined further later in these reasons. For present purposes, it should be noted that Dr Nairn says that until shortly before he left employment with Sunstate in March 2007, Sunstate did not directly supply flyash to customers other than as part of a cement blend. Dr Nairn reasserts the position that this commercial strategy was adopted because Sunstate did not have the processing infrastructure installed on site, nor the required storage facilities. Furthermore, Sunstate did not supply ground slag to customers other than as part of a cement blend (Ex-9, paras 64-67).
244 Plainly enough, Dr Nairn considers that when “industry participants” refer to “concrete-grade flyash” and transact for the acquisition of concrete-grade flyash for concrete production, they use that phrase as an analogue for “flyash of the finest grade” and, typically, the average fine grade flyash sought by buyers for this purpose is 85% by mass passing a 45 micron sieve not just 75% so passing, and over 90% of all concrete produced in Queensland contains flyash. As a buyer of flyash at Sunstate in 2003 at the outset of his employment, Dr Nairn purchased from QCL fine grade flyash sourced from Tarong but found that run-of-station flyash purchased from QCL and sourced from Swanbank was adequate for intergrinding so as to produce Sunstate’s blended flyash cement product.
245 For almost the entire period of Dr Nairn’s employment at Sunstate, Sunstate did not offer flyash for sale as a separate product to customers (that is, until shortly before March 2007). According to Dr Nairn, Sunstate confined itself, so far as flyash is concerned, to offering only a flyash cement blended product. It chose not to supply flyash as a separate product either to its buyers of blended products or to concrete producers seeking to acquire flyash separately or to actual or potential buyers of flyash at all. It took that commercial course because it did not have the processing infrastructure installed or the required storage facilities. In the period 2003 to just before Dr Nairn’s departure from Sunstate in March 2007, Dr Nairn was not a supplier of flyash, separately, of any grade and ceased being a buyer of fine grade flyash as a production input for Sunstate’s blended flyash cement product offering.
246 For present purposes, it should be noted that whatever possibilities may, or might, or could have been pursued by Sunstate as an actual or potential supplier of flyash (presumably fine grade flyash at about 85% passing a 45 micron sieve) by grinding run-of-station flyash in its Fisherman Island mills, the fact is that in the four year period of Dr Nairn’s direct engagement with decision-making by that company, from March 2003 until March 2007, (as a function of the strategy he and the General Manager, Mr Young, had decided upon), Sunstate’s product offerings were focused upon blended cement products and predominantly slag cement blends. Sunstate chose, as a deliberate strategy, the commercial behavioural path of not offering a separate flyash product for sale until 2007 shortly before Dr Nairn’s departure to Austrak.
247 Having regard to Dr Nairn’s expertise in the morphology of flyash collected from power stations and ash collection techniques at power stations about which he speaks, one further aspect of Dr Nairn’s evidence should be noted. At Swanbank, the collection of flyash by electrostatic precipitators meant that some of the collected flyash was capable of use as fine grade flyash in concrete production without the need to classify (or process) the flyash into differential grades. By selecting run-of-station flyash from “specific hoppers”, the flyash collected in those hoppers was fine grade flyash immediately capable of use in concrete production. So, unprocessed run-of-station flyash, might include flyash requiring classification and flyash fit for use as fine grade flyash in concrete without the need for classification. The introduction of fabric filters at Swanbank, however, increased the need for run-of-station flyash to be classified before it could be used in concrete production. At Tarong, the flyash in flue gases passes through the various zones containing electrostatic precipitators resulting in “natural classification” such that finer grades of flyash are collected in some zones rather than others, and flyash collected from the relevant zones does not need classification for use in concrete production. Flyash collected at Tarong North by fabric filters required classification before it could be used in concrete production.
248 In determining the product dimension of the relevant market or markets, and the functional, geographic and temporal dimensions of those markets (and as a necessary part of that analysis, determining whether a corporation enjoys market power), before examining the content of the contended contravening conduct, it is particularly important to have regard to the evidence of those individuals who engage in the relevant activities of, for example, the production and sale of flyash and cement to concrete producers (or intermediaries); the acquisition or attempted acquisition of flyash from power stations with a view to its collection, handling, beneficiation and storage (whether on site or somewhere else); the sale of a flyash product (exhibiting particular features) to concrete producers as a partial substitute for cement in concrete manufacture; operating batching plants; buying transportation services for flyash, cement, aggregates or other materials constituting elements making up a concrete “batch”; and activities of seeking to acquire flyash from power stations either for direct use in concrete manufacture or for re-supply or both, and other relevant transactions. Particular regard ought to be given to the experience and knowledge of such men and women, especially those who have dedicated a large part of their working life to engaging in these activities.
249 Although, of course, the task of market definition is aided by analytical postulates of whether an hypothetical monopolist in the narrowest possible market might profitably impose and sustain a small but significant, non-transitory increase in price conventionally in the range of 5% to 10% as, in part, a measure of the boundaries of substitution possibilities, ultimately, the task of market definition is not simply or even predominantly a theoretician’s exercise. The process of market definition is undertaken, for the purposes of s 46 of the Act, in order to determine whether the relevant corporation enjoys a substantial degree of market power. Market power is a state. It subsists in a corporation in a market and is normally measured by whether the corporation is free of any constraint upon charging more and giving less. The anterior question of determining the boundaries of the market is undertaken only for the purpose of determining the factual question of whether the relevant corporation enjoys a substantial degree of that power. However, the task of market definition, although necessarily a construct, involves underlying matters of fact to be determined by witnesses of fact. Their views of the product and the scope of the market expressed in their evidence, their contemporary letters, emails, notes, formal submissions and other documents is very likely to be the most informed view of the factors determining those questions.
250 In determining the relevant market or markets, I propose to examine the way in which these engaged participants have described their understanding of the market in which they understood they were acting. These experienced individuals were not only astute to the scope of actual transactional daily competition confronting them and their organisations but were also astute to at least some of the potential rivals, over time, who might be likely to engage with them in, for example, the acquisition or supply of flyash (of one kind or another) or its substitutes. Many of them were astute to the logistics costs of moving flyash, particularly by road, from one power station source of supply (acquired from the relevant seller of the flyash) to batching plants. Many of them were astute to the costs, margins and rates of return incurred in undertaking particular activities in relation to the acquisition and use of flyash as a partial substitute for cement. In examining all of the evidence of market participants, my immediate purpose is to identify the market or markets relevant to a determination of the conduct contraventions said to have occurred in a particular market and at the same time determine whether a particular corporation enjoyed a substantial degree of power in that market.
251 Before examining those matters, it is first necessary to identify the activities of companies within the respondent group of companies; the change in the structural arrangements by reason of the steps implemented in May 2003; the sources of production of flyash; the participants engaging with those sources and the history of their relationship; and further aspects of the relevance of flyash to concrete manufacture. This is made necessary because no aspect of this evidence has resulted in any agreement between the parties on any meaningful matter in issue in the proceeding, apart from some aspects of the market position of the three major buyers of flyash in South East Queensland.
252 All facts must be found.
253 As to Dr Nairn’s evidence, I accept his evidence.
PART 4
The respondents and other relevant ownership entities
254 The Commission asserts that conduct events occurred in two separate periods. The first period concerns the conduct of corporations and individuals prior to 31 May 2003 and the second period concerns conduct from 31 May 2003.
255 In the period up to 31 May 2003, the Commission asserts that the third respondent, Cement Australia (Queensland) Pty Ltd (“QCL”) then called Queensland Cement Ltd (also “QCL”), the fourth respondent Pozzolanic Enterprises Pty Ltd (“Pozzolanic”) and the fifth respondent Pozzolanic Industries Pty Ltd (“Pozzolanic Industries”) engaged in contravening conduct as pleaded. In the period prior to 31 May 2003 the ownership structure of the entities in the QCL chain of companies was this. QCL was an entity owned and controlled by a Swiss multinational corporation called Holcim Ltd through its wholly owned subsidiary Holset Pty Ltd. QCL held 100% of the issued shares in an entity called Cementco Investments Pty Ltd (“Cementco”). Cementco held 100% of the issued shares in Pozzolanic Holdings Pty Ltd (“Pozzolanic Holdings”). Pozzolanic Holdings held 100% of the issued shares in Pozzolanic Industries and Pozzolanic Industries held 100% of the issued shares in Pozzolanic.
256 In the period prior to 31 May 2003, a company called Australian Cement Holdings Pty Limited (“ACH”) carried on business in Australia as a supplier of cement and related cementitious products to the concrete industry in Australia. The issued shares in ACH were held as to 50% by CSR and as to 50% by Hanson, more commonly known in Australia as “Pioneer”. The CSR group of companies carried on concrete and quarrying operations in Australia and overseas and produced pre-mixed concrete, concrete pipes and other building products. The Hanson group operated concrete and quarrying businesses in Australia and overseas.
257 On 31 March 2003, CSR undertook a de-merger which involved a transfer of CSR’s concrete and aggregates business (trading in Australia under the name “Readymix”) together with CSR’s 50% interest in ACH to an entity described as “Rinker”.
258 Mr Gregory Blackford swore an affidavit (Ex-60) in the proceedings dated 25 November 2010 in which he explains aspects of the activities of ACH. By describing ACH as a leading supplier of cement and related cementitious products to the concrete industry in Australia, Mr Blackford described those materials so supplied as traditional or General Portland cement (GP cement) and other cementitious materials used in the production of concrete such as flyash, ground granulated blast furnace slag, limestone fines and silica fume. Mr Blackford says that ACH manufactured and distributed cement, blended cement and flyash. Mr Blackford described ACH as a joint venture of its shareholders CSR and Hanson to whom ACH supplied, in the year ending 31 March 2003, approximately 78.2% of its cementitious products (cement, flyash and blended cement). By blended cement, Mr Blackford means a cement and flyash blend (Ex-60, para 18). From 1 March 1991 to 24 September 2003, Mr Blackford was the Company Secretary of ACH and an Alternate Director of ACH from 15 December 1999 to 20 March 2003 (Ex-60, para 3).
259 In March 2003, ACH owned and operated a cement production facility at Kandos in New South Wales with a capacity of 450,000 tonnes of clinker per annum; a cement production facility at Railton in Tasmania with a capacity of 1,100,000 tonnes of clinker per annum; clinker grinding facilities both at Kandos and Railton; distribution terminals at Clyde, Glebe Island, Newcastle and Coffs Harbour (dormant as at March 2003) in New South Wales, a Melbourne cement facility (50% owned with Independent Cement Ltd) in Victoria and distribution terminals at Devonport in Tasmania, at Adelaide in South Australia (then leased to Adelaide Brighton Ltd) and the lease of a potential distribution terminal in Brisbane capable of potential product distribution. ACH operated shipping assets, primarily the MV Goliath which transports cement from Devonport to Melbourne, Sydney and Newcastle. ACH also owned Besser Tasmania, the manufacturer and seller of concrete pavers, blocks and other concrete products. ACH held 82% of the issued shares in Melcann Ltd (“Melcann”) which supplied bagged cement and dry-mix concrete in Victoria, New South Wales, South Australia and Tasmania. Melcann held 50% of the issued shares in Queensland Central Distributors Pty Ltd (“QCD”) which supplied bagged cement and dry-mix concrete in Queensland, the remaining 50% being held by QCL (Ex-60, paras 19 and 20).
260 Within ACH responsibility for the distribution of cementitious products was divided between two divisions. The bulk transport of cementitious products from the source of manufacture to the final point of dispatch represented one division. This transport would occur by ship from Railton in Tasmania to Melbourne, Sydney or Newcastle, or by rail from Kandos in New South Wales to Clyde. The General Manager of Operations was responsible for this division and reported to the Managing Director of ACH.
261 The second division was concerned with the delivery of cementitious products from the final point of dispatch to the customer’s plant. This typically occurred by truck. The General Manager of Sales and Marketing, Mr Shaun Clarke, was responsible for the delivery of products to customer plants. Mr Clarke reported to the Managing Director of ACH. Mr Clarke was responsible for ACH’s interface with customers (Ex-60, para 21).
262 ACH held a 50% interest in a joint venture company called Flyash Australia (FAA). The other 50% owner was Boral. Mr Blackford was an Alternate Director of FAA in July 1998 and then from June 2003 to March 2005. FAA carried on the business of purchasing flyash from coal-fired electricity generating plants in New South Wales and South Australia. Flyash purchased by FAA from New South Wales power stations (at Eraring, Mt Piper and Bayswater) was sold “roughly equally” to FAA’s two shareholders, Boral and ACH at cost plus a margin.
263 Accordingly, in a structural sense, ACH represented a joint venture vehicle owned by Hanson (Pioneer) and Rinker (Readymix) which was engaged in the production of cement, the grinding of clinker, the production of flyash (through the FAA joint venture with Boral) used in concrete manufacture, and the operation of distribution terminals all of which represented products and services consumed very substantially by ACH’s shareholders who were engaged in downstream activities of concrete production (among other things). Those shareholders had a direct interest in acquiring cementitious products from their jointly owned production entity.
264 In the course of analysing the business case, on behalf of ACH, for the proposed merger between the QCL group of companies and ACH, Mr Blackford considered that one important point of distinction between ACH and QCL was that QCL was not an integrated cement and concrete business, whether by direct shareholding in subsidiaries or through joint venture arrangements, and did not necessarily have guaranteed access to large downstream concrete customers. Mr Blackford considered (or understood) that this subjected QCL to a degree of vulnerability in the period prior to 1 June 2003 as although QCL was an entity which enjoyed “high home market shares”, it enjoyed “little channel” and that one of the key identified strategic issues for QCL, which Mr Blackford considered to be a correct assessment (paras 50 and 51 of his affidavit sworn 25 November 2010) was that 50% of QCL’s sales were to three customers being CSR, Hanson and Boral and that a key strategy for QCL involved the consideration of merger or alliance opportunities with industry players and the diversification of QCL’s customer base.
265 In a Capability Statement dated October 2001 (Ex-17, ENC-3) submitted by Pozzolanic to Tarong Energy in support of Pozzolanic’s Expression of Interest (“EOI”) in response to TEC’s call for expressions of interest for the sale and removal of flyash at Tarong and Tarong North Power Stations, Pozzolanic describes itself as a company which had established flyash processing and marketing in Queensland at the Swanbank Power Station in 1966 providing the construction industry with a quality flyash product. The statement says that within Queensland, Pozzolanic processes and markets “premium grade flyash” as well as other flyash and bottom ash products from coal-fired power stations at Gladstone, Callide B, Tarong, Swanbank and Stanwell; Pozzolanic removes flyash from power stations and processes it to meet the requirements of “AS 3582.1”; Pozzolanic pioneered the use of flyash in concrete in Australia; the “flyash market in Queensland is fully saturated, with the economic and physical benefits of using ash well understood”; Pozzolanic also sells ash into northern-NSW and is continuing to develop the market in Victoria; with no suitable flyash produced in that State, Pozzolanic supplies Victoria primarily through shipping the product from Central Queensland, and the Central Queensland market continues to grow with Pozzolanic’s aim being to maximise the use of flyash.
266 The Capability Statement describes Pozzolanic as “a member of the QCL Group”, a wholly owned subsidiary of the international Holcim group, one of the world’s leading suppliers of cementitious materials, aggregates and concrete. The statement describes Holcim as a company founded in 1912 and listed on the ZÜrich and London Stock Exchanges. As to the QCL group, the statement says this: the group is Queensland’s largest manufacturer and distributor of cement and one of Australia’s major marketers of concrete materials; QCL was incorporated in 1914; the group has assets from Cairns to Melbourne; since 1990 QCL has been wholly owned by Holcim Ltd; the products offered by QCL include clinker produced from QCL’s 1.6 million tonnes per annum clinker plant at Gladstone, Portland and blended cement products, flyash, slag, high grade quicklime and hydrated lime, distribution services through a transport fleet of trucks (and rail and sea distribution), quarry materials (aggregates) used in concrete production, and the provision of technical services in cement and concrete technology.
267 On 31 May 2003, Hanson and Rinker agreed with Holcim to merge their respective interests in ACH and the QCL group of companies. ACH acquired the issued shares in QCL thus creating the new “Corporate Group”. ACH was re-named Cement Australia Holdings Pty Ltd (“CA Holdings”), the second respondent, and became the holding company for the group of companies formerly controlled by QCL and ultimately Holcim.
268 The shares in the merged business undertaking are held as to 50% by Holcim, as to 25% by Rinker and as to 25% by Hanson.
269 Apart from constituting the new Corporate Group, a partnership was also established and invested with the objective of conducting a business consisting of logistics, distribution, sales, marketing and the operation of certain storage facilities for cementitious products. A new company called Cement Australia Pty Ltd (“Cement Australia”), the first respondent, was incorporated with the shares held by Holcim, Rinker and Hanson in the same proportions as the Corporate Group.
270 The newly formed Corporate Group retained ownership of ACH’s and QCL’s manufacturing assets and assumed responsibility for manufacturing cementitious products. The partnership became responsible for the distribution, marketing and sale of cementitious products. Cement Australia was appointed as agent for the partnership in the performance of the partnership functions. Cement Australia was also appointed as manager of the Corporate Group to provide management services to that group of companies, in its capacity as agent for the partnership.
271 These new arrangements were constituted by a series of agreements executed on 31 May 2003 called the Framework Agreement; the Partnership Agreement; the Cementitious Products Acquisition Agreement; the Licence Agreement; the Agency Agreement; the Management Agreement and the Secondment Agreement.
272 The post-merger corporate structure takes this form:
273 As to the Framework Agreement, the agreement was entered into by the following participants: Holbris Pty Ltd and Holglad Pty Ltd as the Holcim Partners; Holset Pty Ltd, a Holcim entity (being the holder of Holcim’s 50% interest in the issued shares in CA Holdings); Readymix Cement Pty Ltd as the Readymix Partner; Readymix Holdings Pty Ltd (being the holder of Readymix’s 25% interest in the issued shares in CA Holdings), a Rinker entity; Hanson Australia Cement Pty Ltd as the Hanson Partner; Hanson Australia Investments Pty Ltd (being the holder of Hanson’s 25% interest in the issued shares in CA Holdings); CA Holdings and Cement Australia.
274 The Framework Agreement contemplates that Holcim, Hanson and Readymix will establish a partnership, a new Corporate Group under the control of CA Holdings and appoint a manager. The business of the partnership would initially consist of logistics, distribution, sales, marketing and storage operations for cementitious products but might extend to the conduct, under licence, of manufacturing, packaging and other storage operations although until such time as the partnership embarked upon those further activities, those operations would be carried out by the Corporate Group and all cementitious products produced by the Corporate Group would be sold to the manager, Cement Australia, as agent for the partnership.
275 Cement Australia would act as an agent for the partnership in carrying on the partnership business.
276 The Framework Agreement provides that subject to the terms of that agreement, the Agency Agreement and the Management Agreement, the manager, Cement Australia, will make all day-to-day operating decisions in relation to the partnership once established, as agent for the partnership, and day-to-day operating decisions in relation to the Corporate Group, in Cement Australia’s capacity as agent for the partnership.
277 On 31 May 2003, the partnership was established between Holcim, Readymix and Hanson in the ratios 50%, 25% and 25% by the Holcim partners, the Readymix partner and the Hanson partner.
278 On 31 May 2003, the Holcim partners, the Readymix partner and the Hanson partner and Cement Australia entered into the Agency Agreement.
279 Under the Agency Agreement, Cement Australia assumed responsibility to undertake, establish, conduct, manage and operate the business of the partnership and transact the business affairs of the partnership; manage the business; negotiate and enter into contracts with suppliers to the business of the partnership; act as the primary point of contact for suppliers; negotiate and enter into contracts with customers of the business of the partnership; act as the primary point of contact for customers; facilitate dealings with customers; act as employer of the employees and accept secondments of employees seconded to the partnership from the Corporate Group so as to enable Cement Australia to properly and efficiently conduct its functions under the Agency Agreement; enter into, execute and perform contracts with customers, employees, suppliers and other parties relating to the business undertaking of the partnership; market and sell on behalf of the partnership the products marketed and sold by the partnership; and otherwise provide management services to CA Holdings and entities controlled by it.
280 On 31 May 2003, Cement Australia as agent of the partnership and described in the Management Agreement as the “Manager” and 24 companies including CA Holdings, QCL, Pozzolanic and Pozzolanic Industries entered into the Management Agreement. Under the Management Agreement, each of the companies engaged Cement Australia (and Cement Australia accepted the engagement) in its capacity as agent of the partnership, to provide such services as might be required by each of the companies including but not limited to management services, consulting, administrative and related services on the terms and conditions of the Management Agreement.
281 On 31 May 2003, CA Holdings and Cement Australia as agent for the partnership entered into the Cementitious Products Acquisition Agreement (the “CPA Agreement”) by which CA Holdings on behalf of the Corporate Group would act as the seller on its own behalf and on behalf of each of its related bodies corporate (called the “Seller Group”), and Cement Australia as agent for the partnership would act as the buyer, of “all Cementitious Products [defined to include cement, clinker, related cementitious materials, flyash and slag] produced by the Seller Group”. The CPA Agreement provides that during the term, Cement Australia will purchase from the Seller Group (and the Seller Group will sell) all the cementitious products produced by the Seller Group in a contract year and if Cement Australia is unable to purchase all of the cementitious products produced by the Seller Group, the seller may sell any surplus products to third parties and Cement Australia will pay the seller the difference between the amounts received by the seller from those third party sales and the amount which the seller would have received from Cement Australia if it had complied with the obligation to purchase all of the seller’s cementitious products.
282 The CPA Agreement also provides that Cement Australia shall advise the seller of the buyer’s requirements for cementitious products and the seller group will supply those products on an ex-works basis at the works, plant, terminal or other facility nominated by the seller as set out in Schedule 2 to the Agreement. Cement Australia is to be responsible for arranging transportation of the cementitious products from the Schedule 2 location.
283 As to price, the price is to be, unless the parties otherwise agree, the amount (cost) per tonne of the relevant cementitious product which the seller group entity incurs (inclusive of all raw material costs, labour costs, other fixed and variable overheads, all product research, design and development costs, all administrative costs and an appropriate apportionment of interest and other financing costs) in order to supply the nominated product to Cement Australia, plus a mark-up on that cost of 10%, subject to a review of the formula for the calculation of the relevant price to be undertaken by the participants so as to “ensure the mark-up is consistent with the functions undertaken, the risks assumed and the assets employed by each party”.
284 Apart from pricing supply of a cementitious product on the footing of a cost plus 10% mark-up as indicated, an amendment was made to the CPA Agreement by a document described as “Cement Australia Corporate Group and Partnership Term Sheet no. 1, 27 September 2005” which has the effect described in aspects of the evidence given by Ms Carol Boman. Between 2005 and the end of 2006 Ms Carol Boman was the “Fly ash Management Accountant” for Cement Australia responsible for the preparation of accounts and management reports for Cement Australia’s “Mineral Included Component” (“MIC”) business which includes both the flyash and slag businesses. In addition, Ms Boman was from the beginning of 2007 to 31 January 2010 the “Commercial Manager – Marketing & Sales” for Cement Australia responsible for overseeing the preparation of accounts and management reports for the MIC business, the lime business and bulk revenues derived from the sale of cement, blended cement, flyash, slag and lime. The amendment to the CPA Agreement contemplates that should the partnership require the Corporate Group to secure a raw material source which is not materially utilised in supplying cementitious products to the partnership in any financial year, the Corporate Group (relevant entity) will be entitled to recover any associated costs greater than $100,000 incurred in securing the source by way of a separate charge at cost to the partnership but cannot otherwise recover such costs as “product supply costs”. In other words, the actual costs incurred in securing the new source will be a cost to be invoiced to Cement Australia but that cost will not attract any mark-up.
285 An example of such a cost is set out as the costs incurred in calendar year 2004 concerning the Millmerran flyash royalty payment.
286 Ms Boman in her affidavit sworn 5 February 2010 (Ex-50) describes aspects of the financial flows occurring between the Corporate Group and the partnership based on her experience and role as Cement Australia’s Flyash Management Accountant and Commercial Manager in the years 2005 to 2006.
287 The main four types of financial flows occurring between the Corporate Group and the partnership involve a corporate partnership mark-up, a management fee, a licence fee and the costs associated with securing supply of cementitious products (Ex-50, para 19).
288 As to the mark-up as between the Corporate Group and the partnership, the key elements are based upon these factors. The Corporate Group manufactures cementitious products and undertakes all steps required (and therefore bears the costs) up until the point at which the cementitious products leave the manufacturing site which is generally referred to as the point of dispatch. At the point of dispatch the Corporate Group sells the cementitious products to the partnership at cost plus a mark-up which is referred to as the “Corporate Partnership Mark up” and the partnership then distributes and sells the cementitious products to customers. In respect of cement that is manufactured and transported by truck, the mark-up would be added to the cost price of the cement up to and including the point at which it is loaded into the truck. No mark-up is applied to the subsequent cost of transportation by truck.
289 The corporate partnership mark-up is calculated prior to the beginning of each financial year during the budgeting process which is generally finalised in October or November in each year. The level of mark-up may vary from year to year and the movement in the mark-up occurs because it is intended to provide the Corporate Group with a reasonable level of return on its assets. The Corporate Group issues an invoice to the partnership in respect of both the cost price and the mark-up. Where Pozzolanic manufactures and processes flyash in Queensland, Pozzolanic applies a mark-up to the cost of production of flyash and invoices the partnership.
290 As to the management fee, the Corporate Group is required to pay a management fee to the partnership. The management fee is designed to remunerate the partnership for its provision of management accounting and administrative services to the Corporate Group.
291 On 31 May 2003, the Holcim partners, the Readymix partner, the Hanson partner, ACH, Australian Cement Ltd, QCL, Pozzolanic and Pozzolanic Bulk Carriers (Qld) Pty Ltd entered into a Licence Agreement which provides that particular existing assets of the Corporate Group are to be licensed to the partnership for use in the distribution of cementitious products and the provision of management services. The partnership is to pay a licence fee to the Corporate Group for the use of those assets. Ms Boman explains that the licence fee is designed to compensate the Corporate Group for the use of its distribution assets.
292 As to the costs incurred by the Corporate Group in sourcing the supply of cementitious products, the partnership is required to provide the Corporate Group, generally, with a reasonable rate of return on its deployed assets. When the Corporate Group incurs costs in connection with securing raw materials as inputs in the production of cementitious products supplied to the partnership, the Corporate Group is entitled to a mark-up on these costs on the footing that they are production costs. However, if costs relating to securing raw material inputs do not result in the production of cementitious products which can be sold to the partnership and then to customers of the partnership, the Corporate Group is not entitled to apply a Corporate Partnership Mark up to those costs although the Corporate Group is entitled to “re-charge” these costs directly to the partnership (Ex-50, para 26). Ms Boman illustrates the point by observing that in securing the rights to flyash at Millmerran Power Station, Pozzolanic incurred royalty charges but because the partnership did not use Millmerran flyash for sale to its customers, the royalty cost did not attract any mark-up to the Corporate Group but were simply costs directly charged to the partnership.
293 As to the accounting processes in relation to these financial flows, Ms Boman says this.
294 When a financial flow occurs as just described, an invoice is raised by the payee and an expense is recorded in the accounts of the payer. Because the financial flows as described occur within Cement Australia related entities, the standard accounting practice in recording the transactions involves making a corresponding entry in the relevant Cement Australia inter-company loan accounts. Thus, a record is maintained of all of the fees and payments that are owed from one Cement Australia entity to another. These inter-company balances are recorded in separate accounts for each of the entities related to Cement Australia and are ultimately consolidated.
295 Where a payment to a third party occurs, a purchase order is issued by Cement Australia to the third party and is recorded in the accounts of Cement Australia. On receipt of the goods or services, a goods receipt is entered in Cement Australia’s accounting system. The vendor is then paid by Cement Australia using funds held by its “treasury company”. Prior to the merger of ACH and QCL, the treasury company for QCL and its related entities including Pozzolanic and Pozzolanic Industries was QCL (Ex-50, para 31).
296 After the merger, the treasury company continued to be QCL in its re-named form Cement Australia (Queensland) Pty Ltd. When a payment is made by QCL as the treasury company on behalf of a particular company within the group, a corresponding entry is made in the inter-company loan account to reflect the fact that the company which incurred the payment owes the amount so paid on its behalf, to QCL. For example, should Pozzolanic be required to make a payment to a third party in relation to capital expenditure, QCL would make the payment and an entry would be made in the inter-company loan account to reflect an advance made to Pozzolanic by QCL. In those circumstances where Pozzolanic is required to make a payment to a power station in respect of flyash royalties, an entry would be made in the inter-company loan account as between QCL and Pozzolanic, upon QCL making the payment. Similarly, where a payment was received by QCL from a third party prior to the merger, that money was deposited into the account of QCL as the treasury company and upon receipt, a corresponding entry was made in the inter-company loan account to reflect the relevant company’s entitlement to the payment with a corresponding adjustment to the loan accounts of QCL.
297 Since the merger, a similar practice prevails.
298 Where a payment is received by the partnership on behalf of the Corporate Group from a third party, that money is deposited into the account of the partnership and is then transferred to QCL as the treasury company on a daily basis. On receipt of the relevant amount by QCL, a corresponding entry is made in the inter-company loan account to reflect the fact that QCL owes the partnership the amount which has been transferred to QCL.
299 I find as facts those matters set out at [255] to [298].
300 At this point, it is convenient to mention Mr Blackford’s observations about the conduct of Board meetings in the post-merger environment.
301 In making these observations, Mr Blackford speaks in his capacity as the Chief Financial Officer of Cement Australia and joint Company Secretary of CA Holdings and Cement Australia. Consistent with cl 3.1 of the Framework Agreement, the Corporate Group of companies and Cement Australia (the issued shares in which, as described earlier, are held by Holcim, Hanson and Rinker rather than by any company in the Corporate Group) each have a Board of Directors. The responsibility of each Board is to oversee the management of the business of the Corporate Group and to oversee the management of the business of Cement Australia. Each Board may do all things necessary to discharge that responsibility including determining the overall business strategy and direction for each company; performing any function allocated to a company pursuant to the Partnership Agreement, a constitution of the company or the Framework Agreement; and approving annual budgets and business plans.
302 Mr Blackford says that the applied governance arrangements operate in this way. Board meetings are held “simultaneously for the Corporate Group, CAPL [Cement Australia] and the Partnership Management Committee” (Ex-60, para 96). Mr Blackford said that while there is no requirement for the directors on each Board of the Corporate Group, Cement Australia and the Management Committee of the partnership to be common, “in practice they always have been”. The attendees at these simultaneous meetings of the Boards of the Corporate Group, Cement Australia and the Management Committee of the partnership include the directors of Cement Australia, all alternate directors of Cement Australia, the Chief Executive Officer, the Chief Financial Officer, the Company Secretary and other members of the Executive as and when required.
303 From June 2003, these meetings generally occurred on a monthly basis. However, from 2004 the meetings began to be held every two months, approximately. Prior to the Board meetings, a Board report or set of Board papers is prepared and distributed to the Board. Mr Blackford was responsible for the compilation of the Board papers although the content of them is prepared by each respective General Manager. In most cases, the material distributed to the Board in the “bound pack” of materials will have been first discussed at an Executive meeting. Before the bound pack is provided to the Board members, both Mr Blackford and Mr Chris Leon, the Chief Executive Officer and Managing Director of Cement Australia, will generally review the papers.
304 I accept Mr Blackford’s evidence on these matters of decision-making.
305 It is now convenient to return to the period prior to 31 May 2003 in relation to the practises adopted within the QCL group of companies prior to the merger.
306 The practises described by Mr Blackford are very similar to those which prevailed within the QCL group of companies.
307 Between 22 February 2002 and 19 April 2003, Mr Philippe Arto was a Director of QCL, Pozzolanic and Pozzolanic Industries. Between February 2002 and March 2003, Mr Arto was not only a Director but also the Managing Director of QCL. He thus represented a bridge between the Board and the Executive Management Group of QCL.
308 Prior to this appointment, Mr Arto had discharged a number of senior positions within the Holcim group of companies. Between 1992 and 1998, he had been the General Manager Aggregates, for Origny, a Holcim group company and between 1999 and 2002, immediately before his appointment as Managing Director of QCL, he says that he had been General Manager, French market, for Obourg-Origny, a Holcim group company.
309 Mr Arto reported to Mr Jerry Maycock, the Chairman of the Board of QCL. Mr Maycock also held the position at that time of Area Manager for Australia and New Zealand for the Holcim group. During Mr Arto’s period as Managing Director of QCL, the General Manager of Sales and Distribution for QCL was Mr Ian Ridoutt. Mr Ridoutt reported to Mr Arto. The Manager of Pozzolanic was Mr Michael Wilson. Mr Wilson reported to Mr Ridoutt.
310 It will be necessary to examine more closely the particular relationship between Mr Arto, Mr Ridoutt and Mr Wilson in the context of the events which occurred from the moment in time of Mr Arto’s appointment and contextually the role and function of Mr Ridoutt and Mr Wilson in the analysis of particular matters which became important in the decision-making of Mr Arto, Mr Maycock and QCL. For present purposes however, Mr Arto said this (T, p 1232, lns 1-24), about decision-making. Pozzolanic was a subsidiary of QCL. Because Pozzolanic was 100% owned by QCL, Jerry Maycock, Mr Arto (Directors) and Ron Schodel (Secretary) sat on the Boards of QCL and Pozzolanic. The Directors held the Pozzolanic Board meeting first in time so as to go into detail about aspects of the flyash business and then report to the QCL Board on the main component of the strategy to be adopted or, for example, in making requests of the QCL Board for approval of capital expenditure. The QCL Board had to approve capital expenditure items.
311 Mr Arto’s observation on this last matter is consistent with Ms Boman’s observations about the treasury role QCL performed.
312 Mr Arto said that he was prepared to concede that Pozzolanic was a 100% owned subsidiary and was “fully managed in an integrated way with QCL, so I did not make any significant difference between the two legal entities as far as I was concerned” (T, p 1232, ln 21).
313 Mr Jerry Maycock gave evidence that in 1983 he began working in the cementitious products industry by accepting a commercial role with a New Zealand company called Milburn Cement which was a company in which Holcim had a minority shareholding. Mr Maycock became the Chief Executive Officer of that company in 1988 and remained there until 1992 (T, p 1331, lns 34-46).
314 In 1992, Mr Maycock was appointed Director and Chief Executive Officer of QCL which was then a wholly owned subsidiary of Holcim. Mr Maycock held that position until 1998 and in the period 1992 to 1998 Mr Maycock was also a Director of Pozzolanic which was at all relevant times a wholly owned subsidiary of QCL through the chain of companies earlier described (T, p 1332, lns 24-39).
315 Pozzolanic’s responsibility within the group was the conduct of the flyash business and the provision of bulk materials transport through the operation of a bulk carrier transportation fleet which was used to transport flyash and cement and some other products.
316 In 1998, Mr Maycock ceased acting as the CEO of QCL and became Area Manager and Senior Vice-President of Holcim. He was appointed Non-Executive Chairman of QCL. He held that role until the merger with ACH on 31 May 2003. He then became the Non-Executive Chairman of the Cement Australia group (T, p 1335, ln 2). Mr Bill Townsend, an Executive of the Holcim group, replaced Mr Maycock as the Managing Director of QCL in 1998. Mr Townsend was subsequently replaced as CEO of QCL by Mr Arto in February 2002. At about the time that Mr Maycock became the Non-Executive Chairman of Cement Australia on 1 June 2003, Mr Christopher (Chris) Leon, the sixth respondent, was appointed Chief Executive Officer of Cement Australia.
317 Mr Maycock gave evidence of the scope of his engagement in decision-making after 1998 as follows (T, p 1335, ln 10ff).
318 After his resignation as Chief Executive Officer of QCL in 1998, he did not have executive responsibility for the operation of QCL or any of its subsidiaries and his involvement with QCL was generally limited to reviewing Board papers and attending meetings of the Board of Directors and discharging his role as a Holcim Senior Vice-President. Mr Maycock however did engage in “things like annual budgeting reviews and strategic reviews, that type of activity”. After ceasing to be CEO, Mr Maycock’s principal point of contact with QCL management was Mr Townsend and then Mr Arto. As to engagement with members of the management team below the level of Mr Townsend or Mr Arto from the time Mr Maycock ceased being CEO, he did not routinely communicate with members of the management team although he would see them on occasions or at Board meetings. After the merger, Mr Maycock dealt with Mr Leon and rarely (other than occasionally at Board meetings), dealt with members of the management team below the level of Mr Leon. As to Mr Maycock’s engagement with Mr Townsend and Mr Arto, he did not have a practice of involving himself in management decisions.
319 As to the functioning of Board meetings of companies in the QCL group of companies prior to the merger, and then after the merger, Mr Maycock said this. Both QCL and Cement Australia adopted the practice of supplying Board papers to Directors as a “Board pack”. The practice over the period 2002 to 2005 adopted by QCL up to 31 May 2003 and thereafter by Cement Australia was largely common between the two companies. The Board pack would usually be delivered about a week, or three or four business days, before the meeting. Mr Maycock adopted a practice of reading the Board papers in advance of the meeting. If there was something in the Board papers that struck Mr Maycock as contentious or that Mr Maycock did not understand or did not agree with, it was “entirely likely” that he would have spoken to the Chief Executive about it. If the papers were largely self-explanatory or non-contentious or did not involve a “big decision”, Mr Maycock would “probably not” have spoken to the Chief Executive. Board meetings at QCL prior to the merger occurred between eight or 10 times across the period of a year. On average Board meetings occurred every six weeks (T, p 1349).
320 To the extent that QCL conducted activities through separate legal entities like Pozzolanic for various reasons, the Board meetings for the relevant subsidiaries would be conducted at the same time as the QCL Board meeting. Mr Maycock said this: “… we just actually ran one meeting, and then we worked our way through the agenda and through the Board report. And then the company secretary, at the end of the meeting, would write separate minutes for the legal entities, you know, as required, on a sort of – well, he would just of notionally allocate the time that we had spent overall and he would allocate it to the various meetings” (T, p 1349, lns 39-44).
321 Mr Maycock said that a similar practice was adopted after the merger although things may have changed a little as companies like Pozzolanic may have just become, in effect, an organ of management (T, p 1350, ln 2).
322 I accept this evidence of Mr Arto and Mr Maycock concerning the decision-making process they describe.
PART 5
Tarong and Tarong North Power Stations
323 Although Pozzolanic had a contract (ATB SB 5.90) with the Queensland Electricity Generating Board (“QEGB”, the then owner of the Tarong Power Station), as early as 7 June 1984 with subsequent renewals which will be mentioned further shortly, Tarong Energy Corporation Limited (“TEC”), in August 2001, publicly advertised for expressions of interest for the sale and removal of flyash from both the Tarong Power Station (“Tarong”) and the Tarong North Power Station (“Tarong North”). In 1997, ownership of the Tarong Power Station was transferred to TEC, a Government Owned Corporation of the State of Queensland. In August 2001, Tarong North had not been commissioned. It was commissioned in 2003 and is jointly owned by TEC and a consortium of Japanese companies. Tarong North Pty Ltd (“TNPL”) manages Tarong North and TEC supplies various services including procurement services to TNPL.
324 In the documents issued by TEC in support of the call for expressions of interest (ATB SB 5.94), TEC describes Tarong and Tarong North as coal-fired electricity generating power stations near the town of Nanango situated approximately 180 kilometres north west of Brisbane. Tarong consists of four 350 megawatt generating units producing total ash of 1.5 million tonnes, on average, per annum with “flyash of cement grade of approximately 300,000 tonnes” per annum. Tarong North consists of one 450 megawatt production unit. Tarong ash is described as being “Precipitator graded ash” of good cementitious properties. Tarong North incorporates a “Bag house filter” or fabric filter system for capturing flyash particles. Tarong is said to be burning Meandu coal. Upon commissioning, Tarong North would also burn Meandu coal.
Mr Huskisson
325 Mr Russel Huskisson is employed by TEC in the position of “Production Officer – Business Services”. Mr Huskisson has been employed in various roles at Tarong since May 1997. In 2002 he became involved in the construction of Tarong North which was completed in 2003. Thereafter, he worked in the provision of Engineering and Commercial Services before taking up his current role in 2004. Since 2004, Mr Huskisson has had responsibility for the sale of flyash, and since 2008 he, together with Mr Leo Tellam, has been responsible for undertaking a project designed to seek out additional opportunities for TEC to sell flyash.
326 Having regard to Mr Huskisson’s background experience in these roles, he gives the following evidence about operational aspects of the Tarong Power Station in his affidavit sworn 19 November 2009 (Ex-21).
327 Tarong is a base load coal-fired electricity generating facility comprising the four generating units already mentioned. When operating at base load (1,400 megawatts), Tarong produces approximately 1.5 million tonnes of ash per annum. Flyash consists of very fine particles which are caught up in the flue gases produced by the power station when burning (pulverised) coal. The flue gases produced at Tarong pass through electrostatic precipitators to remove flyash particles before the gases are released into the atmosphere.
328 Tarong’s electrostatic precipitators are structured and function in the following way.
329 Each of the electrostatic precipitators for each generating unit is divided into six separate zones comprising 24 zones in all (4 units x 6 zones). Each of these zones contain metal plates which hold an electric charge. The plates attract flyash in the flue gas stream and hold the flyash on the metal plates. In Zone 1, every three to five seconds, some of the plates are rapped with a mechanical hammer causing the flyash particles to fall into a bin or hopper below the precipitator. This process occurs continuously. In Zones 2 to 6, a similar process takes place at a slower rate in each zone as the flue gases pass through each zone.
330 Flyash particles caught within the electrostatic precipitators are thus “naturally filtered” according to size (Ex-21, para 14).
331 The largest and therefore the heaviest particles of flyash are captured in Zone 1 while the finest flyash particles are collected in Zone 6. Most flyash produced at Tarong is collected in Zone 1. The volume of flyash collected in each zone decreases across the passage of the zones. The approximate historical annual volume of flyash in tonnes collected in hoppers in each of the zones of Tarong’s electrostatic precipitators when Tarong is operating at base load (with all four generating units engaged) is as follows:
| Zone 1 | Zone 2 | Zone 3 | Zone 4 | Zone 5 | Zone 6 |
| 792,000 | 316,000 | 128,000 | 50,000 | 20,000 | 8,000 |
332 Mr Huskisson says that these figures are based upon historical data available to him and the actual output can vary due to operating factors and the quality of the coal burned (Ex 21, para 16).
333 TEC does not measure the output from the precipitators.
334 Mr Huskisson says that in his role he is generally aware that grades of flyash can be used in concrete production as a replacement for cement and he describes flyash which may be so used as “concrete grade flyash”. He understands that at least one of the requirements of “concrete grade flyash”, so described, is that 80% of the flyash particles are capable of passing a 45 micron sieve (Ex-21, para 17).
335 In the context of a discussion of particle sizes, Mr Huskisson says this.
336 Flyash collected in Zone 1 exhibits a range of particle sizes. Flyash from Zone 1 can be “classified” to remove the coarse material so that the remaining particles can be used as concrete grade flyash (that is, in his terms, 80% of the particles passing a 45 micron sieve). Mr Huskisson understands that Pozzolanic classifies Zone 1 ash, as required, so as to separate out concrete grade flyash and then removes the concrete grade flyash from site by truck. Flyash in Zone 1 not taken by Pozzolanic is disposed of through Tarong’s ash disposal system into the “ash dam”. Any “reject flyash” after classification (being the oversized particles) is returned, from the classification process, to Tarong’s ash disposal system and then to the ash dam.
337 Flyash collected in Zones 2 and 3 is “naturally fine” and can be used as concrete grade flyash (as Mr Huskisson understands that term) without further processing.
338 The finest flyash produced by Tarong is collected in Zone 6.
339 There are, however, significant occupational health and safety issues associated with handling this particular flyash as the ash can contain crystalline silica which, if not properly handled as collected in the Zone 6 hoppers, can cause silicosis, a lung disease brought about by inhaling fine particles of material containing crystalline silica.
340 Under the arrangements which prevailed between Pozzolanic and TEC, Pozzolanic did not remove flyash collected in the hoppers in Zones 4, 5 and 6 at Tarong for use as a cementitious substitute. From the time of Mr Huskisson’s employment at Tarong in May 1997, Pozzolanic has extracted flyash from only Zones 1, 2 and 3 of the electrostatic precipitator zones for each generating unit.
341 Tarong’s flyash disposal system has limited holding capacity.
342 When Tarong operates under normal base load conditions, Zone 1 of the electrostatic precipitators attached to each unit is capable of holding approximately 12 hours of flyash production. If the collection hoppers are not cleared before reaching maximum storage capacity, it becomes necessary to “shut down” the generating unit at significant cost to the power station and thus TEC seeks to keep the collection bins or hoppers at low levels at all times. This is especially so for Zone 1 which collects the largest volume of ash (Ex 21, para 22).
343 As already mentioned, each of the four generating units at Tarong has six precipitator zones (24 zones in all) and in each of the six zones there are four electrostatic precipitators (ie 96 electrostatic precipitators in all: 24 zones x 4 units) each with related collection hoppers. Pozzolanic removes flyash particles from the hoppers in only Zones 1, 2 and 3 for the reasons mentioned by Mr Huskisson. For Zone 1, across all four generating units, there are 16 electrostatic precipitators and so it is for Zones 2 and 3. For the period in issue in these proceedings (and before), Pozzolanic had its own plant and infrastructure connected to all of the hoppers in each of Zones 1, 2 and 3 for all of the 48 electrostatic precipitators (ie 16 zonal precipitators x 3 Zones).
344 TEC operates a system of continuous flyash disposal.
345 Flyash not removed from the site is continuously disposed of through a “wet ash disposal system” in which waste products generated by the combustion processes (being bottom ash, reject coal and rocks from the pulverises of the coal and flyash not removed from the site) are sluiced into a trench with water to create a slurry for transmission to the “ash pits”. This slurry is then sent to the ash dam via an “ash thickening plant” as part of the wet ash disposal system.
346 When operating at full base load capacity (1,400 megawatts), Tarong produces up to one quarter of the electricity required in South East Queensland (Ex 21, para 24).
347 Mr Huskisson says that the generation of electricity is TEC’s “core business”. Mr Huskisson says that there are both operational and financial advantages for TEC in selling by-products produced by Tarong such as flyash and cenospheres rather than disposing of these by-products as waste. Nevertheless, TEC’s primary focus is upon its core business of the generation of electricity and whilst there are some benefits to be derived by TEC in generating revenue from selling flyash produced by Tarong, the sale of flyash is not part of TEC’s core business.
348 The priority for TEC is to ensure that the sale of flyash does not compromise its capacity to generate electricity for dispatch into the National Electricity Market (the “NEM”).
349 Mr Huskisson says that the volume of flyash removed from Tarong Power Station by Pozzolanic varies from day to day. Due to the nature of Tarong’s continuous flyash disposal processes and the variability of the day-to-day demands of Pozzolanic for flyash, it has been necessary for Pozzolanic to “liaise closely” with Tarong staff on a daily basis concerning the operation of the ash collection, treatment and disposal processes. This necessity involves daily communications with Tarong personnel about operations as to the timing and volume of supply required, routine maintenance and any unscheduled outages, changes in coal quality or boiler conditions which may impact on the volume or quality of flyash available, traffic movements on-site, and any occupational health and safety issues that might arise (Ex-21, para 26).
350 Once a week, a more formal operational meeting is conducted between Tarong’s operational staff and Pozzolanic’s onsite manager. The issues discussed typically include Pozzolanic’s ash quality/quantity in the previous week, any maintenance work Tarong has scheduled around the precipitators and safety issues that need to be addressed.
351 The electrostatic precipitators and hoppers at Tarong are located too low in the plant configuration to enable direct access for trucks under the infrastructure. It is simply not physically possible or practical to load trucks from underneath Tarong’s flyash disposal system.
352 In order to extract bulk flyash from the electrostatic precipitators at Tarong, it is necessary for the party extracting flyash to physically connect flyash extraction equipment to TEC’s “ash collection system”. In order to transport flyash to a location where it can be physically loaded into a truck, Pozzolanic operates a number of pneumatic pumps to move the flyash from the electrostatic precipitators/hoppers to a location where the flyash can be processed, if required, and then loaded into trucks and taken from the site.
353 Whilst Pozzolanic has upgraded or replaced parts of its plant over time, Pozzolanic, to the best of Mr Huskisson’s knowledge and recollection, has had flyash extraction equipment attached to all of the hoppers in Zones 1, 2 and 3 of the electrostatic precipitators since Mr Huskisson commenced employment at Tarong in May 1997 (Ex 21, para 32).
354 It follows that Pozzolanic has had its flyash extraction equipment attached to the precipitators/hoppers in each of Zones 1, 2 and 3 for each of the four generating units (48 precipitators in all with related hoppers: 4 units x 12 precipitators) at least since May 1997. According to Mr Huskisson’s volume analysis mentioned earlier, Zones 1, 2 and 3 collect, on average, 1,236,000 tonnes of flyash per annum and Zones 2 and 3 collect 424,000 tonnes of flyash which generally meets Pozzolanic’s standard for concrete grade flyash and exceeds the Australian Standard for fine grade flyash.
355 Flyash not taken by Pozzolanic is mixed with water and disposed of in the course of the power station’s ordinary operations. This includes flyash collected in hoppers in Zones 4, 5 and 6. As to Zones 1, 2 and 3, Mr Huskisson says that it would be possible to make flyash not taken by Pozzolanic from Zones 1, 2 and 3 available to other parties prior to mixing the untaken flyash with water for disposal. However, Mr Huskisson says that collection of this untaken flyash would need to be on an “as available” basis and, according to Mr Huskisson, TEC has not found a party willing to take flyash on an “as available” basis (Ex 21, para 33).
356 Tarong North Power Station was established as a joint venture between TEC and TM Energy Pty Ltd. It commenced operation in mid-2003. The joint venturers appointed TN Pty Ltd (“TNPL”) to manage Tarong North. TEC ultimately acquired TM Energy’s interest in Tarong North. TEC and TNPL entered into a site services agreement which, among other things, provides for TEC to sell flyash produced by Tarong North.
357 The sale of Tarong North flyash was primarily addressed by the contract in issue in these proceedings entered into between TEC and Pozzolanic on 26 February 2003 (ATB SB 1.10).
358 At Tarong North, the flyash produced by the power station is removed from flue gases by a bag filter system which does not naturally separate flyash particles according to size. Flyash collected from bag filters, suspended in the passage of flue gases, drops into a number of hoppers and is mechanically conveyed by a bucket conveyor to a 700 tonne silo. Any flyash in the silo not taken for sale is mixed with water in a pug mill and pumped as a paste to TEC’s ash dam.
359 In order to enable the power station’s electricity generating operations to be maintained, Tarong North, necessarily, operates a continuous flyash disposal system.
360 Trucks can be loaded with flyash directly from the Tarong North silo.
361 In Section 1 of its EOI submitted to TEC in October 2001 for the sale and removal of bulk flyash, Pozzolanic observes that it has had an operation (flyash removal and sale) at the Tarong Power Station since the commissioning of the station in the mid-1980s (ATB 3.09).
362 I accept the evidence of Mr Huskisson on these matters, and generally.
The contractual history
363 On 7 June 1984, Pozzolanic entered into an agreement with the QEGB for the sale and removal of flyash from the Tarong Power Station precipitators.
364 The contract commenced on 1 March 1985. By cl 1, QEGB granted Pozzolanic the exclusive right, subject to cl 20, to purchase flyash made available at the precipitator hoppers in the power station provided that Pozzolanic would not unreasonably or capriciously refuse to sell flyash to any other party. Clause 20 prohibited QEGB from selling flyash from the station’s precipitator hoppers to any party other than Pozzolanic (without Pozzolanic’s prior written consent) unless Pozzolanic had refused without sufficient cause to sell flyash to a willing buyer and the station was producing a sufficient quantity of acceptable flyash as specified under the contract.
365 The flyash quality specified under cl 35 of the contract contemplated that “under normal circumstances” the carbon content of the flyash would not exceed 5% by weight and the particle size would be such that 90% of the particles would pass a 150 micron (British Standard) sieve.
366 The expected chemical composition of the flyash was also set out.
367 Clause 45 of the contract provided for minimum take or pay quantities specified for each of the four commissioned generating units; a payment to QEGB of an amount per tonne of flyash removed; and, a term of 10 years with continuing options of renewal for further periods of three years on the same terms, except as to price, subject to particular qualifications.
368 The contract also described, in Schedule A, the plant to be installed by Pozzolanic (all of which had to be approved by QEGB). Pozzolanic’s plant was to be connected to the hoppers of the precipitators for each boiler for each generating unit and was to consist of pneumatic conveying equipment joined to precipitator hoppers in a manner to interface with the station’s precipitator hopper valves in a particular operational way. The plant was to consist of “storage silos, raw product silos, classifiers, reject silos, weighbridge, control hut, compressor room, bagging plant, bag storage and truck loading office, laboratory, maintenance area, car park, truck parking etc”.
369 Schedule A also records that a blank flange was provided beneath the manual isolation valve at the base of each precipitator hopper and that there is a “1.5 metre clearance beneath the flange and the pavement”. The Schedule records that Pozzolanic’s plant will provide for the “[removal] of the ash from the hopper and transporting it to a centrally located silo”.
370 On 24 August 1999, TEC and Pozzolanic entered into a new agreement for the supply of flyash to Pozzolanic (ATB SB 5.91).
371 By cl 2, the agreement commenced on 1 September 1999; it was to be the sole agreement governing the supply or marketing of flyash from Tarong; it superseded any other agreement; and it was to remain in force for two years unless ended earlier under the agreement, thus ending on 1 September 2001.
372 By cl 3, Pozzolanic was entitled to “any and all” concrete grade flyash Pozzolanic obtains from the station’s hoppers and processes in Pozzolanic’s plant. Concrete grade flyash is defined to mean flyash processed to meet the “Fine Grade requirements of AS 3582.1 (1998) or flyash extracted from the Hoppers specifically for processing to meet the Fine Grade requirements of AS 3582.1 (1998)”. The hoppers are defined to mean the precipitator ash hoppers on Units 1 to 4 to which Pozzolanic has connected the Pozzolanic plant, at the date of the agreement, and Pozzolanic plant means all plant and equipment installed or owned by Pozzolanic, downstream of the hoppers, including all free standing plant (such as compressors) installed and owned by Pozzolanic.
373 By cl 4.1, Pozzolanic was to provide and maintain the Pozzolanic plant so as to ensure maximum availability and throughput of flyash.
374 Clause 7 of the agreement required Pozzolanic to facilitate the supply of “Run of Station Non Concrete Grade Fly Ash to TEC or third parties nominated by TEC”.
375 That supply obligation was said to include the processing and handling of run-of-station non-concrete grade flyash through the Pozzolanic plant to the limit of the capacity of the Pozzolanic plant; grading run-of-station non-concrete grade flyash into ash grades requested by TEC (to the extent possible); scheduling the arrival, loading and departure of vehicles of TEC and third parties for a commercial fee as agreed; and, loading vehicles presented at the Pozzolanic plant.
376 Apart from the obligation to facilitate such inclusive “supply” as defined, cl 7 also cast an obligation upon Pozzolanic to provide run-of-station non-concrete grade flyash from the Pozzolanic plant to TEC or a third party upon request by TEC. Clause 7 also contemplated that Pozzolanic might elect to buy run of station non concrete grade flyash from TEC for its own purposes or for resupply.
377 The parties also acknowledged that they had had “a long term relationship” in respect of the “site” on which the Tarong Power Station is located, adjacent land owned and used by TEC and the land upon which Pozzolanic’s plant is located (cl 10.6).
378 The parties also agreed to “work diligently together during the term of the Agreement to establish a commercial arrangement between the parties which will sustain the parties beyond the current term, satisfying the strategic and commercial objectives of each party” (cl 13.1). Any such arrangement was to be confirmed or otherwise by 31 December 2000. Schedule 1 sets out a description of the quality standards for Tarong flyash, much in the same terms as the earlier agreement. Schedule 1 also sets out the expected chemical composition of the flyash.
379 As already mentioned, TEC publicly advertised a call for expressions of interest for the sale and removal of flyash from both Tarong and the proposed Tarong North Power Station in August 2001. Clause 2 of the document issued by TEC in support of the call contemplated that the procurement process would result in the awarding of a contract in February 2002, approximately six months after the expiration of the term of the 24 August 1999 contract.
380 On 5 December 2000, Mr Thomas (Neville) Burton, TEC’s Supply Manager, and Mr Paul O’Callaghan, Pozzolanic’s General Manager for Sales and Distribution, executed a further agreement for the supply of Tarong flyash to Pozzolanic virtually on the same terms as the 24 August 1999 agreement (Ex 19, NTB-1), except that the new agreement was to commence on 1 September 2001 and remain in force for one year. Mr Burton gave evidence that TEC entered into this “short-term contract” so as to ensure that TEC continued to have a “contract in place” for the sale and removal of flyash whilst “an appropriate tender and assessment process was undertaken for a long-term flyash contract” (Ex-19, para 17).
381 Although many aspects of the tender process will be examined later in these reasons, it is sufficient for present purposes to note that Mr Burton, who in his role as TEC’s Supply Manager was engaged in the tender process in 2001 and 2002, gave evidence that prior to April 2002, TEC told Pozzolanic that it was the “preferred tenderer” in the process. Mr Burton described this advice to Pozzolanic as part of the “normal process to follow” as it enabled Tarong to then enter into “detailed negotiations” with Pozzolanic in relation to the terms of a proposed contract (Ex-19, para 27).
382 The contract signed by Mr Burton for TEC on 5 December 2000 with Pozzolanic was due to expire on 1 September 2002 pursuant to cl 2.
383 I accept the evidence of Mr Burton on these matters, and generally.
384 In the period from 1995 until 2003, Mr Edward (Norman) Collingwood was the Contracts Officer employed by TEC (Ex-19, para 7).
Mr Collingwood’s extension of the contractual arrangements
385 Mr Collingwood initially reported to the General Manager for Asset Strategy but later, after the creation of Mr Burton’s role as Supply Manager, Mr Collingwood reported to Mr Burton. In 2003, Mr Collingwood was promoted to the position of Senior Contracts Supervisor. In the years 2001 and 2002, Mr Collingwood, in his role as Contracts Officer, was involved in the process that resulted in the awarding of the contract of 26 February 2003 by TEC to Pozzolanic for the removal of flyash.
386 Although the exchanges between Mr Collingwood and representatives of TEC will be examined later in these reasons, it is sufficient to note for present purposes that because a new supply agreement had not been finalised by July 2002, Mr Collingwood took steps on 24 July 2002 to put in place with Pozzolanic a three month extension of the existing contract from 1 September 2002 to 30 November 2002 (Ex-17, para 50). However, an agreement was not able to be reached by 30 November 2002 and, as a result, Mr Collingwood, in early November 2002, took steps to put in place a further three-month extension of the existing flyash agreement with Pozzolanic from 1 December 2002 to 28 February 2003 so as to enable the negotiations to continue.
387 Ultimately, TEC and Pozzolanic entered into the “Fly Ash Agreement” on 26 February 2003. The document was signed by Mr Arto on that date for Pozzolanic and by Mr Burton on 18 February 2003 for TEC (Ex-17, ENC-36).
388 One aspect of the 26 February 2003 contract can conveniently be mentioned now.
389 Whereas the agreements of 24 August 1999 and 5 December 2000 and necessarily the three month extension arrangements (and the agreement of 7 June 1984) contemplate an entitlement in Pozzolanic to any and all concrete grade flyash it obtains from the hoppers, and processes in the Pozzolanic plant, where concrete grade flyash means flyash processed by Pozzolanic to meet the requirements of Fine Grade flyash under AS 3582.1, the 26 February 2003 agreement is concerned with the sale and purchase of any and all concrete grade flyash obtained by Pozzolanic from Tarong’s “ash transfer points”, and concrete grade flyash obtained from processes deployed in Pozzolanic’s plant, where concrete grade flyash is defined to mean, flyash material (consisting of any solid flyash material extracted from flue gases), extracted by Pozzolanic from the station’s ash transfer points and capable of being processed in Pozzolanic’s plant for use as “supplementary cementitious materials” for use with Portland and blended cement, and as shown in Table 1, of AS 3582.1 (which comprehends, relevantly, Fine, Medium and Coarse grade flyash particles), rather than simply the Fine Grade requirement of Table 1 of AS 3582.1.
Production volumes and contended constraints on production of concrete grade flyash at Tarong and Tarong North
390 It is now necessary to turn to the contested question of the production volumes of flyash at Tarong and Tarong North, the actual and potential yield of concrete grade flyash from raw or unprocessed flyash produced at those stations and the daily and annual capacity of Pozzolanic to extract or produce concrete grade flyash by means of the deployed plant and equipment at those two power stations.
391 This question loomed large in the Commission’s case(s) because the Commission contends that when Pozzolanic entered into the Millmerran Ash Purchase Agreement (as caused by QCL) on 30 September 2002, the Amended Millmerran Contract in July 2004 and the Second Election to Proceed in March and April 2005, neither QCL (up to June 2003) nor Cement Australia (after June 2003), first, had need of flyash from Millmerran to satisfy actual or prospective demand and, second, the volume of flyash produced by Pozzolanic at Tarong and Tarong North was more than enough to meet actual and anticipated demand confronting QCL and later Cement Australia. Mr Arto and Mr Maycock gave evidence that they believed in September 2002 (and earlier) that QCL would need the additional volumes produced at Millmerran “in the longer term” (T, p 1361, ln 14) apart from the need to “risk manage” the problem, as they say they saw it, that Pozzolanic at September 2002 did not have a long term contract in place (signed, sealed and delivered) with TEC for Tarong (and Tarong North flyash) which was Pozzolanic’s major source of flyash and QCL’s major source of cgfa for sale.
392 The Commission contends that the papers put to the Board in 2002 informing the decision-making of Mr Arto and Mr Maycock to enter into the Millmerran Ash Purchase Agreement did not contain a demand forecast and supply capacity analysis required by Holcim’s benchmarking document called the “FINPLAN” and, in truth, the contended need to secure Millmerran flyash to service demand from customers, representing either actual or anticipated demand, formed no real part of the decision. Rather, the decision was the expression of the use of QCL’s market power by bidding supra-competitive prices for Millmerran flyash to prevent competitor entry into markets in the way pleaded as earlier described.
393 One foundation question therefore is what volume of cgfa was produced by Pozzolanic at Tarong and Tarong North between 2001 and 2006 (and into the period beyond 2006) and, secondly, what volume of cgfa was capable of being produced from those power stations.
394 The question of the capacity to serve actual and anticipated demand of customers must also be answered by reference to the available capacity at other relevant power stations, including Swanbank. Since the question of what volume of cgfa was capable of being produced through the use of the installed facilities at these power stations and what flyash capacity was available (subject to capital being deployed to realise the available capacity as opposed to simply exploiting the installed capacity of particular facilities) is centrally contested, and its examination invites the rejection of Mr Robert (Alan) Druitt’s evidence, as unreliable, it is necessary to deal with the evidence at some length.
395 As already mentioned, Mr Huskisson gave evidence that when operating on base load conditions, Tarong produces approximately 1.5 million tonnes of flyash per annum and the historical annual average of the flyash collected in the six zones (across all of the four generating units) is 1.314 million tonnes.
The documents of the respondents upon which the Commission relies as going to the capacity to produce concrete grade flyash
396 The Commission says that the documents of some of the respondents reveal assessments made by those respondents of the capacity to produce “useable concrete grade flyash” from Tarong and Tarong North flyash. The Commission makes the following contentions on this question.
397 First, between 2001 and 2010, Pozzolanic had concluded that a maximum quantity of 600,000 tonnes of fine grade flyash could be extracted from Tarong each year although the expansion of capacity from between 350,000 and 450,000 tonnes to 600,000 tonnes would require further capital expenditure.
398 Second, between 2001 and 2006, Pozzolanic estimated that a maximum quantity of 100,000 to 150,000 tonnes of fine grade flyash could be extracted from Tarong North each year. Thus, Pozzolanic’s own estimate of the total flyash available from Tarong and Tarong North, useable in concrete production, and said to be fine grade flyash, is said to be 700,000 to 750,000 tonnes per annum.
399 Third, in the period 2001 to 2007, Pozzolanic estimated that it could obtain between 350,000 and 450,000 tonnes of fine grade flyash each year from Tarong using the plant and equipment already installed on site operating under normal generating conditions.
400 Fourth, prior to the installation of a classifier at Tarong North, Pozzolanic had estimated that a further 50,000 tonnes of fine grade flyash could be obtained from Tarong North each year by trucking flyash from Tarong North to Pozzolanic’s existing processing facilities at Tarong.
401 The Commission says that these assessments of annual actual and potential capacity to produce fine grade flyash from Tarong and Tarong North emerge from a range of documents of the respondents.
The “Workshop” documents
402 The first collection of documents relied upon by the Commission relate to a “Fly Ash Strategy Workshop” conducted on 2 March 2001 at Pozzolanic’s offices at Milton in Brisbane (ATB 2.9).
403 The first document in the cluster is the agenda page for the meeting which bears the above title and recites: the “Aim” of the meeting is to “develop definite strategies to protect the fly ash market with new power stations being built”. In that context, the agenda items to be addressed are: “1. Establish the facts (existing volumes, customer base, prices, margins, profitability from each station); 2. Rundown on existing contracts and the timeframe for new power stations; 3. Define ‘what if scenarios’; 4. Workshop on the different scenarios; 5. Develop strategies and action plans.” The agenda page concludes with the comment: “Attached are some workings and thought starters of mine. Please come prepared to argue these if need be, but also with whatever facts you have which might help in the workshop sessions”. The document is issued under the name “Paul”.
404 In the period 1999 to 2001, Mr Paul O’Callaghan was employed by QCL as “General Manager, Sales and Distribution” (Ex-37, para 9). Mr O’Callaghan gave the following evidence in cross-examination in relation to the workshop.
405 Mr O’Callaghan convened the meeting (T, p 1498, ln 41).
406 The agenda document is his document and the aim expressed on it is the aim he held for the meeting and reflected the purpose of the meeting. Mr O’Callaghan’s aim, over the long term, was to develop strategies to protect the flyash market with new power stations being built. His objective was to protect the profitability of the business (T, p 1499, ln 20). Mr O’Callaghan saw the possibility of another flyash supplier obtaining a contract with a new power station as a risk to Pozzolanic’s profitability, as a competing supplier with access to flyash from a new station, would compete for market share in the South-East Queensland market (T, p 1500, lns 1-6), and if the new station was, for example, at Callide, a new supplier with access to that flyash might compete in the Central and Northern Queensland markets. Part of Mr O’Callaghan’s strategy was to retain the company’s business position with its customers; retain market share if possible; and, retain, if possible, current prices and profitability.
407 The document at ATB 2.9 sets out the “what-if” scenarios to be discussed at the workshop concerning South-East Queensland, including the possibility of Millmerran Power Station calling tenders for ash marketing in 2001; a Tarong Ash Marketing Tender in 2001 or early 2002; the entry of Tarong North ash into the South-East Queensland market in 2003; the future of Swanbank and the possibility of either TEC or Millmerran Power Partners entering into an ash marketing contract with QCL or with any one of four competitors of QCL/Pozzolanic, namely, Wagner, FAA, Peabody and Sunstate.
408 A separate set of topics are identified for “country Queensland” should a competitor secure access to “Callide Ash (B or C Stations)”.
409 A further document in the bundle is a schedule setting out sales volumes, places of sale, revenue, prices, variable production costs, fixed production costs, freight costs, gross margins, ex-works prices, contribution margins, earnings before interest and tax (EBIT) and EBITDA (EBIT including depreciation and amortisation), for sales of flyash sourced from Tarong, Swanbank, Gladstone and Callide for the calendar year 2000 (as QCL and its subsidiaries operate on calendar years). Mr O’Callaghan gave evidence that he assumed that the document had been prepared by someone at QCL who had extracted all of the figures from the relevant records. On its face, it shows that in calendar year 2000, 283,000 tonnes of Tarong sourced flyash were sold into South East Queensland; 40,000 tonnes of Swanbank flyash were sold into South East Queensland (constituting 323,000 tonnes sold into South East Queensland); 46,000 tonnes of Gladstone flyash were sold into Central Queensland; 50,000 tonnes of Gladstone flyash were sold into North Queensland; and, 70,000 tonnes from that source sold into Melbourne.
410 Mr O’Callaghan gave evidence that the purpose of having that document at the workshop meeting was so that the participants had proper information at hand (T, p 1502, ln 32).
411 The next document relied upon by the Commission is also at ATB 2.9. It represents a printout from a whiteboard and Mr O’Callaghan accepted that this document is in his own handwriting. It is a schedule which sets out power stations in Queensland and volumes attributable to particular categories (see below). Mr O’Callaghan gave evidence that the document takes its form as a result of the participants undertaking something “almost like a brainstorming session, so it would [be] as accurate as that could be”. (T, p 1503, ln 10). However, Mr O’Callaghan accepted that the people who were participants in the meeting were the people who had knowledge of the business and they were the people best placed to come up with the accurate figures.
412 Mr O’Callaghan could not recall specifically who attended the workshop or whether Mr Michael Wilson, the manager of Pozzolanic at that time, was present, or whether Mr Desmond (Des) Chalmers, the Manager, Sales (cement and flyash) for QCL at that time was present, although Mr O’Callaghan accepted that Mr Chalmers could have been present (T, p 1500, ln 36).
413 The document in Mr O’Callaghan’s handwriting copied from the whiteboard contains the following information (all ash volumes are understood to be in kilotonnes):
| Station | Total Ash Produced | Available Useable Ash | Potential Useable Ash | Required Capex | Competitor Capex |
| Tarong | 1300 | 450 | 600 | $2 m | $6 m |
| Tarong North | 500 | 100 | $1 m | $1 m | |
| Swanbank | 250 | 30 | 30 | +$1 m | |
| Millmerran | 1000 | 200 (100) | $1.5 m $0.75 m | $1.5 m $0.75 m | |
| Gladstone | 800 | 300 | 400 | $0.5 m | +$2 m |
| Callide B | 300 | 200 | 250 | $0.5 m | $1 m |
| Callide C | 400 | 300 | +$1 m | ||
| Stanwell | 500 | 10 | 150 | $1.5 m | $1.5 m |
414 Mr O’Callaghan could not recall the “specifics” behind the term “Potential Useable Ash” although he accepted that one possible sensible interpretation of it was that “Potential Useable Ash” was related to the next column “Required Capex” such that if further capital investment was to be made at Tarong, the amount of “Available Useable Ash” of 450,000 tonnes could be increased to 600,000 tonnes. Mr O’Callaghan accepted that he convened the flyash strategy workshop in his capacity as the person then “in charge of [Pozzolanic’s] fly ash business” (T, p 1504, ln 24).
415 As earlier mentioned, Mr O’Callaghan could not recall whether he formed any view about a particular strategy that might be adopted to protect the flyash market against the consequences of a new power station being built or any content of the discussion that took place at the workshop.
416 On the face of the document, it is clear that there was, at least, a discussion taking place on 2 March 2001 as part of a flyash strategy workshop expressly convened for that sole purpose by Pozzolanic’s senior flyash executive (and made up of people who had the knowledge of the business and were best placed to know accurate data, that is, an informed discussion by directly interested executive members) directed to these topics (among others), as written on the whiteboard, by Mr O’Callaghan of which the document at ATB 2.9 is a copy: “BORAL – incentive to capture ash margin, wary of QCL reaction, no [management] in Qld for ash; CSR – incentive to capture ash margin, use as lever to reduce price, capex tight, no [management] in Qld; PEABODY [founder of Pozzolanic] aim to re-enter Qld ash?, pure ‘ash’ competitor, danger for them of a price war; WAGNER – presence at Millmerran, close to Millmerran, lower ash cost, transport opportunities, break PBC (accepted by Mr O’Callaghan as a reference to Pozzolanic) ash monopoly, lack of ash experience; THIESS – see as part of contracting business could compete or partner (in Millmerran); MPA - looking for contracting opportunities, partner with QCL”.
417 This document at ATB 2.9 was admitted into evidence, not as an admission of existing useable flyash production or potentially useable flyash production at Tarong (and the other stations) (see [2010] FCA 1131 at [49] on 19 October 2010 as a preliminary ruling), but on the footing that the participants in the workshop produced the assessments reflected in Columns 2 to 6, and particularly Columns 3, 4 and 5 in the course of the workshop; these views were being expressed by this group, and the assessments made and recorded by Mr O’Callaghan arising out of the workshop, may or may not be accurate.
418 The same position applies to the other documents in the bundle.
419 Mr O’Callaghan, as the convenor of the meeting, gave the evidence just described concerning the circumstances of, and matters related to, the convening of the meeting, which gives the document additional context and authority.
420 Matters relating to the documents at ATB 2.9 are mentioned here only in the context of the Commission’s reliance upon references in the documents to the volume of flyash said to be “available useable flyash” and “potential useable ash” recited in the document emerging out of the workshop. Other matters relating to “required capex” are mentioned in the context of these other two references and although, contextually, Mr O’Callaghan made references to a discussion of “strategies” to protect the “flyash market”, the present consideration of the volumes of Tarong and Tarong North useable concrete grade flyash as a cementitious substitute for cement is an aspect of the consideration of the capacity of Tarong and later Tarong North to produce concrete grade flyash; the power stations from which ash was and might be sourced; and Pozzolanic’s relationship with those sources.
The “PowerPoint” slides
421 The second of the respondents’ documents relied upon by the Commission as giving content to the volume of useable concrete grade flyash production is a series of PowerPoint slides bearing the QCL logo, on the topic of, “The Challenges for Sales & Distribution” (ATB 32.3) presented at a QCL Sales & Distribution Group. The document is dated 7 December 2001. Slides 18 to 22 address the topic of flyash as a product. Slide 20 is strikingly similar to ATB 2.9 except for these qualifications: the column headed “Total Ash Produced” has a footnote that the figures in the column include “bottom ash”; the “Available Useable Ash” column has a footnote that the useable ash is “Cementitious”; the “Potential Useable Ash” column adjusts the assessment for Millmerran from 200,000 tonnes to 300,000 and retains the reference “(100)”. Otherwise, the information at ATB 2.9, based on the assessments arising out of the 2 March 2001 flyash strategy workshop, is the same information set out in the QCL slides for the Sales & Distribution Group presentation.
Ms Collins’s email of 28 June 2004
422 The third of the respondents’ documents relied upon by the Commission on this issue is referenced ATB 13.2. That document consists of an email sent by Ms Sandra Collins to Mr Murray Adams on 28 June 2004 at 5:41pm on the topic of the development of a paper to be prepared by management (“EGM” – Executive General Managers) to be presented to the Board of Cement Australia which addresses the subject of “Queensland Fly Ash Development Plans”. The email attaches a draft set of templates on one sheet and Ms Collins says in her email that she has entered into the template headed “Useable Supply Available (2003)”, estimates of the ash available and used. Ms Collins suggests that other data might be obtained by Mr Adams from Mr Mark Wrigley.
423 In the period November 2003 to December 2004, Ms Collins was the “Business Manager Fly Ash” for Cement Australia employed by Pozzolanic (affidavit of Ms Collins sworn 30 January 2010, Ex-62, para 15).
424 Ms Collins reported to Mr Shaun Clarke.
425 In the years 2004 and 2005, Mr Adams was the “Strategy and Business Development Manager” for Cement Australia (T, p 227, ln 18). He reported to Mr Colin Bailey who, in 2003 and 2004, was Cement Australia’s Integration Manager and in 2004 until 2006, Cement Australia’s General Manager – Strategy and Projects (T, p 2222, ln 8).
426 The present discussion of those documents is directed to the question of the extent to which the respondents’ documents speak to their own assessments of actual and potential production of “useable flyash” sourced from Tarong and Tarong North (at least as contended for by the Commission) although references, where convenient, have also been made to other power stations where they occur in the documents.
427 The schedule of available concrete grade flyash, and used concrete grade flyash, as completed by Ms Collins and attached to her email to Mr Adams, is in these terms:
Usable Supply Available (2003)
| Power Station | Concrete Grade Fly ash available (kte) | Fly ash used by PE (kte) | Fly ash used by Others (kte) | |
| Tarong | 600 | 310 | - | |
| Tarong North | 150 | - | - | |
| Calide B | 60 | 58 | - | |
| Calide C | 600 | 5 | - | |
| Swanbank | 60 | 44 | - | |
| Gladstone | 230 | 180 | - | |
| Millmerran | 500 | - | - | |
| Stanwell | 100 | - | ||
| Kogans Creek | - | - | - | 400 in 2008 |
| CARS | - | - | - | 50 in 2005 |
| Other 2 | - | - | - | |
| Other 3 | - | - | - | |
| Other 4 | - | - | - | |
| Total | 2300 | 597 | 0 |
Mr Druitt’s May 2005 Report
428 The fourth document relied upon by the Commission is Pozzolanic’s monthly report for May 2005 (ATB 19.38) under the name of Mr Druitt which reports upon the “Existing capacity” of Pozzolanic’s facility at Tarong.
429 Mr Druitt is the “Engineering Manager” for the “Ash Division” of Cement Australia and has held that position since 2005. He reports to Mr Christopher White, the seventh respondent. Mr Druitt observes in the May 2005 report on the topic of Pozzolanic’s Tarong facility and its “Existing capacity”, that an “Analysis of recent historical records confirms that the current capacity is 1100 tpd [tonnes per day], seven days per week” with the result that “[a] 350 day operating year (ie less 15 days [public] holidays) yields 385,000 tonne of concrete grade ash”. Two factors are said by Mr Druitt to influence that result: first, all four generating units are to be available all year; second, road transport of ash from the plant is to be kept constant at 1,100 tpd every day of the week.
430 Mr Druitt (T, p 1962, lns 9-25) accepted that he had “done the arithmetic” and that the capacity assessment reflected in the May 2005 report was correct.
Mr White’s email of 20 February 2006
431 The fifth document is CRZ-102 to the affidavit of Mr Colin Zeitlyn affirmed 1 February 2010 (Ex-42) and consists of an email from Mr White to Mr Zeitlyn (copy to Mr Druitt) dated 20 February 2006 attaching a capital expenditure request summary sheet for the installation of a classifier at Tarong North and a profit and loss statement with accompanying explanatory notes.
432 Mr Zeitlyn is the “General Manager, Marketing and Sales” for Cement Australia. He has held that position since 20 September 2004. The explanatory notes express concern that the Tarong ash facility will not be able to maintain ash supply to South East Queensland in 2006 having regard to production forecasts for January to December 2006. Normal monthly production of useable ash in the forecast is projected to range between 31,584 tonnes (in February) and 34,968 tonnes (for each of five months) apart from the months of July and August due to a planned unit outage at Tarong reducing production in those months by 5,887 tonnes and 6,618 tonnes respectively to 27,974 tonnes in each of those two months.
433 Nevertheless, total projected production for 2006 is 397,732 tonnes.
434 Although management expressed confidence in a production rate at Tarong of 1,100 tpd during normal operations as Mr Druitt had expressed, annual demand was said to require a production rate of 1,300 tpd [455,000 tonnes] during normal operations and “1200 tpd regardless” [420,000 tonnes]. The options for increasing production are then discussed in the notes together with the merits of undertaking Stages 1 and 2 of the “complete Tarong North Proposal”.
Pozzolanic’s EOI of 28 July 2006
435 The sixth document is Pozzolanic’s Expression of Interest (EOI) dated 28 July 2006 (although one cover sheet mistakenly bears the date 27 July 2006) submitted by Mr White (for Pozzolanic) to TEC in response to a tender process commenced by TEC in May 2006 to replace, according to Mr Burton, the contract of 26 February 2003 which was due to expire in 2008 (ATB 2623).
436 As to “Ash Markets” Pozzolanic observes in the EOI that it “supplies the bulk of the South East Queensland (SEQ) concrete market with fly ash products” and the “Sized fly ash” for use in “Concrete construction” is critical to the SEQ economy. The estimated annual quantity of concrete grade flyash to be taken is “400,000t rising to over 500,000t”. Figure 1 is said to set out the “consistent increase in concrete grade ash markets achieved by Pozzolanic and Cement Australia” from 1996 to 2005, followed by production projections for 2006 to 2017. Projected sales slightly exceed 400,000 tonnes in 2006 and reach 500,000 tonnes by 2017.
437 The EOI proposes an entitlement, in Pozzolanic, of “First Rights” to a fixed or capped annual volume of 600,000 tonnes which would involve first rights to all of “zone 2 and higher ash” from Tarong, and first rights to “sufficient … run of station non-concrete grade ash” from Tarong and Tarong North, to enable Pozzolanic to manufacture 600,000 tonnes of concrete grade ash each year, over a proposed 10 year minimum term with options to extend as agreed. As to the quality of the ash, Pozzolanic proposed an “Acceptance Limit” that 40% of the weekly sampled average of Tarong ash produced by the station must be fine grade flyash and the weekly sampled average of the flyash particles must have a LOI content of less than 2%.
The Relocation Summary of September 2006
438 The seventh document relied upon by the Commission is a “Tarong Classifier Relocation Project Summary” for September 2006 (ATB 27.18). A schedule on p 2 sets out daily and weekly production volumes for the current plant at Tarong. On the assumption that low ash coal is used, the weekly recoverable useable ash is 7,584 tonnes which amounts to annual production of 394,368 tonnes. Should high ash coal be used, the weekly recovery is 9,523 tonnes which amounts to annual production of 495,196 tonnes. The schedule also sets out predicted capacity improvements (and relocation costs) should classification plant be relocated to Tarong.
The Pozzolanic Tender of 22 March 2007
439 The eighth document relied upon by the Commission is Pozzolanic’s tender submitted to TEC for the sale and removal of flyash and bulk materials at Tarong Energy and Tarong North Power Stations (TENDER TE 1159) dated 22 March 2007 (ATB 28.1). At p 5 of the tender, Pozzolanic observes that approximately 300,000 to 400,000 tonnes of concrete grade flyash is currently sold from Tarong each year and that Tarong North produces 400,000 tonnes of undifferentiated flyash. Approximately 10,000 tonnes of concrete grade flyash is sold each year from Tarong North. The tender involved a supply term of 10 years with rights of renewal by negotiation. The right was described as a first right to take ash from Tarong Zones 1, 2 and 3 and Tarong North run-of-station ash to produce concrete grade ash volumes of between 300,000 and 600,000 tonnes. The ash quality requirement was the same as that described in relation to the EOI of 28 July 2006.
440 At point 8 of the criteria information, Pozzolanic describes its experience and track record in ash markets in this way:
Pozzolanic has over 40 years experience in ash sourcing, processing and supply. It has had continuous operations at TPS [Tarong Power Station] for over 20 years and has developed Queensland’s largest single ash supply operation at the TPS site. Pozzolanic has been the largest supplier of ash products in Queensland for most of its existence and continues to hold that position.
441 Schedule A to the tender sets out annual ash off-take quantities for the period 2 March 2008 to 31 December 2010 for Zones 1, 2 and 3 and, during periods of supply constraint, Zones 4, 5 and 6 under the current coal supply arrangements. Projections are also made for all of these zones in the period after 2010 having regard to the new coal supply arrangements. At point 4 of the supplementary information, Pozzolanic makes this observation: “Pozzolanic consider the maximum practical volume of concrete grade ash that can be extracted using current technology from new ash generation at TPS and TNPS is 700,000 [tonnes] during normal operations (as for 2006)”.
The 2008 Budget Presentation
442 The ninth document relied upon by the Commission is a document described as “Budget Presentation 2008 For the Cement Australia Board” which is GGB-134 exhibited to the affidavit of Mr Blackford (Ex-60). At Slide 52 of the presentation, reference is made to Queensland flyash sources. Under the heading “Tarong” the volume of flyash produced is said to be 600,000 tonnes per annum based upon estimated 2009 normal production. Millmerran is said to produce 250,000 tonnes and Swanbank is said to produce 50,000 tonnes of concrete grade flyash.
443 The Commission says that these assessments across the period March 2001 up to the date of commissioning of a classifier at Tarong North in early 2007 are consistent with Pozzolanic’s records of actual production. Mr Druitt gave evidence that from 2005 to early 2007, Pozzolanic trucked unprocessed flyash from Tarong North to the classifier at Tarong for processing. The Commission says that in the 2006 year Pozzolanic’s records (a spreadsheet entitled “Production Volumes for PE 2000 to 2008”, CB-1 to Ms Boman’s second affidavit (Ex-51)) show that in 2006 Pozzolanic produced 379,101 tonnes of concrete grade flyash from Tarong with total sales of 380,700 tonnes of concrete grade flyash.
Mr Druitt’s extensive evidence of installed capacity, constraints and bottlenecks in production
444 Before examining the actual production statistics it is necessary to turn to the evidence of Mr Druitt.
445 Mr Druitt is the Engineering Manager for Cement Australia’s Ash Division.
446 In August 1994, Mr Druitt commenced work in the Ash Division of Pozzolanic as an Engineer. Mr Druitt was responsible for engineering issues in relation to flyash collection, processing and dispatch, including engagement in engineering projects, tenders, capital expenditure requests for projects for QCL and Pozzolanic and the design, planning and installation of new or refurbished equipment. From 1994 to 1998, Mr Druitt was part of the management group for a flyash services company called “MPA” later called “MPA Energy Services”, a joint venture between Clough Engineering (WA), Pozzolanic and a South African participant. MPA provided operational and engineering services including ash handling services to power stations, mainly in New South Wales.
447 In 1999, Mr Druitt was appointed as a Project Engineer with QCL, and from 1999 to 2001, he was primarily involved with the Geocycle Division of QCL (which focused on the use of “alternate fuels”). In this period, Mr Druitt was also involved in making improvements to QCL’s bulk handling operations and efficiency improvements in the handling of bulk materials.
448 From 2001, Mr Druitt has been primarily involved in engineering work for the Ash Division of QCL and then Cement Australia in the post merger arrangements.
449 In that role, Mr Druitt has regularly travelled to Queensland power stations to meet with the Ash Division’s plant managers to assist them with plant and ash handling issues. He has prepared designs and cost estimates for new equipment; prepared capital expenditure requests for new equipment including flyash processing plant; advised on specific engineering aspects of capital projects of the Ash Division at power stations; arranged for drafting and design work to be done; and has engaged on the engineering aspects of a number of specific projects (Ex-44, para 30).
450 Mr Druitt says that an important component of his role is the design and specification of equipment required for Ash Division projects which includes designing, modifying and specifying equipment with the objective of “optimising the fly ash output by the application of engineered solutions”.
451 Mr Druitt reports to Mr Chris White, Cement Australia’s Ash Manager.
452 So far as Mr Druitt’s experience with flyash collection and processing is concerned, he gives this evidence.
453 Mr Druitt has been directly involved in the planning, design, costing, approval and construction of infrastructure for QCL and Cement Australia including flyash processing facilities. He has spent approximately 50% of his time on-site dealing with engineering issues. He has travelled to and inspected facilities at Tarong, Tarong North, Swanbank, Gladstone, Callide, Eraring, Mount Piper, Wallerawang and Bayswater. Since 2005, Mr Druitt has met with Tarong, Tarong North, Gladstone, Swanbank and Callide power station representatives at least on a bi-monthly basis to discuss flyash handling and processing operations at those power stations. He has been in regular, if not daily, contact with one or more of Pozzolanic’s site managers at each of Tarong, Swanbank, Gladstone and Callide power stations regarding their flyash operations and he has been involved in overseeing the maintenance, refurbishment and installation of classifiers at various power stations.
454 By force of his experience, Mr Druitt says that he is “intimately familiar” with all engineering and commercial aspects of the collection, processing and production of cementitious products including flyash and the engineering, design, construction, procurement, operation and maintenance of facilities and equipment required by operators in connection with the production of flyash and other cementitious products (Ex-44, para 38).
455 Having regard to those matters, Mr Druitt gives the following background evidence about the Pozzolanic infrastructure at the power stations; the capacity to produce concrete grade flyash using that infrastructure (in conjunction with the power station collection infrastructure) and the operational constraints upon realising the potential capacity to produce concrete grade flyash at Tarong and Tarong North (and other power stations relevant to these proceedings).
456 Mr Druitt puts his evidence on these topics in the following context.
The dynamics of handling
457 Flyash is best handled as a bulk solid in fully enclosed vessels with transfer from those vessels by pneumatic pumps.
458 In Australia there are two principal types of flyash collection devices used at power stations. The first is an electrostatic precipitator (ESP) and the second is a fabric filter (“FF”) also described as a bag house. Flyash collected by an ESP or FF is deposited into large inverted pyramidal or cone shaped collection hoppers located beneath an ESP or FF.
459 In an ESP, as the flue gases travel through the device, the velocity of the gas decreases. Many ash particles “drop out” while others are electrostatically collected. An ESP charges the flyash particles in the gas stream which attracts them to plates. The plates are struck and the ash falls into the hoppers below. Large particles tend to fall into the first row of hoppers and smaller particles remain in the flue gas stream. The particles attracted to the plates agglomerate to form larger particles. The majority of flyash is collected in zone 1, at the front of the ESP. There are typically six zones.
460 A FF is more efficient than an ESP as it captures the majority of the fine flyash particles and prevents them from being emitted into the atmosphere. A FF is a large vessel that contains thousands of filter bags suspended from the roof of the chamber through which the flue gases pass. As the gases pass, particles are collected on the surface of the bag with small particles agglomerating to form large particles which drop by gravity into the hopper below when the bag is pneumatically or mechanically pulsed.
461 Hoppers are simply collection devices which facilitate the orderly capture and removal of flyash. If the flyash is not removed from the hopper in a “timely fashion”, the boiler which produces steam to drive turbines to generate electricity must be shut down (Ex-44, para 57).
462 Flyash must be “handled” as a bulk material in a way that does not generate “fugitive dust or unwanted emissions”. Flyash therefore needs to be handled using a fully enclosed system of pipes, valves and pumping vessels. Thus, pneumatic pumping vessels are used to move flyash from the power station hoppers to a “flyash processing facility” or to remove the flyash from the hoppers to a “disposal system”. The pumping vessels typically transfer flyash from the hoppers to a “holding silo”. From the holding silo, the flyash can be further transferred to a classifier to produce a saleable product or pumped directly into a tanker for removal. These pneumatic pumps are often referred to as Ash Transfer Vessels. Prior to 1994, Pozzolanic deployed commercially available pumping vessels for its ash handling operations. Since 1994, Pozzolanic has designed and built “in-house pumps” which reduce maintenance costs and tend to be more reliable.
463 Flyash collected from the hoppers is pumped to a device called a classifier which separates out the fine flyash particles to produce concrete grade flyash. The functional mechanism is relatively simple. Flyash is presented from a feed silo into the classifier which by centripetal force moves various sized particles to either a product stream or a reject stream. The classifier thus facilitates the collection of oversized particles (reject material) and a separate range of flyash particles which meet Pozzolanic’s requirements for concrete grade flyash as a saleable product.
464 Mr Druitt says that Pozzolanic’s standard for concrete grade flyash requires the flyash particles to have a fineness of 82% to 86% passing a 45 micron screen or sieve (Ex-44, para 65).
465 Pozzolanic’s flyash processing operations currently employ either a Sturtevant or Buell classifier. Sturtevant classifiers are generally elevated off the ground in a tower arrangement with a feed silo situated above the classifier so as to present flyash particles for classification, and a product silo and reject silo located below the classifier. A Buell classifier is typically configured in a way which does not present flyash by an overhead feed silo. Instead, flyash is fed into the classifier by compressed air which carries the feed ash up into the classifier chamber for separation.
Yield
466 Mr Druitt says that the distribution of small and large flyash particles in the feedstock presented to a classifier for processing “directly affects” the amount of concrete grade flyash produced from the classifier (that is, the “yield”). By feedstock, Mr Druitt means the ash material presented to the classifier for processing, and the yield represents the proportion (by mass rather than volume) of concrete grade flyash produced from the feedstock by the classification process.
467 Mr Druitt says, based on his observations, Pozzolanic achieved the following approximate yield from its feedstock at Tarong and Tarong North during 2009: 25% to 40% yield at Tarong from a Sturtevant classifier and 30% to 60% yield at Tarong North from a Sturtevant classifier. These yield ranges seem to be very wide estimates. Although the present focus of Mr Druitt’s evidence is confined to Tarong and Tarong North it may be convenient to mention, in this context, Mr Druitt’s evidence as to yield for the Swanbank Power Station and Callide B. Pozzolanic achieved a yield at Swanbank of 50% to 70% from a Buell classifier and a yield of 70% to 80% from a Buell classifier at Callide B (Ex-44, para 73).
468 Mr Druitt says that Pozzolanic aims to maximise its concrete grade flyash production rate, which is a function of yield. The main variable that Pozzolanic can manipulate is the feedstock for presentation to the classifier. To maximise the yield, Pozzolanic prefers to select a feedstock that, proportionally, has finer particles. This is said to explain why Pozzolanic elected to transfer finer feedstock flyash particles from Tarong North to the classifier at Tarong, as compared with using feedstock from Zone 1 at Tarong.
469 Dispatch facilities generally involve a weighbridge platform at road level directly below a loading device upon which a road tanker is marshalled. The weighbridge is required in order to record the amount of material loaded into each tanker and for stock control.
470 Conducting a high volume flyash operation requires one or more silos. The silos provide bulk storage for flyash. Silos enable a flyash operator to blend flyash from various sources. A silo might contain blended classified product or it might contain flyash taken directly from hoppers located at particular zones under the collection units.
The Tarong facilities and installed capacity
471 As to Tarong Power Station, Mr Druitt says this.
472 The station comprises four generator units consisting of a coal-fired boiler and a steam-driven turbine in each unit. There are two ash pits used for the disposal of ash and waste products (including bottom ash and excess flyash not taken for recycling). Each pit serves two units. An ESP deposits precipitated flyash into the collection hoppers. There are 48 hoppers per unit comprising eight hoppers in each of the six zones, and therefore 192 hoppers in all. Cement Australia has installed ash pumps under or alongside the hoppers in Zones 1, 2 and 3 of each unit amounting to all 96 hoppers in those zones.
473 Prior to 2006, Pozzolanic had eight gravity filled pumps mounted directly below each hopper in Zone 1. Since 2006, Pozzolanic has progressively modified the arrangements to have four pumps in Zone 1 and one pump in each of Zones 2 and 3. The ash pumps are pneumatically operated and facilitate removal of the hopper ash to a “transfer station”. Pozzolanic has two transfer stations. One serves units 1 and 2 and the other usually serves units 3 and 4. The two transfer stations are located adjacent to the ash pits.
474 A transfer station acts as an intermediate holding and pumping facility and marshalling point. At the time of swearing his first affidavit on 6 February 2010 (Ex-44), Mr Druitt said (at para 97) that the “transfer stations have a discharge capacity of between 30 and 50 tonnes of flyash per hour”. When giving evidence Mr Druitt made a number of corrections to his first affidavit and expressed the view that the correct position is that the transfer stations have a discharge capacity of between 30 and 40 tonnes of flyash per hour. Although para 97 seems to suggest a range of 30 to 50 tonnes per hour as the discharge capacity of the transfer stations, Mr Druitt says at para 113(b) that the discharge capacity of transfer station one is 30 tonnes per hour and the discharge capacity of transfer station two is 40 tonnes per hour. Paragraph 113(b) makes it plain that the total capacity of both stations taken together is 70 tonnes per hour. Having regard to para 113(b), Mr Druitt must be taken to have been referring at para 97 to a range of 30 to 50 tonnes per hour for each station resulting in total capacity of 60 to 100 tonnes per hour. Paragraph 113(b) adopts a specific capacity for each individual station resulting in total capacity of 70 tonnes per hour in the aggregate. The flyash is pumped from the transfer stations to Pozzolanic’s processing facility which is approximately 700 metres away. Pozzolanic classifies flyash at the processing facility using a Sturtevant classifier. The change in Mr Druitt’s assessment of the discharge rate and its relationship with a different assessment made by him in para 58(b) of Mr Druitt’s second affidavit (Ex-45) is the subject of criticism by the Commission and is discussed later in these reasons.
475 Finished “product” is stored in a group of 200 tonne storage silos ready for sale.
476 Reject flyash from the classifier is slurried and pumped to an ash pit for disposal to the ash dam.
477 The ESP operates on the principle that some heavier particles fall in Zone 1 due to a significant drop in gas velocity when the particles enter the precipitator. Other particles carry beyond Zone 1 into Zones 2 to 6. As flue gases move through the various zones some natural classification occurs. Zone 1 collects the majority of the flyash produced by the station but this material does not generally meet Pozzolanic’s fineness standard. Zone 1 flyash usually needs to be classified to produce concrete grade flyash of the required standard. Zones 2 and 3 collect less flyash but the flyash contains a much higher proportion of fine particles. Generally, flyash from Zones 2 and 3 meets or exceeds Pozzolanic’s required standard for concrete grade flyash. Zones 4 to 6 collect far less flyash and it is difficult to handle as a bulk material due to its fineness.
478 In each 24 hour period, depending upon the requirements for the extraction of flyash for that period, Pozzolanic’s operating staff decide which hoppers to “campaign” and which pumps to operate and the period of operation. Typically, Pozzolanic arranges for the Tarong Power Station controller to “hold” ash in the hoppers in Zones 2 and 3 so as to accumulate the flyash which deposits in those hoppers. Flyash pumps transfer the ash from the selected hoppers to the nearest transfer station at the direction of the operating staff. This method of campaigning ash collection can take up to 12 hours to completely remove all of the Zones 2 and 3 flyash from those hoppers. This recovery activity takes advantage of the natural classification occurring in those zones. Flyash taken from the hoppers in Zones 2 and 3 “blends” when it accumulates in a single silo at the transfer station prior to further transportation to the dispatch facility (Ex-44, para 102).
479 If, after daily testing, the flyash from Zones 2 and 3 meets Pozzolanic’s concrete grade flyash standard, the ash is pumped directly from the transfer station silo to Pozzolanic’s product silos for dispatch.
480 The quality and volume of Tarong flyash varies and is thus assessed on a daily basis by staff so as to decide how best to optimise the off-take of flyash. The variability might arise due to an outage when one or more of the operating units are taken off-line by the power station operator, or the generating load in one or more units is reduced. These factors can affect the quantity of ash available in Zones 2 and 3. When this occurs, a corresponding need arises to collect more feedstock from Zone 1 for presentation to the classifier to produce concrete grade flyash capable of use to meet demand as a cementitious substitute.
481 Operationally, Pozzolanic typically first collects and blends flyash in Zones 2 and 3 and, if required, in order to meet product requirements, Pozzolanic then classifies the flyash from Zone 1 to produce concrete grade flyash. Prior to Pozzolanic installing a classifier at Tarong North in early 2007, it would classify flyash from Tarong to produce product “when necessary”. Since early 2007, Pozzolanic has preferred to classify Tarong North flyash and only classify Tarong flyash if necessary (Ex-44, para 125(c)).
482 Mr Druitt says that Pozzolanic does not collect all the flyash from the precipitator hoppers. The residual ash in the hoppers is ejected to the adjacent ash pits by Tarong’s equipment. This involves a process where ash is wet ejected from each hopper and is sluiced to the ash pit and then to the ash dam. Through communications with Tarong’s control room operator, when necessary, Pozzolanic indicates the unit and zones required for production. The Tarong control operator decides when to remove the surplus ash. The amount of surplus ash in the power station is “generally about 400% more than the quantity of ash taken by Pozzolanic”, according to Mr Druitt.
483 Pozzolanic has collected and processed flyash from Tarong since 1983. The initial processing equipment was installed between 1982 and 1984. The equipment operated by Pozzolanic at Tarong in the period 2000 to 2006 is this.
484 Three Sturtevant classifiers were installed in the 1980s. Under normal operating conditions, the normal capacity of each classifier to produce concrete grade flyash is approximately 10 to 30 tonnes per hour subject to the quality of the feedstock. The classifiers require a feedstock presentation rate of approximately 60 tonnes per hour. In approximately 2003, due to ancillary plant capacity restrictions, Pozzolanic ceased using multiple classifiers simultaneously. In approximately 2005, a spare classifier was refurbished and transported to Millmerran Power Station and that classifier was finally installed and commissioned at Tarong North Power Station in early 2007.
485 At Tarong, there are five 200 tonne product silos; one 60 tonne fine kaolite ash silo installed between 2004 and 2005 to facilitate bag filling; one weighbridge approximately 20 metres long and suitable only for B Double road tankers if dual-weighed; ash conveying equipment to deliver feedstock ash from the hoppers to transfer stations and the three Sturtevant classifiers, including two flyash transfer stations each with two ash conveying vessels and four air compressors; associated civil works, electrical works, compressed air facilities and other related works facilities; and a computer controlled dispatch facility.
The production constraints at Tarong
486 Mr Druitt says there are, however, production constraints at Tarong and they are these.
487 Tarong has a large number of hoppers and Pozzolanic has its own pumps which take ash from 96 of those hoppers. Through a series of pipes, the pumps convey ash to an intermediate transfer station and then to Pozzolanic’s site 700 metres away. At that site, the flyash is either blended or classified. Mr Druitt says that whilst “… a lot of ash is produced at Tarong, Pozzolanic’s ability to produce fly ash [by which I assume he means concrete grade flyash of the Pozzolanic standard] is limited by various plant constraints at each of these stages” (Ex-44, para 111).
488 At full capacity, the four Tarong units are capable of producing approximately 150 tonnes of flyash each hour (150 x 24 x 7 x 52 = 1,310,400 per annum). All of the Zones 2 and 3 hoppers are capable of producing (together) approximately 800 tonnes of flyash per day (Ex-44, para 112) which qualifies as fine grade flyash, amounting to 292,000 tonnes of fine grade flyash over 365 days or 280,000 tonnes of fine grade flyash over 350 days (assuming as Mr Druitt did, in his May 2005 Ash Division report, a 350 day operating year).
489 The various constraints arise in this way, according to Mr Druitt.
490 First, the Zones 2 and 3 pneumatic vessels installed by Pozzolanic under the hoppers in those zones can each pump between approximately 15 and 20 tonnes of flyash per hour but the eight Zone 2 hoppers can only produce six tonnes of flyash per hour per unit and the Zone 3 hoppers produce approximately two tonnes per hour per unit.
491 The second constraint concerns the transfer station. Mr Druitt says that until a recent upgrade to the pumps in 2007, transfer station 1 could transfer approximately 30 tonnes per hour and transfer station 2 could transfer 40 tonnes per hour.
492 The third constraint concerns the capacity of Pozzolanic’s classifier feedstock silo which is 80 tonnes.
493 The fourth constraint concerns storage. Pozzolanic has five product silos giving a total storage capacity of 1,000 tonnes. If no tankers cycle to remove flyash from these product silos, production must cease. There is only sufficient capacity for additional flyash production for so long as Pozzolanic can remove ash by cycling road tankers at a higher rate than the production of concrete grade flyash.
494 The fifth constraint concerns the classifier. At full production, one Tarong Sturtevant classifier can produce approximately 200 tonnes per day amounting to 70,000 tonnes per year assuming the classifier is operated each day for a 350 day operating year. Mr Druitt says that the classifier is constrained by the daily limited capacity of Tarong’s reject ash disposal equipment and thus Pozzolanic can only operate one classifier at a time and there are times when the deployed classifier cannot operate continuously.
495 The sixth constraint concerns the feedstock. At Tarong, Pozzolanic classifies Zone 1 flyash which typically contains larger flyash particles resulting in a yield of between 20% and 40%. Mr Druitt says that only 20% to 25% of the feedstock ash, once classified, meets Pozzolanic’s standards. Pozzolanic must process around 100 tonnes of Zone 1 feedstock ash to produce approximately 20 to 25 tonnes of concrete grade flyash.
496 The seventh constraint concerns the product vessels. Mr Druitt says that it takes Pozzolanic’s product vessels approximately 12 hours to transfer 800 tonnes of naturally classified (that is, blended Zones 2 and 3) flyash to Pozzolanic’s dispatch facility silos.
497 The eighth constraint concerns the load-out facility. Mr Druitt says that the load-out facility processes up to two tankers per hour which nominally takes 30 minutes per tanker depending upon whether the tanker is a single or double tanker. At best, Pozzolanic’s dispatch facility can nominally process 50 tankers per day. The capacity of the dispatch facility is limited by the time taken to load a tanker with product which is approximately two tankers per hour or around 50 tanker movements over a 24 hour period. Generally, Pozzolanic’s facility operates 24 hours a day but if the road tankers fail to cycle properly and fail to remove the product produced, this can “severely constrain” production.
498 Mr Druitt says that flyash production by Pozzolanic is a matter of balancing all of these competing constraints.
499 In addition to these matters, Mr Druitt says that unit shutdowns by the power station for maintenance or any other reason can impose constraints upon the production of concrete grade flyash.
500 Mr Druitt says this about third party extraction: “If other fly ash operators wanted to they could install fly ash collection equipment alongside Pozzolanic’s equipment and install their own fly ash processing plant at Tarong. There is sufficient space beyond the perimeter of the power station to construct the necessary processing plant and sufficient space below the hoppers for additional extraction equipment” (Ex-44, paras 116 and 117).
The Tarong North facilities
501 As to Tarong North, Mr Druitt says this.
502 The Tarong North unit at full capacity nominally produces approximately 1,200 tonnes of flyash each day. There are eight collection hoppers. Below the hoppers a chain-driven series of conveyors deliver the ash discharged by the hoppers to a bucket elevator which elevates the flyash to the Tarong North silo which is a run-of-station silo with a nominal capacity of 700 tonnes. This mechanism has been the usual process for removing flyash from the hoppers. In 2003, Pozzolanic installed two pneumatic transfer vessels as backup facilities which are capable of recovering ash from the hoppers and delivering that ash to the Tarong North run-of-station silo ready for wet ash disposal.
503 Between 2005 and 2007, Pozzolanic collected Tarong North flyash from the run-of-station silo through an original “silo load-out facility” and transported that flyash by truck approximately one kilometre to Pozzolanic’s Tarong flyash processing facility where it was classified. The recovered concrete grade flyash was then blended with other concrete grade flyash.
504 In early 2007, Pozzolanic commenced operating a classifier at Tarong North. Because an FF classifier produces little segregation of the flyash particles by size, the flyash collected in the Tarong North hoppers reflect that circumstance, although the flyash in some of the Tarong North hoppers tends to be finer than other particles. Daily testing of the fineness of flyash by hopper has resulted in Pozzolanic predominantly taking flyash from four of the eight hoppers, namely, A2, A4, B2 and B4. Flyash not removed from the Tarong run-of-station silo is slurried into a thickened paste and pumped overland to the ash dam for disposal (Ex-44, para 123).
505 In the period between 2003 and early 2007, Pozzolanic had little installed equipment at Tarong North. The following equipment has been installed and is owned and operated by Pozzolanic.
506 In approximately March 2007, one Sturtevant classifier became operational at Tarong North. The nominal capacity of the classifier is between 300 and 400 tonnes per day (between 109,500 and 146,000 tonnes annually assuming a 365 day operation). The capacity depends upon the quality of the feedstock and the size of the product silo which loads the road tankers. Three ash conveying vessels deliver feedstock ash from the “bag house” to the Sturtevant classifier and also operate as a back-up ash disposal system in the event of the unavailability or breakdown of the mechanical ash handling system. There is one 60 tonne feedstock silo owned and operated by Pozzolanic. There is one 40 tonne product silo below the classifier which functions as a surge capacity for the loading of ash into road tankers. A pump transfers reject ash to the Tarong North run-of-station silo. Pozzolanic operates associated civil works, electrical works, compressed air reticulation and other control systems.
507 There is no road tanker weighbridge at Tarong North.
The production constraints at Tarong North
508 Mr Druitt identifies these production constraints at Tarong North.
509 At full capacity the generating unit produces between 1,000 and 1,200 tonnes per day of flyash or approximately 40 to 50 tonnes each hour (Ex-44, para 129).
510 The first constraint which limits Pozzolanic’s capacity to take and process a substantial volume of flyash involves the pumps. The three pneumatic pumps installed by Pozzolanic under the fabric filters can pump at a rate of 90 tonnes of flyash each hour to the Tarong North run-of-station silo. These pumps were installed to enable flyash production to continue should the original mechanical ash handling equipment fail. In theory, the pump can transfer 2,160 tonnes of flyash per day.
511 The second constraint concerns storage.
512 The Tarong North run-of-station storage silo has a capacity of 700 tonnes and Pozzolanic’s capacity to remove flyash from the silo is 60 tonnes per hour which is 30 tonnes per hour less than the in-flow rate to the silo. In theory, the removal rate over 24 hours is 1,440 tonnes per day. The daily in-flow/removal rate surplus is 720 tonnes per day.
513 The third constraint concerns the load-out facility below the classifier which has a capacity of 30 tonnes per hour. In theory, the load-out facility can out-load 720 tonnes per day.
514 The fourth constraint concerns truck transfers.
515 The maximum volume of feedstock ash Pozzolanic can transfer by tanker from the run-of-station silo to the classifier at the Tarong Power Station (during the period until early 2007) was approximately 240 tonnes per day. On average, Pozzolanic could transport between eight and nine tanker loads of run-of-station flyash from Tarong North to the Tarong classifier each day. The tanker would operate for approximately 18 hours each day across two shifts to make those trips. There was no point operating two tankers simultaneously as only one classifier could operate at Tarong at any time. In addition, occasionally, trucks would have to be weighed although a practice was adopted of attributing a nominal weight of 30 tonnes per load as the basis of relevant calculations. At Tarong, the tanker has to pump out its load into the Pozzolanic classifier feedstock silo. The round trip would take approximately 60 to 80 minutes to complete. Again, Mr Druitt describes Pozzolanic’s capacity to produce concrete grade flyash from Tarong North as being “severely limited” by these truck transfer factors.
516 The fifth constraint concerns the Sturtevant classifier which is not as efficient as a Buell classifier. At Tarong North the Sturtevant classifier achieves a yield of between 30% and 60%. Mr Druitt estimates that Pozzolanic is able to produce approximately 200 to 300 tonnes of concrete grade flyash per day (between 73,000 and 109,500 tonnes of concrete grade flyash annually, assuming a 365 day operation) at Tarong North, having processed between 600 to 700 tonnes of feedstock ash.
517 As to third party processing, Mr Druitt says this: “If other fly ash operators wanted to they could install fly ash collection equipment alongside Pozzolanic’s equipment and install their own fly ash processing plant at Tarong North power station. There is sufficient space beyond the perimeter of the power station to construct the necessary processing plant and sufficient space below the hoppers for additional extraction equipment” (Ex-44, paras 131 and 132).
518 Mr Druitt makes no further elaboration in his first affidavit as to any aspect of the physical or engineering dynamics of third party connection and installation of collection equipment at either Tarong or Tarong North and the language of third party capability in each case is precisely the same. That matter, however, is addressed in the cross-examination of Mr Druitt and is mentioned further, later in these reasons.
Bottlenecks
519 Mr Druitt swore a further affidavit on 3 September 2010 (Ex-45) in which he says that the most common bottleneck affecting production of concrete grade flyash at Pozzolanic’s facilities is the dispatch facility. The capacity of the dispatch facility caps the amount of concrete grade flyash that can be loaded into road tankers which results in limitations in the volume of concrete grade flyash produced by the facility. Pozzolanic’s ability to process flyash to produce cgfa is said to be affected by the on-site storage capacity. Apart from production bottlenecks, Mr Druitt says that the most significant external constraint on cgfa production at Pozzolanic’s facilities is the power station and the possibility that units might be taken off-line or the load reduced.
520 Specifically, Tarong is said to be subject to a number of significant processing and dispatch bottlenecks. Three in particular are mentioned again by Mr Druitt.
521 First, the existing weighbridge is too small to enable easy movements for B double road trucks. In 2006, Mr White instructed Mr Druitt to investigate increasing the storage capacity, and installation of a second weighbridge on Tarong Power Station land adjacent to the existing weighbridge. At para 62 of Mr Druitt’s second affidavit, he says that “Pozzolanic’s existing footprint at the Tarong Power Station means that there is insufficient room to install a second weighbridge or additional silos nearby and the cost to install this further away from the existing facility would involve substantial additional expenditure”. Thus, Mr Druitt concluded that, based on his investigations, it was not possible to fix the dispatch and storage bottlenecks without significant capital investment disproportionate to the “production gains”.
522 Second, the location of the flyash processing facility is 700 metres from the power station which means that all flyash must be pneumatically pumped from the hoppers to the transfer stations and then 700 metres to the flyash processing facility prior to either, classification, or truck loading. Until the upgrades to the pumps and transfer stations in 2007, the capacity of the transfer stations was approximately 30 and 40 tonnes per hour (Ex-44, para 113(b)).
523 Third, the on-site storage capacity is limited to 1,000 tonnes.
524 These three bottlenecks are said to be difficult to correct.
525 Mr Druitt also says that prior to 2004 Pozzolanic had off-site storage capacity at Yatala where it had two 600 tonne silos, and at Darra, where it had two 600 tonne storage silos and a collection of six steel silos used for a variety of products other than Tarong non-fine grade flyash. When the Darra cement plant was decommissioned in 1997, most of the assets were demolished. Two 600 tonne silos were modified and used for flyash storage in 1998. Four other silos on the Darra site were converted for the storage of flyash by 2005. Since then they have been used on a daily basis to store flyash predominantly sourced from the Tarong Power Station. This additional flyash storage is said to have allowed Cement Australia to more consistently dispatch higher volumes of Tarong and Tarong North Power Station flyash.
526 Although it will be necessary to examine the sequence of exchanges leading to the installation of a classifier at Tarong North and the method selected for the treatment of reject ash, it is sufficient for present purposes to note that Mr Druitt oversaw the installation of the classifier at Tarong North. The work commenced in mid-2006 and took approximately 12 to 13 months to complete. Mr Druitt says that the Tarong North classifier was commissioned in approximately late February 2007. From late 2005 to February 2007, Pozzolanic trucked unprocessed flyash from Tarong North to its Tarong flyash processing facility. Mr Druitt says that Pozzolanic did so because the quality of the flyash from Tarong North contained a higher proportion of fine particles than Zone 1 Tarong ash, and Pozzolanic regarded the classification of Tarong North ash as preferable to classifying the coarser particles collected in the hoppers in Zone 1 at Tarong.
Mr Druitt’s references to the production records, and spreadsheet data of Ms Boman
527 In Mr Druitt’s second affidavit at para 100 he makes reference to the Tarong production records for the years 2003 to 2010 excluding 2006. Those production records are contained in a series of confidential tabs.
528 The first document is a spreadsheet under the title Tarong – Sales & Stocks 2003 (Ex-45, RAD-24). The spreadsheet, as the name implies, sets out the volume of daily production of concrete grade flyash by Pozzolanic and the volume of daily sales of Tarong concrete grade flyash. The schedule sets out the statistics for each day of the 2003 calendar year from 1 January 2003 to 31 December 2003. The spreadsheet also contains a running monthly total and an annual total. So, for example, on 2 January 2003 Pozzolanic produced 457.6 tonnes of concrete grade flyash and sold 507.6 tonnes of concrete grade flyash and on that day Pozzolanic held 1,000 tonnes of concrete grade flyash in its product “silo stock” (at 6.00am). The sales figure is rounded up for each day in the monthly total column. On 3 January 2003, Pozzolanic produced 535 tonnes of concrete grade flyash and sold 485 tonnes of it. The cumulative total for the two days of sales of concrete grade flyash amounts to 993 tonnes.
529 Each of the stock, production and sales statistics are set out for each day of the year in the spreadsheet. The total concrete grade flyash sold by Pozzolanic in the 2003 calendar year was 303,045 tonnes. The 2003 spreadsheet sets out yearly totals by way of comparison for the 2002, 2001 and 2000 years of 271,932 tonnes, 242,902 tonnes and 285,966 tonnes respectively. The spreadsheet does not contain a running total of the production quantity for the 2003 year nor the production totals for the comparator years.
530 The second document is a spreadsheet for the 2004 calendar year (Ex-45, RAD-25). It shows that total sales of concrete grade flyash “ex-Tarong” for the 2004 year were 308,039 tonnes. The spreadsheet shows the comparator years of 2003, 2002, 2001 and 2000 which reflect the figures previously mentioned.
531 The next document is a spreadsheet for the 2005 calendar year in the same format which shows that total sales for that year were 348,468 tonnes of concrete grade flyash (Ex-45, RAD-26).
532 The next document is a spreadsheet in similar terms for the 2007 year although the first day in the schedule is 31 December 2006 (Ex-45, RAD-27). Nevertheless, the annual total tonnes sold “ex-Tarong” in the 2007 year were 295,666 tonnes. The schedule sets out the comparator years for 2006, 2005, 2004, 2003, 2002, 2001 and 2000 and although there is no separate spreadsheet for the 2006 year, the spreadsheet for the 2007 year contains the daily statistics for sales “ex-Tarong” for 2006 which shows total sales in that calendar year of 379,101 tonnes. The spreadsheet for the 2007 year also contains a second spreadsheet which, as exhibited to Mr Druitt’s affidavit, is almost impossible to read. However, the document bears a heading Total Tonnes Ex-Tarong which is the same figure previously mentioned, namely, 295,666 tonnes but also contains, on this occasion, a running total of production for the 2007 year which shows production of cgfa of 296,915 tonnes.
533 The total tonnes ex-Tarong for the 2008 calendar year are 147,226 and the production quantity for that year is 146,836 (Ex-45, RAD-28). For the 2009 year, total sales ex-Tarong amount to 298,689 and total production was 299,689. For the 2010 year, total sales ex-Tarong were 153,211 tonnes and total production was 153,861 tonnes. In each case for all of these spreadsheets, the daily opening silo stock statistics are also given. When daily sales ex-Tarong exceed daily production, draw downs occur from the product silo stock.
534 At CB-19 to the first affidavit of Carol Boman sworn 5 February 2010 (Ex-50), Ms Boman sets out a spreadsheet entitled “Production Volumes of Concrete Grade Fly Ash between 2001 and 2004”. Ms Boman describes this spreadsheet as the “actual volumes” produced, based on information extracted from Pozzolanic’s records. The volumes produced at Tarong in the years 2001, 2002, 2003 and 2004 are said by Ms Boman to be 243,359; 272,488; 311,580; and 309,995 tonnes of concrete grade flyash per annum, respectively. Ms Boman then goes on at para 74 to describe those statistics as “details of the amount of fine grade flyash despatched out of … Tarong …” [emphasis added] in those years. The volumes recited at CB-19 spreadsheet seem to be what the spreadsheet says, namely, the volumes of flyash produced rather than the volumes sold “ex-Tarong”, but the statistics may be the volumes produced and dispatched out of Tarong including sales and transfers to intermediate storage at Darra, Yatala and Wacol.
535 An examination of the spreadsheets attached to Mr Druitt’s affidavit reveal that, by and large, Pozzolanic/QCL and later Pozzolanic/Cement Australia were selling each year approximately the amount of flyash produced during the relevant year and producing marginally in excess of the volume sold. The five product silos at Tarong were capable of storing in all 1,000 tonnes of flyash and Pozzolanic essentially sold what it produced and, by and large, maintained storage of approximately 619.97 tonnes per day on average of concrete grade flyash in the product silo. The quantity of fine grade flyash actually produced at Tarong seems to be almost interchangeable with the quantity of fine grade flyash sold sourced from Tarong.
536 The statistics for each day of operation are available for the years 2003 to 2005 and 2008 to 2010. The daily 6.00am silo stock quantity is also available for those years. No such data is available for 2001 or 2002 or 2006 or 2007. From the statistics which are available, the days of operation and the annual average silo stock opening volume can be calculated and I have set out the calculations in the schedule below.
| Year | Average 6.00am Silo Stock Quantity | Days of Operation |
| 2003 | 664.26 | 350 |
| 2004 | 615.58 | 357 |
| 2005 | 586.14 | 351 |
| 2006 | data unavailable | data unavailable |
| 2007 | data unavailable | data unavailable |
| 2008 | 528.79 | 160 |
| 2009 | 680.64 | 354 |
| 2010 | 664.41 | 239 |
537 The cumulative average of the Tarong silo stock quantities across the years for which data is available is 619.97 tonnes.
538 Ms Boman’s second affidavit of 19 February 2010 is Ex-51.
539 A confidential schedule described as part of CB-1 to Ex-51 in the electronic version of the annexures (referred to as part of CB-2 in Ex-51, para 9), is “Power station by product by year” and described as “Production Volumes for PE 2000 to 2008”. In the second sentence of para 9, however, the document is said to set out the volumes of fine grade flyash (and also non-fine grade flyash) produced by Pozzolanic during the years 2001 to 2008. That schedule sets out a summary of the “invoiced quantity” of fine grade flyash and non-fine grade flyash by station for the years 2001 to 2008. The quantities for Tarong for the years 2001, 2002, 2003 and 2004 for fine grade flyash are the same quantities set out for each of those years in Ms Boman’s document at CB-19 of Ex-50 (as earlier mentioned).
540 The invoiced quantity for the 2000 year by reference to the electronic version of the schedules for Tarong is 139,211 tonnes of fine grade flyash. However, the methodology statement accompanying the electronic schedules described as “Methodology” within CB-1 of Ex-51 says that some information was extracted for 2000 however the information is not complete as the information requested was from 2001.
541 Only data in evidence from 2001 onwards is complete.
542 For the years 2005, 2006, 2007 and 2008, the invoiced quantity of fine grade flyash from Tarong is 351,435; 380,700; 294,903; and 327,493 tonnes per annum respectively.
543 Mr Druitt draws attention to the daily production records and observes that significant variation occurs from day to day and says that consistently high daily production of concrete grade flyash across multiple weeks is the exception.
544 Mr Druitt says that based upon his experience in designing and overseeing flyash facilities at various power stations and his observation of the production and other constraints that affect such facilities, he considers that an attempt to quantify the annual production capacity of a facility based upon a “theoretical maximum output capacity of plant and equipment” would be unreliable (Ex-45, para 102). It is said to be “unreliable for reasons including the daily variation in the production of flyash by any such facility” as demonstrated by the various spreadsheets, and the consideration that annual concrete grade flyash production statistics “ignore issues that arise on a daily basis and which affect production from one day to the next”.
545 Mr Druitt also says that annual production figures “also require that the maximum daily production achievable is reproduced every day of the year” and to achieve that position the calculation must assume no unplanned power station outages, no breakdowns in any flyash processing equipment, regular and consistent cycling of road trucks to ensure a consistent off-take of flyash; no rain; no holidays as annual production figures assume that concrete grade flyash is always being produced and removed in an orthodox truck cycle; production 24 hours a day, 7 days a week over 52 weeks whereas production is typically a 22 hour operation over 6 days; no occupational health and safety issues arising as a result of flyash operations being suspended; each road truck taking the minimum time; each truck being loaded efficiently; and, flyash produced by the power station being always of a consistent high quality with no LOI or other issues (Ex-45, para 103).
546 Having regard to all of those matters, Mr Druitt says that he considers it unrealistic to assume that all or indeed many of these variables “will remain constant from time to time” and this is especially so because “many planned and unplanned contingencies affect the daily production capacity of flyash facilities at power stations”.
Mr Druitt’s comments concerning Mr O’Callaghan’s handwritten responses from the workshop participants
547 Mr Druitt, in his second affidavit, examines and comments upon the statistical data contained in the print-out from the whiteboard reflecting Mr O’Callaghan’s handwritten record of the responses from the participants at the flyash strategy workshop convened by Mr O’Callaghan and conducted on 2 March 2001. Mr Druitt did not attend that meeting and does not recall having had any contribution to make to the preparation of the document.
548 Mr Druitt makes these observations about the statistics recited at ATB 2.9.
549 In relation to what is said to be the “available usable ash” for the Tarong and Tarong North Power Stations, Mr Druitt considers that the maximum capacity of the Tarong Power Station, based upon his understanding of the flyash processing facilities installed at that station at 2001, was between 300,000 and 350,000 tonnes per annum, on a stand-alone basis (Ex-45, para 107(a)).
550 Based upon his understanding of the flyash processing facilities proposed for Tarong North and later installed, the maximum capacity of the Tarong North Power Station on a stand-alone basis was between 100,000 and 120,000 tonnes per annum (Ex-45, para 107(b)(i)).
551 For convenience, the other statistics mentioned by Mr Druitt in relation to Millmerran and Swanbank can be mentioned now. Mr Druitt considers that the maximum stand-alone capacity of the Swanbank Power Station based upon the installed flyash facilities as at 2001 was 30,000 tonnes per annum and based upon the facilities proposed and installed at Millmerran Power Station, the maximum stand-alone capacity of that station was 100,000 to 120,000 tonnes per annum (Ex-45, para 107(b)(ii)).
552 Mr Druitt also says that based upon his understanding of the flyash processing facilities installed at the Tarong and Tarong North Power Stations as at 2007, the maximum combined capacity of both facilities was between 400,000 and 450,000 tonnes per annum (Ex-45, para 107(c)).
553 Mr Druitt says that, in the production of flyash, the individual stand-alone capacities of the Tarong and Tarong North facilities cannot simply be added together to arrive at a single maximum capacity figure in a theoretical sense for five reasons. First, Tarong and Tarong North share a weighbridge which is a key piece of equipment. Flyash produced at Tarong North must be weighed over the Tarong weighbridge facility and the weighbridge is a “significant bottleneck”. Second, an additional weighbridge could not be practically installed nearby the existing Tarong weighbridge and would involve substantial additional expenditure if installed further away. Third, a weighbridge or silo facility at Tarong North would require significant additional capital expenditure and since there is only one production unit at Tarong North, the necessary investment would only result in the maximum production capacity reaching something close to 120,000 tonnes. Fourth, although the transfer stations at Tarong have been modernised since 2007, realising efficiency gains, those gains have not resulted in significant changes in the maximum production capacity of the facility. Fifth, although the availability of off-site storage enabled the processing facilities to operate more consistently, and dispatch higher volumes of concrete grade flyash because dispatch to the customer could be better managed through off-site storage (and the risk of stock-outs and processing downtime when the on-site storage silo was full, could be better managed), the off-site storage “did not result in significant changes in the maximum production capacity of these facilities”.
554 As to the “potential usable ash” and the “required capex” figures in the document, Mr Druitt assumes that the figures indicate a potential capacity assuming the proposed capital expenditure is made. He says the capital expenditure figures are too low having regard to the tonnages recorded and in order to achieve those projected volumes, the 2001 proposed capital expenditure required would have to be substantially more than is suggested in the document. The document does not take account of the significant existing constraints at the Tarong facility. Mr Druitt says that investing $2 million in additional equipment would not have alleviated the existing bottlenecks, at that time, to the extent that an additional 150,000 tonnes of concrete grade flyash could then have been produced each year (Ex-45, para 109).
555 There are four reasons for that conclusion. First, to produce an additional 150,000 tonnes of concrete grade flyash, Pozzolanic would have been required to pump an additional 600,000 tonnes of raw feedstock ash and dispose of approximately 450,000 tonnes of reject flyash. Second, to pump and dispose of these high additional volumes of flyash would have required duplication of the existing transfer stations, additional pipeline networks and upgrades to the existing pneumatic pumps located below the hoppers. Third, significant expansion to the reject ash disposal network would have been necessary. Fourth, new silos and a weighbridge would have been necessary.
The criticism of Mr Druitt’s evidence
556 The Commission criticises the reliability of Mr Druitt’s evidence on a number of grounds.
557 The first criticism is that the various capacity figures given in evidence by Mr Druitt are based upon “estimates”, “opinions” or “gut feelings” and not soundly based upon records maintained by the operators of the various plant and equipment Pozzolanic deploys at the power stations. Mr Druitt’s figures are not capable of being tested by reference to hard data. The capacity statistics for each facet of the equipment such as the discharge capacity of the transfer stations and other equipment are said to be simply based upon Mr Druitt’s general experience or something he says he was once told by someone in an operational position at Pozzolanic’s facilities at the power stations.
558 Both the first and second affidavits of Mr Druitt extensively set out information concerning Mr Druitt’s engagement with power station operators, regular visits to the power stations, a broad field of experience concerning the design and operation of flyash processing equipment and the development of engineering solutions to processing problems. Mr Druitt is put forward by the respondents as the most engaged authoritative source of knowledge and information about all of the matters about which he speaks and especially the functional capacity of all aspects of the equipment to produce concrete grade flyash, and the constraints upon Pozzolanic’s ability to realise that capacity.
559 I accept that Mr Druitt is in a position to speak to that experience in giving evidence about these capacity issues and, based upon his experience, he is in a position to comment upon the accuracy, in his view, of the capacity statistics reflected in documents put to him. I also accept, however, that each of the statistics he identifies is, as he puts it, based upon his “opinion at the time”, his “general experience”, information given to him from “site people”, “calculations” which may well be in “records he keeps in his office” but he cannot “exactly say where they would be”, “assessments” and “estimates” which he believes to be correct having regard to his general experience, rather than by reference to actual records documenting the performance characteristics or “rates” of the relevant equipment.
560 The evidence of Mr Druitt on capacity statistics, to the extent that it is inconsistent with contemporaneous documents, is said to lack the probative rigour necessary to be authoritative or, more importantly, reliable.
561 The first manifestation of this dilemma is said to concern Mr Druitt’s evidence of the discharge capacity of the transfer stations, set out at para 97 of his first affidavit (Ex-44), of between 30 and 50 tonnes of flyash per hour. When Mr Druitt gave oral evidence he elected to correct that assessment so that the capacity was said to be between 30 and 40 tonnes per hour (T, p 1929, ln 30) rather than 30 and 50 which, in any event, seemed to be inconsistent with the assessment contained at para 58(b) of Mr Druitt’s second affidavit (Ex-45) which talks about a capacity of between 30 and 45 tonnes per hour as the discharge rate for the transfer stations. As mentioned earlier, it may be that Mr Druitt had in mind a range of 30 to 50 tonnes per hour for each station or an aggregate discharge capacity for both stations of 30 to 50 tonnes per hour. However, para 113(b) of Ex-44 and para 96(e) of Ex-45 make it clear that Mr Druitt was seeking to identify the capacity of each station separately. For example, in para 96(e) Mr Druitt says that he was aware in 2002 that at Tarong the two transfer stations “could pump zone 1 ash at 30 tonnes per hour and 40 tonnes per hour respectively, and zones 1, 2 and 3 ash sequentially at 35 tonnes per hour and 45 tonnes per hour respectively”.
562 On a more fundamental level, Mr Druitt was asked about the basis for the correction to para 97 of his first affidavit and the sources of information which caused him to believe that the capacity assessment ought to be corrected. Mr Druitt said that the original assessment was based upon his opinion at the time, and his opinion concerning transfer rates was based upon his experience at Tarong of how many tonnes are capable of being harvested from the precipitators and sent to the storage silos for dispatch. Mr Druitt accepted that, in general, he has not been involved in the day-to-day management of Pozzolanic’s operations at Tarong and that there are probably no records kept of the hourly rate of the discharge of the transfer stations (T, p 1929, ln 17 and ln 26).
563 The correction to para 97 was actually made, it seems to me, to bring that paragraph into conformity with the observations at para 113(b).
564 The statistics given in evidence by Mr Druitt are said by him to be based on his general experience with powder handling and his knowledge of the nature of the pressure vessels which fill and discharge flyash having regard to fixed volume and cycles over time. Mr Druitt said he believed that the “site people” keep a record of these numbers and the discharge rates would have been given to him by the site people who count the cycles. Mr Druitt seemed to accept that he had been given the initial statistics by the site people but, on reflection, he felt that the reduction to 40 tonnes per hour was a “closer estimate” and 50 tonnes per hour was an “exaggeration”. Mr Druitt said that the change from 30 and 50 in the first affidavit to 30 to 45 in the second affidavit and then a correction to 30 and 40 in evidence, probably involved some degree of calculation in his head although ultimately it was simply his assessment or, put another way, sort of a gut feeling (T, p 1931, lns 29, 33 and 35).
565 As to these exchanges in cross-examination, it seems clear enough that Mr Druitt was, in effect, giving his best estimate or opinion of the discharge rate based on his understanding of the pressure vessels; the fact that the vessels cycle over time having regard to volume; something he was told by an operational person at some undefined point in time; and his own assessment, although it seems unlikely that any hard data was examined in order to derive precise operational capacity figures for the discharge rates.
566 These assessments are, no doubt, drawn from Mr Druitt’s general experience and in the absence of hard data, his general experience has led him to a view which suggests that the discharge rates approximate something in the range of 30 and 40 tonnes of flyash per hour.
567 The second example of this lack of data said to render the assessments unreliable is what appears to be an odd assessment in relation to the post-upgrade discharge rate.
568 The discharge rate mentioned at para 58(b) of Mr Druitt’s second affidavit (Ex-45) represent the discharge rate relevant up to the upgrade to the ash pumps in approximately 2007. That discharge rate was said to be “between 30 and 45 tonnes per hour”. Mr Druitt said that the discharge rate presently, in the post-upgrade environment, is between 30 and 40 tonnes per hour and thus the estimate of 40 tonnes, after the upgrade, is less than the pre-upgrade capacity numbers. It was put to Mr Druitt in cross-examination that his assessments must necessarily be complete nonsense as the upgrade presumably increased the discharge capacity of the transfer stations. Mr Druitt agreed that the figures put forward were not consistent (T, p 1932, ln 7). This example does seem odd.
569 The general point is that the assessments are, ultimately, simply estimates.
570 The same criticism is made of Mr Druitt’s assessment that the Zones 2 and 3 pneumatic vessels installed by Pozzolanic under the hoppers at Tarong each pump approximately 15 and 20 tonnes of flyash per hour. These statistics are based upon observations, general experience, information given to Mr Druitt by site people and tests undertaken by Mr Druitt which he describes as “on a small laboratory scale” undertaken “probably in the late 90s”. Mr Druitt agreed with counsel for the Commission that his affidavit records “at best some memory you have of a view you formed back in the early 2000s” and that it would not be possible to test the accuracy of Mr Druitt’s estimates “because none of the base data exists” (T, p 1933, ln 28).
571 As to the yield derived from classifying Zone 1 flyash at Tarong of between 20% and 40% according to Mr Druitt’s evidence, Mr Druitt said that he had been given information to this effect by the manager of the power station and, based on his own experience, he knows that approximately 100 tonnes of feedstock is required to load a truck with 25 tonnes of concrete grade flyash.
572 Mr Druitt was taken to a document at ATB 27.1 and, in particular, a worksheet of that document which is described at the bottom of the document as “Production options”.
573 The document sets out a table under the heading “Current Configuration” which sets out production scenarios under the current generation regime at Tarong and Tarong North in August 2006. The production options are postulated on the basis of whether “low ash” or “high ash” coal is burned in the power station. The schedule sets out daily tonnages of concrete grade flyash production. Mr Druitt agreed with counsel for the Commission that, with Tarong North’s unit operating and the four units at Tarong also operating, a realistic estimate of the capacity of a Tarong North classifier (at August 2006) was that 400 tonnes of concrete grade flyash could be produced; 800 tonnes of concrete grade ash could be produced from Zones 2 and 3 at Tarong; and a realistic estimate of the amount of concrete grade flyash capable of being produced by classifying Zone 1 ash at Tarong was 400 tonnes (T, p 1936, lns 15 to 43).
574 Having regard to the additional “Tarong Pumping” statistic, Mr Druitt accepted that, in the circumstances described, 1,700 tonnes of concrete grade flyash per day was capable of being produced.
575 Column 1 of the worksheet not only assumes the operation of the four Tarong units and the Tarong North unit but also assumes that the ash burned has a “high ash content”. Assuming all the same units are operating burning coal with a “low ash content”, the daily production of concrete grade flyash would be this: Tarong North – 300 tonnes; Tarong (Zones 2 and 3) – 600 tonnes; Tarong Zone 1 classified ash – 300 tonnes with total production of 1,105 tonnes per day. Mr Druitt, however, has referred to production of 800 tonnes per day of concrete grade flyash from Zones 2 and 3 of Tarong without the need to classify that ash, in his primary affidavit evidence. That assessment of daily production from Zones 2 and 3 is consistent with the high ash content scenario in the schedule. Mr Druitt, as the most experienced of the respondent’s witnesses on the topic of the operational aspects of the plant and equipment and its capacity, accepted that the quantities nominated in the high ash column represented realistic assessments of the capacity of the equipment in August 2006.
576 The schedule then postulates daily availability of tonnes of concrete grade flyash on the basis of an 85% availability rate with the result that under the current configuration 1,445 tonnes per day of flyash is available from Tarong and Tarong North, in terms of capacity.
577 Mr Druitt in cross-examination was asked whether allowing an 85% availability figure is “an appropriate allowance for contingencies in a calculation of this sort [an availability rate] to work out what production you could expect”, and said, “I would say that’s a fair comment, yes” (T, p 1937, ln 36). Mr Druitt accepted that as a matter of calculation, the Tarong availability rate in tonnes is 1,445 tonnes per day and that assuming a seven day production week, the weekly production is 10,115 tonnes per week. Mr Druitt embraced that conclusion as only an arithmetic one.
578 The third column in the schedule assumes that three of the Tarong units are engaged rather than four, and the Tarong North unit is engaged. In those circumstances, the production rate from Zones 2 and 3 is said to be 700 tonnes. Mr Druitt, however, did not accept that with one unit off-line at Tarong, Zones 2 and 3 would produce 700 daily tonnes of concrete grade flyash.
579 Mr Druitt was also taken to a document at ATB 15.5 which is a document consisting of an agenda for a “Fly Ash Strategy Meeting” to be held on 26 October 2004 attended by a range of participants including Mr Druitt. Attached to the agenda is a document at 15-61 entitled “Board Briefing Paper – Queensland Flyash Development Plan”. That document contains a table headed “Table 2: Power Station Information” which lists Tarong, Tarong North, Swanbank, Callide B, Gladstone, Callide C, Millmerran and Stanwell. The schedule contains three columns (among others) under the headings “Available Ash (ktpa)”; “CA [Cement Australia] Utilised Ash (ktpa)”; “CA Ash facilities capacity”. As to Tarong, Tarong North and Swanbank, the schedule is in these terms:
| Station | Available Ash (ktpa) | CA Utilised Ash (ktpa) | CA Ash facilities capacity |
| Tarong | 600 ktpa | 310 ktpa | 350 ktpa |
| Tarong North | 150 ktpa | Small amounts for blending | 50 ktpa |
| Swanbank | 60 ktpa – declining as to be used for peaks | 44 ktpa | 60 ktpa |
580 Mr Druitt was asked whether 600,000 tonnes per annum was an accurate estimate of the amount of concrete grade flyash available from Tarong. Mr Druitt said that he was not sure of that figure but accepted that the Board briefing paper recited that figure. Mr Druitt was asked whether 350,000 tonnes per annum of concrete grade flyash was an accurate estimate of the capacity of the then existing Cement Australia facilities. Mr Druitt said he thought that it was.
581 As to whether 150,000 tonnes per annum was an accurate estimate of available concrete grade flyash from Tarong North, Mr Druitt said that he could not comment on the accuracy but “at the time, [26 October 2004] that probably was a reasonable estimate …” (T, p 1961, ln 4).
582 Mr Druitt was asked whether 50,000 tonnes per annum was an accurate estimate of the tonnage of concrete grade flyash which could be produced by trucking ash from Tarong North to be classified at the Tarong classifier using the then existing facilities, and said, “Yes, I’d say that’s reasonable”.
583 As to whether 44,000 tonnes per annum was then being taken or utilised from Swanbank, Mr Druitt said that he did not dispute that figure and said that it “would be pretty reasonably accurate, yes”.
584 Mr Druitt was also taken to a document at ATB 19.38, which is a Pozzolanic “Monthly Local Report” for May 2005 which bears Mr Druitt’s name. Mr Druitt accepted that in his report he recorded that an analysis of recent historical records confirms that the current capacity of the Tarong facility is 1,100 tonnes per day, seven days per week, yielding 385,000 tonnes of concrete grade ash assuming an operational year of 350 days, subject to the two factors of all four Tarong units being engaged and constant road transport of ash to enable 1,100 tpd every day of the week. Mr Druitt accepted that the document accurately reflected his “understanding of the available production from Tarong at that time”.
585 Before conveniently mentioning some other aspects of Mr Druitt’s evidence as to functional or operational aspects of the processing and collection equipment and Pozzolanic’s interaction with the power station at Tarong, one matter concerning Mr Druitt’s evidence should be mentioned further. At [544], I note Mr Druitt’s evidence that in seeking to establish or quantify the annual production capacity of a facility, adopting a theoretical maximum output capacity of plant and equipment is unreliable in a methodological sense. That is said to follow because theoretical capacity does not take account of daily variations in production, and achieving the theoretical maximum capacity of plant and equipment assumes the subsistence of all of the 11 factors described at [545]. At [553], I also note Mr Druitt’s evidence that the stand-alone capacities of the Tarong and Tarong North facilities cannot simply be “added together” to derive a “single maximum capacity figure”. Five reasons are given for not aggregating the stand-alone capacity of each facility to answer the question of total capacity. It follows that Mr Druitt has given careful consideration to the factors that inform the determination of the output capacity of the infrastructure at Tarong and Tarong North in a stand-alone sense and also those factors that make adding the capacity of each facility together a mistaken approach to determining a single maximum capacity figure for Tarong and Tarong North.
586 There is some force, however, in the Commission’s contention that these careful considerations set out in the primary affidavit evidence by Mr Druitt fail to reflect the following qualifying considerations. First, whilst it is no doubt true, as Mr Druitt observes, that the orthodoxy of Pozzolanic’s daily operational flyash activities at the two power stations requires a balancing of a number of production constraints (including some or all of the 11 factors mentioned at [545] and the five factors at [553]), prudential business planning and annual production forecasting nevertheless required Pozzolanic and QCL (and Pozzolanic and Cement Australia in the post-merger environment) to weigh up all of these production contingencies and make final and reliable judgments about actual and potential production of fine grade flyash over time.
587 Second, as already mentioned, Mr Druitt (T, p 1937, lns 34-36) accepted that allowing an 85% figure for contingencies in the calculation of what might be able to be produced is an “appropriate allowance” for production contingencies.
588 Third, when asked in re-examination about the question of whether the stand-alone production capacity of Tarong and Tarong North could be added together as a means of determining a single maximum capacity figure for Tarong and Tarong North, Mr Druitt seemed to abandon the careful analysis in his primary affidavits and responded by saying, “I don’t see why not” (T, p 1970, lns 41-44).
589 The Commission places some emphasis on one other apparent contradiction in Mr Druitt’s evidence on this topic. Mr Druitt gave evidence in cross-examination that in August 2006, 400 tonnes per day “probably was” a realistic estimate of the capacity of the Tarong North classifier to produce concrete grade flyash (T, p 1936, lns 15-20). However, in the course of addressing the process of adding together the capacities of Tarong and Tarong North so as to determine a maximum capacity figure, Mr Druitt emphasised that all of the variables he had earlier mentioned would need to all be “in line” and he did not, in any event, agree with a capacity figure of “400 tonnes out of – the Tarong North classifier” and observed that the document (ATB 27.1) was not his document. No doubt, Mr Druitt reflected upon the matters put to him in cross-examination about the capacity statistics drawn from the documents and he may well have felt uncomfortable about a capacity figure of 400 tonnes for the Tarong North classifier, on reflection. Nevertheless, Mr Druitt was put forward as the most experienced authoritative witness on these capacity questions and seemed, on balance, in cross-examination, willing to accept 400 tonnes as “probably” a realistic estimate without observing that the figure was not accepted by him or identifying the basis on which 400 tonnes a day was not a realistic estimate of the capacity of the Tarong North classifier to produce concrete grade flyash.
590 Apart from the question of the capacity of the Tarong and Tarong North plant and equipment to produce concrete grade flyash, Mr Druitt gave the following further elaboration of the operational protocols governing the collection and processing of ash at Tarong in 2005 (T, pp 1945 and 1946).
591 Mr Druitt accepted that flyash was first collected from Zones 2 and 3 because that ash did not need classification in order to be sold. The collection system did not enable Pozzolanic to pump flyash from Zones 2 and 3 and from Zone 1 at the same time. Generally, Pozzolanic took all of the Zones 2 and 3 ash every day and the amount of Zone 1 ash required for classification was determined by someone’s assessment of demand. Whilst flyash was being pumped from Zones 2 and 3, flyash was continuing to be deposited into the hoppers for Zones 1, 2 and 3. When Pozzolanic wanted to remove Zone 1 ash, Pozzolanic’s employees advised the Tarong operator which of the hoppers Pozzolanic wanted to use.
592 Tarong would then shut off the discharge valve for those hoppers so that Pozzolanic could access Zone 1 hoppers to pump to the classifier. The selection of the relevant Zone 1 hoppers involved an assessment being made by Pozzolanic’s operational people of the better ash to use on the day. Pozzolanic’s people would then select the best Zone 1 ash for classification, test it for loss on ignition or residual carbon and fineness. Once those tests were done, a decision would be made as to which of the hoppers in Zone 1 would be selected for the removal of flyash for classification. Whilst the classification process was underway, the other hoppers in Zone 1 would be discharged by the power station in the ordinary course of removing ash from the hoppers.
593 Mr Druitt also said that if a third party was able to remove Pozzolanic’s connections to those hoppers in Zone 1 not being used by Pozzolanic for the collection of ash for classification, and build their own pumping and transfer stations and a classifier, a third party would be able to commence taking Zone 1 ash whilst Pozzolanic was taking ash.
594 One further aspect of Mr Druitt’s evidence (T, p 1950, ln 10 ff) about engineering and processing questions can also be conveniently mentioned now.
595 At Tarong North after the installation of the classifier, Pozzolanic adopted the process of taking ash for classification from four of the eight hoppers. Those four hoppers were generally selected because the selected hoppers contained a greater volume of flyash and the quality of the flyash in the selected hoppers was “probably significantly better”. Pozzolanic had adopted a technique of feeding a classifier with the best quality ash available. The selection of the particular hoppers was, in part, a result of a number of tests conducted by Pozzolanic of the ash and also tests of the reject ash from the classifier of which there were about 10 or a dozen tests which Mr Druitt saw. The tests which Mr Druitt saw suggested to him, fundamentally, that the ash from the “other four hoppers” not selected by Pozzolanic revealed ash of similar quality collected in those hoppers, according to the test results, to that of the reject ash. Mr Druitt accepted that his view was that the reject ash from the classifier was of comparable quality to the ash taken from the four hoppers not used by Pozzolanic.
596 Mr Druitt is not a person in charge of the day-to-day operations of either the Tarong or Tarong North flyash collection and processing facilities. He cannot speak to production capacity or the experience of daily production from the informed position of an engaged operator. He does, however, bring his general experience to bear as a person who has been asked to find “engineered solutions” to production problems at these facilities over time. His evidence is based on this general experience and some knowledge of test data he saw (and tests he conducted in the late 1990s and in early 2000). As to the functional capacity of the particular equipment (pumps etc) it is a little unfortunate that no specific data is available. Presumably the pumps and other equipment have functional performance capabilities and some precise information would normally be available as to, in situ, operational performance rates, over time, for the equipment in each of Tarong and Tarong North.
597 I accept that Mr Druitt’s estimates of the capacity and performance rates of the plant and equipment are his best estimates of those rates. However, I am a little troubled by the apparent anomaly (which Mr Druitt accepted as an inconsistency) that the production rate for the transfer pumps after the upgrade is said to be less than before the upgrade. I am also a little troubled by Mr Druitt’s evidence [545] that “typically” production is conducted as a “22 hour operation over 6 days” which represents 312 operational days (6 x 52 weeks) when in his own report of May 2005 he postulated the operation as a 350 day operation [429] and [488] and the actual operational statistics for the 2003 year demonstrate 350 days of operation; the 2004 year demonstrates 357 operational days; the 2005 year demonstrates 351 operational days; and the 2009 year reveals 354 actual days of operation. The 2006 and 2007 data is not available and the 2008 and 2010 data is well below either 312 days or the average of the other years, namely, 353 days. Moreover, the outage records in evidence for Tarong make it plain that the power station operated under a protocol of seven days operation, 24 hours a day, with flyash produced every hour of every day.
598 It is a little surprising that Mr Druitt was not aware of these data.
599 In 2003, 2004, 2005 and 2009, the “Tarong – Sales & Stocks” statistics show that the facility was operational for 38, 45, 39 and 42 more days in each respective year than the “typical” 312 day operational year Mr Druitt understands to be a typical operational year.
600 This simply suggests that Mr Druitt is not as engaged with the actual operational activities for the plant and equipment as others. I do not mean to suggest by any of these observations that Mr Druitt was doing anything other than giving his best understanding of the factual position on each topic about which he spoke. However, as to matters such as days of operation, functional performance statistics of plant and equipment, daily pump and transfer rates, Mr Druitt’s evidence is based on his estimates or assessments or general experience rather than actual hard statistical operational data.
601 It seems to me that the documents produced by Pozzolanic for Board briefing papers or other analytical processes are likely to be more reliable estimates of production and productive capacity than Mr Druitt’s assessments or estimates derived from his general experience in addressing particular engineering processing problems arising from time to time. Nevertheless, a summary of Mr Druitt’s evidence of the estimates of production and relevant constraints comes down to this (Ex-44, paras 95-132):
Tarong Power Station 2000 – 2010
1. Four generating units capable of producing 150 tonnes of raw flyash per hour constituting 3,600 tonnes per day or 1,310,400 tonnes per annum. Assuming average production days of 353 days per annum, annual flyash production would be 1,270,800 tonnes.
2. Zones 2 and 3 are capable of producing 800 tonnes of flyash per day of a standard almost universally constituting concrete grade flyash meeting the requirements of fine grade flyash constituting 291,200 tonnes of flyash per annum or 282,400 tonnes per annum assuming 353 average operational days.
3. There are two transfer stations having a certain discharge capacity. As to Transfer Station 1, 30 tonnes per hour and, as to Transfer Station 2, 40 tonnes per hour constituting 70 tonnes per hour or 1,680 tonnes per day, or a discharge capacity in the aggregate of 613,200 tonnes per annum. Assuming 353 average operational days per annum, the total discharge capacity would be 593,040 tonnes per annum.
4. At Tarong although there were, until 2007, three classifiers on site, only one classifier was operated at any one time, from 2003. The classifier was capable of producing 200 tonnes per day of concrete grade flyash or 73,000 tonnes of cgfa per annum from Zone 1 of Tarong.
5. As to the load-out facility and weighbridge, Pozzolanic was capable of dispatching 50 “B-double” tankers per day at an average load of 30 tonnes per load constituting 1,500 tonnes of cgfa per day capable of being moved and weighed, amounting to 529,500 tonnes per annum over 353 days.
6. The production capacity of the Tarong facility seems to have been 800 tonnes of cgfa per day from Zones 2 and 3, and 200 tonnes per day of cgfa produced by classifying run-of-station flyash whether from Zone 1 of Tarong (or from Tarong North until a classifier was installed at Tarong North Power Station in 2007).
7. The production capacity, therefore, on Mr Druitt’s evidence seems to have been 1,000 tonnes of concrete grade flyash per day at Tarong based upon use of Zones 2 and 3 flyash and use of classified Zone 1 flyash of 200 tonnes per day constituting 365,000 tonnes per annum or 353,000 tonnes per annum assuming 353 average operational days.
Tarong North Power Station 2000 to 2006
8. One generating unit capable of producing 1,200 tonnes of raw flyash per day or 438,000 tonnes per annum. Assuming 353 average operational days, annual production would be 423,600 tonnes per annum.
9. Pozzolanic deploys three pneumatic pumps under the fabric filters (to transfer flyash to the Tarong North run-of-station silo) which have the capacity to transfer 90 tonnes of raw flyash per hour or 2,160 tonnes of raw flyash per day or 788,400 tonnes per annum. Assuming 353 operational days the transfer pumps would have the capacity to transfer 762,480 tonnes to the silo.
10. As to storage, Tarong North’s run-of-station storage silo has a capacity of 700 tonnes and the capacity to remove flyash from the silo is 60 tonnes per hour or 1,440 tonnes per day assuming a 24 hour operation, constituting capacity of 508,320 tonnes per annum over 353 days.
11. As to truck movements or truck transfers, Pozzolanic was capable of hauling nine loads per day at an average load of 30 tonnes of raw flyash per load from the run-of-station silo or 270 tonnes per day amounting to 98,550 tonnes per annum. Assuming 353 operational days, the truck transfer capacity was 95,310 tonnes per annum.
12. As to the weighbridge, the weighbridge at Tarong has a capacity of 1,500 tonnes of concrete grade flyash per day. Assuming production capacity at Tarong of 1,000 tonnes per day based on Zones 2 and 3 production, and utilisation of the classifier capacity at 200 tonnes per day, the residual capacity of the weighbridge is 500 tonnes per day capable of being dedicated to Tarong North flyash.
13. It follows that before the Tarong North classifier was installed, although 1,440 tonnes per day of Tarong North run-of-station flyash might be taken from the silo at the hourly rate Mr Druitt nominates, Pozzolanic’s capacity to transfer flyash from Tarong North to the Tarong classifier was apparently limited to 270 tonnes per day based on a maximum of nine truck movements of 30 tonnes per day.
14. Assuming 270 tonnes of Tarong North flyash was taken to the Tarong classifier for classification and the yield was 60% as Mr Druitt suggests, the concrete grade flyash produced would amount to 162 tonnes of concrete grade flyash from the classifier. Assuming the classifier was operated at full capacity so as to produce 200 tonnes of cgfa per day, Tarong North flyash adds little capacity to the assumed capacity production at Tarong of 1,000 tonnes per day, unless and until further capital is deployed to utilise another classifier.
Tarong North 2007 to 2010
15. One generating unit: 1,200 tpd, run-of-station flyash; pump transfer to silo, 2,160 tpd; storage discharge capacity 1,440 tpd.
16. One classifier installed and commissioned in 2007 capable of producing 400 tonnes per day of cgfa.
17. Load-out facility capable of discharging 720 tonnes of cgfa per day.
18. Weighbridge capacity 500 tonnes cgfa per day, residual capacity.
19. Effective capacity production from Tarong North upon commissioning of the classifier, 400 tonnes per day.
20. The combined capacity of Tarong and Tarong North Power Stations would then amount to 1,400 tonnes of concrete grade flyash per day constituting 511,000 tonnes per annum or, assuming 353 operational days, 494,200 tonnes per annum. Mr Druitt’s estimates of cgfa annual production from Tarong and Tarong North were 450,000 tonnes.
How does Mr Druitt’s evidence compare with the sales statistics?
602 The spreadsheets exhibited to Mr Druitt’s affidavit (the “Tarong – Sales & Stocks” spreadsheets) suggest that sales of Tarong concrete grade flyash for the years 2000 to the end of the calendar year 2002 (the Millmerran contract being signed on 30 September 2002) were as follows:
| Year | Volume |
| 2000 | 285,966 |
| 2001 | 242,902 |
| 2002 | 271,932 |
603 The sales of Tarong concrete grade flyash for the years 2003 to 2006 before the Tarong North classifier commenced in February 2007 were, based on the Druitt spreadsheets, these:
| Year | Volume |
| 2003 | 303,045 |
| 2004 | 308,039 |
| 2005 | 348,468 |
| 2006 | 379,101 |
604 The sales of Tarong concrete grade flyash for 2007 to 2010 based on the Druitt spreadsheets were these:
| Year | Volume |
| 2007 | 295,666 |
| 2008 | 147,226 |
| 2009 | 298,689 |
| 2010 | 153,211 |
605 Ms Boman’s spreadsheets (Ex-51, CB-1) of actual production of concrete grade flyash at Tarong for the years 2001 to 2004 show production as follows:
| Year | Volume |
| 2001 | 243,359 |
| 2002 | 272,488 |
| 2003 | 311,580 |
| 2004 | 309,995 |
606 The Boman data earlier described shows production of concrete grade flyash at Tarong for 2005 to 2008 as follows:
| Year | Volume |
| 2005 | 351,435 |
| 2006 | 380,700 |
| 2007 | 294,903 |
| 2008 | 327,493 |
607 As to capacity, Mr Druitt says that at 2001 the maximum capacity of the Tarong processing facilities was 300,000 to 350,000 tonnes of cgfa per annum; once constructed, Tarong North’s maximum capacity was 100,000 to 120,000 tonnes of cgfa per annum; and, by 2007 the maximum capacity of both facilities was 400,000 to 450,000 tonnes of cgfa per annum.
608 Mr Druitt accepted that as at 26 October 2004 the capacity of the Tarong facilities was 350,000 tonnes of cgfa per annum and the capacity to produce cgfa by trucking Tarong North flyash to the Tarong facility was an extra 50,000 tonnes of cgfa per annum representing a capacity out of Tarong of 400,000 tonnes. By May 2005, Mr Druitt was reporting that 385,000 tonnes of cgfa was capable of being produced by Tarong and the explanatory notes to the Capital Expenditure Request Summary attached to Mr White’s email of 20 February 2006 (Ex-74, CSW-38) to Mr Zeitlyn projected annual production for 2006 of 397,732 tonnes of cgfa per annum notwithstanding the constraints described at [486] to [500]. Those notes also suggest a required production rate of 455,000 tonnes of cgfa per annum to meet demand and production of 420,000 tonnes “regardless”.
609 What reconciliation is there with the documents more generally?
610 Although the 2 March 2001 assessment was a “workshop” one, the participants thought available ash from Tarong was 450,000 tonnes and potential usable ash was 600,000 tonnes assuming extra capital expenditure of $2M, and capacity at Tarong North of 100,000 tonnes assuming additional capital expenditure of $1M. The “Challenges for Sales and Distribution” document of 1 May 2001, and amended on 7 December 2001, has the same “available” concrete grade flyash assessment as nominated by the workshop participants, and the same “potential usable ash” as the workshop participants nominated for Tarong and Tarong North. On 28 June 2004, Ms Collins in her document (Ex-62, SGC-73) said that concrete grade flyash “used” from Tarong was 310,000 tonnes and concrete grade flyash available from Tarong was 600,000 tonnes, and from Tarong North 150,000 tonnes. Clearly, these assessments also assumed additional plant and equipment. On 26 October 2004, the Board Briefing Paper addressing the “Queensland Fly Ash Development Plan” (ATB 15.5) also recorded that concrete grade flyash available at Tarong was 600,000 tonnes and at Tarong North, 150,000 tonnes. Mr Druitt said in evidence that he was not sure of the 600,000 tonnes figure but thought the 150,000 tonnes figure for Tarong North was probably a reasonable estimate.
611 In August 2006, the “Production Options” worksheet 3 of ATB 27.1 suggested that 1,700 tonnes per day of concrete grade flyash was capable of being produced from Tarong and Tarong North with all units operating, and the daily production capacity at Tarong North was 400 tonnes; the daily production capacity at Tarong was 800 tonnes from Zones 2 and 3; and 400 tonnes could be produced from Zone 1 at Tarong by classifying flyash, resulting in daily concrete grade flyash capacity of 1,600 tonnes per day from those sources or zones. Having regard to the additional 100 tonnes per day attributed to “Tarong pumping”, production capacity was said to be 1,700 tonnes per day. Based on an average operational year of 353 days, annual capacity on that footing would be 564,800 tonnes without reference to the Tarong pumping statistic and 600,100 tonnes at 1,700 tonnes per day including the Tarong pumping statistic.
612 At an annual “availability rate” of 85% as accepted by Mr Druitt, available capacity at Tarong and Tarong North based on 1,600 tonnes per day is 480,080 tonnes of concrete grade flyash and assuming 1,700 tpd, annual available capacity is 510,085 tonnes per annum.
613 Unfortunately, the evidence on production capacity at Tarong and Tarong North is confusing. It is clear however from the Boman and Druitt schedules that actual sales of Tarong cgfa from 2000 (and sales of cgfa from Tarong North and Tarong) were these in annual tonnes as compared with the available statistics showing cgfa annual production:
| Year | Volume Sold | Volume Produced |
| 2000 | 285,966 | - |
| 2001 | 242,902 | 243,359 |
| 2002 | 271,932 | 272,488 |
| 2003 | 303,045 | 311,580 |
| 2004 | 308,039 | 309,995 |
| 2005 | 348,468 | 351,435 |
| 2006 | 379,101 | 380,700 |
| 2007 | 295,666 | 294,903 |
| 2008 | 147,226 | 327,493 |
| 2009 | 298,689 | - |
614 Mr Druitt gave evidence that the maximum capacity of the Tarong facilities at 2001 was in the range 300,000 to 350,000 tonnes per annum, in his view, and, viewed then, Tarong North was likely to produce, when installed and commissioned, 100,000 to 120,000 tonnes per annum. He accepted that the 26 October 2004 document suggesting then existing capacity at Tarong of 350,000 tonnes per annum was accurate; 150,000 tonnes per annum capacity at Tarong North was “probably reasonable”; 50,000 tonnes per annum was a “reasonable” estimate of cgfa which could be produced by trucking Tarong North flyash to the Tarong classifier; and 44,000 tonnes per annum of cgfa then being utilised from Swanbank was “pretty reasonably accurate”. Mr Druitt said he could not be sure about the figure of 600,000 tonnes per annum of “available ash” at Tarong as at 26 October 2004 as recited in the Board Briefing Paper.
615 By August 2006, the estimate in the “Current Configuration” document suggested capacity of 400 tonnes per day at Tarong North; 800 tonnes per day from Zones 2 and 3 at Tarong and 400 tonnes per day of Zone 1 classified flyash amounting to capacity of 1,600 tonnes per day or 584,000 tonnes per annum at 365 days or 564,800 tonnes per annum at 353 days. In Mr Druitt’s May 2005 document, he accepted that the capacity of the Tarong facility based on historical records was 1,100 tonnes per day yielding 385,000 tonnes per annum over an operational year of 350 days. Mr Druitt accepts that Zones 2 and 3 at Tarong produce 800 tpd. Zone 1 classified ash must then represent an additional 300 tpd. As noted, Mr Druitt accepts a figure of 400 tpd in cross-examination and then distanced himself from that figure in re-examination.
616 An assessment of 300 tpd for Zone 1 seems consistent with Mr Druitt’s own paper of May 2005.
617 The August 2006 document suggests 300 tpd using low ash content coal and 400 tpd using high ash content coal, for Zone 1 at Tarong.
618 The evidence suggests that a conservative estimate at 2002 of the capacity of the installed facilities at Tarong was 800 tpd from Zones 2 and 3 and 350 tpd from Zone 1 (by classification), constituting 1,150 tpd or 419,750 tonnes over 365 days or 405,950 tonnes over 353 days. The forward-looking likely capacity, at 2002, at Tarong North once a classifier was installed was 400 tpd or 146,000 tonnes per annum over 365 days or 141,200 tonnes per annum over 353 days. The capacity at Swanbank was about 44,000 tonnes per annum.
619 So, I find that at 2002 Pozzolanic could have expected to produce 405,950 tonnes of cgfa at Tarong and 44,000 tonnes at Swanbank amounting to 460,000 tonnes. In addition, Pozzolanic could have expected to produce an extra 200,000 tonnes (approximately) at Tarong assuming further deployed capital and an extra 140,000 tonnes at Tarong North assuming the installation of new plant. All of this assumes that Pozzolanic would enjoy the same rights after 2002 (as expanded by Tarong North) as it enjoyed in 2002, by winning the TEC tender.
620 One other aspect of the production statistics concerning the Tarong schedules should be mentioned as exhibited to the second affidavit of Mr Druitt.
621 There seem to be discrepancies in the continuity of the “silo stock holding” figure within the “Tarong Sales & Stocks” spreadsheets. The tonnes held in the silo stock at the reported final day of production for one year does not reconcile with the opening silo stock holding for the first day of production of the following year. For example, the stock held on the last operational day of 2003 was 650 tonnes but the opening stock on the first operational day for 2004 was 1,000 tonnes, an increase of 350 tonnes. Between the last operational day of 2007 and the first operational day of 2008 an additional 645 tonnes is included in the silo stock. Between these relevant days in 2008 to 2009, 610 tonnes of flyash is unaccounted for and between the relevant operational days for 2009 and 2010, 1,000 tonnes or the full capacity of the silo is unaccounted for. There seems to have been product removed from site not accounted for in the stock production records.
622 One other aspect of Mr Druitt’s general evidence is important and it does not rely upon statistical data. I accept Mr Druitt’s quite detailed understanding of the operational arrangements or protocols as between Pozzolanic and TEC staff in the daily “campaigning” of the hoppers and the daily interaction (almost integration) between the two organisations in the processes deployed for collecting ash in particular hoppers and in clearing it from particular hoppers at particular times over 12 hour cycles.
PART 6
Swanbank Power Station and aspects of the contractual history
623 The Swanbank Power Station (“Swanbank”) is situated nine kilometres from Ipswich which, in turn, is approximately 40 kilometres south west of the Central Business District of Brisbane.
624 Swanbank therefore is the power station producing concrete grade flyash located closest to Brisbane.
625 The history of Pozzolanic’s engagement with Swanbank is this.
626 On 22 April 1993, the Queensland Electricity Commission (“QEC”) as the then owner and operator of Swanbank issued a notice to tenderers calling for tenders for the purchase and removal of flyash from Swanbank for the purposes of a proposed contract described as Contract No. HO315/93 (the “1993 Swanbank Contract”) (Ex-20, SDC-72). Mr White in his evidence of later events refers to this contract by this number. At that time, Pozzolanic was a party to Contract No. HO996/91 for the purchase and removal of flyash from Swanbank. Those contractual arrangements were to come to an end on 30 June 1993. On 24 June 1993, QEC proposed a three month extension of the contract during the anticipated period of the deliberations in relation to the tenders for Contract 315/93. On 28 June 1993, Pozzolanic agreed to that extension. In the “Additional Information” document in support of the tender notice, the QEC made a number of observations including the following.
627 The call for tenders contemplated the purchase and removal of flyash from what was described as Swanbank A and Swanbank B generating units. The four generating units making up Swanbank B are the particularly relevant units having regard to the QEC’s ultimate acceptance of Pozzolanic’s non-conforming tender described as “NCT1”. Swanbank B comprises four coal-fired generating units of 125 megawatts each and Swanbank A comprised six units of 60 megawatts (“mw”) each although some units could be operated at up to 68mw. In the tender information, the QEC attached graphs setting out the “possible operating regimes” for Swanbank A and B over the primary five year period of the proposed contract. In the Additional Information document the QEC observed that the number of units online in Swanbank B could vary from no units over the Christmas period to possibly three or four units during overhauls of the Tarong units.
628 The operating regime was said to be subject to large uncertainty due to the low merit order and thus the power dispatch regime for the station.
629 The tender information contained test data for coal burned at the power station during the period February to March 1991 including particle diameter in microns.
630 The tender documentation contemplated a five year contract commencing on 1 July 1993 with an extension of two years at the option of the QEC. The QEC sought tenders directed to three classes of activity (later described in QEC correspondence as Parts A, B and C of the Introduction and Description of Works section of the tender Specification).
631 Clause 1.1(a) (otherwise called Part A) sought tenders on the footing that the QEC would supply in bulk from the precipitator hoppers to the successful tenderer (described formally as the “Prime Purchaser”) and the Prime Purchaser would take in bulk such flyash as the QEC “may from time to time have available for delivery to the Prime Purchaser and as the Prime Purchaser may require”. Delivery was to be effected at the precipitator hoppers through the Prime Purchaser’s plant. The QEC would not be bound to make available to the Prime Purchaser’s plant all the flyash extracted from the boiler/generating units at Swanbank. The QEC or its agents or contractors would be entitled from time to time to use such quantities of flyash produced at Swanbank as it may desire.
632 The Prime Purchaser’s rights under a Part A tender were described in this way: “The Prime Purchaser shall have the first option to purchase and remove flyash made available by the [QEC] and the [QEC] will sell to others at a nominal price from its on site silo any fly ash not removed by the Prime Purchaser and with the selling price being nominated by the [QEC]” [emphasis added].
633 Clause 1.1(b) (otherwise called Part B) sought alternate tenders for the removal of all ash from the Swanbank precipitator hoppers although a conforming tender under cl 1.1(a) was required before an alternate tender under cl 1.1(b) would be admitted for consideration.
634 Clause 1.1(c) (otherwise called Part C) sought, separate to cl 1.1(a), tenders for the purchase and removal by parties formally called “Supplementary Purchasers” of flyash in excess of the requirements of the Prime Purchaser from the QEC’s silo at quantities nominated by the Supplementary Purchasers and at prices agreed with the QEC.
635 The tender documents also contained proposed Conditions of Contract.
636 Clause 3 of the Conditions provided that for a period of five years from the date of the acceptance of a tender, the Prime Purchaser would have the first option to purchase and remove flyash from Swanbank subject to any special terms and conditions contained in the specification document, and thereafter an extension of two years at the option of the QEC. By cl 3, the QEC proposed, among other things, the retention of the right to not make available to the Prime Purchaser all flyash collected from the operation of the generating units; the right to sell, at a price determined by the QEC, any flyash not removed by the Prime Purchaser; and the right to sell all flyash sluiced to the ash containment area, at prices determined by the QEC. The tender documents also contained a statement of Technical Requirements.
637 As to the availability of flyash, the Technical Requirements provided that Swanbank B would have a more consistent output than Swanbank A which would only operate in particular cycles. The QEC would not guarantee the level of production of flyash or its quality although the current annual production at 22 April 1993 of flyash was said to be approximately 100,000 tonnes of which 75,000 tonnes was produced by Swanbank B. Total flyash production throughout the life of the contract was thought to be in the range 80,000 to 150,000 tonnes per annum.
638 On 18 May 1993, Pozzolanic lodged a Proposal with the QEC in response to the call for tenders. Pozzolanic lodged a conforming tender for the purposes of cl 1.1(a) and four non-conforming tenders. Ultimately, after negotiations, QEC accepted Pozzolanic’s non-conforming tender NCT1.
639 By NCT1, which was directed to a non-conforming tender addressing the cl 1.1(a) (or Part A) tender, Pozzolanic set out its understanding of what was contemplated by cl 1.1(a) and cl 3 of the Conditions conferring upon the Prime Purchaser the first option to purchase and remove flyash from Swanbank. That understanding, according to Pozzolanic’s proposal, was that the QEC and its agents and contractors “cannot offer for sale any flyash produced from operating the boilers [generating units] unless [Pozzolanic] notifies the [QEC] that it does not require it” and thus, the QEC could not “exercise its rights [the reservations in cl 3] inconsistent with [Pozzolanic’s] first option to purchase unless [Pozzolanic] has notified the [QEC] that it does not require that fly ash”.
640 In the “Explanation of Tender” section of NCT1, Pozzolanic explained NCT1 as operating on the footing that, “If Pozzolanic does not require fly ash collected in the precipitator hoppers for any use, Q.E.C. is obliged to dispose of the excess ash by sluicing to its ash containment area”. Pozzolanic said that it would install flyash processing and material handling facilities to the extent of $400,000 within the first year of the term of the contract. Pozzolanic also reserved the right to take reject material, resulting from beneficiation processing by Pozzolanic on site. Pozzolanic set out its anticipated sales in tonnes having regard to each of the four purposes.
641 In its “Description of Departures” in NCT1 from the proposed Conditions, Pozzolanic set out 13 proposed departures.
642 By NCT1, cl 3 of the Conditions would continue to provide that Pozzolanic would have the first option to purchase and remove flyash from Swanbank for the five year term and any two year extension.
643 By NCT1, Pozzolanic proposed quantities of flyash to be taken from Swanbank B. As to Swanbank A, Pozzolanic simply proposed to take any amount of flyash it might require which could not be supplied by Swanbank B.
644 As to the “Recovery Method” (see Schedule 7 of NCT1), Pozzolanic said that it intended to use its existing equipment on site and would continue to deploy the approved procedures which had been shown to be successful. The projected rate of recovery from the precipitators was said to be limited to plant and equipment then on site which provided for an extraction rate of up to 100 tonnes per day although the projected rate was said to be dependent upon the quantity and quality of the ash. Pozzolanic’s silo capacity on site was said to be 800 tonnes which quantity of flyash could be removed from site by pneumatic tankers over a 24 hour period.
645 As to removal, Pozzolanic said that when it had determined that sufficient ash had built up in the precipitators and the collected ash was required by Pozzolanic, manually operated butterfly valves would be opened to enable ash to be extracted from the precipitators by means of a vacuum conveyor, and transfer to a holding silo.
646 Pozzolanic observed in Schedule 7 of NCT1 that, “This extractive procedure has been adopted for all primary and secondary precipitators on both A & B Stations and is followed whenever sufficient quantities of suitable ash are available”.
647 Ash was to be removed from Swanbank by pneumatic tankers.
648 Finally, Pozzolanic observed that provision had been made for further capital investment at Swanbank of $400,000 to provide for “necessary infrastructure for increased fly ash processing and material handling capabilities” which would be deployed in the first year of the contract.
649 By its description of departures from the proposed contract, Pozzolanic proposed these two further departures. First, a clause which entitled Pozzolanic to re-negotiate the royalty rates in the event of “a significant decline in Pozzolanic’s current market for Swanbank fly ash … caused by other sales of Swanbank fly ash” (departure 4). Second, waste material produced from Pozzolanic’s processing plant would be disposed of by the QEC by sluicing the waste material to Swanbank’s ash containment area (departure 5).
650 On 6 August 1993, the QEC wrote to Pozzolanic setting out the QEC’s understanding of Pozzolanic’s position in relation to each of the 13 departures from the proposed contract having regard to Pozzolanic’s NCT1 proposal. In that letter, the QEC set out what it understood to be the resolution with Pozzolanic on each of the proposed departures “conditional upon QEC not proceeding to make provision for supplementary purchasers”.
651 The QEC observed that since the reservation in relation to re-negotiation of the royalty rate in the event of a significant loss of Pozzolanic’s market for Swanbank flyash was related to the supply of flyash by QEC to Supplementary Purchasers, this royalty re-negotiation reservation was no longer relevant as no provision would be made for QEC sales to Supplementary Purchasers and Pozzolanic would thus withdraw its royalty re-negotiation reservation.
652 The QEC’s understanding of the regime in relation to sales of fly ash to Supplementary Purchasers is set out at p 3 of the letter of 6 August 1993 in these terms:
Sales to Supplementary Purchasers
It will be agreed that any requests to QEC for purchases of fly ash from the precipitator hoppers will be referred to Pozzolanic. It will be agreed that Pozzolanic will supply fly ash to supplementary purchasers whether referred by QEC or applying by direct approach to Pozzolanic, from Pozzolanic’s silos appropriate to the use nominated by the purchaser, subject to [8 particular conditions]. …
[emphasis added]
653 The eight conditions set out in the letter included these matters: the hours of supply; price determined by negotiation between Pozzolanic and the purchaser; the purchaser’s entitlement to use its own transporter; uses by Supplementary Purchasers only as approved by the Department of Environment and Heritage; Pozzolanic to supply Supplementary Purchasers from its installations in either the A or B stations; sales to Supplementary Purchasers to be counted as part of the guaranteed quantity at the rate nominated in Schedule 1 for Purpose A in excess of 2,125 tonnes per quarter; lagoon ash available to purchasers from the QEC at a particular rate; and a final determination in relation to the installation of bag filters at Swanbank A.
654 On 10 August 1993, Pozzolanic wrote to the QEC in response to the letter of 6 August 1993, confirming that all of the departures proposed for the purposes of NCT1 were satisfactorily resolved.
655 As to departure 5 (cl 2.8(b)), Pozzolanic restated its understanding that ash quantities in excess of Pozzolanic’s guaranteed quantity not sold by Pozzolanic would be disposed of by the QEC at no cost to Pozzolanic. Ash quantities up to the guaranteed amounts not removed by Pozzolanic (including sales to Supplementary Purchasers by Pozzolanic) would attract a particular dollar rate per tonne penalty for sluicing that ash by QEC to the containment area.
656 As to the particular provision concerning sales to Supplementary Purchasers, Pozzolanic agreed that sales to those parties would be dealt with in the terms set out under the heading “Sales to Supplementary Purchasers” in the QEC’s 6 August 1993 letter and that those statements of the position represented agreed departures from the Specification.
657 On 13 August 1993, the QEC wrote to Pozzolanic noting Pozzolanic’s acceptance of the resolution of the departures and also noting that Pozzolanic’s statement of the operation of cl 2.8(b) was consistent with the QEC’s view of it. As to sales to Supplementary Purchasers, the QEC advised Pozzolanic in the 13 August 1993 letter that tenderers for supplementary purchases of flyash, had been notified that the QEC did not intend to enter into any contracts for the purchase and removal of flyash by Supplementary Purchasers nor enter into a contract governed by cl 1.1(b). The QEC then observes that, “This leaves the way clear for the proposals in our letter of 6 August 1993 to be a matter of negotiation between Pozzolanic and all enquirers and is agreed as a departure from the Specification” [emphasis added].
658 On 6 September 1993, Pozzolanic submitted a revision of NCT1 having regard to the agreements reached as set out in the QEC’s correspondence of 6 and 13 August 1993 and Pozzolanic’s response of 10 August 1993.
659 On 9 September 1993 in a letter to the QEC, Pozzolanic confirmed its agreement that the contract would commence on 1 January 1994 with a term of five years from that date, with an extension of two years at the option of the QEC. The existing contract (HO996/91) was extended so as to expire on 31 December 1993. The letter attached a schedule signed by Pozzolanic’s flyash Manager, Mr Baird, setting out the final resolution on each of the tender departures and the final resolution on all Tender Information Requests from the QEC (called “TIRs”).
660 On 10 September 1993, the QEC advised Pozzolanic that it had accepted NCT1 as amended in terms of the correspondence listed in a schedule to the letter and the resolution of the matters also identified in the schedule to the letter. The contract sum represented a guaranteed payment to the QEC over five years of $2,258,500 with the contract commencing on 1 January 1994. The QEC advised Pozzolanic that, “execution of a Formal Instrument of Agreement is not required”. The QEC also said in its letter that copies of “all documents which constitute the Contract shall be assembled and forwarded to you in due course”.
661 By 10 September 1993, Pozzolanic had entered into a five year contract from 1 January 1994 (with an option in the QEC to extend for two years thereafter) for the purchase and removal of Swanbank ash that included these features. First, a first option in Pozzolanic (cl 3) to remove flyash from Swanbank. Second, a common position on Pozzolanic’s “Statement of Interpretation” in NCT1 of the operation of the cl 3 first option to the following effect. Although Pozzolanic accepted that the QEC could have access to flyash for use “only for designated and agreed QEC works projects” (see the attachment to Pozzolanic’s letter of 9 September 1993; TIR1), the QEC could not offer for sale any flyash produced from its generating units unless Pozzolanic notified the QEC that it did not require that flyash. The QEC could not act inconsistently with Pozzolanic’s “first option to purchase” unless Pozzolanic had notified the QEC that it did not require the relevant flyash. Third, no provision was made for direct sales by QEC to “Supplementary Purchasers” (TIR4 and the nominated letters). Fourth, no requirement for access by the QEC to Pozzolanic’s collection, processing and loading facilities was part of the contract. Fifth, Pozzolanic assumed responsibility for the disposal of any reject material as a result of a beneficiation process since the QEC was not making provision for sales to Supplementary Purchasers (TIR5). Sixth, control of the ash levels in the hoppers remained a QEC responsibility. Seventh, since the QEC would not be making provision for direct sales to Supplementary Purchasers, Pozzolanic elected to withdraw its claim to a right of re-negotiation of royalty rates on flyash should other (referred third party) sales of Swanbank flyash cause a “significant decline in [Pozzolanic’s] cement market for fly ash (sales)”. Eighth, a protocol for referring third party enquiries for the purchase of flyash to Pozzolanic as set out in the QEC’s letter of 6 August 1993.
662 The documents forwarded to Pozzolanic making up the contract represent approximately 250 pages of documents comprising all of the documents described in this subsection of this Part.
Mr Christy’s evidence
663 Mr David Christy is the Coal and Water Resources Manager for CS Energy. He has held this position since 1997. Mr Christy has been a participant in the electrical power industry since 1970. CS Energy is a Queensland Government owned electricity generating company which was established in 1997 and became the owner and operator of Swanbank B in that year. CS Energy also operates a coal-fired power station near Biloela in Central Queensland called Callide B Power Station. It is a 50% joint venture owner with InterGen Australia of a coal-fired power station near Biloela called Callide C Power Station. It operates a gas-fired power station at Mica Creek in Mt Isa and a coal-fired power station near Chinchilla in South-West Queensland called Kogan Creek Power Station (Ex-20, para 2).
664 Mr Christy’s responsibilities at CS Energy, relevantly for present purposes, include the negotiation and management of coal agreements for Swanbank B, water agreements for Swanbank B and responsibility for CS Energy’s contract for the purchase and removal of flyash from Swanbank. Mr Christy assumed responsibility for Contract HO315/93 in about 1997. Mr Christy says that he reviewed the Swanbank Contract in about 2000 but did not regularly involve himself in it. He says that the contract of 1993 comprised a “disjointed set of attachments to a file rather than a concise agreement”. Mr Christy annexes a copy of the main documents drawn from CS Energy’s files (under his administration on this topic) making up Contract No. 315/93 which he describes as the “Swanbank Contract”. Those documents are also included in the contracts folders in these proceedings (Ex-20, DCH-1).
665 The documents making up Contract HO315/93 are correctly described by Mr Christy as “disjointed” but largely because they are arranged in the papers, at least in this proceeding, in an incoherent and unchronological way. If the bundle of documents making up the contract is re-assembled in a strict chronological way as I have found it necessary to do, the sequence of exchanges between the QEC and Pozzolanic resulting in the foundation agreement are made much more readily apparent.
The 16 July 1998 letter
666 On 16 July 1998, the Site Manager for Swanbank (by this time owned and operated by CS Energy), Mr Wade, wrote to Pozzolanic confirming Swanbank’s earlier oral advice of an approval of a variation to the Swanbank Contract (Ex-20, DCH-2). The variation was concerned with an adjustment to guaranteed quantities for clinker raw feed material due to the closure of QCL’s Darra plant. The variation also provided for an extension of the contract period so as to apply to the purchase and removal of flyash from Swanbank for a period of four years commencing on 1 January 1999 and concluding on 31 December 2002. The variation conferred upon Pozzolanic an option to extend the contract beyond 31 December 2002 for a further two calendar years until 31 December 2004 “if sales reach at least 48,000 tonne volume over twelve consecutive months within the period 1 January 1999 and 31 December 2002”.
667 The variation also provided for revised guaranteed quantities. The maximum guaranteed quantity of concrete grade flyash per annum was 8,500 tonnes with a royalty of $17 payable on the “Effective Volume” of concrete grade flyash actually sold by Pozzolanic. Concrete grade flyash was defined as ash of “the appropriate quality to sell to ready-mix concrete users” and the effective volume in the royalty calculation would be based upon those sales. The guaranteed quantities (and related payments) would be adjusted on a pro-rata basis if the volume of flyash produced by Swanbank (calculated by reference to the tonnage of coal burned and measurements of the ash content), fell below 100,000 tonnes per annum.
The 9 September 1998 letter and variation signed on 30 September 1998
668 That letter was the subject of a response from Pozzolanic which led to a final agreed variation set out in Swanbank’s letter of 9 September 1998 signed by Mr Wade, and counter-signed on behalf of Pozzolanic by Mr Des Chalmers, Manager, Pozzolanic on 30 September 1998 in recognition of the acceptance of the contract variation (Ex-20, DCH-2).
669 The 9 September 1998 letter is in substantially the same terms as the 16 July 1998 letter including the extension of the contract period, the option to extend and the revised quantities. Each letter also contains an arrangement in relation to “Sales Development” by which Pozzolanic agreed to endeavour to maximise the off-take of flyash and agreed that in cases where CS Energy refers new customers not already actively doing business with Pozzolanic, Pozzolanic would not unreasonably refuse to sell flyash to such parties. Pozzolanic and CS Energy agreed that “subject to the condition that sales [to new customers] will not adversely affect its already established business end markets, Pozzolanic will consider offering fly ash to these parties at attractive conditions to maximise sales volumes”. Pozzolanic agreed that in such cases it would consult with CS Energy to achieve “the best outcome for all parties”.
670 By the letter of 9 September 1998, Pozzolanic would pay a royalty of $17 per tonne for concrete grade flyash up to 8,500 tonnes per annum and then a royalty for an “Effective Volume” up to 48,000 tonnes, and for all tonnes over 48,000 tonnes, a royalty of 50c per tonne. In the event that Pozzolanic failed to take less than 48,000 tonnes, a penalty of $4.00 per tonne for any shortfall would be payable.
The 11 July 2002 letter extending the contract to 31 December 2004
671 On 11 July 2002, Mr Michael Wilson, the Manager for Pozzolanic wrote a letter to Mr John James, the Site Manager for Swanbank, in which he said, by reference to the extension provision of the contract contained in the 9 September 1998 variation letter (a copy of which he attached to his letter) that at the close of business on 30 June 2002 Pozzolanic had achieved sales in excess of 48,000 tonnes over 12 consecutive months. The actual amount sold was 49,379.5 tonnes. Mr Wilson said, “We would like to take the option of extending the contract by a further 2 calendar years until 31 December 2004”. Mr Wilson also said that, as at 11 July 2002, Pozzolanic had found it necessary to transfer customers to Tarong flyash due to the quality of ash supply at Swanbank. The letter attached a graph showing Swanbank ash sales from December 1998 to June 2002 (ATB 30.10).
672 Mr Druitt gave evidence in relation to the four 125mw generating units at Swanbank B. In 1995, Swanbank converted from the original electrostatic precipitators to fabric filters for extracting ash particles from flue gases. Pozzolanic installed a manifold system under each of the generating units to simplify extraction of ash from the collection hoppers. Pozzolanic generally pneumatically pumps ash from eight to 10 of the hoppers rather than all 12 hoppers. The ash is pumped by four pneumatic pumps to one of two feedstock silos next to a classifier. The classifier yields approximately 20 tonnes per hour of concrete grade flyash which is pumped to one of two dispatch silos. Reject ash from the classifier is pneumatically pumped to a reject silo for disposal (by CS Energy) to the ash dam, or pumped to an intermediate silo for sale as non-concrete grade flyash (Ex-33, paras 133 to 135).
673 Ash not taken by Pozzolanic from the hoppers for classification is wet injected by CS Energy to an ash pit and pumped to an ash dam.
674 At least since 1993, Pozzolanic has had the following equipment installed at Swanbank: a Buell classifier with a “nominal” capacity of 300 to 400 tonnes per day (assuming 350 days, 105,000 to 140,000 tonnes per annum); two 80 tonne product silos (concrete grade fly ash – 160 tonnes); two 80 tonne feedstock silos for the classifier; five 80 tonne silos for run-of-station ash for application in uses not associated with the manufacture of concrete; four run-of-station ash pumps to move ash from the fabric filter hoppers to the classifier feed silos; and associated civil and electrical works and related works (Ex-44, para 137).
675 Mr Druitt says Swanbank flyash must be classified in order to be used as concrete grade flyash and since the capacity of the classifier is nominally 20 tonnes per hour and the product silo storage is limited to 160 tonnes (or eight hours of production), the rate of replacement of concrete grade flyash into the product silo is less than the off-take rate from the product silos by road tankers. Thus, the classifier is a production constraint.
676 Mr Druitt says that other parties could install flyash collection equipment alongside Pozzolanic’s equipment and also install their own processing plant at the Swanbank Power Station (Ex-44, para 141).
677 At the workshop convened by Mr O’Callaghan on 2 March 2001, the participants suggested that the total ash production at Swanbank was 250,000 tonnes yielding 30,000 tonnes of usable ash and 30,000 tonnes of potentially usable flyash (ATB 2.9). Mr Druitt at para 107(a)(ii) of his second affidavit, Ex-45, said the maximum capacity of the Swanbank Station was 30,000 cgfa tonnes per annum. In “The Challengers for Sales & Distribution” document of 1 May 2001 and amended on 7 December 2001, the available usable ash is said to be 30,000 tonnes with potential annual capacity of 30,000 (ATB 32.3). Ms Collins seemed to think on 28 June 2004 that available concrete grade flyash at Swanbank was 60,000 tonnes with 44,000 tonnes actually used by Pozzolanic. By 30 June 2002, QCL had sold in the previous twelve months 49,379.5 tonnes of Swanbank cgfa.
678 Although Mr Druitt thought that 30,000 tonnes was the maximum capacity of the Swanbank Station, he accepted in cross-examination as “reasonably accurate” the figure of 44,000 tonnes recited in the Board Briefing Paper attached to the agenda for the “Fly Ash Strategy Meeting” to be held on 26 October 2004 as the volume of concrete grade flyash utilised from Swanbank by Pozzolanic (T, p 1961, ln 18). The “available ash” was said to be 60,000 tonnes and “declining” and the capacity of the Swanbank facilities was recited in the Paper as 60,000 tonnes.
679 Mr Druitt’s assessment of maximum annual capacity of 30,000 tonnes of concrete grade flyash at Swanbank is at odds, for the period 2001 to 2004, with the spreadsheets of actual sales of Swanbank concrete grade flyash. The spreadsheets put in evidence by Ms Boman (Ex-51, CB-1) show the following sales of flyash by reference to categories described as fine grade flyash and non-fine grade flyash:
| Year | Fine Grade Flyash | Non-Fine Grade Flyash | Total |
| 2001 | 34,562 | 9,727 | 44,289 |
| 2002 | 44,807 | 12,527 | 57,333 |
| 2003 | 36,568 | 11,225 | 47,792 |
| 2004 | 40,952 | 22,823 | 63,774 |
| 2005 | 26,851 | 17,645 | 44,496 |
| 2006 | 17,751 | 21,520 | 39,271 |
| 2007 | 21,776 | 10,897 | 32,672 |
| 2008 | 17,584 | 14,996 | 32,580 |
680 By 11 July 2002, the rights and entitlements and benefits and burdens of the parties under the 1993 Swanbank Contract, as amended by the 9 September 1998 Letter of Agreement, were carried forward to 31 December 2004.
Mr Christy’s approach to the relationship with Pozzolanic
681 It is convenient at this point to also mention aspects of the arrangements in the period after 31 December 2004 (and some of the considerations starting to take shape up to 31 December 2004) before returning to Mr Christy’s oral evidence.
682 In Mr Christy’s affidavit (para 13) he says that by at least 2000, CS Energy (“CSE”) had formed the view that the ash sales arrangements with Pozzolanic needed to be reviewed having regard to workplace health and safety issues and considerations relating to the requirements of the Trade Practices Act 1974 (Cth). Mr Christy was responsible for the negotiation of a new agreement with Pozzolanic and, for the reasons set out in his affidavit (to which I will return), CSE chose not to supply ash to anyone other than Pozzolanic until 2006. One matter about which CSE was “unequivocal” according to Mr Christy, was CSE’s need to adopt an express term conferring upon CSE the right to sell flyash to parties other than Pozzolanic.
683 It will be necessary to return to negotiations particularly from 2004 to the conclusion of the new agreement and questions addressed in those negotiations in relation to sales to third parties and access to Pozzolanic’s plant and equipment. However, for present purposes, it is sufficient to note that on 11 March 2005 the Manager of Pozzolanic, Mr Chris White, sent a letter to Mr David Christy, arising out of their meeting on 7 March 2005 (about a new agreement), confirming Pozzolanic’s desire to complete a new agreement for the purchase and supply of Swanbank ash (Ex-20, DHC-3). The new agreement would address supply to third parties; the total volume of Swanbank ash suitable for use in concrete; access to and ownership of facilities; and alternative ash sourcing options. As to the “status of the current agreement”, Mr White sought an extension of the “current terms” until 30 June 2005. Mr White described the current terms as those set out in Contract 315/93 as varied by the 9 September 1998 letter. Plainly enough, Mr White regarded those terms as the “prevailing agreement” at the date of his letter. The extension of the current terms until 30 June 2005 was said to provide Pozzolanic with some security during the development of the new agreement.
684 On 15 March 2005, Mr Christy for CSE, agreed to the extension to 30 June 2005 (Ex-20, DHC-4).
685 Negotiations in relation to a new agreement continued throughout 2005 up to 30 June 2005 and beyond. Mr Christy sent a draft further version of a proposed agreement to Mr White on 17 June 2005 addressing CSE’s sales of ash to third parties and the removal of Pozzolanic’s off-take equipment from some of the hoppers to allow a third party to collect ash from those hoppers with its own equipment (Ex-20, DHC-9).
686 On 30 June 2005, the earlier agreement as extended, expired.
687 On 8 July 2005, Mr White responded to Mr Christy’s proposition about Pozzolanic accommodating a third party at Swanbank and set out Pozzolanic’s assessment of the possibilities based upon “commercial and business” considerations and suggested the allocation of “one unit entirely to the other party” thus removing any interface and potential conflicts between Pozzolanic and a third party, although Mr White also identified issues that would need to be addressed including the possibility that a third party’s unit might go off-line and total flyash volume securely available to Cement Australia in any year might be insufficient (Ex-20, DHC-10).
688 On 8 July 2005, Mr Christy sent an email to Mr White agreeing that third party reliance on one unit may be problematic and an alternative arrangement may be necessary with some degree of cooperation between ash takers.
689 On 11 August 2005, Mr Chris Leon as Managing Director and Chief Executive Officer, sent a letter to Mr Mark Chatfield, CSE’s Chief Executive Officer, setting out Pozzolanic’s concerns in relation to negotiations being conducted by CSE. Mr Leon sought “time” to complete a new agreement with CSE before CSE advanced negotiations with other parties for an ash sale and supply agreement (Ex-20, DHC-13). On 18 August 2005, Mr Chatfield sent a letter to Mr Leon addressing aspects of Mr Leon’s concerns and said that CSE was obliged to progress negotiations with all relevant parties “simultaneously” (Ex-20, DHC-14).
690 On 28 November 2005, correspondence resumed between Mr Chris White and Mr David Christy and on that date Mr White sent a letter to Mr Christy noting that the Swanbank Agreement had only been extended to 30 June 2005 and that under the expired arrangements ash pricing was linked to a royalty scale with a penalty for volumes taken of less than 48,000 tonnes per annum. Mr White said Pozzolanic would continue to pay the royalty but not the penalty having regard to the change in quality and performance of the ash. Total off-take for 2005 was thought to be between 45,000 and 50,000 tonnes (Ex-20, DHC-15). On 18 January 2006, Mr White sent a further letter to Mr Christy proposing a series of “interim” measures relating to existing sales, future sales opportunities, proposed royalties and the adoption of a “short-term solution” pending the negotiation of a longer term agreement (Ex-20, DHC-16).
691 It seems clear from the exchanges between Mr White and Mr Christy on 8 July 2005 and the “interim measures” letter of 18 January 2006 that in the period after 30 June 2005 neither Pozzolanic nor CSE regarded the content of the earlier Contract HO315/93, as amended, (and extended to 30 June 2005) as continuing to govern the terms of the sale and supply of Swanbank ash to Pozzolanic.
692 In cross-examination, Mr Christy gave evidence of his understanding of the relationship between Pozzolanic and CSE throughout the course of the negotiations.
693 Mr Christy accepted that throughout the negotiations for a new contract he found Pozzolanic willing to engage to facilitate third party access; Pozzolanic exhibited “no desire” to prevent such access; appropriate practical issues were raised by Pozzolanic in correspondence; Pozzolanic exhibited no “obstructive” approach to CSE giving third party access; Pozzolanic did not suggest that there was any “contractual prohibition” upon CSE in granting third party access; and in the period 1 January 2005 to 31 December 2006, Mr Christy did not regard himself as constrained in dealing with any potential off-taker by reason of any contractual arrangement with Pozzolanic (T, p 849, ln 27ff). As to the contractual arrangements making up Contract 315/93 as varied by the 9 September 1998 letter and the subsequent exercise of the option on 11 July 2002 to extend to 31 December 2004, Mr Christy, notwithstanding Mr White’s letter of 11 March 2005 expressly seeking an extension of the terms to 30 June 2005, and Mr Christy’s agreement to the extension on 15 March 2005, gave the following evidence. By January 2005, the provisions of Contract HO315/93 were “pretty much a dead letter” and that is how Mr Christy “behaved on behalf of Swanbank” and so too did Pozzolanic in dealing with Swanbank; the position was that a new agreement was being negotiated (T, p 851, lns 20-30); throughout the negotiations for the new agreement, so long as any person who wanted ash could “fit in” and not jeopardise the safety or efficient operation of the power station, Mr Christy felt under no contractual constraint in supplying ash to such a person; Mr Christy conducted negotiations with Nucon and also Sunstate with a view to entering into supply arrangements with those parties although no such arrangement was reached with Nucon.
694 These further aspects should be noted concerning Mr Christy’s evidence.
Swanbank’s principal focus
695 Mr Christy says that CSE’s “principal focus” was on electricity generation. Flyash and the contracts for the sale and removal of flyash represented a “peripheral aspect of [CSE’s] operations” (Ex-20, para 14). Moreover, Pozzolanic had been purchasing ash from Swanbank for decades prior to the 11 July 2002 extension of the 1993 Swanbank Contract and Swanbank had undertaken public tenders for the purchase and removal of flyash from the station on the footing that the tenderer would attach its collection plant to Swanbank’s hoppers, and the winning tenderer, would conduct processing operations. Further, as to scale, CSE did not consider it “prudent” to deal with “small-scale purchasers” of flyash who had no reliable record of safety or environmental behaviour. Collecting flyash meant that the relevant party would have to conduct operations on the power station site. Importantly, as to risk management of the generating operation, CSE was of the view that it was preferable for CSE to bear the cost of sluicing flyash to its dedicated ash dam rather than risk the consequences of workplace health and safety breaches and breaches of environmental protection legislation which “could potentially cause power-generating operations to be halted, when the only benefit to [CSE] would have been the removal of relatively small quantities of flyash” [emphasis added]. In cross-examination, Mr Christy also observed that his “concern” was to “make sure the power station’s operations aren’t interfered with from a point of view of health and safety or environmental things” (T, p 851, ln 34).
696 These considerations also led to CSE’s decision not to supply any party, other than Pozzolanic, with flyash until 2006. Two other considerations were, first, because the lifespan of Swanbank was uncertain, CSE could not give third parties the certainty of a sufficient life-of-station time to recoup the capital cost of installing collection plant and equipment, processing and loading plant; and, second, the terms of a new agreement with Pozzolanic would also reflect the final terms to be adopted with a third party.
697 There is no suggestion in any of the evidence that CSE had any desire or disposition to itself conduct the activity of removing, processing, beneficiating and selling flyash as a substitute for cement in the manufacture of concrete.
698 I accept the evidence of Mr Christy on these matters, and generally.
PART 7
Variability of the Swanbank flyash and the evidence of Mr Darryl Blackburn
699 Mr Darryl Blackburn is the Business Process Manager for Pozzolanic. He was appointed to that role in March 2009. Mr Blackburn reports to Mr White. Prior to Mr Blackburn’s appointment to this role, he held many and various positions at QCL until 1997 when the cement manufacturing plant at Darra was closed. Upon the closure of the Darra plant, Mr Blackburn was appointed to the position of Manager - Ash for Pozzolanic’s activities at Swanbank from 1 July 1997. He remained in that role until March 2009 although his title in the period June 2003 to March 2009 was Manager - Product Development for Pozzolanic. Mr Blackburn’s role in the period June 2003 to March 2009 incorporated his roles as Manager of Swanbank and his responsibilities as Ash Development Manager. In these roles, Mr Blackburn was responsible for managing the process of flyash testing at Swanbank. He was also responsible for managing the process of flyash testing at Millmerran Power Station which involved co-ordinating the tests, reporting the test results in monthly quality reports to the operator of Millmerran Power Station, and communicating with staff of the power station about the results.
700 I am presently concerned with those aspects of Mr Blackburn’s evidence in relation to Swanbank flyash.
701 In the period July 1997 to March 2009 Mr Blackburn was the Manager responsible for Pozzolanic’s relationship with CS Energy for the purchase and removal of flyash from Swanbank.
702 Mr Blackburn says that across the period of this experience, he observed that the quality of flyash produced at Swanbank could vary from day to day due principally to four factors: first, since coal is stockpiled outside the power station, it becomes wet during rain and when wet coal is crushed, the particles are generally coarser and more difficult to burn resulting in a higher proportion of unburnt carbon remaining in the flyash particles; second, Swanbank operates as a peak loading station rather than a base load station with the result that loads fluctuate over a 24 hour period; third, the source of the coal is an important factor; and, fourth, the operating condition of the plant and, in particular, the boilers generating steam, affects the quality of the ash produced (Ex-65, para 17).
703 Mr Blackburn explains in some considerable detail the processes adopted by Pozzolanic for the daily testing of flyash in accordance with the quality controls and standards adopted by Pozzolanic and QCL (and later Cement Australia) for continuous assessment of flyash produced by the Swanbank Power Station. These daily testing protocols are also described, in part, by Mr Druitt. Pozzolanic and QCL adopted a systemic daily practice of testing flyash produced at power stations as part of its set of procedures and activities for the extraction, removal, processing and dispatch of flyash to silo storage, intermediate storage, customer’s batching plants, or in the case of ash for disposal, to the disposal system in place in each particular power station for removing ash to an ash dam, mine void or other disposal location.
704 The testing procedures were in place as part of the “Pozzolanic Quality System” when Mr Blackburn assumed the role in July 1997. They were updated over time by specifying greater detail in the testing regime and the particular standards to be met and measured under that regime. Mr Blackburn says that the quality standards flyash was required to meet were based upon an Australian Standard 3582.1 although, under Pozzolanic’s quality system, Pozzolanic set a higher standard for the quality of its flyash product (Ex-65, para 19).
705 Mr Blackburn says that the testing sheets for on-site testing of flyash at Swanbank specify limits for two quality standards, namely, a fineness of 86%-100% and an unburnt coal residue (LOI) of 0-3%. Mr Blackburn puts in evidence, a copy of the Pozzolanic Quality Manual (Ex-65, DJB-2). The Manual describes the frequency of sampling and testing of Swanbank ash. The work instructions make it clear that the Manual sets out the minimum sampling and testing regime. The document provides for classifier feedstock and product timing tests and final inspection tests. The Manual sets out quality limits for Tarong, Swanbank, Gladstone and Callide B. As to Swanbank, the Manual sets out the two limits described by Mr Blackburn for fine grade ash. Under the Codes & Categories Section, the Manual makes it plain that “Concrete Ash” is fine grade flyash at 86%-100% passing a 45 micron sieve. The Manual also sets out limits for coarse grade flyash at Swanbank in the range 40%-100% fineness and 0-12% LOI. However coarse grade flyash or alternatively medium grade ash falls into the category “Flowable Fill” and not “Concrete Ash”. The fineness and LOI limits for Tarong, Gladstone and Callide B fine grade flyash are set out in the Manual as follows: Tarong 80%-92% and 0%-3% LOI; Gladstone 86%-100% and 0%-3% LOI; Callide B 88%-100% and 0%-2% LOI.
706 It was part of Mr Blackburn’s role to engage in discussions with power station staff in relation to the results of flyash testing and particularly where the test results suggested that the quality of the ash was poor. Apart from daily on-site testing, Pozzolanic caused samples of ash to be sent, on a monthly basis, to the testing facilities at Darra. Generally, the tests at the Darra facility would take four to six weeks to conduct. Each month Mr Blackburn prepared a report on Pozzolanic’s operation at Swanbank. The reports addressed aspects of flyash production and related quality issues. To compile these monthly reports Mr Blackburn relied upon discussions with Pozzolanic operators of the facilities, technical managers at QCL such as Mr Chalmers and Dr Nairn, and discussions with power station staff. Mr Blackburn’s reports were also based upon his own review of test results “from time to time and from my direct involvement with the power station” (Ex-65, para 27).
707 Mr Blackburn puts in evidence many of the monthly reports prepared under his supervision in the period from October 1997 to June 2006 (Ex-65, DJB-3-12, 14-21, 23 and 24).
708 The reports reveal a range of considerations affecting ash quality:
[October 1997]
Customers were transferred over to Tarong ... due to low stocks and poor quality feed ash … Feed ash supplies were low due to unit 1B operating only on two coal mills, low availability of unit 4B and A station units producing dark ash.
[November 1997]
The main focus this month was to fill the Yatala silo and return plants as soon as possible with due consideration to the future supply of feed ash at Swanbank. … [due] to the limited availability of feed ash other plants will not return at this stage … feed. Feed ash from “A” station was too high in carbon to be collected throughout the month.
[December 1997]
The quality of the feed ash did not change this month and hence no additional customers were returned to Swanbank. No 3 Unit at B station is expected to be back on line early in January 1998.
[February 1998]
Feed ash quality did not improve this month. Only three of the twelve hoppers in No 3 and No 4 units at B Station are used for collection of feed ash. ... The ash at A station remains high in carbon while the units are run at maximum output. Feed ash LOI tests are now performed for fifteen minutes only with consistent results.
[April 1998]
There was no improvement in the quality of feed ash at B station and no ash was collected from A station. Feed ash quantities will be lower next month due to a two week shutdown of unit 4 at B station. [CS Energy] … to trial a new classifier in the coal milling circuit.
[May 1998]
The ash quality at B station varied from the normal poor quality to a better quality as the unit’s load reduced. The units are not expected to run for any significant time on reduced load. Unit 3 ... will be off line until at least September … Samples tested from A station indicated good and poor quality in different units.
[June 1998]
The ash quality at B station improved this month and the concern for ash availability reduced.
[July 1998]
The ash quality at B station varied this month due to fluctuating loads of the units.
[August 1998]
The ash quality at B station varied … due to changes in unit loads.
[November 1998]
The quality of ash was good this month as the boilers remain on lower loads.
[18 November 1998]
[An] investigation was undertaken to determine if Swanbank could sustain supply of fine ash to Bulwer [Island] for blended cement. ... Due to the variability in quality with LOI and quantity Swanbank is not able to maintain a long-term supply of fine ash to Bulwer [Island]. The most effective way to supply fine ash out of Swanbank is to run with a number of smaller plants, which have been advised of the possibility of loss of supply and are able to switch over to Tarong if required.
[December 1998]
The quality of ash was good this month as the boilers remain on lower loads.
[January 1999]
The “normal” Swanbank ash quality return this month as the boiler loads occasionally reached maximum output. Unit results varied between 4-6.4 LOI on maximum load days ... Higher carbon feed ash performs differently in the classifier post the modifications to the classifier ducting [resulting in] a lower % of carbon removed when there is a higher % of carbon in the feed ash.
[February 1999]
Ash quality for classifier feed ash was good for most of the month, there were a couple of days where the ash was unsuitable for classifier feed.
[March 1999]
Ash quality for classifier feed ash was good throughout the month. LOI results remained low.
[April 1999]
Ash quality for classifier feed ash was good throughout the month. LOI results remained low.
[May 1999]
Ash quality for classifier feed ash remained good throughout the month as the boilers remained on low loads.
[June 1999]
Ash quality for classifier feed ash remained good throughout most of the month. There were several days ... when boiler loads were at maximum load resulting in ash quality in two units not being suitable for classified feed ash [for those days].
[July 1999]
The quality of classifier feed ash changed this month mainly due to wet coal.
[August 1999]
Finding good quality classifier feed ash was literally like gold mining this month. The carbon in ash in Unit’s 2 & 4 dramatically rose, there were several results in excess of 7% from both boilers and a 9% result from A station. Ash from A station does not classify as well as B station ash in removing carbon. ... There were 21 days where the feed silos could not be kept full. Unit 3 is still off line for a major overhaul and was due back on the 17 September but this may be extended for another 10 days. This month highlights the uncertainty of quality of ash at Swanbank and how quick it can change.
[September 1999]
The ash quality did not improve this month and several customers were switched over to Tarong ash due to the low stock levels of Fine grade ash. Unit 4 is off for a six-week overhaul.
[November 1999]
The ash quality did not improve this month and several customers remain with Tarong ash. Unit 4 is due back early in December after a six-week overhaul. When it comes on line it will be operating with new coal classifiers and an improvement in LOI results is expected.
[December 1999]
The ash quality improved slightly this month and unit 4 came on line providing some additional ash.
[August 2000]
The ash quality varied throughout the month, however it was an improvement on the July results. CS Energy has attempted to isolate the “problem” coals to A station to try to improve ash quality, while stocks allow it.
[September 2000]
The ash quality varied throughout the month as normal. The LOI’s reduced in the last week of September. Unit 2 will be off [for six weeks] for a major overhaul.
[October 2000]
The ash quality varied throughout the month. CS Energy continues to look at the operation of the new coal classifiers.
[December 2000]
The ash quality was fair on three units throughout the month ... [no] further progress by CS Energy with their long-term look at the operation of the new coal classifiers.
[January 2001]
The ash quality turned bad in the early part of the month with results up to 7.8% carbon. Supply was very low for one week ...
[February 2001]
During the middle part of February the LOI of the ash had dropped to very low levels ... due to the power station reducing power output ...
[March 2001]
Ash production this month has been a mixed bag in that the LOI of the ash has been reasonable but we experienced a spike in the latter days of the month.
[April 2001]
Ash production this month has been good with LOI on average 3.5% feed ash.
[June 2001]
Ash production this month has been good with LOI on average 1.8% feed ash.
[4th Quarter Report 2001]
Ash quality from the baghouse filters remained consistent throughout the period, the expected major increase in LOI due to higher unit loads did not result ... Total sales for 2001 were 43,512 [tonnes] an increase on the 2000 total amount of 40,710t. Progress towards the 48,000 target had been going well since August when [Bulwer Island] was transferred to Swanbank fly ash for Fly Ash Blend. Fine ash sales to [Bulwer Island] were ceased in early December due to issues with ... alkaline limits in the Swanbank ash. ... Several opportunities are currently being investigated in an attempt to meet the 48,000 target over the next 7 months.
[December 2001]
Ash production has been very good with plenty of feed ash due to all four units operating.
[January-February 2002]
Ash quality remains good although the ash hopper LOI graphs show an upward trend mainly due to higher loads ... Ash production [January 2002] has been very good with plenty of feed ash, all four units operating from January 1st 2002 ... Ash production [February 2002] has been very good with plenty of feed ash with a slight increase in LOI’s.
[March-May 2002]
Ash quality remained constant except for the latter part of May when LOI’s increased slightly with higher loads in the units.
[June-July 2002]
In June LOIs steadily increased to levels not observed for 12 months. Ash production for July was a mixed bag. LOI’s continued to remain at high levels. Ash production [June 2002] was tough going. Ash production [July 2002] was a mixed bag. LOI’s continued to remain at high levels ... 48,000t target achieved at the end of June, 49,379 one month ahead of the plan, this provides a two year extension of the contract at Swanbank. Good effort considering issues with [fire ants], low grade ash and storage issues.
[August–September 2002]
Ash production for August was a mixed bag. The shutdown had no real impact upon our production until CS Energy lost two units to mechanical faults ... Feed ash quality remained constant, in the mid 3% [LOI] average.
[November-December 2002]
Ash production [October 2002] was typically a mixed bag. Ash production [November 2002] was lean until Ackland coal was blended with local coal at 50-50 mix. The quality change was instant with improvement in LOI, increase in fines and a decrease in bulk density ... Ash production [December 2002] has been good with plenty of feed ash. CS Energy is unable to transport enough Ackland coal to meet the need of the four units, at present the mix is approx 25% Ackland across all four units. This has resulted in higher LOIs and increased fines. But overall ash quality still remains good.
[January-February 2003]
Ash production [January and February 2003] has been good with plenty of feed ash with consistent LOI’s and fineness across all four units.
[July 2003]
Ash production has been good with plenty of feed ash with consistent LOI’s and fineness across all four units.
[August 2003]
Ash production has been good with plenty of feed ash with consistent LOI’s and fineness across all four units.
[September 2003]
Ash production has been good with plenty of feed ash, some variation in LOI’s have been observed due to higher unit loads.
[October 2003]
Ash production has been good with plenty of feed ash with consistent LOI’s and fineness across all four units.
[November 2003]
Ash production has been good with plenty of feed ash with consistent LOI’s and fineness across all four units.
[December 2003]
Ash production has been ok with reasonable levels of feed ash with consistent LOI’s and fineness across all available units.
[February 2004]
[Summary of meetings held between John Salisbury, Des Chalmers and Peter Klose concerning a perceived drop in strength of Swanbank flyash] Hymix advised QCL they were transferring their source of fly ash from Swanbank to Tarong due to low strengths in May 2003. This resulted in a loss of Fine grade flyash sales of 18kt per year. Initial investigations hinted at a change of coal source at Swanbank .. Ackland coal commenced in November 2002, however a change to the aggregates in the mix of CT occurred at a similar time which resulted in a strength drop.
[March 2004]
Plenty of ash was available for production with no quality problems arising during the month.
[April 2004]
Plenty of ash was available for production with a minor increase in LOI’s due to increased electricity generation.
[May 2004]
Ash production has been good with constant low LOI’s.
[July 2004]
Ash production has been good with constant low to very low LOI’s.
[August 2004]
Ash production has been good with constant low to very low LOI’s.
[September 2004]
Ash production has been good with the station operating a capacity for short periods at a time due to on going availability issues of other power stations.
[October 2004]
Changes in ash quality were observed during the month ... due to increased load output from CS Energy ... resulting in increased LOI’s ...
[November 2004]
CS Energy began mini shutdown on all four units, with only one unit off line at any one time ... some technical problems with B1 and B2 ... The end result ... was very limited feed ash availability.
[January 2005]
On return from Christmas holidays all units are available and producing good quality ash.
[February 2005]
All units operating and producing good quality fly ash.
[April 2005]
Nil [quality issues].
[May 2005]
Nil [quality issues].
[June 2005]
Loss of customers Nucon, Hammercrete and CA Bulwer Island due to ongoing quality issues.
[September, October and December 2005]
Nil [quality issues].
[January, February, April, May and June 2006]
Nil [quality issues].
The decline in the quality of the Swanbank ash
709 Mr Colin Zeitlyn is the General Manager of Marketing and Sales for Cement Australia and he has held that role since 20 September 2004. Between September 2004 and early 2005 Mr Zeitlyn’s responsibilities primarily related to the management of marketing and sales for bulk cementitious products including responsibility for the central laboratory facilities where bulk cementitious products are subjected to quality and performance testing.
710 Mr Zeitlyn says that in the role he has held since 20 September 2004 he has spent only a moderate amount of time dealing with issues associated with the fly ash business operated by Pozzolanic (Ex-42, para 14).
711 In the period between September 2004 and October 2006 the business manager responsible for Pozzolanic was initially Mrs Sandra Collins and then Mr Chris White. Since October 2006 Mr Zeitlyn has spent an increased proportion of his time addressing issues relating to Pozzolanic.
712 At para 116(b) of his affidavit sworn 1 February 2010 (Ex-42), Mr Zeitlyn observes that the performance of Swanbank ash declined from the beginning of 2005 to 2006 to such an extent that most of Cement Australia’s customers declined to accept the ash, and even though Cement Australia substantially reduced the price of Swanbank flyash to reflect the reduced quality and performance of the ash, it nevertheless remained difficult to sell the product in the market. These propositions are supported by a number of documents at CRZ-23 to Mr Zeitlyn’s affidavit. In the Managing Director’s Report to the Board of February 2005 this observation is made:
Swanbank ash is showing significant negative performance differentials to Tarong ash and more customers are likely to stop taking Swanbank [product]. A plan to take Swanbank ash out of the market has been developed for consideration. Discussions were held with Swanbank regarding the ash agreement renewal and the performance issue was raised.
713 On 17 May 2005, Mr Chalmers sent an email to Mr White advising that, “Basically Swanbank Fine Grade ash is no longer ‘cutting the mustard’ as a Concrete Grade fly ash”. Mr Chalmers told Mr White that Cement Australia’s largest independent user of Swanbank flyash had approached him seeking a price for Tarong ash, rather than converting to Bayswater flyash. Mr Chalmers said that the problem could not be improved by processing as even at 97% fineness, the concrete performance (made with Swanbank flyash) was still four megapascals (or more) below the performance using Tarong ash. The performance issue was said to be related to the change in the coal source. The Managing Director’s Report to the Board for September 2005 observes that Sunstate had notified Cement Australia of “technical issues” experienced using Swanbank ash. There is no doubt on the evidence that the quality of the Swanbank ash deteriorated in 2005 and 2006 to the point where Pozzolanic and Cement Australia decided to remove Swanbank ash from the concrete SEQ grade flyash market and concentrate on trying to develop non-concrete grade opportunities or outlets for the Swanbank ROS ash. These matters are discussed in detail later in these reasons.
PART 8
Millmerran Power Station
714 The Millmerran Power Station (“Millmerran”) is located near the town of Millmerran approximately 230 kilometres by road north-west of Brisbane, in south eastern Queensland.
715 Millmerran is a coal-fired 850mw power station owned by eight companies (as listed in Schedule 3 to the MPP/Pozzolanic Ash Purchase Agreement of 30 September 2002) (Ex-24, DJH-25) that trade under the name Millmerran Power Partners (“MPP”). MPP has entered into a contract with Millmerran Operating Company Pty Ltd (“MOC”) under which MOC has been appointed as the operator of the station. Millmerran Power Management Pty Ltd (“MPM”) is the Manager of the station. Both MOC and MPM are subsidiaries of InterGen Australia Pty Ltd (“InterGen”). In August 2001, MOC conducted a tender process to secure a range of materials handling services to be provided in connection with the new Millmerran Power Station to be built and commissioned in 2002 (Ex-24, DJH-2).
716 Mr David Hunt is the Engineering Manager for Millmerran employed by InterGen. From September 2001 to September 2006, Mr Hunt was employed by MOC as the Fuel and Ash Manager for Millmerran. His responsibilities included managing the quality and quantity of coal delivered to the station; managing a coal mining contract between MPP and Downer EDI Mining (“Downer”); managing water supply to the station; managing the provision of coal handling services by the successful tenderer for those services; the operation and maintenance of Millmerran’s waste flyash disposal system, and the sale of flyash by the successful tenderer for those services. He also had responsibility for expenditure budgets.
717 Mr Hunt reported to Mr Mal Gamble, the Manager of the station.
718 Mr Hunt says that although MOC was primarily responsible for the operation of the station, and MPM responsible for the management services (and other entities conducted electricity trading and bidding), Mr Hunt saw no reason to distinguish between the corporate entities conducting operations or management activities in performing his duties. Mr Hunt in his evidence uses the term “InterGen” and in that context at para 11 of his affidavit sworn 21 October 2009 (Ex-24) he describes MOC and MPM as companies owned by InterGen. The question of the capacity in which individuals acted, and which individuals might or might not have been the decision-makers in awarding the Ash Purchase Agreement, and more particularly, in determining the terms of the Ash Purchase Agreement, was the subject of questions addressed to both Mr Hunt and, with more focus, to Mr Gamble. Those matters will be mentioned shortly.
719 The Commodore Coal Mine is owned by MPP. Downer operates the mine for MPP and that role includes the disposal of flyash into the mine void.
720 Millmerran operates two 425mw generating units. The Millmerran Power Station is described as an 850mw advanced cycle supercritical pulverised coal-fired base load Power Station. The reference to “supercritical” essentially means that the boiler operates at high pressure and temperature. The boiler operates under high compression which produces certain efficiency gains for the generating unit (T, p 1910, lns 28-32). Each year Millmerran produces approximately one million tonnes of flyash and approximately 200,000 tonnes of furnace or bottom ash. Flyash produced at Millmerran is collected in two baghouses (one for each generating unit). Each baghouse, attached to each generating unit, has 14 hoppers which collect flyash particles in each baghouse. Any flyash not taken for sale from these hoppers is mixed with water and trucked to the nearby Commodore Coal Mine for disposal. The burners for combusting coal at Millmerran are low nitrous oxide producing burners which operate by staging the admission of air so that the combustion zone of the burner is extended thus lowering the combustion temperature which is a key factor in the reduction of nitrous oxides. Mr Hunt says that extending the combustion zone, historically, has had some implications for the ash produced from the combustion of the pulverised coal. Extending the combustion zone with a lower combustion temperature can lead to more unburnt carbon in the ash produced. The essential purpose however of extending the combustion zone is to reduce the amount of nitrous oxides produced from burning coal (T, p 911, lns 10-19). These questions of the combustion protocols later became important considerations in dealing with the Millmerran ash colour variability issues.
721 On 6 August 2001, MOC invited the submission of tenders for the performance of Materials Handling Services.
722 The tender comprised three separable components being Coal Handling Services; Ash Handling Services; and Ash Purchase.
723 Tenderers could bid for all or one of the components.
724 The Coal Handling Services involved the delivery of certain tonnages of coal from the run-of-mine hopper delivery point for conveyor transportation to stockpiles at the power station and the handling of all coal delivered to the station by the contracted miner.
725 The Ash Handling Services required the successful contractor to remove ash and manage, operate and maintain relevant equipment specified in the contract.
726 The Ash Purchase was to proceed in terms of the proposed conditions set out in Schedule 1 of Part C to the Agreement forming part of the tender documents. The contractor was required to tender the amount of flyash it proposed to purchase (the “nominated amount”) and would be required to take and pay for a “minimum quantity” of flyash per month. Flyash not taken might or might not be removed by MOC. The contractor would be required to construct all facilities required for the collection of flyash.
727 The tender documents contemplated that the successful contractor would provide the relevant services for seven years from a commencement date (being a period from the date of execution of the agreement until substantial completion of Unit 1) until the expiration of the term. Substantial completion of Unit 1 was programmed to occur on 1 May 2002 and substantial completion of Unit 2 was programmed to occur on 1 September 2002.
728 Substantial completion of Unit 1 however occurred on 21 September 2002 and substantial completion of Unit 2 occurred in February 2003 (T, p 911, ln 38).
729 In due course, it will be necessary to examine issues in relation to the quality of the flyash produced at the Millmerran Power Station which was the subject of an extensive range of reports commencing in December 2002 and Mr Hunt’s evidence about that matter.
730 On 18 September 2001, Pozzolanic lodged a conforming tender and a non-conforming tender for separable Part C, Ash Purchase (Ex-24, DJH-3). The tenders were signed by Mr Maycock, and the Company Secretary, Mr Ronald Schodel. The obligations of the tenderer were guaranteed by Pozzolanic Industries, and the guarantee was signed by Mr Maycock and Mr Schodel for Pozzolanic Industries. The “contact person” for Pozzolanic was Pozzolanic’s Manager, Mr Michael Wilson, who is also described as the “Contract Area Project Manager” for the tender and the “Contractor’s Representative”. The contact person for the guarantor was Mr Schodel.
731 In the tender documents, Pozzolanic describes (applicable to both tenders) some of the notions inherent in its proposal. Pozzolanic said that its proposal involved a two-stage approach to the removal of marketable flyash from Millmerran. The first stage or phase was described as an interim phase of allowing Pozzolanic to take ash for technical assessment during different operational conditions of the particular operating unit. The assessment phase was said to be designed to ensure low financial risk to Pozzolanic due to the unknown suitability of the chemical and physical characteristics of Millmerran flyash. Comprehensive testing and analysis would be undertaken at QCL’s nationally accredited testing laboratory in Brisbane.
732 Should the results of the analysis and performance testing of Millmerran flyash be favourable, the second phase would be implemented which would involve Pozzolanic installing a beneficiation plant and storage facilities in the Ash Purchase Contract Area (as defined by relevant drawings), although Pozzolanic expressed a preference for locating its facilities closer to the baghouse units. Pozzolanic said that it would install an engineered valve selection system allowing the diversion of ash into a transfer line to a storage feed silo which would allow the selective removal of quality flyash from the baghouse hoppers transfer line. Other items of plant would include a weighbridge, beneficiation plant, storage for processed flyash, and other facilities designed to provide a method of accumulating quantities of bulk flyash ready for collection by pneumatic road tankers for transportation to selected customers. All trucks would be loaded directly on the weighbridge reducing unnecessary truck movements on the power station site.
733 In the non-conforming tender, Pozzolanic also expressed its view to Millmerran about the concrete market and the market dynamics associated with Pozzolanic’s proposed purchase and sale of concrete grade flyash sourced from Millmerran. Pozzolanic said this: “The concrete market in South East Queensland is currently saturated with fly ash. Given Millmerran’s location, the unknown quality of the fly ash and competitive pressures, there is a limit to the amount of fly ash that can be sold into the concrete market. This volume will only ever represent a small portion of the total ash produced by the station”.
734 In the tender, Pozzolanic said: “[o]ne of the biggest issues with supplying some markets is the cost of logistics” and then went on to make observations about the utility of a proposed new rail network that was thought to be passing through the town of Millmerran.
735 Pozzolanic’s tender for the Ash Purchase Agreement was submitted in association with a tender by MPA Energy Services Pty Ltd (“MPA Energy”) (Ex-24, para 30). MPA Energy tendered for Parts A and B of the Materials Handling Services, namely, the Coal Handling Services and the Ash Handling Services. MPA Energy became a joint venture entity of QCL (Pozzolanic) and Clough Engineering Limited (“Clough”).
736 The tender documents issued by MOC in support of the invitation to tender included, as Annexure B, a Materials Handling Agreement comprising 50 proposed provisions (Ex-24, DJH-2). The tender contemplated, as a conforming tender, that the Coal Handling Services Agreement would embody all of the terms of the Materials Handling Agreement but for four sub-provisions of the Agreement. The Ash Handling Services would embody all of the terms of the Materials Handling Agreement but for a number of nominated clauses of that Agreement and the Ash Purchase Agreement would embody the terms and conditions set out at Schedule 1 of Part C (“Ash Purchase Terms”) and would include cls 1, 2, 4, 7, 8.1, 8.2, 8.3(f), 17.10, 18.8, 18.9, cls 20 to 31 and cls 33 to 50 (inclusive) of the Materials Handling Agreement. The tender documents therefore are the origin of, or starting point for, the terms of the Ash Purchase Agreement as proposed by MOC as the basis for the Ash Purchase Agreement between MPP and Pozzolanic.
737 It will be necessary to examine, in some detail, in the course of these reasons, the exchanges between Pozzolanic and Millmerran; the terms and conditions under discussion between those parties in the course of the tender negotiations and proposed departures from or additions to the proposed Ash Purchase Terms; and, the negotiations which were taking place between Pozzolanic and TEC in parallel with the Millmerran negotiations. It is, however, sufficient for present purposes to observe that on 30 September 2002, MPP entered into an Ash Purchase Agreement with Pozzolanic as buyer, and Pozzolanic Industries as guarantor, which reflects these elements, among others.
738 The commencement date of the contract is 30 September 2002.
739 The contract ends on the expiry date which is the last day of the seventh operating year, or termination, whichever occurs earlier. The first operating year is the period commencing on 1 January 2003 and ending on 31 December 2003. Each other operating year is the period of 12 months commencing on the first day of January each year until 31 December 2009 or earlier termination.
740 Subject to the quality of the flyash falling within the “Acceptable Range” (as defined), MPP is obliged to make available to Pozzolanic and allow Pozzolanic to take the minimum quantity of concrete grade flyash in each operating year. The minimum quantity is defined to mean 135,000 tonnes. Pozzolanic is obliged to pay MPP the contract price for the flyash which is made up of the aggregate of all of the lump sum payments for all operating years and any additional sum payable for each operating year. The lump sum payment is $1,323,500 for the first operating year escalated according to the CPI formula in cl 7 in each subsequent operating year and represents payment for the minimum quantity of concrete grade flyash for the relevant operating year. The lump sum payment is payable to MPP irrespective of how much (or any) flyash is actually taken by Pozzolanic in any operating year or whether Pozzolanic’s “Facilities” (as defined by the contract) have been completed. Any additional sum payable in respect of concrete grade flyash is represented by the number of tonnes taken in excess of 135,000 tonnes multiplied by a royalty rate of $10.10 per tonne and, in respect of other classes of ash, other rates apply. The lump sum payment for the first operating year was payable on or before 1 December 2002 ($1,323,500) and for each subsequent operating year, the indexed lump sum payment, was payable on or before 1 December in the year prior to that operating year. The lump sum amounts for Years 2, 3 and 4 are recorded in the attachment to the agreement as $3,358,959.45, $1,402,085.81 and $1,437,545.26 respectively.
741 As to ash quality, “Acceptable Range for concrete grade fly ash” means flyash complying with the requirements for flyash as a cementitious material in concrete and mortar as set out in Australian Standard 3582.1-1998, and falling within the term “Critical Limits”. The Critical Limits are set out in Schedule 2 to the contract in these terms:
| Property | Fineness (by mass passing 45 µm sieve) | Loss of ignition | Relative strength |
| % minimum | % maximum | % minimum | |
| Limit | 85 | 3.0 | 95 |
| Reference test method | AS 3583.1 | AS 3583.3 | AS 3583.6 |
742 On 6 March 2002, Pozzolanic sent a letter to Mr Don Cameron, the General Manager of MPA Energy, arising out of a meeting between Mr Wilson, Mr Hunt and Ms Belinda Knox (an InterGen employee) and Mr Cameron (ATB SB 3.22). In the letter, Mr Wilson proposed a revised ash payment for concrete grade flyash of $10.10 per tonne (including GST) in respect of a guaranteed minimum quantity of 135,000 tonnes representing an annual payment of $1,363,500 although having regard to payment of the guaranteed yearly amount one year in advance, a discount of $40,000 would apply resulting in an annual payment of $1,323,500 each year subject to indexation.
743 Pozzolanic said in the letter that annual payments:
… could result in the following revenues for Millmerran, assuming the entire South East Queensland ash market was supplied from Millmerran:
Potential Concrete Grade Fly Ash Revenues
| Year | SEQ Volume | Ash Payment |
| ’000t | ’$000 | |
| 2003 | 296 | 2,990 |
| 2004 | 314 | 3,171 |
| 2005 | 360 | 3,636 |
| 2006 | 369 | 3,727 |
[emphasis added]
744 Mr Wilson also observed in the letter that the main condition for acceptance of the flyash from Millmerran is that Pozzolanic can process the ash in accordance with the fine grade flyash requirements of AS 3582.1 and that the Critical Limits (set out in the schedule) would also apply. Mr Cameron sent a copy of that letter to Mr Hunt by email on 8 March 2002.
745 Apart from these payments under the Ash Purchase Agreement, MPA Energy and Pozzolanic proposed a discount upon payments to be made by Millmerran to MPA Energy in respect of the Materials Handling Agreement if all three parts of the tender were awarded to MPA Energy including the awarding of the Ash Purchase Contract to Pozzolanic. Millmerran accepted that proposal. The unexecuted version of the Amendment Deed (the parties to which are MOC, MPA Energy, Pozzolanic and Clough), in evidence through Mr Hunt (Ex-24), DJH-13), amending the Materials Handling Agreement of January 2002 between MOC and MPA Energy, describes the price reduction mechanism (subject to other qualifications) in these terms:
3.11 Price Reduction
(a) The parties acknowledge that [MPP] and [Pozzolanic] have entered into an agreement for the sale and purchase of fly ash produced by the Power Station (the “Ash Purchase Agreement”). As a consequence of entry into the Ash Purchase Agreement the total amount payable by [MOC] to [MPA Energy] hereunder will reduce by $1,080,000.00 (the “Reduction”).
(b) The Reduction is to apply as a deduction of $15,000.00 from payment due per Month commencing from the beginning of the Second Operating Year.
746 The unexecuted Payment Deed as between MPA and Pozzolanic (Ex-39, SDC-71) recites Pozzolanic’s contribution to the reduction as a payment to MPA of $12,500 per month commencing from the beginning of the Second Operating Year of the Materials Handling Agreement for 72 months amounting to $900,000. The parties acknowledge (cl 2) that the payment is made for the services of MPA in facilitating Pozzolanic’s acquisition of ash under the Ash Purchase Agreement. Tenders were also lodged by Transpacific Industries Pty Ltd (“Transpacific”) and Flyash Australia, Minfox and Roche Mining although the latter two companies did not tender for the Ash Purchase Agreement.
The roles of Mr Hunt, Mr Gamble and Ms Knox
747 Mr Hunt says that together with Mr Gamble, Mr Hunt was primarily responsible for the initial assessment of the three tenders (Ex-24, para 41). On 30 October 2001, Mr Hunt prepared a report for Mr Gamble summarising the key elements of the three tenders. In early November 2001, Millmerran engaged a consultant, Mr Heeley, to conduct an independent review of the tenders. Neither Mr Gamble nor Mr Hunt had significant experience in the sale of flyash. Mr Heeley submitted a draft report on 23 November 2001 and a final report on 30 November 2001. Mr Hunt prepared a report to Mr Gamble on 17 December 2001 assessing the three tenders and recommended that MPP contract with Pozzolanic.
748 Mr Hunt says that by early January 2002, Mr Gamble and Mr Hunt had made an in-principle decision that Pozzolanic was the preferred tenderer for the Ash Purchase Agreement (Ex-24, para 58).
749 From January 2002 onwards, Ms Belinda Knox, InterGen’s Commercial Manager reporting to the CEO for InterGen (Mr Nelson) and Mr Hunt had day-to-day carriage of the continuing evaluation of the final terms of the proposed Ash Purchase Agreement. Mr Hunt said that he was responsible for assessing the tenders from an operational perspective and Ms Knox was responsible for assessing them from a commercial perspective, in bringing the in-principle decision to a recommendation from Mr Hunt and Ms Knox to the group who would decide to award the contract.
750 Mr Hunt says that it was MPP’s intention to award the Ash Purchase aspect of the tender to a single contractor. In assessing the tenders, Mr Hunt regarded the “main priority” as one of securing a low risk impact on “operations revenue for the owners of the power station”. Mr Hunt was concerned to ensure that any arrangements for the sale of flyash did not have “a negative impact on the power station’s operations or expose the power station to potential legal risks or liabilities, or complicate [the station’s] workplace health and safety issues, as the generation of flyash for sale is not part of Millmerran power station’s core business” [emphasis added] (Ex 24, para 37.2).
751 Mr Hunt says that because there was limited potential for immediate cost savings for Millmerran arising out of the removal of flyash by a purchaser, Mr Hunt was more concerned about the quantum of royalties Millmerran might derive rather than the absolute volume of flyash which would be removed by the successful tenderer. As already mentioned, Downer had been appointed by MPP to operate the Commodore Coal Mine owned by MPP and the scope of that contract contemplated the disposal by Downer of flyash in the mine void. In other words, the cost, as Mr Hunt saw it, of disposal of flyash was already incurred as part of the costs of operation of the mine and in that sense the disposal cost of flyash was already an incurred cost. It followed for Mr Hunt that MPP was unlikely to secure any advantage in the form of lower coal handling costs with Downer by entering into an Ash Purchase Agreement unless the volumes of ash removed by the buyer under the Agreement were of the order of 300,000 tonnes of flyash per annum. Thus, Mr Hunt was more focussed on the quantum of royalties Millmerran might obtain from the buyer rather than the volume of flyash removed, as the volume removed was unlikely to reach a threshold which would make a difference to coal handling costs.
752 Mr Hunt also says that whilst Millmerran was unwilling to offer the successful tenderer an exclusive agreement, MPP did not intend (at the time the invitation to tender was issued) to enter into an ash purchase agreement, in the short term, with a second or subsequent purchaser due to the potential operational complications involved in having multiple contractors accessing the site for the purpose of taking away “a by-product of our core business activities”.
753 Mr Hunt said that it was his intention to reassess this position once he had obtained sufficient operational experience of one purchaser in order to determine whether an agreement with a second purchaser was “operationally and commercially desirable” (Ex-24, para 38).
754 A further aspect of Millmerran’s approach was this.
755 Mr Hunt considered that if MPP entered into agreements for the sale of flyash with more than one buyer, potential difficulties would arise including the need to coordinate the purchase of flyash between multiple purchasers to ensure that each buyer had access to “sufficient ash” when required, and occupational health and safety risks might arise due to increased truck traffic movements within the power station site. Mr Hunt also considers that there were “practical limitations” in terms of the limited locations for additional ash processing plant and equipment. Due to this latter consideration, MPP had “no interest in complicating its operations at the power station by arrangements it had made for the disposal of a by-product”.
756 Mr Hunt again emphasises that his “main priority” in managing MPP’s flyash sales was to “ensure that the sale of flyash did not negatively affect the operation of the power station”. Mr Hunt says that whilst the difficulties he identified would not prevent MPP from entering into agreements with more than one purchaser, they were factors which had to be considered in determining whether to enter into agreements with multiple purchasers. Mr Hunt re-asserted this position in cross-examination. The anticipated turnover of the core electricity generating business of Millmerran, operating efficiently, was expected to be very substantial, and of the order of hundreds of millions of dollars each financial year. In the context of that activity, although Mr Hunt regarded the revenues to be derived from the sale of flyash as not insignificant, Mr Hunt would not allow ash sales to compromise the manner of operation of the power station. Mr Hunt agreed that the power station’s “efficient operation was the overwhelmingly primary goal” [emphasis added] in his mind and he agreed that whilst it would be fair to say that the characteristics of flyash were of some significance, his view was that the operation of the power station should not in any way be compromised to improve the quality of the output of the flyash (T, p 913, ln 39).
757 A further consideration exercising Mr Hunt’s mind was this.
758 During the period that he was the Fuel and Ash Manager for MPP discharging his responsibilities in relation to the management of the ash sales arrangements, he took the view that it would not be commercially or operationally desirable for MPP “to build its own flyash facilities and sell processed flyash directly to end-users”. Mr Hunt says that during the period he discharged these responsibilities he had limited knowledge of the flyash industry. He was not aware of any other person working for Millmerran (other than a consultant, Mr Peter Heeley) who had detailed knowledge of the flyash industry. Moreover, if Millmerran had chosen to build its own flyash facility and market flyash directly to concrete producers, MPP would have found it necessary to engage employees or retain consultants with knowledge of the flyash industry; invest in flyash processing plant and equipment and truck loading facilities; undertake testing procedures for Millmerran flyash to ensure that it met the Australian Standard; and employ sales people to market concrete grade flyash.
759 Mr Hunt did not regard embarking upon these activities as “a viable course for Millmerran Power” (Ex-24, para 44).
760 The Ash Purchase Agreement of 30 September 2002 also contained a protocol in cl 2 which required Pozzolanic to test the Millmerran flyash; determine whether it met the Acceptable Range criteria; notify MPP within a certain time of the outcome; and enable MPP to commission an independent verification test to determine whether the Millmerran flyash met the Acceptable Range criteria. Such a test was also required to determine whether the flyash could be “practically and economically” converted into concrete grade flyash if the flyash failed to meet the Acceptable Range criteria. If the flyash failed to meet the Acceptable Range criteria, and MPP accepted that position, or an independent verification test determined that the flyash did not satisfy those requirements (or could not be practically and economically converted into concrete grade flyash having regard to AS 3582.1 and the Critical Limits requirements), either Pozzolanic or MPP could terminate the Agreement.
761 Apart from this mechanism (or by reason of breach) Pozzolanic could terminate the Agreement at any time after 31 December 2006 (being the end of the Fourth Operating Year) on 60 days notice to MPP which would trigger an obligation in Pozzolanic to pay a Termination Payment to MPP on the Termination Date (being the expiration of 60 days) calculated under a formula which amounts to $50,000 multiplied by the number of remaining months to 31 December 2009 (being the end of the Seventh Operating Year) minus the proportionate remainder of the Lump Sum Payment (entirely pre-paid) for the Operating Year in which termination occurs. To take an example, if Pozzolanic gave notice which had the effect of terminating the Agreement on 30 March 2007, the payment would be $50,000 multiplied by 34 months to 31 December 2009 (including the month of March 2007) amounting to $1,700,000 minus 75.61% (the proportionate 276 remaining days of the 2007 year) of the pre-paid Lump Sum Payment for that Fifth Operating Year (which would be the CPI indexed Fourth Operating Year sum of $1,437,545.26), amounting to $1,086,927.97 (assuming no indexation for the purposes of this example) resulting in a payment to MPP of $613,072.03.
762 Two other aspects of the Agreement can be conveniently mentioned now.
763 By cl 3.3, Pozzolanic agreed to complete construction of the Buyer’s Facilities (plant, equipment and related items) necessary to enable Pozzolanic to take delivery of Ash (as defined) so as to be ready for operation by 1 May 2004. Pozzolanic would retain ownership of the Buyer’s Facilities, and MPP agreed not to allow other persons to use the Buyer’s Facilities. By cl 4, MPP enjoyed the right to terminate the Agreement if Pozzolanic had not notified MPP whether or not the flyash fell within the Acceptable Range criteria within nine months of substantial completion of Unit 1.
764 As events evolved (which will be examined later in these reasons), Pozzolanic did not install plant and equipment at Millmerran nor did it take commercial quantities of flyash from Millmerran. Pozzolanic and MPP ultimately negotiated a termination of the Agreement on 20 October 2006.
765 As already mentioned, Mr Hunt was appointed by and reported, in his capacity as Fuel and Ash Manager, to Mr Malcolm Gamble.
Decision-making
766 From October 2000 to the early part of 2006 (approximately February and March of 2006), Mr Gamble was the Plant Manager for the station, employed by InterGen. Mr Gamble was seconded to MOC to discharge this role. Mr Gamble reported to the CEO for InterGen, Mr David Nelson. The commercial project to develop Millmerran Power Station was a project initiated by the parent company for InterGen, InterGen USA. Mr Gamble also reported, as to some operational matters, to employees of InterGen USA based in Boston in the United States. Energy trading was conducted by Millmerran Energy Trader Pty Ltd which was formed no part of Mr Gamble’s responsibilities.
767 InterGen is a wholly owned subsidiary of InterGen USA which at the commencement of the Millmerran power project was a Boston-based power company owned by companies sufficiently described for present purposes as Shell and Bechtel. In configuring the Millmerran power project, InterGen USA struck arrangements with investment partners which resulted in 35% of the project being taken up by Marubeni Corporation, 5% by General Electric, 5% by a further participant, and a subsequent take-up of 5% of Marubeni’s interest by Tohoku Electric Power Company with the remainder of the equity in the project retained by InterGen. Unhelpfully, Mr Gamble simply uses the undefined term “InterGen” in his affidavit but in this context he seems to mean InterGen USA which held its interest in the project through InterGen Australia. InterGen, and these international partners, own the Millmerran Power Station with their respective interests held through a series of companies which are together known as MPP.
768 Mr Gamble says that MOC was established to operate the power station and MPM was established to manage the Millmerran power project, and to serve those ends MOC has an operations and maintenance agreement with MPP. MPM has a management agreement with MPP and “effectively represents the interest of [MPP]”. Mr Gamble says that whilst there are a number of inter-company agreements between MPM and MOC, in practice, MPM and MOC effectively work as one company (Ex-23, paras 13 and 14).
769 In giving oral evidence in relation to these structural ownership issues and the working management and operation of the power station, Mr Gamble was asked about the reference to InterGen in the context of his description of the ownership organisations. He accepted that his references to InterGen were references to InterGen USA. Mr Gamble also said that there are agreements in place between the ownership entities so as to enable MOC and MPM to “actually manage the day-to-day operations, [the] operational decisions associated with the power station” (T, p 886, lns 20-41).
770 In that context, MPM acted as the agent for the owners, MPP, in entering into the Ash Purchase Agreement. The contract was signed by Mr Gamble as agent for each of the eight MPP entities. Mr Gamble accepted that the decision-making in relation to the Ash Purchase Agreement (and the letting of the contracts the subject of the tender for materials handling), at a practical level, was concentrated in MPM as Manager on behalf of the MPP owners. A proposition was put to Mr Gamble that MPM was a company which was owned and, in effect, staffed by InterGen USA. Mr Gamble agreed with that proposition but observed that the term “InterGen USA” used in his affidavit “is a broad description rather than a precise registered company name … So that’s a loose descriptive term here”. Mr Gamble accepted that the “control and staffing of MPM” comes from InterGen America and the decision to enter into the Ash Purchase Contract in 2002 was ultimately a decision of MPM.
771 Mr Gamble accepted that from the Australian point of view, the operational recommendations in relation to entry into the Ash Purchase Agreement were “a cooperative arrangement between Mr Hunt and the people employed directly as part of MPM” (T, p 887, lns 21-28; lns 46 and 47). Mr Gamble accepted that Mr Hunt had the principal responsibility for making recommendations in relation to the operational aspects of the proposed contract, and the principal commercial adviser for MPM in relation to decisions about the Ash Purchase Agreement was Ms Belinda Knox. Mr Gamble accepted that MPM, in terms of assessing the tenderers, was looking to Mr Hunt for an operational assessment and “pretty much” looking to Ms Knox for the “commercial attractiveness” of the tenderers.
772 Mr Gamble made further observations later in his evidence on this topic when he was asked about the observation at para 36 of his affidavit (Ex-23) that in early 2002 “we made an in-principle decision that Pozzolanic was the preferred tenderer for the purchase of Millmerran flyash” [emphasis added]. Mr Gamble also said in his affidavit that from this time onwards, negotiations were conducted with Pozzolanic by Mr Hunt and Ms Knox. In these negotiations, Mr Hunt reported to Mr Gamble and Ms Knox reported to Mr John De Stefani, a man described in Mr Gamble’s affidavit as “InterGen’s Commercial Manager”. When asked about the reference to “we”, Mr Gamble said he was referring to a group decision made through consultation with Mr Gamble and “the other senior management team of InterGen Australia upon advice from David Hunt and Belinda Knox” [emphasis added] (T, p 890, ln 22).
773 Mr Gamble accepted that the decision as to which company would be awarded the Ash Purchase Contract, was a decision for MPM “in a formal sense”. When asked what Mr Gamble meant by “in a formal sense” and whether MPM was the “decision-maker”, Mr Gamble observed that he “should make it clear that [MPM] is a legal entity but not necessarily a different group of people … to other parts of the organisation” and it was this same “group of people” referred to in para 36 that came to a decision in early 2002 that Pozzolanic was the preferred tenderer.
774 As to the reference to “InterGen’s Commercial Manager” Mr Gamble clarified that the word “InterGen” was there used as a reference to InterGen Australia and Ms Knox reported to Mr John de Stefani as a person who was, in effect, “in a general manager commercial-type role for InterGen Australia … but he was also formally the manager of [MPM]” (T, p 891, lns 4-17).
775 Although the exchanges between Pozzolanic’s representatives including Mr Michael Wilson and Mr Ian Ridoutt and MPM’s representatives for Millmerran including Ms Knox, Mr Hunt, Mr Greg Hines, Ms Fiona Connell and Mr David Nelson will be examined further in these reasons, one aspect of Mr Gamble’s evidence reflecting his perception of one matter that became important in the negotiations can be conveniently mentioned now.
Pozzolanic’s desire for an exclusive arrangement
776 At para 43 of his affidavit, Mr Gamble observes that during the course of negotiations with Pozzolanic, he was told that Pozzolanic wanted a grant of an exclusive right to purchase Millmerran flyash for sale to participants in the concrete industry because Pozzolanic would be making a significant capital investment in flyash plant and equipment at the station and having made such an investment, Pozzolanic did not want to later find that MPP had sold flyash to other purchasers who had not made the same capital investment, or where those other purchasers were paying a lower royalty rate.
777 At para 44, Mr Gamble says that throughout the negotiations he was unwilling to enter into an agreement with Pozzolanic that would “expressly prevent Millmerran Power from selling flyash to other parties” for two reasons: first, Mr Gamble had concerns about the implications of the Trade Practices Act 1974 (Cth) and second, Mr Gamble wished to keep Millmerran’s options open to “potentially sell increased volumes of ash to alternative off-takers”. Mr Gamble accepted that this issue became a point of difference with Pozzolanic which had the potential to result in no agreement being reached with Pozzolanic and which gave rise to discussions between Ms Knox, Mr Hunt and Mr Gamble about what course MPM might take should Pozzolanic “fall out” as a potential contractor.
778 Mr Gamble gave evidence that he rejected absolutely the notion that any agreement should be struck with Pozzolanic which would give Pozzolanic exclusive access to Millmerran flyash and that after the agreement was reached, it was Mr Gamble’s understanding of the terms of the agreement that exclusivity had not been conferred upon Pozzolanic.
Transpacific and FAA regarded as credible bidders
779 In the course of the negotiations leading up to the agreement, events occurred in relation to Transpacific’s position as a tenderer and that of FAA. The events in relation to those tenders and the views formed by Mr Gamble and others about the commercial capacity of those tenderers to perform the commercial obligations contemplated by the Ash Purchase Agreement are discussed later in these reasons. However, for present purposes it is sufficient to note, and I find, that MOC/MPM regarded both Transpacific and FAA as serious and credible bidders for the Ash Purchase Agreement.
780 I accept the evidence of Mr Gamble and Mr Hunt on the matters I have described, and generally.
PART 9
Gladstone Power Station
781 In the first half of 1988, the Queensland Electricity Commission (“QEC”) issued invitations to tender to a number of companies, including Pozzolanic, for the purchase and removal of flyash at Gladstone Power Station (Ex-39, SDC-75). The Gladstone Power Station is located close to the town of Gladstone on the central coast approximately 544 kilometres from Brisbane.
782 The invitation also sought tenders for the purchase and removal of flyash and cenospheres at Callide B Power Station (“Callide B”). These observations are confined to the arrangements between Pozzolanic and the QEC at Gladstone.
783 The “Technical Requirements” to the tender specification describe the Gladstone Power Station as comprising six 280mw generating units. The tender contemplated that the contract would commence on 1 July 1991 and would provide for the purchase and removal of flyash for the financial years ending 30 June 1991 through to 30 June 1998. Pozzolanic already had a contract with the QEC for the purchase and removal of flyash at Gladstone until 30 June 1991.
784 The QEC estimated that the production of flyash at Gladstone would range from 500,000 tonnes per annum in the financial year ending 30 June 1992 to 400,000 tonnes by 30 June 1998. Under the tender, the Prime Contractor would be required to purchase and remove a guaranteed minimum total number of tonnes in each financial year and would have a first option to purchase additional quantities at a tendered price on a particular basis.
785 The Introduction and Description of Works section of the tender provides that the QEC reserved the right to sell any or all surplus flyash from Gladstone to a third party in any financial year up to 30 June 1993. Surplus flyash was defined as the total number of tonnes produced by Gladstone over and above the total number of tonnes nominated by the Prime Contractor as its requirements for the relevant financial year. Such sales to a third party would be subject to these restrictions imposed upon the third party by the QEC: first, the third party purchaser could not sell the flyash “in any classified or processed form in competition with any fly ash product currently marketed by the Prime Contractor” (this restriction is described in later QEC correspondence as the cl 1(C)(a) restriction recited in the tender documents); second, any third party purchaser could not process or classify for its own use flyash acquired from the QEC at Gladstone to “derive products which are currently marketed by and available [from] the Prime Contractor” (the cl 1(C)(b) restriction).
786 The Introduction and Description of Works document provides that in respect of all sales of surplus flyash by the QEC to a third party on and after 1 July 1993, such sales would be subject to a restriction that the third party purchaser shall not sell, in any classified or processed form, any product produced or extracted from flyash, which is a product currently marketed and available from the Prime Contractor as at 28 February 1993.
787 Clause 1(C) is, in terms, directed to an exclusive right and obligation to purchase and remove all cenospheres at Callide B commencing from the relevant date. The words forming part of what is described by the QEC as cl 1(C)(a) and (b) apply to the rights of the QEC (together with the relevant restrictions) in relation to sales of surplus flyash from either Callide B or Gladstone.
788 The invitation to tender contemplated the lodging of conforming and/or non-conforming tenders. Pozzolanic lodged a conforming and non-conforming tender on 11 August 1988.
789 The non-conforming tender was accepted by the QEC subject to some matters of clarification. On 26 January 1989, the QEC set out the conditions of acceptance in a letter to Pozzolanic. Those conditions included these matters. Pozzolanic would take and pay for a minimum of 60,000 tonnes of Gladstone flyash at a particular price per tonne and take or pay for between 60,000 to 100,000 tonnes of flyash at another particular price per tonne with volume in excess of 100,000 tonnes at a further price per tonne; the guaranteed minimum quantity of flyash to be removed was 60,000 tonnes with a guaranteed minimum payment for 100,000 tonnes.
790 The contract would commence on the date of receipt by Pozzolanic of QEC’s letter of acceptance although the obligation to purchase and remove flyash at Gladstone would commence on 1 July 1991. The letter of 26 January 1989 accepts Pozzolanic’s non-conforming tender on the footing that Pozzolanic accepts the original formulation of cl 1(C)(a) in relation to sales of surplus flyash to third parties.
791 On 3 February 1989, Pozzolanic acknowledged receipt of the QEC’s 26 January 1989 letter and noted that some of the provisions governing acceptance of the tender were sufficiently different to Pozzolanic’s non-conforming tender as to amount to a counter-offer. The content of that proposition was set out in Pozzolanic’s letter of 14 February 1989 especially in relation to cl 1(C)(a).
792 On 17 February 1989, the QEC set out its position on the operation of that provision and said this:
With respect to Clause 1(C)(a) of the Specification [the section described as Introduction and Description of Works] … The intent is to protect the Prime Contractor from the Commission selling surplus fly ash to a third party or parties for use in the cement-extender and hot mix asphalt markets where they would be in competition with the Prime Contractor.
Your confirmation of acceptance on this basis will enable us to proceed with preparation of the contract documents.
[emphasis added]
793 On 23 February 1989, Pozzolanic responded to that letter accepting the contract on the basis of the QEC’s letter of 17 February 1989. The contract became described as Contract No. H751/88 (“Contract H751/88”).
794 Those arrangements governed the position in relation to sales to third parties up to 30 June 1993 and sales after 1 July 1993 were governed by cl 1(C)(b).
795 In the Technical Requirements (“TR”) document forming part of the Specification, Technical Requirements 3.16 and 3.17 provide for these matters. First, irrespective of the rights of the Prime Contractor to purchase flyash from the QEC, should the Prime Contractor refuse or without sufficient cause, fail to sell to any person wishing to purchase any product (produced or extracted from the flyash) currently marketed and available from the Prime Contractor, the QEC may sell flyash to such a person for the whole of the unexpired period of the contract (TR 3.16). Second, should the QEC desire for any reason to remove flyash from the hoppers by using the contractor’s plant, the contractor shall allow the QEC unrestricted use of the contractor’s plant and equipment subject to no interference with the contractor’s normal operations.
796 The Technical Requirements also set out statistics in relation to the flyash quality in terms of particle size distribution, the unburnt carbon percentage by weight and analysis of the Curragh coal used at Gladstone. TR 3.4 notes that under normal circumstances the flyash will not contain carbon in excess of 3% by weight and typical values are expected to be less than 1.5% by weight.
797 In the QEC’s Minutes of Meeting of 10 November 1988 with Mr Cornish and Mr Peabody on behalf of Pozzolanic, Item 6 of the Minutes notes Pozzolanic’s view that even though Callide B flyash is poor in quality as a cement-extender, Callide B flyash represented a back-up supply to Gladstone flyash and a blend of the two would probably be deployed by Pozzolanic. In rating the quality of the flyash, the Minutes observe that on a scale of 1 to 10, Callide B and Swanbank flyash were rated 6, Tarong rated at 9 and Gladstone flyash rated at 10.
798 All of the documents I have just described are contained within an exhibit to the affidavit of Mr Shaun Daniel Clarke (Ex-39) who at the date of swearing his affidavit was the General Manager, Contracting, for CMA Corporation Limited. However, prior to Mr Clarke assuming that role he had held the positions, within Cement Australia, of General Manager Marketing and Distribution between June 2003 and January 2004; General Manager of Sales and Marketing between January 2004 and October 2004; and, General Manager Business Development between 1 October 2004 and 13 May 2005.
799 Like the Swanbank documents, the collection of documents making up Contract H751/88 are comprised of the invitation to tender documents, the tender, all of the relevant correspondence and related exchanges (Ex-39, SDC-75). Again, the documents are assembled in an unchronological way but once re-assembled in chronological sequence the content of the arrangements is made more readily apparent.
800 At some time prior to July 1997, the QEC sold the Gladstone Power Station to seven incoming project participants.
801 In July 1997, Pozzolanic and NRG Gladstone Operating Services Pty Ltd (“NRG”) as agent for the new project participants entered into an agreement in relation to the purchase and removal by Pozzolanic of flyash produced at the Gladstone Power Station (the “1997 Agreement”). The recited object of the 1997 Agreement was to amend Contract H751/88 and to adopt the further matters set out in Annexure 1 to the 1997 Agreement. By cl 1 of the 1997 Agreement, all provisions of the Contract H751/88 not modified by the amending Agreement remained valid so long as the 1997 Agreement remained in force. In the case of any inconsistency between the Contract H751/88 and the 1997 Agreement, the 1997 Agreement is to prevail. The 1997 Agreement is exhibit SDC-77 to Mr Clarke’s affidavit.
802 The 1997 Agreement was to be valid from 1 July 1997 to 30 June 2003. Subject to cl 6.1 (or unless one or both of the parties notified their intention to terminate the 1997 Agreement prior to 30 June 1998 in which event the Agreement would terminate as at 30 June 2003), the Agreement was to automatically remain in force for consecutive terms of four years each. During any part of the consecutive terms of four years each, either party could terminate the 1997 Agreement on 30 June of any of the subsequent years by giving four years notice of termination.
803 Under the 1997 Agreement, Pozzolanic guaranteed a minimum off-take of 60,000 tonnes per annum; new royalty rates were negotiated for every tonne of flyash taken by Pozzolanic with an annual indexation protocol to be negotiated for the royalties; the new royalty rates for flyash used in Queensland would be $10.52 up to 60,000 tonnes, $9.90 for quantities between 60,000 and 100,000 tonnes and $6.19 for quantities in excess of 100,000 tonnes; for flyash to be used outside Queensland Pozzolanic would pay NRG a royalty rate of $2.90 per tonne; a minimum royalty amounting to an average of $1,027,200 per annum would be paid by Pozzolanic to NRG over the term of the contract corresponding to royalties paid for volumes of 100,000 tonnes per annum; a protocol was established for dealing with circumstances in which NRG continually produced flyash in excess of the specification and particularly in circumstances where the loss on ignition exceeded 3% by weight; and, NRG recorded that it could not guarantee to be able to supply more than 250,000 tonnes of flyash per annum.
804 As to the Annexure 1 matters, the annexure removes the reference to precipitators and inserts a reference to fabric filter collection (baghouse collection), giving rise to more even particle size distribution throughout the hoppers. The revised table of estimated flyash production is recited as ranging from 470,000 tonnes in 1997 to 567,000 tonnes in 2002.
805 The spreadsheet of Gladstone flyash sales put in evidence by Ms Boman (Ex-51, CB-1) for the years 2001 to 2008 shows these sales in tonnes each year:
| Year | Fine Grade Flyash |
| 2001 | 148,108 |
| 2002 | 162,870 |
| 2003 | 180,645 |
| 2004 | 184,927 |
| 2005 | 206,917 |
| 2006 | 253,046 |
| 2007 | 311,801 |
| 2008 | 280,548 |
806 In agitating the merits of Pozzolanic’s earlier non-conforming tender to the QEC, Pozzolanic observed that it had begun to establish a flyash market in Melbourne which, before Pozzolanic’s activities, had not been evident. Pozzolanic said that the Melbourne marketplace now only awaited the capacity to deliver large quantities of flyash at an economical rate in order to enable Pozzolanic to expand the market tenfold. Pozzolanic observed that with the use of QCL’s facilities and the QCL ship “Cementco”, Pozzolanic now had the opportunity to establish a viable system of ship transport of Gladstone flyash to Melbourne. Pozzolanic observed that negotiations were then underway for establishing an unloading facility on the Melbourne waterfront.
Some aspects of Ms Reich’s evidence
807 Ms Deborah Reich is the National Terminals & Rail Manager of Cement Australia. From 29 August 2005 to 30 September 2006, Ms Reich was the Queensland Logistics Manager for Cement Australia responsible for the logistics movement of all products on road and rail transport as well as the Terminal and Depot interfaces across Queensland and northern New South Wales. On 1 October 2006, Ms Reich became the National Terminal & Rail Manager for Cement Australia (Ex-47).
808 Although it will be necessary to examine in some detail aspects of the logistics in the movement of flyash, some aspects of Ms Reich’s evidence can be noted now in relation to the movement of Gladstone flyash. Ms Reich’s evidence in relation to logistics questions both generally, and specifically in relation to Gladstone, are directed to the period of her knowledge from 29 August 2005 to the present.
809 As to the shipping assets of Cement Australia, Ms Reich says that during the period 2005 to 2006 Cement Australia owned two ships, namely, Goliath and Cementco. A third ship operated full-time by Cement Australia under charter arrangement was the Calaca. Around 2008 the ships were sold to CSL. From that time, shipping of cementitious products by Cement Australia has been undertaken under contract with CSL. The Goliath was used predominantly in transporting material from Devonport to Melbourne, Newcastle and Glebe as part of the “southern circuit”. Ms Reich says that the Goliath was predominantly kept in the southern circuit because the Devonport operation suited the vessel specification and loading requirements and the shipping parcel size (tonnage carried) allowed for quick load, quick travel and quick discharge into the above three ports (Ex-47, para 83).
810 The Cementco was used predominantly for transporting clinker into Bulwer Island because it was an open hold vessel which suited clinker cargo and the vessel also suited the unloading station at Bulwer Island. The Calaca was used predominantly for the Gladstone to Townsville circuit carrying GP cement and also the Gladstone to Port Melbourne circuit carrying flyash which was a blend of Gladstone flyash and Callide flyash.
811 The Calaca was used on these routes because the tonnage carried by the Calaca suited the parcel size requirements (tonnage) for silos at both Townsville and Port Melbourne. Ms Reich says that during the period 2005 to 2007 there was very little flyash moved by ship except for the flyash transported into Port Melbourne because, during that time, the only terminal which had a flyash silo receival set-up was Port Melbourne. Ms Reich says that in addition to this consideration, the export silo at Gladstone, used to hold and build stock prior to ship-loading, had a capacity between 9,000 and 10,000 tonnes. The parcel sizes (tonnes loaded) for the Calaca is 11,000 to 12,000 tonnes.
812 Ms Reich says that during the period 2005 to 2007 and to the date of the trial, Cement Australia only shipped a blend of Gladstone and Callide flyash to Melbourne from the Gladstone export silo. The majority of product shipped by Cement Australia is GP cement. Ms Reich says that Gladstone flyash and Callide flyash are blended at the export silo and at Gladstone for shipping. The Gladstone export silo is located approximately nine kilometres from the Gladstone Power Station and approximately 130 kilometres from the Callide Power Station.
813 Apart from shipments of Gladstone and Callide flyash to Melbourne, Gladstone and Callide flyash was moved by road and rail to destinations within Queensland.
814 Ms Reich says that there was no dedicated road fleet based at the Callide Power Station and thus, generally, the Gladstone fleet, based in Gladstone, served the entire Central Queensland region. Ms Reich says that during the period in 2006 and 2007, however, the Tarong fleet and third party contractors were also used to transport Gladstone flyash into South East Queensland to supplement the shortage of Tarong flyash. From early 2006, a product called Kaolite from the Callide Power Station began to be brought into South East Queensland using the Gladstone fleet, Tarong fleet and third party contractors.
815 In examining the logistics issues, Ms Reich uses terms such as the “Gladstone fleet” and the “Tarong fleet”. Those terms describe transportation fleets organised in this way. The “South East Queensland fleet” includes trucks based at Tarong, Bulwer Island, Wacol and Yatala. The “Central Queensland fleet” includes trucks based at Gladstone and Rockhampton. The “North Queensland fleet” includes trucks based at Mackay, Townsville and Cairns, and the “North West Queensland fleet” includes trucks based at Cloncurry (Ex-47, para 176).
816 Ms Reich says that there is also a rail fleet that transports Gladstone flyash northbound for use in Mackay, Townsville, Cairns and Mt Isa. Ms Reich says that in 2007, Gladstone flyash was also transported into South East Queensland by rail to supplement the downturn in the production of flyash at Tarong due, among some other considerations, to water restrictions as a result of the drought in Queensland. Ms Reich observes that in March 2007 level 5 water restrictions were announced leading to what she describes as approximately a 44% downturn in production at Tarong Power Station and a 30% downturn at Tarong North. Ms Reich says that at the date of swearing her affidavit on 1 February 2010 (Ex-47), Gladstone flyash was no longer being transported into South East Queensland by rail and only 100 tonnes per week was being brought into South East Queensland by truck.
817 In her second affidavit sworn 2 September 2010 (Ex-48), Ms Reich clarifies aspects of her observations about the movement of Gladstone flyash. In her earlier affidavit she had noted that in 2006 and 2007 there was a drought in Queensland and she observes that the drought coincided with what she describes as a “boom” in the Queensland construction industry. She also observes that there were, at this time, a number of late deliveries and stock-outs of all cementitious products, although stock-outs of flyash in South East Queensland were “relatively limited” (Ex-48, para 41).
818 In order to avoid late deliveries and stock-outs during this period, Ms Reich engaged a number of third party transport subcontractors to supplement delivery. So far as supplementation occurred by transporting Gladstone flyash into South East Queensland, Ms Reich provides the statistics for 2006 and 2007 in her second affidavit. In the 2005 calendar year, Ms Reich says that no Gladstone flyash was transported into South East Queensland. Prior to 2005 virtually no Gladstone flyash was being transported into South East Queensland.
819 Ms Boman’s spreadsheets (Ex-51, CB-1) show that sales of Gladstone flyash (fine grade flyash) in the 2006 calendar year were 253,046 tonnes. Ms Reich says that in the 2006 calendar year 4,517 tonnes of Gladstone flyash were transported into South East Queensland which represents 1.78% of the sales (2,279 tonnes by road and 2,238 tonnes by train).
820 Ms Boman’s spreadsheets show that sales of Gladstone flyash (fine grade flyash) in the 2007 calendar year were 311,801 tonnes. Ms Reich says that in the 2007 calendar year 65,907 tonnes of Gladstone flyash were transported into South East Queensland which represents 21.13% of the sales (19,915 tonnes by road and 45,992 tonnes by train).
821 The summary tables set out at para 45 of Ms Reich’s second affidavit (Ex-48) show the volume of flyash that was loaded and dispatched. Ms Reich says that the volumes in her tables for 2006 and 2007 may include flyash that was stored at the off-site storage facilities (at Gladstone apart from the export silo facility) but not yet sold to third parties, as well as flyash that was used for internal purposes such as the production of blends.
PART 10
Callide B and Callide C
822 Relevantly for present purposes, the Callide Power Station consists of two coal-fired electricity generating stations described as Callide B and Callide C operated by CS Energy. Each station is located 18 kilometres east of the town of Biloela in Central Queensland approximately 130 kilometres inland from Gladstone. Callide A was originally constructed in 1965 and refurbished and recommissioned in April 1998. That station is now the site of the Callide Oxyfuel Project which is not relevant for present purposes.
823 The Callide B Power Station was commissioned in 1988 comprising units capable of generating 700mw. The Callide C Power Station is a 900mw station commissioned in 2001 which more than doubled the generating capacity at the Callide site. Callide C was among the first supercritical coal-fired power station in Australia (T, p 910, ln 21). CS Energy owns Callide C in a 50/50 joint venture arrangement with InterGen.
824 As already mentioned, the QEC invitation to tender process in the first half of 1988 called for tenders for the purchase and removal of flyash and cenospheres at Callide B and flyash at Gladstone. The Pozzolanic non-conforming tender in relation to both locations was accepted and the terms and conditions of that acceptance have already been discussed. The contract became described as Contract H751/88. The QEC’s letter of 26 January 1989 recites that the contract, relating to Callide B, would commence three months from the date of Pozzolanic’s receipt of the QEC’s letter although Pozzolanic finally accepted the terms on 23 February 1989.
825 On 10 March 1989, the QEC confirmed the award of the contract to Pozzolanic with the contract to commence on the date of receipt of that letter. Pozzolanic acknowledged receipt of the 10 March 1989 letter on 16 March 1989. Pozzolanic’s non-conforming tender contemplated the guaranteed minimum removal of 6,000 tonnes of flyash per annum from Callide B in the period 30 June 1989 to 30 June 1998 (Ex-39, SDC-75).
826 In 1997, Pozzolanic entered into an agreement with CS Energy to amend Contract H751/88 (the “1997 CSE Agreement”). The Agreement was signed by Mr Jerry Maycock and the Company Secretary, Mr Schodel. By the 1997 CSE Agreement, all terms and conditions of Contract H751/88 relating to Callide B, unless modified by the 1997 CSE Agreement, remained valid for so long as the amending Agreement was in force. The 1997 CSE Agreement contemplated that no later than 1 January 1998 Pozzolanic would make particular capital investment (approximately $200,000) at Callide for the removal of flyash and cenospheres including particular collection and load-out facilities for flyash. The 1997 CSE Agreement was to be valid from 1 October 1997 until 30 June 2003, and unless one or both of the parties gave notice of an intention to terminate the 1997 CSE Agreement on 30 June 2003 by giving 12 months written notice, it would automatically remain in force from 30 June 2003 on a year-to-year basis with each of the parties being entitled to terminate at any time by giving the other at least 12 months written notice of termination.
827 The 1997 CSE Agreement provides that in the event Pozzolanic makes the contemplated capital investment or attracts sales beyond the cl 5 guaranteed volumes, an extension of the 12 month termination notice provision would be determined in good faith between the parties and in the absence of agreement the notice would be not less than two years.
828 The cl 5 guaranteed off-take volumes are 25,000 tonnes per annum.
829 The 1997 CSE Agreement amended the royalties payable for flyash used for cementitious purposes according to the quantities used ranging from $8.50 up to 6,000 tonnes; $7.50 for the next 4,000 tonnes; $6.00 for the next 10,000 tonnes; $4.00 for the next 10,000 tonnes; $2.00 for the next 20,000 tonnes and $1.00 for tonnes in excess of 50,000. Royalties in respect of flyash used for non-cementitious purposes were to be negotiated. As to quality, CS Energy recited that under normal circumstances it would produce flyash with a loss on ignition (“LOI”) not exceeding 3% by weight with Pozzolanic’s obligations to be reviewed should CS Energy not be able to produce flyash meeting the quality requirement thus preventing Pozzolanic meeting its obligations under cl 5.
830 Ms Boman’s spreadsheets (Ex-51, CB-1) show that the sales of fine grade flyash from the Callide Power Station for the years 2001 (recognising that Callide C was commissioned in 2001) to 2008 were these.
| Year | Fine Grade Flyash |
| 2001 | 46,078 |
| 2002 | 71,478 |
| 2003 | 62,824 |
| 2004 | 60,037 |
| 2005 | 51,812 |
| 2006 | 52,662 |
| 2007 | 62,760 |
| 2008 | 79,721 |
831 Ms Reich says she recalls that during the period 2006 and 2007 there was increased demand to transport flyash from Central Queensland to South East Queensland due to the reduction in the volume of flyash available from Tarong and Tarong North power stations. In 2007 (with insignificant amounts in 2006) flyash was transported from Gladstone Power Station to South East Queensland. It is not clear from the evidence whether those volumes represent, to some degree, blended Gladstone and Callide flyash although the direct evidence of Ms Reich is expressly confined to references to Gladstone only flyash.
832 No tables are presented by Ms Reich of any Callide flyash transported to South East Queensland during the period of her knowledge of flyash movements from 29 August 2005. However, at para 252 of Mr Zeitlyn’s affidavit (Ex-42) he observes that in the period between 2004 and 2007 Global Cement was also acquiring flyash from the Callide C Power Station.
PART 11
Stanwell Power Station
833 The Stanwell Power Station is located 22 kilometres west of Rockhampton in Central Queensland. The station was commissioned and became fully operational in 1996. It has the capacity to generate 1,460mw for dispatch into the national electricity market. In 1999, Flyash Australia won a tender to purchase and remove flyash from the Stanwell Power Station. However, due to problems associated with the quality of the ash, Flyash Australia did not install plant or equipment or take ash from Stanwell (Ex-39, para 83). There is no evidence in these proceedings which suggests that flyash produced at Stanwell has ever been sold in South East Queensland or that material quantities of Stanwell flyash have been sold since 1999.
834 In Ms Reich’s analysis of logistics she observes that flyash in Queensland was sourced by Cement Australia from Tarong, Tarong North, Swanbank, Gladstone and Callide. In Ms Boman’s spreadsheets of sales of flyash she notes the following sales of flyash from Stanwell, none of which are sales of fine grade flyash. There were no sales of fine grade flyash in the period 2001 to 2008. The sales statistics for the years 2001 to 2008 drawn from Ms Boman’s spreadsheets are these (Ex-51, CB-1):
| Year | Non-Fine Grade Flyash |
| 2001 | 1,067 |
| 2002 | 579 |
| 2003 | 1,204 |
| 2004 | Nil |
| 2005 | 30 |
| 2006 | 4,353 |
| 2007 | Nil |
| 2008 | Nil |
PART 12
Flyash Australia Pty Ltd (“FAA”) and the New South Wales Power Stations
835 Between 5 January 1998 and 30 May 2003, Mr Shaun Clarke held the position of General Manager Sales and Distribution for Australian Cement Holdings Pty Ltd (ACH). That role included responsibility for the management of ACH’s clients; marketing; supply and distribution of ACH’s products; management of ACH’s transport operations in New South Wales; and management of the pricing for bulk sales of finished product (Ex-39, para 10).
Aspects of Mr Clarke’s evidence on sources of ash and sales and distribution statistics
836 Between June 2003 and 31 December 2003 (the first phase of the post-merger period), Mr Clarke was responsible for the management of Cement Australia’s flyash business in Queensland, New South Wales and Victoria. Between 1 January 2004 and October 2004, Mr Clarke assumed the role of General Manager Sales and Marketing which engaged him in aspects of the implementation of the integration of the merged businesses. In this role, Mr Clarke no longer had responsibility for the management of road distribution in New South Wales and Queensland although he remained responsible for the management of the flyash business in Queensland, New South Wales and Victoria.
837 Mr Clarke was a Director of FAA between 2 July 1998 and 2 March 2005. Having regard to his position as a Director and his responsibilities as General Manager, Mr Clarke was responsible for the management of ACH’s interest in FAA and responsible for the supply of flyash purchased by ACH from FAA for re-supply.
838 As already mentioned, ACH prior to the merger, was 50% owned by Hanson (Pioneer) and 50% by CSR. Entities in the Hanson and CSR groups conducted concrete and quarrying businesses in Australia. On 31 March 2003, CSR undertook the demerger earlier mentioned with the transfer to Rinker of CSR’s concrete and aggregate’s business, trading as Readymix. CSR’s 50% interest in ACH was taken up by Rinker. As to the flyash business, ACH purchased flyash from FAA for on-sale to ACH’s customers. FAA was a flyash production joint venture with the shares held 50% by a Boral subsidiary, Blue Circle Southern Cement Ltd (“BCSC”) and 50% by ACH.
839 After the merger in May 2003, FAA became a production joint venture owned in equal shares between BCSC for Boral and Cement Australia (Ex-39, para 65).
840 Mr Clarke says that during his time as General Manager of the flyash business, the majority of flyash purchased by ACH from FAA was re-supplied to ACH’s shareholders in the New South Wales region. Mr Clarke says, however, that he recalls that ACH supplied flyash sourced from the Eraring Power Station (on Lake Macquarie near the township of Dora Creek) to Hymix, a customer on the Gold Coast of Queensland. Mr Clarke says that he also recalls that from time to time ACH supplied “projects” in the area of the Gold Coast by transporting flyash by rail to Murwillumbah and then trucking flyash to the Gold Coast. Mr Clarke also recalls that ACH competed for “various one-off projects in Northern New South Wales” such as a road project near Coffs Harbour called the “Raleigh by-pass” for which FAA supplied the flyash. In a different context, Mr Clarke also says that ACH supplied cement to a northern New South Wales road project called the Yelgun to Chinderah Road Project on the Pacific Highway.
841 No content is given by Mr Clarke in his affidavit of the tonnes supplied in respect of these various examples and nor are the buyers of the flyash identified.
842 Mr Clarke says that flyash sourced by FAA was purchased by ACH and BCSC and either used by them or sold by each shareholder independently of the other. The pricing model adopted by FAA in New South Wales involved what Mr Clarke describes as “setting transfer prices” between FAA and each shareholder by which FAA would supply flyash at an “ex-works” price per tonne to which each shareholder would independently apply a margin before competing with the other. The flyash supplied by FAA was delivered using the ACH and BCSC trucking fleets.
843 Mr Clarke says that FAA did not have formal contracts in place with either ACH or BCSC. During Mr Clarke’s period as a Director of FAA, FAA purchased flyash from power stations in New South Wales and South Australia. Although FAA successfully tendered for the purchase and removal of flyash from the Collie Power Station in Western Australia and the Stanwell Power Station in Queensland, FAA did not supply flyash from either station due to quality issues.
844 FAA, however, acquired flyash from the Eraring Power Station (“Eraring”).
845 The first Eraring generating unit was commissioned in 1982 and the second and third units in 1983. The fourth unit was commissioned in 1984. The station is owned by Eraring Energy, a Government Owned Corporation. The station is located approximately 120 kilometres from metropolitan Sydney. FAA commenced operations at Eraring in 1984 and since that time has installed processing equipment, a classifier for the production of consistent fine grade flyash, dispatch facilities, a weighbridge and pumping equipment. Mr Clarke cannot recall the particular arrangements with Eraring Energy although FAA paid a royalty per tonne taken from the station, and flyash not taken was pumped to the ash dam.
846 The second source of flyash was Mount Piper Power Station (“Mount Piper”) which is located in the central west region of New South Wales 25 kilometres west of Lithgow. The station was commissioned in the early 1990s and is owned by Delta Electricity, a Government Owned Corporation. FAA commenced operations at Mount Piper in 1992 and has established similar infrastructure to that installed at Eraring. Again, Mr Clarke cannot recall the terms of the supply arrangements at Mount Piper. However, Mr Clarke says that the details of FAA’s operations at Eraring and Mount Piper are set out in FAA’s Conforming Tender for the purposes of the proposed Millmerran Supply Agreement (attached to an email from Mr Simon of FAA to Mr Jardine dated 19 September 2001) (Ex-39, SDC-2) and he would have been familiar with its content at the time. There is little detail set out in that document although FAA observes that the contract with Eraring Energy had been renewed and the contract with Delta Electricity extended to 2009. The submission recites that “Current FAA sales of flyash” per annum are these: NSW – 550,000 tonnes; Gold Coast and northern New South Wales – 30,000 tonnes; South Australia – 30,000 tonnes; and, Victoria – 30,000 tonnes.
847 Mr Clarke says that during his period as a Director of FAA, he recollects that Wallerawang Power Station (“Wallerawang”) in New South Wales also produced flyash. Wallerawang is owned by Delta Electricity and is located 15 kilometres west of Lithgow about 160 kilometres from metropolitan Sydney. In Mr Clarke’s period as a Director, FAA did not obtain flyash from Wallerawang. The station is a peak demand power station and the quality of the flyash was poor.
848 Mr Clarke says that Vales Point Power Station (“Vales Point”) was also a source of flyash in New South Wales during Mr Clarke’s period as a Director. The station is owned by Delta Electricity and is located on the New South Wales central coast about 110 kilometres north of metropolitan Sydney. Mr Clarke says that during his period as a Director, Rocla Pty Ltd, sourced flyash from Vales Point for use in the manufacture of concrete pipes.
849 A further source of flyash in New South Wales is Bayswater Power Station which is owned by Macquarie Generation, a Government Owned Corporation (established in 1996). The station is located in the upper Hunter Valley approximately 250 kilometres from metropolitan Sydney and was commissioned in 1985. Mr Clarke understood, during his period as a Director of FAA, that Bayswater run-of-station flyash was of a very high quality and did not require classification to be used in concrete as it could be sourced “selectively” from the power station. Mr Clarke says that because the flyash was of such high quality, it only required simple collection and storage facilities and it obtained a higher ex-station price “with the result that it could absorb the transport costs of transporting it (250 kilometres) into the Sydney metropolitan region” (Ex-39, para 88).
850 FAA, during Mr Clarke’s period, tried to secure direct access to Bayswater flyash. Negotiations to that end were conducted in November 2001 with Macquarie Generation. However, a supply contract was entered into between Macquarie Generation and Hyrock Pty Ltd for the purchase of Bayswater flyash commencing on 1 July 2002 for a period of 18 months. A further contract was to be negotiated and let by Macquarie Generation in 2004.
851 By May 2003, discussions were taking place between Macquarie Generation, FAA and other potential contracting parties. A new contract was to be let in January 2004. The FAA Board Report of 22 August 2003 attaches Minutes from the 23 May 2003 meeting which described securing access to Bayswater flyash by FAA as a matter of “strategic importance” (Ex-39, SDC-12). FAA was requested on 23 June 2003 by Macquarie Generation to submit an expression of interest for the purchase and removal of Bayswater flyash. The status of negotiations with Macquarie Generation are recorded in the FAA Board Minutes for 22 August 2003 (Ex-39, SDC-8).
852 The sales statistics suggest that FAA first acquired Bayswater flyash for supply to its shareholders (and re-supply by them) and others in 2003.
853 Document ATB 29.17 comprises two spreadsheets in electronic format. The spreadsheets set out information in relation to the quantity of fine grade flyash supplied by FAA to ACH and Boral (BCSC) in the years 2001 (part only) to 2003 (and in that year supplies transitioned to Cement Australia); the market into which the flyash was sold, and the purchase price in dollars per tonne. The first Excel spreadsheet bears the title “Summary” and the second spreadsheet bears the title “data”. The first spreadsheet consists of a summary of information contained in the data spreadsheet which sets out the detailed information in relation to the subject matter just mentioned. The summary spreadsheet is also described as a confidential document of Boral.
854 The summary shows that for six months of 2001, FAA sold to ACH 89,099 tonnes of flyash sourced from Eraring into New South Wales and 48,729 tonnes of Mount Piper flyash into New South Wales. No flyash was sold by FAA from Bayswater in 2001. For the six months of 2001, 27,261 tonnes of Eraring flyash was sold to ACH for supply into Queensland.
855 For the same period, FAA sold to Boral 85,394 tonnes for supply into New South Wales from Eraring; 15,260 tonnes into New South Wales from Mount Piper and no tonnes from Bayswater. FAA sold 5,960 tonnes of Eraring flyash into Victoria and 6,660 tonnes of Mount Piper flyash into Victoria.
856 In the result, for this period, FAA sold 278,363 tonnes of flyash from Eraring and Mount Piper to ACH and Boral for supply into New South Wales, Victoria and Queensland. Of that quantity, 27,261 tonnes was sold (to ACH) into the Queensland market which represents 9.79% of FAA’s sales for six months of 2001.
857 At para 92 of his affidavit (Ex-39), Mr Clarke sets out details of FAA’s sales volumes to “both shareholders” at “about 2001”. Annual sales into New South Wales are said by Mr Clarke to be 550,000 tonnes; Gold Coast and Northern New South Wales 30,000 tonnes; Victoria 30,000 tonnes; and, South Australia 30,000 tonnes.
858 If the actual sales for six months of 2001 are doubled, the actual sales statistics suggest annualised sales of 556,726 tonnes supplied into New South Wales. The annualised sales into Queensland for about 2001, according to Mr Clarke, are 30,000 tonnes.
859 For 2002, the sales statistics are these.
860 FAA sold to ACH 172,390 tonnes of Eraring flyash into New South Wales and 48,430 tonnes of Eraring flyash into Queensland. FAA sold to ACH 89,050 tonnes of Mount Piper flyash into New South Wales. FAA sold to Boral 180,943 tonnes of Eraring flyash into New South Wales and 29,610 tonnes of Mount Piper flyash into New South Wales. FAA also sold to Boral 16,148 tonnes of Eraring flyash for supply into Victoria and 14,828 tonnes of Mount Piper flyash into Victoria.
861 For the 2002 year, FAA sold 553,400 tonnes. The sales into Queensland were 48,430 tonnes or 8.75% of FAA’s sales.
862 The statistics for the remaining years to 2007 for sales by FAA of fine grade flyash to ACH (Cement Australia) sourced out of the three NSW power stations are these:
| Source | Market | 2003 | 2004 | 2005 | 2006 | 2007 |
| Eraring | NSW | 198,541 | 209,683 | 200,899 | 173,659 | 201,174 |
| Eraring | VIC | 11,806 | 449 | 0 | 0 | 0 |
| Eraring | QLD | 21,384 | - | - | - | - |
| Mount Piper | NSW | 83,839 | 90,672 | 97,209 | 91,648 | 73,261 |
| Mount Piper | VIC | 0 | 2,674 | 0 | 79 | 0 |
| Bayswater | NSW | 2,692 | 22,924 | 6,209 | 5,604 | 5,192 |
| Bayswater | VIC | - | 21,738 | 9,760 | 9,886 | 9,008 |
863 The statistics for the remaining years to 2007 for sales by FAA of fine grade flyash to Boral from Eraring, Mount Piper and Bayswater are these, subject to the qualification that for the 2004 year only five months of statistics are available and for the 2005 year only six months of statistics are available:
| Source | Market | 2003 | 2004 | 2005 | 2006 | 2007 |
| Eraring | NSW | 213,771 | 93,007 | 116,619 | 210,927 | 187,457 |
| Eraring | VIC | 11,359 | 1,233 | 2,401 | 3,921 | 1,976 |
| Mount Piper | NSW | 31,022 | 14,209 | 24,557 | 44,826 | 56,541 |
| Mount Piper | VIC | 18,099 | 8,520 | 10,754 | 36,480 | 40,285 |
| Bayswater | - | 16,847 | 15,963 | 14,958 | 28,646 | 11,864 |
864 It follows that for the 2003 year total sales of flyash from these stations by FAA to its shareholders into New South Wales, Victoria and Queensland were 611,363 tonnes of which 21,384 tonnes were sold into Queensland (sourced out of Eraring) which represents 3.50% of the sales. Total sales by FAA to its shareholders into New South Wales, Victoria and Queensland of Eraring, Mount Piper and Bayswater fine grade flyash for the years 2004, 2005, 2006 and 2007 were 481,072, 483,366, 607,681 and 588,765 tonnes respectively recognising that according to the spreadsheets there were no sales by FAA to its shareholders from those New South Wales sources into Queensland.
865 The detailed spreadsheets containing all the data summarised in the first spreadsheet provides some further information and some apparent anomalies. First, the data spreadsheets confirm that there are no sales of Mount Piper flyash under the entries “QLD – Boral” or “QLD – ACH” (which are the terms used in the data spreadsheets) or any other variant of “QLD” in the period 2001 to 2007. Second, the data spreadsheets reflect what seems to be two “one-off” shipments or sales by FAA to “QLD – Boral” of Eraring flyash in the period June to December 2001 of 208 tonnes and in 2002 a further 208 tonnes. Third, the data spreadsheets show sales by FAA of Eraring flyash to “QLD – ACH” of 27,261, 48,209 and 21,384 tonnes in the periods June to December 2001, January 2002 and December 2003 which reconciles with the summary but for a rounding up in 2002. Shipments to ACH ceased in August 2003. Cement Australia became the participant in the FAA joint venture from mid-2003.
866 Fourth, as to Bayswater, sales of Bayswater flyash by FAA are not marked in the data spreadsheets for Boral or ACH by reference to any destination detail such as “QLD – Boral” or “QLD – ACH”. The data spreadsheets show that shipments of Bayswater flyash to Boral began in July 2003 and the volume recorded in the data spreadsheets amount to 16,848 tonnes in 2003 (which is a difference of 1 tonne as compared with the summary spreadsheet); 15,963 tonnes in the period January to May 2004; 14,957.9 tonnes in the period July to December 2005; 28,645.86 tonnes in 2006 and 11,863.98 tonnes in 2007. These figures reconcile with the summary apart from rounding up.
867 The data spreadsheets show that FAA supplied 2,244 tonnes of Bayswater flyash to ACH although the summary suggests 2,692 tonnes in 2003. The data spreadsheets suggest that 7,155 tonnes were supplied in the period January to May 2004 (as there are sections entirely blank for the 2004 year in the data spreadsheets) although the summary spreadsheet recites that 44,662 tonnes of Bayswater flyash were supplied to ACH/Cement Australia in the full 2004 year. The data spreadsheets show that 6,039.95 tonnes of Bayswater flyash were supplied to ACH/Cement Australia in the period July to December 2005 although the summary suggests that for the full year 15,969 tonnes of Bayswater flyash were supplied. The quantities for 2006 and 2007 revealed by the data spreadsheets are 15,336.90 tonnes and 12,877.03 tonnes. The summary spreadsheet suggests that 15,490 tonnes and 14,200 tonnes of Bayswater flyash were supplied in 2006 and 2007 to ACH/Cement Australia.
868 It follows that some of the information drawn together in the summary spreadsheet is not entirely consistent with the detailed data spreadsheets at ATB 29.17 in electronic form.
869 There is no suggestion in the primary evidence of Mr Clarke nor in the evidence of Ms Reich in relation to the supply and distribution logistics for flyash that ACH or Cement Australia supplied Bayswater flyash into South East Queensland either, during the drought from about February 2007 during periods of lesser production at Tarong, or at any other earlier time.
870 Mr Clarke attaches to his affidavit at SDC-3 to 13 inclusive copies of the papers for meetings of directors of Flyash Australia for the months of February, May, August and November 2001; February, August and November 2002; February, May, August and September 2003. In those reports, apart from the financial aspects, the papers contain an assessment of the quality of the flyash by particle size for each month by reference to a daily high and low measure and an average measure. Similar statistics are recited each month for the LOI content of the flyash.
871 The average fineness of Eraring and Mount Piper flyash over the four months of 2001 reflected in the reports was 86.75% and 85.5% respectively. The average LOI for flyash from each station was 1.025 and 0.85. For 2002, the fineness for each station was 83% and 82% respectively. The LOI for each station was 1.03 and 0.8 respectively. For 2003, the fineness for each station was 85.75% and 81.25% respectively. The LOI for each station was 0.9 and 0.8 respectively.
872 In the 2003 year, the Board papers begin to incorporate similar statistics for flyash sourced from Bayswater. The 2003 Board papers for the nominated months show that the average fineness over those months of Bayswater flyash was 93.75% and the average LOI over those months was 0.63%.
Mr Clarke’s evidence of the FAA action plan and the FAA business model
873 In August 1999, FAA developed an action plan for the sale of flyash in Queensland, New South Wales, South Australia and Western Australia. As to Queensland, one of the key objectives was to try and reduce the transport costs incurred in transporting flyash to Murwillumbah, among other costs. The objectives also included taking steps to invigorate discussions between FAA and Tarong for the purchase of flyash and to secure a purchase contract with Stanwell. In the analysis reflected in the Respondents’ Confidential Tender Bundle (RCTB 544), Eraring flyash is seen as a possible source of flyash for Queensland although the market price for flyash is described as $48.00 for the Gold Coast and $50.00 for Brisbane whereas FAA’s “delivered cost” of Eraring flyash to Murwillumbah is recited as $56.34 per tonne. The transport cost of trucking flyash from Murwillumbah to each batching plant in and around the area of the Gold Coast is not set out by Mr Clarke. The approximate volume of tonnes for this purpose is 28,000 tonnes. The August 1999 analysis seems consistent with FAA’s 2001 experience of supplying 27,261 tonnes of Eraring flyash to Queensland or as Mr Clarke describes the quantity for the 2001 year as 30,000 tonnes.
874 The summary spreadsheet of ATB 29.17 shows that the ex-works Eraring flyash price paid by ACH to FAA in 2001 for tonnes supplied into “QLD” was $0.15.
875 As to the business model deployed by FAA, Mr Clarke says that the price of flyash is primarily a function of the price paid to the power station per tonne and the logistics costs, “largely determined by the distance fly ash is required to travel to market” to reach the batching plant, and to a lesser extent, the quality of the flyash, (which determines its “cement equivalence”, that is, the replacement value of the flyash in concrete as compared with cement). Bayswater flyash, in Mr Clarke’s example, might replace cement in concrete kilo for kilo, replacing up to 20% of the cement content in a cubic metre of concrete without compromising the strength or other qualities of the concrete. Lesser quality flyash requires greater quantities of flyash for every kilo of cement replaced, and the percentage of cement replaced might well be diminished where the flyash is of a lesser quality.
876 In describing (at para 93 of Ex-39) these factors affecting pricing and the notion of cement equivalence, Mr Clarke did not seem to be confining, so far as FAA was concerned, his remarks to greater or lesser grades of only fine grade flyash: one at 75% and others at 85% or over, for example. The identified principle seems to recognise the possibility of the use of fine grade flyash of the quality of Bayswater flyash (at an average of 96%) and flyash that might require, in Mr Clarke’s example (using Vale’s Point Power Station), three kilos of flyash for every kilo of cement replaced, which seems to recognise the use of flyash of lesser quality than fine grade flyash but nevertheless concrete grade flyash (presumably as determined by AS 3582.1).
877 Nevertheless, the sales statistics show that all of the flyash supplied by FAA to its shareholders from the identified New South Wales power stations from 2001 to 2007 was fine grade flyash.
878 FAA derived the substantial proportion of its profits from supplying flyash to BCSC and ACH for use in concrete. Flyash purchased by the shareholders was either used by them in their concrete operations or sold by each shareholder independently. Mr Clarke says that FAA did not incorporate “any material mark-up” in its prices charged to BCSC or ACH and thus those companies were able to purchase flyash at “relatively inexpensive prices”. FAA’s business model involved pricing flyash so as to generate sufficient revenue to cover its costs and declare a modest dividend to its shareholders. Mr Clarke says this model, in effect, rendered FAA a “wholesaler of flyash for its shareholder customers only” (para 94) and FAA principally sourced flyash to meet the demand of its shareholder customers. Mr Clarke says that another part of FAA’s flyash strategy was to have multiple sources of flyash supply due to variability in the characteristics of flyash from different stations and sometimes within one station. At para 96 of his affidavit, Mr Clarke explains his understanding of flyash of the “highest quality” and flyash of “mid-range” quality. Mr Clarke regarded Bayswater and Gladstone flyashes as flyash of the highest quality, with Tarong, Eraring, Mount Piper and Callide producing mid-range ashes.
879 Mr Clarke also says that because flyash is a low density product compared with cement (for the purposes of calculating and comparing the weight of a cubic metre of volume of each product); and the volume of a powder tanker is fixed; and the costs of transport involve “high fixed-cost transport costs”, the “economics of fly ash” are much better if a flyash source is “situated close to where the customers are located”. Mr Clarke illustrates the importance of this “proximity principle” in the “economics” of flyash by observing that whilst Eraring and Mount Piper flyash is only mid-level quality flyash (as to which, however, see the earlier statistics), the economics of transporting flyash from those stations (120km and approximately 140km respectively from metropolitan Sydney) to customers is made “viable” because each station is located “close to freeways to Sydney”.
880 The FAA pricing model for New South Wales involved FAA setting a “transfer price” as earlier described in supplying Eraring and Mount Piper flyash (up to mid-2003 and thereafter including Bayswater flyash) to each shareholder (the example given by Mr Clarke is a transfer price of $18.00) upon which each shareholder would apply its own margin. The FAA pricing methodology involved FAA acting principally as a wholesaler of flyash to the shareholders for the principal purpose of meeting the demand of FAA shareholders. It did so in a way that was said to recoup FAA’s costs and produce a modest dividend for each shareholder. The Board papers for meetings of directors of FAA attached to Mr Clarke’s affidavit show the earnings before interest and tax (EBIT), and the profit before tax, for the 2000, 2001, 2002 and 2003 financial years. It is not necessary to mention the EBIT and pre-tax profit amounts in each year in these reasons. The flyash action plan for 1999 shows a “transfer price” of $18.00 as mentioned by Mr Clarke and the electronic summary spreadsheet (ATB 29.17) shows a 2001 purchase price ex-works for Eraring flyash supplied into New South Wales of $18.00. Another part of the spreadsheet shows the FAA “ex-bin” price, the cartage cost using Boral cartage from Eraring to metropolitan Sydney (as a general area) and eight non-metropolitan regional locations in New South Wales the most north of which is Armidale. The spreadsheet also sets out the total FAA cost of flyash purchases on four bases and the margin relativity for each shareholder based on a transfer price of $18.00. The net result, however, after FAA distributions to its shareholders seems to be that FAA was, in effect, acting as a cost plus modest margin “wholesaler” to its shareholders for their own flyash demand.
881 Mr Maycock described the FAA model as a “pass-through” model.
The ACH focus on supply and delivered pricing
882 ACH had its own business model for the on-sale of FAA sourced flyash to its shareholder customers.
883 Two objectives were paramount.
884 First, ACH was required to offer CSR (Rinker) and Pioneer the best price in the market and no worse a price than that offered to competitors of the shareholders. Second, ACH had to maintain security of supply and a consistent high quality flyash product for use in the concrete businesses of each shareholder. Apart from meeting the demand of CSR and Pioneer, ACH sought to lower its average costs by securing sales of flyash in the “secondary market” (sales to non-shareholder plants; independent plants; manufacturers of concrete blocks, pavers and precast panels). The shareholder expectation was that ACH would not supply bulk flyash (or cement) to a competitor of CSR or Pioneer at a price lower than that supplied to a shareholder batching plant. The ACH pricing of flyash (and cement) was “location specific” and on a “delivered basis”.
885 When determining the price for cement (or adjusting prices) ACH would calculate the price in a particular market (geographic area) at which a competitor of the shareholders would be able to sell imported cement taking into account all of the costs a competitor would incur in doing so, a measure which amounted to, in effect, a comparative substitution metric in determining price. Flyash had, according to Mr Clarke, different “notional importing economics” to cement in that in pricing flyash ACH considered import parity considerations by reference to Mount Piper and Eraring as the competing supply locations or analogues of a relevant entry port. Another consideration was that ACH needed to compete for each marginal tonne of flyash available in the market and thus ACH had to be in a position to compete aggressively for purchases by the independent plants and in supplying project work (Ex-39, para 44).
886 Mr Clarke says that although notional important parity considerations were taken into account in reviewing prices, the “delivered price” of cement and flyash also had to be determined. To calculate the delivered price of the product ACH would treat the product as originating at its point of supply (a distribution terminal) at which a “base price” would be determined and to which a freight component would be added reflecting the costs of delivering the product to the relevant concrete plant or site batching plant. The road freight cost was calculated on the basis of a flag fall component plus an amount reflecting cents per kilometre per tonne carried. The flag fall and cents per tonne per kilometre were based upon the fixed and variable costs incurred. The fixed costs included such items and depreciation, registration and the financing costs of the relevant assets involved. The variable costs were represented by time costs or kilometre-dependent costs such as fuel, tyres, labour, etc. The combination of these items determined the amortised cents per tonne per kilometre.
887 Despite this freight component calculation in determining a delivered price, certain geographic market areas reflected a common or non-variable freight component. The most notable example is the freight calculation into the Sydney metropolitan region which reflected a common freight price notwithstanding whether the concrete plant or batching plant was in north Sydney or in Botany Bay.
888 The delivered cement and flyash prices charged by ACH to all concrete batching plants competing in overlapping market areas was the same. Mr Clarke says that delivered pricing for flyash operated on the same basis. Thus, the freight component for determining the delivered price of flyash was added to the base price for flyash and was calculated from the point of supply (a power station) to the delivery point (a concrete plant or batching plant). A common price applied in the Sydney metropolitan region. This pricing method for determining the freight component was generally described as the ACH “freight model” and, according to Mr Clarke, the same freight prices as determined for cement and flyash applied in determining the delivered price of either product to shareholders and non-shareholder customers alike.
889 The delivered price was then subject to any relevant discounts and rebates which might apply in any given location.
FAA’s approach to attempting to supply flyash and meet demand in SEQ and Northern NSW
890 In the August 1999 Flyash Action Plan (RCTB 544), FAA calculated the flyash requirements of the shareholder customers in the Gold Coast “region” and “Brisbane” and in 23 other regions in Queensland. In 1999, FAA was conducting discussions with Stanwell and Tarong about sourcing flyash in Queensland. In mid-2001, Mr Clarke approached CSR and Pioneer, and Mr David Edmiston (BCSC’s nominated Boral Director on the Board of FAA) approached Boral, to determine the respective demand of the shareholders for flyash in Queensland. The shareholders were “comfortable” that QCL was supplying them with acceptable quality flyash at an acceptable price and meeting their demand in Queensland.
891 Mr Clarke considers that FAA would not have ultimately sought to secure flyash sources in Queensland without the tacit support of the shareholders “because without their support and [their] demand for fly ash, any such project would not have been viable for [FAA]”. Mr Clarke recalls, based on his dealings with the shareholders, that at about mid-2001 he formed the view that the shareholders would support an expansion of alternative sources of flyash in Queensland beyond QCL as a means of applying “leverage” on QCL as “alternative sources of cementitious products in South Eastern Queensland would be welcome both as a means of cost containment and to improve supply security” (para 105). By cost containment, Mr Clarke is necessarily referring to a cost reduction in the buyer’s operations by reason of a constraint on prices payable to QCL by the provision of a competing opportunity to the ACH shareholders to obtain flyash in Queensland from a new entrant source supplier at a lower price than that charged by QCL.
892 The SEQ sales of flyash by QCL to Boral, CSR and Pioneer in 2001 were 190,000 tonnes and represented 72% of QCL’s SEQ sales.
893 The ultimate result of a consideration of all of these factors described by Mr Clarke is that notwithstanding the inherent and perhaps ultimately fatal weakness perceived by Mr Blackford (and also Mr Clarke as earlier described) in QCL’s structural position as a supplier of flyash in South East Queensland (and into northern New South Wales) to Boral, CSR and Pioneer, of an absence of any shareholder ownership engagement between Boral, CSR and Pioneer (or any one of them) on the one hand, and QCL on the other; and, FAA’s corresponding advantage of having something in the nature of guaranteed or largely assured purchases of flyash by its shareholder customers, and their natural disposition to act consistently with the FAA general business model as a wholesaler to those shareholder customers (having direct ownership interests in FAA), FAA recognised that it was not able to supply the demand of the shareholder customers in South East Queensland without securing a flyash source of supply in Queensland.
894 A business model based on seeking to supply those shareholder customers in South East Queensland (and into northern New South Wales) with their annual demand requirements for flyash, supplied out of Eraring, Mount Piper or Bayswater was not “viable”.
895 The “economics of transporting fly ash” as Mr Clarke put it, required FAA to secure a flyash source in Queensland close to the customers in order to meet that demand. Even then, the preliminary response of the shareholders when enquiries were made of them was that they were content with the price and quality of flyash supplied by QCL. Nevertheless, Mr Clarke took the view that FAA would have the tacit support of the shareholder customers in seeking to supply shareholder demand from a source of flyash acquired in Queensland subject to the flyash meeting the relevant standard.
896 Pricing by FAA of such a source would likely give rise to cost reductions for the shareholder customers by constraining QCL’s prices for cgfa, according to Mr Clarke.
897 In any event, meeting the demand of the shareholder customers by seeking to supply flyash sourced from the New South Wales power stations was not viable as a business or economic model (option) for FAA, according to Mr Clarke, and did not occur.
898 It follows, at least so far as the ACH shareholders of FAA were concerned, power stations in New South Wales (through FAA) were not a source of flyash to meet the demand of the shareholder customers in South East Queensland and to that extent, FAA as a major supplier of fine grade flyash secured from New South Wales power stations was not engaged in a field of transactional rivalry with QCL for the supply of flyash to the shareholder customers of FAA to meet their annual demand in South East Queensland or northern New South Wales. This is, no doubt, why Mr Clarke was of the view, as he expressed in evidence, that the transport economics for FAA of seeking to supply flyash to customers at or in or around Murwillumbah “were marginal at best” in the sense that “… we didn’t make a lot of money out of it. It was a very inefficient process, it must be said” (T p 1601, lns 5-12).
899 Potential rivalry was dependent upon FAA securing a flyash source in South East Queensland.
900 However, Hyrock, in fact, supplied Bayswater flyash in the following volumes in the following years into South East Queensland: 2003/2004 – 25,536.50 tonnes; 2004/2005 – 24,520.99 tonnes; 2005/2006 – 19,341.41 tonnes; 2006/2007 – 23,261.78 tonnes; and July to December 2007 – 12,290.58 tonnes (RCTB 479). The majority of these purchases of Bayswater flyash were made by Nucon Pty Ltd. Other purchases were made by Wagner Investments Pty Ltd and some other companies.
901 It will be necessary to examine the circumstances surrounding those transactions and their relationship with the field of rivalry within which QCL supplied flyash.
902 I accept the evidence of Mr Clarke as to the matters I have just described in this Part.
PART 13
Sunstate Cement Ltd (“Sunstate”) and the evidence of Mr Ward
903 I have already referred to the evidence of Dr Nairn in the context of the “strategy” Dr Nairn developed together with Sunstate’s General Manager Mr Young in the production and sale of Sunstate’s particular products.
904 Mr Gareth (Anthony) Ward commenced employment with Sunstate in the role of General Manager in June 2006. In his affidavit (Ex-26), Mr Ward gives evidence of the business operations of Sunstate. Mr Ward’s evidence is directed to Sunstate’s undertaking at the moment in time he assumed the role of General Manager, its methods of operation and the steps Mr Ward initiated in 2006 and then 2007.
905 Mr Ward gives the following evidence.
906 Sunstate is a joint venture formed in 1984 between Adelaide Brighton Ltd (“Adelaide Brighton”) and Blue Circle Southern Cement Ltd (“BCSC”), a Boral entity. The Sunstate Board meets every two months to consider “strategic issues” including pricing. There must be a consensus between both shareholders before strategic decisions of the company are adopted and made final policy. In effect, this means that the strategic decisions and focus of Sunstate reflect the strategic focus for that company based on the consensus views of two major experienced participants in cement markets in the form of Adelaide Brighton and Boral.
907 Sunstate manufactures cement and blended cement products and distributes them throughout an area Mr Ward describes as “south-east Queensland and northern New South Wales” (Ex-26, para 9).
908 Manufacturing takes place at Sunstate’s Fisherman Island plant in Brisbane.
909 Sunstate produces “General purpose (‘GP’) Portland cement”, various blended cement products, fine grade flyash (since 2007) and ground slag. As to sources of supply, Sunstate purchases many of its raw materials used in the production of cement through arrangements made by Adelaide Brighton. Under the joint venture arrangement, Adelaide Brighton and BCSC each have the right to supply up to 50% of Sunstate’s raw materials.
910 In making cement, Sunstate uses clinker, gypsum, mineral additives (mostly limestone although other mineral additives are also used), a liquid grinding aid, flyash (which is used in a flyash blend cement), and blast furnace slag. Clinker is purchased through Adelaide Brighton or BCSC either directly from Japan or through Adelaide. Slag is sourced from Adelaide Brighton which imports it from Nippon Steel in Japan. Mr Ward sets out in Confidential Annexure A, the cost of the raw materials purchased by Sunstate in the production of cement products. As to flyash, Mr Ward at para 65.5 [REMOVED TO THE SUNSTATE CONFIDENTIAL SCHEDULE]
911 Sunstate produces seven different blends of cement including blends containing 25% flyash (resulting in a product known as flyash blend or “FAB cement”) which is Sunstate’s third largest selling product; cement blends containing 30% slag (resulting in a product known as general blend or “GB cement”); and, cement blends containing 65% slag (resulting in a product known as “road blend” or “high slag blend (“HSB”)). HSB cement is typically used for expansive pours such as dam walls or major construction where high durability in the concrete is required.
912 [REMOVED TO THE SUNSTATE CONFIDENTIAL SCHEDULE]
913 In producing cement, Sunstate operates three cement grinding mills each with a capacity of 500,000 tonnes per annum. Sunstate commissioned its third grinding mill in June 2009. The cost of Sunstate’s third grinding mill was [REMOVED TO THE SUNSTATE CONFIDENTIAL SCHEDULE].
914 Mr Ward says that in producing cement, Sunstate’s most significant production costs are the cement milling costs; the transport costs; and the overhead costs.
915 As to the supply of cement, Mr Ward says that Sunstate adopts the following methodology for determining the price of its products. It does so by conducting a review of import parity pricing which involves understanding what it would cost a multinational company to land cement at the Port of Brisbane (taking into account the cost of the product in the country of origin and the freight costs to deliver that product to the Port). Mr Ward says that in his experience at various cement companies, this same import parity pricing method was commonly used in Australia and the United Kingdom to inform pricing decisions, where domestic manufacturing costs are high. Apart from determining a substitution import parity price as part of price decision-making, Sunstate also considers the prices charged by “local competitors” when Sunstate is quoting for the supply of its products. Also, customers purchasing high volumes of cement would be offered volume discounts. Customer loyalty is also a factor. Customers with a long term supply contract (up to five years) might be able to fix a price for a Sunstate product which may, over time, be lower than the price charged to non-long term contract customers who are subject to price rises. Companies that purchase blended pre-mix cement products from Sunstate include, for example, Boral entities, Adelaide Brighton entities, Nucon, Wagners and Cordwell (Ex-26, para 24).
916 As to flyash, Mr Ward says this.
917 In mid-2006, Mr Ward proposed to the Sunstate Board that Sunstate purchase run-of-station or reject flyash, cause it to be delivered to Fisherman Island, and grind it in Sunstate’s cement mills to the standard required by AS 3582.1 for fine grade flyash. Sunstate trialled or tested doing so and was “operational producing ground flyash by April 2007”. At that time, Tarong North Power Station had issued a request for tenders for the purchase and removal of flyash. Sunstate responded to the tender and was invited to enter into post-tender negotiations. Since April 2007, Sunstate has been purchasing run-of-station flyash from Tarong North.
918 Sunstate uses run-of-station flyash because the manufacturing processes adopted by Sunstate allow it to either grind flyash alone in its grinding mills or inter-grind it with other raw materials during a milling process. Sunstate can grind run-of-station ash alone until it reaches a consistency of fine grade flyash with the result that, due to grinding, Sunstate does not need to classify the ash. Alternatively, Sunstate can grind run-of-station flyash mixed with slag or clinker or other raw materials in a process called inter-grinding. Typically however, other cement producers blend high grade flyash with cement after the cement milling production process.
919 However, each of Sunstate’s three cement mills has a classification plant at the top of the mill. The classifier forms part of the milling process removing cement that is fine, allowing the remainder to be milled until it is, sufficiently fine. Although Sunstate could use its classifier plant to classify flyash rather than simply mill it, the costs involved in storing the reject ash from the classifier makes this unattractive. By milling run-of-station flyash, Sunstate is able to use 100% of the run-of-station flyash it purchases. There is no waste nor any reject ash. The flyash milling process is similar to the cement milling process although much faster, due to the small particle size of the flyash to begin with.
920 Prior to the commissioning of the third mill in June 2009, Sunstate had a “nominal” grinding capacity of one million tonnes per annum for a combination of cement and flyash (that is, a capacity to produce one million tonnes of cement and flyash, in all). Both mills were operating at maximum capacity.
921 Sunstate continues to purchase run-of-station flyash from Tarong North. [REMOVED TO SUNSTATE CONFIDENTIAL SCHEDULE]
922 Mr Ward says, based upon his review of Sunstate’s business records, that prior to 27 October 2003, Sunstate purchased high grade flyash (fine grade) from Cement Australia sourced from the Tarong Power Station in these volumes: 2001-02 fy 9,090 tonnes; 2002-03 fy 10,407 tonnes; 2003-04 fy, 4,246 tonnes. The high grade flyash was used by Sunstate as a raw material and inter-ground with other raw materials in the manufacture of flyash blended cement. From 27 October 2003 to the middle of 2006, Sunstate purchased raw unprocessed run-of-station flyash from Cement Australia sourced from Swanbank. From mid-2006, Sunstate switched to the use of Tarong North run-of-station flyash. Since mid-2006, Sunstate has occasionally purchased run-of-station flyash from Cement Australia on those occasions when, for example, Tarong North has ceased operating to enable maintenance to be undertaken.
923 Mr Ward says that Sunstate has trialled the use of run-of-station flyash sourced from Bayswater, Millmerran, Callide and Kogan Creek power stations. Since Mr Ward’s appointment, Sunstate has generally only purchased run-of-station flyash unless classified flyash was the only ash available at the time of collection. During the period of reduced production of flyash at Tarong due to the water restrictions in south east Queensland, Sunstate purchased flyash from Bayswater. Nucon and Wagner provided haulage services to transport the flyash to Fisherman Island. Mr Ward says that the cartage costs were “high”. Sunstate has also sourced Millmerran run-of-station flyash from IFB.
924 The cost of transport of Bayswater flyash to Fisherman Island during the period of the water restrictions in south east Queensland was between [REMOVED TO THE SUNSTATE CONFIDENTIAL SCHEDULE] per tonne. The cost of transport from Callide to Fisherman Island was between [REMOVED TO THE SUNSTATE CONFIDENTIAL SCHEDULE] per tonne.
925 Since April 2007, Sunstate has supplied milled fine grade flyash as a separate product. [REMOVED TO THE SUNSTATE CONFIDENTIAL SCHEDULE] Sunstate does not sell its fine grade flyash on a delivered basis. Sunstate has determined a price for its fine grade flyash product by undertaking a process of “matching” the prices offered by each customer’s existing supplier of flyash. Mr Ward says that customers of its product require fine grade flyash that meets AS 3852.1 as the standard for fine grade flyash. Sunstate’s fine grade flyash product has been purchased by a range of concrete producers including Boral (since 2009), Nucon (since 2009), Hammercrete (since 2007 although that company switched to IFB in 2009). In all, Mr Ward identifies [REMOVED TO THE SUNSTATE CONFIDENTIAL SCHEDULE] companies (and the volumes purchased by each company) which were, during the 2009 financial year, buyers of its fine grade flyash product (Ex-26, Confidential Annexure A).
926 As to the catchment within which these transactions occur, Mr Ward says this.
927 Sunstate supplies flyash in the same geographic area as it supplies cement. This area extends as far south as Ballina, west to Charleville and north as far as Bundaberg. Mr Ward calls this Sunstate’s “supply area”. Sunstate has decided not to supply cement or flyash any further south than Ballina for the reason that BCSC and Cement Australia both supply cement and flyash in northern New South Wales and charge cheaper prices than Sunstate for, at least, cement in areas south of Ballina. Mr Ward says that the transport costs beyond Sunstate’s supply area are “very high” resulting in a landed cost to the buyer in excess of the supply price payable by the buyer to BCSC or Cement Australia. Mr Wards says that it follows from contestability with BCSC and Cement Australia in areas south of Ballina that Sunstate “has decided not to deliver any significant volume (of either flyash or cement) outside the Sunstate delivery area due to concerns [Sunstate] may need to reduce its margins and drop its prices to compete in that area” (Ex-26, para 60).
928 As to slag, Sunstate supplies a slag cement blend comprising slag sourced from Japan and until recently Sunstate did not supply ground slag as a separate product in south east Queensland. It now offers to supply ground slag. The price is determined by reference to the price at which Sunstate sells its slag cement blend rather than by reference to a margin on the costs of production of ground slag. Mr Ward says that in view of the additional likely storage costs a customer would incur in separately storing ground slag, customers would generally find the price of Sunstate’s slag cement blend more attractive than the price of ground slag alone. However, Boral has requested Sunstate to offer a slag only price. Mr Ward says that, from a customer’s perspective, the cost of delivered slag to a batching plant is not significantly more expensive than the cost of delivered flyash to a batching plant. However, slag is not a direct alternative for flyash because higher prices can be, and from time to time are, charged for slag as the product is not generally readily available as a supply side substitute for flyash in south east Queensland and the price of slag varies due to the higher grinding costs associated with its production.
PART 14
The relevant terms of the Original Millmerran Contract executed on 30 September 2002
929 The relevant terms of the Ash Purchase Agreement are set out below (ATB SB 1.09). The Seller is Millmerran Power Partners (“MPP”) being the eight companies recited in Schedule 3 to the Agreement. The Buyer is Pozzolanic. The Guarantor is Pozzolanic Industries. In reciting the relevant terms of the Ash Purchase Agreement, I have italicised terms which are defined terms in the Dictionary at cl 42.1.
930 The terms are these:
1 Purchase of Ash
1.1 Sale and Purchase of Ash
The Buyer will purchase from the Seller and the Seller will sell to the Buyer Ash on the terms set out in this agreement.
1.2 Provision of facilities
Except to the extent that this agreement otherwise provides, the Buyer must supply, at its own cost, all personnel, equipment, facilities and everything else necessary to enable it to execute and complete the Buyer’s obligations under this agreement.
2 Ash quality
2.1 Buyer to investigate Ash quality
The Buyer acknowledges that it must undertake the necessary testing and investigations (at the Buyer’s cost and expense) to determine whether the quality of the Fly Ash is within the Acceptable Range for concrete grade fly ash. The Buyer acknowledges that the Seller gives no warranty, and has made no representation as to the quality of the Fly Ash, or in relation to any characteristic of the Fly Ash.
2.2 Notice of Ash Quality
(a) The Buyer must keep the Seller informed as to the progress of the testing and investigations into the quality of the Fly Ash and provide a written report of progress each Month (including the results of ash analysis) to the Seller from the Substantial Completion of Unit 1. Within 3 months from the Substantial Completion of Unit 1, the Buyer must provide the Seller with an initial non-binding report setting out the status of its investigations to that point and such report must give a non-binding indication to the Seller as to the Buyer’s opinion of the likelihood that the quality of Fly Ash will fall within the Acceptable Range for concrete grade fly ash.
(b) The Buyer must complete the necessary investigations, and must notify the Seller not later than 9 months after the Substantial Completion of Unit 1 whether or not the Fly Ash falls within the Acceptable Range for concrete grade fly ash, and can be practically and economically converted into Concrete Grade Fly Ash.
2.3 Independent verification of Fly Ash quality
(a) If the Buyer notifies the Seller that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, the Seller must, within 14 days advise the Buyer whether it accepts the Buyer’s determination or whether it intends to have the Fly Ash quality independently verified under clause 2.3(b);
(b) Upon receipt of the Buyer’s notification under clause 2.3(a), if the Buyer notifies the Seller that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, the Seller may, at the Seller’s cost and expense have the determination independently verified by a procedure to be mutually agreed by the Seller and the Buyer. Any independent verification carried out under this clause 2.3(b) must determine whether the Fly Ash falls within the Acceptable Range for concrete grade fly ash, and whether it can be practically and economically converted into Concrete Grade Fly Ash. The Buyer agrees to cooperate with the Seller and the party engaged to conduct the independent testing, and furnish them with all information regarding the Buyer’s testing and investigations as reasonably required; and
(c) The parties agree that the independent verification of Fly Ash quality conducted under clause 2.3(b) is final and binding on all parties.
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2.5 Alteration in Fly Ash quality
If there is a material reduction in the quality of Fly Ash, the parties agree to meet and discuss ways in which the quality of the Fly Ash can be restored to a quality suitable for the production of Concrete Grade Fly Ash. If the parties are unable to reach agreement, then the matter will be referred as a Technical Dispute to be resolved under clause 29.1.
2.6 Buyer/Seller may terminate
(a) If, following the Buyer giving the Seller a notice under clause 2.2(b) stating that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash:
(1) the Seller notifies the Buyer that it accepts the Buyer’s determination; or
(2) an independent verification carried out under clause 2.3(b) finally determines that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, (or cannot be practically and economically converted into Concrete Grade Fly Ash)
(either of (1) or (2) being a “Termination Event”) then either party may by notice terminate this Ash Purchase Agreement, provided that such notice of termination must be given within 14 days of the Termination Event. Subject to clause 2.6(b) below, and any other rights expressly provided for in this agreement, upon termination the terminating party will have no rights against the other party under or pursuant to this agreement.
(b) If termination under clause 2.6(a) occurs after the Buyer has made the Lump Sum Payment in respect of the First Operating Year, the Seller must repay to the Buyer the amount of the Lump Sum Payment within 30 days of the notice of termination being received.
3 Buyer’s Facilities
3.1 Construction of Buyer’s Facilities
The Buyer acknowledges that it is solely responsible for constructing, operating and maintaining the Buyer’s Facilities to enable the Buyer to take delivery of Ash under this agreement.
3.2 Seller approval prior to construction of Buyer’s Facilities
[Clause 3.2 contains a protocol under which the Buyer must submit details of the facilities and the construction time table to the Seller and a time for the Seller’s approval of the proposal. The subclause also contains a protocol for resolving disagreements about those matters. The Buyer may not commence construction until the Seller has given its prior written approval.]
3.3 Failure to Construct
The Buyer agrees to construct the Buyer’s Facilities so that they are completed to the satisfaction of the Seller and in all respects ready for operation by 1 May 2004.
…
3.5 Buyer retains ownership of Buyer’s Facilities
The Seller acknowledges that ownership of Buyer’s Facilities remains with the Buyer and the Buyer’s Facilities will not become fixtures to the Contract Area, notwithstanding that they may be affixed to the land by more than their own weight.
3.6 Use of Buyer Facilities
The Seller would not allow any other person to use the Buyer Facilities.
4 Termination by Seller
If the Buyer has not notified the Seller under clause 2.2(b) whether or not the Fly Ash falls within the Acceptable Range for concrete grade fly ash within 9 months of the Substantial Completion of Unit 1, then the Seller may, in its absolute discretion terminate this agreement without liability to the Buyer.
5 Quantity
5.1 Minimum Quantity
Subject to the quality of the Fly Ash being within the Acceptable Range for concrete grade fly ash (as determined under clause 2), the Seller must make available to the Buyer and allow the Buyer to take the Minimum Quantity [135,000 tonnes for each Operating Year] of Concrete Grade Fly Ash each Operating Year.
5.2 Procedure for determining weight
…
5.3 Advance Notice of Supply/Offtake
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5.4 Title to Ash
(a) Title in Concrete Grade Fly Ash passes when the Concrete Grade Fly Ash is loaded into the Buyer’s finished product storage silo. Risk of loss or damage in Concrete Grade Fly Ash passes when the Concrete Grade Fly Ash is extracted from the Ash Equipment by the Buyer.
(b) Title in all other grades of Ash passes when the Ash is loaded into the Buyer’s truck.
5.5 Consistent supply
The Seller will use best endeavours to ensure supply of Fly Ash to the Buyer in a regular and consistent manner throughout each Operating Year however does not guarantee regular and consistent availability of Fly Ash.
5.6 Seller may dispose of any Ash not taken
(a) For the purposes of this agreement the words “make available” in respect of Fly Ash mean that the Seller must produce the Fly Ash and allow the Buyer an opportunity to extract the Fly Ash from the Ash Equipment by procuring that the Fly Ash travels past a point where the Buyer may extract Fly Ash (“point of extraction”). The points of extraction will be at locations agreed by the parties, between the fly ash hopper and the point at which fly ash is discharged from a fly ash silo into a conditioner.
(b) …
6 Payment
6.1 Contract Price
(a) The Buyer must pay the Seller the Contract Price for the Ash.
(b) The Contract Price comprises the aggregate of all the Lump Sum Payments for all Operating Years, and the Additional Sum payable for each Operating Year (if any).
6.2 Lump Sum Payment
(a) The Buyer agrees to pay the Seller the Lump Sum Payment [$1,323,500 – Year 1] for the First Operating Year on or before 1 December 2002 or such other subsequent date nominated by the Seller in writing.
(b) For each subsequent Operating Year, the Buyer agrees to pay the Seller the Lump Sum Payment for the next following Operating Year on or before 1 December in the year prior to that Operating Year.
(c) The Lump Sum Payment is payable to the Seller irrespective of:
(i) how much (or whether any) Ash is actually taken by the Buyer in any Operating Year; or
(ii) whether the Buyer’s Facilities have been completed.
6.3 Calculation of Additional Sum
The Additional Sum payable for each Operating Year (if any) is determined:
(a) in the case of Concrete Grade Fly Ash, by multiplying the number of tonnes of Concrete Grade Fly Ash actually taken in excess of the Minimum Quantity by the Applicable Rate for Concrete Grade Fly Ash; and
(b) in the case of all other grades of Ash, by multiplying the number of tonnes of the relevant grade of Ash actually taken by the Buyer during that Operating Year by the Applicable Rate for the particular grade of Ash.
The Applicable Rates to apply initially are set out in the following table:
| Grade of Ash | Applicable Rate |
| Concrete Grade Fly Ash | $10.10 per tonne |
| Non-Concrete Grade Fly Ash | $0.55 per tonne |
| Conditioned Ash | $0.55 per tonne |
| Bottom Ash | $0.55 per tonne |
6.4 Buyer to provide yearly reconciliation of Ash taken
Within 14 days after the end of each Operating Year, the Buyer must provide to the Seller a notice specifying:
(a) the amount of Ash taken of each grade; and
(b) the Buyer’s calculation of the Additional Sum.
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7 Escalation of Purchase Price
[Clause 7 contains a formulation of a particular Consumer Price Index adjustment of the Lump Sum Payment and Applicable Rate to apply for each successive Operating Year.]
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10 Term
10.1 Term of agreement
(a) This agreement commences on the Commencement Date and ends on the Expiry Date.
(b) The Term includes the Testing Period and the Offtake Period.
10.2 Operating Years
For the purposes of this agreement:
(a) the First Operating Year, will be the period commencing on 1 January 2003 and ending on 31 December 2003;
(b) each other Operating Year will be the period of twelve Months commencing on the day after the end of the prior Operating Year.
11 Contract Area and conditions
[Clause 11 provides for a protocol under which the Seller will provide access to the Contract Area to the Buyer as reasonably necessary to enable the Buyer to perform its obligations, subject to areas of exclusion until the substantial completion of Unit 2. The protocol recognises that the Buyer’s Facilities must be installed within the Contract Area subject to exceptions including the prior written approval of the Seller which is not to be unreasonably withheld. The protocol also recognises that the Buyer is solely responsible for the provision of any additional facilities required to perform the agreement not located within the Contract Area.]
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26 Termination
[Clause 26.1 provides that the agreement may be terminated by either party by notice to the other should a Force Majeure continue for a period of 6 months or the power station is expropriated or compulsorily acquired. Clause 26.2 provides that the Seller may terminate the agreement in the event of breach by the Buyer, an act of insolvency on the part of the Buyer or a failure on the part of the Buyer to acquire any relevant licence necessary to perform the agreement. Clause 26.3 provides that the Buyer may terminate the agreement in the event of un-remedied breach by the Seller.]
26.4 Termination or reduction of Minimum Quantity by Buyer
(a) The Buyer may, at any time after 31 December 2006 terminate this agreement upon 60 days notice to the Seller.
(b) If the Buyer terminates the agreement under clause 26.4(a), the Buyer must pay to the Seller (or the Seller must pay to the Buyer as the case may be) on the Termination Date, an amount (“Termination Payment”) calculated in accordance with the following formula:
TP = ($50,000 x M) – (d/365 x L)
where:
TP = the Termination Payment payable under this clause 26.4
M = the number of months (including part of a month) in the period from the Termination Date to 31 December 2009 (and where such number includes part of a month then M will be rounded to two decimal places)
D = the number of days remaining in the then current Operating Year after the Termination Date
L = the amount of the Lump Sump Payment paid by the Buyer for the Operating Year in which the agreement is terminated under this clause 26.4
If the result of this calculation is positive, the amount must be paid by the Buyer to the Seller. If the result is negative, the amount must be paid by the Seller to the Buyer.
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35 Guarantee
35.1 Guarantee
The Guarantor unconditionally and irrevocably guarantees to Seller the due performance, observance and fulfilment by the Buyer of all Buyer obligations.
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40 General
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40.12 Transfer
(a) Seller may at any time assign, transfer or otherwise dispose of the whole or any part of its rights and obligations under this agreement without the consent or approval from the Buyer.
(b) The Buyer may not assign any of its rights under this agreement without the prior written consent of the Seller. The Seller agrees not to unreasonably withhold its consent to assignment, provided that:
(1) the Buyer is not in breach of any of its obligations under the agreement;
(2) the Seller is satisfied that the proposed assignee enjoys a reputation and a financial standing acceptable to the Seller and is, in the reasonable opinion of the Seller capable of performing all obligations under this agreement; and
(3) the proposed assignee provides to the Seller an acceptable guarantee in substitution of that provided by the Buyer under this agreement.
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42 Dictionary
In this agreement:
Acceptable Range for concrete grade fly ash means complying with the requirements for fly ash as a cementitous material in concrete and mortar as set out in Australian Standard AS 3582.1-1998, and being within the Critical Limits.
…
Ash means ash produced at the Power Station and includes Concrete Grade Fly Ash, Non-Concrete Grade Fly Ash, Conditioned Ash, and Bottom Ash.
Ash Collection Points means the silos located at the Power Station where the fly ash is unloaded as shown on the Contract Area Map.
Ash Equipment means the installations, facilities and equipment used for the handling of Ash at the power station, and excludes the Buyer’s Facilities.
…
Buyer’s Facilities means all plant, offices, equipment, facilities and similar items used on or in the vicinity of the Contract Area in the performance of the Agreement, to be provided by the Buyer.
…
Commencement Date means the date of execution of this agreement [30 September 2002].
…
Concrete Grade Fly Ash means Fly Ash graded in accordance with AS 3582.1-1998 as a cementitous material in concrete and mortar, and within the Critical Limits.
Conditioned Ash means Fly Ash to which water has been added, available at the discharge of the Fly Ash silos.
Critical Limits means those limits set out in schedule 2.
Contract Price means the amount determined in accordance with clause 6.1.
…
Expiry Date means the last day of the seventh Operating Year [31 December 2009] or the Termination Date, whichever is the earlier.
First Operating Year means the period referred to in clause 11.2(a) [which should read clause 10.2(a) being the period 1 January 2003 to 31 December 2003].
Fly Ash means all solid material extracted from the flue gases of the boiler when fired with pulverised coal, and includes Concrete Grade Fly Ash and Non-Concrete Grade Fly Ash.
…
Lump Sum Payment means the sum of $1,323,500 in the First Operating Year, to be escalated in accordance with clause 7 in subsequent Operating Years and represents payment in respect of the Minimum Quantity of Concrete Grade Fly Ash for the relevant Operating Year.
…
Minimum Quantity means 135,000 tonnes per Operating Year.
…
Non-Concrete Grade Fly Ash means fly ash that is not Concrete Grade Fly Ash.
…
Offtake Period means that part of the Term commencing on the day the Buyer commences taking delivery of Ash under this agreement and ending on the Expiry Date.
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Substantial Completion of Unit 1 means the date which the Seller notifies to the Buyer as being the date of substantial completion of Unit 1 of the Power Station.
Substantial Completion of Unit 2 means 1 September 2002 or such other date which the Seller notifies to the Buyer as being the date of substantial completion of Unit 2 of the Power Station.
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Testing Period means that part of the Term from the Commencement Date to the day immediately prior to the commencement of the Offtake Period.
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Schedule 2 – Fly Ash Critical Limits
Critical Limits for Fly Ash testing
| Property | Fineness (by mass passing 45 µm sieve) | Loss of ignition | Relative strength |
| % minimum | % maximum | % minimum | |
| Limit | 85 | 3.0 | 95 |
| Reference test method | AS 3583.1 | AS 3583.3 | AS 3583.6 |
PART 15
The relevant terms of the Tarong Contract (TE 363/02) executed on 26 February 2003
931 The terms are these and in reciting these terms I have again italicised terms which are defined terms in clause 1 of the agreement:
2. TERM
This agreement is taken to commence on 1 March 2003 and will remain in force for 5 years after that date, unless ended earlier under this agreement. Either Party may terminate the Agreement by giving the other Party 12 months written notice at this time.
3. SUPPLY OF FLY ASH AND REJECT ASH
3.1 TEC agrees to sell and the Contractor agrees to buy any and all Concrete Grade Fly Ash the Contractor obtains from the Ash Transfer Points and processes in the Contractor Plant.
3.2 All Reject Ash is and will remain the property of TEC. The Contractor may seek approval from TEC to market and sell Reject Ash.
3.3 TEC will be entitled to use or supply or sell to any other person any and all Reject Ash for any use or application. The Contractor will have no rights in respect of such products or activity.
3.4 TEC will be entitled to manufacture, distribute and sell Ash Products and to authorise any other person to manufacture, distribute and sell Ash Products. The Contractor will have no rights in respect of such products or activity.
3.5 The Contractor shall deal with or dispose of any Reject Ash produced by the Contractor’s Plant or taken by the Contractor from the Ash Transfer Points by:
(a) depositing it in the Tarong Ash Pits;
(b) delivering it into the Ash System; or
(c) transporting it to the Ash Dam in a dewatered state, if the Contractor’s Plant is not available to achieve (a) or (b) above.
4. CONTRACTOR PLANT
4.1 The Contractor will provide and maintain the Contractor Plant so as to ensure maximum availability and throughput of Fly Ash.
…
4.4 As soon as possible after the date of this agreement, and at reasonable intervals thereafter, the Contractor must determine (acting reasonably) whether or not Fly Ash sourced from the Tarong North Power Station is suitable for use in portland cement. If within 12 months after the Contractor determines (acting reasonably) that the Fly Ash sourced from the Tarong North Power Station is suitable for use in cement, TEC must request the Contractor to:
(a) establish a plant to extract Concrete Grade Fly Ash from Tarong North Power Station. This plant shall be of capacity equal to or greater than the volume of Fly Ash removed from a fully operational unit at Tarong Power Station, Precipitator Zone 1.
(b) construct that plant in accordance with drawings and designs approved in writing by TEC; and
(c) connect that plant to the Ash Disposal System at a point approved in writing by TEC.
The Contractor must not contact the TNPS Owners concerning access to Power Station Ash from TNPS without the prior written consent of TEC.
4.5 TEC will allow the Contractor access to the Licensed Area on the Tarong Site in accordance with, and the Contractor must comply with, schedule 3. TEC will organise access to a suitable Licensed Area at Tarong North Power Station if a plant is to be established by the Contractor.
4.6 The Contractor must comply with any terms or conditions of entry to that part of the Tarong Site that is leased by the TNPS Owners.
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6. TITLE AND RISK
6.1 Title to Concrete Grade Fly Ash bought by the Contractor will transfer from TEC to the Contractor when the processed Concrete Grade Fly Ash is transferred from the Contractor Plant:
(a) into a vehicle or storage vessel for movement off the Tarong Site; or
(b) to the Final Product Storage Facility.
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7. RUN OF STATION NON CONCRETE GRADE FLY ASH
7.1 At the request of TEC, the Contractor will use its best endeavours to provide Run of Station Non Concrete Grade Fly Ash from the Contractor Plant to TEC or a third party nominated by TEC, including:
(a) processing and handling Run of Station Non Concrete Grade Fly Ash through the Contractor Plant, to the full limit of the capacity of the Contractor plant;
(b) grading Run of Station Non Concrete Grade Fly Ash into ash grades requested by TEC (to the extent possible);
(c) scheduling arrival, loading and departure of vehicles of TEC and third parties;
(d) providing suitable transport if required and available at an agreed price;
(e) supplying Run of Station Non Concrete Grade Fly Ash at temperatures requested by TEC (to the extent possible);
(f) loading TEC and third party vehicles presented at the Contractor Plant; and
(g) otherwise cooperating with TEC and third parties and using its best efforts to minimise disruption to the operation of the Contractor Plant,
with the intention that the Contractor will coordinate, manage and provide all services directly or indirectly required to be provided to facilitate the removal of the Run of Station Non Concrete Grade Fly Ash from the Tarong Site.
8. ASH QUALITY/QUANTITY & ROUTINES
8.1 If:
(a) the quality or quantity of Fly Ash available from TEC’s Ash Transer Points at the Tarong Power Station deteriorates significantly from the AS 3582.1 (1998) Quality Standards, or from the qualities and quantities available on average over the three years preceding the date of this agreement, for a period of more than one month, so as to commercially disadvantage the Contractor; or
(b) there are significant operational changes at Tarong Power Station or Tarong North Power Station which materially reduce the availability of Fly Ash from TEC’s Ash Transfer Points,
then the parties agree to negotiate in good faith to achieve an appropriate adjustment to the contract conditions under the agreement.
8.2 [Clause 8.2 sets out the expected chemical composition of Fly Ash sourced from the Tarong Power Station.]
8.3 If, prior to the Contractor establishing a plant to extract Fly Ash from the Tarong North Power Station, the quality of the six monthly average of Fly Ash available from the Tarong North Power Station Ash Transfer Points under normal power station commercial operating load conditions, after processing does not conform with AS 3582.1 (1998) Quality Standards, or if the quantity of Concrete Grade Fly Ash is not sufficient to support commercially viable operations, the parties agree to negotiate in good faith to achieve an appropriate adjustment to the contract conditions under this agreement. If the Fly Ash from Tarong North Power Station is not suitable for use in portland cement, or the Contractor does not establish a plant to extract Fly Ash from Tarong North Power Station site, the Contractor will not be entitled to any reduction in the amounts payable to TEC under this agreement.
…
8.6 TEC reserves the right for it and the TNPS Owners to empty and clean out the Hoppers and the Ash Transfer Points at normal ashing times. Fly Ash will not be held in the Hoppers or the TEC Ash Transfer Points past normal ashing times. It is the responsibility of the Contractor to make all arrangements necessary to remove Concrete Grade Ash prior to such times. TEC will not be in breach of its obligations under this agreement if Fly Ash is not available because of normal cleaning of the Hoppers or the Ash Transfer Points at normal ashing times.
8.7 The Contractor must remove Fly Ash from each of the Ash Transfer Points prior to it reaching its maximum design storage limit for Fly Ash. The Contractor, when extracting ash from the Ash Transfer Points must ensure all Fly Ash is completely extracted from the ash storage hopper every 24 hours.
…
12. PAYMENT FOR ASH AND ELECTRICITY
12.1 In this clause 12:
“Base Amount” means $600,000.00, Escalated at CPI.
[The remainder of clause 12.1 sets out a series of definitions relevant to the CPI adjustment formula by reference to defined Quarters with the first Quarter being the period commencing on 26 February 2003 and ending on 31 May 2003 with each Quarter after 31 May 2003 ending on 31 August, 30 November, 28 February and 31 May during the term of the agreement. A relevant Quarter may also be the period from the end of the first or successive Quarters as mentioned earlier (being the last Quarter to end before the date of termination of the agreement), to the date of termination of the agreement.]
12.2 Subject to the adjustments provided in this clause 12, the Contractor must pay TEC:
(a) for the right to take Fly Ash granted to the Contractor under this agreement (whether or not the Contractor takes any Fly Ash), the Base Amount in respect of each Quarter, within 14 days after the end of that Quarter; and
(b) for electricity, the amounts calculated in accordance with schedule 2.
12.3 The consideration otherwise payable by the Contractor to TEC under clause 12.2 in the fourth Quarter of each year of this agreement will be adjusted having regard to the total dry quantity of Power Station Ash removed from the Tarong Site by the Contractor in that year, and with the intention that the total amount payable to TEC under clause 12.2 in that year does not exceed the payment per annum (as adjusted under clause 12.4) set out in the following table as corresponding to that amount of Power Station Ash:
| Column 1 Total volume of Fly Ash removed per annum | Column 2 Payment per annum |
| Less than 50,000 tonnes | $2.6 Million |
| 50,000 to less than 150,000 tonnes | $2.5 Million |
| 150,000 to less than 350,000 tonnes | $2.4 Million |
| 350,000 to less than 450,000 tonnes | $2.2 Million |
| 450,000 tonnes or more | $2.1 Million |
12.4 On each anniversary of the date of commencement of this agreement the Base Amount and each of the amounts in column 2 of the table in clause 12.3 will be Escalated at CPI. If the change in CPI in any period is greater than the change in the average bona fide price at which the Contractor sells Concrete Grade Fly Ash in the corresponding period, the parties agree to negotiate an appropriate adjustment to the amounts in column 2 of the table in clause 12.3.
12.5 [Clause 12.5 casts an obligation on Pozzolanic to provide a written report of total annual accumulated tonnes of Power Station Ash removed from the Tarong Site each Quarter according to a particular verification method.
…
15. POSSIBLE CONTINUANCE OF CONTRACT
15.1 The Agreement may be extended in increments of 3 years upon agreement of both parties.
Agreement to extend must be reached no later than 12 months prior to the date on which the Contract or an extension would otherwise expire. In the event mutual agreement is not reached by this date the extension will not proceed.
…
17. ENDING THE AGREEMENT EARLY
17.1 A party can end this agreement early by giving written notice to the other if the other:
(a) has breached any material provision of this agreement and has not cured the breach within 30 days after receiving written notice of the breach; or
(b) is subject to an Insolvency Event.
At any time after 1 September 2004, the Contractor may give written notice to TEC terminating the Agreement, and this Agreement will terminate on the date that is 12 months after the notice given.
...
1. INTERPRETATION
1.1 Definitions
The following definitions apply in this document.
“Ash Dam” means the ash dam facility located on the Tarong Site and occupied by TEC.
“Ash Disposal System” means:
(a) the infrastructure used by TEC to dispose of ash from the Tarong Power Station including the Ash Dam; and
(b) the infrastructure used by TEC or the TNPS Owners to dispose of ash from the Tarong North Power Station, including the Ash Dam.
“Ash Products” means masonry and building products manufactured on or off Tarong Sites. Ash Products may contain portland cement or cementitous Fly Ash as defined by AS 3582.1 (1998) Quality Standards.
“Ash Transfer Points” means the points at which the Contractor Plant is connected to:
(a) the precipitator ash hoppers on Units 1 to 4 at the Tarong Power Station; and
(b) any other points approved in writing by TEC at which the Contractor takes possession of Fly Ash from the Ash Disposal System.
…
“Concrete Grade Fly Ash” means Fly Ash extracted by the Contractor from the TEC Ash Transfer Points and capable of being processed at the Contractor Plant for use as supplementary cementitous materials for use with portland and blended cement, and as shown in Table 1, of AS 3582.1 (1998) Quality Standards.
“Contractor Plant” means all plant and equipment on the Tarong Site installed or owned by the Contractor downstream of the Ash Transfer Points, and including all freestanding plant (such as compressors) installed or owned by the Contractor downstream of the Ash Transfer Points.
…
“Fly Ash” means solid fly ash material extracted from:
(a) the flue gases produced from the coal fired boilers at the Tarong Power Station; and
(b) the flue gases produced from the coal fired boilers at the Tarong North Power Station.
…
“Hoppers” means:
(a) the precipitator ash hoppers on Units 1 to 4 at the Tarong Power Station; and
(b) the Tarong North Power Station fabric filter fly ash hoppers,
to which the Contractor has connected the Contractor Plant with the consent of TEC.
…
“Licensed Area” means the area shown on the plant in schedule 4 and any area agreed at Tarong North Power Station.
…
“Portland Cement” means as per AS 3972.
…
“Power Station Ash” means all solid material produced from:
(a) TEC’s coal fired boilers at the Tarong Power Station; and
(b) the coal fired boilers at the Tarong North Power Station,
and includes Fly Ash, Concrete Grade Fly Ash, Run of Station Non-Concrete Grade Fly Ash, cenospheres and all ash extracted from all hoppers and duct, furnace ash, economiser grits and the ash stored in the Ash Dam at the Tarong Site.
…
“Processing Plant” means
(a) the Contractor Plant; and
(b) all structures, buildings and improvements which are before, on or after the date of this agreement, constructed on the Licensed Area by the Contractor or TEC to facilitate the Permitted Purpose.
…
“Reject Ash” means:
(a) Power Station Ash and cenospheres remaining after extraction by the Contractor of Concrete Grade Fly Ash; and
(b) Power Station Ash and cenospheres stored in the Ash Dam, deposited in the Tarong Ash Pits or delivered into the Ash System.
…
“Run of Station Non-Concrete Grade Fly Ash” is Fly Ash removed from the Ash Transfer Points by the Contractor and intended for supply to TEC or third parties in an unprocessed form or in a form for use in applications other than as Concrete Grade Fly Ash.
…
“Tarong Ash Pits” means Ash Pits 1/2 and 3/4 located south and adjacent to the precipitators.
…
“TNPS Owners” means the owner or owners of the Tarong North Power Station from time to time.
PART 16
Some illustrative maps
932 Annexure A is a map showing the location of Queensland power stations together with a Schedule which sets out the distance by road of each power station from Brisbane.
933 Annexure B is a map showing the location of the Bayswater, Eraring and Mount Piper power stations in New South Wales together with a Schedule which sets out the distance by road from Brisbane of those stations and the distance from those stations to the Gold Coast and Tweed Heads.
934 Annexure C is a map showing the location of the Nucon concrete batching plants.
935 Annexure D is Pozzolanic’s map of the “Ash Market in SE Qld – 2001”.
936 Annexure E is Pozzolanic’s map of the power stations in South East Queensland.
937 Annexure F is a map showing the location of QCL’s (and later, Cement Australia’s) intermediate storage plants at Darra, Wacol and Yatala and their distance from Tarong Power Station.
938 Annexure G is a map also showing the location of the intermediate storage facilities at Darra, Wacol and Yatala together with a Schedule which sets out the distance by road between Swanbank and those intermediate storage facilities.
PART 17
The principles to be applied in identifying the relevant markets and the question of whether QCL, Pozzolanic or Cement Australia enjoyed a substantial degree of power in a relevant market at any moment in time
939 The Commission contends for a market for the supply and acquisition of unprocessed flyash (an upstream market) in a region described as South East Queensland and areas of North East New South Wales adjacent to the South East Queensland area, described as the “SEQ unprocessed flyash market”. The Commission also contends for a functionally separate and distinct market (a downstream market) for the supply and acquisition of concrete grade flyash described as the “SEQ concrete grade flyash market”. If the downstream product is not, on the evidence, concrete grade flyash but rather a product market for fine grade flyash, the Commission contends, in the alternative, for an SEQ fine grade concrete-grade flyash market, although the Commission contends that the functional downstream market is properly characterised on the evidence as a product market for concrete grade flyash comprising fine, medium and coarse grade flyash.
940 The Commission says that in the period up to June 2003 QCL had a substantial degree of power in the SEQ concrete grade flyash market. So too did Pozzolanic by operation of s 46(2) of the Act. The Commission contends that QCL caused Pozzolanic to enter into the Millmerran Ash Purchase Agreement on 30 September 2002 and by doing so QCL took advantage of its substantial degree of power in the SEQ concrete grade flyash market.
941 Pozzolanic, by entering into the contract, took advantage of its substantial degree of power in the SEQ concrete grade flyash market.
942 The Commission says that both corporations took advantage of their market power in the SEQ concrete grade flyash market for the substantial purpose of preventing any competing acquirer entering into the SEQ unprocessed flyash market (s 46(1)(b) of the Act); deterring or preventing any person from engaging in competitive conduct in the SEQ unprocessed flyash market (s 46(1)(c) of the Act); preventing the entry of any competing supplier into the market in which each corporation enjoyed its substantial degree of market power, the SEQ concrete grade flyash market (s 46(1)(b) of the Act); and deterring or preventing any person from engaging in competitive conduct in the SEQ concrete grade flyash market (s 46(1)(c) of the Act).
943 The Commission also contends that Pozzolanic contravened s 45(2)(a)(ii) of the Act because in making the Millmerran Ash Purchase Agreement the relevant decision-makers for Pozzolanic decided to incorporate particular pleaded provisions of the contract for the subjective substantial purpose of substantially lessening competition in the SEQ unprocessed flyash market and the SEQ concrete grade flyash market. The pleaded expression or content of those purposes is set out at Part 1.2 of these reasons. The Commission also contends that those provisions (particularly the guaranteed minimum quantity clause of 135,000 tonnes per annum) had the effect of substantially lessening competition in both pleaded markets in the sense that the effect was meaningful or relevant to the competitive process in each market when analysed according to the orthodoxy of a “with and without” test. The Commission also contends that the predictive likely effect of the provisions was a substantial lessening of competition in both markets. Pozzolanic is said to have contravened s 45(2)(b)(ii) of the Act by giving effect to the provisions, and QCL is said to have given effect to the provisions by acting as a treasury company for its subsidiary and funding Pozzolanic’s entry into the contract, thus contravening s 45(2)(b)(ii).
944 Each of QCL and Pozzolanic Industries are said to have been knowingly concerned in Pozzolanic’s contraventions of s 45(2).
945 My present purpose is simply to identify the principles to be applied in determining whether each of the pleaded markets are made out for the purpose of determining whether QCL, Pozzolanic or Cement Australia had a substantial degree of power in an SEQ concrete grade flyash market or an SEQ fine grade flyash market at the time the conduct said to constitute a taking advantage of market power occurred.
946 Before doing so I will briefly summarise the remaining contended s 46 contraventions and the contended s 45 contraventions (without restating the alternative SEQ fine grade cgfa market contention in each case).
947 In July 2004 Cement Australia in the post-merger arrangements had a substantial degree of power in the SEQ concrete grade flyash market. In July 2004, Cement Australia caused Pozzolanic to enter into the Amended Millmerran Contract and waive its rights to terminate the Ash Purchase Agreement (conduct called the first election to proceed). The amendments extended the term of the contract and established a new date for the installation of plant (see [95] to [100] of these reasons). Cement Australia (as the funder of Pozzolanic’s obligations under the Amended Contract), by causing Pozzolanic to enter into the Amended Contract, is said to have taken advantage of its substantial degree of power in the SEQ concrete grade flyash market. It is said to have done so for the substantial purposes set out at [104] of these reasons in relation to both markets thus contravening s 46(1)(b) and s 46(1)(c) of the Act.
948 Pozzolanic is said to have entered into the Amended Contract at the direction and with the consent of Mr Leon. Mr Leon, Cement Australia Holdings, Pozzolanic and Pozzolanic Industries are all said to be knowingly concerned in or party to, and to have aided, abetted, counselled and procured the s 46 contraventions.
949 The Commission also contends that Pozzolanic contravened s 45(2)(a)(ii) because in making the Amended Contract the relevant decision-makers in Pozzolanic decided to affirm the earlier provisions (see [42] of these reasons) and incorporate the amended provisions (see [95] to [100] of these reasons) for the subjective substantial purpose of substantially lessening competition in the SEQ unprocessed flyash market and the SEQ concrete grade flyash market (see the purposes set out at [109] to [112] of these reasons). The provisions are also said to have the effect or likely effect of substantially lessening competition in each market in the way described at [113] to [117] of these reasons. Pozzolanic and Cement Australia are said to have given effect to the provisions in contravention of s 45(2)(b)(ii) of the Act.
950 As to effect or likely effect of the continuing provisions of the Millmerran Ash Purchase Agreement together with the amendments to that Agreement, those effects or likely effects are also said to arise having regard to their effect or likely effect taken in conjunction with the relevant Swanbank Contract provisions (extended to 31 December 2004) and the relevant Tarong Contract provisions (see [113] – [118] of these reasons).
951 The Commission says that although Cement Australia could have sought to negotiate a termination of the Millmerran Amended Contract in March and April 2005 (or sought to re-negotiate the terms or assign the contract), Cement Australia elected to keep the contract on foot and approve further capital expenditure at Millmerran (conduct called the second election to proceed). In making the election to proceed with the contract and cause Pozzolanic and Cement Australia Holdings to go on with it, Cement Australia took advantage of its substantial degree of market power in the SEQ concrete grade flyash market for the substantial purposes described at [153] of these reasons in contravention of s 46(1)(b) and s 46(1)(c). The Commission contends that making the second election to proceed gave effect to cl 3.3 of the Amended Contract (requiring Pozzolanic to construct plant on-site at Millmerran by 1 May 2005) and that clause was adopted for the purpose and, together with cl 5.1 of the original Millmerran contract (obliged MPP to make available to Pozzolanic a guaranteed minimum quantity of 135,000 tonnes of concrete grade flyash per annum), had the effect or likely effect of substantially lessening, hindering or preventing competition in both pleaded markets.
952 Apart from these contraventions, the Commission contends that Pozzolanic contravened s 45(2)(a)(ii) of the Act by entering into the Tarong Contract on 26 February 2003 because in making the Tarong Contract the relevant decision-makers for Pozzolanic incorporated particular pleaded provisions of the contract for the subjective substantial purpose of substantially lessening competition in the SEQ unprocessed flyash market and the SEQ concrete grade flyash market, and those provisions had the effect or likely effect of substantially lessening competition in both markets.
953 Pozzolanic contravened s 45(2)(b)(ii) of the Act by giving effect to the pleaded provisions between 26 February 2003 and 31 December 2006. QCL is said to have contravened s 45(2)(b)(ii) by giving effect to the pleaded provisions of the Tarong Contract by funding Pozzolanic’s entry into the contract. Pozzolanic and Cement Australia are said to have contravened s 45(2)(b)(ii) of the Act by giving effect to the provisions of the Tarong Contract by approving, installing and commissioning, a classifier at Tarong North and acquiring flyash from Tarong North. QCL is said to have been knowingly concerned in Pozzolanic’s contraventions. Cement Australia Holdings, Mr Leon and Mr White, are said to have been knowingly concerned in and to have procured the contraventions by Pozzolanic and Cement Australia in giving effect to the pleaded provisions.
954 As to Swanbank, the Commission contends that Pozzolanic contravened s 45(2)(a)(ii) by entering into arrangements that had the effect of extending the operation of the pleaded provisions of the original 1993 Swanbank Contract which had been extended by operation of the 1998 Swanbank Contract and then further extended, because those arrangements contained pleaded provisions said to have been adopted for the subjective substantial purpose of substantially lessening competition in the SEQ unprocessed flyash market and the SEQ concrete grade flyash market. Those provisions are also said to have the effect or likely effect of substantially lessening competition in both markets. Pozzolanic is said to have contravened s 45(2)(b)(ii) by giving effect to the provisions between 30 September 2002 and 30 June 2005, and QCL is said to have contravened s 45(2)(b)(ii) by giving effect to the provisions of the extension arrangements prior to the merger, by funding Pozzolanic’s performance of obligations arising under the extension arrangements. Cement Australia is said to have contravened s 45(2)(b)(ii) by giving effect of the provisions of the extension arrangements after June 2003 by continuing to fund Pozzolanic’s performance of obligations under those arrangements. Cement Australia, Cement Australia Holdings, Pozzolanic Industries, Mr Leon and Mr White are said to have been knowingly concerned in Pozzolanic’s contraventions. Claims of ancillary liability are also pressed.
The organising principles
955 In defining the relevant market or markets with a view to answering the question of whether QCL, Pozzolanic or Cement Australia enjoyed a substantial degree of power in a particular market when engaging in the impugned conduct (quite apart from questions of whether by that conduct the corporation took advantage of its market power, or questions of purpose) the organising principles to be applied are largely uncontroversial.
956 The starting point is to recognise that in identifying the relevant market for the purposes of a s 46 claim, the object is to discover the degree of the relevant respondent’s market power. Thus, defining the market and evaluating the degree of power enjoyed by a respondent in that market are parts of the same process. The two issues might be separated for simplicity of analysis but they cannot be separated as a matter of law: Queensland Wire Industries Pty Ltd v Broken Hill Pty Co. Ltd (“Queensland Wire”) (1988) 167 CLR 177 at 187, Mason CJ and Wilson J; Arnotts Ltd v Trade Practices Commission (“Arnotts v TPC”) (1990) 24 FCR 313 at 328, Lockhart, Wilcox and Gummow JJ. Market definition is but a tool to facilitate a “proper orientation” for the analysis of market power and competitive processes, and should only be taken a sufficient distance to achieve the legal decision: an observation of Professor Maureen Brunt approved by the Full Court in Arnotts v TPC at 328; also see Australian Competition and Consumer Commission (ACCC) v Liquorland (Australia) Pty Ltd (“ACCC v Liquourland”) [2006] ATPR 42-123 [429], Allsop J (CJ).
957 The most authoritative, appellate approved, explanation of the features or boundaries of a field of rivalry and particularly the defining feature of substitution possibilities on the supply and demand side remains the formulation adopted by Woodward J, Mr Shipton and Professor Maureen Brunt constituting the Trade Practices Tribunal in Re Queensland Co-operative Milling Association Ltd and Defiance Holdings (“Co-operative Milling”) (1976) 25 FLR 169. The Tribunal’s observations at 189 about competition as a process, the role market structure plays in determining whether firms compete, the particular importance of the height of barriers to entry, vertical integration and formal arrangements between firms, are well known and understood. So too are the Tribunal’s observations about the “concept” of a market.
958 Nevertheless, some of these observations are worth repeating having regard to the issues in this case. At p 190, the Tribunal said this of the concept of a market:
… we should explain our understanding of the market concept, and of the relationship between “markets” and “sub-markets”. We take the concept of a market to be basically a very simple idea. A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them. (If there is no close competition there is of course a monopolistic market). Within the bounds of a market there is substitution – substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. Let us suppose that the price of one supplier goes up. Then on the demand side buyers may switch their patronage from this firm’s product to another, or from this geographic source of supply to another. As well, on the supply side, sellers can adjust their production plans, substituting one product for another in their output mix, or substituting one geographic source of supply for another. Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance and cost and price incentives.
It is the possibilities of such substitution which set the limits upon a firm’s ability to “give less and charge more”. Accordingly, in determining the outer boundaries of the market we ask a quite simple but fundamental question: If the firm were to “give less and charge more” would there be, to put the matter colloquially, much of a reaction? And if so, from whom? In the language of economics the question is this: From which products and which activities could we expect a relatively high demand or supply response to price change, i.e. a relatively high cross-elasticity of demand or cross-elasticity of supply?
[emphasis added]
959 In the context of the Act, the “most that can be said” is that the “market” should be understood in the sense of an area of potential close competition in particular goods and/or services and their substitutes: Queensland Wire at 195, Deane J.
960 The reference in the Tribunal’s passage to a firm’s ability to give less and charge more is the expression of the “central idea” involved in the concept of market power: Boral v ACCC at 414 [100], Gleeson CJ and Callinan J.
961 The Tribunal observed that competition expresses itself as rivalrous market behaviour and effective competition requires both that prices should be flexible reflecting the forces of demand and supply and that there should be independent rivalry in all dimensions of the price-product-service packages offered to consumers and customers. Because, in principle, the outer boundaries of a market are defined by reference to a field of transactional rivalry exhibiting close competition within which the possibilities of strong substitution occur, thus constraining a firm’s ability to give less and charge more, the best evidence of the field of actual potential transactions comes from those people who engage in those transactions: Rural Press Limited v ACCC (“Rural Press”) (2003) 216 CLR 53 at 72-73 [45], Gummow, Hayne and Heydon JJ; Boral v ACCC at 457 [257], McHugh J; Arnotts v TPC at 334 (para 2), Lockhart, Wilcox and Gummow JJ; the Hon J D Heydon, Trade Practices Law (The Law Book Company Limited) at [3.245] (update 132); Seven Network v News Ltd (“Seven Network”) (2009) 182 FCR 160 at 297 [628], Dowsett and Lander JJ. Lay witnesses in describing their perception of competition or rivalry, actual or potential, may not describe the perceived competition as “close”. However, closeness is a matter of degree: (Seven Network) at 305 [660], Dowsett and Lander JJ. Because individuals very often live within the limits of their own experience, market participants giving evidence of actual transactions and actual experience might not be astute to the diversity of substitution possibilities which constrain a firm’s ability to give less and charge more. On the other hand, depending upon the dynamic character of the rivalrous possibilities, the relevant market participants may have been particularly conscious of the substitution possibilities confronting them.
962 The process of defining a market by substitution possibilities involves both including products which, on the evidence, compete with the relevant respondent’s products and excluding those which, on the evidence, do not compete: Queensland Wire at 188, Mason CJ and Wilson J.
963 The principles set out by the Tribunal in Co-operative Milling, although published before the introduction of s 4E into the Act “remain good” (Seven Network at 240 [348]) in the context of the Act and have the approval of the High Court: Queensland Wire at 188, Mason CJ and Wilson J; Boral v ACCC at 413 [99], Gleeson CJ and Callinan J (accepting the Tribunal’s formulation as embodying the central idea of the concept of market power) and 422 [133]. Sections 4E and the presently relevant parts of s 46 are in these terms:
4E Market
For the purposes of this Act, unless the contrary intention appears, “market” means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.
…
46 Misuse of market power
(1) A corporation that has a substantial degree of power in a market shall not take advantage of that power for the purpose of:
(a) eliminating or substantially damaging a competitor of the corporation or of a body corporate that is related to the corporation in that or any other market;
(b) preventing the entry of a person into that or any other market; or
(c) deterring or preventing a person from engaging in competitive conduct in that or any other market.
(1A) For the purposes of subsection (1):
(a) the reference in paragraph (1)(a) to a competitor includes a reference to competitors generally, or to a particular class or classes of competitors; and
(b) the reference in paragraphs (1)(b) and (c) to a person includes a reference to persons generally, or to a particular class or classes of persons.
(2) If:
(a) a body corporate that is related to a corporation has, or 2 or more bodies corporate each of which is related to the one corporation together have, a substantial degree of power in a market; or
(b) a corporation and a body corporate that is, or a corporation and 2 or more bodies corporate each of which is, related to that corporation, together have a substantial degree of power in a market;
the corporation shall be taken for the purposes of this section to have a substantial degree of power in that market.
(3) In determining for the purposes of this section the degree of power that a body corporate or bodies corporate has or have in a market, the Court shall have regard to the extent to which the conduct of the body corporate or of any of those bodies corporate in that market is constrained by the conduct of:
(a) competitors, or potential competitors, of the body corporate or of any of those bodies corporate in that market; or
(b) persons to whom or from whom the body corporate or any of those bodies corporate supplies or acquires goods or services in that market.
…
(7) Without in any way limiting the manner in which the purpose of a person may be established for the purposes of any other provision of this Act, a corporation may be taken to have taken advantage of its power for a purpose referred to in subsection (1) notwithstanding that, after all the evidence has been considered, the existence of that purpose is ascertainable only by inference from the conduct of the corporation or of any other person or from other relevant circumstances.
964 As to the relationship between market structure and market power, s 46(3) of the Act obliges the Federal Court in assessing whether a corporation has a substantial degree of power in a market for the purposes of s 46(1), to have regard to the extent to which the conduct of QCL or Pozzolanic (or later Cement Australia) in that market is constrained by the conduct of competitors or potential competitors in that market; the conduct of persons to whom those companies supply goods or services in that market; and the conduct of persons from whom those companies acquire goods or services in that market. Other structural matters like those mentioned by the Tribunal in Co-operative Milling at 189 “such as the number of competitors, their strength and size, the height of barriers to entry and the stability or volatility of demand usually will, at the evidentiary level, properly be considered in reaching conclusions as to the extent of the constraints stipulated in s 46(3)” [emphasis added]: Boral v ACCC at 433 [168], Gaudron, Gummow and Hayne JJ.
965 The “essence of market power” for the purposes of the Act in the case of a supplier is the absence of constraints from the conduct of competitors, potential competitors or customers. An absence of a substantial degree of market power however “only requires a sufficient level of competition to deny a substantial degree of power to any competitor in the market”: Boral v ACCC at 419 [120], [121] and 423 [137], Gleeson CJ and Callinan J.
966 One aspect of facilitating a “proper orientation” of the analysis of market power is the notion that the Court will take as the market, for the purpose of deciding cases of contended misuse of market power, just that market which the concern itself takes for its field of rivalry or activity. If a firm shows an intention to engage in conduct to exclude rivals or potential rivals from that field, it will be assumed, at least as a starting point, that the field so taken by the firm sufficiently describes a market, otherwise the conduct of the firm directed to that field of interest would have little rational point. This notion (put slightly differently by me) nevertheless reflects, in substance, the observations of Sir Alan Neale in The Antitrust Laws of the United States of America (1970), 2nd Edition, Cambridge, University Press, at 121 (for The National Institute of Economic and Social Research) cited with approval by the Hon J.D. Heydon (then Heydon J) in his writing, and also by Allsop J (CJ) in ACCC v Liquorland.
967 Whilst it is undoubtedly true that a rational starting point for a consideration of the relevant market is the field selected by the concern itself and about which it has focused its own internal analysis and behavioural responses (especially when the firm itself shows an intention by conduct to exclude rivals), it is, nevertheless, important to remember the statutory emphasis upon the role of substitution possibilities under the Australian Act which may or may not have been fully taken into account in the documents, analysis, thinking and utterances of relevant officers of the particular firm.
968 In the context of s 2 of the Sherman Act addressing monopolisation, Sir Alan Neale, in the broader context of his remarks, said this:
A great deal has been written by economists about the potential competition of substitutes that the monopolist always has to face. The point that they make is obvious enough. There is no absolute monopoly in the real world, short of a monopoly of everything. If golf-clubs became impossibly expensive, more men would take up bowls; if all sports goods became impossibly expensive, they would ride bicycles or read books. The scale of “substitutability” of products is nowhere markedly discontinuous. … But the courts, in practice, do not allow themselves to be bewildered by recondite economic concepts such as “substitutability”; they simply ask whether a firm before them has attempted to build up or use its power to raise prices or exclude competitors. If there is evidence of such conduct, they take it for granted that the firm sees real gains to be made by it: in other words, that there is a market worth monopolising. … In other words, the courts will take as the market, for the purpose of deciding cases, just that market which the concern itself takes for its field of activity: if a firm shows an intent to exclude competition from the field, it will be assumed that the field sufficiently describes the market – for otherwise what would be the point of the effort to exclude.
969 Without diminishing at all the approach reflected in the final sentences of those remarks concerning the probative value of a concern’s own assessment of its field of rivalry, the field of substitution possibilities must always be kept in mind when determining whether, under the Australian Act, a firm enjoys the power to charge more and give less.
970 To the extent that a firm perceives itself as free from any constraint to charge more and give less in a particular field of activity, those perceptions are highly significant in marking out the boundary of the field of transactions. If a firm, by its conduct, seeks to exclude another firm from entry into a field of activity, that field of transactions is likely to properly reflect the relevant field of activity for analysis.
971 Strong substitution possibilities marking out the boundaries of close competition are measured over the long run (rather than assessments of the short run transitory position) as a function of the operational time firms require for organising and implementing redeployment of existing capital in response to profit incentives: Re AGL Cooper Basin Natural Gas Supply Arrangements (1997) ATPR 41-593 at 44-210. The question, on the facts, is what reasonable time is required within which buyers might switch to an alternative supplier or another geographic source of supply and, how long might it take firms to switch or adjust their plant and production plans to reconfigure their output mix, given a sufficient profit incentive. In other words, what is likely to happen to patterns of consumption and production should existing suppliers raise prices or offer poorer terms of trade: Re Tooth & Co Ltd and Tooheys Ltd (1979) 39 FLR 1 at 38-39, Keeley J, Mr Shipton and Professor Maureen Brunt.
972 The product dimension is measured by the goods (and services) the subject of demand and supply and those goods readily substitutable for those goods, by those products which are sufficiently close in their characteristics, quality, utility, functionality and performance, such that movements in the price of one conditions demand for the other. The geographic dimension is the area within which sellers offer the product for sale and includes areas of substitutable geographic sources of supply buyers might turn to in switching their patronage to another supplier of the same or substitutable product. Whether such substitution is feasible or likely, on the evidence, depends ultimately on customer attitudes, distance, cost, market structure, formal and informal arrangements between participants, new technology and price incentives to switch.
973 Ultimately, market power is the capacity to act without constraint thus conferring discretionary power (whether taken advantage of or not) on the relevant firm to remain “sufficiently free from market pressures” of “workable” or “effective competition” (in the economic sense that no seller has the power to choose its level of profits by giving less and charging more), so as to be able to “‘administer’ its own production and selling policies at its discretion”: Co-operative Milling at 188. In such cases, the values, incentives and penalties of management replace the market pressures of rival sellers (whether existing or new potential entrants), constraining market power by offering or threatening to offer effective inducements to switch: Co-operative Milling at 188.
974 The source of a firm’s market power may lie in the collection of contractual rights it enjoys over access to an essential input in the production of a product or its control over essential services required in the provision of goods or services. When the source of a firm’s market power is said to lie in the field of contractual rights it enjoys, the question of whether such a firm has enduring market power (at the time of the impugned conduct events) or merely transitory power in the market, in short-run transition to either the expiration, or alternatively, the long-run renewal of those critical rights, will be relevant to the question of whether the firm enjoyed a substantial degree of power in the market at the relevant moment in time. The uncertainty surrounding the sustainability of the firm’s contractual rights may result in the firm not having a substantial degree of market power at all. However, the answer to those questions may simply require asking whether a firm which enjoyed the power to charge more and give less (and stand apart from workable competition) by reason of its contractual arrangements (taken together with other considerations) continued, in fact, on the evidence, either to do so, or be able to do so, notwithstanding uncertainty surrounding the possible loss or renewal of the firm’s critical contractual rights.
975 On the other hand, the uncertainty surrounding the firm’s renewal of its contractual rights at the moment in time the firm engages in the impugned conduct may mean that in a “forward looking” way, over a minimum appreciable operational time (say at least one year), the firm did not have sustainable market power in any sense required by s 46 of the Act as a matter of construction of the section in the context of the Act generally and thus the corporation did not enjoy a substantial degree of market power. These matters are addressed more particularly later in these reasons.
976 The Commission says that the answer to that contention, as a matter of principle, lies in the observations of Finkelstein J in dissent (adopting a position as to the outcome of the case consistent with the High Court’s final orders on appeal) in the Full Court’s decision in NT Power Generation v Power and Water Authority (2002) 122 FCR 399 at 439-440 [154] and [155]. At [154], Finkelstein J observed, in effect, that the selection of an arbitrary period of time (commencing at the time of the impugned conduct event) during which power must continue to exist before it can be said that a firm has market power or a substantial degree of market power, is not a proper principled way to determine whether a firm enjoys market power for the purposes of the Act.
977 At [155], Finkelstein J explained that view in this way:
In my opinion sometimes it will be appropriate for market power to be analysed on the basis of long-term horizons, and on other occasions short-term horizons will do. In the case of a long-term monopolist who has, and will continue to have, discretionary power in a market it is not always necessary to consider for how long into the future that power will continue to exist. The relevant feature of the market is not that the temporal dimension of the market power, whatever that may be, has only a short period to run. The monopolist has market power until its ability to exercise its discretionary power is eliminated or significantly reduced by an actual or potential competitor. Until that time, the monopolist will have market power for the purposes of [s 46 of the Act].
[emphasis added]
978 Ultimately, substantial market power is the ability of a firm to maintain prices above (or volume or quality below) a competitive level set by the signals of prices and profits registering the forces of demand and supply, and substitution: Co-operative Milling at 188.
979 As Co-operative Milling recognises at 188, “new potential entrants into the field” of rivalry (apart from the responses of existing rival sellers) can keep market power “in check” by “offering or threatening to offer effective inducements” to switch. A new potential entrant into the field on the supply side however may well face barriers to actual entry such as physical access to production or processing capacity or access to land proximate to existing facilities to install additional plant; access to raw materials; disincentives arising out of the incumbency of one or two significant existing firms in the market; formal contracts, arrangements or other understandings between particular market participants that constrain a potential new entrant’s access to the bundle of legal rights necessary to engage in independent rivalry in all dimensions of the price-product-service package offerings to buyers; significant minimum scale of entry; significant scale cost efficiencies and savings enjoyed by an incumbent; regulatory and environmental approvals; the risk of potential sunk costs of entry; and other factors.
980 Such barriers are a function of the existing composition and structure of the market characterised by the calculus of dimensional factors already mentioned. Barriers however might also be strategic in nature arising out of behavioural practises and policies of incumbent firms giving rise to disincentives for (or a prevention of) an “outsider” actually entering the field of close competition: Boral v ACCC at 471 [295], McHugh J.
981 The threat of potential entry however must be real (not superficial), practical, feasible and likely, failing which the threat of entry will be sufficiently thin that the conduct of an incumbent firm will likely continue to reflect, should the firm enjoy market power, a behavioural disposition by conduct to give less and charge more or an ability to do so, and therefore stand apart from the constraints which characterise effective and workable competition as described by the Tribunal in Co-operative Milling at 188.
982 The threat of sustained new transactional entry into the field of close competition as a factor leading the Court to a conclusion that the subject firm does not have (or no longer has) a substantial degree of power in the relevant market (when engaging in impugned conduct) must be such that the threat, on the evidence, actually operates to constrain the firm from charging more and giving less.
983 Finally, mention should be made of recourse to the analytical tool of the SSNIP test commonly applied in first determining the narrowest calculus of the dimensional factors within which an hypothetical monopolist could profitably impose and maintain a small, but yet significant, non-transitory increase in price (of the order, typically, of 5% - 10%), and then widening the scope of the calculus of these factors according to the result of the initial application of a SSNIP. Leaving aside the methodological criticism of the SSNIP test in the American literature, the orthodoxy of the test in Australia suggests that if such a price increase can be sustained over a reasonable period of time without constraint, the market is probably as wide as it needs to be drawn for the purpose of the disposition of the case. If such a price increase is unsustainable because buyers would switch to alternative suppliers outside the postulated area (or substitute products), or sellers of products would adjust their production plans over a reasonable period and alter their output mix to substitute for one of their own products, the product (or a like product) produced by the hypothetical monopolist thus displacing or defeating a SSNIP, the market definition selected for the purposes of the analysis of the issues in the case is likely to be too narrowly set and must be reset, broadened and the analytic tool of a SSNIP applied to the broadened area of activity to test the measure of the operational constraints then in play.
PART 18
Descriptions and references adopted by one or more of the respondent companies of the market in which the relevant actors perceived they were operating
984 Before considering further aspects of participant evidence (and particularly the evidence of Ms Deborah Reich), I propose to examine the way in which senior managers of QCL and Pozzolanic (and the directors), described and analysed the “market” within which they, as experienced industry individuals, understood they were acting, in their respective capacities for the relevant respondents.
985 An understanding of the way in which the respondents calibrated their transactional responses within their own perception of the relevant field of rivalry requires an examination of the various letters, emails, memoranda, submissions and tenders they formulated and sent, and to the extent any of them gave evidence, the evidence they gave.
986 I have closely examined all of these sources at length. The material reveals the following things.
Mr O’Callaghan’s views
987 As earlier mentioned (at [404] to [419]), Mr Paul Michael O’Callaghan was employed by QCL as the General Manager, Sales and Distribution, in the period 1 October 1999 to May 2001. In that role, Mr O’Callaghan’s responsibilities included the sale and distribution of cement. It also “covered the Pozzolanic business, which was the fly ash business” and it “covered the lime business” (T, p 1490, lns 20-30). Mr O’Callaghan was responsible for convening a Flyash Strategy Workshop on Friday, 2 March 2001 at QCL’s Conference Room in Milton with the aim of developing “definite strategies to protect the fly ash market with new power stations being built”. The workshop and documents emerging from it have already been discussed (ATB 2.9).
988 Mr Wilson, in his March 2001 report, described the meeting as a strategy meeting held to discuss ash sourcing in Queensland particularly with the emergence of the Millmerran Power Station. However, one aspect of the workshop involved a consideration of “what if” scenarios for a geographic area described as “South East Queensland”. Mr O’Callaghan gave oral evidence that he saw the possibility of another flyash supplier obtaining a contract with a new power station as a risk to Pozzolanic’s profitability because a competing supplier which obtained access to ash from a new station, would compete for market share in the “South East Queensland market”, and if the new power station was, for example, at Callide, a new supplier with access to that flyash might compete in the “central and northern Queensland markets”. Mr O’Callaghan gave evidence that he was trying to develop strategies which might, if possible, have the effect of retaining Pozzolanic’s market share, and the price at which flyash was sold to concrete producers (T, p 1500, lns 5-32), which, in the case of flyash, was the delivered price in those geographic areas as he describes them.
989 As to the question of the seller of flyash to concrete producers, an example of such an arrangement is a letter dated 30 September 1999 (ATB 1.4) sent by QCL under the signature of Mr O’Callaghan, under his title as earlier described, in which QCL offered to supply cement and flyash to the Pioneer Group in Queensland including particular nominated Pioneer entities. One of the terms of the offer was that Pioneer would agree to purchase a minimum of 99% of its flyash requirements in Queensland from QCL and a minimum of 75% of its cement requirements in Queensland from QCL. Flyash would be supplied by QCL on a delivered price basis as set out in Schedule 2 (which is not attached to the letter). Upon Pioneer purchasing 99% of its flyash requirements from QCL, a rebate of 12% of the delivered price would be payable across all of those purchases.
990 Clause 6 of the letter provided that, if accepted, the offer would supersede any other supply agreement between the parties including an agreement between a Pozzolanic entity and Pioneer dated 19 May 1983 for the supply of flyash from Tarong Power Station and an agreement between a Pioneer entity and QCL dated 22 August 1995 for the supply of cement.
991 Mr O’Callaghan was unable to say whether the sale of flyash was invoiced in the name of QCL or not, although, plainly enough, the letter of offer speaks in terms of a contractual arrangement, if accepted, for supply of flyash and cement by QCL.
992 It will be necessary, later in these reasons, to examine other examples of sale agreements of flyash by QCL to concrete producers.
993 Mr O’Callaghan gave evidence that the individuals responsible for the sale of cement and flyash reported to him, as QCL people.
994 As to the South East Queensland geographic region to be discussed at the workshop sessions, the “what if” scenarios included a consideration of what the position might be as a result of a call for tenders for the purchase and removal of flyash from Millmerran in mid-2001; a call for tenders by TEC in late 2001 or early 2002; entry into the South East Queensland geographic area of Tarong North flyash in 2003; the awarding of a supply contract by Millmerran to companies including one or more of Wagner, Flyash Australia, Peabody, Sunstate, QCL (either exclusively or in conjunction with MPA); the awarding of a supply contract by TEC to any of those companies; and, what the future for Swanbank as a power station (and Swanbank flyash) might be.
995 The agenda for the meeting attaches some workings which Mr O’Callaghan describes as “thought starters of mine” and asks participants to come to the meeting prepared to argue the merits, or otherwise, of the points in issue but also to bring to the meeting “whatever facts” participants might have which would help in discussing the matters in issue in the workshop sessions. The “thought starters” must necessarily be a reference to the “what if” scenarios which are divided into the considerations relating to “South East Queensland” and also “Country Queensland” (which is focused upon competitor access to Callide flyash at Callide B or C stations); the scope and nature of a competitor’s costs of entry; QCL’s reaction to those events should any one of them occur; competitor access to Stanwell Power Station flyash; and, the possibility that Callide and/or Stanwell might sell flyash directly to the market.
996 Mr O’Callaghan accepted in evidence that the people who were participants in the meeting had knowledge of the flyash business and they were the people best placed to identify, with some accuracy, the relevant statistics on sales and volume, and also the people who might sensibly address the “what if” scenarios framed by Mr O’Callaghan as the issues to be discussed.
997 Mr O’Callaghan gave evidence that he recalled McKinsey & Company (“McKinsey”) undertaking a review of QCL Group Operations called “project enterprise” which involved discussions between management of QCL and representatives of McKinsey. Mr O’Callaghan recalls seeing a document consisting of a PowerPoint presentation prepared by McKinsey although he cannot recall the “specifics” of it. The document is dated January 2000 and entitled: “Backup Implementation Plans, QCL, Project Enterprise” (ATB 3.8). At Slide 2 of the document, reference is made to the possibility of “At least three more power stations coming onstream in Queensland within the next three years”, with McKinsey observing that “QCL has to be proactive and contract them all or risk exposure in [its] home market” [emphasis added]. At this point, at least three more power station sources of supply side flyash were anticipated as new entrants in Queensland, over time.
998 The three foreshadowed new entrant power stations were Callide C, Millmerran and Kogan Creek.
999 Under the heading “Next steps” on Slide 2, the McKinsey author comments: “Be proactive to lock-up the potential sources with careful attention to fly-ash market micro-economics – Supply/demand balances – Market development”.
1000 Mr O’Callaghan could not recall whether he held a view about that topic at the time.
1001 Mr O’Callaghan said that he assumed that the capacity data described in the McKinsey slide had been given to McKinsey by QCL. Mr O’Callaghan thought that the purpose of providing that data on that topic and examining the question was “to assess the whole effect on our [earnings] … profitability” (T, p 1512, ln 19). Mr O’Callaghan said that he expected McKinsey to make recommendations on that topic. Mr O’Callaghan has a general recollection of a discussion amongst QCL management about the steps QCL might take in response to the opening of these new entrant stations, but nothing specific of the discussion.
1002 The McKinsey Report also addressed the next steps that might be taken in relation to another relatively new entrant on the supply side, Stanwell Power Station. The report notes that the opportunity to secure Stanwell as a source of supply had already shown great promise. In terms of a “situation” assessment, McKinsey observed that developments in relation to Stanwell posed a “Potential threat” in that “losing Stanwell as a source to FAA” represented a “Contribution margin” threat of “up to $6.4 million/year”. McKinsey notes that FAA had an agreement with Stanwell to take 200 tonnes of flyash per week starting 1 September 1999 but had not fulfilled the obligation thus giving QCL another chance “to approach Stanwell again”.
1003 Stanwell ash ultimately proved to be unmarketable.
1004 In terms of anticipated potential “end customer transactions” with the power stations directly, McKinsey observed at 3-310 of the document that “End customers are likely to try to access fly-ash sources directly” and “QCL has to offer the power stations a unique value proposition, (eg find value sharing agreements)”, and this was seen, according to McKinsey, as the “Key” to ensuring “fly-ash control over the sources” of supply of flyash. Mr O’Callaghan gave evidence that this notion of value sharing suggested by McKinsey became the idea within QCL that it should provide the power stations with a “total ash management strategy” (T, p 1513, ln 8). Mr O’Callaghan’s view was that if the power station owners saw value in a total ash management strategy, the power stations would choose to stay with QCL/Pozzolanic rather than switch to “other people”.
1005 On 11 January 2000, Mr Chalmers sent a memorandum to Mr O’Callaghan providing the December 1999 results including the results for that year at Tarong (RCTB 452). Total production for the year was 301,009 tonnes representing a 15.3% improvement. Swanbank ash supply was said to be a remaining problem. Sales were 33,168 tonnes. Mr Chalmers reports on the position at Gladstone, Callide B and Stanwell. Total ash sales including exports were 554,705 tonnes, 30,000 tonnes ahead of the 1998 year. The flyash division in its financial reporting, segments its reporting by reference to “Tarong”, “Central” (which is said to aggregate two geographic regions being Central Queensland and Northern Queensland), “Swanbank” and “Head Office”. The Tarong figures were said to reflect “very high sales”. As to new entrant sources of supply, Mr Chalmers notes that the entry of Tarong North flyash into the market remained “unclear” and the “Millmerran … development is proceeding at some pace” such that “a strategy for Millmerran” would need to be developed “in the first six months of this year” (2000). In February 2000, QCL prepared a confidential report reflecting upon past production and future trends. In that report (RCTB 400), QCL said this:
In 2001 and 2002, the first of the new coal-fired generating capacity in Queensland, namely Callide “C” and Millmerran Power Stations are expected to come on line, substantially increasing the availability of flyash in Central and Southern Queensland markets. There is intense interest in South-East Queensland from a range of potential competitors, and some significant market penetration is expected. Pozzolanic Enterprises will be ensuring that its costs structures are optimized, and that the high level of technical and market support that has always been provided is maintained and where possible, improved.
1006 On 12 February 2001, Mr Peter Klose (QCL’s Business Development Manager from 1999 to June 2003 and the Acting Manager of Pozzolanic from June 2003 to December 2003) sent an email to Mr Ridoutt (QCL’s General Manager Sales and Marketing from 2001 to June 2003) attaching a copy of Mr O’Callaghan’s Sales and Distribution Business Plan written by Mr O’Callaghan in 2000. Mr O’Callaghan accepted that he was the author of the document. That Business Plan was conceived to achieve the “total value” vision adopted by QCL based on the McKinsey value proposition recommendations.
1007 At para 1.3 of the document, Mr O’Callaghan describes QCL’s “home market” as Queensland, and in that market, competition in relation to cement as a product, was said to be comprised of, principally, seven cement producers: Sunstate Cement, Global Cement, Australian Cement Holdings, Barro, Boral, Melcann and CSR. As to flyash, Mr O’Callaghan observed that FAA was seeking to enter the market as a reasonably vigorous competitor and Mr O’Callaghan observes in the plan that FAA already had a position at Stanwell and was “aiming to break Pozzolanic’s exclusive position in Queensland to drive down prices”, that is to say, a likely reduction in flyash prices, according to Mr O’Callaghan’s view at the time (T, p 1518, lns 6-16). Mr O’Callaghan perceived that Transpacific (controlled by Mr Peabody) was also a likely new entrant participant because that company was “looking for opportunities to break into the ash market in Queensland”. In oral evidence, Mr O’Callaghan accepted that one of the possible outcomes, at least, of Transpacific breaking into the ash market in Queensland was a reduction in flyash prices and that if either FAA or Transpacific so entered, their entry could lead to a reduction in the volume of flyash sold by QCL (T, p 1518, lns 25-30).
1008 In oral evidence, Mr O’Callaghan accepted that QCL regarded the flyash market in “Queensland”, its “home market”, as being broken down into “subsections” and they included “a South East Queensland market”, a “north Queensland market” and a “central Queensland market”. Mr O’Callaghan accepted that in the South East Queensland market, the alternative source of supply which QCL had identified in 2000 was flyash sold into Queensland from power stations in New South Wales. Mr O’Callaghan did not accept the proposition that it was always the case that a substantially higher transport cost was involved in trucking flyash from New South Wales into South East Queensland than the cost of trucking flyash from the Tarong or Swanbank Power Stations to South East Queensland. However, Mr O’Callaghan accepted that in terms of delivered pricing transactions between QCL and buyers of flyash (concrete production companies), “delivered pricing” enabled QCL, if it found that flyash was being transported from a New South Wales power station to South East Queensland, to be able to lower the delivered price of flyash “sufficiently to just undercut the price being offered to a customer in respect of ash from a New South Wales power station”. Mr O’Callaghan also accepted that part of the benefit of delivered pricing for QCL was that it could “capture the profit margin in the transport component”. Mr O’Callaghan did not accept that it was necessarily the position that without delivered pricing, the likelihood was that a buyer/customer could have obtained cheaper end product pricing at the batching plant by engaging its own transport arrangements.
1009 In developing the Sales and Distribution Plan for QCL in 2000, Mr O’Callaghan recorded at para 2.1 that one of QCL’s strengths was the provision of “ash pricing on a delivered price basis”.
1010 The modality adopted by QCL for supply transactions in the home market and each of the subsections within the home market, as described by Mr O’Callaghan, including the South East Queensland market, was supply of flyash on a delivered price basis only.
1011 One of the other characteristics of the market identified by Mr O’Callaghan which reflected a weakness for QCL was a “large oversupply of ash” (para 2.2 of the Business Plan). That was perceived by QCL, according to Mr O’Callaghan, to be a weakness because “the large oversupply meant that it was more difficult for QCL to control all sources of flyash in Queensland” and thus an oversupply of ash from the various sources of flyash, on the supply side, meant that there was a risk of a multiplicity of transactions between power station owners and parties other than QCL, in Queensland.
1012 As to pricing on a delivered price basis, Mr O’Callaghan explained in oral evidence that adopting that method of pricing allowed QCL to price on “what we called a next best alternative into the different markets”. The concept, as Mr O’Callaghan understood it, of next best alternative supply terms (service, quality and price), was that the customer at the point of acceptance of delivery of the product would be able to compare QCL’s supply terms with the next best alternative supply terms to the point of delivery at the batching plant.
1013 At para 5 of Mr O’Callaghan’s Business Plan, he records that the ash supply market was then being influenced by several forces which were: deregulation of the power industry with the result that power stations saw flyash as a growth revenue stream; competitors of QCL and customers both looking to gain control of ash sources; growing environmental pressures on power stations to find alternatives to land fill solutions for ash disposal; and a market characterised by a large over-supply of ash with new power stations coming online. Thus, QCL’s aim in contracting and transacting with power stations was to “control supply [of flyash] into the cementitious market” [emphasis added] being the market for the supply of partial substitutes for cement in concrete production.
1014 Mr O’Callaghan in his Business Plan identified (at paras 5.0, 5.1 and 5.2) a number of other factors which he thought would have an influence upon actual and potential rivalry (transactions) affecting “ash supply” in Queensland or the various subsections of the Queensland market as described by Mr O’Callaghan.
1015 First, he observed that contractually, QCL had a long term position with NRG Gladstone and a relatively strong relationship. However, contracts with other power stations needed to be extended. An extension of one year (to 2002) of the Tarong Contract would need to be negotiated on similar terms to the existing contract. The rationale for that extension was said to be that “further sources i.e. Millmerran, Tarong North, will only come on line in 2002 and should not become a real threat until 2003”.
1016 Second, as to the position in “Central Queensland”, QCL would continue to liaise with Stanwell “to find opportunities to have Pozzolanic involved rather than FAA”. QCL’s strength in Central Queensland was said to be its relationship with NRG, the superior performance of Gladstone flyash, and QCL’s ability to export ash by sea.
1017 Third, the contract with Swanbank would need to be extended to 2004 by ensuring an off-take of greater than 48,000 tonnes over a 12 month period before the end of 2002.
1018 Fourth, QCL would maintain pricing on a delivered price basis.
1019 Mr O’Callaghan took the view that by having Swanbank and Gladstone contracts secure, up to 2004 and 2005 respectively, QCL could then focus on Tarong Energy and consider the methods of managing surplus ash entering into the market from the new entrant suppliers, Millmerran, Tarong North, Callide and Stanwell, and also manage the “threat of new entrants” in the form of parties who would seek to deal with those power stations. The major long term threat, in that context, was seen to be power stations selling ash directly to end-users so as to maximise revenue, and power stations “aligning with FAA” to “guarantee sale of their ash to FAA’s customers as the supply/demand balance worsens”.
1020 In other words, as large quantities of surplus ash entered the supply side of the market from power stations, those new suppliers, and perhaps existing suppliers, would seek to engage or align with FAA to secure the quantities of flyash purchased by those stakeholders (or stakeholder customers) necessarily connected with, or seen as tied to FAA. FAA was perceived by Mr O’Callaghan in the formulation of his Business Plan for the organisation as a company that would be capable of “delivering” to a power station, the volumes of flyash purchased by its shareholder customers.
1021 FAA’s shareholder customers were directly or indirectly Boral, CSR and Hanson.
1022 Those companies were the three principal concrete producers in Queensland. Mr O’Callaghan accepted that it was a concern to QCL that FAA could say to power station owners that FAA was the “obvious supplier” of flyash to these three shareholder customers which were also the three principal concrete producers in Queensland with a corresponding demand to be satisfied, for flyash. Mr O’Callaghan also accepted that in the South East Queensland subsection of the Queensland market, the consideration of FAA’s direct and indirect shareholder relationship with the three principal concrete producers in Queensland, was a concern to QCL regardless of whether FAA secured a contract with Tarong Power Station or Millmerran Power Station as, whichever power station FAA might secure as a source of flyash, the problem reflected in Mr O’Callaghan’s Business Plan (of FAA delivering what might be regarded as the tied volume required by the three companies in South East Queensland), would likely arise.
1023 As to Tarong, Mr O’Callaghan accepted that Tarong Power Station was the source of most of the flyash supplied in South East Queensland by QCL at the time and QCL regarded Tarong Power Station as a “key element” in its maintenance of a source of supply. Mr O’Callaghan said in oral evidence that having seen the Business Plan, he accepted that in 2000 QCL had an ash strategy in place based on what he, and those reporting to him, knew at the time.
1024 The Business Plan prepared by Mr O’Callaghan reflecting all of these matters was not presented to the Board of QCL whose Board members also made up the Board of Pozzolanic and Pozzolanic Industries. Mr O’Callaghan could not recall any particular interaction he may have had with the Board or Board members about the matters reflected in his Business Plan although he said that he could not recall that there was much in the way of dealings in 2000 with the Board. He did not recall seeking any Board approval for any business strategy for QCL and, in particular, a business strategy concerning flyash.
1025 Mr O’Callaghan explained, however, in oral evidence, that it did not follow that decision-making on these topics was left to him. Rather, strategic decisions were made, he said, as between the Board and the CEO who, at that time, was Mr Bill Townsend. Mr O’Callaghan was then asked whether he had discussed the Business Plan with Mr Townsend as CEO, and Mr O’Callaghan said that he could not “specifically recall it”. Mr O’Callaghan accepted, however, that he expected that it was “highly likely” that he had discussed the Business Plan with Mr Townsend, and Mr O’Callaghan accepted that for the Business Plan to remain in the form of the document (comprising Exhibit 38), “it [was] highly likely Mr Townsend accepted it” (T, p 1526, lns 4-22).
1026 I infer that Mr O’Callaghan was accepting that in the ordinary course of daily decision-making events, it was highly likely that the Chief Executive Officer had discussed Mr O’Callaghan’s Business Plan with him and that for it to remain in that form as the organisation’s Business Plan, the ordinary course of daily decision-making must have meant that the Chief Executive Officer had accepted it, that is to say, was content with it.
1027 On these matters at [987] to [1026], I accept the evidence of Mr O’Callaghan and I accept his evidence generally as an informed market participant, subject to a later assessment of the detailed evidence generally on the issue of transport costs.
The March 2001 Ash Report
1028 In March 2001, Pozzolanic prepared an Ash Report in relation to the production and sale of flyash from Tarong Power Station for the year 2000. The report notes that economic growth had eased substantially since June 2000 with a sharp slump in residential construction activity.
1029 As to the “ash market”, the report says this:
Global has also brought in some fly ash from China which has been sold into Brisbane. This fly ash is of very low quality and cannot compete with the high quality fly ashes in Queensland although there may be some impact in some markets.
Over the next few years, a number of new stations will be commissioned, substantially increasing the availability of fly ash in South East Queensland.
[A map showing the location of power stations is set out]
There will be a lot of interest from a range of competitors. There is therefore a similar risk to cement in that significant value may be lost from the industry, which includes the power stations.
Pozzolanic has worked very hard on generating and maintaining value from marketing fly ash over more than 30 years.
1030 The report records that the year 2000 saw a peak in annual sales at the end of July of 322,990 tonnes and sales had dropped sharply from July, in line with general building industry trends. The report notes that Pozzolanic supplied more than 50,000 tonnes of Tarong flyash into South East Queensland’s Pacific Motorway Project and Pozzolanic had been successful in “… obtaining further penetration into the northern NSW market” with Tarong fly ash.
Pozzolanic’s description of itself and the market in which it operates contained in the EOI submitted to TEC
1031 In August 2001, TEC advertised a call for expressions of interest for the sale and removal of bulk flyash at Tarong and Tarong North Power Stations including the co-ordination, management and provision of all relevant services. In August or September 2001, TEC distributed information to interested companies outlining the terms and conditions any expression of interest would need to address.
1032 In October 2001, Pozzolanic lodged its Expression of Interest (“EOI”) in response (ATB 3.9). Pozzolanic’s nominated representative for its engagement with TEC was Mr Michael Wilson, Manager, Pozzolanic Enterprises.
1033 In its EOI, Pozzolanic described itself as having had an operation at the Tarong Power Station since the commissioning of the Station in the mid-1980s and since that time, Pozzolanic had “generated strong demand for fly ash from Tarong” and “fly ash sales recently surpassed 300,000 tonnes per annum”.
1034 As to ash marketing, Pozzolanic said this:
The focus of our current and previous contract with Tarong Energy is concrete grade fly ash, which only represents about 20% of the total flyash produced by the station. … The concrete market in south east Queensland is currently saturated with fly ash, which limits the amount of fly ash that can be sold into this market. Without access to Tarong ash, Pozzolanic would supply the south east Queensland market from other stations, including central Queensland, thereby decreasing the available volume of concrete grade ash for Tarong. We would utilise our existing customer base to maintain this market for Tarong.
[emphasis added]
1035 Pozzolanic said that it would seek to find long term sustainable recycling opportunities for both Tarong and Tarong North flyash particularly with non-concrete grade ash markets. As to Tarong North, Pozzolanic observed that it could install truck-loading facilities which would improve access to run-of-station material, and the quality of ash produced at Tarong North would be unknown until production occurred. Pozzolanic considered that due to the use of fabric filters it would be unlikely that the ash would be concrete grade ash without classification.
1036 The organisational structure put to TEC identified Mr Michael Wilson as the senior person in the Pozzolanic structure to whom four managers of Pozzolanic would report (and through them, a number of other line managers) and with whom TEC was encouraged to look as the most senior Pozzolanic person both generally and, in particular, for the purposes of the EOI and any ultimate relationship emerging out of the EOI and tender process, between TEC and Pozzolanic.
The supporting Capability Statement
1037 Pozzolanic’s EOI was accompanied by a Pozzolanic/QCL Capability Statement (ATB 3.5).
1038 In that document, Pozzolanic says that it had established flyash processing and marketing in Queensland at the Swanbank Power Station in 1966 and, in Queensland, it processes and markets “premium grade fly ash” as well as other ash based products, and whilst there are many facets to ash marketing, Pozzolanic had developed the business around the core activity of processing and marketing concrete grade ash. Pozzolanic says that it pioneered the use of flyash in concrete throughout Australia and as a result of its work, “the fly ash market in Queensland is fully saturated, with the economic and physical benefits of using ash well understood”.
1039 The Statement says that, in fact, the Queensland Department of Main Roads “Concrete Specification” calls for the mandatory use of flyash. The Statement says that Pozzolanic “also sells ash into northern-NSW and is continuing to develop the market in Victoria”. As to Victoria, the Statement says this:
With no suitable fly ash produced in the state, Pozzolanic supplies Victoria primarily through shipping the product from Central Queensland. This market continues to grow and our aim is to maximise the use of ash, as is the case in Queensland.
FAA’s views
1040 On 17 October 2001, Mr Graeme Simon, the General Manager of Flyash Australia sent a letter to Mr Collingwood at TEC enclosing FAA’s EOI (Ex-39, SDC-27). In the covering letter, Mr Simon said this:
There are significant changes that are imminent in the Fly Ash market in South East Queensland with Millmerran fly ash becoming available. With this significant increase in competition for fly ash sales in the region Flyash Australia is proud that it can guarantee the highest value proposition to Tarong Energy with regard to the above expression of Interest.
[emphasis added]
1041 At p 4 of FAA’s EOI as submitted by Mr Simon, FAA says this:
Market Variables
Volume of the fine grade fly ash market
Fly ash being a by-product of black-coal fired power generation has application uses in a market around each source the boundaries of which are defined by transport economics and the value of the ash to users.
Currently Tarong Power Station supplies a majority of fly ash (approximately 230,000 tonnes) into the South East Queensland market.
Competitive Forces
Tarong ash currently enjoys near exclusive access to the South East Queensland market due to Pozzolanic Industries being the incumbent contractor on all commercially viable sources of ash in Queensland [although the correct entity is Pozzolanic Enterprises]. This position has limited the competitive dynamics in the development of this fly ash market.
However, the following competitive pressures, which is imminent [original emphasis], will provide changed market conditions:
1. Millmerran Power Station, has recently tendered their fly ash collection/sales. Located approximately 215kms west of Brisbane, Millmerran is within economic transport distance of the market given current market prices. Preliminary testing has shown the fly ash likely to be produced by Millmerran to have commercial application properties similar to Tarong ash. This will provide the first substantial competition to Tarong ash since the market’s development.
2. If Pozzolanic [Enterprises] lose their current dominant market position due to competition from Millmerran and/or lose the Tarong contract, they may continue to economically compete in the region by shipping Gladstone fly ash to the market through the Port of Brisbane. The logistics required are essentially in place already.
These market forces have set the scene for the value proposition FAA seeks to present to Tarong Energy in a long-term business partnership as detailed in the following section of the [EOI].
[emphasis added]
1042 FAA in its EOI emphasised its capacity to maximise access of Tarong flyash to the “cementitious materials market” through sales to its stakeholders, Boral, CSR and Pioneer who were said to represent a large proportion of the pre-mix concrete market. FAA said that it could deliver to TEC flyash sales of 92,500 tonnes per annum and if Tarong flyash becomes the sole source of supply of flyash in Queensland for FAA, the quantity of flyash would amount to 185,000 tonnes. FAA sought a “partnership” arrangement spanning a “contract period” of 10 to 15 years minimum.
1043 FAA also said this in its EOI:
[Guaranteed access to the cementitious materials market through FAA’s stakeholder companies] is extremely critical due to imminent release of Millmerran flyash into the market because:
1. The cementitious materials market (the highest value fly ash market) for fine grade fly ash is mature and therefore is limited to the current volumes being sold. If Pozzolanic [Enterprises] obtains the contract for both Millmerran and Tarong its current sales of Tarong Fly ash will have to be reduced in line with their contractual take requirements of the Millmerran contract.
2. [Pozzolanic’s] major customers are [FAA’s] stakeholders, therefore when [FAA] obtains a source of fly ash Pozzolanic … sales will reduce significantly as our [s]takeholders will switch their supplier of fly ash immediately.
3. Due to this assured access [FAA] can always guarantee to [TEC] a significant proportion of the market volume. No other company can offer this guarantee.
4. If [Pozzolanic] or other party win Millmerran and [FAA] wins the Tarong contract our assured access to the market guarantees to [TEC] minimal reduction in sales as your current substantial customers will continue to purchase your ash.
[emphasis added]
1044 By stakeholder companies, FAA explains in its EOI (at para 3, p 10) that FAA means, shareholder companies, as FAA is owned 50% by BCSC and ACH, in turn owned by CSR and Hanson.
Adelaide Brighton’s views
1045 An Expression of Interest was also lodged by Adelaide Brighton. In a short discussion of “market activities” Adelaide Brighton observed that it saw the EOI (and ultimately a supply relationship with TEC) as an expression of Adelaide Brighton’s commitment to expand its presence in the market “in Queensland and Northern New South Wales” (Ex-17, ENC-5). Expressions of Interest were also lodged by Transpacific, Clean Energy Products, Envirospheres, Bow Quip although Mr Collingwood does not put into evidence the EOIs lodged by those last three entities.
1046 The EOIs were assessed by Mr Collingwood, Mr Dennis Franklin and Mr James Taylor of TEC.
1047 Following an assessment of all EOIs lodged in response to the call for expressions of interest, TEC advised each of Pozzolanic, FAA and Adelaide Brighton in November 2001 that the company had been shortlisted to proceed further with a procurement process. In the letter to those companies (an example of which is Mr Collingwood’s letter to Mr Michael Wilson of 2 November 2001) Mr Collingwood said that TEC’s objective remained to appoint a successful Contractor by January 2002 (ATB SB 5.96).
1048 In terms of the assessed impression at that moment in time of the EOIs as reflected in the assessment sheets completed by Mr Collingwood, TEC’s assessment panel considered that FAA had the technical skills required; appeared to be offering no contribution to the development of any other use of ash (apart from cementitious use in concrete production); FAA was offering guaranteed access to stakeholder companies Boral, CSR and Pioneer; and the ash proposed to be taken was either 92,500 or 180,000 tonnes (actually 185,000 tonnes). According to the 12 assessed “deliverables” and the five categories of grading, FAA attracted a score of 41. Pozzolanic attracted a score of 48 and the assessed impression of Pozzolanic was put this way: Pozzolanic contended that they were engaged in the development of new markets but there appeared to be no evidence of this to date; the Millmerran Contract could impact upon Pozzolanic’s market; infrastructure was in place already at Tarong; and, an “O&M” arrangement was being offered for coal and the ash plants. Adelaide Brighton achieved an assessment of 37 and the assessed impression was that although Adelaide Brighton might be a possible “player in other uses” for ash, it had limited experience in “ash removal in power stations” (Ex-17, ENC-6).
1049 Adelaide Brighton responded to Mr Collingwood’s letter advising of the short-listing, on 23 November 2001 (Ex-17, ENC-8). In that letter, the Business Manager, Bulk & Packaged Product, for Adelaide Brighton (Mr Phillip Earl) said this as to Adelaide Brighton’s view of the position at the time:
As a consequence of research that we have conducted into the Queensland market for fly ash we advise that we have decided not to participate in “the final selection process” as presented by Tarong Energy in Attachment A … dated 2 November 2001.
Since our initial response to the EOI dated 13 October 2001, [Adelaide Brighton] has completed detailed market research into the power generation, ash production and market opportunities in Queensland. Our research highlights an oversupply of ash with 3.55 million tonnes produced in 2000 and in excess of 1 million tonnes coming on line during 2002 with the completion of Millmerran and Tarong North stations.
The traditional Queensland market consumes approximately 495,000 tonnes of ash products with the majority of this product being sold into the Cement & Concrete industries.
With the InterGen–Millmerran Station commissioning early 2002 and a new ash marketer in Queensland, we anticipate heavy discounting of ash prices to allow market penetration for this new entrant. When combined with the defensive tactics that we would expect from the existing marketer of Tarong ash, it will make a third entrant’s position untenable.
As a consequence of the anticipated market competition in the “traditional sectors”, it is our belief that the primary activity for the successful tenderer for Tarong North ash and the surplus Tarong ash will be to manage the ash disposal.
Concurrent to this activity, market, product and process research would confirm the viability of ash beneficiation such as lightweight aggregate production, floater harvesting and magnetite removal which could potentially generate future revenue streams.
We confirm that we are interested in continuing to progress our expression of interest along these lines, but have responded in this way to ensure that you are under no misconceptions regarding the potential utilisation of the ash from the outset.
The Pozzolanic Presentation to TEC in support of the EOI
1050 On 15 November 2001, Mr Collingwood sent an email to Mr Wilson confirming 27 November 2001 for “your presentation” at TEC’s Board Room in support of Pozzolanic’s EOI, to Mr Collingwood, Mr Franklin and Mr Taylor (Ex-17, ENC-7). Mr Collingwood cannot recall the person who delivered the presentation for Pozzolanic. The presentation consisted of a number of slides (ATB 4.7). Under the heading “Ash Marketing” the presentation notes that the market for concrete grade flyash is “Saturated … & supplied by Pozzolanic throughout Queensland” and “Pozzolanic in best position to maintain & maximise sales to this market”. Under the heading “Ash Market in SE Qld – 2001 Estimate” Pozzolanic displays a map of the geographic South East Queensland and northern New South Wales region which displays a series of intersecting ovals which purport to illustrate the natural market catchment for flyash supply from the Tarong and Tarong North power stations, Millmerran and Swanbank power stations. The map displays the shared geographic catchment between, particularly, Tarong and Millmerran and the overlaps with Swanbank.
1051 This map was also used in the presentations to Millmerran.
1052 The total volume of ash sales in 2001 by reference to those power stations in those natural and overlapping geographic catchments was said to be 270,000 tonnes.
1053 A copy of the map is attached as Annexure D.
1054 Under the heading “SE Qld Cement and Ash Market” the presentation observes that “QCL supplies cement & ash into the SE Qld market”; “Most customers are under contract for the purchase of cementitious materials (cement & ash)”; the contracts include “volume-related discounts to encourage loyalty – these are under threat if alternative products are purchased”; and the “Majority of flyash is sold into the concrete market, which is controlled primarily by three majors (CSR, Pioneer & Boral)”.
1055 Under the heading “Supporting Infrastructure” the presentation exhibits another map which displays cement and flyash movements for Queensland, New South Wales and Victoria. As to Queensland, the map shows that Gladstone is a source of supply of both cement and flyash into northern Queensland (Cairns, Townsville, Charters Towers and Mount Isa). Gladstone is shown as a source of flyash supply by ship to Melbourne. The map also depicts “exports” and the movement of product from Gladstone to Brisbane including cement and ash for distribution. On the evidence, Gladstone flyash was supplied, in late 2006 and 2007, by Cement Australia when it began to bring Gladstone flyash to South East Queensland to supply customers during the period of the drought which had caused a reduction in production of electricity at Tarong and a consequent reduction in the production of flyash. In the Brisbane catchment, there is a sub-map which depicts Tarong and infrastructure facilities of QCL (storage silos) at Bulwer Island, Darra, Wacol and Yatala (spoken about extensively in the affidavit of Ms Reich). The presentation also recites under this heading that “Logistics is the vital link between production & the customer”.
1056 Under the heading “Ash Sourcing from Tarong”, the Pozzolanic presentation described the current market demand for concrete grade flyash as 700 tonnes per day sourced by Pozzolanic at Tarong from Zone 2 as to 500 to 650 tonnes, and “to make up the rest” some Zone 1 is blended with Zone 2. The presentation recites that if quality is acceptable, Tarong North ash would be classified to save Zone 1 ash and Zones 3 to 4 are not used. Under the heading “QCL Support Group”, the presentation observes that the QCL Group offers considerable support to the “production, marketing, selling and distribution of fly ash”. An organisational structure is shown depicting Mr Bill Townsend as the Managing Director of QCL with Mr Ian Ridoutt described as QCL’s General Manager Sales & Distribution to whom Mr Michael Wilson reports as the Manager of Pozzolanic. Mr Des Chalmers as Manager Sales is shown as also reporting to Mr Ridoutt who directly reports to the CEO, Mr Townsend.
The TEC move to a tender process
1057 On 28 November 2001, Mr Collingwood wrote to Mr Wilson. The letter invites Pozzolanic to submit a formal tender for the sale and removal of flyash at Tarong and Tarong North Power Stations. In that letter, Mr Collingwood observed that there were “a number of scenarios and variables that could influence this Tender” and therefore Pozzolanic’s proposal would need to address a range of options, including, the term of any agreement (four years, eight years, reviewable, evergreen etc); the tonnage per annum (guaranteed, not guaranteed, reviewable) and the consideration (fixed per annum, reviewable etc). The tender would need to address related services (electricity, water, access roads etc).
1058 It is convenient to also mention at this point that TEC contemplated that an agreement based on Pozzolanic’s proposal would need to be drafted setting out “the most appropriate options” to be adopted. Mr Collingwood said that “following negotiations and further development (acceptable to both parties), [the] amended draft [would] become the final Agreement/Contract”. Thus, representatives from Pozzolanic and representatives of TEC would engage in a process of negotiation and further development of a draft agreement, jointly, which would, as a result of that process, at least as contemplated at this point by TEC, result in an “acceptable position” on the terms and conditions of the final Agreement/Contract, to both sides. The content of the negotiations is discussed as a separate topic later in these reasons.
1059 Mr Collingwood invited FAA to also make a presentation which also occurred on 27 November 2001. On 28 November 2001, Mr Collingwood wrote a letter to Mr Graeme Simon, FAA’s General Manager, in the same terms as the letter written to Pozzolanic (Ex-39, SDC-31).
The 14 November 2001 Board meeting and the budget assumptions
1060 On 14 November 2001, the November meeting of directors of QCL and subsidiary companies of QCL was held in Auckland preceded by a QCL strategy meeting with the directors of Milburn New Zealand Limited. At that meeting, the Board considered a document called the “2002 QCL Group Consolidated Budget” (ATB 4.1). The document was also circulated to a number of the General Managers including Mr Ridoutt and Mr Sherlock. In the budget summary under the heading “Market Outlook” the document says that the market downturn which commenced in July 2000 appeared to have “bottomed out” and an improved domestic cement sales outlook was anticipated for 2002, which meant that there would likely be an improved outlook for flyash sales. Total cement sales were expected to increase in the 2002 year by 10.8%. In discussing those influences on sales, the analysis is conducted by reference to sales in three particular regions or market sectors. The first is “South Qld (incl NSW)”. The second is “Central Qld” and the third is “North Qld”.
1061 As to flyash specifically, “Total Fly Sales” were expected to increase by 4.2%. Sales are categorised by reference to “Queensland” and “Victoria”. The budgeted sales for 2002 for Queensland were 410,000 tonnes compared with the actual sales in the 2001 year of 388,000 tonnes. Sales in Victoria were expected to remain roughly at the 2001 levels.
1062 As to sales in Queensland, the budget recites these considerations which were thought to affect transactions in the market:
Sales
Queensland
The increase in fly ash sales follows the general market improvement on 2001. The total market is expected to increase by 13% following a flat 2001. No allowance has been made for the loss of market confidence following the recent world events. Pozzolanic’s increase is reduced to 5.7% because of the potential loss of market share from ash sourced by others from the new power station at Millmerran in SEQ as from July 02.
…
Market Share
The budget reflects reduced sales from Tarong of 5k per month as from July 02 as Millmerran ash enters the market.
Although the Tarong contract expires in Aug 02 the budget assumes that this is renewed.
Prices
A price increase of $3 per tonne was implemented in September 2001 though for CSR and PNI this increase was reduced to $2.64. No increases were made for inter company sales to QCL for blending and there were no increases in Victoria as a $4.00 per tonne increase was implemented in September 2000.
As from July 2002, the budget allows for prices ex Tarong to drop by $10 per tonne because of competition from ash sourced ex Millmerran.
…
EBIT
The effect on EBIT of competition from ash sourced ex Millmerran in the 2nd half of 2002 is -$2.8m. However, because of (i) stronger market conditions in 2002, +$1.0m, (ii) the effect of the Qld price increase from Sept 01, +$1.0m, (iii) the reduction of distribution costs of ash to Melb +$0.9, and [iv] the higher proportion of ash sourced ex NRG [Gladstone] instead of Callide +$0.3, EBIT for the budget year increases from $5.9m in 2001 to $6.4m in 2002.
[emphasis added]
1063 One of the documents put to the directors for consideration at the Board meeting was a Board Report for the QCL group of companies (RCTB 375). The report was distributed to all of those individuals who were provided with the 2002 QCL group consolidated budget.
1064 In the discussion of markets, the commentary is divided by reference to events and circumstances in each region including “South Qld”, “Central Qld” and “Northern New South Wales”.
1065 In the Board Report, the Board was given this information in relation to flyash:
Pozzolanic has tendered for the ash sales from a new power station at Millmerran (just over 200km west of Brisbane – similar distance Tarong). This new station is owned by Intergen, which owns half of the Callide “C” station. MPA has tendered for coal and ash handling. Both Flyash Australia and Transpacific (Peabody) are particularly keen to capture this supply. At the same time, Tarong has called for Expressions of Interest for the sale and removal of bulk fly ash from Tarong and Tarong North. In addition the competitors for Millmerran, ABL [Adelaide Brighton] have apparently made an offer which is 20% above our current take or pay contract. It is most likely that a formal tender will be advertised in December.
…
The EBIT for fly ash as at September YTD is $4.02m, which is $1.58m below budget. Sales in Queensland are 5.9% below budget while Victorian sales are 16% above budget.
[emphasis added]
1066 The report bears the name of Mr G P Sherlock on the front page who was QCL’s General Manager Finance, although the report is described in the agenda as the Managing Director’s Report.
The propositions Pozzolanic put to Millmerran as part of that tender process
1067 As earlier mentioned, in August 2001, the entity responsible for the management and operation of the Millmerran Power Station, MOC, on behalf of the joint venture owners, MPP, commenced the tender process for the procurement of a Materials Handling Agreement comprising coal handling services, ash handling services; and, the sale and removal of flyash (Separable “Portion C” of the tender) (ATB SB 2.16A). In September 2001, Pozzolanic lodged a conforming tender for Portion C and a separate non-conforming tender for Portion C, signed on behalf of Pozzolanic by Mr Maycock as Director and Mr Schodel as Secretary. The guarantor of the tenderer’s obligations was Pozzolanic Industries. The guarantee was signed by Mr Maycock and Mr Schodel on behalf of that company. The documents as lodged and executed were the subject of resolutions of the Boards of Pozzolanic and Pozzolanic Industries. Pozzolanic’s tender for the Ash Purchase Agreement was submitted jointly with a tender from MPA Energy which tendered for the ash handling and coal handling portions of the Materials Handling Agreement (Separable Portions A and B).
1068 In Pozzolanic’s tender information for Portion C, Mr Michael Wilson was nominated as the “Contact Person” in his capacity as the Manager of Pozzolanic. He was also nominated as the “Contractor’s Representative” and the “Contract Area Project Manager” for the tender. In its tender documents (in both the non-conforming and conforming tenders), Pozzolanic said this by way of background to its proposal:
This tender … has been based on the sale of concrete grade fly ash, which only represents about 10% of the total fly ash produced throughout Australia.
Further to this, this tender is being used to create strategic benefit for some organisations. This may not result in long term ash sales for Millmerran. An example of this is Flyash Australia’s failed attempt at realising any market from the Stanwell Power Station. Pozzolanic continues to develop ash markets for Stanwell.
The concrete market in south east Queensland is currently saturated with fly ash. Given Millmerran’s location, the unknown quality of the fly ash and competitive pressures, there is a limit to the amount of fly ash that can be sold into the concrete market [that is, sold to participants who use, or who would seek to supply entities that use, flyash as an input in the production and supply of concrete]. This volume will only ever represent a small proportion of the total ash produced at the station.
Pozzolanic is the only fly ash marketing company with an active research and development program for non-concrete grade applications.
[emphasis added]
1069 Like the Tarong tender, Pozzolanic then emphasised that one of the “biggest issues” with supplying some markets is the “cost of logistics”.
1070 MOC also received tenders from Transpacific, FAA, “Minfox” and “Roche Mining”, although the latter two companies did not tender for the purchase of flyash from Millmerran.
Transpacific’s view
1071 In Transpacific’s tender (Ex-24, DJH-4), Mr Stuart, the Group Projects and Logistics Manager, said this of perceived constraints on competition, or actual or potential, rivalry:
An essential element of any proposal to utilise Millmerran fly ash should be the potential restrictions and/or hurdles that could hamper the producer/marketer’s attempts to capitalise on the product’s strengths and opportunities, without the constraint of competing products by the same owners. In this regard, Transpacific Industries is completely unhindered and has no allegiance to any cement and/or concrete producers, and, has the capability to provide the capital and resources necessary to serve the interests of “fly ash utilisation” under this proposal.
[emphasis added]
Pozzolanic’s view of the Ash Market
1072 On 18 October 2001, representatives of Millmerran and Pozzolanic met. Arising out of that meeting, Pozzolanic submitted a document to Millmerran which contained a description of some features of the “Ash Market”. In that document, Pozzolanic said these things to Millmerran:
As outlined in our offer, the concrete market in South East Queensland is currently saturated with fly ash. With Millmerran there will be three power stations supplying concrete grade ash in the region, not including the ash that comes up from NSW power stations. Due to current environmental restrictions, the use of other grades of fly ash is limited. Figure 1 shows an estimate of the quantity of ash used and produced in South East Queensland in the year 2000. This indicates a utilisation factor of under 20%. This figure will drop to just over 10% with Millmerran, given that the amount of concrete grade ash used will not change (other than in cyclic fluctuations).
[emphasis added]
Mr Wilson and Mr Ridoutt’s Presentation to MOC
1073 In early November, Mr Rob Thatcher (a mining consultant retained by MOC) and Mr Hunt, MOC’s Fuel and Ash Manager from September 2001 to September 2006 attended a presentation by Mr Wilson and Mr Ridoutt at QCL’s offices in Brisbane in support of Pozzolanic’s tender. In his first affidavit (Ex-24), Mr Hunt exhibits some of the PowerPoint slides from the presentation which include the “Ash Market In SE Qld – 2001” slide at Annexure D of these reasons, a further map (Annexure E to these reasons) showing the relative location of Tarong and Tarong North Power Stations, the Millmerran Power Station and CS Energy’s Swanbank Station at Ipswich, in relation to South East Queensland and northern New South Wales. The presentation also included a slide under the heading “SE Queensland Ash Forecast” which forecast “SE Qld Fly Ash Market Growth” from 2001 to 2006 of 300,000 tonnes in 2002; slightly in excess of 300,000 tonnes for 2003; about 350,000 tonnes for 2004 and very slight incremental growth beyond that until 2006 (Ex-24, DJH-7).
1074 Mr Hunt says that in the course of these presentations, Pozzolanic emphasised that Millmerran flyash would likely be used to meet increases in demand for flyash in South East Queensland rather than to supply existing customers which Pozzolanic might be unable to supply from existing sources of flyash. Mr Hunt recalls that Mr Michael Wilson said that Pozzolanic would be able to take an annual quantity of flyash close to approximately 100,000 tonnes but not substantively more, in the next five years.
FAA’s view put to MOC
1075 On 7 November 2001, Mr Simon responded by letter to matters Mr Hunt had raised with him concerning FAA’s tender for separable Portion C (Ash Purchase) (Ex-39, SDC-23). In that letter, Mr Simon said this:
We would like to reiterate that the competitive forces with regard to fly ash supply in South East Queensland are about to change dramatically as both your ash collection tender and Tarong Energy’s are being tendered simultaneously.
Flyash Australia is the only company that can guarantee access to the cementitious materials market for fly ash through our Stakeholder Companies. But due to both ash supplies being tendered simultaneously, legally binding tender offers had to be submitted to both parties. This required us to halve our guarantee equally between the parties to ensure our commitments made in our tender offers could be sustained if we were to win both contracts.
We believe our existing offer of 92,500 tonnes … per annum is balanced and fair and allows significant development for our partnership to grow as the following underdeveloped market opportunities present themselves [and a range of possibilities were then set out].
…
Due to the current market variables we believe that if the total South East Queensland premix concrete market for fly ash, as used by our Stakeholders, were committed to Millmerran, Tarong Energy’s fly ash sales would significantly reduce. Their most likely reaction to this situation would be to offer their fly ash equally to all users resulting in fly ash having zero value in the market.
[emphasis added]
Pozzolanic’s assessment of its market position in the Business Plan analysis of 9 November 2001
1076 Consistent with the notion that the market for flyash for use in concrete in South East Queensland was saturated with flyash, QCL in its Business Plan for the years 2002 to 2005, formulated on 9 November 2001, observed that QCL suffered from some weaknesses and enjoyed some strengths. One of the identified strengths was that QCL “currently enjoy[s] single supplier status for Ash in Queensland”. One of the identified weaknesses was the difficulty QCL was confronting “in retaining [its] flyash single supplier status in the future” and that there was a “large oversupply of flyash” in the market in which concrete producers purchase flyash as a cementitious substitute for cement. The Business Plan analysis under the heading “Ash Supply” observes that “with growing oversupply of ash, new power stations are encouraging new entrants to compete with Pozzolanic” (p 3-385). The Millmerran Power Station is noted as a source of flyash supply subject to tendering arrangements in which the tenders have closed. Competing bids are noted as having been received by Millmerran from FAA, Transpacific and Wagner. The preferred tenderer for ash marketing is noted as “yet to be disclosed”. The document notes that the Tarong Contract is to be decided by tender in early 2002 and will be influenced by which tenderer is successful at Millmerran for the ash marketing contract. Interested parties are noted as FAA, Transpacific and ABL. The Ash Supply section observes that “any loss of [QCL’s] single supplier status will adversely impact QCL’s annual EBIT by $1m to $6m p.a.”. At p 3-383, the document notes a general weakness (not confined to flyash) that QCL is subject to “extreme customer buying power by 3 majors” and that cement pricing (as opposed to flyash pricing) is “primarily structured as ex-works rather than delivered [pricing]”.
1077 At p 3-381 of the document, a segmentation is made of QCL’s flyash sales in 2001 by category of buyer. The top 10 customers accounted for 92% of sales. The customers described as the “Majors” (which is a reference to the 3 majors, Boral, Pioneer and Readymix) accounted for approx. 70% of sales at 340,000 tonnes; the key independents accounted for approx. 13% of sales at 62,000 tonnes; the minor independents accounted for approx. 6% at 30,000 tonnes; other sales represented approx. 12% of sales (divided into segments such as projects, asphalt production, roads etc) at 57,000 tonnes. Total sales according to the segmentation in 2001 amounted to 489,000 tonnes. By way of comparison, Ms Boman’s Schedule (Ex-51 CB1, Product Summary by Year) records fine grade flyash sales in 2001 of 472,107 tonnes and non-fine grade sales of 11,881 tonnes amounting to 483,977 tonnes in all. South East Queensland fine grade flyash sales according to Ms Boman’s Schedule amount to 277,795 tonnes which essentially reconciles with the Briefing Note prepared for Mr Arto dated 28 June 2002 of 260,000 tonnes.
1078 South East Queensland sales to the three majors described in the Briefing Note (190,000 tonnes) represents 73% of South East Queensland sales (260,000 tonnes) which is broadly consistent with year 2001 sales overall of 70% to the three majors.
Mr Ridoutt’s email of 26 September 2003
1079 This notion that QCL and Pozzolanic enjoyed the status of a single supplier in the market for flyash emerged again in an email from Mr Ian Ridoutt to Mr Leon dated 26 September 2003 under the heading “Flyash Strategy in QLD” which attached a copy of a Capital Expenditure Request Summary prepared 28 March 2002 and signed by Mr Wilson and Mr Ridoutt as proposers and by the General Manager Finance and the Managing Director as the reviewers. The email also attached the document described as “Ash Market in SEQ, March 2002”. In the covering email, Mr Ridoutt said this:
Chris,
Please find attached [the papers mentioned above] that supported our strategy to win the new contracts at Tarong and Millmerran and maintain our single supplier status position in the QLD Flyash market.
I thought this paper [the Capital Expenditure Request Summary] was more detailed but it was condensed for the Board meeting and although [it] provides some interesting info probably it does not have the depth and detail to cover all the issues you are now facing.
It is very pleasing that this strategy has worked extremely well and performance has been much better than forecast, however like any matter it will need to be managed and tweaked a bit where necessary in the south Brisbane and Gold Coast to ensure that things are kept under control.
[emphasis added]
1080 On 14 November 2001, the November Board Meeting of Directors of QCL and QCL subsidiaries occurred as earlier discussed.
Pozzolanic’s tender to TEC
1081 On 17 January 2002, Mr Michael Wilson sent a letter to Mr Collingwood at TEC enclosing Pozzolanic’s tender for the sale and removal of flyash at Tarong and Tarong North (ATB SB 5.98). In the letter, Mr Wilson said that “Millmerran Power” had not made any decision in relation to their contract for ash sales from the station and whilst Mr Wilson “did not feel it appropriate to publish our marketing strategies as a result of Millmerran ash entering the South East Queensland market” [emphasis added], Mr Wilson and others at QCL and/or Pozzolanic would be happy to discuss Pozzolanic’s marketing strategies as a result of that ash entering the South East Queensland market, with Mr Collingwood in person.
1082 Pozzolanic’s tender contained a graph setting out Pozzolanic’s forecast growth in sales (by volume) “for the concrete grade ash market in South East Queensland”. The predicted growth was this:
| Year | Potential Volume (‘000t) | Potential Volume (‘000t) |
| Concrete Grade | Non-concrete Grade | |
| 2002 | 294 | 10 |
| 2003 | 322 | 20 |
| 2004 | 350 | 50 |
| 2005 | 369 | 100 |
| 2006 | 378 | 100 |
| 2007 | 377 | 150 |
| 2008 | 345 | 150 |
| 2009 | 319 | 200 |
1083 In its tender, Pozzolanic emphasised its incumbent position at Tarong and the virtue for TEC of maintaining continuity of operation with Pozzolanic at Tarong. The tender emphasised that Pozzolanic currently supplies the market with ash, generally as part of a cementitious supply contract with Pozzolanic’s customers, and observed that “without Tarong, Pozzolanic would continue to supply this market from its Central Queensland ash sources” [original emphasis].
FAA’s guaranteed purchases
1084 On 9 January 2002, Mr Simon for FAA, sent a letter to Mr Collingwood at TEC setting out again the elements of FAA’s tender proposal (Ex-39, SDC-33). Mr Simon again said that FAA guaranteed to purchase 92,500 tonnes per annum although if TEC proceeds to be FAA’s sole source of flyash, the volume taken would be 185,000 tonnes per annum. In the letter, Mr Simon set out his view of the substitution forces operating, or about to be operating, in the supply of flyash in South East Queensland and that view was set out on p 2 in the same terms as the first three paragraphs from Mr Simon’s letter of 7 November 2001 as earlier quoted.
Mr Hunt’s assessment of the tenders
1085 In November 2001, MOC engaged Mr Heeley of Pacific Power to review the three tenders for Millmerran ash. Mr Hunt reviewed Mr Heeley’s draft report on 23 November 2001. In December 2001, Mr Hunt conducted a further review and recommended that an agreement be made with Pozzolanic. Nevertheless, Mr Hunt considered that FAA and Transpacific were both “credible alternative purchasers” (Ex-24, para 54). In February 2002, Mr Hunt told FAA that it was unlikely to be considered for a shortlist of candidates for the purchase and sale of Millmerran ash. On 11 February 2002, FAA withdrew its Millmerran tender.
1086 On 26 February 2002, FAA revised its offer. It offered a non-exclusive take or pay commitment of 120,000 tonnes per year at $8.80 per tonne. However, in the letter of revision, Mr Simon said that if FAA was granted exclusive access to Tarong ash, it would source all of its requirements for flyash “in the SEQ market” from Tarong (with the volume expected to be 220,000 tonnes). In that event, FAA would be prepared to “forego our current and developing opportunities to supply [its] customers in South East Queensland and Northern New South Wales” (Ex-39, SDC-36).
1087 As earlier mentioned, between 22 February 2002 and 19 April 2003, Mr Phillipe Arto was a Director of QCL, Pozzolanic and Pozzolanic Industries and between February 2002 and March 2003 Mr Arto was the Managing Director of QCL reporting to the Chairman of QCL, Mr Jerry Maycock. Mr Townsend had been the Managing Director of QCL from 1998 to February 2002, immediately before Mr Arto. Mr Maycock had been the Managing Director from 1992 until 1998 when he became the Area Manager and Senior Vice-President of Holcim and Non-Executive Chairman of QCL.
1088 Having commenced in the role in February 2002, Mr Arto had what he described as a three week handover from Mr Townsend. Mr Arto gave evidence that this role was a “new market environment” for him and therefore Mr Townsend briefed Mr Arto on the “context of the market and the competition”. Mr Maycock as Chairman had also briefed Mr Arto on the need to develop a strategy within QCL to address the problem that QCL was “very vulnerable and exposed to a very high level of concentration of customers, being also competitors” (T, p 1220, lns 25-34).
1089 A second “key concern” of Holcim, and therefore of Mr Arto, was that QCL was experiencing, in its current operations (having built a new cement plant only two years earlier) a lower level of margin compared to other Holcim operations. Thus, Mr Arto was asked by Mr Maycock to look at all possible options in QCL’s dealings with CSR, Pioneer and Australian Cement Holdings (and Boral), including a merger, or a sale of the business, or any other option that would “build a stronger more sustainable position for QCL” (T, p 1220, lns 34-39). These observations applied to both cement and flyash according to Mr Arto, as Mr Arto’s recollection was that these customers represented 60% of QCL’s sales and 65% to 70% of the flyash sales.
Mr Arto’s assessment
1090 As to QCL’s flyash business, Mr Arto said this of his discussions with Mr Townsend:
… we covered the whole situation, and certainly we covered the relationships with CSR, Pioneer, Boral, ACH, and obviously in the context of this relationship, we covered cement and flyash, and we could see – I could see immediately from the numbers that [they] were critical customers for QCL in defence of [their] share of the volume we were selling, and in the sense that – compared to other customers, they had much more capability to supply their own operations or they have options to supply these operations.
… dealing with customer competitors is much more difficult than dealing just with big customers. Usually big customers have a buying power, and they can leverage this buying power to extract price concessions [from] their suppliers. This is already something which was existing with CSR, Pioneer or Boral as customers, but on top of that, they had the ability to leverage [Australian Cement Holdings] as a cement company, to potentially import cement in – or in our market for their own needs, or to develop their relations in the market, or to bring in fly ash or develop fly ash operations. So they were, in a sense, much more difficult for us to [manage].
1091 Mr Arto gave evidence that the only way QCL could keep customers “like this” was, first, to have flyash to supply (or a cement plant, in the case of cement); second, to provide an excellent service (logistics); and third, supply at a price that discouraged those customers from setting up their own operations. Thus, QCL’s supply price had to be lower than the “alternative” supply price should they seek to “buy elsewhere” or to “import” the product. Mr Maycock also gave evidence about the nature of QCL’s relationship with CSR and Pioneer and Boral. Mr Maycock described negotiating with these “very substantial multinational companies” as an “arm wrestle” mostly undertaken by the marketing and sales people but also sometimes, although rarely, by the CEO (T, p 1341. ln 45).
1092 The present point of examining Mr Arto’s evidence on these matters is simply to identify the contextual market circumstances, as Mr Arto understood them in February and March 2002 (and going forward), as incoming Managing Director of QCL, particularly in terms of the concentration in the purchasing power of Boral, CSR and Pioneer for concrete grade flyash for use in concrete production; the perceived vulnerability of QCL to Boral, CSR and Pioneer; the importance Mr Arto attached to transport costs and logistics in defining the boundaries of transactional rivalry; and Mr Arto’s view of the geographic market segments within which actual or potential rivalry was expressed.
1093 The flyash issues came to the fore much sooner in his role as Managing Director than Mr Arto had anticipated and Mr Arto was therefore engaging in discussions with Mr Ridoutt and Mr Wilson about the tenders for Millmerran and Tarong in late February and early March 2002 in preparation for Mr Arto’s first Board meeting of QCL in April 2002. Aspects of the briefing provided to Mr Arto will be mentioned shortly.
1094 As to the role of transport costs as a function of transactional substitution possibilities, Mr Arto gave an example of his view of the importance transport costs play in determining the source of supply of flyash for a customer (and thus the delivered price of supply in the case of QCL). In Mr Arto’s example, he observes that the differential cost involved in transporting flyash from Millmerran to the Gold Coast as compared with transporting flyash from Tarong to the Gold Coast could be “something like” $5 or $7 and the difference “could be significant, like, 10 per cent of the actual selling price”, which in QCL’s case in the supply of flyash, was always a delivered price (T, p 1222, lns 42-45). Therefore, in Mr Arto’s example, supplying South Brisbane and the Gold Coast from Millmerran rather than Tarong would be cheaper because the “better logistics” would “reduce the logistic cost”. Mr Arto understood, in this example, that the difference in the transport distance was approximately 100 kilometres which would add, in his understanding, about $7 to $8 to the selling price which, plainly enough, Mr Arto regarded as material to substitution choices as to sources of supply of flyash for a buyer in South Brisbane or the Gold Coast.
1095 It does not really matter ultimately whether Mr Arto in his example is correct or not about the distance involved. What does matter, however, is that it seems to necessarily follow that if 100 kilometres was regarded by Mr Arto at that time as a material transport distance affecting the delivered selling price in the way he illustrates, thus rendering Millmerran a material substitution possibility to Tarong delivered flyash for buyers in South Brisbane and the Gold Coast, then, a transport distance of something in the order of 700 to 800 kilometres from Brisbane or parts of the Gold Coast, to Bayswater, Eraring and Mount Piper Power Stations must at least at a commercial level have been regarded by Mr Arto and QCL as sources of flyash which were not truly contestable with QCL’s supply of flyash from power stations at Millmerran, Tarong and Swanbank, unless a proper and detailed analysis of the logistics costs determined otherwise.
1096 In terms of the importance of transport costs and comparative logistics costs, Mr Arto said this (T, p 1223, lns 16-20):
… you know, we are in the bulk business, basically, so be it for cement or fly ash, the transportation costs [are] the same, and the transportation costs [are] a very critical component of our total cost delivered to the customer.
[emphasis added]
Mr Arto’s characterisation of the geographic market
1097 As to the correct characterisation of the geographic market, Mr Arto accepted that there were “two separate markets in Queensland for fly ash”; there was “the central and north Queensland market where fly ash was also transported to Victoria and elsewhere”; and, there was “a separate market for what [Mr Arto or QCL or both] described as south Queensland”. Mr Arto accepted that he understood that “Tarong and Swanbank Power Stations were supplying fly ash to the south Queensland market” and those power stations “were not supplying fly ash to the central Queensland market, the north Queensland market or the Victorian market … because of the logistic costing”; and, “Millmerran Power Station would be a source of fly ash for the south Queensland market … and potentially part of New South Wales … and [certainly] not for the central Queensland, north Queensland or Victorian markets … because of the distance” (T, p 1224, lns 20-42).
Mr Maycock’s macro view
1098 Mr Maycock is a person with very considerable experience in the management and governance of a company engaged in the business of making and selling cement and selling flyash as a partial cementitious substitute for cement. Mr Maycock described the “fundamental business characteristics of the fly ash business” in this way (T, p 1339, lns 14-33):
… fly ash is essentially a partial substitute for cement so if you’re using ready-mix concrete, you can substitute, maybe – it depends but between 20 and 30 or 35 per cent of cement with fly ash. And depending on the quality of the fly ash, you know, you can get different substitution rates but you might have to put slightly more fly ash in than cement to achieve the same concrete performance. But to that extent, it was a direct substitute for cement. So from an economic point of view, if the amount of fly ash you had to put in to replace a given amount of cement was cheaper, then there was a strong incentive for the ready-mix concrete companies to use fly ash. So that was the sort of economic case from the point of view of a ready-mix concrete company. Now, from the point of view of a power station – coal-burning power station – ash is an inevitable by-product of burning coal. And most of the power stations had a problem, or at least a cost, associated with disposing of the ash by-product from burning coal. And Pozzolanic’s business origins in the 70s actually was – and the innovation was to go to the power station and figure out that they could take some of this ash or treat some of this ash and convert it into a saleable product and sell it to a concrete company. And everybody would win in the sense that a power station would dispose of some ash – it might even get a royalty – usually did; Pozzolanic, as it then was, would make a margin; and the readymix concrete company would make some money compared to cement. So it was a – you know, it was clearly an interesting business model. And that’s the business model that QCL acquired when they bought Pozzolanic.
1099 Notwithstanding the elements of this business model, Mr Maycock also added, “But to be honest, compared to the value of producing electricity, the value of the ash was a very small component – or the variable value of the ash was a pretty small component of their [the power stations] overall income stream”, although “they did have some incentive to try and maintain [a] reasonable supply of ash as they originally contracted to do”.
1100 As to Flyash Australia, Mr Maycock said that he regarded FAA by November 2001 and onwards as a potential competitor of Pozzolanic in South East Queensland because market intelligence had made it plain to him that FAA was looking at opportunities that came up in South East Queensland to secure flyash sources of supply.
1101 Mr Maycock, no doubt, regarded FAA as a potential competitor not only because FAA was looking at opportunities that came up in South East Queensland to secure flyash sources of supply but also because it carried with it the joint venture shareholder engagement, directly or indirectly, of Boral, CSR and Pioneer. Mr Maycock had regarded negotiations with those companies as an “arm wrestle” for all the obvious reasons already mentioned. It should also be remembered that, historically, in conducting an “arm wrestle” with these companies, QCL suffered from at least one disability and probably at least three advantages. The disability was the circumstance mentioned by Mr Blackford and also noted by Mr Clarke in his evidence (and also the evidence of Mr Arto and Mr Maycock) that none of Boral, CSR or Pioneer were stakeholders in QCL (or any joint venture entity with QCL as shareholders) with the result that QCL could not be guaranteed that sales of flyash (or cement) to those companies were embedded as part of any shared common proprietary undertaking. This consideration dictated the strategic examination Mr Arto was asked to undertake by Mr Maycock immediately upon Mr Arto taking up the role as Managing Director in February 2002. This was undoubtedly perceived as a weakness or vulnerability which needed to be dealt with and was ultimately addressed in the form of a merger.
1102 The three advantages, at least historically, leading up to the call for expressions of interest at Tarong, the subsequent Tarong tender, and the tender process at Millmerran, were these. First, Pozzolanic enjoyed a subsisting contractual position at Tarong and Swanbank, and to the extent that supply transactions with CSR, Boral or Pioneer (or any other buyer) might engage transactions in which Gladstone or Callide flyash might be supplied into South East Queensland or Northern New South Wales (if at all), Pozzolanic also had flyash contracts with the Gladstone and Callide Power Stations which gave Pozzolanic some real commercial control over flyash sources and therefore some real commercial control over the supply of concrete grade flyash to concrete companies as users (and also to re-sellers). These contractual controls represented significant practical, operational working barriers to entry to potential competitors. In one sense, Pozzolanic’s greatest strength in the form of the contracts it held with power stations was also one of its emerging weaknesses as the contracts became subject to further tenders. These issues are discussed later in these reasons.
1103 Second, FAA as a joint venture entity between Boral and ACH, and in turn, CSR and Pioneer, did not have a contract for the purchase and removal of flyash from a power station in Queensland (although FAA did establish a supply arrangement at Stanwell that proved to be unworkable as the ash was unmarketable). Certainly FAA was after a contract with a power station in SEQ.
1104 Third, QCL enjoyed the benefit of an apparent logistical tyranny of distance, as QCL regarded the logistic cost of transporting flyash to a customer’s batching plant (often via intermediate QCL storage with consequent double-handling costs) as a critical component of delivered pricing, and QCL set its prices taking account of the next best alternative delivered price for a customer in Brisbane, or the Gold Coast, or Northern New South Wales, or anywhere in the area depicted in the maps used by Mr Wilson at Annexures “D” and “E” as a definition of the geographic catchments for Tarong, Millmerran and Swanbank.
1105 Mr Clarke considered that FAA’s attempts to supply flyash into Northern New South Wales and South East Queensland from Bayswater, Mount Piper or Eraring was a marginal commercial exercise, “at best”. FAA’s agitation by 2001 to seek a source of flyash in Queensland coupled with its threatened capacity to deliver the purchases of its major shareholders, rendered QCL, in Mr Maycock’s view, “very vulnerable” to a “very high level of concentration of customers who were also competitors”.
1106 By March 2002, there was no actual rivalry in the supply of concrete grade flyash (whether fine, medium or coarse grade cgfa) obtained by a supplier from a power station in Queensland for supply to buyers of cgfa for use in concrete production or for re-supply, in the catchments depicted in Mr Wilson’s maps annexed as “D” and “E” to these reasons. QCL controlled the supply of such flyash in every practical sense. The two tender processes for Tarong (and Tarong North) and Millmerran represented by March 2002 a source of potential new entrant rivalry in the supply of flyash within the overlapping catchments in the geographic areas depicted in Mr Wilson’s maps annexed as “D” and “E”, generally described as South East Queensland. Tarong (and the new Tarong North Power Station in effect “stapled” to the Tarong tender) represented the major source of Pozzolanic’s flyash (and QCL’s cgfa product) for supply to customers in SEQ. Millmerran represented a new substantial volume of flyash although unknown and untested. Both sources of flyash were under competitive challenge by tender. Although QCL periodically engaged in an “arm wrestle” with Boral, CSR and Pioneer over prices, rebates and other supply terms, QCL perceived the strength of its position in that process (and, in consequence, the profitability of its flyash enterprise) would be affected should it not secure a contract for the familiar and well known Tarong flyash (in particular) and the Millmerran contract.
1107 So far as the independent concrete producers were concerned, they were not, to use Mr Maycock’s description of Boral, CSR and Pioneer, “very substantive multinational corporations”, and in any “arm wrestle” with QCL concerning the delivered pricing of flyash, the possibility of securing self or contracted delivery to batching plants, was a contest in which the independent producers lacked the same strength or muscle in contesting the terms of supply.
1108 As earlier mentioned, Mr Arto was required to confront the range of issues arising in connection with the Millmerran and Tarong tenders much sooner than the three or four month period within which he expected to conduct his strategic review. In this chronological sense, it is convenient to mention some of the documents that came before Mr Arto notwithstanding in the context of the assessments within Pozzolanic and QCL of the relevant market within which these participants understood they were engaging, daily. Some of these documents go much more to the question of business reasons for conduct or purpose, but it is convenient to mention some of them now.
Mr Wilson’s briefing email of 4 March 2002
1109 On 4 March 2002, Mr Michael Wilson provided an email briefing note to Mr Arto explaining some of the dynamics concerning flyash supply arrangements in South East Queensland (Ex-35A, PPAA-1). The briefing note is headed “Ash Contracts in SEQ – Background Information”. This email was sent to Mr Arto as a background position paper for the purposes of a meeting on the following Wednesday. The material put to Mr Arto was concerned with the circumstances in South East Queensland. Mr Wilson provided Mr Arto with a copy of his map showing the locations of the South East Queensland power stations relative to Brisbane. The position paper from Mr Wilson set out Mr Wilson’s understanding of the position at that moment in time, in these terms:
Current Contracts
As background to our meeting on Wednesday, here is some information regarding ash contracts, particularly in South East Queensland.
Here is a summary of all of the contracts Pozzolanic Enterprises has with power stations:
There are two contracts with power stations in SEQ:
Tarong Power Station
- owned & operated by Tarong Energy
- current contract expires 31 August 2002
- fixed royalty of $2,200,000 per year
- 247kt sold from Tarong in 2001
- fly ash is not as good as ash from Gladstone Power Station
- about 1.5 million tpa of ash produced by the station
Swanbank Power Station
- owned and operated by CS Energy (also operate Callide Power Station)
- current contract expires 31 December 2002
- contract extended by 2 years if sales target achieved (good possibility)
- 41kt sold from Swanbank in 2001 (only 33kt is concrete grade fly ash)
- ash is not good quality
- $449,000 royalty paid in 2001
- CS Energy looking for a life-of-station agreement to replace current (approx 10 years)
- about 200,000 tpa of ash produced by the station
There are two contracts currently being tendered – Tarong Power Station & Millmerran Power Station
Tarong Power Station
Current profitability of Tarong is as follows:
Tarong’s total EBIT [that is, the EBIT contribution derived from selling Tarong sourced flyash] for 2001 was $7.3 million for 247kt.
Tarong is installing another unit at Tarong North (currently under construction – should be completed by early 2003). The new ash contract will cover fly ash from both stations. Tarong North will produce a further 500 ktpa of fly ash (total of 2 million tpa for the station).
[The] other tenderer is Flyash Australia. They were not preferred at Millmerran and have subsequently increased their offer to Tarong. To secure contract we need to offer the following:
Fixed royalty of $2,600,000 per annum, indexed with CPI (excluding GST) for 10 year term.
Installation of plant at Tarong North (capital of $1-$1.5 million) during 2003.
Millmerran Power Station
This is a new power station with similar cartage distances to Brisbane (except via the north of Brisbane). It will be operated by InterGen … It will produce about 1 million tpa of fly ash.
MPA has an agreement with Millmerran for coal and ash handling. The other tenderer for the ash sales is Transpacific (Terry Peabody). To secure contract we need to offer the following:
Guaranteed royalty of 135ktpa @ $9.20 per tonne (excluding GST) – total of $1,242,000 per annum for 7 year term ... Installation of plant (capital of $1.5 million) during latter part of 2002.
Millmerran would also like us to look at early payment options – ie pay cash for a year (or some other term) upfront. This is to help with their cash flows. …
[emphasis added]
1110 This was Mr Arto’s first “actual briefing” on specific issues in relation to each power station. Mr Wilson and Mr Ridoutt attended the meeting. Mr Arto accepted that there was a discussion about the amount which would need to be offered to secure the Millmerran and Tarong Contracts. Mr Arto took the view that Mr Ridoutt was more informed and in a better position to know and determine the prices needed to be offered to win the bids and secure an acceptable level of profitability in doing so.
1111 In analysing the profitability of the flyash business to Mr Wilson, in his Briefing Note, did not engage in any analysis of whether QCL might be able to supply its current customers with fine grade flyash sourced from Callide or Gladstone should QCL not have a source of flyash from Tarong even though Pozzolanic had said in its tender to Tarong that should Pozzolanic not secure the Tarong contract, QCL would supply its contracted customers with flyash from Central Queensland.
1112 On 6 March 2002, Mr Wilson sent a letter (ATB SB 3.22) to Mr Cameron at MPA Energy advising that Pozzolanic was willing to revise its ash payment for concrete grade flyash as part of the joint proposal to $10.10 per tonne (including GST) for a guaranteed quantity of 135,000 tonnes per annum resulting in a guaranteed payment of $1,363,500, subject to a discount of $40,000 should the amount be paid one year in advance ($1,323,500).
1113 On 13 March 2002, Millmerran wrote to MAP Energy advising Pozzolanic that its bid had been awarded “first place bidder” status.
The Ash Market in SEQ Board paper of March 2002
1114 In March 2002, a report was prepared for a meeting of Directors of the QCL group of companies to be held on 11 April 2002. The report was entitled “Ash Market in SEQ March 2002”. It formed part of the Board papers for those meetings and was attached to a Capital Expenditure Request Summary dated 28 March 2002. The Ash Market Report and the Capital Expenditure Request are at ATB 9.23. The likely position, on the evidence, is that the ash market report was presented to the Board by Mr Ridoutt.
1115 As to Pozzolanic’s assessment of the ash market in SEQ in March 2002, the report reflects these views. First, the report is expressly addressing the “ash market” in “South East Queensland” and, in particular, the issues surrounding the contracts for the new power station at Millmerran, the new Tarong North station and the existing Tarong station. The entire analysis assumes the subsistence of an ash market in South East Queensland in which new entrants would emerge and contestability would likely take a particular shape.
1116 Second, the “Key indicators” for the 2001 year were that QCL’s “South East Queensland Fly Ash Business” generated total sales, by volume, of 288,000 tonnes representing 58% of total flyash sales (497,000 tonnes). Total sales were $17.52 million generating EBIT of $4.82 million. QCL’s EBIT on all sales of flyash was $4.92 million and thus the EBIT in respect of SEQ flyash sales was a very significant proportion of EBIT overall. The EBITDA was 34.8% on the SEQ flyash business as compared with 21.8% on total flyash sales.
1117 As to the “New Ash Contracts in SEQ”, the report makes these observations:
We are currently in contract negotiations for 2 new ash contracts in SEQ – Millmerran Power Station; and Tarong and Tarong North Power Stations.
Pozzolanic’s objective is to be the preferred ash manager for Queensland power stations. Our strategy was therefore to secure both contracts and therefore maintain the supply of fly ash to our existing customer base.
Millmerran is a new power station that will be operated by InterGen … MPA has entered an agreement for coal and ash handling. Pozzolanic is the preferred tenderer for the ash sales. Millmerran is hoping to finalise the ash sales contract by early May.
The new contract at Tarong replacing our existing contract, which expires at the end of August, and includes ash from the new Tarong North Power Station. We have been told unofficially that Pozzolanic is the preferred tenderer. A contract is currently being prepared.
[emphasis added]
1118 The report says that the proposed contract terms for Tarong and Millmerran are these:
| Station | Tarong | Millmerran |
| Term | 7 years with a 3 year notice period (initial 10 year term) | 7 years |
| Payment (ex-GST) | Fixed payment of $2,600,000 indexed with CPI | Concrete grade - $9.20/t; Other grades - $0.50/t; Guaranteed payment of $1,242,000 (based on 135kt of concrete grade ash); Fixed payment of $150,000 to MPA (operational discount to Millmerran) |
| Electricity | Fixed payment of $35,000/month for all electricity | No charge |
1119 As to the risks, the report says this:
Loss of either contract (Tarong or Millmerran) may result in a loss of up to 250,000t of fly ash and an EBIT of $6 million. However, there are some risks associated with securing both of the new contracts for 7+ years. These risks and the appropriate actions are outlined below:
Risks associated with securing both contracts
| Risk | Action |
| Imports from NSW or Asia | Cost structure of importing fly ash should prevent large volumes of ash from Asia; Using NBA [next best alternative] analysis from NSW power stations to determine ceiling for ash pricing in SEQ |
| New power station in SEQ | Kogan Creek is the next coal-fired power station planned for SEQ – near Dalby. It is unlikely that this power station will be up and running within the next 10 years, given the current capacity being developed in the electricity market within Queensland and the moratorium of coal-fired power stations by the Beattie Government |
| Product manufacturers distribute ash into market | We are negotiating some protection in the contracts for this possibility. Further to this, a product manufacturer should only be able to get run-of-station fly ash, which will require processing to be suitable for the concrete market |
[emphasis added]
1120 The proposal put to the Board as set out in the paper was put in these terms:
Proposal
We seek the approval of the following items:
(a) Enter into long term contracts at Millmerran and Tarong to secure fly ash supply at both power stations;
(b) Increase our minimum yearly take or pay payments for ash by $1.6 million per annum to $4.2 million; and
(c) Allocate $3.5 million to build new plants at Millmerran and Tarong North.
[emphasis added]
1121 The report then sets out an analysis of the “economics” of the proposal as put. The analysis is set out in a table which compares “key indicators” between the 2001 actual results, the 2002 budget and the 2003 projection or estimate (which is a projection that assumes that Pozzolanic wins the Millmerran and Tarong contracts and the capital, as proposed, is expended and deployed) for South East Queensland. The comparison is this:
| Indicator | 2001 Actual | 2002 Budget | 2003 Estimate |
| Total fly ash sales | 288,000t | 297,000t | 331,000t |
| Average selling price | $61/t | $57/t* | $67/t |
| Total net sales | $17,535,000 | $16,934,000 | $22,177,000 |
| Royalty cost | $2,606,000 | $2,771,000 | $4,248,000 |
| Production & maintenance costs | $1,620,000 | $1,693,000 | $2,513,000 |
| Distribution costs | $5,469,000 | $5,483,000 | $6,589,000 |
| Gross profit | $7,831,000 | $6,987,000 | $8,827,000 |
| EBITDA | $6,100,000 | $5,256,000 | $7,096,000 |
| EBIT | $4,825,000 | $4,896,000 | $5,471,000 |
| EBITDA margin | 34.8% | 31.0% | 32.0% |
* Lower average selling price reflected a lower selling price due to loss of Millmerran ash contract
1122 Although the economics of the proposal were based upon an assumption that both contracts had been secured and all capital spent and deployed as proposed, the 2002 budget had been formulated and put to the Directors at the Board meeting for the combined QCL entities in November 2001 assuming an average selling price for the 2002 year of $57.00 per tonne on the assumption that a lower average selling price would be obtained due to a loss of the Millmerran Ash Contract. Accordingly, for the purposes of the table, the 2002 column reflected the 2002 budgeted figure which was not the position assumed for the purposes of the 2003 estimate.
1123 The report set out a table showing the current Pozzolanic contractual position (and a short synopsis on the rights conferred upon Pozzolanic) with power stations in Queensland for each of Tarong, Swanbank, Gladstone, Callide B and Stanwell together with one of Mr Wilson’s earlier maps showing the geographic catchment.
Mr Klose’s email of 2 April 2002
1124 On 2 April 2002, Mr Peter Klose sent a memorandum (ATB 4.39) to the Executive Management Group in which he said this on the topic of “Control of SCM’s [supplementary cementitious materials]”:
Flyash
The threat of a second flyash supplier in the Queensland market remains current. Both Trans-pacific and FAA have submitted tenders for Millmerran and Tarong power stations.
The ability to secure these contracts is vital in retaining value to the Pozzolanic business. Current estimates to secure the contract are for an additional cost of [$3 million per annum] but this will be offset by increased ash prices.
[emphasis added]
The January/February 2002 Board Report
1125 In the Board report of January/February 2002 for the Board meeting on 11 April 2002, reference is made to the “South East Queensland Ash Strategy Paper and Proposal” included in the papers as a separate report. In the commentary in the Board report, an observation is made that Flyash Australia is particularly keen to win the Tarong contract having withdrawn its tender for Millmerran. Transpacific is said to be “particularly aggressive” in relation to the Millmerran Contract. The report notes that the MPA Energy/Pozzolanic bid is preferred from an operational point of view. The capital expenditure request seeks an approval for the expenditure of $3,500,000 for the provision of plant and equipment at the Millmerran and Tarong sites in the event that both contracts are secured. The provision of the plant and equipment would be a condition of the contract for both sites. The “significant strategic benefit” of the capital investment was put this way:
Securing the contracts at Tarong and Millmerran will maintain our ash sales to our existing customers. Loss of either contract may result in a loss of up to 250,000t of fly ash and an EBIT of $6 million.
1126 The Capital Expenditure Request was prepared and proposed by Mr Michael Wilson and recommended by Mr Ian Ridoutt. It was reviewed and approved by the General Manager Finance for QCL and the Managing Director of QCL. The Directors of Pozzolanic, Mr Maycock and Mr Arto considered the Capital Expenditure Request for the installation of plant at Millmerran and Tarong in 2003 (consisting of a classifier, product silos and weighbridge at both sites) and resolved on 11 April 2002 to proceed with the expenditure “subject to the finalisation of acceptable ash contracts for the Millmerran Power Station and for the Tarong North Power Stations” (RCTB 412). The Minute reflects the practice earlier noted as described by Mr Maycock of Mr Schodel preparing a Minute after the joint Board meetings allocating decisions to each particular entity.
The 28 June 2002 Briefing Note
1127 On 28 June 2002, Mr Ian Ridoutt sent an email to Mr Des Chalmers and Mr Michael Wilson (ATB 5.22) advising that he had organised a meeting with Mr Arto for 2.30pm that day for Mr Ridoutt, Mr Chalmers and Mr Wilson to “give him a compelling story of why Intergen [Millmerran] should award us the contract and make sensible decisions about distribution of their ash”.
1128 Mr Wilson and Mr Chalmers prepared an information paper for the purpose of briefing Mr Arto on the dynamics operating within the “Ash Market”. It contains an important assessment of their thoughtful views about that matter. The information paper is called “Briefing Note Millmerran Ash Sales” and begins with an assessment of the “Ash Market” (ATB-5.20).
1129 The briefing note observes that in 2001 concrete production in Queensland amounted to 4.2 million cubic metres of concrete. It observes that if an assumption is made that the average flyash usage is 90 kilograms per cubic metre, flyash usage would be 378,000 tonnes. The report notes, in that context, that QCL’s actual flyash sales for 2001 were 390,000 tonnes.
1130 In other words, Mr Wilson and Mr Chalmers were telling Mr Arto that QCL, in effect, had the entire market in Queensland. They put that conclusion, based on those statistics, in this way:
The fly ash market is truly saturated in Queensland, thanks to the efforts of Pozzolanic over a number of years.
1131 The briefing note then goes on to provide a segmentation of the position in South East Queensland in this way:
In South East Qld, a rough split of the concrete grade ash sales in 2001 is as follows:
CSR 70kt
Pioneer 60kt
Boral 60kt
QCL/Sunstate 20kt
Excel 10kt
Major Independents 30kt
Minor Independents 10kt
Total 260kt
1132 The 2001 sales to CSR, Pioneer and Boral therefore amounted to 190,000 tonnes.
1133 The briefing note asks:
Given the control by the majors, what [volume] is available to another competitor [to QCL] from Millmerran, particularly Peabody [Transpacific]? Without serious movement in price, a maximum amount of about 50,000 t may be achievable.
1134 The dynamic confronting Millmerran was put in these terms:
The issues for Millmerran are how much of the pie do they get and could they get more (and therefore more money) from a competitor to QCL. They see an opportunity to sell an additional 50ktpa over and above what we may remove. This volume would most likely be taken off Tarong and would return additional revenue to Millmerran (say $0.5M).
1135 The briefing note then postulates the profitability of Transpacific should it secure a contract at Millmerran. Assuming Transpacific supplied 50,000 tonnes per annum of flyash to producers of concrete, the total value of the contract to Transpacific, in terms of its margin or profitability, would be $550,000 and should Transpacific supply 100,000 tonnes, the total of value of the contract, in terms of margin, would be $2.6M. The briefing note then identifies the current value (2001) for QCL of its contract with Tarong as $7.3M; with Swanbank $0.7M; with Central Queensland (Callide and Gladstone) $2.7M, representing $10.7M in all, less the Head Office costs, attributed to deriving that profitability, namely, $5.0M resulting in a total margin excluding Millmerran of $5.7M.
1136 The briefing note then identifies the total margin or value of the contracts at each power station once the payments to Millmerran and revised payments to Tarong are brought to account. Those payments represent approximately $2M and thus QCL’s profitability from Tarong, Swanbank, Central Queensland and Millmerran would be $3.7M.
The Ash Market in SEQ September 2002 Board paper
1137 Mr Arto considers that he received and read the “September Board Paper” (Ex-35A, PPAA-3). It seems likely that the Board paper entitled “Ash Market in SEQ September 2002” was presented by Mr Ridoutt. Again, the paper expressly addresses a position relating to an ash market in South East Queensland.
1138 As to the current status, the Board paper observes that “Negotiation for the Millmerran Ash Purchase Agreement is complete and is being prepared for signing”. The terms of the Millmerran Agreement are summarised in this way:
| Item | Details |
| Term | 7 years from 1 January 2003 |
| Payment (ex-GST) | Minimum payment of $1,203k per annum (indexed to CPI) + payment to MPA of $180k pa (operational discount) Applicable rates for different grades of ash: Concrete grade - $9.18/t non-concrete, conditioned, bottom ash - $0.50/t |
| Ash quality | PE has 9 months to test and accept the ash from substantial Completion of Unit 1 (Sep 02) |
| Ash quantity | Millmerran must make available enough ash to produce 135k of concrete-grade fly ash |
| Facilities | PE must establish plant by 1 May 2004 |
| Termination | PE may terminate the agreement after 31 December 2006, or reduce the guaranteed tonnage, both with some financial penalty |
1139 As to the position confronting QCL, the paper observes:
If we do not sign the agreement, Millmerran will negotiate an agreement with TransPacific (Peabody) who are particularly keen to re-enter the ash market in Queensland, and will with all probability match our offer.
[emphasis added]
1140 As to the position in relation to the Tarong Contract, the September Board paper says this:
Negotiations for the ash sales agreement with Tarong are still ongoing. The key elements of the current draft agreement are as follows:
Tarong Ash Sales Draft Agreement
| Item | Details |
| Term | 8 years from 1 December 2003 – contract may be extended in increments of 3 years upon agreement by both parties |
| Payment (ex-GST) | Fixed payment of $2,600k per annum (indexed to CPI) for access concrete-grade fly ash at Tarong and Tarong North PE will be paid for ash handling services as required |
| Ash quantity | PE guarantees to remove 200k of ash per annum (any type ash including bottom ash) |
| Facilities | PE must establish plant within first 12 months of normal operating conditions (approx end-2003) |
[emphasis added]
1141 As to the position in relation to the Tarong draft agreement and the negotiations with TEC, the Board was told this in the report:
Tarong’s lawyers are holding up the contract. Their concerns centre around the trade practice implications of the contract. This delay necessitated a 3-month extension of our current contract with Tarong, which now expires at the end of November. While we have not been officially offered a new contract, we are confident that a new contract will be secured for the following reasons:
? We have been involved with reviewing the draft contract which has been written around our offer and our capabilities;
? We have just been verbally awarded a minor 6-month contract to manage the furnace ash at Tarong North which starts on 3 October 2002 and is conditional on having a current ash sales agreement with Tarong. We are now awaiting formal contract documents for review and execution.
[emphasis added]
1142 The report then identifies the market dynamics for QCL in not securing a contract with TEC, in these terms:
If we do not secure the Tarong ash contract it will go to Flyash Australia, a joint venture between Blue Circle (Boral) and Australian Cement (CSR and Pioneer). CSR, Pioneer and Boral account for 72% of the South East Queensland fly ash market. Therefore the available market left would be 85kt, 40kt of which would most probably be supplied from the Swanbank Power Station. Securing a contract at Millmerran at a volume of 45kt per annum would be marginally profitable, as follows:
Profitability of Stand Alone Millmerran Operation
| Item | Amount |
| Royalty | $30.73/t |
| Depreciation | $4.44/t |
| Production | $4.83/t |
| Cartage | $22.00/t |
| Total costs | $62.01/t |
| Price | $65.00/t |
| Margin | $2.99/t |
| Total value | $135k |
1143 The calculation is based upon 45,000 tonnes per annum sourced from Millmerran with a delivered price based on a buyer’s next best alternative of delivered Bayswater flyash, rather than a rivalrous price, with no contribution to overhead costs included. The reference to “$135k” as the total value seems to be a reference to 45,000 tonnes at a margin of $2.99/t amounting to $134,550 or 4.82% on total costs of $2,790,450.
1144 The ultimate conclusion of the Board paper is that “Based on year-end forecasts, the loss of the Tarong supply would result in an EBIT loss of about $6.3M”. The recommendation put to the Board was that “Subject to a final review and approval of the Millmerran Ash Purchase Agreement by Mr P Arto that the Board approve the execution of the Millmerran Ash Purchase Agreement”.
1145 The contract was entered into on 30 September 2002.
1146 Further aspects of these documents and the views of Pozzolanic, QCL and Cement Australia of the market are examined in a detailed consideration of the evidence of Mr Arto and Mr Maycock going to these matters and conduct questions. I am urged by the Commission to reject in large part the evidence of Mr Arto and Mr Maycock on aspects of these events. There can be no doubt that Pozzolanic and QCL (and later Cement Australia) saw themselves as operating and supplying into an SEQ concrete grade flyash market in which QCL and Cement Australia were either the single supplier or virtually the single supplier of cgfa.
PART 19
Logistics, transport costs, direct delivery to the customer’s batching plant from the power station, indirect delivery through intermediate storage to the customer’s batching plant, the evidence of Ms Deborah Reich
1147 The primary evidence in the proceeding concerning the logistic functions of the respondents and the costs of undertaking the logistic task both generally and in relation to particular specific activities by participants to transactions was given by Ms Deborah Ann Reich.
1148 Ms Reich swore two affidavits (Ex-47, Ex-48) in the proceeding.
The logistics task and its features
1149 In her evidence, Ms Reich examines the considerations taken into account in developing a logistics plan and the costs associated with transporting flyash, by various modes, from particular power stations to a customer’s batching plant directly, and the costs involved in what she describes as “double-handling” caused by transporting flyash to an intermediate point of storage, handling flyash at that intermediate point and then transporting flyash from that storage point to a customer’s site.
1150 On 29 August 2005, Ms Reich was appointed to the position of Queensland Logistics Manager for Cement Australia. Ms Reich was in that role until 30 September 2007. Ms Reich reported to Mr Glen Thomas who was the General Manager of Supply Chain for Cement Australia. On 1 March 2006, Mr Colin Bailey assumed the role of General Manager Supply Chain and Projects for Cement Australia and from that date Ms Reich reported to Mr Bailey. On 1 October 2007, Ms Reich was appointed to the position of National Terminals & Rail Manager for Cement Australia.
1151 As Queensland Logistics Manager, Ms Reich was responsible for managing the logistics of all cementitious products for designated regions described as Queensland, Northern New South Wales and the Northern Territory. The Northern New South Wales area included the area south of the Queensland border, south to Coffs Harbour, and west to the Queensland, South Australia and Northern Territory’s borders (Ex-47, para 12).
The logistics task
1152 The cementitious products for which Ms Reich organised logistics included cement, flyash, and cement and flyash blends. The logistics role involved processes associated with transporting and delivering the “correct product to the correct destination at the correct time”. Ms Reich’s overall responsibility was to ensure the effectiveness of the supply chain including the land transport (road and rail) component and terminals component in Queensland. In particular, the role involved ensuring that customer orders were taken directly into the “Allocation centre” for processing; managing the running of the truck fleet and rail fleet; scheduling inter-departmental transfers and direct deliveries to customers; and, managing the transport terminals and depots in Queensland for both ship receipt, rail receipt and road receipt as well as road and rail dispatch.
1153 Towards the end of 2007, the organisation of Cement Australia’s supply chain changed from a geographical structure to a functional structure with the result that instead of allocating responsibilities by reference to regional areas, Cement Australia allocated responsibilities by function.
1154 During the period 2005 to 2007, the following products were transported by Cement Australia in Queensland, in the following approximate percentages of total product transported in Queensland: cement, including GP cement – 50%; off-white cement and ivory cement – 5%; flyash – 20%; cement/flyash blends – 15%; and, lime – 10%. Within the “South East Queensland region” which included, for the purposes of organising the logistics of supply, the North Coast, the Brisbane metropolitan area, the Gold Coast and Northern New South Wales, the approximate percentages of total products transported by Cement Australia were these: GP cement – 60%; flyash – 25%; cement and flyash blends – 10%; off-white cement and ivory cement – 4%; and, lime – 1% (Ex-47, para 23).
1155 Flyash in Queensland was sourced, during this period, from Tarong and Tarong North, Swanbank, Gladstone and Callide power stations.
1156 Cement, flyash, and cement and flyash blends, were typically transported either directly to market (that is, to the customer’s site) or stored at on-site storage facilities at a power station or stored at off-site facilities. In South East Queensland, Cement Australia’s storage facilities were located at Yatala, Wacol and Darra. Storage facilities were located in Northern Queensland at Townsville, Mackay and Cairns. Product was also stored at an export silo at Gladstone for export to Melbourne.
The tanker fleet
1157 Pneumatic tankers which operate under compressed air, are used to transport cementitious products by road. They can be used interchangeably for transporting cement, flyash, and cement and flyash blends although not lime (and some other products) without an exhaustive cleanout of the tanker. Pneumatic tankers are configured as single tankers, B double tankers or road trains known as triple-tankers. B double tankers, by specification, are either a “19 metre” or a “25 metre” configuration. There are two types of road trains. The first is a road train tanker which is, in effect, a combination of three single tankers. The second type combines a prime mover with three particular trailers used to transport “ISO containers” on road. During the period 2005 to 2007, Cement Australia only used single tankers and B double tankers in South East Queensland.
1158 When Ms Reich joined Cement Australia in 2005, she became responsible for a fleet of approximately 120 pneumatic trucks. When she assumed her new role in 2007, as National Terminals and Rails Manager, the fleet had grown to approximately 190 trucks. Some of the trucks were owned and operated by Cement Australia and others were “contracted”. Within South East Queensland, company trucks were predominantly used with a ratio of company trucks to contracted trucks of 70:30. Within the Queensland fleet, approximately 80% were single tankers, 15% were B double tankers and 5% were road trains.
1159 Within the South East Queensland fleet, approximately 80% were single tankers and 20% were B double tankers. In South East Queensland between 2005 and 2007, Cement Australia only used single tankers and B double tankers.
1160 Different trucks have different volume capacities for particular products. During the period 2005 to 2007 across the fleet in Queensland, single tankers could hold approximately 25 tonnes of cement or 23 tonnes of flyash; 19 metre B double tankers, approximately 33 tonnes of cement or 30-31 tonnes of flyash; 25 metre B double tankers, approximately 40 tonnes of cement or 37-38 tonnes of flyash; and road train tankers, approximately 68 tonnes of cement although road train tankers did not carry flyash at all. To the extent that road train ISO containers were used, flyash could be carried in those containers, although no volume statistics are given by Ms Reich as to ISO containers. Flyash, as a product, is less dense than cement and thus a lesser volume of flyash can be carried by the various methods identified (Ex-47, para 41).
1161 These volume capacities also applied to the South East Queensland fleet.
1162 During 2005 to 2007, the standard practice was to load cement, flyash or a cement and flyash blend onto pneumatic trucks directly from silos using associated loading facilities, with a weighbridge, so as to weigh vehicles loaded and unloaded. Depending upon the loading time, it may take 15-20 minutes to load a single tanker; 30-40 minutes to load a 19 metre B double tanker; and up to an hour to load a 25 metre B double tanker, with flyash. B double tankers are restricted to specific B double tanker routes which are prescribed by law and require the grant of a permit.
1163 During the period 2005 to 2007, Cement Australia did not generally use B double tankers to deliver flyash to customers (ie. customer batching plants) in South East Queensland because of the road restrictions and the small silo sizes at customer sites which meant that customers were unable to take more than a single load.
Rail
1164 During the period 2005 to 2007, Cement Australia operated two different types of rail fleet in Queensland, namely, fixed rail wagons which are vessels permanently attached to a rail wagon and require compressed air for loading and discharge, and ISO containers which are essentially tanks affixed to a rail wagon and operate as an inter-modal freight transport unit between rail and road transport standardised by size according to an international specification. During the period 2005 to 2007, Cement Australia’s Queensland rail fleet consisted of approximately 15 fixed rail wagons, and in 2005, 150 ISO containers. By 2007, a further 118 ISO containers were procured from China so as to implement a contingency plan mentioned later in these reasons.
1165 More ISO containers were leased between November 2007 and July 2008. Fixed rail wagons can hold approximately 50 tonnes of cement or 46-48 tonnes of flyash. The volume range for an ISO container is 20-28 tones of cubic capacity. Across the Queensland fleet, in the period 2005 to 2007, Cement Australia’s ISO containers could hold, on average, approximately 20 tonnes of flyash each.
1166 Fixed rail wagons do not run in South East Queensland because there is no discharge facility in South East Queensland. Ms Reich says that developing an unloading station would have required a capital outlay of $5 million and securing an appropriate footprint to build such a facility (Ex-47, para 77).
Ship
1167 During the period 2005 to 2006, Cement Australia owned two ships, namely, Goliath and Cementco. The Calaca was operated under charter to Cement Australia. In 2008, Cement Australia’s two ships were sold to CSL. Ms Reich says that there was very little flyash moved by ship except for the flyash transported into Port Melbourne which was the only terminal which had a flyash receival silo. The Gladstone export silo had a capacity of between 9,000 and 10,000 tonnes. This limited capacity was said by Ms Reich to be the source of a major bottleneck in increasing flyash loading requirements from Gladstone.
On-site and off-site storage
1168 During the period 2005 to 2007, Cement Australia used storage facilities on-site at Tarong, Swanbank, Gladstone and Callide Power Stations; off-site storage facilities at Yatala, Darra and Wacol in South East Queensland; the export silo at Gladstone for domestic shipping to Port Melbourne; and off-site storage at Mackay, Townsville and Cairns. Cement Australia also leased silos in Murwillumbah from Sunstate between September 2006 and March 2007 to support particular construction projects.
1169 The Yatala storage facility is a distribution terminal built in the 1990s and located approximately at the mid-point between Brisbane and the Gold Coast. Darra is a distribution terminal in South East Queensland. Wacol was predominantly a transport depot with some storage capacity. In June 2008, Cement Australia sold the Wacol site and the silos were moved to the Darra facility but have not been erected for use.
1170 The flyash storage capacity at these various places was this: at Tarong Power Station – 1,000 tonnes; at Gladstone Power Station – 600 tonnes; at Swanbank Power Station – 300 tonnes; at Yatala – approximately 1,200 tonnes across two silos which were wholly dedicated to flyash storage; at Darra – approximately 10,000 tonnes across various storage facilities predominantly used for storing flyash; and at Wacol until June 2008 – 8 x 80 tonne and 2 x 100 to 120 tonne silos which added approximately 1,000 tonnes of storage capacity (Ex-47, paras 109-111).
1171 Ms Reich says that in her experience a concrete batching plant in a rural area would typically have one silo with a capacity of about 30 tonnes, and in an urban area a batching plant would typically have two silos with a capacity of 60 tonnes. Hanson’s West End batching plant, for example, is a large scale metropolitan plant with separate silos for cement and flyash (four to five silos with the capacity of up to 80 tonnes each). In Ms Reich’s experience, there was generally significantly less storage in rural areas than metropolitan areas. Hanson’s plant at Roma, for example, had only one silo which generally stored GP cement. Sites such as this could lead to significantly increased logistic tasks as small batching plants may nevertheless have a high throughput requiring hourly deliveries of flyash.
1172 In Ms Reich’s second affidavit sworn 2 September 2010 (Ex-48), she provides additional information in relation to the off-site storage facilities in South East Queensland. As to the Darra storage facilities, Ms Reich says that the silos are between 40 to 50 years old and were originally erected for the storing of GP cement rather than flyash. Ms Reich says that by the time she was involved with these facilities as the Queensland Logistics Manager, and throughout the period to 2007, the great majority of the silos at Darra (around 90% or a cumulative total capacity of 9,000 tonnes) were used for storing flyash.
1173 As to the Yatala facilities, Ms Reich understands that they are approximately 28 years old and were originally erected for storing GP cement. In about 2003, 50% of the silos began to be used for storing flyash so as to support a major infrastructure project on the Gold Coast. By 2005 and throughout the period to 2007, 100% of the silo capacity at Yatala (1,200 tonnes) was used for storing flyash.
1174 As to the Wacol facilities, Ms Reich says that they were 10 years old and in the period 2005 to 2007, two of the silos (a cumulative capacity of 200 tonnes) were dedicated to flyash storage with additional silos being used for flyash storage when required.
Distances
1175 Ms Reich also says that the approximate straight line distances between the Tarong Power Station and the Darra, Yatala and Wacol facilities is 181km, 210km and 175km respectively and the straight line distance between the Swanbank Power Station and the Darra and Yatala facilities is 27km and 21km respectively. Ms Reich also says, in her second affidavit, that while the location of customer batching plants differs, the majority of the customer plants to which she made arrangements for the delivery of flyash in the period 2005 to 2007 from each of Darra, Yatala and Wacol, were located within 30km of metropolitan Brisbane (Ex-48, para 14).
Typical transactions
1176 Ms Reich says that during the period of her experience, Cement Australia typically received and took orders on a load-by-load basis which was normally 25 tonnes. Typically, local batch plants would place orders for delivery on the day of the requested delivery or the day prior to the requested delivery. Customers would typically provide Cement Australia with a longer notice period in respect of maintenance work and major projects such as infrastructure projects, bridges, dams and projects for the Department of Main Roads. Advance notice was required for these projects as Cement Australia would be requested to provide a fleet of trucks with cementitious products. When Ms Reich joined Cement Australia all orders were manually written down into large spreadsheets and the Allocation team would allocate delivery times for all orders taken on the day or preceding days. After some time, Cement Australia began to migrate these tasks to a management system activated by drivers at the various weighbridges which would result in the automatic production of delivery documents and related documents directing the truck driver to the particular storage facility whether at a customer’s site or an intermediate storage facility.
Limitations in the data
1177 Ms Reich says that upon commencing employment with Cement Australia in 2005 she became aware that Cement Australia held very limited data relating to logistics costs. Ms Reich thought that due to this lack of data, many of the costing decisions were reactive and intuitive rather than decisions based on actual costs or hard data. As Manager, Ms Reich began a process of attempting to properly understand the costs of undertaking the logistics tasks. Ms Reich oversaw modelling exercises to understand and identify the costs of this aspect of Cement Australia’s business. This approach led to logistics costs being derived or assessed on the following basis: transport costs were “aligned to the market place” in the sense that they reflected actual wages and the cost of fuel, maintenance of the vehicles, tyres and other costs; the cost of capital (including depreciation, particularly, the trucks) was determined; having identified these costs, the distance travelled by a truck from the point of loading to the point of delivery and return to the loading point was calculated for each delivery site and a dollar per tonne rate determined; and, a similar breakdown of the costs of using subcontractors was calculated (Ex-47, para 153).
1178 Rail costs were based on rates agreed with QR National.
The logistics costs and Ms Reich’s references to three categories of estimated logistics costs in the amounts of $12.00 per tonne, $2.00 to $5.00 per tonne and $5.00 to $8.00 per tonne
1179 Ms Reich says that in her experience one of the most important strategies in the logistics industry is adopting the “least cost solution” to the logistics of product movements, which means the “most efficient delivery of a service or product at the lowest possible (optimal) cost”. Ms Reich says that in order to devise a least cost solution for the delivery of cementitious products, “fleet utilisation should be maximised by delivering the product direct to market and by avoiding double handling” [emphasis added]. By double-handling, Ms Reich means loading flyash at one facility, unloading flyash at an off-site storage, and then delivering flyash from an off-site storage to a customer’s batching plant.
1180 In her oral evidence, Ms Reich explained that her use of the term “fleet utilisation” is intended to mean a reduction in what Ms Reich saw at the time as “empty running” and her aim was to reduce the “unloaded distance travelled”, as much as possible. Ms Reich said that a large part of the fleet was travelling unloaded which meant that for every tonne Cement Australia delivered, the truck would travel back empty with variable and fixed costs associated with that empty running. The trucks involved were predominantly single trucks rather than B double trucks.
1181 Ms Reich says that this notion of fleet utilisation is not so much related to double-handling as trying to make sure that the company had the ability to deliver flyash to a customer and then load either the same product or a different product and continue loaded delivery to another customer thus removing the empty running leg in totality, if possible (T, p 1991, lns 5-48).
1182 Ms Reich says that double-handling any cementitious product through a terminal is particularly costly compared to delivering a product directly to a customer. Ms Reich says that the double-handling costs include the following categories of costs (Ex-47, para 164).
1183 The first category is “Road transport delivery costs to the point of off-site storage”.
1184 Ms Reich says that during the period 2005 to 2007 the road transport delivery cost of delivering flyash from Tarong Power Station to the off-site storage facilities at Darra, Yatala and Wacol was approximately $12.00 per tonne.
1185 The second category is “Handling costs at a terminal”.
1186 In Ms Reich’s experience, during the period 2005 to 2007, the approximate costs of handling flyash at a terminal could vary between $2.00 and $5.00 per tonne for every tonne handled through the terminal, subject to the particular features of the operation of that terminal. Ms Reich says that there were two sets of handling costs at a terminal. The first costs were the costs of discharging flyash from the tankers into the intermediate storage silos and the second were the costs of out-loading flyash from the silos. The more costly operations were those involving multiple pumping or transfer of product to silos that had a weighbridge in order for the product to be out-loaded. The less costly operations were those involving direct discharge into a silo which also allowed out-loading over a weighbridge.
1187 The third category is “On-forward delivery costs”.
1188 Ms Reich says that during her period of experience from 2005 to 2007 the approximate on-forward delivery costs could be between $5.00 and $8.00 per tonne, depending upon the location. The more costly locations were determined by the distance from the storage location and the less costly were those within a 10km radius of the storage location.
1189 In Ms Reich’s second affidavit, however, she has some further things to say about these three categories of costs. In relation to the first category, Ms Reich says that she considers that $12.00 per tonne is a “reasonable estimate”. Ms Reich’s estimate is based upon an assumption that the deliveries are made primarily by B double tankers with some single tankers. Moreover, the estimate is a “budget estimate”. However, the actual delivery costs can differ substantially. The delivery costs per tonne are calculated by dividing the total costs of transporting flyash over the total volume carried and thus, if the forecast budgeted tonnes are not realised, then the total costs are amortised over a lower volume resulting in a higher cost per tonne delivered. Ms Reich says that in her experience variability between the budgeted volume and the actual volume transported is “common” and can be “substantial” leading to variability in the calculation of the delivery cost to the intermediate storage facilities (Ex-48, para 19).
1190 As to the second category of costs, Ms Reich says that the amount of $2.00 to $5.00 per tonne for handling costs is a “reasonable estimate” of the average handling costs at the transport depots at Darra, Yatala and Wacol for the period 2005 to 2007. Ms Reich considers these estimates to be conservative as they do not take into account the costs that might be incurred if flyash needs to be transferred from one silo, at such a site, that does not have a weighbridge to another that does, in order to be off-loaded into a tanker, and these transfer movements will lead to additional costs (Ex-48, para 21).
1191 As to the third category of costs, Ms Reich considers that an estimate of $5.00 to $8.00 per tonne for the on-forward delivery costs is also a “reasonable estimate” of those costs in the relevant period. The estimate is based on assumption that the deliveries are made primarily by single tankers with some B double tankers (Ex-48, para 23).
1192 In her oral evidence, Ms Reich accepted that adopting a “least-cost solution” to logistics movements is a “theoretical notion” which always needs to be adapted to the requirements of the particular business (T, p 1990, ln 46), and to the extent that avoiding double-handling was an aspect of implementing a least cost logistics solution in Cement Australia’s supply of flyash, “double handling was a reality [the company] had to live with to some extent” (T, p 1992, lns 1-3). Some of the practical realities of dealing with flyash movements were that the South East Queensland fleet between 2005 and 2007 was comprised predominantly of single trucks and the Tarong fleet was comprised entirely of B double trucks. Customers tended to have small silos at batching plants. They are too small to receive full B double loads and due to this factor and road restrictions, B double pneumatic trucks were used to transport flyash from the power stations to the storage depots at Darra and Yatala, particularly. Ms Reich accepted in oral evidence that due to the limitations in on-site storage and the substantially greater off-site storage, flyash, as a product, necessarily had to be double-handled (T, p 1993, lns 4-46). The measure of it can be seen in Ms Reich’s statistics in her second affidavit.
1193 Also, in her oral evidence, Ms Reich accepted that although the paragraph of her affidavit (Ex-47, para 164) which addresses the three classes of costs contemplates a comparison between product delivered directly to a customer on the one hand, with product delivered via intermediate storage on the other, para 164 does not actually attempt any such comparison. Ms Reich simply attempts to identify the cost of three functions that, taken together, constitute the cost of delivering cementitious products (of any kind) to a customer through the use of intermediate storage facilities, per se. No comparison is undertaken with the cost of direct delivery from the power station to the customer.
1194 That comparison emerges in Ms Reich’s second affidavit and the actual costs, for example, of delivering flyash from the Tarong Power Station to the Darra, Yatala and Wacol intermediate storage facilities in 2005, 2006 and 2007, averaged across the three depots, was not $12.00, but was $19.70, $21.41 and $22.45, respectively. These costs, obviously enough, are substantially greater than the estimate given by Ms Reich in her first affidavit which she regarded as a reasonable estimate.
1195 The three classes of costs mentioned in Ms Reich’s first affidavit, however, all simply represent Ms Reich’s recollection or “memory a number of years later of the costs at the time” or her recollection of the costs that applied in the relevant time period (T, p 1996, ln 30). The costs were based on a budget estimate. Ms Reich also gave oral evidence that the estimate of the cost of road transport to the point of intermediate storage of $12.00 represented a “rough calculation” based on known costs at the time. Ms Reich accepted that the costs assessment could have been prepared by her by reference to the actual costs incurred but the rudimentary nature of the record-keeping at the time made it “quite difficult” to extract the data a number of years after the event.
1196 Accordingly, Ms Reich had to rely upon her best recollection of a reasonable estimate of the rough calculation of costs some years earlier.
1197 Similarly, the costs of handling flyash at a terminal of $2.00 to $5.00 per tonne was also an estimate only and a best recollection based upon Ms Reich’s recollection of “the physicalities of the [Yatala, Darra and Wacol] terminals in question, and of the budget work at the time that we undertook to determine those costs” (T, p 1997, lns 35-46). Again, the on-forward delivery costs also represent a recollection of a budget figure rather than an amount derived from any reference to costs actually incurred.
1198 Ms Reich also makes these observations as to road transport.
1199 Based on her experience, transport by road is always the best option in terms of cost for a distance of less than 400km (Ex-47, para 173).
1200 This result is said to follow because road transport has a relatively high fixed cost and is most cost efficient when large quantities are loaded and transported over longer distances (up to 400km) thus reducing the dollar per tonne ratio. As earlier mentioned, the road transport costs comprised wage rates, fuel, maintenance and depreciation. For the purposes of record keeping and reporting, Ms Reich does not differentiate between cement, flyash or flyash blends because, in her view, there is “no significant difference in costs between the delivery of the different products” (Ex-47, para 175).
1201 In addition, in calculating costs, the management reports do not address the costs of “point to point deliveries”. Rather, the costs are calculated by reference to total volumes transported by a particular fleet. In the period 2005 to 2007, the fleets were segmented by the geographic catchment served by the fleet. Therefore, there were fleets for South East Queensland, Central Queensland, North Queensland and North West Queensland. Ms Reich does not generally report on the average costs from the respective power stations to, for example, the Brisbane metropolitan region (or point-to-point deliveries).
Ms Reich’s assessment of road transport costs and the amounts of $14.47 per tonne for 2006 and $13.76 per tonne for 2007
1202 For example, in the 2006 management year end report for the Supply Chain Division, the report records that for the 2,899 kilotonnes of cementitious product sold in Queensland, the variable costs of fuel, maintenance and the use of third party subcontractors amounted to approximately $10.31 per tonne and the fixed costs including salary and wages and lease costs, were approximately $3.85 per tonne constituting a total “average cost” for road delivery overall in Queensland of cementitious product, including depreciation of $14.47 per tonne, for the 2006 year (Ex-47, DAR-31). In her oral evidence, Ms Reich accepted that this figure could have been used rather than the amount of $12.00 in relation to the costs of delivery from the power station to an intermediate point of storage (T, p 1997, ln 13).
1203 By the end of 2007, Cement Australia’s data collection had improved such that management year end reports could differentiate between specific regions within Queensland including Northern Queensland, Central Queensland and South Queensland, and the variable and fixed costs could also be differentiated or allocated into the various classes of cost. The 2007 report records that for the 1,776 kilotonnes of cementitious product moved in South Queensland, the variable costs were $13.737M resulting in $7.73 per tonne, and the fixed costs were $10.168M resulting in $5.72 per tonne constituting total “average costs” of $13.76 per tonne, for the 2007 year (Ex-47, DAR-32). Ms Reich did not accept that the amount of $13.76 per tonne could properly be applied in determining the costs per tonne of transport of flyash to points of intermediate storage as the figure represents the complete South Queensland logistics task and not just the flyash task. Nevertheless, the figure of $14.47 drawn from the 2006 management reports seems to be a figure related to average costs in Queensland for the logistics movement of all cementitious products, as well (T, p 1998, ln 43).
1204 These figures of $14.47 and $13.76 per tonne for the 2006 and 2007 years are drawn from Cement Australia’s management reports with summary data exhibited to Ms Reich’s first affidavit at Tab 31 for 2006 and a more comprehensive spreadsheet at Tab 32 for 2007.
Ms Reich’s references in her affidavit material to a logistics costs model
1205 In her first affidavit, Ms Reich also refers to a spreadsheet containing a summary of the out-working of a logistics costs model for road transportation which is said to illustrate how road transport costs are derived (Ex-47, DAR-24). Ms Reich gave oral evidence that this model is an industry model that was relevant to Cement Australia’s business and which could have been applied to identify the costs in, for example, transporting flyash from Tarong Power Station to either the Darra, Yatala or Wacol silos or in transporting flyash from any one of the intermediate storage points to a customer. However, Ms Reich said that although the model is an “industry recognised model” and a “similar model to this could have been used … in the period in question, in 2006 [for which] the budget would have been struck in 2005, this model was not used” (T, p 2000, lns 24-27). Ms Reich had no idea of the date when the model was developed or whether it was in existence in 2006.
1206 The document is described, on its face, as a logistics costs model and it attaches a print-out of two columns reflecting calculations of the costs per kilometre per tonne of transporting product. As each kilometre of distance increases a related number of cents calculated to four decimal points is applied to derive a cost for carrying product any particular distance. For example, Ms Reich says that the straight line distance between Tarong Power Station and the Yatala, Darra and Wacol storage facilities is 210km, 181km and 175km respectively in which event, according to the (relevant) left hand column of the model, the transport cost would be $27.67, $24.56 and $23.91. Because the model was not applied by Cement Australia in its calculations reflected in the documents at Ex-47, DAR-31 and DAR-32, and Ms Reich simply puts the model on the footing of an example of something that might have been around at the relevant time, it is not clear to me that the model has any relevance in informing the question of what transport costs might have been incurred or relevant in the period 2005 to 2007 or otherwise.
1207 The primary difficulty with the calculations at DAR-31 and DAR-32 is this. DAR-31 represents a summary of the fixed and variable costs drawn from the 2006 management reports of Cement Australia’s costs associated with the movement of all cementitious products on all journeys, by tonne, throughout all of Queensland. It produces the result that the “total average cost for delivery, including depreciation, was approximately $14.47 per tonne”. DAR-32 is slightly more focused in the sense that it represents the road transport cost in dollars per tonne for the movement of all cementitious products by Cement Australia in “South Queensland” and that description seems to include for the purposes of logistics movements, Northern New South Wales, as Ms Reich says the figure of $13.76 represents the “complete South East Queensland task not just the fly-ash task” (T, p 1998, lns 43-44). In her oral evidence, Ms Reich accepted two propositions: first, as a matter of principle, the figure of $14.47 could not be used to derive the actual costs of any particular trip involving the transport of flyash because that figure is an average price involving multiple products; and, second, as a general proposition, wherever an average cost for the road transport of cementitious products is used, it does not reflect the actual costs of transporting flyash (T, p 2046, lns 5-9).
1208 The statistics provided by Ms Reich in her second affidavit are not statistics which reflect the average cost of all movements of all cementitious products throughout Queensland nor the average cost of movements of all cementitious products confined to a particular region, and in particular, the South East Queensland and Northern New South Wales region, but they are statistics which show, at least as “charge back costs” to the business unit, a focused journey from a power station to the points of intermediate storage at Darra, Yatala and Wacol for the specific product in question, namely, flyash.
1209 In other words, the statistics reflect a particular set of journeys for the particular product.
1210 Of course, Ms Reich has said in her evidence that the transport costs would not vary according to the commodity because in her view the transport costs for flyash, cement, and a cement and flyash blend, would be the same because there is no relevant basis for differentiation. Analysing the transport costs to determine the average cost of all movements of all cementitious products throughout Queensland, as the 2006 document does, seems to be not particularly relevant and would need to recognise the differential volume capacities for each truck or transport modality for flyash which would affect the averages. The volume of flyash capable of being carried is, in every case, significantly different by some tonnes for every load carried for every journey.
1211 Ms Reich says that during the period 2005 to 2007, Cement Australia also used third party contractors to transport cementitious products. There were several components in the rates charged by subcontractors. There was a flag fall component which generally represented the “loading and unloading times”. There was also an hourly rate, a trip rate or a load rate all of which may have formed part of a cartage charge depending upon the particular journey. A “load rate typically was used”. Ms Reich says, by reference to spreadsheet data (Ex-47, DAR-34), that the “delivery costs” ranged between 6.59c and 8.97c per tonne per kilometre while the “overall” subcontractor delivery cost was 7.68c per tonne per kilometre.
Ms Reich’s data in relation to average transport costs to particular customers from particular sites
1212 On 7 June 2006, Ms Reich sent an email to Mr Bailey entitled “flyash delivery cost” which attached a spreadsheet setting out the “average” transport costs to particular customers (that is, the average transport cost across each customer’s portfolio of sites and batching plants) from Swanbank Power Station, Tarong Power Station and the Wacol Depot (Ex-47, DAR-35). The results of that analysis were these.
| Customer and tonnages | Swanbank Power Station ($/tonne) | Tarong Power Station ($/tonne) | Wacol depot ($/tonne) | Differential: Tarong is greater than Swanbank by: ($/tonne) | Differential: Tarong is greater than Wacol by: ($/tonne) |
| Boral (11,700 tonnes) | 8.27 | 25.69 | 24.98 | 17.42 | 0.72 |
| Neilsens (19,800 tonnes) | 9.99 | 23.91 | 26.85 | 13.92 | -2.94 |
| Hanson (12,800 tonnes) | 7.58 | 25.46 | 25.28 | 17.87 | 0.18 |
| [Readymix] (12,400 tonnes) | 7.76 | 25.47 | 26.54 | 17.71 | -1.07 |
1213 These statistics represent the outcome of averaging a range of other statistics. The actual transport costs to the particular batching plants of Boral, Neilsens, Hanson and Readymix in dollars per tonne from Swanbank, Tarong and Wacol are these:
| Plant | Swanbank | Tarong | Wacol |
| Boral | |||
| Browns Plains | $8.58 | $25.92 | $25.01 |
| Coopers Plains | $8.45 | $25.70 | $24.88 |
| Jindalee | $8.31 | $25.58 | $24.88 |
| Kingston | $9.68 | $27.71 | $26.11 |
| Wacol | $6.94 | $24.24 | $24.33 |
| Neilsons | |||
| Wacol (Concrete) | $6.94 | $24.69 | $24.33 |
| Windsor (Concrete) | $10.37 | $24.69 | $26.30 |
| Strathpine (Concrete) | $11.73 | $23.13 | $28.44 |
| Hanson | |||
| Coopers Plains | $8.45 | $25.70 | $25.01 |
| Ipswich | $5.02 | $23.69 | $26.39 |
| Jindalee | $8.31 | $25.47 | $24.88 |
| Park Ridge (Hymix Conc) | $7.76 | $26.92 | $25.70 |
| Wacol (Hymix Conc) | $6.94 | $24.69 | $24.33 |
| [Readymix] | |||
| Acacia Ridge | $8.58 | $26.03 | $25.01 |
| Wacol | $6.94 | $24.69 | $24.33 |
| Beaudesert | $11.17 | $29.49 | $31.49 |
| Boonah | $10.23 | $28.94 | $31.94 |
| Ipswich | $5.02 | $22.46 | $26.39 |
1214 In 2006, for the 375 kilotonnes of cementitious product carted in Queensland by rail, the variable costs, including cartage costs, were approximately $34.94 per tonne and the total average cost for rail delivery, including depreciation, was approximately $35.24 per tonne (Ex-47, DAR-37).
1215 As to the cost of operating terminals, Ms Reich says that she was not responsible for reporting upon the Darra, Yatala and Wacol terminals and thus she does not know the operating costs of those terminals, located in the South East Queensland and Northern New South Wales regions. However, as Ms Reich points out at para 207 of her first affidavit, she does not have any knowledge of the actual fixed or variable costs of operating each of the Darra, Yatala and Wacol terminals or the total actual average operating cost of each of those terminals or all of the terminals taken together. Ms Reich however observed at para 164 of her first affidavit, as already mentioned, that the “approximate costs” of handling any cementitious product through a terminal could vary between “$2 and $5 per tonne [for every tonne of cementitious product] handled through the terminal”.
1216 In the course of oral evidence, Ms Reich gave further context and explanation to that matter and each of the costs identified in her affidavits as forming part of the “double handling costs” of cementitious products.
1217 That evidence will be mentioned shortly.
Intermediate storage and direct delivery
1218 In her primary affidavit evidence, Ms Reich made these further observations concerning the logistics costs associated with handling the distribution of flyash.
1219 Ms Reich says that in her experience several factors determined the strategy for the movement of flyash from power stations in Queensland. First, power stations do not produce flyash to a customer demand schedule but produce according to the station’s production schedule. Second, storage of flyash at most power stations is quite limited. Flyash that could not be stored was either removed to off-site storage or removed as waste. Third, since excess flyash would be needed by Cement Australia at some point, Ms Reich would try to gather as much flyash as possible, from a logistics perspective, and move it to off-site storage.
1220 One of the constraints upon doing so was an insufficient number of trucks, and another was insufficient storage capacity.
1221 As to the Tarong and Tarong North Power Stations, Ms Reich says this (Ex-47, para 223ff).
1222 In the period 2006 and 2007, Ms Reich understood from her attendance at “fly ash stock meetings” that flyash produced at Tarong North Power Station was transported to Tarong Power Station to supplement ash at that station. Ms Reich was not responsible for the logistics of moving ash from Tarong North to Tarong. However, Ms Reich was responsible for the logistics movements of flyash from Tarong Power Station. On any one day, production of flyash could exceed that capacity. Ms Reich exhibits to her affidavit (Ex-47, DAR-42), a copy of the Flyash Stock and Transport Meeting Minutes for 27 March 2006 in which it is noted that production at Tarong on a two week average was at a level of 1,204 tonnes per day.
1223 At Tarong, as already noted, there was one silo with a capacity of approximately 1,000 tonnes and one single-sided weighbridge. This meant that B double tankers took longer to load as drivers had to manoeuvre their trucks to ensure that both tanks of the B double could be loaded.
1224 Cement Australia dedicated a “road fleet” for flyash movements from Tarong. Ms Reich says that the fleet was largely comprised of B double tankers because, during the period 2005 to 2007, much of the flyash from Tarong Power Station needed to be double-handled and stored off-site in order to minimise wastage of the flyash produced from that station. However, there were times when Cement Australia delivered single loads of Tarong flyash direct to “market”, that is, directly to the customer’s batching plant. This occurred for some customers located close to Tarong or on occasions when there was a single truck in the area. However, this practice of delivering single loads of flyash direct to market was always subject to daily demand for other products, particularly GP cement and, in any event, deliveries were based upon customer orders which were generally not known until the day before delivery was required.
1225 In her oral evidence, Ms Reich explained that by “dedicating” a fleet to Tarong she means that by reason of the nature of the configuration of the trucks and their location, those trucks did not undertake any task other than the delivery of Tarong flyash. In 2005, there were seven company owned B double trucks and one subcontractor engaged using a B double truck. There were no single trucks dedicated to Tarong. Ms Reich says that using B double transport of flyash from the power stations to the storage depots was the most efficient way of transporting flyash to those facilities (T, p 1989, lns 3-24).
1226 Ms Reich sets out in her first affidavit a summary of the tonnes transported from Tarong Power Station directly to a customer’s batching plant and tonnes transported to an intermediate storage or transfer facility, in 2006 and 2007 based upon records of each delivery of Tarong flyash for the relevant period maintained by Cement Australia (Ex-47, para 234). Ms Reich’s schedule sets out these data for each month for 2006 and 2007. The aggregate position, sufficient for present purposes, is this:
Flyash tonnes transported from Tarong Power Station
| Year | To Customer (Tonnes) | To Storage (Tonnes) | Total (Tonnes) |
| 2006 | 152,826.48 (40.4%) | 225,732.26 (59.6%) | 378,558.74 |
| 2007 | 128,738.47 (44.0%) | 164,058.16 (56.0%) | 292,796.63 |
1227 As to Swanbank, the considerations were these: Swanbank had on-site storage capacity of 300 tonnes; whatever flyash was produced beyond that capacity had to be otherwise stored; at times in 2006 and 2007 the silos at both Darra and Wacol were dedicated to storing Swanbank flyash; there was no fleet dedicated to Swanbank as Swanbank was close to where most of the fleet in South East Queensland was based (Ex-47, para 235ff).
1228 Set out below is a schedule which identifies, by tonnes, Swanbank flyash transported to a customer and tonnes transported to intermediate storage in 2006 and 2007 extracted by Ms Reich from Cement Australia’s records.
Flyash tonnes transported from Swanbank Power Station
| Year | To Customer (Tonnes) | To Storage (Tonnes) | Total (Tonnes) |
| 2006 | 15,547.49 (87.3%) | 2,154.20 (12.7%) | 17,701.69 |
| 2007 | 18,906.43 (86.6%) | 2,933.07 (13.4) | 21,839.50 |
1229 It can be seen from these statistics that in the 2006 and 2007 years, 59.6% and 56.0% respectively of the total flyash transported from Tarong Power Station was transported to intermediate storage. In the case of Swanbank, in those two years 12.7% and 13.4% respectively of the total flyash transported from that station was transported to intermediate storage.
Gladstone movements into South East Queensland
1230 As to Gladstone Power Station, Ms Reich recalls that in 2006 and 2007 there was increased demand to transport flyash from Central Queensland to South East Queensland due to factors Ms Reich describes as the reduction in the levels of available flyash from the Tarong Power Station, the drought in Queensland, outages at Tarong Power Station and an increase in the demand for flyash in the construction industry.
1231 Ms Reich says that she has had difficulty in identifying the precise volume of flyash transported into South East Queensland by road in 2006. However, Ms Reich has been able to identify the volume of Gladstone flyash received into Cement Australia’s Darra storage facility which would represent, in Ms Reich’s view, the minimum volume of Gladstone flyash transported into South East Queensland by road in 2006. Ms Reich says that she has identified the relevant volumes transported by road and rail from Cement Australia’s records for the period 2005 to 2007. Ms Reich points out in her second affidavit (Ex-48, para 44) that although she has identified that period, there was no transport of Gladstone flyash into South East Queensland in 2005 at all and that position was affirmed in oral evidence (T, p 2043, ln 10).
1232 The relevant years are only 2006 and 2007 and the statistics are these.
| Month | By road (tonnes) | By train (tonnes) | Total (tonnes) |
| 2006 | |||
| January | 140 | 140 | |
| February | 166 | 166 | |
| March | 119 | 119 | |
| April | 122 | 122 | |
| May | 95 | 95 | |
| June | 24 | 24 | |
| July | 0 | ||
| August | 404 | 404 | |
| September | 657 | 908 | 1,565 |
| October | 724 | 260 | 984 |
| November | 466 | 466 | |
| December | 432 | 432 | |
| Total | 2,279 [50.5%] | 2,238 [49.5%] | 4,517 |
| 2007 | |||
| January | 83 | 43 | 126 |
| February | 121 | 95 | 216 |
| March | 199 | 1,993 | 2,192 |
| April | 195 | 3,769 | 3,964 |
| May | 3,284 | 4,877 | 8,161 |
| June | 4,052 | 3,354 | 7,406 |
| July | 3,948 | 5,997 | 9,945 |
| August | 4,447 | 6,563 | 11,010 |
| September | 2,074 | 2,749 | 4,823 |
| October | 909 | 4,228 | 5,137 |
| November | 269 | 7,072 | 7,341 |
| December | 338 | 5,254 | 5,592 |
| Total | 19,915 [30.2%] | 45,992 [69.8%] | 65,907 |
1233 In Ms Reich’s second affidavit, she says that these statistics are concerned with the volume of flyash that was loaded and dispatched. Ms Reich says that she is unable to determine from Cement Australia’s records (including the SAP financial records) the manner in which Gladstone flyash was subsequently sold or used. The quantities set out in the Table may include, according to Ms Reich, flyash that was stored at the off-site storage facilities but not then sold to third parties, as well as flyash that was used for internal purposes (such as blends) (Ex-47, para 46).
Stock-outs and further aspects of Gladstone movements
1234 Apart from implementing the least cost delivery methodology involving both fleet utilisation and seeking to avoid double-handling, as described by Ms Reich, efforts were also made to minimise or avoid “stock outs” which are events which describe a circumstance where a customer has an empty silo at a batching plant and cannot service a project that day or service a concrete pour due for that day.
1235 Ms Reich notes that during the period 2005 to 2007 there were occasions on which there were delayed deliveries of flyash from Tarong and stock-outs at Tarong. An example of the problem is reflected in data produced from a “stock model” of Tarong Power Station flyash gauging hourly production and transfer rates (Ex-47, DAR-47). The Tarong stocks model for 10 and 11 July 2007 shows that there were 16 cancelled loads on 10 July 2007 and 150 deliveries delayed from 11.00am to 4.00pm that day. Ms Reich says that in 2006 the main causes for the shortage of Tarong flyash were changes in coal source and planned and unplanned outages at Tarong and Tarong North Power Stations, coupled with an increase in demand.
1236 However, in describing in oral evidence the notion of a “stock-out” of Tarong flyash, Ms Reich was not suggesting that a stock-out was necessarily an inability to obtain flyash from the power station. A stock-out might be due to a driver reporting sick in which case a flyash load was not able to be delivered to a batching plant. A stock-out included any other reason that prevented Cement Australia from supplying stock it held. If the result of a particular event was that Cement Australia failed to deliver a load from stock it held, that failure was treated in the records as a stock-out. Virtually all of the entries in (Ex-47, DAR-47) (all but one) compiled by Ms Reich are examples of circumstances where Cement Australia had the product but could not deliver it for a logistics reason rather than a stock-out due to the operation of the Tarong Power Station (T, p 1984, lns 6-10).
1237 Ms Reich accepted in oral evidence that in the period the subject of her document, concerning stock-outs in the period 2004 to 2009, stock-outs of flyash in South East Queensland were “relatively limited” (T, p 1985, lns 26-30). Ms Reich also attributed some of the stock-outs, as she uses that term, to an inability to secure from Mr Bailey and Cement Australia support for capital adequacy initiatives (in some low millions of dollars) for matching the logistics fleet with forecast cementitious product movements in Queensland which would have involved acquiring largely single pneumatic trucks but also some additional B double capacity.
1238 Another solution mentioned by Ms Reich in oral evidence was the option of making greater use of 19 metre B double configurations (T, p 1986, ln 45). By September 2007, the South East Queensland fleet had grown from 120 pneumatic trucks to 190 trucks (a 58.3% increase) with a mix of single trucks (70% to 80% of the fleet) and B double trucks representing the balance although little capital was deployed to achieve this increase as subcontractor fleet was used in the main.
1239 Ms Reich notes that in 2007, there was a drought in Queensland that brought about, in March 2007, Level 5 water restrictions leading to a reduction in the generation of electricity at Tarong Power Station of 44% and a reduction at Tarong North of 30% which caused a downturn in the production of flyash at both those stations (Ex-47, para 268). The Minutes of the Flyash Stock Meeting of 3 September 2007 notes a planned 42 day shutdown at Tarong North Power Station. The production data also shows that for March 2007 weeks 1 to 5 of the production schedule was not able to be met (Ex-47, DAR-42).
1240 Apart from the drought conditions in 2007, Ms Reich says that by June and July 2006 she recalls being aware that there would be risks of stock-outs with Tarong flyash due to a change in coal (and other issues) burned at Tarong and Tarong North Power Stations. The use of high calorific coal at Tarong Power Station was expected to result in lower production rates of flyash. Ms Reich says that in about August 2006 she recalls looking at the flyash stocks held by Cement Australia in Queensland and it was clear to her that “there were some opportunities … to supplement the gap in the demand profile in South East Queensland” by exploiting an opportunity to use the production capacity in Gladstone and Callide as supplemental flyash in South East Queensland.
1241 Ms Reich’s statistics show that up until August 2006 only 404 tonnes of flyash had been transported from Gladstone into South East Queensland (and that was by train). Between September and December 2006, 2,279 tonnes of Gladstone flyash was transported by truck into South East Queensland and 1,168 tonnes was transported by train, amounting to 3,447 tonnes in all, out of 400,777.43 tonnes of flyash supplied in South East Queensland from Tarong, Tarong North, Swanbank (and Gladstone in 2006 representing less than 1% of the total supply, that is, 0.86%). As mentioned already, Ms Reich conceded in oral evidence that Tarong stock-outs in the period 2004 to 2009 were relatively limited.
1242 In 2007, 380,543.13 tonnes of flyash were transported in South East Queensland from Tarong, Tarong North, Swanbank and Gladstone according to Ms Reich’s data and, of that, 65,907 tonnes, were transported into South East Queensland from the Gladstone Power Station. The Gladstone flyash represented, in 2007, 17.31% of flyash transported in South East Queensland.
1243 Ms Reich says that during 2006 and 2007, during the period of downturn in production at Tarong Power Station, Cement Australia personnel commenced discussions with major customers whose batching plants required continuity of supply of Tarong flyash as to whether those customers might be able to take flyash from an alternative source and whether their mix designs would accommodate a change in the source of supply. Based on those discussions, a rationing plan was developed for the use of Tarong flyash (Ex-47, para 272).
1244 Ms Reich recalls that Gladstone flyash was the predominant alternative source of flyash, together with Swanbank flyash.
1245 For example, nine Readymix batching plants on the Sunshine Coast were converted from Tarong flyash to Gladstone flyash in the week of 14 August 2006 and seven of the nine plants reverted to the use of Tarong flyash on or about 20 October 2006. Similarly, nine Readymix plants in South Brisbane, one Readymix in North Brisbane and one on the Gold Coast were converted from Tarong flyash to Swanbank flyash. Eight of the nine plants in South Brisbane, the North Brisbane plant and the Gold Coast plant were converted to Swanbank flyash on 14 August 2006. Ms Reich says that as at 20 November 2006 (which is the date of the spreadsheet upon which this conversion and reconversion (or not) data is based), only the Gold Coast plant had reverted to the use of Tarong flyash and the remaining plants were continuing to take Swanbank flyash. However, Ms Reich does not know whether any of these plants reverted to the use of Tarong flyash at some time after 20 November 2006.
1246 The spreadsheet as at 20 November 2006 shows that five Readymix plants in Northern New South Wales were converted from Tarong flyash to Eraring flyash on 14 August 2006 and by 15 November 2006 those plants had reverted to the use of Tarong flyash.
1247 One Hanson plant in South Brisbane converted from using Tarong flyash to Gladstone flyash on 23 August 2006 and that plant reverted to the use of Tarong flyash on 11 October 2006.
1248 Four of the Hanson plants in South Brisbane converted from the use of Tarong flyash to Swanbank flyash on 14 August 2006 and by 20 November 2006 one plant remained using Swanbank flyash while the other three plants had either reverted to the use of Tarong flyash or were in the process of doing so.
1249 Two of the Hanson plants in Northern New South Wales converted from Tarong flyash to Eraring flyash on 14 August 2006 and each of these plants reverted to the use of Tarong flyash on 14 November 2006 (Ex-47, para 280).
The contingency plan
1250 In her first affidavit, Ms Reich talks about the development of a contingency plan to address a “longer term solution” to support demand for flyash in South East Queensland. The long term contingency plan to “replace Tarong fly ash” as a source of supply in South East Queensland continued to be discussed and developed throughout July 2006 and January 2007 with Mr Bailey and others within Cement Australia. In January 2007, Ms Reich drafted a “contingency plan” for the consideration of the Executive Committee of Cement Australia at its meeting on 8 February 2007. Mr Chris White, Mr Peter Klose and Ms Reich contributed to the development of the contingency plan. The contingency plan involved five levels at which the transport of projected quantities of Gladstone flyash into South East Queensland might operate. The plan addresses the timing of the transport, the capacity in tonnes, the transport mechanism, the absolute cost in dollars per tonne, the impact on Cement Australia’s operating costs in dollars per tonne, the assumptions upon which the plan would operate and the risks attending implementation of the particular level of the plan.
1251 The levels are described as Levels 1A, 1B, 2, 3 and 4 (Ex-47, DAR-54).
1252 Level 1A involved transporting Gladstone flyash in the first half of 2007 to North Coast customers at a rate of 300 tonnes per week or 7,800 tonnes in the first six months, by truck (lorry owner drivers) at an absolute cost across the first six month period of $30.06 per tonne representing an impact operating cost of $50.63. In the second six months of 2007 under Level 1A, the same volume would be transported into South East Queensland using lorry owner drivers and other dedicated means, at an absolute cost of $38.65 or an impact operating cost of $59.22.
1253 Under Level 1B, the same volume would be brought into South East Queensland in the first and second halves of 2007 except that, first, the flyash would be transported to the Darra intermediate storage facility and, second, the transport method would be by “Road/rail/road - 10 existing ISOs - 2 Skell trailers”. The impact operating cost would be $34.50 per tonne in the first six months. In the second six months of 2007 under Level 1B of the contingency plan the impact operating cost would be $39.78 per tonne, should Level 1B of the plan be selected.
1254 Under Level 2, Gladstone flyash would be transported in the second half of 2007 to Darra intermediate storage with five months notice being given of a “progressive ramp-up” in the use of Gladstone flyash. The postulated capacity would be 1,000 tonnes per week or 50,000 tonnes per annum. The impact operating cost would be $43.48 per tonne. Level 2 contains an alternative lease cost in which event the impact operating cost would be $41.65 per tonne.
1255 Under Level 3 of the proposed plan, Gladstone flyash would be transported in the second half of 2007 to Darra intermediate storage. The volume capacity would be 1,538 tonnes per week or 80,000 tonnes per annum. The impact operating cost would be $44.05 per tonne. Level 3 also contains an alternative lease cost resulting in an impact operating cost of $42.67 per tonne.
1256 Under Level 4 of the contingency plan, Gladstone flyash would be transported to Darra and/or Yatala intermediate storage in the second half of 2007. The quantity would be 3,000 tonnes per week or 150,000 tonnes per annum. The impact operating cost would be $52.27. Like Levels 2 and 3, Level 4 contains an alternative leasing cost calculation in which event the impact operating cost would be $50.28 per tonne. Levels 3 and 4 set out some assumptions which contemplate the possibility of supply directly to customers.
1257 In February 2007, the contingency plan was approved.
1258 While rail access arrangements were being negotiated, Ms Reich made arrangements for the transportation of Gladstone flyash by road. In the second half of 2007, as the transport of Gladstone flyash into South East Queensland by rail increased, the volume transported by road decreased, particularly in October, November and December 2007. In April 2007, Ms Reich negotiated transport capacity for Gladstone flyash by rail into South East Queensland three times a week giving a maximum capacity of 1,800 tonnes per week and when the ISO containers purchased from China arrived in September 2007 the capacity increased progressively to a train a day (six trains a week) giving a maximum capacity of 3,300 tonnes of flyash a week (Ex-47, para 302).
1259 Cement Australia did not use that capacity.
1260 In oral evidence, Ms Reich was asked about the costs of transporting Gladstone flyash to South East Queensland. Ms Reich accepted that the distance by road from Gladstone to Brisbane is 520km. On 27 October 2006, Ms Reich sent an email to Mr Bailey attaching a “Costing and requirement matrix” in spreadsheet form of fixed and variable costs of transporting Gladstone flyash to Brisbane (Ex-47, DAR 25). In the email, Ms Reich describes the analysis as one directed to the topic of “Tonnes and Sales/demand to market Assumptions”. In that analysis, she makes these observations:
• 150,000 tonnes pa ex [Gladstone] to Brisbane to service the SEQ market.
• 150,000 tonnes pa reduced from Tarong Ash movement into SEQ market.
• Sales phasing (below) as per SQ actuals.
[emphasis added]
1261 Ms Reich’s calculations operate on two footings.
1262 The first is the actual cost of transporting Gladstone flyash into South East Queensland to service what she describes as the South East Queensland market and the second is the impact of doing so having regard to a reduction in sales of Tarong ash into the South East Queensland market. In her analysis, Ms Reich explains that the Gladstone tonnes would be supplied to “customer base Beenleigh south to NNSW [Northern New South Wales]”. Sales tonnes based on actual sales were 146,000 tonnes. At p 5 of the email, Ms Reich identifies the capital expenditure involved more than $5.5 million, the costs of that capital, and other fixed costs amounting to $1,817,400.00 or fixed costs of $12.12 per tonne. The variable costs are $4,260,111.11 or $28.40 per tonne resulting in a total cost of $40.52 per tonne of implementing the transport proposal reflected in the matrix. Ms Reich accepted that her analysis resulted in that cost per tonne.
1263 On 22 March 2007, Ms Reich sent an email to Mr Bailey attaching options (Ex-47, DAR-36) for the best utilisation for B doubles, as well as finding a means of bringing more ash into the SEQ market “albeit another type of ash”. The analysis identifies (by examining the staged introduction of ash to Brisbane across phases called Stages 1, 2, 3A and 3B) rail movements of Gladstone flyash from Mount Miller to Acacia Ridge; the utilisation rate for B double trucks (and some single trucks); and costs associated with particular journeys. The cost of a “full rig” 19 metre B double journey from Gladstone to Darra, using a subcontractor, was $67.19 per tonne. The road cost of a specific subcontractor is shown as $65.73 per tonne. The rail cost for delivery to the Acacia Ridge rail facility and then delivery to Darra is shown as $38.16 per tonne.
1264 Ms Reich accepted that the contingency plan involving Levels 1A, 1B, 2, 3 and 4 show that adopting Level 1A (Gladstone to North Coast customers), would result in impact operating costs of between $50.63 per tonne and $59.22 per tonne depending upon whether the movements were in the first or second half of the 2007 year; for Level 1B (Gladstone to Darra storage facility at 300 tonnes per week), the operating costs using rail and road would likely be in the range of $34.50 to $39.78 per tonne; for Level 2 (Gladstone to Darra by road and rail at 1,000 tonnes per week), the likely costs would be in the range of $41.65 to $43.48; for Level 3 (Gladstone to Darra at 1,538 tonnes per week by road and rail), between $42.67 and $44.05; and, for Level 4 (Gladstone to Darra or Yatala by road and rail at 3,000 tonnes per week), between $50.28 and $52.27 per tonne. For 2006, the actual cost of Queensland Rail transport movements was $35.24 per tonne. The actual cost of Queensland Rail transport movements in 2007 was $37.23 (T, p 2044, ln 26ff).
The evidence of the “actual charge back costs” and intermediate delivered costs
1265 In her second affidavit Ms Reich comments further about the logistics costs of delivering flyash from a power station to a point of off-take storage, and the costs of delivery directly to a customer. Ms Reich considers that it is reasonable to calculate the additional cost of double-handling flyash through an off-site storage facility and compare that cost with the cost of delivering flyash directly to a customer, by isolating the difference between the sum of the three components represented by the three classes of costs earlier mentioned and comparing that sum with the cost of delivering flyash from the power station directly to the customer. Ms Reich notes that although she considers the estimates she had earlier identified to be reasonable, she had been shown Ms Boman’s second affidavit (Ex-51) which sets out transport costs data for 2006 and 2007 which generally appear to reflect the actual “charge back cost” for delivering flyash from Swanbank and Tarong. Ms Boman’s data, however, is not full year data.
1266 Ms Reich notes in her second affidavit that, in her first affidavit, she had observed that in the period 2005 to 2007 the logistics costs of flyash delivery services were “charged back” by the Supply Chain Division to the business unit transacting with customers for supply of product whether cement or flyash. Those costs were charged back on a “dollar per tonne of product per kilometre basis” to ensure that the business unit took account of the “true cost” of the overall product from the point of production to the point of delivery to the customer (Ex-48, para 26).
1267 Ms Reich says in her second affidavit that she has accessed and examined the transport charge-back costs data for the full years from 2005 to 2007 drawn from Cement Australia’s SAP Accounting System. Having done so, Ms Reich sets out in her second affidavit a summary table that shows the actual charge-back costs of delivery from the Tarong and Swanbank Power Stations to the off-site storage facilities at Darra, Yatala and Wacol, and the actual charge-back costs of delivery from the power stations directly to the customer for 2005.
1268 The data also shows the total tonnes delivered and the transport costs per tonne.
1269 Ms Reich was not able to extract data relating to on-delivery of Swanbank flyash from the off-site storage sites to customers and, in addition, the data Ms Reich examined for Swanbank captures all types of Swanbank ash not just fine grade flyash.
1270 Ms Reich’s further information in relation to 2005 is this:
| 2005 | Charge Back Costs ($) | Volume Delivered (Tonnes) | Transport Costs ($/Tonne) |
| Tarong to Darra | 445,008.64 | 23,727.92 | 18.75 |
| Tarong to Yatala | 2,115,506.89 | 99,942.08 | 21.17 |
| Tarong to Wacol | 1,516,931.30 | 83,329.11 | 18.20 |
| Tarong to Darra, Yatala and Wacol, combined total | 4,077,446.83 | 206,999.11 | 19.70 |
| Tarong to the customer | 2,642,044.27 | 144,820.13 | 18.24 |
| Depot (Darra, Yatala or Wacol) to customer | 1,621,396.59 | 206,966.63 | 7.83 |
| Swanbank to Darra | 2,875.56 | 450.36 | 6.39 |
| Swanbank to Yatala | 0.00 | 0 | 0.00 |
| Swanbank to Wacol | 616.19 | 106.94 | 5.76 |
| Swanbank to the customer | 346,103.28 | 27,117.17 | 12.76 |
1271 Ms Reich says that it follows for the 2005 year that the average additional cost of double-handling Tarong flyash through an off-site storage facility as compared with delivering flyash directly to the customer was approximately $11.29 to $14.29 per tonne for every tonne delivered to the customer (Ex-48, para 29).
1272 That follows on this basis: the average cost to an intermediate storage facility was $19.70; the handling costs at that facility range from $2.00 to $5.00 representing a total cost in the range of $21.70 to $24.70; the cost of delivery from the intermediate storage facility to the customer was $7.83 representing a total cost in the range $29.53 to $32.53. The cost of delivery directly from Tarong to the customer was $18.24. The additional cost, said to be attributable to double-handling, is therefore in the range of $29.53 less $18.24 ($11.29) and $32.53 less $18.24 ($14.29).
1273 In 2005, 206,966.63 tonnes of Tarong flyash were delivered to a customer from an intermediate storage facility (being the Darra, Yatala and Wacol facilities) rather than direct delivery to a power station. It follows from Ms Reich’s data that the additional cost associated with delivering Tarong flyash to a customer through the vehicle of an intermediate storage facility added costs in the range $2,336,653.00 to $2,957,553.00 as compared with the costs of direct delivery to the customer, in 2005.
1274 However, as Ms Reich points out in her first affidavit, those tonnes delivered to customers through intermediate storage could not have been delivered to the customers directly because Cement Australia had very limited storage at the power stations and the only way in which it could supply Tarong flyash to customers was by removing processed flyash or flyash accommodating the description fine grade flyash, to off-site storage facilities. Otherwise, the production of flyash beyond the very limited storage capacity at the power stations would necessarily have been sent to disposal as waste. The Pozzolanic flyash supply business simply could not function without intermediate off-site storage capacity.
1275 Ms Reich’s information in relation to 2006 is this:
| 2006 | Charge Back Costs ($) | Volume Delivered (Tonnes) | Transport Costs ($/Tonne) |
| Tarong to Darra | 784,086.13 | 36,175.71 | 21.67 |
| Tarong to Yatala | 2,443,844.40 | 106,885.52 | 22.86 |
| Tarong to Wacol | 1,468,458.80 | 76,324.65 | 19.24 |
| Tarong to Darra, Yatala and Wacol, combined total | 4,696,389.33 | 219,385.88 | 21.41 |
| Tarong to the customer | 3,177,223.42 | 153,745.97 | 20.67 |
| Depot (Darra, Yatala or Wacol) to customer | 1,770,779.88 | 212,703.23 | 8.33 |
| Swanbank to Darra | 8,650.58 | 1,293.96 | 6.69 |
| Swanbank to Yatala | 0.00 | 0 | 0.00 |
| Swanbank to Wacol | 6,291.99 | 1,036.84 | 6.07 |
| Swanbank to the customer | 480,263.91 | 33,332.24 | 14.41 |
1276 These statistics have also been drawn by Ms Reich from the Cement Australia SAP Financial Accounting System which identifies the charge-back costs to each business unit within Cement Australia. Ms Reich’s statistics for the year 2006 set out in her first affidavit concerning quantities of flyash transported from Tarong Power Station to a customer or to an intermediate storage facility were drawn from a source described by Ms Reich as Cement Australia’s “DMS database” (Ex-47, para 234). The information contained in that database suggested that in the year 2006 Cement Australia transported 152,826.48 tonnes of flyash from Tarong to a customer and 225,732.26 tonnes of flyash from Tarong to a point of intermediate storage. Those numbers are substantially similar to the numbers drawn from the SAP Financial System. The relevant corresponding numbers from the SAP System are 153,745.97 and 212,703.23.
1277 Applying the same methodology as earlier described having regard to the SAP information, Ms Reich says that in 2006 the average additional cost of double-handling Tarong flyash through an off-site storage facility rather than delivering flyash directly to a customer’s batching plant was an amount between $11.07 and $14.07 per tonne for every tonne delivered to the customer. That follows on this basis. The average cost to an intermediate storage facility was $21.41; the handling costs at that facility range from $2.00 to $5.00 representing total costs in the range of $23.41 to $26.41; the cost of delivery from the intermediate storage facility to the customer was $8.33 representing a total cost in the range of $31.74 to $34.74. The cost of direct delivery from Tarong to the customer was $20.67. Therefore, the additional cost, said to be attributable to double-handling, is in the range of $31.74 less $20.67 ($11.07) to $34.74 less $20.67 ($14.07).
1278 It follows from Ms Reich’s data that the additional costs associated with delivering Tarong flyash to a customer through the vehicle of an intermediate storage facility added costs in the range $2,354,624.00 to $2,992,734.00, in the 2006 year.
1279 The 2007 statistics drawn from the SAP records are these:
| 2007 | Charge Back Costs ($) | Volume Delivered (Tonnes) | Transport Costs ($/Tonne) |
| Tarong to Darra | 418,769.56 | 18,721.94 | 22.37 |
| Tarong to Yatala | 1,982,358.84 | 83,053.52 | 23.87 |
| Tarong to Wacol | 1,171,783.10 | 57,370.96 | 20.42 |
| Tarong to Darra, Yatala and Wacol, combined total | 3,572,911.50 | 159,146.42 | 22.45 |
| Tarong to the customer | 2,967,197.52 | 129,861.08 | 22.85 |
| Depot (Darra, Yatala or Wacol) to customer | 1,385,788.60 | 156,675.49 | 8.84 |
| Swanbank to Darra | 10,243.22 | 1,516.69 | 6.75 |
| Swanbank to Yatala | 0.00 | 0 | 0.00 |
| Swanbank to Wacol | 10,675.90 | 1,775.76 | 6.01 |
| Swanbank to the customer | 447,930.47 | 27,216.79 | 16.46 |
1280 Applying the same methodology, Ms Reich says that the average additional cost of double-handling Tarong flyash in 2007 was in the range $10.45 to $13.45 per tonne, although the actual range according to Ms Reich’s statistics is $10.44 to $13.44 (see below). That follows on the basis that the average cost to an intermediate storage facility was $22.45; the handling costs at that facility range from $2.00 to $5.00 representing total handling costs in the range of $24.45 to $27.45; the cost of delivery from the intermediate storage facility to the customer was $8.84 representing a total cost in the range $33.29 to $36.29. The cost of delivery directly from Tarong to the customer was $22.85. The additional cost said to be attributable to double-handling therefore is in the range of $33.29 less $22.85 ($10.44) to $36.29 less $22.85 ($13.44).
1281 It follows, based on these statistics, that the additional costs associated with delivering Tarong flyash to a customer through the vehicle of an intermediate storage facility added, in 2007, costs in the range of $1,635,692.00 to $2,105,718.00.
1282 Ms Reich says that by reason of her position she has had access to certain portions of the SAP System including volume data for the period 2003 to 2005. Based on access to that data, Ms Reich sets out a summary of the volumes of flyash for each month for each delivery of Tarong flyash during those years, either to the customer or to points of intermediate storage. These statistics are based entirely upon the SAP database rather than the DMS system. Ms Reich, of course, had earlier set out the tonnes of flyash delivered from Tarong to intermediate points of storage, and directly to the customer, for the purpose of identifying the transport cost in dollars per tonne based on the factors determining the actual charge-back costs of delivery as contained within the SAP System. The monthly breakdown of deliveries of Tarong flyash to the customer and to intermediate storage for the 2005 year in this later part of Ms Reich’s second affidavit substantially corresponds to Ms Reich’s earlier figures discussed by her in the context of the actual charge-back costs to the business unit.
1283 Nevertheless, oddly enough, there is a very slight difference. In the charge-back context, Ms Reich identified 206,999.11 tonnes delivered to intermediate storage and 144,820.13 tonnes delivered directly to a customer, in 2005. In the later part of her affidavit, Ms Reich identifies a quantity of 206,616 tonnes delivered to intermediate storage and 143,825 tonnes delivered to a customer, in 2005.
1284 Ms Reich’s statistics for the 2003, 2004 and 2005 years for the Tarong Power Station are these:
Quantity of Flyash transported from Tarong Power Station (SAP Statistics)
| Year | To Customer (tonnes) | To Storage (tonnes) | Total (tonnes) |
| 2003 | 108,370 (40.0%) | 163,422 (60.0%) | 271,792 |
| 2004 | 131,580 (42.6%) | 177,399 (57.4%) | 308,979 |
| 2005 | 143,825 (41.0%) | 206,616 (59.0%) | 350,442 |
1285 Ms Reich’s statistics for the 2003, 2004 and 2005 years for the Swanbank Power Station are these:
Quantity of Flyash transported from Swanbank Power Station (SAP Statistics)
| Year | To Customer (tonnes) | To Storage (tonnes) | Total (tonnes) |
| 2003 | 23,546 (82.6%) | 4,972 (17.4%) | 28,518 |
| 2004 | 39,356 (96.1%) | 1,596 (3.9%) | 40,952 |
| 2005 | 26,599 (99.0%) | 276 (1.0%) | 26,875 |
1286 As set out in these preceding paragraphs, Ms Reich has attempted to demonstrate throughout her extensive affidavit evidence, the double-handling costs associated with supplying flyash through the vehicle an off-site storage facility as compared with the costs of direct delivery to a customer’s batching plant. Ms Reich has done so particularly for the years 2005, 2006 and 2007 identifying the precise dollar value of the differential double-handling cost.
1287 Nevertheless, in cross-examination, Ms Reich accepted that the analysis which she had undertaken in the paragraphs dealing with that topic did not “accurately capture the extra costs of double-handling because [Ms Reich had] not attempted, on a customer by customer basis, to compare the costs of delivering [flyash] directly from the power station to that customer with the costs of delivering double-handled product to that customer” (T, p 2039, lns 41-45). As an example of that proposition, Ms Reich accepted that she had not compared the costs of direct delivery from, as an example, Tarong to Boral’s Beenleigh plant with the costs of a double-handled delivery from Tarong to that particular plant (T, p 2040, lns 1-3).
1288 Ms Reich also accepted that because she had not undertaken that comparative analysis, Ms Reich’s analysis had not “captured the difference – the actual difference – between the cost of a direct delivery to a particular location and the cost of a double-handled delivery to that location”. Ms Reich also accepted that unless an analysis of that type was undertaken, neither Ms Reich (nor anyone else) could “meaningfully identify the additional cost of double handling” and, “that proposition applied equally in relation to the analysis [Ms Reich had] done” for the years 2005, 2006 and 2007 as earlier described in these reasons based on the relevant paragraphs of her affidavit and particularly her second affidavit (T, p 2040, lns 1-15).
1289 It should also be noted that from a logistics perspective, Ms Reich consistently talks about organising the logistics task to accommodate the transport demand in a region (along with other separate regions) she habitually describes as South East Queensland and Northern New South Wales. At Ex-47, DAR-51, Ms Reich exhibits an extract from a “Supply Chain Quarterly Review” presentation given on 25 August 2006. In that review, Ms Reich presented that part of it dealing with Queensland logistics and at p 9 of the presentation Ms Reich identifies a reduction in Tarong flyash available “for transfer to SEQ Storage” or supply “direct to market [customers]” as a “Potential risk to SEQ and NNSW market”. Plainly enough, Ms Reich conceived that her management of the logistics task was engaged by transport and supply movements serving a multiplicity of transactions within a South East Queensland and Northern New South Wales market.
1290 In her presentation, Ms Reich noted, as at 25 August 2006, short to medium term solutions to the “steady reduction in Tarong available product” issue and throughout the period July 2006 to January 2007, longer term contingency plans continued to be discussed (T, p 1981, lns 5-25). Ms Reich gave oral evidence that this was the first time in Ms Reich’s experience in her role that she had ever had to look at long term contingency plans in respect of a loss of supply from Tarong Power Station (T, p 1981, lns 26-29), and when Ms Reich turned her mind to the issue of developing a contingency plan, she found that she was “starting from scratch” in the sense that she was not able to turn to any existing plan that addressed loss of supply from Tarong.
1291 It seems to be a new problem and one largely determined by the externality of the drought giving rise to a reduction in generation capacity at Tarong which resulted in a reduction in the production of flyash.
1292 It is a little unfortunate that Ms Reich’s evidence on the logistics costs, informed by all of the considerations and many spreadsheets she mentions (with the benefit of access to the DMS data and the SAP financial accounting data), and I have reviewed, began, in her first affidavit, with the average cost analysis of movements of all cementitious products throughout all of Queensland based on recollections some years later of rough, but said to be reasonable, estimates for budget purposes; then moved to identify the average costs of $14.47 and $13.76 calculated in the way earlier described, but which did not actually expose an actual comparative costs analysis between the costs of direct and intermediate delivery; and, it was not until the second affidavit that an attempt was made to come to grips with a comparison of actual costs of direct and intermediate storage, although on an average basis of movements rather than a direct comparison of particular journeys.
1293 However, Ms Reich accepts that the comparison based on the charge-back costs does not isolate particular transactions for comparison although the statistics identify the proportion of flyash handled through intermediate storage and the costs overall of transport of that flyash to points of intermediate storage and then transport from those points to the ultimate point of delivery. It would have been quite useful had Ms Reich for the 2005, 2006 and 2007 years about which she speaks, selected, with the benefit of her considerable experience in logistics and access to the hard data on transport movements, five or six emblematic examples of the actual cost of transporting flyash directly from, for example, Tarong to a customer’s particular batching plant and the actual cost of delivering Tarong flyash to that customer’s same batching plant through the use of a particular intermediate storage facility.
1294 There presumably would be examples of a customer receiving Tarong flyash (or Swanbank flyash) at a particular batching plant by direct delivery from the power station and also through intermediate silo storage. It may be, however, that such examples do not exist because B double trucks were used out of Tarong to deliver flyash to off-site storage facilities and very few customers had facilities that could accommodate or receive B double trucks, with the result that B double trucks delivered to the off-site storage silos and single trucks delivered from the silos to the plants. However, the statistics on the percentage of product delivered directly as compared with deliveries through intermediate storage, seem to suggest that there must be comparable examples.
1295 In oral evidence Ms Reich was taken to one comparative hypothetical example to illustrate what an actual calculation might look like based on the costing model and distance tables at ATB-26.3 attached to Ms Reich’s email to Mr Bailey dated 7 June 2006. Ms Reich accepted that the outcome of the hypothetical comparison based on her model attached to that email would be this.
1296 First, suppose a transaction involves delivery of flyash from Tarong to ACL Readymix’s batching plant at Ballina. Second, the distance from Tarong Power Station to that plant is 370km. Third, the transport cost of a 370km journey using a single tanker is $46.25. Fourth, by comparison, the transport cost from Tarong to the Yatala depot using B double transport is $22.78 and the distance is 210km. Fifth, the transport cost using a single tanker from the Yatala depot to the same batching plant at Ballina is a distance of 162km at a cost of $23.01. In the result, the cost of direct delivery from Tarong to the Ballina plant is therefore $46.25 and the cost of intermediate delivery from the Tarong Power Station to the same plant via the Yatala storage facility is $45.79 (assuming use of B double transport where indicated).
1297 Ms Reich accepted in oral evidence that based on the transport element alone, it was cheaper to use a B double truck to deliver Tarong flyash to Yatala and then deliver it to the customer from Yatala by single truck, than to deliver directly to the customer from Tarong. Ms Reich also accepted that in this hypothetical example, the “true nature and extent of the extra cost, if any, of the double-handling would come down to the true handling costs at the Yatala storage depot” (T, p 2041, lns 45-48).
1298 In making these observations about Ms Reich’s evidence, I do not mean to suggest that I hold any adverse views about Ms Reich as a witness. On the contrary, I found her to be forthright in her answers and by her demeanour she was seeking to assist the Court on each of the factual matters about which has given affidavits and in respect of which she was cross-examined.
1299 Notwithstanding the illustration reflected in the hypothetical example above, it seems to me that the weight of the evidence given by Ms Reich is ultimately directed to demonstrating that the average cost of delivering flyash from Tarong to the intermediate storage facilities of Darra, Yatala and Wacol is something of the order of the average figures mentioned by Ms Reich for 2005, 2006 and 2007 namely $19.70, $21.41 and $22.45. Similarly, the average costs of transporting flyash from the intermediate storage depots to the customer is the costs set out in those schedules for the relevant years of $7.83, $8.33 and $8.84. It also seems to me that the costs identified by Ms Reich for the transport of flyash from Swanbank to Darra, Yatala and Wacol for the years 2005, 2006 and 2007 is the best evidence of that cost. So too is the other information set out in the three schedules for those years. In any event, it represents the cost structure Pozzolanic has adopted for conducting its flyash business and the features relevant to its delivered pricing model. Nevertheless, I accept that these statistics do not have the virtue of measuring actual transactions in a direct way by comparing delivery from a power station to a particular batching plant, with delivery of ash from that station to the same batching plant through the vehicle of a particular and specific intermediate storage facility.
1300 In part, the absence of a direct comparison of that kind has made it necessary to examine the delivered price and the actual costs, year by year, customer by customer, of delivery of flyash from, in particular, Tarong and Swanbank to customers and delivery of flyash from those power stations to the same customers at the same batching plants through the vehicle of a particular intermediate storage facility whether it be Darra, Yatala or Wacol. There is a very substantial body of material in evidence in the proceedings through documents and many spreadsheets addressing these actual costs, batching plant by batching plant, year by year. I propose to deal with some of it which sufficiently illustrates the steps taken by the respondents to track and measure the costs involved in the logistics movement of flyash from the various power stations and the relationship between those costs and the delivered pricing methodology adopted by the respondents.
1301 Ultimately, the point of the analysis of the extensive evidence of Ms Reich is to determine the systemic method adopted by Cement Australia in the conduct of the flyash business (direct delivery and much use of intermediate storage assets) and the actual transport, handling and delivery costs associated with that method. QCL and Cement Australia would only supply flyash on a delivered price basis using a next best alternative pricing method and by doing so they avoided bypass of their intermediate storage assets. The adoption of delivered pricing was an essential element of the system for the distribution of flyash and critical to the margins QCL and Cement Australia were able to derive.
PART 20
Direct delivery and particular pricing transactions
1302 QCL, in its letter dated 30 September 1999 (signed by Mr O’Callaghan and accepted for Pioneer by Mr Les Cadzow) setting out the terms of supply of flyash to Pioneer Group entities as from 1 April 1999, recites that flyash will be supplied on a delivered price basis according to a schedule for prices for Pioneer’s various batching plants (ATB 1.4). A rebate of 12% of the delivered price would be payable by QCL if Pioneer purchased 99% of its flyash requirements from QCL.
1303 In its letter dated 19 November 2002, QCL (by Mr Chalmers) set out the terms of supply of Swanbank fine grade flyash to four of Nucon’s batching plants (Oxenford, Southport, Carrara and Currumbin) as part of a cement and fly ash supply package. Only a delivered price was available (exclusive of GST) for flyash delivered to all four plants, at a price of $66.40 per tonne. If, however, flyash was supplied other than as part of the proposed package arrangement, the delivered price for flyash to all four plants would be $68.40 per tonne (ex-GST). Mr Chalmers makes it plain in his letter that Tarong fine grade flyash is substitutable for Swanbank fine grade flyash as he says this, as part of the terms:
In the event that, for reasons beyond the control of QCL, Swanbank Fine Grade Fly Ash is not available, Tarong Fine Grade Fly Ash would be supplied on request ...
1304 The delivered price of flyash from Tarong to the four batching plants would then be, at that time, $80.85 per tonne.
1305 In supplying cement, QCL also adopted a delivered price although very often the cement contracts gave the buyer an option to take cement priced either ex-production site or priced delivered to the customer’s site, and when a delivered price applied, a customer (usually with its own fleet) might be engaged by QCL to transport cement at a cartage rate nominated and paid by QCL.
1306 That position did not occur in the supply of flyash.
1307 Similarly, in the QCL and Neilsen Group Supply Contract of 1 January 2003 (for the period 1 January 2003 to 31 December 2007), QCL’s supply of Tarong fine grade flyash (required to meet the fine grade requirements of AS 3852.1) to Neilsen’s plants at Brendale, Wacol and Windsor, was “on a delivered basis only” as part of a “package offer” for the supply of 100% of the cementitious product requirements of the Neilsen Group (RCTB 457). The delivered price of flyash to the three batching plants was $85.00 per tonne. A volume rebate of $5.00 per tonne would apply to all purchases of flyash.
1308 On 24 December 1999, QCL entered into a cement and flyash supply and purchase contract with effect from 1 July 1999 with CSR Limited (the “1999 CSR Agreement”) for the supply of CSR’s requirements for those products in Queensland, Tweed Heads and Murwillumbah (the “Defined Area” for the contract) (ATB 1.5). CSR agreed to purchase at least 90% of its requirements for both products (as defined, which as to flyash, meant “fly ash as defined in AS 3582.1-1998”, not just fine grade flyash) from QCL. Flyash was to be purchased on a delivered price basis. The delivered price is set out in Part B of Schedule 1 by reference to CSR’s batching plants in particular areas, namely, Brisbane (14 plants); Darling Downs (4 plants); Gold Coast (6 plants); Sunshine Coast (10 plants); Northern New South Wales plants not forming part of the Defined Area but plants to which flyash might be delivered by agreement (7 plants); Central Region plants supplied with Callide C flyash (6 plants); and, Northern Region (6 plants).
1309 The delivered price for the 14 Brisbane plants involved very little price variation. The range of prices was this: $59.75, $60.63 and $61.51. The range of prices in the Darling Downs region was $48.66, $53.59, $59.75 and $62.39. On the Gold Coast, the range was $48.00, $50.00 and $57.62. The delivered price to the Southport batching plant was $57.62. As deliveries progressed southwards, the delivered price, by and large, reduced as the distances increased. For example, delivery to the Burleigh Heads plant was $48.00 and delivery to Tweed Heads and Murwillumbah plants was $50.00. As to the delivery of flyash to the Gold Coast, QCL makes this observation in Part B of Schedule 1: “Gold Coast prices (excluding Humes Southport) are based on QCL’s ability to supply Fly Ash ex Swanbank to CSR’s requirements for consistency in quantity and quality, otherwise QCL will supply Gold Coast Fly Ash requirements ex Tarong, at the agreed schedule prices”. As to the Sunshine Coast, the delivered price to the 10 batching plants also involved little price variation. The range was $58.78, $60.19, $61.95 and $62.39.
1310 Schedule 4 to the 1999 CSR Agreement simply stipulates that the required typical flyash properties are those stipulated in AS 3852.1. There is no reference to a particular power station source of flyash. The 1999 CSR Agreement sets out the cement price ex-works, Bulwer Island in Part A of Schedule 1, and at A(ii) of Schedule 1, the “delivery price” in dollars per tonne, to each of the batching plants to which flyash was also delivered, is set out. The delivery prices do not represent any useful analogue of flyash delivery prices as the transport journey always is from Bulwer Island to each batching plant whereas flyash is transported either from the power station to the customer’s plant, or from the power station to the customer’s plant via intermediate storage at Darra, Yatala or Wacol.
1311 In 1999, as part of the Project Enterprise Review, the McKinsey authors record that the transport cost of flyash per tonne from Tarong to Yatala by B double was $16.57 per tonne. The variable production cost at Tarong was $2.29 per tonne. The cost of transporting flyash from Yatala to southern batching plants at Lismore and Ballina was $19.00 and $18.41 by single tanker constituting a total transport cost respectively of $35.57 and $34.98 which together with the variable production cost amounted to a delivered cost to each of those southern plants of $37.86 (Lismore) and $38.27 (Ballina).
1312 In the 1999 CSR Agreement, the delivered price to CSR’s batching plants at Lismore and Ballina was $58.08.
1313 If the handling costs at Yatala were $2.00 to $5.00 on average as Ms Reich says (accepting that those prices relate to the period 2005 to 2007 which presumably exceeded the average handling price in 1999), the margin between the 1999 CSR Agreement delivered price, for example, and the delivered cost to those southern plants was an amount between $15.22 and $18.22 per tonne.
1314 On 12 September 2003, Mr Paul Pappas of Cement Australia sent an email to Mr Shaun Clarke attaching a Boral flyash pricing analysis requested by Mr Clarke. Mr Des Chalmers had helped in providing cost and delivered pricing information for the Pioneer and Readymix batching plants for incorporation in the analysis so as to compare the delivered pricing and transport cost components of supplying flyash to the batching plants of Boral, Hanson and Rinker. On 24 September 2003, Mr Pappas made changes to the spreadsheet having consulted further with Mr Chalmers. On 25 and 26 September 2003, Mr Ian Ridoutt sent an email to Mr Clarke commenting upon aspects of the analysis.
1315 In his email of 25 September 2003, Mr Ridoutt observed that the comparative analysis is a “best of breed analysis” in the sense that if adopted in determining prices for Boral, Boral would be taking advantage of “the best of Pioneers and Readymixs prices and would end up better than either of them which was never intended”. Mr Ridoutt also observed that a “premium” had been built into the “cartage rates ex Yatala for Boral so this would also need to be backed off”. The analysis was designed to make these comparisons so as to enable Mr Clarke to determine whether an adjustment rebate ought to be built into Boral’s delivered price.
1316 Subject to those observations, the analysis provides some useful information in relation to the location of the batching plants relative to Tarong Power Station and the Yatala storage facility, the delivered price to each batching plant, the cartage cost in dollars per tonne and the margin in the sense only of the delivered price less the cartage cost. In each of the entries for Boral’s batching plants, the delivered price is subject to a particular rebate depending upon the plant in question.
1317 The first entry in the spreadsheet, for example, is Boral’s Brisbane plant at Hendra. The spreadsheet records that the plant is 178km from the Tarong Power Station. The delivered price is $84.84 and the transport cost component from Tarong Power Station is shown as $17.53 per tonne. The spreadsheet shows the applicable rebate for each Boral plant (which in the Hendra example is $7.00). A comparison can be seen in the spreadsheet with plants operated by Pioneer and Readymix. One illustration is Readymix’s plant at Wacol which is said to be 177km from the Tarong Power Station (virtually the same distance as Boral’s Hendra plant). The delivered price to the Readymix plant is $75.89 (a difference of $8.95) and the transport cost component is $17.45. No rebate applies to prices paid by Readymix or Pioneer presumably because those companies enjoy more favourable delivered prices. After adjusting Boral’s higher delivered price by the new rebate of $7.00, Boral’s delivered price became $77.84 (a difference with the Readymix price of $1.95). The spreadsheet also sets out the relevant volumes.
1318 The spreadsheet contains the following information so far as it relates to Tarong bulk flyash:
| Plant | Distance from Plant (km) | Sales Point | Delivered Price | Cartage $/t | Delivered Price less Cartage |
| Brisbane Plants | |||||
| B-Hendra | 178 | TA | $84.84 | $17.53 | $67.31 -r |
| B-Wacol | 173 | TA | $85.01 | $17.11 | $67.90 -r |
| B-Browns Plains | 188 | TA | $84.94 | $17.53 | $67.41 -r |
| B-Capalaba | 207 | TA | $84.86 | $20.00 | $64.80 -r |
| B-Coopers Plains | 186 | TA | $84.94 | $18.21 | $67.73 -r |
| B-Coorparoo | 196 | TA | $84.87 | $19.06 | $65.81 -r |
| B-Geebung | 173 | TA | $84.90 | $17.11 | $67.79 -r |
| P-Northgate | 173 | TA | $75.80 | $17.11 | $58.69 |
| P-Coopers Plains | 186 | TA | $75.83 | $18.21 | $57.62 |
| P-West End | 194 | TA | $75.79 | $18.29 | $57.50 |
| P-Springwood | 207 | TA | $75.73 | $20.00 | $55.73 |
| Sunshine Coast Plants | |||||
| B-Caloundra | 161 | TA | $64.41 | $16.09 | $48.32 -r |
| B-Noosa | 207 | TA | $86.72 | $20.00 | $66.72 -r |
| B-Maroochydore | 168 | TA | $84.37 | $16.68 | $67.69 -r |
| P-Caloundra | 161 | TA | $75.36 | $18.09 | $57.27 |
| P-Maroochydore | 257 | TA | $75.32 | $24.25 | $51.07 |
| P-Noosa | 207 | TA | $77.37 | $20.00 | $57.37 |
| Gold Coast Plants | |||||
| B-Labrador | 246 | TA | $75.70 | $21.31 | $52.39 -r |
| B-Burleigh | 50 | YA | $75.60 | $6.65 | $68.95 -r |
| B-Benowa | 43 | YA | $75.70 | $6.06 | $69.64 -r |
| B-Alstonville | 182 | YA | $83.00 | $17.87 | $65.13 -r |
| B-Lismore | 182 | YA | $83.00 | $17.87 | $65.13 -r |
| B-Ballina | 182 | YA | $83.00 | $17.87 | $65.13 |
| P-Labrador | 246 | TA | $68.97 | $23.31 | $45.66 |
| P-Burleigh | 53 | YA | $68.86 | $6.91 | $61.95 |
| P-Ballina | 162 | YA | $72.13 | $16.17 | $55.96 |
| P-Lismore | 173 | YA | $72.13 | $17.11 | $55.02 |
| R-Southport | 39 | YA | $66.41 | $5.72 | $60.69 |
| R-Alstonville | 157 | YA | $72.13 | $16.17 | $55.90 |
TA = Tarong; YA = Yatala; - r = the projected rebate payable to Boral arising out of the comparative analysis with the delivered prices charged to Pioneer and Readymix in the various regions; B = Boral; P = Pioneer; R = Readymix
1319 Plainly enough, the cartage in dollars per tonne in respect of entries showing a “sales point” at Yatala does not take into account the cartage costs in transporting flyash to Yatala, at least so far as the spreadsheet is concerned. Since the spreadsheet differentiates between a sales point at Tarong and a sales point at Yatala, I assume that the cartage costs reflected in the spreadsheet represent the cartage costs from Tarong to the batching plant, and in those cases where the sales point is Yatala, the cost is only the cost from the Yatala sales point to the batching plant.
1320 The following table sets out QCL’s pricing to CSR at some of its various batching plants as at 1 July 2000 and 1 July 2001 although not all of CSR batching plants have been extracted for present purposes. The spreadsheet with the primary information is to be found at ATB 2.10:
| CSR Plants | P | SP | Distance from SP | 1/7/2000 NDP | 1/7/2001 DP | 1/7/2001 NDP |
| H-Eagle Farm | TA | WA | 31 | $59.55 | $70.67 | $62.19 |
| R-Acacia Ridge | TA | WA | 15 | $59.70 | $70.84 | $62.34 |
| R-Alstonville | SB | SB | 235 | $58.64 | $63.64 | $63.64 |
| R-Ballina | SB | SB | 240 | $58.43 | $63.43 | $63.43 |
| R-Beenleigh | TA | WA | 31 | $59.57 | $70.70 | $62.21* |
| R-Burleigh Heads | TA+ | TA+ | 93 | $47.35 | $52.35 | $52.35 |
| R-Geebung | TA | WA | 173 | $59.64 | $70.78 | $62.28* |
| R-Lismore | SB | SB | 208 | $58.43 | $63.43 | $63.43 |
| R-Maroochydore | TA | TA | 129 | $59.16 | $70.23 | $61.80 |
| R-Murwillumbah | TA+ | TA+ | 134 | $48.94 | $53.94 | $53.94 |
| R-Nanango | TA | TA | 27 | $48.58 | $58.21 | $51.22 |
| R-Southport | TA+ | TA+ | 83 | $47.41 | $52.41 | $52.41 |
| R-Tweed Heads | TA+ | TA+ | 114 | $49.14 | $54.24 | $54.24 |
| R-Wacol | TA | WA | 3 | $59.73 | $70.88 | $62.37 |
| S-Caloundra | TA | TA | 165 | $59.20 | $70.28 | $61.84* |
| S-Noosa | TA | TA | 208 | $61.21 | $72.56 | $63.85 |
P = flyash Product (either Tarong or Swanbank flyash); SP = the Source Plant of supply (either the power station or an intermediate storage point such as Wacol; NDP = Net Delivered Price (after rebate); DP = Delivered Price; TA = Tarong; SB = Swanbank; WA = Wacol; H = Humes; R = Readymix; S - Sellers
* These three amounts seem to be in error by 1c as a strict matter of mathematics as the net delivered price is determined by subtracting the nominated rebate from the delivered price which in the case of the three entries ought to be $62.22, $62.29 and $61.85.
+ These entries appear to contemplate the possibility of Swanbank ash substitution.
1321 A second part of the schedule sets out the margin derived from supplying flyash to each batching plant from the relevant supply point. For the above examples drawn from the spreadsheet the margin is shown in the spreadsheet as follows:
| CSR Plants in the Above Schedule | Margin $/tonne for Each Plant |
| H-Eagle Farm | $27.81 |
| R-Acacia Ridge | $29.30 |
| R-Alstonville | $25.27 |
| R-Ballina | $24.74 |
| R-Beenleigh | $27.83 |
| R-Burleigh Heads | $14.62 |
| R-Geebung | $15.97 |
| R-Lismore | $26.79 |
| R-Maroochydore | $35.94 |
| R-Murwillumbah | $13.58 |
| R-Nanango | $31.89 |
| R-Southport | $15.32 |
| R-Tweed Heads | $15.16 |
| R-Wacol | $30.34 |
| S-Caloundra | $33.67 |
| S-Noosa | $32.93 |
1322 A similar spreadsheet setting out the same class of information in relation to Pioneer showing the 1 July 2000 delivered price; the 1 July 2000 rebate; the net delivered price at 1 July 2000 (by calculation); the net delivered price at 1 July 2001; and the margin on the delivered price, all by reference to each of Pioneer’s batching plants is set out at ATB 2.11.
1323 Examples of the data is set out below:
| Pioneer Plants | Ash | Plant | D (km) | 1.7.2000 NDP | 1.7.2001 NDP | Margin $/t |
| Ballina | SB | SB | 240 | $55.97 | $58.61 | 25.64 |
| Bribie Island | TA | TA | 161 | $58.85 | $61.48 | 33.57 |
| Caboolture | TA | TA | 136 | $58.99 | $61.62 | 32.59 |
| Lismore | TA | WA | 246 | $55.97 | $58.61 | 11.09 |
| Cleveland | TA | WA | 44 | $59.53 | $62.17 | 26.70 |
| Coopers Plains | TA | WA | 15 | $59.67 | $62.31 | 24.27 |
| Labrador | TA | WA | 75 | $56.32 | $58.96 | 22.38 |
| Billinudgel | TA | WA | 214 | $56.26 | $58.90 | 13.42 |
| Byron Bay | TA | WA | 192 | $56.16 | $58.80 | 14.73 |
| West End | TA | WA | 23 | $59.62 | $62.26 | 28.55 |
SB = Swanbank; TA = Tarong; WA = Wacol; Ash = the power station source of the flyash; Plant = the supply point; NDP = Net Delivered Price (after rebate); Margin = the margin in dollars per tonne referable to each Plant; D = distance from the Plant
1324 The Net Delivered Price of supply to Pioneer seems to have increased as at 1 July 2001 (taking account of the rebate) by approximately $2.63 or $2.64 delivered, at each batching plant.
1325 For Boral, examples of the delivered pricing as at 1 October 2002 and as at 1 January 2003 for its batching plants are set out below (ATB 5.38):
| Boral Plants | Ash | Plant | 1.10.2002 NDP | 1.1.2003 NDP |
| Alstonville | TA | YA | $79.00 | $82.52 |
| Ballina | TA | YA | $79.00 | $82.52 |
| Beenleigh | TA | WA | $66.94 | $70.46 |
| Benowa | TA | WA | $71.70 | $71.70 |
| Browns Plains | TA | WA | $75.94 | $79.46 |
| Burleigh | TA | WA | $71.60 | $71.60 |
| Caloundra | TA | TA | $80.41 | $83.93 |
| Casino | TA | YA | $10.00 | $15.52 |
| Darra | TA | - | $75.98 | $79.50 |
| Evans Head | TA | YA | $79.00 | $82.52 |
| Labrador | TA | WA | $71.70 | $71.70 |
| Lismore | TA | YA | $79.00 | $82.52 |
| Noosa | TA | TA | $82.72 | $86.24 |
| Tweed Heads | TA | WA | $77.08 | $77.08 |
| Wacol | TA | WA | $76.01 | $79.53 |
TA = Tarong; YA = Yatala; WA = Wacol; Ash = the power station source of the flyash; Plant = the supply point; NDP= Net Delivered Price (after rebate)
1326 For CSR and Pioneer, the pricing spreadsheets in evidence show examples of the pricing position as at 1 October 2002 and 1 January 2003 as follows (ATB 5.38):
| Batching Plants | Product/Ash | Source Plant (D) | 1.10.2002 NDP | 1.1.2003 NDP |
| CSR Plants | ||||
| Alstonville | TA | WA | $70.46 | $73.98 |
| Alstonville | SB | SB (235) | $73.64 | $77.64 |
| Burleigh Heads | TA | TA (93) | $68.86 | $68.86 |
| Ballina | SB | SB (240) | $73.43 | $77.43 |
| Ballina | TA | WA | $70.24 | $73.76 |
| Beenleigh | TA | WA (31) | $72.21 | $75.73 |
| Byron Bay | TA | WA | $70.46 | $73.98 |
| Byron Bay | SB | SB (208) | $73.65 | $77.65 |
| Lismore | SB | SB (208) | $77.43 | $73.43 |
| Lismore | TA | WA | $70.24 | $73.76 |
| Maroochydore | TA | TA (129) | $71.80 | $75.32 |
| Murwillumbah | TA | TA (134) | $68.46 | $68.46 |
| Nanango | TA | TA (27) | $61.22 | $64.74 |
| Southport | TA | TA (83) | $66.93 | $66.93 |
| Tweed Heads | TA | TA (114) | $68.76 | $68.76 |
| Wacol | TA | WA (3) | $72.37 | $75.89 |
| Caloundra | TA | TA (165) | $71.48 | $75.36 |
| Noosa | TA | TA (208) | $73.85 | $77.37 |
| Pioneer Plants | ||||
| Ballina | SB | SB (240) | $73.43 | $77.43 |
| Ballina | TA | TA | $68.61 | $72.13 |
| Bribie Island | TA | TA (161) | $71.48 | $75.00 |
| Caboolture | TA | TA (136) | $71.62 | $75.14 |
| Byron Bay | TA | WA (192) | $68.80 | $72.32 |
| Labrador | TA | WA (75) | $68.96 | $68.96 |
| Lismore | TA | WA (246) | $68.61 | $72.13 |
| West End | TA | WA (23) | $72.26 | $75.78 |
TA = Tarong; WA = Wacol; SB = Swanbank; NDP = Net Delivered Price (after rebate); Product/Ash = the power station source of the flyash; Source Plant = the supply point; D = the distance in kilometres from the supplier’s Source Plant to the customer’s batching plant, which distances have been adopted from the distances recited in the supplier’s earlier pricing spreadsheets (where a distance has been recited) on the footing that the place of the relevant batching plant has not changed in the period 2001, 2002 and 2003
Price increases notified by QCL in its delivered pricing
1327 These delivered pricing changes were explained by Mr Ridoutt of QCL in his letter to Mr Brian Halcrow of CSR dated 28 June 2002 (RCTB 470).
1328 In that letter, Mr Ridoutt advised that a price increase in all QCL flyash products would apply from 1 October 2002. A price increase also applied to cement products. As to flyash, the delivered price was to increase by $4.00 for “South Queensland & Northern NSW”. A $6.00 price increase applied in relation to the “Central & Northern Queensland” areas. As a transitional mechanism, QCL said that these delivered price increases for cement and flyash would apply from 1 October 2002 but the rebates would be increased by the same amount of the price increase until 31 December 2002 so as to offset the price increase until then. From 1 January 2003, however, the delivered price as it applied at 1 October 2002 would be maintained but the rebate that had previously applied was to be “reduced to $0.48 per tonne (excl GST) for Tarong fly ash”.
1329 There would be no rebate for Swanbank flyash.
1330 As to the Central and Northern Queensland regions, the rebate for Gladstone flyash would be reduced to $0.72 per tonne. Mr Ridoutt also advised CSR that the rebates for Tarong flyash supplied to Gold Coast batching plants would be 100% of the increase applying from 1 January 2003. In other words, on the Gold Coast, there would be no price increase in the supply of Tarong flyash to Gold Coast CSR batching plants.
1331 In the pricing spreadsheets which show the delivered price at 1 October 2002 and the new net delivered price applicable from 1 January 2003, the delivered price at 1 October 2002 and 1 January 2003 remains the same for every CSR batching plant as Mr Ridoutt says in the letter, but the rebate is reduced to either 48c per tonne in the case of supplies of Tarong flyash or 72c in the case of Gladstone flyash supplied to Central and Northern CSR plants. The pricing spreadsheet shows that the price increase was effected by reducing the rebate.
1332 For Gold Coast plants (such as Burleigh Heads), the rebate applicable at 1 October 2002 remained fully payable at 1 January 2003 and thereafter. In the above schedule, that position can be seen in the entries for Burleigh Heads, Murwillumbah, Southport and Tweed Heads. In each of those cases, Tarong flyash was supplied from Tarong. That pricing position did not prevail in relation to southern CSR batching plants at, for example, Ballina and Byron Bay supplied with Tarong flyash from the intermediate storage facility at Wacol. Nor did the position apply to the supply of Swanbank flyash to Ballina or Byron Bay. There was no increase in the price of delivered Swanbank flyash to Lismore from Swanbank. The price of Tarong flyash delivered to Lismore from the intermediate storage point at Wacol did increase.
1333 There was no increase in the supply price of Tarong flyash to Pioneer’s batching plant at Labrador supplied out of the Wacol storage facility. Tarong flyash supplied to Ballina from Tarong did increase. Tarong flyash supplied to Byron Bay and Lismore from the Wacol facility also increased.
1334 Mr Ridoutt had previously notified CSR (1 February 2002) of a price rise in the delivered price of flyash from 1 April 2002 of $10.00 per tonne for all bulk and bagged flyash (RCTB-470).
1335 Mr Ridoutt also wrote a letter on 28 June 2002 to Mr Cadzow of Pioneer in the same terms as the 28 June 2002 letter to CSR.
1336 As to Boral, Mr Ridoutt wrote to Boral on 7 February 2002 arising out of discussions between Mr Townsend for QCL and Mr Reid for Boral, advising that in recognition of Boral’s acceptance of QCL’s total product and pricing offer, QCL would provide Boral with a rebate of $10.00 per tonne for all flyash purchases (and cement) in Queensland and New South Wales from 1 April 2002 to 30 June 2002, and from 1 July 2002 QCL would provide Boral with a $5.00 per tonne rebate on all cement purchases only.
1337 On 28 June 2002, Mr Ridoutt wrote to Mr Reid advising that as from 1 October 2002 there would be an increase in the delivered price for flyash for South Queensland and Northern New South Wales of $4.00 per tonne and, for Central and Northern Queensland, $6.00 per tonne with increases in the prevailing rebate to offset the price increases until 31 December 2002. In the case of Boral, from 1 January 2003, the delivered price for flyash would be maintained at the 1 October 2002 delivered price but the rebate would be reduced to a level that had the effect of increasing the net delivered price of flyash from Gladstone and Tarong to Boral batching plants by 50% of the increase, that is, $2.00 and $3.00 respectively for the two regions. Like CSR and Pioneer, QCL’s pricing to Boral was on terms that a rebate would be paid representing 100% of what would otherwise be the price increase from 1 January 2003, for the supply of Tarong flyash to Boral’s Gold Coast batching plants. Like the other letters, Mr Ridoutt advised Boral that a further review of pricing would occur at the end of the first quarter of 2003.
Pricing, revenue, EBIT and OPAT statistics
1338 In the 2001 financial year, QCL derived the following revenue in dollars per tonne in the delivered price supply of fine grade flyash from Tarong; incurred the following costs; and derived the following EBIT and OPAT:
| Sales Revenue | Rebates | Total Revenue Less Rebates | Cartage to Customers | Total Costs | EBIT | OPAT |
| $65.32 | $3.86 | $61.46 | $20.64 | $35.68 | $25.77 | $25.77 |
EBIT = Earnings Before Interest and Tax; OPAT = Operating Profit After Tax
1339 In the 2002 financial year, QCL derived the following revenue in dollars per tonne in the delivered price supply of fine grade flyash from Tarong; incurred the following costs; and derived the following EBIT and OPAT (ATB 6.09):
| Sales Revenue | Sundry Revenue | Rebates | Total Revenue Less Rebates | Cartage to Customers | Total Costs | EBIT | OPAT |
| $75.72 | $0.05 | $8.31 | $67.46 | $21.58 | $35.60 | $31.86 | $31.86 |
1340 In the 2003 financial year, QCL derived the following revenue in dollars per tonne in the delivered price supply of fine grade flyash from Tarong; incurred the following costs; and derived the following EBIT and OPAT (ATB 10.19):
| Sales Revenue | Sundry Revenue | Rebates | Total Revenue Less Rebates | Cartage to Customers | Total Costs | EBIT | OPAT |
| $78.71 | $0.23 | $4.08 | $74.85 | $21.77 | $34.99 | $39.86 | $39.86 |
1341 In the 2001 financial year, QCL derived the following revenue in dollars per tonne in the delivered price supply of fine grade flyash from Swanbank; incurred the following costs; and derived the following EBIT and OPAT:
| Sales Revenue | Sundry Revenue | Rebates | Total Revenue Less Rebates | Cartage to Customers | Total Costs | EBIT | OPAT |
| $47.97 | $0.00 | $0.11 | $47.86 | $9.63 | $29.66 | $18.19 | $18.17 |
1342 In the 2002 financial year, QCL derived the following revenue in dollars per tonne in the delivered price supply of fine grade flyash from Swanbank; incurred the following costs; and derived the following EBIT and OPAT (ATB 6.09):
| Sales Revenue | Sundry Revenue | Rebates | Total Revenue Less Rebates | Cartage to Customers | Total Costs | EBIT | OPAT |
| $55.46 | $0.00 | $0.44 | $55.03 | $8.58 | $25.31 | $29.72 | $29.72 |
1343 In the 2003 financial year, QCL derived the following revenue in dollars per tonne in the delivered price supply of fine grade flyash from Swanbank; incurred the following costs; and derived the following EBIT and OPAT (ATB 10.19):
| Sales Revenue | Sundry Revenue | Rebates | Total Revenue Less Rebates | Cartage to Customers | Total Costs | EBIT | OPAT |
| $57.99 | $0.09 | $0.32 | $57.76 | $8.20 | $27.63 | $30.13 | $30.13 |
1344 In each of the six examples mentioned above, the total revenue less rebates in dollars per tonne, of $61.46, $67.46, $74.85, $47.86, $55.03 and $57.76 is said to be a proxy for the net delivered price per tonne for delivered flyash.
1345 A number of things should be mentioned at this point in relation to the delivered pricing of flyash, the costs associated with that business and the margins derived by QCL and later Cement Australia in conducting the delivered price undertaking.
1346 By the time Mr Ridoutt wrote his letters of 28 June 2002 advising customers and, in particular, the major customers but also the larger and smaller independent concrete producers, of the price increases which would take effect from 1 October 2002 (but for the moratorium he mentioned until 31 December 2002) and thereafter from 1 January 2003, Mr Ridoutt, Mr Wilson and others within QCL were proceeding on the basis that a contract for the purchase and supply of flyash from Millmerran Power Station was very likely to occur.
Further considerations
1347 At this point, and certainly from 30 September 2002 until the commissioning of the first unit of the Millmerran Power Station, QCL did not know what the performance characteristics of the flyash produced at that station would be. QCL did not know whether the flyash from Millmerran would be immediately substitutable for Tarong fine grade flyash or whether it would meet in all respects the requirements of, for example, AS 3582.1 or whether it would exhibit other properties (such as a colour issue), which would make it saleable or unsaleable or otherwise present commercial questions which would need to be addressed in seeking to sell it as a product capable for use in particular applications.
1348 At this point, Mr Ridoutt, Mr Wilson and others within QCL understood that there would likely be an annualised pre-payment of an amount of something of the order of $1.35M to MPP as part of a take or pay obligation for Millmerran flyash. That obligation came to pass by 30 September 2002, as things transpired.
1349 The imperative for QCL (and later Cement Australia) in the conduct of its flyash business from 1 October 2002 was to recoup what was simply, at that point, an additional cost of doing business in the supply of fine grade flyash (or other concrete grades of flyash) on a delivered price basis to customers wishing to use flyash in the production of concrete, or to otherwise re-sell that flyash.
1350 That cost of doing business was to be recouped, as Mr Ridoutt’s letters make plain, by increasing the delivered price of flyash in “South Queensland and Northern New South Wales” by $4.00 per tonne for every tonne supplied and by increasing the delivered price of flyash in “Central and Northern Queensland” by $6.00 per tonne. At this point, no flyash from Central Queensland had been delivered into the area described by Mr Ridoutt as “South Queensland and Northern New South Wales” from Central Queensland and no flyash from Gladstone, in particular, was delivered into South East Queensland for supply in South East Queensland and Northern New South Wales until 2007 apart from the virtually insignificant quantity in 2006 of less than 1% of sales overall.
1351 Moreover, the pricing increase reflected in Mr Ridoutt’s letters of 28 June 2002 as it began to take effect from 1 January 2003 would be subject to a further price review “at the end of the first quarter of 2003”. It follows that not only did QCL anticipate that it could sustain a delivered price position as part of its terms of supply to customers; refuse to price flyash on an ex-power station or ex-point of intermediate supply basis; refuse to accept collection by customers of flyash at the power station (or other points of intermediate storage); and increase the delivered price per batching plant from 1 January 2003, it also anticipated that it would be able to undertake a further price review three months later at the end of Quarter 1 2003, on the footing I infer, that the delivered price of fine grade flyash would likely increase rather than decrease.
1352 Plainly enough, as at June 2002, in a forward looking way, Mr Ridoutt had an expectation that QCL would be able to supply the major customers (and the larger and smaller independent concrete producers) in the area of transactional engagement he chose to describe as South Queensland and Northern New South Wales with fine grade flyash from Tarong, in particular, and Swanbank, even though QCL’s entitlement to sell classified Tarong fine grade flyash (through the vehicle of Pozzolanic’s purchase, removal and processing of flyash at the Tarong Power Station) which would be the dominant source of supply of fine grade flyash to customers in South Queensland and Northern New South Wales was the subject of an uncertain outcome by force of the tender processes then still underway, for Tarong ash.
1353 The uncertainty surrounding a secure source of supply of fine grade flyash from Tarong, in the sense that QCL’s capacity to supply Tarong fine grade flyash to customers could not be said to be in place until Pozzolanic’s contractual rights were signed, sealed and delivered (as QCL contends), did not operate as a perceived constraint upon QCL’s capacity to supply fine grade flyash sourced from Tarong on a delivered price basis to customers in South Queensland and Northern New South Wales or upon QCL’s election to increase the delivered price of flyash in the forward-looking way reflected in Mr Ridoutt’s letters of 28 June 2002.
1354 As to the position in the years 2004 to 2010, I accept that the delivered price of Tarong and Swanbank fine grade flyash for those years in each case either was the figure set out below or in those cases where a budgeted figure is recited in the various papers, the delivered price was approximately that figure:
Delivered Price
| Year | Tarong | Document | Swanbank | Document |
| 2004 | $75.43 (Budget) | ATB 16.09 | $56.94 (Budget) | ATB 16.09 |
| 2005 | $76.91 (Budget) | ATB 16.09 | $59.19 (Budget) | ATB 16.09 |
| 2006 | * | Ex-50, CB-4 | $44.03 (Actual) | Ex-50, CB-4 |
| 2007 | * | Ex-50, CB-4 | $43.74 (Actual) | Ex-50, CB-4 |
| 2008 | * | Ex-50, CB-4 | $46.74 (Budget) | Ex-50, CB-4 |
| 2009 | * | Ex-75, CSW-4.1 | $57.65 (Actual) | Ex-75, CSW-4.1 |
| 2010 | * | Ex-75, CSW-4.2 | $58.40 (Actual) | Ex-75, CSW-4.2 |
* [REMOVED TO THE CEMENT AUSTRALIA CONFIDENTIAL SCHEDULE]
1355 As to the production costs at Tarong and Swanbank, I am satisfied that the production costs are these:
Production Costs
| Year | Tarong | Document | Swanbank | Document |
| 2001 | $15.03 | Spreadsheet, Volume 6, Tab 9, p 6-47 Based on a calculation of total costs $35.6828/t less cartage $20.6496/t = $15.0332/t | $20.03 | Spreadsheet, Volume 6, Tab 9, p 6-48 Based on a calculation of total costs $29.6657/t less cartage $9.6345/t = $20.0311/t |
| 2002 | $14.02 | ATB 6.9 Based on a calculation of total costs $35.60/t less cartage $21.58/t = $14.02/t | $16.73 | ATB 6.9 Based on a calculation of total costs $25.31/t less cartage $8.58/t = $16.73/t |
| 2003 | $13.22 | ATB 10.19 Based on a calculation of total costs $34.99/t less cartage $21.77/t = $13.22/t | $19.43 | ATB 10.19 Based on a calculation of total costs $27.63/t less cartage $8.20/t = $19.43/t |
| 2004 | $15.68 | ATB 16.9 Based on a calculation of the “Production” costs (5 items) | $19.32 | ATB 16.9 Based on a calculation of the “Production” costs (5 items) |
| 2005 | * | * | * | * |
| 2006 | * | * | * | * |
* [REMOVED TO THE CEMENT AUSTRALIA CONFIDENTIAL SCHEDULE]
1356 As to flyash distribution costs, Mr Murray Adams prepared a document on behalf of Cement Australia (at ATB 14.20) in October 2004 which sought to identify the costs associated with transporting flyash from Swanbank to clusters of customers described as “Swanbank Customers”, “Wacol Customers” and “Yatala Customers” as Alternatives 1 and 2. Alterative 1 contemplated supply from the Swanbank Power Station to Swanbank Customers (in the immediate catchment of the power station) and supply to Wacol and Yatala Customers from the Wacol and Yatala intermediate storage depots. Alternative 2 contemplated supply directly from the power station to each group of customers without intermediate storage. A similar exercise was undertaken by Mr Adams concerning supply from the Tarong Power Station to Tarong Customers, Darra Customers, Wacol Customers and Yatala Customers.
1357 The result of Mr Adams’s analysis in October 2004 in relation to supply of Swanbank fine grade flyash in dollars per tonne was this for Alternative 1 involving intermediate storage:
| Cost Item | Wacol Customers | Yatala Customers |
| Production Component | $1.95 | $1.95 |
| B Double Delivery to Depot | $3.62 | $5.60 |
| Depot | $0.30 | $0.30 |
| Flagfall Component | $2.31 | $2.31 |
| Delivery to Customer (Single Semi) | $1.78 | $1.78 |
| Total | $9.96 | $11.94 |
1358 For Alternative 2 involving direct delivery from the power station to the same customers, the position is this:
| Cost Item | Wacol Customers | Yatala Customers |
| Production Component | $1.95 | $1.95 |
| Flagfall Component | $2.31 | $2.31 |
| Delivery to Customer (Single Semi) | $3.70 | $6.69 |
| Total | $7.96 | $10.95 |
1359 The result of Mr Adams’s analysis in relation to the supply of Tarong fine grade flyash in dollars per tonne was this for Alternative 1 involving intermediate storage:
| Cost Item | Wacol Customers | Yatala Customers | Darra Customers |
| Production Component | $2.07 | $2.07 | $2.07 |
| B Double Delivery to Depot | $11.87 | $13.85 | $12.16 |
| Depot | $0.30 | $0.30 | $0.30 |
| Flagfall Component | $2.31 | $2.31 | $2.31 |
| Delivery to Customer (Single Semi) | $1.78 | $1.78 | $1.78 |
| Total | $18.33 | $20.31 | $18.62 |
1360 For Alternative 2 involving direct delivery, the position is this:
| Cost Item | Wacol Customers | Yatala Customers | Darra Customers |
| Production Component | $2.07 | $2.07 | $2.07 |
| Flagfall Component | $2.06 | $2.06 | $2.06 |
| Delivery to Customer (Single Semi) | $15.50 | $18.53 | $15.99 |
| Total | $19.63 | $22.66 | $20.12 |
1361 It follows in terms of this analysis that the cost of direct delivery of Tarong flyash to the body of customers located within 20km of the Wacol, Yatala and Darra facilities (being the determinate of the customers for the purposes of the model) was $19.63, $22.66 and $20.12 as compared with the cost of delivery via intermediate storage of $18.33, $20.31 and $18.62 respectively. In relation to Swanbank, it follows that the cost of direct delivery of Swanbank flyash to customers located within 20km of the Wacol and Yatala facilities was $7.96 and $10.95 respectively as compared with the cost of delivery via intermediate storage of $9.96 and $11.94 respectively.
1362 In Ms Reich’s analysis, the combined average of the cost of transporting flyash from Tarong to the Darra, Yatala and Wacol facilities was $19.70 per tonne and the cost of transport from those facilities to the customer was said to be $7.83 resulting in a combined transport cost of $27.53 as compared with the cost of direct delivery to the customer of $18.24. These statistics were said to reflect the measure of the double-handling costs which as a matter of efficient logistics one would seek to eliminate in order to deploy a least cost solution. These statistics seem very much at odds with the actual costs of actual journeys calculated by Mr Adams.
PART 21
Other participant evidence: Nucon Pty Ltd (“Nucon”)
1363 Mr Bruce Neumann is the Managing Director of Nucrush Pty Ltd (“Nucrush”).
1364 The companies in the Nucrush group are owned and controlled by Mr Neumann and his family. Mr Neumann has been a Director of Nucrush since the 1960s, and in the late 1970s Mr Neumann became the Managing Director of Nucon (Southport) Pty Ltd. Mr Neumann was responsible for the management of the supply of pre-mix concrete and other products and responsible for the operation of the company’s pre-mix batching plant at Southport. In 1999, the company was merged with other companies controlled by Mr Neumann and his siblings into Nucon Pty Ltd (“Nucon”) which was established in 1997 (Ex-5, para 1).
1365 Nucrush produces approximately 500,000 to 600,000 tonnes of quarry products (sand and gravel) each year. These quarry products represent 90% of the ingredients used in the manufacture of ready mix concrete. Nucon uses about 50% of Nucrush’s production volumes in the production of concrete.
1366 Nucrush owns a small grinding mill at Wakerley in Brisbane used for grinding zircon. The mill is capable of being adapted to grind clinker, slag or flyash. The capacity of the mill is said by Mr Neumann to be about less than 5% of the capacity of the large cement mills used by the major cement producers. Nucon is one of the largest independent pre-mix concrete producers in Queensland. Nucon owns and operates concrete batching plants approximately every 20 kilometres from a northerly point south of Brisbane (Logan City) to points along the Gold Coast as far south as Ballina in northern New South Wales. The batching facilities are located at Logan, Yatala, Oxenford, Southport, Carrara, Currumbin, Chinderah and Ballina.
1367 Annexure C is a map showing the geographical distribution of the Nucon batching plants.
1368 Nucon manufactures and supplies general purpose concrete (used in domestic house slabs) and exposed aggregate concrete where gravel, particularly coloured gravel, is exposed as part of the aesthetic design of the building. Nucon concentrates on serving smaller construction customers. The largest projects supplied by Nucon are usually three storey residential buildings. Nucon does not supply the complex concrete products supplied by the larger concrete suppliers (Ex-15, para 15).
1369 Each of Nucon’s eight batching plants set out on Annexure C has separate storage facilities for cement and flyash. Nucon’s batching plants have two silos which hold 100 tonnes of cement. A further silo holds between 70 and 80 tonnes of flyash. Hoppers store gravel and sand. Each plant uses approximately eight tonnes of flyash per day and must receive regular weekly or bi-weekly deliveries of flyash to maintain supply. Deliveries are typically 30 to 40 tonnes of flyash. Until about early 2006 Nucon’s Logan plant had only one silo available to store cement and flyash.
1370 Pre-mix concrete is typically manufactured using a mix of cement, slag, flyash, sand, gravel and water although in most compositions, the primary ingredients in the mix are cement, sand, gravel and water except for projects sponsored by the Department of Main Roads where flyash is specified for use. Flyash is not required to be added to a pre-mix concrete blend and would not usually be added unless the use of flyash reduced the total cost of the concrete mix. The precise composition of a concrete mix varies according to the purpose for which the concrete is prepared, the cost of the ingredients and the strength required to be achieved.
1371 Most companies, including Nucon, have a particular mix design for pre-mix concrete. Nucon supplies its pre-mix concrete on the footing that the concrete meets the relevant Australian Standard and Nucon through its registered National Association of Testing Authorities (“NATA”) laboratory carries out testing and certification of each concrete mix to ensure that it meets the applicable standard. The essential test is undertaken to determine the strength of the concrete by placing a cylinder of concrete into a hydraulic press to undertake a “compression test” for the mix after seven, 14 and 28 days to determine the “compressive strength” of the concrete.
1372 Nucon’s customers generally specify the required strength of the concrete, the size of the gravel to be included in the mix, and the water content of the concrete. Subject to any relevant specification, Nucon in over 90% of cases in which it supplies pre-mix concrete, exercises a discretion as to the source and volume of cement, flyash and slag used in each mix. Concrete producers seek to optimise their mix designs so as to achieve the lowest cost possible. Mr Neumann says that concrete producers tend to keep their mix designs a closely guarded secret (Ex 5, para 23).
1373 The document at ATB 14.7 is an email dated 17 December 2004 from Mr Kempsey of Cement Australia to Mr Zeitlyn which attaches a document described as a “Mix Cost Comparison spreadsheet updated with RMH Mix Design data (FYI)”. The spreadsheet sets out a typical mix cost comparison for Hanson and Readymix in relation to concrete exhibiting a mix strength of 20 megapascals (“MPa”). The spreadsheet shows that in a 20 MPa strength mix Hanson would use 210 kilograms of cement in each cubic metre of concrete where no flyash is used. Where flyash is used, the mix would contain 190 kilograms of cement and 30 kilograms of flyash resulting in 220 kilograms of cementitious material in each cubic metre of 20MPa concrete. Readymix in each 20MPa cubic metre of concrete would use 235 kilograms of cement where no flyash is used, and where flyash is used, the mix would be 180 kilograms of cement and 55 kilograms of flyash in each cubic metre or concrete. The spreadsheet sets out the relevant costs comparisons in each case.
1374 In the Hanson example, flyash represents 13.63% of the cementitious component of a cubic metre of 20MPa concrete and in the Readymix example flyash represents 23.40% of the cementitious component of a cubic metre of 20MPa concrete.
1375 The strength of a concrete slab is a measure of the capacity of the concrete to withstand pressure. A typical cubic metre of 20MPa concrete (which is the Standard adopted for domestic house slabs), would comprise 180 kilograms of cement and 60 kilograms of flyash with flyash representing 25% of the cementitious components of the concrete. In a cubic metre of concrete comprising 200 kilograms of cement and 80 kilograms of flyash, flyash would represent approximately 28.57% of the cementitious composition of the concrete.
1376 Increasing the strength of the concrete to a high-strength concrete used in some high rise applications (a cubic metre of 50MPa concrete) requires up to double the weight of cement in each cubic metre of concrete.
1377 Nucon does not use blended cement in its concrete mixes as it is more expensive than buying flyash and cement separately and then blending the two at a batching plant. Moreover, using blends does not allow Nucon to control the cost and performance characteristics of its concrete. Nucon formerly purchased a flyash blended cement product (up to 2006) for use at its Logan batching plant as it only had one silo and could not store cement and flyash separately (Ex-5, para 29).
1378 Nucon’s average costs of producing a cubic metre of 20MPa concrete using the typical mix earlier described is this: sand and gravel - $54 (based on a cost per tonne of raw material of between $20 to $35); cement - $28 (based on a cost per tonne of $155 after taking into account available rebates); flyash - $6 to $7 (based on a cost per tonne of flyash of $80 depending upon the power station source of the flyash supplied by the seller); additives - $1; administrative costs - $21 ($110 - $111 in all). These costs are not supported by underlying data.
1379 Cement is the most expensive raw material component per tonne in pre-mixed concrete production and represents a commodity where significant savings might be made through cementitious substitution possibilities. Nucon seeks to reduce the raw material cost of its pre-mixed concrete to the greatest extent possible without affecting the quality of the concrete. Lower cost products such as flyash or slag represent such a cementitious substitute. Nucon chooses not to use more than 90 to 100 kilograms of flyash in each typical cubic metre of pre-mixed 20MPa concrete so as to preserve the performance and compressive strength characteristics of the concrete.
1380 Mr Neumann says that the use of flyash as a partial substitute for cement in pre-mixed concrete is “critical” in lowering Nucon’s concrete production costs and enabling it to compete with the major pre-mixed concrete suppliers (Ex-5, para 36).
1381 Mr Neumann estimates the price advantage it enjoys as against those competitors as, of the order of, $0.50 to $1.00 per cubic metre. Mr Neumann says that flyash and cement account for approximately 38% of the total materials component cost of a typical 20MPa concrete mix (although only 31.53% of the cost in the example earlier described).
1382 Apart from cost advantages, Mr Neumann says that flyash is important in the production of concrete for the many functional cementitious reasons he identifies. Using flyash in the mix also increases the durability of the concrete. As a result, a concrete producer can replace some of the cement used in pre-mixed concrete with flyash so as to reduce the total costs and still achieve what Mr Neumann describes as “a mix-strength close to that of a mix using cement alone” (Ex-5, para 45).
1383 Mr Neumann says that as Nucon’s major competitors use fine grade flyash in their mixes, Nucon also needs to offer a concrete mix using fine grade flyash. Some of Nucon’s customers require flyash to meet the Australian Standard for fine grade flyash, such as the Department of Main Roads. Nucon does not have separate silos at its batching plants for the storage of different classes of flyash. As a result, Nucon cannot supply customers who require fine grade flyash if the only available flyash storage silos contain lesser quality flyash. Nucon generally purchases “classified flyash” so as to guarantee “a high level of quality” so as to meet the Australian Standard. Nucon adopts this practice because Mr Neumann considers, as a concrete producer, that “most flyash” produced by a power station requires “some classification” to ensure its quality is consistent for use in concrete production especially for use as “fine flyash” as used by Nucon’s major competitors (Ex 5, para 52).
1384 Mr Neumann says that until April 2002, the only supplier of flyash to Nucon in South East Queensland was Pozzolanic. Since late 2008, Independent Flyash Brokers (“IFB”) has offered classified flyash from Millmerran to Nucon and since around 2008, Sunstate has offered to supply “ground flyash” produced from flyash sourced from Tarong North. Until 2002, Pozzolanic supplied fine grade flyash to Nucon sourced from power stations in South East Queensland. However, from 2002 onwards Hyrock Pty Ltd (“Hyrock”) supplied fine grade classified flyash to Nucon sourced from Bayswater. From 2002 to 2008, Nucon purchased the majority of its flyash from Hyrock from this source. From April 2009 to August 2009, Nucon continued to purchase a small amount of flyash from Hyrock to supply its batching plants at Chinderah and Ballina and to supply a concrete products company called Rocla Pty Ltd (“Rocla”) (Ex-5, para 57).
1385 In August 2009, Nucon again commenced purchasing its primary supply of flyash from Hyrock (sourced from Bayswater).
1386 In 2005, Nucon acquired a limited supply of unclassified flyash from Tarong North for testing purposes. Nucon was able to use some of this flyash in concrete production by blending it with classified Bayswater flyash.
1387 Between April 2009 and August 2009, Nucon chiefly acquired its requirements for flyash from Sunstate being ground flyash sourced from Tarong North.
1388 Mr Neumann says that Nucon ceased acquiring flyash from Pozzolanic (as its primary supplier) in 2002 for these reasons.
1389 The only terms of supply offered by Pozzolanic incorporated supply on a “delivered basis” with the result that Nucon was not able to collect flyash ex-works or ex-bin and transport it to Nucon’s batching plants itself. Nucon’s proposals to purchase flyash from Pozzolanic on an ex-works basis were rejected. Supply of flyash on a “delivered-only basis” is disadvantageous to Nucon for a number of reasons according to Mr Neumann. First, Nucon is not able to seek to obtain cheaper transport prices from contractors. Second, Nucon is not able to identify the cost of the transport component of the delivered price. Third, Nucon is concerned that information about its business (quantities of flyash purchased and delivered to particular batching plants) might be passed on to Nucon’s competitors having regard, particularly since 2003, to the shareholder relationship between Pozzolanic/QCL/Cement Australia and Hanson and Rinker (Ex-5, para 61).
1390 In November 2002, QCL offered to supply Nucon with flyash from Swanbank at the delivered price of $66.40 per tonne and from Tarong at a delivered price of $80.85 per tonne (excluding GST in each case) if Nucon agreed to acquire 100% of its flyash and cement requirements from Pozzolanic for Nucon’s plants at Oxenford, Southport, Carrara and Currumbin.
1391 Apart from that proposal, Pozzolanic offered to supply flyash separately from Swanbank at a delivered price of $68.40 per tonne (including GST).
1392 Mr Michael Cooper is the General Manager of the Nucrush group of companies. He was appointed in 2000 and since that time he has assumed many of the former responsibilities of Mr Neumann. He manages the day-to-day operations of the companies. The QCL offer described by Mr Neumann was made in a letter dated 19 November 2002 from QCL to Mr Michael Cooper signed by QCL’s Manager of Sales, Mr Des Chalmers (Ex-5, BGN-1).
1393 The letter sets out these matters:
… the offer for cement supply relates to cement produced at our Bulwer Island facility. Fly ash supply relates to the provision of Swanbank Fine Grade Fly Ash (whenever available). A package of cement plus fly ash is offered, as is ongoing supply of fly ash alone. We offer supply under the following terms and conditions:
…
Fly Ash Supply
QCL shall supply Swanbank Fine Grade Fly Ash to the four Nucon plants nominated under the following conditions:
The delivered price for all plants, as part of a cement and fly ash supply package, shall be $66.40 per tonne (excluding GST).
Fly ash is offered on a delivered price only basis, and the price quoted above is exclusive of GST.
In the event that, for reasons beyond the control of QCL, Swanbank Fine Grade Fly Ash is not available, Tarong Fine Grade Fly Ash would be supplied on request, at the delivered Tarong Fine Grade Fly Ash price that is presently $80.85 per tonne (excluding GST).
For supply outside the package of cement and fly ash products, the delivered price for supply of “fly ash only” to all plants will be $68.40 per tonne (excluding GST). For other than the cement and fly ash package above, this price shall replace any existing fly ash price for Swanbank Fine Grade Fly Ash from 1st December, 2002.
Price Movements
The delivered price of cement will be increased in accordance with any general price increase announced by QCL’s competitors or any reasonable cartage rate increase notified by Nucon [for cement] that may occur from time to time. If a general decrease in the price of cement occurs in the marketplace Nucon and QCL will negotiate in good faith to revise the delivered prices. Within the package offer, the fly ash price may increase at the same time as that of cement. For the supply of “fly ash only”, price increases may occur from time to time, and will not necessarily be tied to cement price increases.
[emphasis added]
1394 The package offer remained open until 13 December 2002 and the “fly ash only” offer at a price of $68.40 per tonne excluding GST was to be fixed until at least 31 March 2003.
1395 Mr Neumann says that on 19 November 2002, it was cheaper for Nucon to acquire and truck high quality flyash from Bayswater (approximately 750 kilometres from the Gold Coast) to its batching plants than it was to acquire delivered flyash from Pozzolanic sourced from Tarong (approximately 189 kilometres from Brisbane and approximately 250 kilometres from the Gold Coast) (Ex-5, para 63).
1396 Mr Neumann says that Hyrock operates what he describes as a “multi-user facility” at Bayswater from which concrete producers can purchase flyash ex-works. Hyrock in 2002 supplied Nucon with classified flyash ex-works for approximately $15.00 per tonne (excluding GST). The price was reduced to $12.50 per tonne (excluding GST) in late 2005 during negotiations between Nucon and Hyrock at a time when transportation costs had increased.
1397 In 2002, when Nucon commenced purchasing its flyash requirements from Hyrock, it cost Nucon between $55.00 and $65.00 (excluding GST) to transport flyash from Bayswater to Nucon’s batching plants although the particular cost of transport varied over time due to fluctuations in the cost of diesel. The landed cost of Bayswater flyash to Nucon’s Southport plant was between $70.00 and $80.00 per tonne (excluding GST). Nucon invested $460,000 in a new tanker truck and also employed contractors to haul flyash from Bayswater to Nucon’s batching plants. Under these arrangements, Nucon caused to be transported to its SEQ batching plants approximately 10,000 to 15,000 tonnes of flyash each year from 2002 to 2008.
1398 Nucon was able to lower the cost of transport from Bayswater to its South East Queensland batching plants by “back-loading” some of its Bayswater flyash having “forward-transported” coarse river sands to Tumut in New South Wales in tanker trucks. However, back-loading flyash was not the orthodox method of transporting Bayswater flyash to Nucon’s batching plants and at least 80% of the time, the trucks were sent to Bayswater empty. Mr Neumann says that at any one time, Nucon may have had three trucks on the road hauling flyash from Bayswater to its batching plants (Ex-5, para 75).
1399 Although Nucon acquired most of its flyash between 2002 and April 2009 from Hyrock sourced from Bayswater, Nucon from time to time purchased flyash from QCL and Cement Australia when the costs of transportation increased or in circumstances where there may have been difficulties in obtaining supply of Bayswater flyash from Hyrock.
1400 During the period that Nucon was chiefly purchasing Bayswater flyash from Hyrock, Nucon supplied small quantities of Bayswater flyash to Sunstate on those occasions when flyash in excess of Nucon’s silo capacity at its batching plants was due to be delivered from Bayswater. These events would not often occur. However, arrangements between Nucon and Sunstate were made such that supply by Nucon became a more regular arrangement. The supply by Nucon of Bayswater flyash to Sunstate was at a price which enabled Nucon to make a profit on the haulage component from Bayswater to Sunstate’s facilities.
1401 On 25 August 2009, Nucon resumed obtaining its primary supply of flyash from Hyrock sourced from Bayswater. At this time, Wagner Investments Pty Ltd (“Wagner”) commenced supplying cement into New South Wales on a delivered basis using a transport provider called “Brimms Transport” (“Brimms”). Brimms offered Nucon a backhaul rate of $45.00 per tonne including GST which enabled Nucon to purchase Bayswater flyash from Hyrock at a delivered cost to Nucon of approximately $57.50 per tonne including GST.
1402 Mr Neumann says that until Nucon was able to secure a backhaul rate at $45 from Brimms, the high transport costs associated with hauling Bayswater flyash to Nucon’s batching plants meant that it was “not economical” for Nucon to use Bayswater flyash in the production of concrete rather than flyash purchased from Sunstate, ground in Sunstate’s grinding mill (Ex-5, para 79).
1403 Mr Neumann estimates that it cost Nucon approximately $25.00 per tonne more in haulage costs to transport flyash from Bayswater to the Gold Coast than the cost of transporting flyash from Tarong to the Gold Coast. Mr Neumann also estimates that it cost Nucon an extra $40.00 per tonne to transport flyash from Bayswater to the Gold Coast than it cost to transport flyash from Swanbank to the Gold Coast. These costs are not supported by underlying data.
1404 In addition, there is a “just in time” component to purchasing flyash from a power station as far away from Nucon’s batching plants as the Bayswater Power Station. Longer lead times for orders is necessary due to the time associated with the lengthy distances to be travelled for delivery with truck drivers unable to complete the round trip from the Gold Coast to Bayswater and back, non-stop. Drivers can only complete the cycle every 48 hours and orders must be placed at least 36 hours in advance of delivery to ensure continuity of supply. By way of comparison, Tarong flyash can be delivered to the Gold Coast with only a few hours notice.
1405 Mr Neumann says that although Bayswater flyash is high quality flyash and exhibits higher qualities than Tarong flyash, these quality advantages “do not justify the extra transport costs” associated with purchasing Bayswater flyash. Mr Neumann says that Nucon would not purchase flyash from Bayswater if it could secure a supply of Tarong or Swanbank flyash at a price ex-works from those stations of the order of the Bayswater ex-works price, as the transport cost from those power stations to Nucon’s batching plants, having regard to the shorter distances, would necessarily eliminate the level of “extra transport costs” associated with hauling Bayswater flyash to Nucon’s batching plants in South East Queensland over the longer haulage distances (Ex-5, para 82).
1406 Mr Neumann says that Nucon has explored the costs associated with transporting Bayswater flyash to South East Queensland, by rail.
1407 Mr Neumann says that due to the significant costs involved in acquiring the necessary infrastructure to load and unload flyash on and from trains, and the annual quantities of flyash involved, purchased from Hyrock, Nucon would not have been able to recoup its investment in the necessary infrastructure.
1408 Mr Neumann gave the following further evidence in relation to attempts by Nucon to secure supplies of flyash in South East Queensland.
1409 In early 2004, Nucon engaged an independent expert in flyash, Mr Ron McLaren, to assist in establishing a “flyash supply operation” at the power stations as an alternative operator to Pozzolanic. In 2006, MPP offered Nucon the opportunity to conduct some limited testing of Millmerran Power Station flyash. Nucon also considered acquiring flyash from the Callide Power Station in Central Queensland. Mr Neumann says that because of the distances involved between Callide and Nucon’s batching plants in and around the Gold Coast, the transport costs of hauling Callide flyash to Nucon’s batching plants were similar to the costs of hauling flyash from Bayswater to the Gold Coast.
1410 Moreover, in order to acquire Callide flyash, it would have been necessary for Nucon to invest considerable capital expenditure in installing a classifier at Callide.
1411 Mr Neumann estimates, based on his understanding of Nucon’s costs of establishing “concrete production and aggregate facilities”, and his investigations into flyash processing, that the cost of installing a “fully automated classifier, storage silos, truck-loading, weighbridge and other associated facilities” at a power station is in the order of $2 million. In addition to these costs, recurrent costs include electricity, maintenance, labour costs and depreciation.
1412 As to Swanbank, Mr Neumann says that its close location to Brisbane and the Gold Coast makes it a desirable source of flyash although the age of the station is an issue. Any concrete producer seeking to establish a flyash processing operation at Swanbank finds it “impossible to know” the period during which it will be possible to continue to take flyash from Swanbank. Nucon opened negotiations with Swanbank in 2002 seeking the supply of at least 20,000 tonnes per annum from Swanbank. By 2006, discussions had proceeded to the point where Nucon believed it likely that it would be able to install its own processing facilities at Swanbank. Design drawings for plant and equipment were prepared. On 15 May 2009, Nucon signed an agreement with Swanbank entitling it to install a processing plant at the station should it wish to do so. It has not done so because the owners of the station are investigating whether the power station should be closed or upgraded (Ex-5, para 118).
1413 Mr Neumann says that if Nucon installs a classifier at Swanbank, the estimated capacity of the plant is 30,000 to 40,000 tonnes of classified flyash per annum.
1414 As to Tarong North, Mr Neumann, Mr Cooper and Mr McLaren met with Tarong North’s Plant Manager, Mr Dennis Franklin, a number of times after the commissioning of the Tarong North Power Station, in 2004. In 2005, Nucon obtained flyash for testing from Tarong North and over an 18 month period Nucon tested several hundred tonnes of Tarong North flyash.
1415 The flyash proved too coarse to use in concrete.
1416 Nucon subsequently abandoned its attempts to seek access to flyash from Tarong North. Nucon has been undertaking negotiations with TEC to obtain direct access to flyash at Tarong and Tarong North which would involve Nucon installing plant at Tarong although should Nucon obtain access to particular zones, classification may not be necessary.
1417 As to Millmerran, IFB entered into arrangements for the purchase and removal of flyash from Millmerran.
1418 As to slag, concrete can be made using up to 35% ground granulated blast furnace slag replacing GP cement essentially kilogram for kilogram whilst retaining the equivalent concrete strength after 28 days. Mr Neumann says that using slag (up to 45% slag) in any concrete mix would increase the setting time, decrease early stage strength and increase the 28 day strength of the concrete. Therefore, Nucon would only be able to increase the use of slag in particular or “targeted” concrete applications (Ex-5, para 139).
1419 Blast furnace slag must be ground in a cement mill or similar grinder to achieve the necessary “fineness” for use in cement. Mr Neumann says that if Nucon had ready access to a commercial source of slag, this would have “no significant impact on [Nucon’s] use of flyash”. Mr Neumann says that slag was formerly commonly available in New South Wales sourced from Port Kembla Steelworks but is no longer widely available and Nucon has been unable to obtain granulated slag from Port Kembla at a price which would enable it to economically use slag when the cartage costs from Port Kembla are included.
1420 Nucon has used a blended cement/slag mix known as Type GBFS blended cement purchased from Sunstate, for approximately 13 years. Type GBFS cement is cheaper to purchase per tonne than cement powder. Sunstate sources its slag from Nippon Steel in Japan and uses its cement unloading facility at Fisherman Island to unload imported slag. Sunstate has facilities onsite to grind slag.
1421 In October 2002, Nucrush established a grinding mill in Wakerley.
1422 The mill was purchased from Consolidated Rutile Ltd for approximately $1.9 million. Nucrush uses the grinding mill to produce ground zircon which is used in the production of ceramic material. The grinding mill is said to be “somewhat similar to a clinker grinding [mill] although on a much smaller scale”. Mr Neumann says that at the time Nucrush purchased the mill, it was considering importing slag and grinding it for use in concrete production. Nucrush also examined the option, and the costs associated with the option, of using the Wakerley grinding mill to grind unclassified flyash for use in concrete production. Mr Neumann says that he formed the view that it would not be “commercially viable” for Nucrush to do so for these reasons. First, Mr Neumann considered that the transport and handling costs involved in grinding flyash were “significant” and in order to grind flyash at the Wakerley Mill, it would be necessary for Nucrush to acquire flyash from the power station; transport it to the Wakerley Mill; unload it; grind it to the relevant consistency; and then transport the ground flyash to a batching plant. Mr Neumann estimates the transport costs of trucking ground flyash from the Wakerley Mill to Nucon’s batching plants would be approximately $5.00 to $10.00 per tonne above and beyond the costs of delivering flyash directly to the batching plants from other sources. Second, Mr Neumann considered that because unclassified flyash contains particles of unburnt carbon, the unburnt carbon, when ground, can cause a colour variation or “staining” to occur in concrete which, in Mr Neumann’s experience, makes the concrete unattractive to potential buyers (Ex-5, para 149).
1423 Mr Neumann says that if Nucrush made a decision to grind flyash at its Wakerley Mill, pursuing such an option would require Nucon or Nucrush to secure access to unclassified flyash and Nucrush has been unsuccessful in obtaining access to “commercially usable supplies of flyash on suitable terms from any power station”. Mr Neumann says that grinding flyash or slag requires significant “technical expertise” which Nucrush would need to acquire before it could begin to grind its own flyash or slag for use in concrete production.
1424 Mr Neumann says that apart from grinding mills owned and operated by suppliers of cement whose integrated operations include the production and supply of pre-mix concrete (such as Hanson and Readymix) the only other mills in South East Queensland that can be used for grinding flyash or slag, apart from Nucrush’s Wakerley Mill are these: Sunstate’s Grinding Mill at Fisherman Island and a mill established by Wagners in 2009.
1425 I accept that evidence of Mr Neumann although as to the matters about which Mr Cooper gives evidence, I place greater emphasis upon Mr Cooper’s evidence for the reasons mentioned below.
PART 22
Some aspects of the evidence of Mr Michael Cooper
1426 Although Mr Neumann speaks about the issues he addresses with obvious long term experience in the businesses as an owner, shareholder and director in Nucon and the Nucrush companies, and as the Managing Director of Nucon for over 40 years, Mr Michael Cooper, as General Manager of Nucon from 2000, assumed many of the responsibilities of Mr Neumann.
1427 In the course of cross-examination, Mr Neumann accepted that “the real knowledge, the detailed knowledge”, in respect of matters such as Nucon’s attempts to secure access to sources of flyash at Tarong, Tarong North, tendering for Tarong flyash, negotiations with Swanbank and some aspects of the utility of undertaking mill grinding of flyash particles and related issues, fell within the “prime responsibility” of Mr Cooper. The details of such matters were left by Mr Neumann to Mr Cooper who was, in effect, Nucon’s Chief Executive Officer (T, p 609, lns 17-40).
1428 Mr Cooper is, in effect, in day-to-day charge of the operations of Nucon. His role in that regard dates from at least 2001 although he was appointed to the role in September 2000.
1429 Mr Cooper says that flyash used by Nucon is stored in silos which typically hold 60 to 100 tonnes, at each of Nucon’s concrete batching plants. Deliveries occur infrequently at some plants such as Ballina (once a month) and more frequently at others such as Oxenford (every couple of days). Flyash is used by Nucon as a partial substitute for cement so as to reduce the overall or total cost of a concrete mix and improve the characteristics of the concrete (such as workability, durability and pumpability). Use of higher quality flyash (finer grade particles) tends to maintain a higher relative strength concrete mix.
1430 Until 2002, Nucon purchased “high grade flyash” from Pozzolanic in South East Queensland supplied only on a delivered basis from either Swanbank or Tarong Power Stations. In 2001, Nucon began generally looking for access to power stations in South East Queensland for the supply of flyash although the search began properly in 2002. Nucon, by Mr Cooper, started “thinking about” direct availability of flyash from the power stations in 2001, and in August 2002 Mr Cooper retained Mr Forbes to start “investigating” the availability of flyash from the power stations directly.
1431 Nucon took these steps because Mr Cooper, Mr Neumann and Mr Peter Brown, Nucon’s Concrete Manager in 2001, considered that Nucon’s “best alternative source of flyash” (as an alternative to Pozzolanic) was to secure a direct source of flyash from a power station in South East Queensland. Mr Cooper also believed that sourcing flyash directly from these power stations would secure for Nucon the lowest raw material cost for flyash; enable Nucon to control the quality of the flyash supplied to it; and reduce to a minimum, transport costs incurred by Nucon.
Bayswater flyash
1432 Mr Cooper says that because Nucon could not secure direct access to flyash from the South East Queensland power stations, Nucon began purchasing classified Bayswater flyash from Hyrock from about 2002. Nucon sourced the majority of its flyash from Hyrock until 2009 until it switched to Sunstate as a supplier for a brief period.
1433 Mr Cooper says that on 1 January 2003, Nucon and Hyrock entered into a five year supply agreement for the bulk supply to Nucon of fine grade flyash (required to meet AS 3582.1) on an “ex-bin” basis with flyash taken by Nucon at Hyrock’s “Bayswater Power Station Fly Ash Facility” (the “supply point”). The agreement provided for an ex-bin price of classified flyash of $15.00 per tonne plus GST for the first three years and a CPI adjustment for the remaining two years with the base three years being September 2002 to September 2005.
1434 Mr Cooper says that from 2002 (presumably September) Hyrock supplied classified fine grade flyash to Nucon for between $12.50 and $15.00 per tonne.
1435 The haulage cost to Nucon’s batching plants was an amount between $55.00 and $65.00, with an approximate range in the landed price of Bayswater flyash at Nucon’s batching plants of $67.00 to $80.00 per tonne.
1436 Apart from using haulage contractors, Nucon purchased a new tanker and prime mover ($460,000) to haul Bayswater flyash to Nucon’s batching plants (among other uses). A typical flyash load was 34 tonnes. Back-loading, as also described by Mr Neumann, lowered the cost of transportation although Mr Cooper also says that from 2006, 80% of the truck journeys to the Bayswater supply point were by empty trucks.
1437 From 2002 to 2009, Nucon purchased and delivered between 10,000 and 15,000 tonnes of Bayswater flyash to its South East Queensland batching plants.
1438 Mr Cooper puts in evidence a spreadsheet (MPC-66 to his first affidavit) setting out Nucon’s purchases, by volume, of Bayswater flyash from Hyrock, by month, for the financial years ending 30 June 2004, 30 June 2005 and 30 June 2006, by batching plant, at Oxenford, Carrara, Southport, Currumbin and Chinderah for the first two financial years, and those plants plus the Logan plant in the financial year ending 30 June 2006. The Hyrock price for the year ending 30 June 2004 is shown as $15.00 per tonne with a reference on the spreadsheet to a “current cartage price” shown as $53.00. The Hyrock price from 1 July 2004 to 1 May 2005 is shown as $15.00, and from 1 May 2005 the Hyrock price is shown as $12.50. The “current cartage price” shown is $59.00. The Hyrock price for the year ending 30 June 2006 is $12.50 and the current cartage price shown on the spreadsheet is $56.00.
1439 The total volumes in the years ending 30 June 2004, 30 June 2005 and 30 June 2006 were 13,074.18 tonnes; 10,751.04 tonnes and 3,411.96 tonnes respectively.
1440 The spreadsheet also shows, for each year, Nucon’s purchases of Bayswater flyash for re-supply by Nucon to particular third parties.
1441 Nucon supplied approximately 5,000 to 6,000 tonnes of Bayswater flyash per annum to an entity sufficiently called “Rocla Pipes” and supplied Sunstate with Bayswater flyash for use in Sunstate’s flyash cement blend product initially on an “overflow” or excess to Nucon’s storage capacity basis, and then as a more regular supplier to Sunstate. Like Mr Neumann, Mr Cooper says that, in his view, Nucon’s transport costs are higher than they would otherwise have been had a source of South East Queensland flyash been available to Nucon, and the haulage distances involved in transporting Bayswater flyash to South East Queensland made flexibility in ordering and delivery times more difficult.
1442 Mr Cooper says that if Nucon had been able to obtain a reliable source of classified flyash from Tarong or Swanbank at about the ex-bin Bayswater price, Nucon would not have used (bought) Bayswater flyash. Mr Cooper says that although Bayswater flyash is a better quality flyash than Tarong flyash (according to tests undertaken by Nucon) the difference in quality between the two flyash products does not justify the extra transport costs.
1443 In 2004, Mr Cooper prepared a flyash projection (MPC-2) setting out Nucon’s flyash usage at each of its batching plants and the potential for on-supply of flyash to third parties. Mr Cooper says that had Nucon been able to secure direct supply of flyash from a South East Queensland power station, it planned to use that flyash in its own concrete production at batching plants and sell any excess flyash to third parties. The spreadsheet shows Nucon’s current use, projecting total Nucon usage each year to 2011, according to each batching plant and each new plant, as commissioned.
1444 The projection addresses 11 factors described as “A” to “L”. The first is total Nucon usage based on current kilograms per cubic metre of concrete. The second is projected additional usage by Nucon each year based on projected increases. The third is additional usage by one of the Neumann companies (as 25% of GB cement use is replaced by flyash in that company’s use). The fourth is Rocla’s use through Nucon. The fifth is Sunmix’s use through Nucon. The sixth is use by Nucon in a cement bagging facility to be established that would use 25% flyash. The seventh is export of bagged cement to New Zealand. The eighth is a list of five companies that buy flyash from Hyrock that Mr Cooper thought would buy flyash from Nucon if “the price was realistic”. The ninth is two companies, Wagner and Cordwell Concrete, that buy flyash from Cement Australia and Hyrock, with Mr Cooper projecting that Nucon would secure those sales made by Hyrock. The tenth and eleventh projections are concerned with “other markets” that might be exploited by Nucon including the potential opportunity said to be available to Nucon to use 150,000 tonnes of flyash in “downstream processing using technology exclusively available to Nucrush”.
1445 The tenth and eleventh projections are described as “J” and “L”. Having identified the 11 factors informing the projection, the total projected consumption for each item is totalled with a total projection across all items. The spreadsheet is a little odd in the sense that it comes to an aggregate total projected requirement for flyash “without ‘J’ and ‘L’” yet the spreadsheet, in the total for each year, includes the tonnes attributable to item “L”.
1446 Nevertheless, it is plain that in 2004 Mr Cooper and Nucon were actively considering what might be done in terms of the use of flyash and other opportunities for exploitation of flyash should Nucon secure a reliable source of flyash. The total tonnes across the projection amount to 1,197,891 tonnes. If the tonnes related to the potential exploitation of Nucrush technology referred to in item “L” is removed from the projection, the total tonnes across the projection are 537,891 tonnes. The total quantities in respect of factor A (projected use by Nucon) is 163,458 tonnes across the projection. The total quantities in respect of factor B (anticipated increases) is 114,314 tonnes across the projection. The total quantities in respect of factor C (25% substitution of GB cement used by a Neumann company) is 14,070 tonnes and the total quantities in respect of factors D and E (re-supply by Nucon to two particular third parties) is 49,132 tonnes.
1447 By 2005 Nucon, “broadly speaking” (T, p 504, ln 9), took the view that the best processed flyash was from Bayswater and that Nucon wanted to use flyash of that quality or better. Nucon considered Bayswater flyash to be fine grade flyash with greater than 80% of the flyash particles passing a 45 micron sieve, although Bayswater flyash, according to Mr Cooper, had deteriorated over time; had become more variable than it used to be; and was no longer “as good as it used to be”. These factors, however, were not affecting the “business utility” of Bayswater flyash from Nucon’s perspective, in Mr Cooper’s view.
1448 Mr Cooper accepted that Nucon regarded Bayswater flyash as the highest quality flyash exhibiting consistency in the size in the flyash particles and in the unburnt carbon (LOI) relative strength and colour measures, as compared with other ashes. Mr Cooper accepted that of the ashes available in 2005, the range of variations in the Bayswater flyash was smaller than most other ashes and this position prevailed, in terms of the quality of the ash, until the more recent deterioration in the quality of the Bayswater flyash observed by Mr Cooper.
Attempts to secure access to Tarong North flyash
1449 On 13 or 14 May 2004, Mr Cooper, Mr Ron McLaren and Mr Ian McDonald (a Project Manager) met with Mr Dennis Franklin, the Manager of Tarong North to discuss access to the power station’s flyash which resulted in arrangements being made for Nucon to obtain “ongoing samples” of Tarong North flyash for testing at Nucon’s laboratory.
1450 Mr Cooper made a note of the meeting.
1451 Mr Cooper noted that Tarong North flyash seemed to be fine grade and visually brighter than Millmerran ash; tanker off-take points were already established; the capital cost was low and a site was possibly available for processing plant, if required. The silo holding capacity, however, was small and disruption of supply might have been an issue should the bucket conveyors to the silo fail. The flyash was said to be a blend, and Pozzolanic was said to be taking Tarong flyash which did not need classification. Mr Cooper noted, however, that he was optimistic of securing access to Tarong North flyash. The note simply explains Mr Cooper’s thinking at the time and explains the events occurring at that time.
1452 On 30 July 2004, Mr Cooper, Mr Neumann and Mr McLaren met with Mr Franklin and Mr Ewen, Tarong North’s Commercial Manager.
1453 Mr Cooper put Nucon’s position to Mr Franklin and Mr Ewen to the effect that Nucon, at least in the view of Mr Cooper and Mr Neumann, was compelled to buy flyash from New South Wales due to the high price of flyash charged by Pozzolanic to the independent concrete producers (although sales contracts were made with QCL) as a result of Pozzolanic’s control of sources of flyash from Queensland power stations and thus Nucon needed to secure access to flyash directly from Tarong North. Mr Cooper also told Mr Franklin and Mr Ewen that Nucon’s proposal to take flyash would reduce TEC’s disposal costs (referred to as “dumping” costs) of transferring ash to the ash dam. Environmental benefits would also arise. Nucon wanted to continue sampling and testing Tarong North flyash.
1454 Mr Franklin responded by saying that the combined power stations had a real problem with flyash and would do all they could to minimise dumping. Mr Franklin said that he was “happy to continue with negotiations”. An exclusive agreement with Nucon might suit their needs as TEC “did not want the bother of two contractors on their site”. TEC would provide Nucon with test results of LOI of the flyash and fineness of the coal feedstock from the pulverising mill. As to the need to minimise dumping of ash, one of the problems TEC was experiencing in relation to both Tarong and Tarong North was that the ash dam was rapidly filling and TEC was willing to consider looking at all options to ameliorate that problem, including the possibility of someone taking flyash, particularly at Tarong North.
1455 In Mr McLaren’s note of the meeting, accepted as accurate by Mr Cooper, Mr McLaren records that Mr Franklin had said that TEC was concerned about the possibility of Pozzolanic withdrawing a back-up pneumatic transfer system (a back-up to the scraper chain conveyor and bucket elevator system) service to transfer flyash from the fabric filter hoppers to the 700 tonne storage silo, should TEC enter into an arrangement with Nucon. Mr Cooper accepted that what he was told at this meeting was not that Pozzolanic might cease taking flyash from Tarong North, but that TEC was concerned that Pozzolanic might cease to provide the pneumatic back-up service in support of the mechanical transfer system.
1456 The plant was inspected that day.
1457 Mr Franklin agreed to send a plan to Nucon of possible suitable sites for locating flyash plant.
1458 The fabric filter hopper system was also inspected that day.
1459 Mr Cooper either by force of the inspection that day or by reason of other sources of information, developed what he describes as a “general understanding” of the baghouse extraction system deployed at Tarong North and the configuration of the hoppers. Mr Cooper had no “particular recollection” of the number or orientation of the hoppers although he was generally aware of the system and aware that flyash was transported from the hoppers through a conveyance system to the top of the silo and deposited into the silo.
1460 Mr Cooper says that at the 30 July 2004 meeting, Mr Franklin told him that Pozzolanic was “making a claim” to the Tarong North flyash by reason of the rights it held under the Pozzolanic Sale Agreement of 26 February 2003 and Mr Franklin would need “to review the contract in regard to this”. Mr Cooper says that not knowing whether Pozzolanic enjoyed the claimed rights, he went ahead with TEC under the presumption that Pozzolanic did not enjoy those rights, and sought access to the document.
1461 Mr Cooper says he was not sure whether Pozzolanic enjoyed the claimed right or not.
1462 On 2 December 2004, Mr Cooper sent an email to Mr Franklin advising that Nucon had secured a significant volume of concrete orders in which Tarong North flyash could be used to confirm the performance of the ash. Mr Cooper said that Nucon’s preliminary tests had confirmed that the ash was “generally” in compliance with the AS 3582.1. Mr Cooper suggested that further tests could be carried out in large volumes at one of Nucon’s plants which had the appropriate accredited testing facilities. Mr Cooper sought an average of three loads of flyash each week for a period of three to four months. Tarong North would be given the “Fineness” and “LOI” results from the testing.
1463 On 14 January 2005, Mr Tellam, TEC’s Business Services Manager, wrote to Nucon (Mr Neumann) proposing a contract of sale governing flyash supply from Tarong North. The agreement would commence on Nucon’s acceptance, and end on 31 March 2005, unless varied. TEC would sell and Nucon would buy any and all flyash Nucon obtained from the discharge points at the fabric filter flyash hoppers at Tarong North subject to five factors recited at cl 4.2 of the proposed agreement, including TEC reciting that the agreement did not confer on Nucon either exclusive rights or first rights of access to Tarong North flyash; TEC remained entitled to use or supply Tarong North flyash to any other person at any time; and Nucon’s right to take flyash from the hopper discharge points was subject to any and all rights of Pozzolanic to take flyash from the hopper discharge points under the Pozzolanic Sale Agreement of 26 February 2003 (cl 4.2(e)).
1464 In the course of cross-examination, Mr Cooper contended that unless and until he was able to see and assess the rights of Pozzolanic under the Pozzolanic Sale Agreement of 26 February 2003, he had no proper sense of the scope or content of Pozzolanic’s rights, notwithstanding that cl 4.2(e) deferred Nucon’s “right to take” flyash from the same hopper discharge points as Pozzolanic, to any and all rights of Pozzolanic to take flyash from those points.
1465 Mr Cooper did not accept that cl 4.2(e) of the proposed agreement told him “in no uncertain terms” that any dealings Nucon might have with TEC concerning Tarong North flyash would be “subject to the first right of Pozzolanic to be satisfied”. Mr Cooper says that cl 4.2(e) talked about “any and all rights” of Pozzolanic under the Pozzolanic Sale Agreement and he could not be sure whether Pozzolanic’s rights, so described, had “precedence” over any rights Nucon might acquire from TEC. Mr Cooper says he remained “uncertain” about that matter. Mr Cooper asked TEC for a copy of the agreement “so that we could understand the rights of Pozzolanic under that agreement”. Mr Cooper says that he “wasn’t sure” whether it was possible that rights Nucon might acquire from TEC could enjoy “some prior right to that of Pozzolanic” (T, p 516, lns 4-37).
1466 The proposed price was $10.00 per tonne which included the cost of loading Nucon’s vehicles at the transfer points. The supply of Tarong North flyash under the Agreement was to be on a “trial” basis for a period commencing on 21 January 2005 (when Nucon accepted the offer) until 31 March 2005 (two months and one week later). Under cl 7.1(c) of the Agreement, Nucon was to provide a periodic report of the results of trials of “ash products” which included any product containing Tarong North flyash.
1467 In Mr Cooper’s letter of acceptance of the proposal on 21 January 2005, Mr Cooper noted that the trial might be extended beyond 31 March 2005 by agreement and that TEC was not prepared to provide Nucon with a copy of the Pozzolanic Sale Agreement of 26 February 2003. Mr Cooper expressed concern that Nucon would be expected to take flyash subject to the rights of Pozzolanic set out in a document Nucon had not seen. Mr Cooper says Nucon proceeded to enter into the agreement even though Nucon had not seen the Pozzolanic Sale Agreement, as the agreement was a “temporary supply arrangement for the purpose of testing”.
1468 In February 2005, Nucon began collecting unprocessed flyash from the hopper discharge points at Tarong North. Nucon established a separate silo at Oxenford for the ash and either mixed it with refined Bayswater flyash for use in concrete not requiring critical strength, or used it internally to Nucon for applications at Nucon sites, by way of trial. However, Nucon took approximately four truckloads of flyash before malfunctions occurred in the out-loading facility preventing any further loads being taken. By 31 March 2005, the defective valve had not been replaced. On 6 May 2005, the trial was extended to 30 June 2005 by letter of agreement, on the same terms and conditions of the earlier agreement. Also on 6 May 2005, Mr Cooper was told by Mr Cochrane (of TEC) that no flyash would be available until 17 May 2005. In May 2005, Mr Cooper was also told by Mr Cochrane that further delays in Nucon taking flyash would occur.
1469 On 27 May 2005, Mr Cooper met with Mr Tellam and Mr Hatton, TEC’s Chief Financial Officer, to discuss the delays in Nucon obtaining access to Tarong North flyash and also to discuss Nucon’s desire to secure a long term source of flyash. Mr Cooper says he was told by Mr Hatton that TEC (“we”) had concerns that “if a new player is to access the flyash, Pozzolanic might leave”. Due to that observation, Mr Cooper put a “Tarong Energy Flyash Proposal” to TEC on 16 June 2005 setting out submissions identifying the basis for Nucon’s belief that Pozzolanic would not leave Tarong North should flyash be supplied to Nucon. In the submission, Nucon contended that Pozzolanic’s delivered price of flyash to Nucon sourced from Tarong was $75.00 (and to some producers a delivered price of $85.00) resulting in a contended profit of $32.00 per tonne.
1470 The analysis informing Mr Cooper’s thinking, of the contended comparative cost structures for flyash from Tarong, Swanbank and Bayswater sources, was this:
| Tarong | Swanbank | Bayswater | |
| Price Delivered | $75/Tonne | $68.4/Tonne | $68.50/Tonne |
| Less Delivery Cost | $23/Tonne | $11.5/Tonne | $56/Tonne |
| Less Production Cost (estimated) | $10/Tonne | $10/Tonne | $5/Tonne |
| Less Royalty to Powerstation (estimated) | $10/Tonne | $10/Tonne | $5/Tonne |
| Estimated Profit | $32/Tonne | $36.90/Tonne | $2.50/Tonne |
1471 On 28 June 2005, Mr Cooper was told by Mr Cochrane that the trial of Tarong North flyash would cease on 30 July 2005.
1472 Mr Cooper told Mr Cochrane that Nucon had not been able to access Tarong North flyash “often enough” to properly assess the ash. On 28 June 2005, Mr Cooper wrote to Mr Hatton. In that letter, Mr Cooper observed that the loading plant had been available for only 10 out of the planned 70 days, setting out details of the various interruptions; Nucon had installed a silo at Oxenford and had commenced works to install additional silos at its Logan batching plant at a cost, in all, of $600,000 to complete; and, Nucon was committed to the trials with a view to securing a long term supply arrangement. Nucon sought a continuation of the trials for a minimum of eight weeks from 1 July 2005.
1473 On 30 June 2005, Mr Cooper met with TEC’s Acting Chief Financial Officer, Ms Anne Conlon, Mr Cochrane and Mr Ware (TEC’s lawyer) and pressed the notion that the trials were critical to enabling TEC to develop a flyash strategy, and the trial should continue for at least an eight week period. Mr Cooper reasserted those matters in his letter of 30 June 2005 and enclosed a schedule setting out the results of the February 2005 tests. However, the results were said by Mr Cooper to be unreliable and inconclusive due to the limited number of samples received and the minor number of tests and concrete trials able to be conducted in summer conditions. The tests conducted by Nucon on 2, 3 and 10 February 2005 revealed a fineness of raw Tarong North flyash of 52%, 60% and 58% passing a 45 micron sieve and an LOI of 1.8, 1.3 and 1.2 respectively.
1474 On 4 July 2005, Mr Cooper received a letter from Ms Conlon agreeing to an extension of trials until 1 September 2005 governed by the terms of the earlier agreement.
1475 On 8 August 2005, Mr Cooper had a conversation with Mr Franklin and pressed for a response from TEC to Nucon’s proposed terms of supply suggested on 16 June 2005. Mr Cooper told Mr Franklin that Nucon was about to commit to a contract to take up to 50,000 tonnes of flyash from Swanbank. On 29 August 2005, Mr Neumann sent a letter to Mr Hatton advising that the trials had been completed; Nucon test results were being collated; and external test results would be available in six weeks. Mr Neumann requested TEC’s permission to continue with the trials over the summer months so as to provide test data for comparison with data arising out of the recent trials. Mr Neumann also explained that Nucon’s business plan involved building capacity to process 100,000 tonnes and, over the longer term, up to 400,000 tonnes depending upon market demand.
1476 On 10 September 2005, Mr Cochrane sent a letter to Mr Cooper proposing an extension of the agreement to supply Tarong North flyash and continue the trials from 1 September 2005 to 20 January 2006 on the footing that the total quantity of flyash to be taken from Tarong North in the extension period would not exceed 1,500 tonnes.
1477 Mr Cooper accepted the proposal, signed the letter and returned it on 21 September 2005.
1478 Due to the variable nature of the flyash, Nucon ceased further trials of Tarong North flyash in November 2005.
1479 On 17 March 2006, Mr Millhouse (TEC’s Specialist Contracts Officer) sent an email to Mr Cooper attaching a draft letter (bearing, in effect, a proposed date for a final version of a letter to be dated 24 March 2006). In that letter, the recited author, TEC’s Business Services Manager, Mr Russell Anderson, observed that the “Trial Agreement” had ceased on 20 January 2006; TEC was reviewing the results of the trial with a view to seeking expressions of interest for the sale of flyash from Tarong North and Tarong commencing in March 2008; and, in the interim, Tarong North flyash would be provided on the terms set out in Mr Anderson’s letter.
1480 As to existing arrangements, Mr Anderson said that the removal and sale of flyash from both Tarong North and Tarong was “predominantly dealt with” under the Pozzolanic Sale Agreement with TEC of 26 February 2003; Pozzolanic was “in the process of” installing a temporary ash classifier at Tarong North due for installation between May and June 2006; and the temporary classifier would only be available for the use of Pozzolanic. Mr Anderson said that ash not taken by Pozzolanic from the temporary classifier would be directed to the Tarong North flyash silo and, under the interim offer, ash would be made available from the flyash silo. Mr Anderson observed that following the installation of Pozzolanic’s temporary classifier, flyash made available from the silo may differ in quality from the flyash made available under the Trial Agreement.
1481 As to the interim offer, Mr Anderson said that the Pozzolanic Sale Agreement did not cover the “entire quantity of fly ash available from [Tarong North]” and that flyash not required by Pozzolanic under the agreement could be provided from the Tarong North flyash silo on the terms set out in the “Conditions of Sale” document attached to the letter. The interim offer remained open for acceptance until 16 March 2006.
1482 Under the proposed Conditions of Sale, the term would commence upon Nucon’s acceptance of the proposal and end on 2 March 2007 unless earlier terminated under the provisions of the Agreement. TEC would agree to sell and Nucon would agree to buy any and all flyash taken from the ash transfer discharge points up to a proposed maximum quantity of 30,000 tonnes at $10.00 per tonne (Items 2 and 3 of the proposed Annexure 1 to the Conditions of Sale). Clause 4.2 of the Conditions of Sale reflect the same five factors described in respect of the earlier agreement including the notion that TEC would not grant Nucon either exclusive rights or first rights of access to the flyash at the ash hopper discharge points; TEC would be entitled to supply flyash to any other person at any time; and the rights of Nucon to take flyash from the ash hopper discharge points would be subject to any and all rights of Pozzolanic under the Pozzolanic Sale Agreement (cl 4.2(e)).
1483 On 23 March 2006, Mr Cooper responded to Mr Anderson’s proposed letter and confirmed Nucon’s interest in signing an agreement to purchase ash from Tarong North Power Station.
1484 As to Mr Anderson’s observations about Pozzolanic’s installation of a temporary ash classifier, further clarified by Mr Tellam, Mr Cooper observed that the process flow method for the plant seemed to be the sequence set out in a plan attached to Mr Cooper’s letter. Mr Cooper observed that if Pozzolanic’s proposal (and the process flow plan) was implemented, Nucon would be “extremely concerned” that ash in the Tarong North flyash silo (the off-take silo for purchases under the interim supply arrangements) would be the equivalent of reject ash and thus, in Mr Cooper’s view, it would be uneconomic for Nucon to use ash in concrete and Nucon would face too high a risk to take the ash for processing for use in concrete. Mr Cooper expressed the view that flyash taken from the Tarong North flyash silo might be suitable for use in concrete should, for example, Sunstate take the flyash, blend it with clinker and mill the blend to produce a flyash blended cement product.
1485 Mr Cooper suggested that the reject ash from Pozzolanic’s classification plant should be slurried and pumped, using the existing Tarong North transfer system, to the ash dam, thus avoiding contamination of the product in the off-take silo.
1486 As to cl 4.2(e) of the Conditions, Mr Cooper again asked to be provided with a copy of the Pozzolanic Sale Agreement of 26 February 2003, “so that due consideration is given to this agreement, in [Nucon’s] assessment of this proposal”.
1487 Mr Cooper also said that Nucon was considering a proposal to install a temporary ash processing facility at Tarong North with ash taken from the hopper discharge points and processed through a temporary classifier, with reject ash being returned to the ash dam via a road tanker.
1488 Mr Cooper did not accept the proposition put to him in cross-examination that after reading Mr Anderson’s draft of the proposed letter for 24 March 2006 (attached to Mr Millhouse’s email of 17 March 2006) and the proposed Conditions, he was then in “absolutely no doubt” that in respect of Nucon’s access to flyash at Tarong North, Nucon would be subject to the first rights of Pozzolanic. Mr Cooper considered that the Conditions of Sale document was very similar to the earlier one, and it again “called up the rights of Pozzolanic”. As a result, Nucon again asked TEC for a copy of the Pozzolanic Sale Agreement.
1489 Mr Cooper thought that it was not until the Expression of Interest process in July 2006 that Nucon became aware, by reason of correspondence from TEC (either enclosing or referring to a Pozzolanic letter to TEC), that Pozzolanic was asserting the agreement of 26 February 2003 gave Pozzolanic first rights to flyash at Tarong North. Mr Cooper accepted that Mr Anderson’s draft letter said that flyash “not required under the Pozzolanic Agreement can be provided from the TNPS fly ash silo on the terms set out in the attached [Conditions]”.
1490 In giving evidence of his understanding of the proposition being put to him by Mr Anderson in the letter about the availability of flyash at Tarong North (in the terms just quoted) and as contained in the Conditions document, Mr Cooper seemed to perceive an inconsistency between the documents setting out the interim offer by TEC and a letter from Pozzolanic asserting a “first right of access to the ash”. The inconsistency seemed to arise in this way. In the introduction to the elements of the Interim Offer, Mr Anderson observed that the “Pozzolanic Agreement does not cover the entire quantity of flyash available from [Tarong North]” [emphasis added]. That observation seemed to suggest to Mr Cooper that Pozzolanic was not entitled to the entire quantity of Tarong North flyash yet, he either had available to him or recalled a Pozzolanic letter, asserting a “first right”, and therefore, for Mr Cooper, if Pozzolanic “wanted all the ash” the Pozzolanic Sale Agreement would cover, in such circumstances, the entire quantity of Tarong North flyash. Mr Cooper said he understood Pozzolanic’s position to be that it had the “first right of access to all of the ash” and therefore it could take all the ash under that right, and there “won’t be any left”, to be taken by Nucon.
1491 The proposition was put to Mr Cooper that this notion of Pozzolanic’s entitlement to take “any” or “as much fly ash as was available” was, in effect, an absolutely identical expression of the notion contained in Mr Anderson’s letter (and the content of the Conditions) and the Pozzolanic letter Mr Cooper was speaking about. Mr Cooper said that he did not “see it that way”. Although the evidence on this topic was confusing, Mr Cooper said that he thought Mr Anderson’s letter meant that there was “a possibility of some ash available at Tarong [North]”. Ultimately, Mr Cooper accepted that his understanding framed that way really meant a “possibility [of] some ash, if Pozzolanic chose not to take all the ash” (T, pp 517, 581 and 519 to ln 27).
1492 Nevertheless, Mr Cooper pressed for a copy of the Pozzolanic Sale Agreement in his response to TEC. Mr Cooper thought it a “reasonable possibility” that Nucon would be given a copy of it notwithstanding that Mr Cooper regarded supply contracts of this kind as “highly confidential” (T, p519, ln 41). Mr Cooper thought the request was appropriate since Nucon was being asked to “comply with it or work with it” (T, p 520, lns 3-4). It was never likely that Nucon would be given a copy of the Pozzolanic Agreement.
1493 In Mr Cooper’s response of 23 March 2006 to Mr Anderson, he did not expressly raise Nucon’s uncertainty about the state of Pozzolanic’s rights to Tarong North flyash, nor assert that Nucon would not deal with TEC due to the subsistence in Pozzolanic of any first right to take ash. Mr Cooper, however, did again request a copy of the Pozzolanic Sale Agreement. Mr Cooper did not accept that he held the view, at this time, that the mere fact of the existence of a first right in Pozzolanic to Tarong North flyash was no impediment to Nucon entering into a supply agreement with TEC for Tarong North flyash. Mr Cooper said that at this time Nucon did not understand the contractual arrangements between Pozzolanic and TEC. Mr Cooper’s letter was seeking out clarification of the process flow method to be adopted once the Pozzolanic temporary classifier was in place; details about the transfer of reject ash to the silo; and a copy of the Pozzolanic Agreement.
1494 Nucon proposed, in its alternative view, that reject ash from Pozzolanic’s classifier should go to the ash dam not the silo. Mr Cooper said that the proposed arrangement with TEC was subject to the Pozzolanic Sale Agreement and that question was a “major part we didn’t know of” and thus clarification was sought as to Pozzolanic’s position, the plant and equipment issues and other matters.
1495 The question of Mr Cooper’s understanding at the time (March 2006) of Mr Anderson’s description of the basis on which flyash would be available to Nucon under the Interim Offer emerged again when Mr Cooper was cross-examined about Nucon’s letter of 23 March 2006.
1496 Mr Cooper accepted that Mr Anderson was telling him in the offer letter that flyash not required under the Pozzolanic agreement, would be available to Nucon. However, because Mr Anderson said that the Pozzolanic agreement did not cover the entire quantity of flyash, Mr Cooper says that he thought it a possibility that someone else had a “first right” and Pozzolanic may have enjoyed a “second right” to the flyash.
1497 Mr Cooper said that the “single biggest thing” going through his mind at this time was “… what was the Pozzolanic agreement?”
1498 Mr Cooper was asked whether it was true to say that, had he believed that Pozzolanic enjoyed a first right to any flyash at Tarong North, Nucon “would not have gone one step further” in dealing with TEC in relation to Tarong North flyash. Mr Cooper said it was not “entirely correct” to say that Nucon would not have gone “a step further”. Mr Cooper did not accept the proposition put to him that he knew full well (when swearing to the contrary fact in his affidavit) that there has never been a concern held by Nucon to the effect that should Pozzolanic hold a first right to take flyash from Tarong North, Nucon could not have entered into a supply contract for Tarong North flyash with TEC due to uncertainties attendant upon supply (T, pp 524 and 525).
1499 Two further aspects of the 23 March 2006 letter are these.
1500 First, Mr Cooper’s proposition in the letter that the transfer of reject ash from the Pozzolanic classifier into the Tarong North flyash silo would “contaminate” the “product” in the silo and render ash in the silo “the equivalent of reject ash” was based on Mr McLaren’s assessment and advice. The process plan attached to Mr Cooper’s letter was drawn by Mr McLaren.
1501 Second, the question of when Mr Cooper first became aware of the “first right” of Pozzolanic was further addressed by Mr Cooper in his second affidavit sworn 4 March 2010 at para 21 in which at para 21.3 he cross-references his knowledge of Pozzolanic’s “first rights” to March 2006 which is necessarily a reference to Mr Millhouse’s email of 17 March 2006 and Mr Anderson’s draft letter (with a proposed date of 24 March 2006).
1502 On 27 March 2006, Mr Cooper wrote a letter to TEC enclosing a final report arising out of the Tarong North flyash trials conducted by Nucrush and Nucon. Some aspects of the results are these. Nucon supplied samples on six dates (from March to October 2005) for testing by the CSIRO and Boral. The fineness of particles passing a 45 micron sieve was 44%, 42%, 47%, 36%, 53% and 42% (an average of 44%). The LOI results were 1.1, 1.4, 1.1, 1.1, 1.2, 1.1 across the samples, respectively. As earlier mentioned, three truckloads of Tarong North flyash were trialled in February 2005 revealing fineness of 53.6%, 61.7% and 59.7% and LOI of 1.8, 1.3 and 1.2.
1503 The June 2005 samples showed an LOI ranging from 1.3 to 2.6. The most notable change in the properties of the flyash related to fineness. The average for the three deliveries in February was 58% whilst the average for the June 2005 samples was 42% with a minimum of 22.1% and a maximum of 51.8%. The average strength of concrete made using June 2005 Tarong North flyash as compared with Bayswater flyash from February 2005 and Swanbank flyash from May 2005 (seven day results), was 15.2, 13.2 and 15.7 (MPa), respectively. The 28 day results were 22.3, 23.6 and 23.9 (MPa), respectively. The only sample exhibiting fineness in excess of 75% (at 75.7%) was one of two contaminated samples, being a sample dated 22 July 2005.
1504 For the period July 2005, Tarong North flyash varied in fineness across 20 samples from 6 July 2005 to 28 July 2005, from 19.5% to 63% (leaving aside those samples said to have been contaminated), representing an average of 45.7%. The LOI range was from 0.0 to 2.9. The average relative strength at seven days in a comparison between Tarong North flyash (July 2005), Bayswater flyash (July 2005) and Swanbank flyash (May 2005) was 14.0, 15.2 and 15.7 (MPa) respectively and at 28 days, 20.7, 24.5 and 23.9 (MPa) respectively.
1505 For the period August 2005, across 16 samples from 1 August 2005 to 31 August 2005 fineness ranged from 24.8% to 53.3% (representing an average of 37.49%) and the LOI ranged from 0.4 to 2.3. The average strength of concrete made using August 2005 Tarong North flyash as compared with August 2005 Swanbank flyash at seven days was 12.3 and 15.3 respectively and at 28 days 17.9 and 20.2 respectively.
1506 For the months of September, October and November 2005, the use of Tarong North flyash was limited due to concerns relating to the strength of the final concrete product. For those months, nine samples were tested across the period 20 September 2005 to 7 November 2005. The fineness range was from 36.5% to 62.2% and the LOI range was 0.4 to 2.4. The average strength of concrete at seven days of Tarong North flyash (sourced over the three months) and Swanbank and Bayswater flyash together (sourced over the same three months) was 13.9 and 13.6 (MPa) respectively. At 28 days the result was 20.9 and 23.8 (MPa) respectively.
1507 On 18 July 2006, Mr Millhouse sent an email to Mr Cooper attaching an agreement for the interim sale of flyash to Nucon. The email attached a letter dated 18 July 2006 from Mr Anderson to Mr Cooper. Like the earlier draft letter, Mr Anderson’s letter made reference to the “predominant” arrangements between Pozzolanic and TEC reflected in the Pozzolanic Sale Agreement of 26 February 2003. Mr Anderson observed that TEC was seeking expressions of interest for the sale of bulk flyash (and other ash materials) from Tarong and Tarong North Power Stations for three periods. First, the period March 2007 to March 2008 for the purchase and removal of bulk flyash remaining after the exercise by Pozzolanic of its rights under the Pozzolanic Agreement. Second, the period March 2008 to 2010 for the purchase and removal of bulk flyash during the period of the existing coal supply source for each power station, from the Meandu Mine. Third, the period post-2010 following the commencement of the new coal supply source for each power station.
1508 Mr Anderson said that TEC expected the expressions of interest and subsequent tender processes in relation to the “on-going sale of bulk fly ash” to be concluded by early 2007.
1509 Mr Anderson said that as an interim measure during TEC’s expression of interest process, Tarong North flyash could be provided on the terms of the letter. Mr Anderson observed that Pozzolanic was installing, in connection with the Pozzolanic Agreement, a temporary classifier at Tarong North which was expected to be installed during July 2006 and its use would be available only to Pozzolanic. Ash not taken by Pozzolanic either from the Tarong North flyash silo or from the temporary ash classifier would be directed to the Tarong North flyash silo and would be made available under the interim offer. Mr Anderson also observed that by reason of these arrangements, flyash made available from the flyash silo, after the installation of Pozzolanic’s temporary classifier, might differ in quality from the flyash made available under the earlier “Trial Agreement”.
1510 The interim offer was made on the basis of attached Conditions of Sale which were in the same terms as the earlier draft Conditions. The Conditions provided for a maximum quantity of flyash of 30,000 tonnes at $10.00 per tonne. The Conditions reflect the terms at 4.2 earlier discussed.
1511 The offer was open for acceptance for 30 days from 18 July 2006.
1512 Mr Cooper accepts in oral evidence that by 18 July 2006 Nucon had become aware of Pozzolanic’s first right to Tarong North flyash and, by then, any uncertainty about that matter had resolved or had become clear (T, p 531, lns 3-8). By reason of the matters sworn to in Mr Cooper’s second affidavit (at para 21.3), the position is that no later than 24 March 2006 Mr Cooper knew that Pozzolanic had a first right to Tarong North flyash (T, p 532, lns 40-46). The proposition was put to Mr Cooper that he (and thus Nucon) was not concerned about the existence in Pozzolanic of a first right to Tarong North flyash “in determining to go forward and deal with Pozzolanic [which should, in the Transcript, be a reference to TEC]”. In response, Mr Cooper said “no”. The further proposition was put to Mr Cooper that he had “never been concerned” about Pozzolanic’s first right “in any proposal to deal with Tarong Energy [by Nucon]”. Mr Cooper said that that proposition was incorrect and his willingness to deal with Tarong Energy, reflected in Mr Cooper’s letter of 23 March 2006 in response to Mr Anderson’s Interim Offer of March 2006, was a willingness expressed in the context of a “short-term agreement” (a period from acceptance of the offer until 2 March 2007 – cl 3.1 of the Conditions of Sale), also described by Mr Cooper as the “interim sale of flyash … agreement”. Mr Cooper said that he was also happy to deal with TEC notwithstanding the existence of Pozzolanic’s first rights, in relation to the further interim agreement from March 2007 to March 2008 referred to in TEC’s letter of 18 July 2006 for the supply of a nominated quantity of flyash from Tarong North.
1513 Although the draft Conditions of Sale contemplated (by Annexure 1), a maximum quantity of 30,000 tonnes, Nucon’s acceptance of the 18 July 2006 proposal was conditioned, by Nucon, on Nucon taking a maximum of only 2,000 tonnes up to 1 March 2007.
1514 On 19 July 2006, Mr Cooper sent an email to Mr Millhouse responding to Mr Anderson’s letter of 18 July 2006. Mr Cooper reasserted his view that the Tarong North flyash product would be contaminated due to the Pozzolanic’s methodology adopted for transferring reject material from the classifier into the flyash silo. Mr Cooper reasserted his view that the cost of processing “contaminated Ash” would be significantly higher than normal processing costs with the result that Nucon, in Mr Cooper’s view, would not be in a position to sell this ash on the open market.
1515 On 28 July 2006, Mr Cooper responded to Mr Anderson by letter attaching Nucon’s acceptance of TEC’s offer of supply of Tarong North flyash. Mr Cooper signed a copy of Mr Anderson’s letter of 18 July 2006 and endorsed it with this: “[Nucon] agree[s] to abide by the terms and conditions contained in this agreement and will take up to a maximum quantity of 2,000 tonnes of Fly Ash up until 1 March 2007”.
1516 Mr Cooper observed that Nucon would continue flyash trials over the interim supply period.
1517 On 3 August 2006, Mr Cooper received a letter addressed to Nuash Pty Ltd from TEC signed by Mr Tellam on behalf of Mr Anderson under the reference “Interim Sale of Fly Ash from Tarong North Power Station”. In that letter, Mr Anderson refers to his letter of 18 July 2006 concerning the interim sale of flyash from Tarong North and observes that Nuash (and presumably Nucon) would be aware that under the Pozzolanic Agreement, Pozzolanic has the first right to purchase flyash from the Tarong and Tarong North Power Stations and, further, any right to purchase flyash under TEC’s interim offer is subject to Pozzolanic’s rights under that agreement.
1518 Mr Anderson says that TEC had been advised by Pozzolanic that due to the current outage of Unit 3 of the Tarong Power Station and a breakdown in the truck-loading system at Tarong North, Pozzolanic intended to take all flyash available during week days from Tarong Power Station until the end of the outage of Unit 3 on 22 September 2006, and further, the installation of the proposed temporary classifier at Tarong North had been delayed with the result that the new plant was not expected to be operational until September 2006.
1519 Having regard to that advice from Pozzolanic, TEC found itself in a position where it was able to offer flyash to Nucon until 22 September 2006, under the Interim Offer, only on the following basis. From 3.00am Monday to 3.00am Saturday each week Pozzolanic would take all of the available flyash from Tarong North, with no flyash available to others under the interim offer. As to Saturday and Sunday, Pozzolanic would advise TEC by 4.00pm each Wednesday whether it would require flyash on those days. By midday on Thursday, TEC would tell third party purchasers the times (if any) during which TEC expected to be able to supply Tarong North flyash under the Interim Offer. TEC also said that it would “review the Interim Offer following the Unit 3 outage at Tarong Power Station”.
1520 On 16 August 2006, Nucon was told that no flyash would be available during the weekend of 19 and 20 August 2006, and on 31 August 2006 Nucon was told that no flyash would be available during the weekend of 2 and 3 September 2006. No flyash was available during the weekend of 9 and 10 September 2006 nor 23 and 24 September 2006.
1521 On 26 October 2006, Mr Millhouse sent Mr Cooper an email attaching a further letter from Mr Anderson, signed by Mr Tellam, dated 25 October 2006. In that letter, Mr Anderson noted that the supply of Tarong North flyash to Nucon had been made subject to the qualifications or constraints set out in the 3 August 2006 letter until the completion of work on the Tarong Unit 3 outage, due to Pozzolanic’s notification of its requirements for Tarong North flyash.
1522 Mr Anderson said that TEC had identified three events that might have an affect upon the availability of Tarong North flyash under the interim supply arrangements. First, Unit 1 at Tarong would not be available from 17 November 2006 to 27 November 2006. Second, from October to late December 2006, Tarong and Tarong North would be undertaking “trial burns” of a new coal source. Third, Pozzolanic’s installation of a temporary classifier at Tarong North might compromise availability of flyash.
1523 In addition, TEC noted two things: first, once the temporary classifier was commissioned (thought to be about late November 2006) the flyash in the Tarong North silo would be a mixture of run-of-station flyash and “oversize ash” produced by the temporary classifier; second, when Unit 3 at Tarong had not been available, Pozzolanic had replaced the original truck-loading system at Tarong North with truck-loading equipment owned, operated and maintained by Pozzolanic so as to ensure Pozzolanic obtained sufficient ash from Tarong North during the Unit 3 outage. Mr Anderson observed that once the temporary classifier was commissioned, Pozzolanic would not require the use of that new truck-loading system, and, in the result, Pozzolanic might elect to replace the new truck-loading system with the original truck-loading equipment.
1524 Mr Anderson said that subject to availability, TEC was able to offer flyash from the Tarong North silo for purchase by Nucon under the Interim Offer for seven days each week for 24 hours a day. Mr Anderson said that given the delays in implementing the supply arrangements, the sale price would be $5.00 per tonne, otherwise the terms would be those set out in the 18 July 2006 letter.
1525 Mr Anderson reiterated that any right to take flyash under the interim arrangements was subject to Pozzolanic’s rights under the Pozzolanic Sale Agreement.
The TEC expression of interest and tender process for Tarong and Tarong North flyash
1526 On 28 July 2006, Mr Cooper lodged an expression of interest for the long term contract for the purchase and removal of flyash from Tarong and Tarong North.
1527 On 4 October 2006, Mr Cooper received a letter from Mr Anderson advising that Nuash had been selected as an interested party and would be invited to submit a detailed tender. Flyash samples would be made available for testing purposes. On 15 December 2006, Mr Anderson sent a letter to Mr Cooper outlining the terms on which flyash samples would be made available to selected interested parties under the Expression of Interest process. Nucon obtained examples of flyash from TEC which were tested in Nucrush’s laboratory. On 22 January 2007, Nucon received TEC’s request for tenders and on 30 March 2007, Nuash/Nucon lodged a tender with TEC.
1528 On 31 July 2007, Nuash/Nucon was told that it had been shortlisted as a preferred tenderer for participation in post-tender negotiations. In the letter, TEC proposed that Nuash/Nucon would have first rights to all flyash from passes 3 and 4 of Precipitator Zone 1 on all Tarong Power Station units. Mr Cooper says that Nuash/Nucon considered that the flyash in Zone 1 would be coarser than Zones 2 and 3 and would require extensive processing in comparison with flyash from Zones 2, 3 and 4. Mr Cooper considered that using Zone 1 flyash would increase costs “significantly” as compared with using flyash from Zones 2, 3 and 4.
1529 In October 2007, Mr Cooper, Mr Neumann and Mr Lang (Nuash’s Business Development Manager) attended a meeting with Mr Tellam, Mr Millhouse and Mr Ware to discuss the quantities of flyash Nucrush was proposing to take under the tender proposal, the arrangements in existence with Pozzolanic, and, access to Tarong.
1530 From October 2007 to June 2008, Nuash/Nucon and TEC negotiated the basis on which Nuash/Nucon might commence taking flyash from Tarong. Nuash/Nucon received a draft agreement from TEC on 6 June 2008 and from June 2008 to April 2009 Nuash/Nucon and TEC negotiated the terms of proposed agreements enabling Nuash/Nucon to take flyash from Tarong. Two matters, however, remained outstanding to be resolved. The first concerned Nucon’s access to the power station site to carry out various inspections in order to assess the capital costs involved in installing plant, equipment, pipelines and other facilities. The second involved TEC’s request for a minimum royalty of $160,000 (excluding GST) subject to CPI increases, payable in quarterly instalments of $40,000.
1531 Nucon had been seeking to negotiate a reduced minimum royalty rate.
Attempts to secure access to Swanbank flyash
1532 In about October 2002, as already discussed, Mr Forbes first approached Swanbank to investigate the possibility of Nucon acquiring Swanbank flyash.
1533 In October 2004, Mr Neumann and Mr Cooper met with Mr Aspinall, a Director of CS Energy, and Mr Chatfield of CS Energy, in Brisbane and sought the supply of flyash from Swanbank. On 28 February 2005, Mr Cooper met with Mr Chatfield and Mr Costello and Mr Christy and discussed the basis upon which Nucon might gain access to Swanbank flyash. Mr Cooper says his thinking was, at least informed by, observations made by Mr Christy at the meeting to the effect that CS Energy had had discussions with Pozzolanic regarding the supply of flyash to third parties and that Mr Christy would be seeking a position from Pozzolanic by early April 2005. Mr Christy also said that CS Energy was considering whether it would form an agreement with only one company and make provision in the agreement for other parties to enjoy a right of access to Swanbank flyash from the first party’s plant, as well as an option to introduce third parties.
1534 Mr Cooper provided CS Energy with a draft Heads of Agreement for the supply of flyash for testing purposes.
1535 On 1 March 2005, Mr Christy sent Mr Cooper an agreement in general terms making provision for access to Swanbank flyash. Mr Cooper reviewed the document. He made some changes, substantially revised Nucon’s draft Heads of Agreement previously given to CS Energy, and sent a copy of the revised documents to Mr Christy and Mr Chatfield by email dated 17 March 2005. The Nucrush amended version of the Swanbank CS Energy Agreement contemplated that Nucrush would install plant at Swanbank within an area licensed by CS Energy to collect, process, store and load flyash.
1536 The term of the proposed agreement would be three years from an agreed commencement date with possible extensions of the term in accordance with cl 2. Clause 2 would provide for a first, second and third option to renew the agreement for periods of three years each. By cl 4, CS Energy would agree to sell and Nucrush would agree to “undertake its best endeavours to purchase, take and pay for” an “estimated monthly off-take” of flyash in each month of the term in accordance with Schedule 1. The Schedule 1 monthly estimated quantity would be 2,500 tonnes although by operation of cl 4 Nucrush, during the term or further terms, might elect to take and pay for a monthly off-take less than the estimated monthly off-take by giving the appropriate notice. A quantity in excess of the estimated monthly off-take might also be taken subject to notice being given to CS Energy. Should Nucrush seek to take quantities in excess of the estimated monthly off-take, CS Energy would be required to make flyash available to Nucrush so long as the requested additional quantity was available from the Swanbank site in the relevant month and the additional quantity had not otherwise been contracted to be sold to a third party.
1537 Mr Christy responded on 17 March 2005 by email.
1538 Mr Christy said that CS Energy could reduce the draft agreement into what he described as “close to final form” with less effort than is needed to reach an acceptable Heads of Agreement. Mr Christy suggested that an exchange of letters would be sufficient to deal with matters such as the provision of test material from Swanbank to Nucrush.
1539 In the email, Mr Christy said that he was discussing with Cement Australia the use of its plant as an alternative to dealing with the “complexity of additional operations on site”. In addition, Mr Christy said that as to production of flyash, CS Energy thought it more effective for CS Energy to provide an indication of likely future flyash production “because there has been considerable variance in the source of coal over the last five years and consequently the type and quality of ash produced has been variable”. Mr Christy said that CS Energy now had a more stable projection of the source of coal and would determine “an indicative ash quantity/quality”, and the “supply of samples will also provide a better indication”.
1540 Mr Cooper says he had a further conversation with Mr Christy in late March 2005. Mr Christy telephoned Mr Cooper and told him that he was discussing the suggested agreement between CS Energy and Nucrush with Pozzolanic and had requested Pozzolanic to respond to CS Energy by 31 March 2005 about particular matters. That observation was consistent with Mr Christy’s remark in the 17 March 2005 email that he anticipated having a response from Cement Australia by the end of March 2005 on the question of use of Cement Australia’s plant as an alternative to Nucrush establishing additional plant on-site.
1541 On 27 May 2005, Mr Cooper met with Mr Chatfield and Mr Lonie of CS Energy concerning Nucon’s access to Swanbank flyash. Mr Cooper says that Mr Chatfield told him that CS Energy had concerns that if “a new player is to access the flyash, Pozzolanic might leave”. Mr Cooper contended to Mr Chatfield that similar remarks had been made to Nucon by representatives of Tarong.
1542 In May 2005, Mr Cooper spoke with Mr Christy who proposed that Nucon purchase a minimum quantity of 15,000 tonnes of flyash in year one of a proposed supply arrangement, increasing to 27,000 tonnes in the fifth year of the arrangement, and that Nucon establish its own classification plant at Swanbank. Nucon and CS Energy proceeded to develop an agreement for the supply of flyash although there were some issues regarding the location of the plant on-site and the capacity to establish an “interface protocol” with Pozzolanic. Like the experience with TEC, Mr Cooper also provided CS Energy on 16 June 2005, with a submission setting out the reasons identified by Nucon as the basis for its belief that Pozzolanic would not leave the Swanbank Power Station site. Those papers included an amended version of a proposed contract between CS Energy and Nucrush and a draft Heads of Agreement prepared by Nucon.
1543 As to the proposed agreement between CS Energy and Nucrush, the agreement contemplated a contract of three years with three renewal options of three years each. Like the earlier proposed agreement, Nucrush would agree to “undertake its best endeavours to purchase, take and pay for” an estimated monthly off-take of flyash at 4,000 tonnes per month. Schedule 1 contemplated that the first 20,000 tonnes would attract no payment; the third 10,000 tonnes taken would have a price of $5.00 per tonne, and for additional tonnes in excess of 30,000 tonnes in each contract year, a price of $10.00 per tonne.
1544 On 27 July 2005, Mr Cooper, Mr McLaren and Mr Neumann met with Mr Glen Risson (CS Energy’s Manager Business Development) and Mr Christy to discuss a possible agreement under which Nucon could purchase flyash from Swanbank. Mr Cooper made a file note of the meeting on 27 July 2005. In that meeting, the participants discussed the terms of a possible agreement between Nucrush and CS Energy for the purchase of Swanbank flyash. Mr Christy encouraged Nucrush to undertake extensive testing of Swanbank flyash before taking the product. The potential quantity of flyash produced by Swanbank was also discussed. So too was the off-take point at which Nucrush could “actually physically” take flyash from Swanbank. In Mr Cooper’s note of the meeting, he records that CS Energy suggested that Sunstate had expressed interest in acquiring Swanbank flyash; Nucrush might talk to Sunstate about Nucrush supplying Sunstate; flyash could be taken seven days a week for 24 hours each day; and, although the term of an agreement was discussed, CS Energy suggested that Swanbank Power Station was earmarked for closure in 2011, and whilst it may continue to operate beyond 2011, it might also close earlier.
1545 Fifteen clauses of a draft agreement were discussed. As to the take or pay quantities, the CS Energy representatives told Mr Cooper and Mr Neumann that CS Energy would be willing to increase the Schedule 1 quantity in final agreement should Nucrush prefer or require a larger quantity. CS Energy would not guarantee the quantity of production or the quality of the flyash.
1546 As to access to plant and equipment, CS energy representatives told Mr Cooper and Mr Neumann that it would be better for all concerned if the number of operators was limited to two with the result that, as to CS Energy’s arrangements with Sunstate, Nucrush ought to talk to Sunstate about the possibility of supplying Sunstate with flyash. Schedule 2 addressed the topic of “Access to third parties”. Nucrush personnel suggested that Schedule 2 might be deleted if Sunstate agreed to take flyash from Nucrush. Seventeen “follow up” matters were also to be addressed. On that day, Mr Neumann, Mr Cooper and Mr McLaren met with Mr Worthington of CS Energy on-site and undertook an “extensive review” of site locations and possible access points at which Nucrush might physically access and take flyash.
Plant costings
1547 Mr Cooper adopts (at para 102 of his first affidavit) as part of his primary evidence an analysis (called Swanbank PS Nucon Fly Ash Plant Costing 8.11.2005) undertaken for Nuash by Mr McLaren setting out a costing analysis prepared by Mr McLaren and revised by Nucon staff as at 8 November 2005. In the analysis, Mr McLaren and Nucon staff estimate that the total cost of plant required to establish a classifier at Swanbank, including one silo, would be a total of $1.8M. The “collection and conveying plant” items and pipeline infrastructure to the “process distribution area” would amount to $494,010 (including a contingency of 20% of the cost of those items); the “single silo option” (again with a contingency) would amount to $327,420; the “total classifier option” (with contingency) would amount to $931,620. Thus, installing the collection and conveying plant, a classifier and a single silo, would cost Nucon, as at 8 November 2005, $1,753,050, according to the analysis.
1548 The analysis also includes the cost as at 8 November 2005, of installing “grinding plant” as an alternative to the “total classifier option”. The total cost of processing plant under the grinding plant option would be $494,010 plus $327,420 (in respect of the categories of plant earlier mentioned) plus the cost of the grinding plant ($1,246,680), rather than the classifier option ($931,620), amounting to $2,068,110, in all.
1549 As to the cost of constructing the various elements of a classification facility, Mr Cooper gave evidence at para 23 of his first affidavit that as at November 2009, the estimated total required investment, according to quotes received by Nucon, of establishing such a facility was $4 million (excluding GST) for a plant with a production capacity of more than 130,000 tonnes of flyash each year. A production capacity of that order is dependent upon available raw feedstock, the quality of the ash, the grade of flyash produced and the availability and efficiency of the plant. Total cost might vary slightly depending upon the distance of the plant from the power station and the facilities available to Nucon at the particular site. The estimate of $4 million includes the cost of establishing a classifier, storage silos, truck-loading facilities and a weighbridge. If additional tankers and prime movers are needed to transport product, a prime mover and tanker would cost approximately $350,000 to $400,000 excluding GST. Mr Cooper identifies 17 broad categories of plant and equipment which would be required in order to establish the classification facility contemplated by the cost estimate.
1550 At para 25 of his first affidavit, Mr Cooper explains that the cost of installing a classification plant at Swanbank prepared in 2005 as earlier described was, by 2009, subjected to further analysis. Mr Cooper says that Nucon re-defined its proposed methods of production as more detailed data became available to it and estimates were able to be updated. It follows that the estimate of the cost of classification plant and equipment in late 2009 more accurately reflects the cost, by that date, of such plant.
1551 Mr Cooper says that throughout 2005 and until 2007, Nuash proceeded with plant design.
1552 On 26 June 2007, Mr Richard Lang, the Business Development Manager for Nucrush sent Mr Cooper a comparative analysis of the costs of establishing and operating processing plant at Swanbank including a profitability analysis of doing so, as compared with the cost of sourcing flyash from other sources. This analysis is adopted by Mr Cooper in his affidavit. The analysis also takes into account the costs associated with electing to pursue the grinding option.
1553 Mr Cooper explains in his third affidavit that he first began investigating the cost of installing classification facilities in about 2003. From about 2003, Nucon engaged various personnel to look into the costs of installing classification facilities. In 2009, Nucon produced a matrix of costs, based on quotes obtained from suppliers. The lowest cost estimate was approximately $3 million. Mr Cooper considered that a more realistic cost was $4 million as some of the lower quotes obtained from suppliers had significant exclusions within them which made a cost assessment at less than $4 million unrealistic.
1554 The cost estimate adopted by Mr Cooper (called Swanbank PS Nucon Fly Ash Plant Costing 5.11.2009) is the cost of establishing collection plant from the Swanbank hoppers; transfer plant to the processing plant (classifier); the classifier plant; distribution plant; silos and related infrastructure. It amounts to $4,084,969.00 including professional engineering services and a 5% contingency fee. The full detail of the costing is set out in the document marked MPC-1 to Mr Cooper’s affidavit of 23 September 2010.
1555 The comparative calculations assume a capital investment of $2,161,000 (as at June 2007) and sunk unrecoverable costs of $665,000. Recoverable capital was assumed to be $1,496,000 of which only 60% might be retrieved after a few years of operation of the plant in the event of closure of the power station ($897,600) resulting in a write-off of $1,263,400, which, amortised over 20 years, resulted in a depreciation charge per annum of $63,170.00 or $2.53 per tonne of flyash, assuming a production rate of 25,000 tonnes. If, however, a straight line depreciation over 20 years was adopted for the invested capital, the depreciation rate would be $4.32 per tonne (Model 2). Depreciation of the unrecoverable capital over five years would amount to $10.11 per tonne (Model 1). In the Nucrush analysis the “delivered cost” and “profit” was calculated based on these two depreciation models and also a third model based on the depreciation of all invested capital over five years (Model 3).
1556 The “delivered cost” of Swanbank flyash to Oxenford (83kms away) under Models 1, 2 and 3 is $34.02, $29.19 and $43.16 respectively. The Pozzolanic delivered price of flyash, according to Mr Cooper’s evidence, was $75.00 and the model assumes a market price at Oxenford of $74.00 per tonne. Transport from Swanbank to Oxenford in each of the three models was either $9.96 or $10.00. The transport cost from Tarong to Oxenford is $31.59 (263kms away) and from Millmerran $27.60 (230kms away).
1557 A further alternative was to take flyash from Swanbank to Nucrush’s grinding mill at Wakerley and make a flyash blend cement. However, Mr Lang’s calculation was thought, by Mr Lang at least, not to be encouraging for Nuash.
1558 The calculation as at 26 June 2007 is this:
Taking flyash from Swanbank to Wakerley and making FAB cement
| Ash unprocessed ex Swanbank (per tonne) | $10.00 | |
| Cost to recover & blow to bin; truck loader cartage Swanbank to Wakerley (58 Km) | $8.00 | |
| ($0.20) | (per Tonne Km) | |
| $11.60 | $/Tonne | |
| Grind at Wakerley with cement | $10.00 | per Tonne |
| $39.60 | sub-total | |
| Mix % GP Cement and ground flyash at 20% | 20% | |
| Price of GP | $133.00 | per Tonne ex bin |
| Cartage | $2.00 | 10 Km |
| FAB Cement Mix Cost ex Wakerley (80% GP; 20% flyash) | $115.92 | per Tonne ex bin |
| Selling price FAB Cement | $127.00 | per Tonne ex bin |
| Contribution to Admin Selling Costs and Return | $11.08 | per Tonne |
1559 In May, June, July and November 2007, Nucon received from Pozzolanic/Cement Australia, Certificates of Analysis of Swanbank flyash showing a fineness of 91%, 90%, 90% and 89% respectively and an LOI of 0.4, 0.9, 0.4 and 1.3 respectively.
1560 On 19 February 2008, Mr Cooper, Mr Lang and Mr Wachtel of Nucon met with Mr Christy, Mr Blato, Mr Kendrich and Mr Rathie of CS Energy. Mr Cooper made a note of the meeting. Mr Cooper notes that CS Energy representatives told the Nucon representatives that the life of the Swanbank Power Station was uncertain; the logistics of taking flyash at Swanbank meant that CS Energy would prefer to have one company taking flyash from the Swanbank off-take points rather than multiple off-takers; CS Energy was concerned that Nuash plant and equipment would duplicate existing plant on-site; and Nuash plant would need to “fit into the on-site requirements”.
1561 Mr Cooper also notes comments of CS Energy personnel to the effect that 60,000 tonnes of unprocessed flyash per annum was “ok”, and other remarks were made about 100,000 tonnes. Mr Cooper’s note records that CS Energy personnel had not spoken to Pozzolanic concerning the issues arising out of interaction under the hopper off-take points between Pozzolanic plant and equipment and Nucon plant.
1562 On 15 April 2008, Mr Cooper attended a meeting at Swanbank together with Mr Lang, Mr Wachtel and Mr McLaren for Nucon, with Mr Blato, Mr Christy and Mr Rathie of CS Energy and also Mr White, Mr Blackburn and Mr Druitt of Pozzolanic.
1563 Mr Lang prepared a note of the meeting that Mr Cooper regards as correct.
1564 At that meeting, Mr White and Mr Cooper identified the respective demands of each organisation for Swanbank flyash. Nucon sought access to 90,000 tonnes for processing so as to remove 48,000 tonnes of concrete grade flyash leaving 60,000 tonnes of raw flyash for Pozzolanic. Mr White said that Pozzolanic required 40,000 to 50,000 tonnes of classified flyash for its operations. Apart from these discussions the participants also discussed plant interaction, pipe access, other plant issues and also the use of silos.
1565 Ultimately, on 15 May 2009, Nuash entered into an agreement with CS Energy which entitled Nucon to install processing plant at Swanbank should it wish to do so. Nucon has commissioned preliminary plans to be drawn up for a classifier and silos which have been submitted to Swanbank for consideration.
1566 Mr Cooper says that Nucon has not decided to proceed with the installation of that plant and equipment at Swanbank as CS Energy has recently commenced an investigation to determine whether the power station ought to be closed down or upgraded. Should Nucon install a classifier and related plant and equipment at Swanbank, Mr Cooper estimates that Nucon could produce approximately 30,000 to 40,000 tonnes of classified flyash per annum.
Grinding
1567 As already mentioned, Mr Cooper, Mr Neumann and Mr Brown (Nucon’s Concrete Manager) had formed the collective view, according to the evidence of Mr Cooper, by 2001 (and Nucon began investigating possible sources in 2002), that Nucon’s best alternative source of flyash to purchasing high grade flyash from Pozzolanic in South East Queensland supplied only on a delivered basis from either Swanbank or Tarong, was to secure a direct source of flyash from a power station in South East Queensland.
1568 In the latter part of 2002 (August), Mr Cooper retained Mr Forbes to start “generally looking” for direct access to flyash from the South East Queensland power stations. Nucon, by 2004, had developed the broader business plans for the use of flyash, as earlier described.
1569 In October 2002, Nucrush purchased a grinding mill for either $1.8M (Mr Cooper’s evidence) or $1.9M (Mr Neumann’s evidence) from Consolidated Rutile Ltd. The mill is located at Wakerley in Brisbane. The mill has been used by Nucrush to grind zircon for use in ceramics. Mr Neumann says that at the time of purchase, Nucrush was considering grinding imported slag for use in concrete production.
1570 Mr Cooper says that in order to grind flyash in its Wakerley mill, Nucrush would need to make “expensive modifications” to the mill. Transporting flyash to Wakerley would necessitate “double-handling” of the flyash and result in increased transport costs. Mr Cooper also says that the “running costs” of the mill may also be “prohibitive”. Accordingly, neither Nucon nor Nucrush has ground flyash using its Wakerley mill. These descriptive terms adopted by Mr Cooper were the subject of further evidence in Mr Cooper’s third affidavit.
1571 As to “double-handling” and “increased transport costs”, Mr Cooper says that grinding flyash at Wakerley would result in double-handling costs due to the need to load flyash in trucks at a power station, transport flyash to the mill, process it using the mill, and then transport the processed flyash to a batching plant. Mr Cooper says that by comparison with taking flyash from a classifier on-site at a power station, classified flyash can be delivered to a batching plant without double-handling. In Mr Cooper’s view, this elimination of double-handling would result in Nucon incurring lower transport costs in transporting flyash to its batching plants from a power station source, than the costs it would incur in transporting flyash directly from a power station to Wakerley, subjecting the flyash to intermediate functional handling by undertaking the grinding step, and then transporting ground flyash to a batching plant. The notion of “double-handling costs” would be entirely unsurprising to Cement Australia having regard to Ms Reich’s evidence.
1572 On 20 October 2009, Nu-con (a company unrelated to Nucrush or Nucon) assessed the cost of upgrading the Wakerley mill facilities to enable Nucon to use it to grind flyash. The assessment consists of five pages of detailed modifications that would be necessary to enable the mill to be so used, costing in all, $1,550,000. Mr Cooper says that the main recurrent cost of operating a grinding mill is the electricity cost and Nucon cannot estimate the cost of operating the grinding mill to grind flyash as the running time to achieve the required fineness is not known. Mr Cooper explained in oral evidence that the mill continues to be used to grind zircon and is leased to a tenant who carries on a metal production undertaking. Thus, the existing combined milling and rental revenue renders the use of the mill and premises profitable.
1573 Mr Cooper accepted that by 2005, probably due to the introduction of Acland coal, the “definite” view within Nucon was that steps would need to be taken to improve Swanbank flyash. One method of doing so was to grind Swanbank flyash although uncertainty over how long Swanbank flyash would be available was one of the factors influencing Nucon’s possible acquisition of Swanbank ash. Mr Cooper accepts that at the meeting with Mr Risson and Mr Christy, on 27 July 2005, he and Mr Neumann were told that Swanbank might close within five years. Mr Cooper’s note of the meeting suggests that although 2011 was a possible date, the power station might continue beyond that date or close earlier. Mr Cooper accepted that although uncertainty in the “time horizon” over which Nucon might have access to Swanbank flyash was a “significant matter” in determining whether to commit capital resources and behave strategically in relation to that source of supply, Nucon “had methods of dealing with it”, as an issue (T, p 509, lns 20-28).
1574 Mr Cooper says that Nucon examined the cost utility of using grinding assets in relation to both Swanbank and Tarong flyash and in that context Nucon examined the cost of establishing a grinding mill and related facilities but the electricity running costs could not be accurately assessed.
1575 Although Mr Cooper was aware that Sunstate deployed a business model of grinding materials to produce cementitious blends, Nucon had not determined whether grinding was a functional business model or method of producing flyash of the relevant standard for use in concrete production, for Nucon. Mr Cooper was invited to embrace the proposition that a “reasonable commercial approach” to the beneficiation of flyash in South East Queensland includes (or included at the relevant time) the use of grinding. Mr Cooper accepted that grinding is “a possibility for some people” but with Nucon’s particular equipment, Nucon had not determined that the equipment would produce an acceptable beneficiation result (T, p 508, ln 45; p 509, ln 1).
1576 I accept the evidence of Mr Cooper described in this Part 22, and generally.
PART 23
Wagner Investments Pty Ltd (“Wagner”)
1577 Mr Denis Wagner is a Director of Wagner and companies related to that company.
1578 Mr Wagner is responsible for the oversight of the flyash, cement, slag and property businesses in South East Queensland conducted by the Wagner group of companies. From 2004 to 2007, Mr Wagner was the Managing Director of Wagner and in that role he had responsibility for the concrete operations of the group. From 1990 to 2004, he had responsibility for the quarrying operations of the group although as a director he says he also had knowledge of Wagner’s concrete operations.
1579 Mr Wagner has been involved in the concrete industry as a Director of and shareholder in Wagner since 1989. Prior to that he had been employed in the cement industry by QCL, and in the concrete industry with a producer called “Sellars”.
1580 Mr Wagner says that the Wagner group has interests in concrete, cement, flyash, aggregates, pre-cast concrete, concrete pumping, transport and other industry interests. Wagner has operated concrete batching plants throughout Queensland since 1989 and currently has 20 batching plants either in operation or under construction in Toowoomba, Darling Downs, Brisbane, Gold Coast and Townsville.
1581 Since about September 2007, Wagner has acquired flyash through its participation as a 60% shareholder in IFB. Since that time, IFB has owned and operated flyash extraction facilities at Millmerran Power Station. Other concrete producers are also shareholders in IFB and they include Neilsen’s Concrete, Cordwell Concrete and Sunmix.
1582 Mr Wagner says the company uses the same amount of flyash in its production of concrete whether it separately blends cement and flyash or uses a blend of cement, flyash and slag. It costs the company about $100 to produce a cubic metre of 20MPa concrete. The largest single cost component is cement or blended cement at approximately $40 to $45 per cubic metre. Flyash costs are approximately $6 to $8 per cubic metre and the remaining costs are aggregates, sand and gravel.
1583 Three of Wagner’s batching plants in regional locations have only a single silo for the storage of cementitious products and thus the company cannot add flyash and cement separately to its concrete mix at these batching plants but must use either only GP cement, or cement which has already been blended with flyash or slag. Wagner uses a flyash blend at these plants because it is cheaper than producing concrete with GP cement alone, and the blend enhances the characteristics of the concrete. The use of flyash enables the company to reduce its costs of production, improve concrete performance and meet particular specifications prescribed by customers.
1584 Prior to 2007, Wagner purchased the majority of its flyash from QCL/Cement Australia which supplied flyash sourced from Tarong Power Station. Wagner, however, also sought out opportunities to obtain flyash directly from power stations.
1585 In the 1990s, Wagner purchased flyash from Mount Piper and Eraring Power Stations in New South Wales. The company also purchased flyash sourced from the Bayswater Power Station. Transport costs were approximately $60.00 per tonne giving rise to a delivered cost of approximately $70.00 per tonne. Wagner primarily purchased Bayswater flyash on a “backhaul basis” when it had supply contracts for the supply of limestone or other products to customers in New South Wales. Wagner also purchased Bayswater flyash when it had “excess trucking capacity” which would otherwise have been idle.
1586 The Wagner group operates a fleet of prime movers, cement tankers and concrete agitator trucks. The group operates a fleet of 17 bulk powder tankers used primarily to transport cement for the group’s own use. Wagner has owned and operated its own trucking fleet since 1989. Wagner operates a “transport division” used by companies within the group. Transport prices are calculated by the transport division on an arms-length basis incorporating a reasonable margin.
1587 Mr Wagner says that the quantities of flyash purchased from Bayswater were “insignificant” in the context of Wagner’s total use of flyash. There were “no real cost saving or other benefits” derived by Wagner’s “concrete business” from the use of Bayswater flyash. There were some advantages derived by the “transport division” on the basis that as it was engaged by the “concrete division”, the transport division derived transportation revenues on a “commercial basis” for the haulage of flyash from Bayswater to Wagner batching plants.
1588 Mr Wagner says that while there were some savings to Wagner in utilising the transport division to haul Bayswater flyash to Wagner batching plants, the benefits to the company from the purchase of Bayswater flyash were not sufficient to justify the company investing in extra tankers to supply Wagner’s concrete operations in South East Queensland with Bayswater flyash on a full time basis. Moreover, because of the “significant transport costs” involved in hauling Bayswater flyash to Wagner batching plants, it was not in the company’s commercial interests, in Mr Wagner’s assessment, to engage third party transport contractors to haul Bayswater flyash to its South East Queensland batching plants rather than purchasing flyash from Pozzolanic.
1589 From the time that Wagner has been able to purchase Millmerran flyash from IFB (September 2007), Wagner has not purchased Bayswater flyash for its own use.
1590 However, Wagner has historically supplied small quantities of Bayswater flyash to a particular customer in Toowoomba.
1591 Mr Wagner puts in evidence a spreadsheet drawn from Wagner’s business records which he says “summarises the value of flyash purchased from Bayswater Power Station by Wagner from 2002 to 2005”. By that description he means the invoices raised by Hyrock for sales of Bayswater flyash to Wagner. Those invoices represent the ex-works price charged by Hyrock for Bayswater flyash. The invoices do not include haulage costs and therefore do not represent the landed cost of Bayswater flyash to Wagner batching plants. The spreadsheet contains a number of product “dissections” and not all of the data relates to flyash. Flyash is described by reference to a dissection code “20200” which is variously described as “ash” or “flyash”. Under the dissection code 20200, the value of invoices issued by Hyrock in the 2002 calendar year was $26,877.32. For the 2003 calendar year the value of the invoices was $16,069.20. For the 2004 calendar year the value of the invoices was $9,462.90; and for the 2005 calendar year the value of the invoices was $9,947.40.
1592 For the calendar years 2002 to 2005 the total invoiced purchases of Bayswater flyash by Wagner from Hyrock amount to $62,356.82.
1593 Assuming that the ex-works price of Bayswater flyash from Hyrock was “about $10 per tonne” as Mr Wagner says, the amount of the total Hyrock invoices to Wagner suggests the purchase of 6,235.68 tonnes of Bayswater flyash over four years. Mr Neumann gave evidence that Nucon’s price from Hyrock was $15.00 per tonne in 2002 and reduced to $12.50 per tonne in late 2005. At $15.00 per tonne, the Wagner purchases represent 4,157.12 tonnes over four years.
1594 Mr Wagner puts in evidence a further spreadsheet drawn from Wagner’s business records which he says records the “landed cost to [Wagner] for flyash delivered to a number of batching plants in South East Queensland as at 1 June 2007”. The spreadsheet shows, for Bayswater flyash, Wagner’s costs which are said to include the purchase cost of flyash from Bayswater, the transport cost of hauling Bayswater flyash to South East Queensland and a profit margin on the transport cost.
1595 The “landed cost” is shown in the spreadsheet as the landed cost at particular batching plants by location. The spreadsheet incorporates data in relation to nine of Wagner’s plants. The spreadsheet also shows, by comparison, the landed cost to Wagner, at each of nine batching plants, of flyash sourced from Tarong, Swanbank and Central Queensland.
1596 The landed costs are these:
| Plant | Bayswater | Tarong | Swanbank | Central Queensland |
| Toowoomba | $90.00 | $78.00 | $42.00 | $97.60 |
| Crows Nest | $97.00 | $75.00 | - | - |
| Oakey | $93.50 | $77.00 | - | $97.60 |
| Dalby | $90.00 | $76.00 | $42.00 | $- |
| Chinchilla | $97.00 | $83.00 | - | $97.60 |
| Goondiwindi | $69.00 | - | $42.00 | - |
| Grassdale | $95.25 | $79.30 | - | $97.60 |
| Wacol | $100.05 | $83.00 | - | - |
| Everton | $105.75 | $83.00 | - | - |
1597 The spreadsheet also shows that purchases of Bayswater flyash delivered to each of the nine Wagner batching plants set out in the above table, in the order of the table, over seven months in 2007 as: $141.80; Nil; Nil; Nil; Nil; $429.89; $20.50; $38.00; and $18.00.
1598 Mr Wagner puts in evidence a further spreadsheet drawn from Wagner’s business records which records sales of Bayswater flyash by Wagner to a Wagner customer in Toowoomba for the period from 2005 to 2007 although the spreadsheet commences with a sale on 18 October 2006. The spreadsheet shows that the invoiced quantity of Bayswater flyash by Wagner to its customer for the period 18 October 2006 to 12 December 2007 is 908.32 tonnes over the entire period.
1599 In 2001, Wagner first made contact with the operators of Millmerran Power Station with a view to securing a flyash supply contract.
1600 In 2006, IFB ultimately negotiated a flyash supply agreement with Millmerran and in 2007 IFB was the successful tenderer to MPP for a contract for the supply and removal of flyash from Millmerran Power Station.
1601 In September 2007, IFB commenced taking flyash from Millmerran Power Station. Initially, the flyash supplied by IFB was run-of-station flyash. In October 2008, IFB completed the installation of a classifier at Millmerran and from this time flyash supplied by IFB was fine grade classified Millmerran flyash.
1602 In 2005, IFB was able to obtain limited quantities of run-of-station flyash directly from a silo at the Tarong North Power Station, loaded directly into trucks from the power station’s existing infrastructure.
1603 In late 2005 and early 2006, Wagner obtained limited quantities of Tarong North flyash under a testing regime in which IFB was a participant. The flyash was unprocessed run-of-station (“ROS”) flyash taken directly from the Tarong North ROS silo. Mr Wagner had some personal involvement in the negotiations with Tarong North personnel and was otherwise kept informed about the discussions. Whilst field trials were undertaken of the flyash, Wagner did not obtain commercial quantities of Tarong North flyash for use in concrete operations. Mr Wagner says that to the best of his recollection, the testing of Tarong North ROS flyash undertaken by Wagner suggested that the ROS flyash was able to be used in the production of concrete. Mr Wagner says that, in his view, once reject flyash produced from the Tarong North classifier was mixed with the ROS flyash in the ROS Tarong North silo, “it was not feasible for IFB to use flyash from the Tarong North ROS Silo as its composition varied unacceptably due to the mix of reject ash and run-of-station ash”.
1604 Wagner also sought to purchase flyash from Pozzolanic at the Tarong North Power Station on an ex-bin basis.
1605 The supply arrangements struck between QCL and Wagner and later Cement Australia and Wagner provided for supply of cement on a delivered price basis on the footing however that Wagner would collect cement from QCL/Cement Australia at the cement plants operated by the supplier at Bulwer Island and deliver the cement to its own batching plants as a subcontractor to the supplier.
1606 However, all supplies of flyash by QCL and later Cement Australia were on a delivered basis only with the delivery undertaken by Pozzolanic. Wagner attempted but was unable to secure supply terms enabling it to undertake the delivery function for flyash. Mr Wagner says that it has always been Wagner’s preference to undertake its own cartage where possible so that Wagner’s transport division is able to make a profit on haulage of flyash. Further, Wagner had a concern that information about the transport of cement or flyash to Wagner’s individual batching plants might become available to other concrete producers.
1607 In 2009, Wagner constructed its own cement mill.
1608 It uses the mill to grind slag (which Wagner imports) as a stand-alone product for supply to Wagner batching plants in the production of concrete. Wagner does not actively promote the sale of ground slag to third parties although it would be willing to supply ground slag if a customer sought supply.
1609 In Townsville, Wagner imports cement for its own use, at times.
1610 Wagner does not import flyash as Mr Wagner takes the view that it is simply not “commercially viable” to import flyash for use in the production of concrete. Prior to the construction of its own cement mill, Wagner purchased the bulk of its cement from Cement Australia. It has also purchased some cement from Sunstate including a cement/slag blend from Sunstate.
1611 As to transport costs, Mr Wagner says that based on his experience and knowledge of the business undertaking, he is aware that the cost of transporting flyash from Swanbank, Tarong, Millmerran and Bayswater Power Stations “to Brisbane” (although Mr Wagner does not specify any one of the Wagner batching plants separately) is this: from Swanbank - $15 per tonne; from Tarong and Millmerran - $25 to $30 per tonne; and from Bayswater - $60 per tonne.
1612 Mr Wagner says, based on his personal knowledge of and involvement in cement and flyash supply negotiations with QCL and Cement Australia, that Wagner sought to purchase flyash from QCL (and later Cement Australia) on an “ex-bin” basis from at least 2000, and thereafter until Wagner started purchasing flyash from IFB at Millmerran Power Station in 2007. The negotiations were primarily conducted in person by Mr Wagner and occurred whenever QCL or Cement Australia notified Wagner of a price increase. Mr Des Chalmers usually represented QCL or Cement Australia in the negotiations. Mr Wagner puts in evidence a series of emails during October 2002 with Mr Ian Ridoutt of QCL and Mr Des Chalmers that reflect the supply arrangements at that time between Wagner and QCL for cement and flyash supply to Wagner’s batching plants at Stuart, Townsville (called NQ) and Toowoomba and the Darling Downs.
1613 As to Townsville, QCL was to supply GP cement at a delivered price per tonne, and Gladstone flyash at a delivered price of $76.00 per tonne for all of Wagner’s concrete production at the Stuart batching plant until 31 December 2003. Although supply was on a delivered price basis, QCL made it plain that Wagner could provide the haulage of cement as a subcontractor to QCL at agreed haulage rates.
1614 As to Toowoomba and the Darling Downs, the delivered price to the nominated batching plants (to 31 December 2003) was on the footing of a particular number of annual tonnes supplied with cement hauled by Wagner’s transport division. As to flyash for these batching plants (all supplied by QCL from Tarong) a particular delivered price applied. All prices were effective from 1 September 2002 and were based upon QCL supplying all of Wagner’s demand for cement and flyash at those batching plants.
1615 In September 2005, Mr Chalmers set out in emails to Mr Wagner (copied to Mr Zeitlyn) the proposed terms of supply of cement and flyash by Cement Australia to Wagner. On 8 September 2005, Mr Chalmers set out a “nominal ex-works price” for cement for Wagner’s nominated Brisbane plants and the Toowoomba, Darling Downs and Townsville plants. The ex-works prices were nominal because all invoiced prices would be on a “delivered price basis” with cartage rates for cement supply to be agreed with Wagner while maintaining the nominal ex-works prices.
1616 Flyash would be supplied on a delivered price basis only, with Tarong fine grade flyash delivered to the nominated Brisbane batching plants at $70.00 per tonne; Gladstone fine grade flyash delivered to the Stuart at $85.00 per tonne; and, Tarong fine grade flyash delivered to the Darling Downs plants at $70.00 per tonne plus a price (to be built into the delivered price) “relative to the cartage distance” to the batching plants at those locations.
1617 These pricing proposals as described were put to Mr Wagner, according to Mr Chalmers’s email of 8 September 2005 as a “demonstration of [Cement Australia’s] commitment to maintaining [Wagner’s] competitiveness … and business” in the face of Wagner giving consideration to importing cement for its own use due to competitive pressures in the Toowoomba market. In the course of addressing that concern Mr Chalmers said, as to imported cement, “[o]ur observation in all of the markets in Queensland where imported cements have been used is that concrete prices have dropped substantially”. Mr Chalmers, however, did not accept that the observed substantial price reductions in concrete (of the order of $20.00 per cubic metre) in all of the markets in Queensland was due simply to contestability from imported cement. Although fine grade flyash might replace up to 30% of the cement component in a concrete mix, Mr Chalmers makes no comment about observed pricing behaviour (if any) related to flyash available from non-Queensland based power stations.
1618 On 1 October 2006, Wagner and Cement Australia entered into a supply agreement (with potential extensions) for the supply of GP cement; a flyash blend cement; a slag blend cement and bulk flyash in conformity with AS 3582.1 to all of Wagner’s “Southern Region” plants including “Toowoomba, Country, Brisbane Metro and Townsville”. Pricing was based upon a nominated quantity of “cementitious products” supplied to Wagner’s nominated batching plants. All rates are said to include a freight component based on Wagner’s current freight rates (as to haulage of cement).
1619 As to flyash, said to be sourced from Tarong but subject to substitution by the supplier from other locations, all pricing is “delivered pricing” and all flyash “is to be delivered by Cement Australia”. The contract contains a pricing schedule showing the delivered price of flyash (and an applicable rebate) for each Wagner batching plant location (15 plants in all). For each location, the distance from the “Port” is shown, consistent with Mr Clarke’s description of the import parity pricing notion adopted by Cement Australia and the analogue of that notion so far as flyash is concerned by treating a relevant power station as the equivalent of the applicable “Port”.
1620 The contract contains a spreadsheet with this information in relation to flyash.
| Location | Delivered Price |
| Toowoomba, 149km from Port | $78.00 |
| Chinchilla, 320km from Port | $83.00 |
| Crows Nest, 187km from Port | $75.00 |
| Dalby, 229km from Port | $76.00 |
| Goondiwindi, 374km from Port | $97.00 |
| Grantham, 121km from Port | $80.00 |
| Miles, 355km from Port | $87.00 |
| Millmerran, 224km from Port | $86.00 |
| Oakey, 175km from Port | $77.00 |
| Pittsworth, 193km from Port | $82.00 |
| Wandoan, 421km from Port | $95.00 |
| Everton Park, Brisbane, 35km from Port | $83.00 |
| Wacol, Brisbane, 35km from Port | $83.00 |
| Townsville, 14km from Port | $88.00 |
1621 I accept the evidence of Mr Wagner discussed in this Part 23, and generally.
PART 24
Transpacific Industries Pty Ltd (“Transpacific”)
1622 Mr David Keating is and has been the Executive Director of Transpacific since 1987. Transpacific provides waste management and recycling services in Australia and overseas. However, from 1981 to 1987, Mr Keating was an employee of Pozzolanic, and subsequently Pozzolanic Industries. During that period, Pozzolanic operated flyash, transport and engineering activities primarily in Australia and was a processor and marketer of flyash.
1623 Mr Keating says that Pozzolanic commenced operations in the 1960s in New South Wales by purchasing flyash from power stations in that State, refining flyash and selling it as a partial substitute for cement in concrete production. Pozzolanic commenced operations in Queensland later in the 1960s and entered into contractual arrangements to acquire, remove, process and sell flyash from Swanbank, Tarong, Callide and Gladstone Power Stations. The Pozzolanic Group was founded by Mr Terry Peabody.
1624 By 1986, “high-grade flyash” had become regarded as a “valuable commodity” and Pozzolanic sold its processed flyash to major cement and concrete companies including Boral, QCL, Readymix and Pioneer with the result that by 1986 Pozzolanic was the largest processor and marketer of flyash in Australia selling about “240,000 tonnes of flyash per annum in Queensland and northern New South Wales”. In 1987, Pozzolanic was taken over by QCL. Mr Terry Peabody sold his controlling interest in the group to QCL. Pozzolanic ultimately became a wholly owned subsidiary of QCL.
1625 At that time, Mr Terry Peabody then founded Transpacific to purchase from the Pozzolanic group of companies those assets and entities within the group which were not directly associated with the flyash undertaking. The QCL acquisition was concerned only with the acquisition of the interests within the group focused upon the acquisition, processing, marketing and transport of flyash.
1626 In 1987, Mr Keating joined the Transpacific Industries group of companies based in Queensland. Transpacific uses cement and “low-grade flyash” in stabilising and processing liquid waste. It uses 7,000 tonnes of cement each year purchased from Sunstate in Brisbane, and Cement Australia in North Queensland. It uses approximately 30,000 to 32,000 tonnes of low-grade flyash each year in Queensland purchased from Collinsville Power Station in North Queensland and since February 2004 low-grade flyash, from the Visyboard Power Station at Gibson Island in Brisbane.
1627 Transpacific also purchases some flyash from Swanbank.
1628 In using the term “low-grade flyash” Mr Keating is referring to “coarse” flyash which contains higher levels of carbon and minerals. Low-grade flyash is absorbent and suitable for use as a “blotter” or absorbent in stabilising liquid waste disposal. Low-grade flyash is widely available as a waste product and is of low value. It can be imported into Australia. It is not suitable for general use in concrete although it can be used in some road stabilisation and bituminous concrete applications. In approximately 2004, Transpacific began selling small volumes of low-grade flyash in Queensland amounting to less than 30,000 tonnes each year.
1629 In using the term “high-grade flyash” or another term Mr Keating uses, “refined flyash”, Mr Keating is referring to flyash which is processed to comply with AS 3852.1. That Standard, of course, contemplates use of fine, medium and coarse grade flyash in concrete as opposed to the notion of “low-grade flyash” which Mr Keating uses to describe flyash not capable of use in the production of concrete and which exhibits coarse features and the high levels of carbon and minerals as mentioned.
1630 Mr Keating says that high-grade flyash can replace about 30% of cement in concrete of normal strength and application and when blended with GP cement, high-grade flyash adds strength and durability to concrete at a lower cost than a purely cement-based concrete. Mr Keating says that “high-grade flyash” is “produced” by “processing flyash” from a coal-fired (black coal) power station and is usually “refined” through a “classification plant”. Mr Keating estimates that today it would cost approximately $12 million to $15 million to establish and commission a classification plant of similar capacity to the plant established by Pozzolanic at the Tarong Power Station.
1631 Mr Keating says that from about 2001 to 2006, Transpacific sought to obtain a supply of high-grade flyash at a power station to sell to participants in the concrete and cement industries. Mr Keating says that in order to become a processor and supplier of high-grade flyash, Transpacific sought opportunities to bid for contracts to take and process flyash from power stations in Queensland. Mr Keating says that, had Transpacific been successful in tendering for contracts with power stations, particularly long term contracts for flyash supply, Mr Keating believes that Transpacific may have been able to supply a significant quantity of flyash in South East Queensland and northern New South Wales.
1632 Mr Keating regarded potential customers as being Boral, Nucon and Wagner.
1633 Mr Keating also says that in his experience in dealing with power stations, a power station operator prefers to have only one off-taker of flyash on-site as this ensures control of the site, availability of ash to contracted parties and security of operations. Mr Keating says that Transpacific was only interested in obtaining supply from a power station if it was the primary or exclusive taker of flyash so as to assure the volume and availability of supply; enable control of the quality and selection of flyash; and, avoid responsibility for the conduct of other parties seeking off-take of flyash from plant operated by Transpacific on-site at the power station.
1634 Mr Keating says that on or about 14 September 2001, Transpacific bid for the contract to take and process flyash from Millmerran Power Station. Mr Keating was directly involved in “putting together” Transpacific’s proposal for Millmerran and directly involved in negotiations with Millmerran staff. As part of the preparation for Transpacific’s tender for Millmerran, Mr Keating and Transpacific staff undertook what he describes as a “detailed cost analysis” and explored a “potential customer base” of independent concrete producers in South East Queensland. Transpacific’s analysis involved calculations based upon achieving sales of flyash at prices in the order of 50% of the price of cement.
1635 Mr Keating was of the view that entry by Transpacific into the supply of flyash to independent concrete producers in South East Queensland would lead to a lowering of prices by QCL, in response. For Mr Keating, that hypothesis was based upon discussions with potential customers and his own experience of Transpacific’s purchases of flyash suggesting that QCL’s flyash price was considerably higher than the benchmark for Transpacific’s analysis, namely, 50% of the cement price.
1636 These considerations simply informed Mr Keating’s thinking in undertaking the analysis.
1637 Having regard to this analysis, Transpacific formulated its proposal to Millmerran. Mr Keating thought that Transpacific could not reasonably offer more favourable terms than those set out in its tender and be able to operate profitably in supplying flyash at the prices anticipated by the analysis earlier mentioned.
1638 Mr Keating did not consider there to be any scope for a substantive increase in the price proposed to Millmerran.
1639 The price proposed was $10.10 per tonne based upon nominated quantities of 10,000 tonnes in the first year; 30,000 tonnes in years 2 to 6 inclusive and 40,000 tonnes for the balance of the proposed term. The minimum quantity proposed was 30,000 tonnes in the first year; 102,000 tonnes in year two; 120,000 tonnes in years 3 to 6; and 10,000 tonnes per month for the balance of the term. The tender describes the contractor’s facilities and the capital value and written down value of those facilities.
1640 On 14 March 2002, Transpacific was advised that it had been unsuccessful in the tender.
1641 Pozzolanic won the tender.
1642 On 21 March 2002, Transpacific sent a letter to the Managing Director of InterGen in relation to the award of the flyash contract by MPP. In that letter, Transpacific, plainly enough, was expressing disappointment about Transpacific having been unsuccessful in the tender process, and expressed concerns about the commercial consequences for MPP in pursuing the course it was intending to take with QCL, among other things.
1643 In that letter, Transpacific also expressed a number of observations about the market or at least perceptions of factors characterising the market. Transpacific said that the QCL group had established exclusive marketing rights for flyash at Tarong, Swanbank, Callide B and Gladstone; the market for flyash is “primarily centred in [south east] Queensland with demand for flyash diminishing northwards as the population decreases”; the quantity of flyash marketed within Queensland from the four power stations already mentioned was less than 15% of the flyash production from those power stations; independent concrete producers had expressed concern to “us” regarding the “monopoly of the fly ash industry throughout the State” and statistically the independent concrete producers “account for approximately 33% of the concrete market” [emphasis added]; and, the “price paid for flyash in [south east] Queensland is 44% more expensive than New South Wales with QCL announcing an increase of $10.00 per tonne (a 15% increase) effective 1 April [2002] with a further $10.00 (15%) increase within the next 6 months”.
1644 In Mr Keating’s second affidavit he makes a further reference to this letter and says that the letter forms part of the records kept by Transpacific in the course of its business and that the statements made in it were made in the course of and for the purposes of the business of Transpacific. The letter is written under the authorship of Mr Terry E. Peabody, Managing Director, rather than Mr David Keating. I infer from Mr Keating’s adoption of the letter in his affidavit that the views put forward in the letter, at that moment in time, were the views held by Transpacific as an organisation. Had they not been so held, presumably Transpacific would never have written a letter under the authorship of the Managing Director to the Managing Director of InterGen.
1645 On 27 March 2002, the Chief Operating Officer for InterGen, Mr Nelson, responded to Mr Peabody’s letter and rejected his various contentions.
1646 After 2002, Transpacific made occasional contact with the operator of Millmerran in relation to the potential for obtaining flyash supply. These discussions did not advance. After Cement Australia withdrew from the power station, Transpacific sought to re-enliven those discussions. MPP however struck arrangements with another party.
1647 On 14 August 2001, Transpacific was invited to respond to an expression of interest for the sale and removal of flyash from Tarong and Tarong North power stations. Transpacific submitted an expression of interest on 16 October 2001. That document is in very similar terms to the tender submitted by Transpacific to Millmerran. Transpacific was unsuccessful in its bid.
1648 Between 1 September 2005 and 31 December 2005, Mr Keating says that Transpacific took 570 tonnes of flyash from Tarong North Power Station for testing purposes and the results of the tests demonstrated that the flyash was very coarse. Mr Keating attributes the coarseness of the particles to the production process at Tarong North which ultimately resulted in all flyash being aggregated in the Tarong North flyash silo, rather than separate hoppers, sorting the ash particles in the manner of the separation reflected at the Tarong Power Station. Mr Keating says that the ash taken from Tarong North was not sufficiently absorbent for the waste processes for which Transpacific needed flyash. The testing undertaken by Transpacific was to determine the utility of the ash for use in waste rather than concrete applications as Transpacific did not have a means of classifying the ash.
1649 Transpacific also lodged a submission with TEC in response to the June 2006 invitation, seeking access to low-grade flyash and concrete grade flyash. Tests undertaken by Transpacific revealed, so far as Mr Keating was concerned, that the ash was “far too coarse for use in concrete without classification” and thus Transpacific did not pursue the tender. The tender was not awarded at that time and an interim supply process was adopted.
1650 On 18 July 2006, Mr Keating received a letter from TEC seeking expressions of interest for the sale of bulk flyash from Tarong and Tarong North Power Stations under an interim arrangement. The letter is in the familiar terms previously discussed. Transpacific lodged a submission and ultimately took a small amount of ash (about 200 tonnes) for testing and use in waste processes only.
1651 In 2006, Transpacific entered into an agreement with CS Energy for the supply of Swanbank flyash for use in “composting products”. Transpacific takes waste ash from the ash dam and also bottom ash. This material is called “wet” flyash and when that product is not available, Transpacific takes dry flyash from Swanbank for use in waste processing. Mr Keating says that the flyash from Swanbank is not concrete grade material and due to the variable operating conditions of the station, Swanbank does not produce consistent quality ash for use in concrete manufacture and thus in Mr Keating’s view, it is not feasible to use Swanbank ash as a source of supply for concrete manufacturers.
1652 Mr Keating makes these further observations.
1653 In his experience, high grade flyash in Australia is priced in proportion to the price of cement rather than as a function of the production costs of the product. Historically in Queensland, flyash has generally been priced at approximately 50% of the price of cement. To obtain equivalent strength at 28 days, to concrete produced from cement alone, a larger volume of flyash is needed than the volume of cement replaced by flyash. Mr Keating says that for normal strength concrete, about 10% to 20% more flyash is needed by volume than the cement that would otherwise be required and this relativity affects the pricing of flyash.
1654 Mr Keating says that at the time he left Pozzolanic, the proportion of flyash used as a cement replacement was approximately 29%.
1655 Mr Keating says that Transpacific considered importing flyash into Australia from a company called Pozzolanic Philippines. That company sells approximately 300,000 tonnes of flyash throughout the Philippines each year. The company has approximately 400,000 tonnes of surplus high-grade flyash each year and some of this is exported to Malaysia, Guam and Brunei for use in relation to contracts where flyash is specified.
1656 In the years 2002 and 2003, Transpacific conducted an informal study in relation to importing flyash from Pozzolanic Philippines which took into account the infrastructure costs, transport costs and likely available market in Queensland. Ultimately, Transpacific decided that the option of importing flyash was not likely to produce an adequate return on the investment deployed. The analysis is described as an “informal one”. The conclusions are described at paras 59.1 to 59.10 of Mr Keating’s first affidavit. The actual analysis itself is not put into evidence. Mr Keating describes some of the thinking involved in the analysis and the conclusions which led to the decision not to pursue importation. The full context of the analysis is not clear because no document is put forward.
1657 Paragraph 59 of Mr Keating’s first affidavit was admitted into evidence provisionally under s 57 of the Evidence Act 1995 (Cth). Because the proceeding has been conducted on the footing that all evidence-in-chief (apart from the evidence of Mr Maycock) has been given on affidavit, I formed the view that the observations by Mr Keating in para 59 were provisionally relevant to the question of market definition and market power, but the determination of the relevance of para 59 would depend upon the Court making a finding that the evidence is, upon proper assessment, what the party claims it to be (s 57(1)).
1658 The party claims it to be evidence which is relevant to market definition, substitution possibilities and thus market power and, subject to weight, the evidence could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceedings (s 55(1), Evidence Act). I find that the evidence is evidence of matters going to market definition, substitution possibilities and thus market power, and accordingly, the evidence is admissible for the purposes of s 55(1) of the Evidence Act.
1659 The weight, however, to be attributed to the evidence is entirely another matter.
1660 As to the evidence itself, Mr Keating says that the key reasons for not pursuing the importation of flyash from Pozzolanic Philippines were these.
1661 First, in 2003 there was a large rise in shipping costs which “made this option uneconomical”. Mr Keating says that Transpacific monitors freight rates as its various business operations involve regular shipping of imports including the importation and distribution of Western Star trucks and MAN vehicles from the United States and Germany. Mr Keating says that even taking advantage of favourable rates from its shipping agents as a large customer, the shipping costs were too high to warrant importing flyash. No particular example, however, is given of transactional quotes or other particulars over time of movements in shipping costs.
1662 Second, Mr Keating says that if shipping costs were not at high levels (which presumably means shipping levels postulated at something according to the mean of normal commercial experience), a minimum shipment size to amortise shipping costs would be in the order of 20,000 tonnes of flyash. Mr Keating, however, does not identify any content going to the foundation for that view. It may well be a summary of Mr Keating’s impressionistic understanding of the position.
1663 Third, although Transpacific has existing port facilities in Brisbane and Gladstone, a further sizeable investment would have been needed in order to develop storage facilities for 20,000 tonnes of flyash.
1664 Fourth, Transpacific estimates that the development of facilities required for bulk importing of flyash would have cost more than $15 million. It is not clear whether that assessment is based upon quotes obtained from suppliers, or the precise foundation for that view. Since the assessment seems to involve a substantial capital investment, presumably the analysis undertaken by Mr Keating involved some measured assessment of the likely capital cost required to enable Transpacific to pursue an importation option.
1665 Fifth, because flyash must be transported in bulk carriers and tankers (to batching plants) it is not feasible to import flyash in bulk bags.
1666 Sixth, flyash is a difficult product to handle and must be properly contained at all times. Although flyash does not set like cement, if it becomes wet, it will lose its qualities as a pozzolan and become unstable. Flyash tends to become compacted unless transported under proper conditions. Mr Keating says that because flyash is “bulkier” than cement, larger storage and transport spaces are required for an equivalent weight of the product.
1667 Seventh, in 2003, Transpacific contacted Mr Young of Sunstate and investigated a proposal to import flyash and supply it to Sunstate. Sunstate expressed no interest in pursuing imported flyash from Transpacific.
1668 Eighth, in the absence of Sunstate taking supply, only the independent concrete producers in Queensland represented possible customers for imported flyash and these customers did not require sufficient volumes of flyash to generate a sufficient turnover of product that would derive revenues that would justify the investment in the infrastructure necessary to enable the importation of flyash. No modelling is available from Mr Keating about that particular difficulty.
1669 Ninth, Mr Keating says that if Transpacific sought to market imported flyash in Queensland, Cement Australia might have responded by lowering its prices to Transpacific’s target customers and as Transpacific’s shipping costs would, likely be, considerably higher than Cement Australia’s comparative domestic transport costs in supplying the batching plants of the independent concrete producers, Transpacific might not have been able to secure a return on its investment in the infrastructure facilities. As a prudent businessperson, Mr Keating took into account the possibility that Cement Australia would engage in contestability and rivalry in the supply of flyash.
1670 Tenth, Mr Keating considered that because there are large domestic supplies of flyash available at power stations in Australia which could be supplied at prices lower than the price of imported flyash, necessary to secure a return on the investment; the importation option was not likely to produce an adequate return on the investment deployed.
1671 I generally accept Mr Keating’s evidence.
PART 25
Independent Flyash Brokers Pty Ltd (“IFB”) and aspects of the evidence of Mr Alan James Forbes
1672 Mr Forbes who was a semi-retired consultant to the flyash and cement industry passed away in June 2010.
1673 He has worked in the cement and concrete industries (and, as he puts it, related industries) since 1974. From 1974 until 1983, he was owner and operator of his own company called Forbes Engineering Pty Ltd. Mr Forbes has qualifications in civil engineering, economics and also a Masters degree in administration.
1674 In 1984 when Sunstate commenced operation as a supplier of cement in Queensland, Mr Forbes was recruited as Sunstate’s foundation General Manager. Sunstate was then a wholly owned subsidiary of Adelaide Brighton Ltd. In 1986 Sunstate became a joint venture entity between ABL and BCSC (now a Boral subsidiary). Mr Forbes was General Manager of Sunstate from 1984 until 1994, responsible for overseeing the establishment and development of Sunstate’s operations as a cement supplier in Queensland. He was an alternate Director of Sunstate from October 1997 to February 1998.
1675 In 1994, Mr Forbes was appointed General Manager of Swan Cement Ltd (“Swan”), a subsidiary of ABL, in Western Australia. He held that position until 1997. Swan operated a clinker manufacturing and a grinding plant in Western Australia. Mr Forbes oversaw the closure of Swan’s 75 year old plant and the development of a new clinker grinding facility at Kwinana. From October 1997 to March 1998, Mr Forbes was an alternate Director of a company called Independent Cement and Lime Pty Ltd (“ICL”).
1676 In 1997, Mr Forbes was appointed General Manager, Strategy and Development, for ABL in Adelaide. In 1998, Mr Forbes established a company called International Quality Cement Brokers Pty Ltd (“IQC”). IQC was formed to purchase cement as a broker for particular companies engaged in the production of pre-mix concrete, namely, Nucon, Neilsen and Cordwell. In November 2005, Mr Forbes established IFB for the purpose of purchasing flyash from power stations.
1677 Mr Forbes was the sole owner and Director of IFB until 2007. Mr Peter Heffernan was a Director of IFB until 1 February 2007.
1678 These matters reflect the background experience which informs the views and observations of Mr Forbes and represents the foundation experience upon which he gives his evidence. Much of what Mr Forbes has to say about flyash use generally and use in concrete is entirely consistent with the evidence of other experienced industry people.
1679 Briefly put, Mr Forbes says these things on those topics.
1680 Customer sites for concrete producers generally operate on a “just-in-time” delivery system for cementitious ingredients including flyash which minimises the size of the storage silos needed at sites. Silos at concrete batching plants typically hold about 80 tonnes of cement or about 50 tonnes of flyash. Deliveries to batching plants in B-double trucks contain up to 40 tonnes of flyash in each load. Customer sites tend to try and avoid deliveries of flyash during their peak morning operations. Flyash is used as an input in concrete manufacture either to reduce the cost of the pre-mix concrete batch or to meet the different chemical or physical properties required for the particular batch. Mr Forbes says that based on his experience he understands that a concrete producer will only use flyash, however, where the producer can make meaningful savings as compared with the cost of using “straight cement”. Although there is a cost saving in the purchase price of flyash as compared with cement (and flyash might often replace 25% of the cement in a concrete mix and sometimes up to 50%), using flyash, in Mr Forbes’s view, also adds to the concrete producer’s costs in other ways. Flyash needs to be stored in a separate silo and although it is a substitute for cement, it is not necessarily a “one for one” replacement. Further, switching supply sources of flyash on a temporary basis is unattractive to concrete producers as customers of the producer usually expect the same (component) mix to be supplied during the project. Mr Forbes holds the view that the grade of flyash used in a concrete mix does not “significantly affect the strength of the concrete” in which it is used and in his opinion there is no “practical reason” why fine grade flyash is required in concrete by some customers such as the Queensland Department of Main Roads.
1681 However, because customers perceive that fine grade flyash is “better than coarse flyash” for this purpose, and customers in Queensland consider flyash at a grade of 80% passing a 45 micron sieve to be superior to other grades of concrete grade flyash, IFB, from the commencement of its operation, “targeted supplying 80% grade flyash” to its “target customers” who were a group Mr Forbes describes as the “independent” concrete producers, that is to say, producers not related to any company that is a supplier of concrete inputs and, in particular, cement. Mr Forbes also says that in his experience this 80% grade of flyash is the quality of flyash that has been “traditionally supplied” by Pozzolanic.
1682 As to colour, Mr Forbes says that in his experience buyers of concrete seek a consistent colour in the concrete. Moreover, sometimes, for example in the case of pre-cast work, colour consistency in concrete is an “essential requirement”. The burning of coal can produce a number of different shades of flyash depending upon the temperature at which the coal is burnt and the composition of the coal used in the power station. Flyash has other uses as a mineral filler, general fill and as a “conditioner” for soil.
1683 Mr Forbes makes the following observations about his attempts to secure a supply of flyash from power stations in Queensland.
1684 Mr Forbes says that his first involvement in the flyash industry was during his employment at Sunstate which, as already mentioned, began in 1984. In approximately 1985 or 1986, Sunstate sought to purchase flyash for supply to its customers and for use in the production of blended cement products. Mr Forbes says that in examining the possible sources of supply for that purpose, he did not regard, and has never regarded, Gladstone, Callide or Stanwell Power Stations as possible sources of flyash supply because those stations are not close enough to Brisbane to justify investing in flyash plant “as the transport cost” is too high relative to the “raw material cost”. Mr Forbes says that he has not approached the owners of Gladstone or Stanwell Power Stations for the supply of flyash. The Kogan Creek Power Station is a coal-fired power station but it was not commissioned until late 2007.
1685 In 2004 or 2005, Mr Forbes reached agreement with Wagner, Neilsen, Sunmix and Cordwell to form a joint commercial venture to acquire a “steady supply” of flyash from Queensland power stations for supply in South East Queensland. Under the arrangement, the participants agreed that Mr Forbes would seek to secure flyash supply contracts to meet the needs of those producers which was estimated at that time to be approximately 50,000 tonnes of flyash each year. Mr Forbes made these enquiries during 2004 or 2005 through IQC until IFB was established in November 2005. IFB was formed for the purpose of pursuing possible flyash supply contracts.
Attempts to secure access to flyash from Swanbank
1686 In September 2002, Mr Forbes sought flyash supply from CS Energy.
1687 Mr Forbes was told that flyash would not be able to be supplied from Callide A, Callide B or Swanbank.
1688 On 2 June 2005, Mr Forbes sent a letter to the Chief Executive Officer of CS Energy on behalf of IQC seeking access to a source of flyash on behalf of a group of producers, described as the foundation shareholders, seeking flyash for use in their own production operations, for existing and future ash requirements, and for potential flyash customers. The ash requirements of those producers were then sourced from Pozzolanic and Bayswater Power Station and their usage of ash was said to be constrained due to the “current high market price for flyash”. Consumption was expected to be in excess of 50,000 tonnes each year.
1689 Mr Forbes sought a five year take or pay contract on the footing that the supply price might vary according to the quantity purchased in the range 20,000 tonnes up to 100,000 tonnes and the flyash would need to meet, or be readily processed to meet, the requirements of AS 3582.1 for fine grade flyash.
1690 CS Energy’s CEO, Mr Chatfield, responded on 6 June 2005 by letter advising that “owing to an existing commitment and an arrangement presently being established with another party, insufficient fly ash remains at Swanbank for CS Energy to be able to meet your requirements”. Mr Chatfield said that significant quantities would be available from its power stations at Callide near Biloela and from Kogan Creek Power Station once commissioned in 2007 or 2008.
1691 Mr Forbes considered that Callide, 600 kilometres from Brisbane where the majority of pre-mix concrete and thus flyash is used, was simply too far away in fact, and Kogan Creek was too far away, in planning. Mr Forbes says that the transport costs in taking flyash from Callide to Brisbane would have been approximately $30 to $40 more per tonne than the cost of transporting a tonne of flyash from Tarong, in Mr Forbes’s view.
Attempts to secure access to flyash from Tarong and Tarong North
1692 On 3 June 2005, Mr Forbes sent a letter to Mr Anderson at TEC seeking flyash supply, in the same terms as the letter sent to Mr Chatfield. In October 2005, TEC advised Mr Forbes that IQC would be entitled to participate in existing trials of Tarong North flyash and at about this time IFB was formed.
1693 On 3 November 2005, Mr Tellam wrote to Mr Forbes advising that TEC would be willing to supply 1,200 tonnes of flyash during the trial period which was to end on 20 January 2006. Mr Forbes had sought 12,000 tonnes. Mr Tellam, in the letter, said that 12,000 tonnes seemed too great a volume for the purpose of trials and that supplying 12,000 tonnes could, when aggregated with the amounts sought by others, exceed the volume of flyash available at Tarong North, and TEC did not wish to enter into any tendering or bidding process at that time. On 15 November 2005, Mr Forbes confirmed the proposal to take 1,200 tonnes for testing in the period to 20 January 2006. On 21 November 2005, Mr Tellam sent a letter to Mr Forbes (at IFB) attaching the Conditions of Sale of the flyash for testing (although the Conditions appear not to have been retained by Mr Forbes). The price was $10.00 per tonne. The formal proposal in that letter was accepted that day by letter to TEC.
1694 In November 2005, IFB took a sample of Tarong North flyash for laboratory testing and shortly afterwards some truckloads were taken for field testing totalling 400 tonnes in all during November and December 2005. IFB received the results of the trial on 3 January 2006. On 19 January 2006, IFB sent a letter dated 19 January 2006 to Mr Anderson expressing disappointment about TEC not continuing the Tarong North trials after 20 January 2006. Mr Forbes set out some of the steps the producers had taken to make silos available for Tarong North flyash for testing and noted that the largest IFB participant was waiting upon results of their laboratory tests.
1695 However, Mr Forbes observed that tests undertaken at a nationally accredited testing laboratory had demonstrated that the samples of Tarong North flyash comfortably achieved AS 3582.1 for “medium” flyash with “satisfactory strength” factors. The results, for example, were said to be these. Relative strength at seven days was 97%, and at 28 days, 93%. Relative strength at seven days was 47.6MPa and at 28 days 53.8MPa. As to fineness, 70% and as to LOI, 1.10. Mr Forbes observed that the qualitative assessment by three IFB customers using the ash in field trials was that Tarong North flyash did not differ perceptibly in field performance in concrete mixes when compared to the ash supplied by Cement Australia as fine grade flyash according to AS 3582.1. Having set out these results, Mr Forbes observed:
IFB is certainly interested in discussing the long term contract to purchase TE’s ash. In June last year it was indicated our customers could use a minimum of 50,000 tpa, however the latest from them is that this could be as much as 95,000 tpa. In the situation where cost of flyash into plant is almost halved, IFB and its customers can be expected to act rationally and maximise flyash use to improve profits.
1696 As to the quality of the flyash, Mr Forbes had set out the test data in the letter but also observed that due to the requirement of the Queensland Department of Main Roads for fine grade flyash in “their relatively extensive projects” it would “probably be necessary” to undertake classification of Tarong North ash, or alternatively, the IFB customers would be “forced to purchase ash from Queensland Cement in order to supply [Department of Main Roads] projects”. Mr Forbes observed that most concrete plants utilise one silo for ash which meant that during any Main Roads project, a plant supplying a Department of Main Roads project would be unable to use Tarong North unclassified ash. The point of the letter ultimately was to seek a continuation of the trials beyond 20 January 2006 and to “initiate negotiations regarding a possible long term agreement to maximise disposal of Tarong North flyash”.
1697 On 17 March 2006, Mr Forbes received an email from Mr Millhouse attaching a proposed draft letter from Mr Anderson (dated 24 March 2006 in the draft) with attached Conditions of Sale. Those documents are in precisely the same form as those received by Mr Cooper for Nucon, already discussed. TEC’s proposed interim offer of supply reflected the “current arrangements” with Pozzolanic for Tarong North as earlier described set out in the draft letter and also the cl 4.2 Conditions.
1698 Like the Conditions discussed earlier, the proposed interim supply by TEC under cl 4.1 was subject to each of the Conditions in cl 4.2. The price was $10.00 per tonne with a maximum quantity to be supplied of 30,000 tonnes (Annexure 1). Mr Forbes responded to the proposal on 20 March 2006 and expressed what he described as “three serious issues with the draft” proposal. First, the interim arrangement would run to only 2 March 2007 rather than March 2008 which Mr Forbes thought a more appropriate expiry date. Second, the installation of Pozzolanic’s classifier at Tarong North would mean that run-of-station (ROS) flyash would not be available to others and that ash not taken by Pozzolanic from the classifier would be directed to the flyash silo which meant that coarse reject ash from the classifier could “significantly affect the variability of the particle size distribution of ash available to others”. Thus, in Mr Forbes’s view, the results of trials already conducted under the Trial Agreement, would be irrelevant. The perceived solution was to direct reject ash from the temporary classifier to the ash dam. Third, a maximum quantity of 30,000 tonnes was not “understandable” as IFB customers/participants had indicated a potential consumption of 90,000 tonnes.
1699 In an undated letter (but probably in April), Mr Heffernan pursued with TEC the outcome of TEC’s investigations into the ways in which coarse material rejected from the Cement Australia classifier might not be returned to the Tarong North flyash silo from which third parties would take supply.
1700 On 12 July 2006, Mr Millhouse distributed a letter to participants at an on-site briefing on 15 June 2006 concerning future flyash supply. Many interested parties had made enquiries regarding the existing flyash contract between TEC and Pozzolanic and had sought a copy of the contract be made available and some direction from TEC in relation to the steps interested parties could properly take consistent with the existing Pozzolanic Sale Agreement. Mr Millhouse made it plain that the Pozzolanic contract was a commercial arrangement which would not be disclosed to third parties but that Pozzolanic had consented to the disclosure of summary information about the contract to enable interested parties to respond to the Request for EOIs.
1701 The summary contains responses from TEC concerning 17 questions. One topic concerned the nature of the back-up ash removal system installed by Pozzolanic to support the mechanical ash removal system. Another concerned the Pozzolanic contract and direction from TEC on the steps participants could take consistent with the “existing bulk ash off-take contract with Pozzolanic”. That question produced an approved “Summary of relevant aspects of the existing Fly Ash Agreement for the Tarong and Tarong North Power Stations”. The summary told participants that Pozzolanic’s contract would expire on 1 March 2008; Pozzolanic had the first right to recover up to 100% of the flyash extracted at Tarong and Tarong North; Pozzolanic had the right to recover flyash from the precipitator ash hoppers on Units 1 to 4 at Tarong (and other points approved by TEC including ash off-take infrastructure at Tarong North); TEC enjoyed a right to residual ash in the sense that any flyash not taken by Pozzolanic (called “residual ash”) could be taken by TEC or made available to third parties; and Pozzolanic had a general obligation to facilitate the removal of residual ash by TEC or by any third party nominated by TEC although Pozzolanic’s obligations in this regard were dependent upon the capacity of Pozzolanic’s plant and equipment.
1702 The summary also said that Pozzolanic had advised TEC that there is currently no additional capacity in Pozzolanic’s plant and equipment to assist with the removal of residual ash.
1703 In the summary, TEC said that on the basis of Pozzolanic’s advice, interested parties were advised that an EOI regarding the purchase and removal of residual ash would require the interested party to supply and maintain all necessary plant and equipment to facilitate the extraction, processing and dispatch of residual ash at its cost. Specifically as to Tarong North, TEC’s summary told interested parties that as to site access and the installation of plant, interested parties would deal with Tarong North, and as to arrangements for interconnection with Pozzolanic’s plant and equipment or any likely impact upon Pozzolanic’s plant or equipment or its ability to extract flyash, arrangements would need to be negotiated with Pozzolanic.
1704 In mid-2006, Mr Forbes spoke to Mr White of Cement Australia and expressed frustration about the short periods over which IFB had enjoyed access to Tarong North flyash, and the transfer of reject ash from Pozzolanic’s classifier to the Tarong North silo. Mr Forbes explained to Mr White that MPP was not offering flyash to anyone other than Pozzolanic and that CS Energy would not supply flyash other than from the Callide C Power Station. Mr Forbes told Mr White that IFB members wanted to source their own flyash needs and were not so concerned about procuring classified ash. Mr Forbes says that he was told by Mr White that Pozzolanic would probably not be going ahead at Millmerran and would probably rely upon supplies of flyash from Tarong and Tarong North. Mr White suggested that Mr Forbes ought to consider approaching Pozzolanic for a supply of Swanbank ROS ash.
1705 On 18 July 2006 Mr Forbes received an email from Mr Millhouse dated 18 July 2006 attaching a letter from Mr Anderson dated 18 July 2006 seeking expressions of interest for March 2007 to March 2008; March 2008 to 2010; and the period after 2010, subject to the attached Conditions of Sale, and the interim offer, set out in the letter. On 21 July 2006, Mr Forbes accepted the interim offer and asserted that IFB would take full advantage of the 30,000 tonnes available up to 1 March 2007 provided IFB could secure access to ash “similar to that which we have trialled”. As to that matter, Mr Forbes said that he understood Pozzolanic to be nearing completion of the installation of its classifier at Tarong North and that when it began operating, reject ash from it would flow to the Tarong North ROS silo rendering the quality of the ash available to IFB from the silo “uncertain and/or unsuitable for our purposes for a period (which will be difficult to define)”. Mr Forbes assumed that having regard to the quantities of flyash available from Tarong Power Station, the classifier at Tarong North would be operated and used only as an “emergency backup when there are infrequent problems at that plant”.
1706 On 3 August 2006, Mr Forbes received a letter from TEC in the same form as the letter discussed earlier in these reasons, notifying IFB that TEC was unable to offer flyash under the interim offer until 22 September 2006 having regard to Pozzolanic’s advice concerning the outage at Unit 3 of the Tarong Power Station. The letter set out the protocols for possible availability of ash. On 3 August 2006, Mr Forbes sent a fax to Mr Millhouse attaching a signed copy of the 3 August 2006 letter endorsed with the observation that “we are interested in purchasing flyash under the Interim Offer on the conditions outlined above (being the protocol restrictions)”.
1707 On 11 August 2006, TEC’s Supply Manager, Mr Aisthorpe, wrote to Mr Forbes arising out of a telephone discussion between Mr Forbes and Mr Millhouse in which Mr Forbes complained about the difficulty IFB was experiencing in purchasing flyash from Cement Australia and Cement Australia’s contention that supply to IFB was constrained as a result of insufficient supply of flyash from Tarong and Tarong North Power Stations. Mr Aisthorpe made three points in the letter. First, Pozzolanic enjoyed first right to purchase flyash from Tarong and Tarong North under the Pozzolanic Sale Agreement. Second, the agreement commenced on 1 March 2003 as a result of a tender process and third, TEC’s letter of 3 August 2006 set out the consequences of the current outage at Unit 3 at Tarong; the impact upon Pozzolanic’s ability to source flyash from Tarong; and the consequential impact upon the availability of flyash from Tarong North to parties other than Pozzolanic.
1708 On 4 October 2006, Mr Forbes was told that there would be no flyash available from either Tarong or Tarong North on the weekend of 7 and 8 October 2006 and that Tarong North had experienced an unscheduled outage effective 27 September 2006, and it was not clear when the unit would return to service. On 26 October 2006, Mr Forbes received the email from Mr Millhouse attaching the letter from Mr Anderson signed by Mr Tellam. That letter identified the particular events which were expected to have an impact on the availability of flyash under the interim offer of 18 July 2006, in the period up to 1 March 2007. In the result, TEC told IFB that subject to availability, TEC would be able to offer flyash from the Tarong North silo for purchase under the interim offer seven days a week 24 hours a day, until 1 March 2007 at the revised purchase price of $5.00 per tonne.
1709 On 31 October 2006, Mr Forbes responded to Mr Anderson and observed that his belief was that effective future access to Tarong North flyash would be “severely limited” due to the trial burns planned for October to late December; a planned outage in November of Unit 1 at Tarong with a consequential demand by Pozzolanic for any ash available at Tarong North; the contamination of the Tarong North silo by reject ash from Pozzolanic’s classifier from late November; and “operational issues” in relation to the operation, maintenance and utilisation of truck-loading equipment at the Tarong North flyash silo now owned by Pozzolanic. Mr Forbes observed that having regard to these factors, it was hard to foresee “… any opportunity for our group (or any others for that matter) to take commercial advantage of your interim offer, even at the reduced price of $5.00 per tonne. Our requirements just like realistic ash availability, if any, will therefore be minimal, and will only be on an ad hoc basis”.
1710 In November 2006 (although the letter is mistakenly dated 15 October 2006), Mr Forbes received a response from Mr Anderson to his letter of 31 October 2006.
1711 As to the availability of Tarong North flyash, Mr Anderson said this:
As you are aware:
• Tarong Energy’s primary focus is the generation of electricity from Tarong Power Station (TPS) and TNPS. Fly ash is merely a by-product of Tarong Energy’s operations. Whilst management of the fly ash resource is an important part of these operations, it is not Tarong Energy’s primary operational or commercial imperative; and
• Pozzolanic Enterprises Pty Ltd (Pozzolanic, a subsidiary of Cement Australia Pty Ltd) has the first right to purchase fly ash from TNPS and TPS under a contractual arrangement (the Pozzolanic Agreement) entered into in early 2003 following a competitive public tender process. IFAB did not participate in that public tender process.
Tarong Energy is entitled to manage it fly ash resources as it sees fit. Given that TPS and TNPS provide approximately 25% of Queensland’s electricity, Tarong Energy properly gives priority to the operational and commercial requirements of the Power Stations, over and above any access to or continuity of supply of fly ash.
1712 Mr Anderson then sets out extensively the background and context of the interim offer proposals, the steps taken by TEC to address the purchase and removal of flyash from Tarong and Tarong North in the period March 2007 to March 2008 (in respect of remaining flyash after Pozzolanic’s exercise of its rights under the Agreement), the period following the expiration of the Agreement and the period after 2010 from the commencement of the new coal supply source.
1713 As to the operational issues set out in Mr Forbes’s letter of 31 October 2006, Mr Anderson made these observations.
1714 First, the trial coal burns are a necessary part of TEC’s fuel procurement program for the supply of coal for 25 to 30 years beyond 2010.
1715 Second, planned outages of units at Tarong and Tarong North are necessary to ensure efficient and safe operation of the power stations and TEC’s focus in planning for outages is upon the operation of the power stations, not on the collateral impact outages might have upon the supply of by-products such as flyash. As to whether Pozzolanic might require all of the available flyash from Tarong North during a planned outage of a unit at Tarong, that was a matter for Pozzolanic and in determining its course, Pozzolanic was exercising a contractual right awarded to it.
1716 Third, although following its commissioning, flyash not taken from Pozzolanic’s classifier at Tarong North would be directed to the existing Tarong North flyash silo and from there made available under the interim offer to other parties, TEC and Tarong North Pty Ltd (the Manager of Tarong North) had identified and investigated several alternative options to deal with reject ash from the classifier, and a technical review of the options “failed to identify a viable alternative that was economically or operationally feasible”. Mr Anderson observed that other parties intending to take flyash under the interim offer “have no issue with these arrangements”.
1717 Fourth, as a result of operational issues with the original truck-loading system at Tarong North, Pozzolanic (at its cost) had replaced this system to ensure that sufficient ash was available from Tarong North during the Unit 3 outage at Tarong. Mr Anderson said that Pozzolanic would not require this infrastructure after the commissioning of the Tarong North classifier and that the proposed tender process, which was designed to include the purchase and removal of flyash remaining after the exercise by Pozzolanic of its rights under the Pozzolanic Agreement, would provide IFB with an appropriate forum to put proposals to TEC regarding alternative loading infrastructure for Tarong North.
1718 Again, Mr Anderson chose to “reiterate” that the “operational imperatives associated with the effective and efficient operation of TPS and TNPS are [TEC’s] paramount concern as these power stations provide approximately 25% of Queensland’s electricity”. Mr Anderson emphasised the amended offer of 25 October 2006 and rejected the notion that the operational issues discussed by Mr Anderson had meant that IFB had been denied access to the supply of flyash or otherwise denied an opportunity to take commercial advantage of the interim offer.
1719 Mr Forbes says that in November 2006, IFB was successful in its tender for Millmerran flyash and from that moment in time abandoned any further attempt to access Tarong North flyash in view of the “reject flyash issue”.
Attempts to secure access to flyash from Millmerran
1720 On 9 June 2005, Mr Forbes sent a letter to Mr Mal Gamble seeking access to Millmerran flyash.
1721 The letter is in the same terms as the initial letters written to Mr Chatfield at CS Energy and Mr Anderson at TEC in June 2005.
1722 On 9 June 2005, Mr Forbes travelled to Millmerran Power Station and met with the General Manager, Mr Gamble, and the Fuel and Ash Manager, Mr David Hunt for two and a half hours. Mr Forbes made an extensive note of the meeting. As to background matters, Mr Forbes notes (among other things) that Millmerran burns 10,000 tonnes per day of high-ash coal which is mined on part of MPP’s 9,000 hectare site. This produces approximately 3,500 tonnes per day of ash which is collected in bag house filters. The LOI average of the ash is 0.5% and ranges from 0.2% to 0.9% which Mr Forbes describes as “excellent”.
1723 Mr Forbes notes that Mr Gamble and Mr Hunt were insistent that any contract that might be struck would be non-exclusive due to “possible issues with ACCC” if they did otherwise. Mr Forbes says that Mr Gamble and Mr Hunt advised that Pozzolanic and MPP had entered into a take or pay contract in late 2002 under which Pozzolanic would “take ‘significant’ quantities of ash”. Mr Gamble and Mr Hunt would not disclose the details of the contract but said that Pozzolanic had been “doing testing”, but had not yet installed any plant on-site although their intention was to divert some ash stream from the collection manifolds to their own silo and classifier just outside the fence around the plant. Mr Gamble and Mr Hunt said that they held an expectation that some plant would be installed by Christmas of 2005.
1724 Mr Forbes records that he was shown particle size tests which suggested that the percentage passing a 45 micron sieve varied between 50% to 70% which suggested to Mr Forbes that classification would be necessary “but this is to be expected when ash is collected by bag house filters”. Mr Forbes also notes that coarser ash can be expected to be not as “reactive” as finer ash and kilogram for kilogram replacement of cement may not be achieved but nevertheless if the price of the ash is “right” this consideration needs to be weighed against the cost of classifying ash to remove some coarse particles. The note records the chemical analysis of the ash is similar to Tarong ash.
1725 The note records that Mr Gamble and Mr Hunt (for MOC), observed that Pozzolanic had expressed concern at colour variation in the ash and MOC was attempting to reduce this colour variation by selective mining. Mr Forbes observes that Mr Gamble and Mr Hunt seemed concerned that Pozzolanic would find some reason not to proceed with their contract with MPP and that if MOC worked with IFB, it might precipitate a problem with Pozzolanic.
1726 In mid-2005, Mr Gamble told Mr Forbes that Pozzolanic would be undertaking trials of Millmerran flyash over a period of one year.
1727 On 16 June 2005, Mr Gamble wrote to Mr Forbes responding to the letter of 9 June 2005 and the discussion on-site on that date, observing that MOC had undertaken a tender process in 2001 for the purchase and removal of flyash and the successful tenderer was in the process of building ash handling facilities on-site. Mr Gamble observed that the current ash purchase arrangements did not prevent MOC considering the supply of flyash to other parties. However, MOC had not yet made a decision whether to pursue transactional sales to other purchasers or whether it would engage in an open tender process or a targeted invitation.
1728 Mr Forbes says that as a result of the contract with Pozzolanic, IFB elected to continue pursuing other options for the supply of flyash including continuing its efforts to secure Tarong North flyash.
1729 In early March 2006, Mr Hunt asked Mr Forbes whether IFB was interested in purchasing Millmerran’s flyash. Mr Forbes says that Mr Hunt expressed concern that Pozzolanic might terminate its contract “because of the colour of the ash” and Pozzolanic had not started constructing plant on-site notwithstanding that the plant was to be completed by the end of 2005. Mr Forbes says that shortly after that conversation he arranged for a sample of Millmerran flyash to be taken for testing to Sydney, and to the United States, to assess the quality of the flyash and obtain advice about the best equipment needed to process the ash.
1730 On 20 July 2006, IFB, by Mr Heffernan, submitted a tender to MOC by letter attaching a tender proposal bearing that date for the purchase of flyash. The proposal provides that the four current members of IFB were Wagner, Neilsen’s Concrete Pty Ltd, Cordwell’s Concrete and Sunmix Concrete Pty Ltd; the expected annual off-take was said to be 100,000 tonnes per annum with a further potential for 50,000 tonnes; and IFB offered a price of $5.00 per tonne with annual escalation. The proposal identifies the expected facilities to be established by IFB including a Sturtevant classifier, ash pumps, underground pipelines, a 600 tonne fine ash storage silo and weighbridge and associated infrastructure. The proposal notes that arrangements were being made to air freight a 400kg sample of Millmerran ash to Sturtevant in the United States for processing in a model of the proposed classifier and Sturtevant would then air freight the sample of classified ash back to IFB for final testing. The proposed term was five years with an option for three and five year extensions to be agreed by both parties three months prior to the expiry of the agreement.
1731 As to the relationship between pricing strategies and anticipated market developments, Mr Forbes made this observation on behalf of those for whom he was acting:
The price structure put forward in this proposal has been determined based on careful analysis of two significant expected developments in the South East Queensland fly ash market, that is, the adding to the market of processed flyash from both Millmerran and Tarong North power stations.
By way of background:
(a) At present the market in South East Queensland is adequately supplied by Pozzolanic with classified ash drawn from Tarong Power Station (South) and some from Swanbank. This market has been in the order of 300,000 to 400,000tpa in recent years.
(b) As you will no doubt be aware, the Pozzolanic contract at Tarong expires in March 2008, and Tarong Energy has initiated an Expression of Interest process leading to Tenders for the purchase of all ash products from both, Tarong Power Station (South) and Tarong North commencing when the Pozzolanic contract expires. The flyash from these power stations is of high quality.
(c) Considerable interest has been shown by the wider market which until now has been unable [to] access this flyash on a secure long term basis due to the exclusive arrangements enjoyed by Pozzolanic. The outcome of this tender process will be that Tarong North flyash (expected to be up to 200,000tpa of fine ash) will become available to the market for the first time in 2008.
It follows from this that combined, Tarong North and Millmerran processed ash will add in the order of 350,000tpa of capacity to the market, i.e., a doubling of existing supply.
Furthermore, in September 2007 (latest advised date) Kogan Creek will commence operations providing a potential further supply (quantities and quality unknown at this point) of flyash to the South East Queensland market.
All of these developments will dramatically open up the flyash market in S E Queensland removing the previous monopoly and placing significant downward pressure on pricing.
1732 Attached to the proposal is a report by Mr Ihor Hinczak of Cementech Pty Limited of Port Kembla in Australia dated June 2006. The report is concerned with two samples of flyash and one sample of General Portland cement received for testing from Mr Forbes and the samples were identified as “Classified Fly Ash ex-Wagner”; “Millmerran Fly Ash”; and “Type GP Cement”. A sub-sample of the Millmerran flyash was processed to produce a product that passed a 45 micron sieve. The three flyash samples (including the sub-sample) were tested in accordance with the procedures and methods prescribed in AS 3583. The results show that the unclassified Millmerran flyash is “relatively coarse” compared to the classified sample from Wagner. The processed sample (being the sub-sample) shows virtually no residue on the 45 micron sieve and would be fine grade processed flyash. The specific results were Wagner classified flyash 10.9% residue (remaining on a 45 micron sieve); Millmerran unclassified 53.7% residue; and, Millmerran processed (sub-sample) 0.01% residue.
1733 Those results mean that as to the Wagner classified sample, 89.1% passed a 45 micron sieve; as to the Millmerran unclassified sample 46.3% passed; and, as to the Millmerran processed sample 99.99% passed.
1734 I accept the evidence of Mr Forbes.
PART 26
The Neilsen Group of Companies and the evidence of Mr Guiseppe Panuccio
1735 Mr Panuccio is the Chief Executive Officer of the Neilsen Group of Companies comprised of several companies owned by the Neilsen family.
1736 Mr Panuccio has over 30 years experience in the pre-mixed concrete industry in New South Wales, Queensland and also Hong Kong. In the period November 2004 to April 2008, Mr Panuccio was the South East Queensland General Manager for the Wagner Group of Companies. Mr Panuccio is familiar with all aspects of concrete production including the design, construction and operation of concrete batching plants. Between 1991 and 1997, Mr Panuccio was the Chairman of the New South Wales Technical Committee of an industry body now called Cement Concrete & Aggregates Australia (the “CCAA”), formerly known as the Cement and Concrete Association of Australia. Mr Panuccio was Chairman of the National Technical Committee of the CCAA. Mr Panuccio says that by force of this experience, he has expertise in the design and performance of concrete and its ingredients including the performance functions of concrete comprising flyash.
1737 During Mr Panuccio’s period employed by Wagner, Mr Panuccio represented Wagner in the IFB consortium.
1738 In 2006 and 2007, Mr Panuccio accompanied Mr Forbes in a number of meetings with representatives of Millmerran Power Station to conduct discussions about the acquisition of flyash from that power station. An agreement was ultimately reached in February 2007. Mr Panuccio says that he, on behalf of Wagner, was interested in obtaining a supply of flyash from Millmerran in order to secure a local supply of flyash other than from Cement Australia. Mr Panuccio’s view, at the time, was that from the perspective of a concrete producer, securing a source of flyash from a local power station provided an opportunity to acquire flyash at a lower cost than Cement Australia’s supply terms, and secure what Mr Panuccio calls “a line of supply of the input”. Additionally, securing a local supply of flyash from a power station provided the IFB consortium with an opportunity to supply flyash to other concrete manufacturers in South East Queensland and seek to make a margin on those sales. Mr Panuccio says that his perception of the matter at the time was that Cement Australia, as the only “local supplier” of flyash was deriving a significant margin in supplying flyash in South East Queensland, which informed Mr Panuccio’s view that it would be profitable for IFB to supply other concrete manufacturers in South East Queensland with flyash. Mr Panuccio says that this view of the matter as to Cement Australia’s margin inherent in its delivered pricing of flyash arose out of investigations Mr Panuccio had conducted into the profitability of IFB obtaining flyash from Millmerran as a source, the likely cost of the raw product, the likely quality and properties of the raw product, the cost of classification of raw flyash and the cost of transportation. This investigation led Mr Panuccio to believe, rightly or wrongly, that there was a large gap between the production costs of flyash capable of being used in concrete production and the price IFB members were paying for flyash to Cement Australia. The content of the investigative analysis is not put in evidence.
1739 Mr Panuccio says that one factor of importance to IFB members in the negotiations with Millmerran was the need to secure a consistent supply, week to week, of flyash for members and, in Mr Panuccio’s view, access to the entire stream of flyash for IFB was critical in order to minimise the risk of variability in flyash supply. Mr Panuccio held the view, at the time, that two off-takers of flyash at Millmerran would not be realistic and that it was not practicable for a second off-taker to operate at the site (and invest capital in a classifier). This was especially so as the power station was not providing any guarantee of supply of any particular volume and thus IFB would need to deal with and manage the increased risk of variability of supply if it found itself in the position of a second off-taker with no right of first access to the flyash stream.
1740 Ultimately, IFB installed a classifier at Millmerran in 2008.
1741 Mr Panuccio regarded this as a necessary step for the IFB members for three principal reasons. First, the Queensland Department of Transport and Main Roads (“Main Roads”) required the use of fine grade flyash meeting the requirements of AS 3582.1 in concrete. Secondly, other project operators adopted the Main Roads specification for their projects. Mr Panuccio says that in his experience about 10% of concrete produced in South East Queensland was required to meet project specifications prescribed by Main Roads. Thirdly, since many concrete manufacturers had a single storage silo at their batching plants, it was simpler or more efficient, for those operators to fill their silos with flyash that could be used for both projects required to meet Main Roads specifications and also non-Main Roads specified projects.
1742 As to Millmerran flyash, Mr Panuccio says that Millmerran ROS flyash had different performance characteristics from fine grade flyash due to the larger particle sizes in the ash. It therefore offered a lower level of strength in concrete which meant that the rate at which it replaces cement in concrete is lower than the replacement rate for fine grade flyash. However, prior to the completion of the Millmerran classifier in late 2008, some of the Wagner batching plants used Millmerran ROS flyash in concrete production.
1743 In 2007, Mr Panuccio approached Main Roads to seek approval to use Millmerran ROS flyash in Main Roads projects. At that time, Wagner was “running short of flyash” for Main Roads projects (meeting the fine grade requirement) and sought interim approval to supply Millmerran ROS flyash until IFB installed a classifier at Millmerran. IFB provided data to Main Roads in relation to the performance characteristics of Millmerran ROS flyash in concrete. Wagner and also Neilsen technical staff were primarily responsible for testing Millmerran flyash together with an external consultant, Mr Hinzack. Mr Panuccio reviewed the test results and a selection of them is annexed to his affidavit sworn 25 June 2010. Mr Panuccio formed the view, based on the test results he examined, that “as a rule of thumb all other things being equal” concrete produced using Millmerran ROS flyash achieved compressive strengths approximately 8% less than the compressive strength of concrete produced using fine grade Tarong flyash available from Cement Australia at the time. The graphs in the test results exhibited to Mr Panuccio’s affidavit support that proposition.
1744 In early 2008, Main Roads approved the use of Millmerran ROS flyash in concrete for its projects until a classifier was installed at Millmerran. Millmerran ROS flyash was then used in concrete production for Main Roads by IFB members. Mr Panuccio says that no IFB member raised with him any technical question or issue concerning the performance of concrete made using Millmerran ROS flyash. Wagner purchased Millmerran ROS flyash in the period of the interim approval ex-works in the price range $20.00 - $30.00 per tonne, after taking into account rebates paid to IFB members. As to the rebate arrangement, IFB supplied flyash to its members at an ex-works price including a margin on the cost of production. Any profit made by IFB was repaid to members as a rebate based upon each member’s flyash usage with the result that IFB members effectively purchased flyash at IFB’s “cost price”.
1745 Mr Panuccio says that concrete can be produced using flyash with a coarser grade than fine grade flyash. Concrete so produced gains strength more slowly than concrete made using fine grade flyash. Mr Panuccio says that pre-cast concrete is also made using fine grade flyash.
1746 In Mr Panuccio’s role as CEO of the Neilsen Group, he oversees the use of Millmerran flyash in pre-mix concrete applications. He also continues to have a role in decision-making for the IFB consortium. Mr Panuccio says the classified Millmerran flyash produced by IFB and used by Neilsen is a very high quality product. Mr Panuccio says he is aware, based on his experience, that Cement Australia flyash is produced to a standard of about 90% fineness minimum. While at Wagner, Mr Panuccio recommended to IFB members that flyash produced by the classifier at Millmerran be produced to a standard of 90% fineness minimum so as to be better able to compete with Cement Australia’s established product at 90% fineness. The production of Millmerran flyash to a 90% fineness was thought by Mr Panuccio to provide a benefit to IFB members in their own use of flyash in concrete production as a higher proportion of cement could be replaced using flyash of this fineness without compromising the strength of the concrete. There is, however, an additional cost because less classified flyash is produced by selecting a higher level of fineness; higher running costs are incurred; and, greater maintenance costs are incurred from wear and tear on the classifier.
1747 The IFB consortium supplies classified flyash from Millmerran Power Station to third parties including Sunstate.
1748 I accept the evidence of Mr Panuccio.
PART 27
The Queensland Department of Transport and Main Roads Projects and the evidence of Mr Alexander Vanderstaay
1749 Mr Vanderstaay has been employed by Main Roads as Director - Concrete Technology since 2007. He was employed in the role of Manager of the Concrete Technology Branch of Main Roads from 2005. He has held a number of other technical positions and roles within Main Roads over a lengthy period. Mr Vanderstaay is responsible for approving any non-compliance with technical specifications adopted by Main Roads. As to concrete, it is required to have different characteristics depending upon the use to which it is put. Main Roads is currently responsible for over 2,900 bridges, 300 miscellaneous structures and 4,000 culverts, the majority of which are concrete, as well as many “lane” kilometres of roads in Queensland which incorporate concrete sections. Main Roads publishes a number of standards including Main Roads Technical Standard MRTS70 Concrete (“MRTS70”) which sets out technical standards for the strength, durability and properties of concrete supplied to its projects. MRTS70 includes requirements as to the minimum quality standards for cement, flyash and slag used in concrete supplied to Main Roads; minimum cementitious materials content for concrete supplied to Main Roads; and requirements as to concrete performance and testing.
1750 These Standards are prescribed as it is extremely expensive for Main Roads to undertake remedial works on structures that fail to reach the requirements for their specified design life.
1751 The prices at which concrete is supplied to Main Roads projects are set by competition amongst concrete producers and whilst it is important for concrete to be supplied at a competitive price, MRTS70 is directed to performance standards and technical questions. Mr Vanderstaay is familiar with the elements of AS 3582.1 and the features of fine, medium, coarse and special grades of flyash for the purposes of that Standard. MRTS70 requires concrete producers to produce concrete using flyash representing, as a minimum, 20% by mass of the cementitious content of the concrete mix, subject to a qualification not presently relevant.
1752 Because concrete batching is an inexact process, MRTS70 recommends a minimum blend of 25% flyash so that Main Roads can be confident that any concrete batch supplied will have at least 20% flyash in the mix. In metropolitan plants, the target content is 22% to 23% (due to more precision in production) so as to ensure a minimum 20% flyash content. Some producers may add more than 25% flyash and, so long as the quantity of cement used per cubic metre is not reduced, the use of additional flyash is of no concern to Mr Vanderstaay. To Mr Vanderstaay’s knowledge, Main Roads is the only Australian road authority which requires the use of flyash in all structural concrete. Main Roads requires the use of flyash to improve durability, ameliorate the effects of alkali reactive aggregates and reduce the risk of thermal cracking, as flyash causes concrete to gain strength more slowly with less heat being produced during setting than concrete produced with cement alone.
1753 MRTS70 requires the flyash used in concrete to be fine grade flyash. Main Roads concrete standards have required the use of fine grade flyash since the 1990s with the exception of a period from 26 January 2008 to 1 September 2008 when Main Roads approved the use of Millmerran ROS flyash in concrete supplied to it. In addition, in the period of the water restrictions in Queensland in mid-2007, Cement Australia told Main Roads that there was a likelihood of shortages of flyash.
1754 Mr Vanderstaay was unwilling to approve the use of concrete produced without flyash due to the lower durability of concrete so produced. Mr Vanderstaay examined testing data shown to him by Mr Humpola of Wagner concerning Millmerran ROS flyash which identified the chemical composition, particle size and distribution of Millmerran ROS flyash. Mr Vanderstaay concluded, based on his review of the data, that, chemically, Millmerran ROS flyash was suitable for use in concrete. The data provided by Mr Humpola demonstrated that Millmerran ROS flyash did not have a sufficiently high proportion of fine particles to be characterised as fine grade flyash under AS 3582.1. The flyash was a medium or coarse grade product. Mr Vanderstaay says that because the flyash was either medium or coarse grade, it would be “necessary to add a greater volume of unclassified Millmerran flyash to achieve an equivalent volume of fine particles compared to using fine grade flyash”.
1755 On 26 January 2008, Mr Vanderstaay approved the use of Millmerran ROS flyash in concrete supplied to Main Roads. Mr Vanderstaay says that he was satisfied there was a “sound technical basis” for approving the use of this flyash, as an interim measure, for these reasons. First, the required durability of the concrete could be obtained from either fine grade flyash or unprocessed Millmerran flyash. However, Mr Vanderstaay says that because coarse and medium grade flyash has a lower proportion of fine particles than fine grade flyash, it is necessary to add more flyash when coarse or medium grade flyash is used, to achieve an equivalent outcome to the use of fine grade flyash.
1756 Second, in the case of Millmerran ROS flyash Mr Vanderstaay required the cementitious content to be a minimum of 25% flyash which would have required producers to target a flyash blend of greater than 25% so as to ensure, due to production inexactness, a minimum cementitious flyash content of 25%. Mr Vanderstaay increased the minimum flyash requirement to 25% so as to be confident that the concrete so produced would meet the durability standard required by Main Roads. Mr Vanderstaay says that he considered that “an equivalent outcome [durability] could be achieved by the use of 25% unprocessed flyash as was achieved by the use of 20% processed [fine grade] flyash”.
1757 Third, there was no material risk to Main Roads of concrete failing due to the use of unclassified Millmerran flyash. Mr Vanderstaay says that while coarse or medium grade flyash contributes less strength than an equivalent volume of fine grade flyash, this issue of less strength was of no concern to him as, in his experience, the lower strength contribution of coarse or medium grade flyash can easily be accommodated by adjusting concrete mix designs and whilst it is necessary to design concrete mixes so as to take into account the quality of the flyash used in the mix, most concrete producers are readily able to achieve the strength requirements prescribed by Main Roads.
1758 Mr Vanderstaay says that if he had considered that the use of unclassified flyash from Millmerran in Main Roads projects would have reduced the durability of the concrete used in those projects or increased the risk of concrete failure, Mr Vanderstaay would not have approved its use. Mr Vanderstaay says that he is not aware of any concrete failures or other problems in projects using Millmerran ROS flyash attributable to the use of that flyash in place of fine grade flyash and Mr Vanderstaay says that he would expect to have been informed of the matter had any issue arisen.
1759 Mr Vanderstaay gave his approval for the use of Millmerran ROS flyash on an interim basis in circumstances where a classifier was to be installed at Millmerran and, following the installation, fine grade flyash would then be used in Main Roads projects. During the period of approved use of Millmerran ROS flyash, Mr Vanderstaay says he was satisfied that the intent of MRTS70 was met by use of unclassified ash in an increased amount in each concrete batch, as earlier described, notwithstanding that the terms of the specification referred only to the use of fine grade flyash. It was Mr Vanderstaay’s preference that specification compliant fine grade flyash be used, where possible.
1760 On 4 September 2008, Mr Vanderstaay granted a further approval for the use of Millmerran ROS flyash until 28 February 2009, pending installation of the classifier at Millmerran. Following the installation of the classifier, classified Millmerran flyash was approved for use in Main Roads projects and it continues to be approved for use in Main Roads projects. Main Roads does not require concrete to achieve a specified colour, and the colour of classified Millmerran flyash was not a factor Mr Vanderstaay took into account in determining whether to approve Millmerran flyash for use in Main Roads projects.
1761 I accept the evidence of Mr Vanderstaay.
PART 28
Market definition
1762 The organising principles governing market definition are set out in Part 16.
1763 The Commission has called expert evidence on the question of market definition from a consulting economist, Mr Gregory John Houston. Mr Houston is a Director and Head of Australian Operations of the United States-based firm of Consultant Economists, NERA Economic Consulting. The respondents have called expert evidence from Professor George Alan Hay. Professor Hay is the Edward Cornell Professor of Law and Professor of Economics at Cornell University, New York. The Commission relies upon a series of affidavits sworn by Mr Houston attaching reports responding to particular questions (Exs-31, 32 and 34), which identify the assumptions. Some of the reports are responsive to propositions advanced by Professor Hay. Similarly, the respondents rely upon affidavits sworn by Professor Hay exhibiting reports (Exs-81(1), 81(2)). The assumptions relied upon by Professor Hay are identified. Professor Hay also responds to propositions advanced by Mr Houston. I have considered all of the reports in considerable detail and the extensive assumptions upon which the reports of each expert are based.
1764 Apart from those reports, the experts have filed a joint report. As to market definition, Mr Houston and Professor Hay said this in the joint report (Ex-33):
Market Definition
There is no disagreement between Hay and Houston on the general principles to be applied in defining relevant markets for the purposes of analysing the economic questions in these proceedings.
Houston adopts the framework of a hypothetical monopolist or SSNIP test (Houston report, par. 70) and concludes that the two relevant markets are as defined in the ACCC’s Statement of Claim, i.e.:
the upstream market for the acquisition of unprocessed flyash throughout SEQ (“the upstream market”) (Houston report, par. 93); and
the downstream market for the supply of concrete grade flyash throughout SEQ (“the downstream market”) (Houston report, par. 130).
Hay was not asked to give an opinion on market definition and has, in effect, assumed that Houston’s definition is correct for the purposes of the analysis of market power, taking advantage of market power and substantial lessening of competition.
1765 For the purposes of giving expert evidence, Professor Hay has assumed, but does not necessarily accept, the definition of the relevant markets adopted by Mr Houston. The respondents have not put on opinion evidence from Professor Hay to contradict the opinion as to the definition of markets formulated by Mr Houston and asserted by the Commission. It nevertheless remains necessary for the Commission to prove the subsistence of the markets it asserts which means proving the foundation facts upon which the conclusions as to market definition rest. Apart from the observations about market power, taking advantage of market power and substantial lessening of competition, all of which will be mentioned later in these reasons, one aspect of the formulation of the various reports arising out of the joint report should be noted now. As to the relationship among the various corporate respondents, the experts said this:
Houston and Hay agree that, for the purposes of their economic analysis, there is no reason to distinguish among the various corporate entities that have been or are affiliated with Pozzolanic and each expert addresses whether “Pozzolanic”, which is understood by Hay and Houston to include Pozzolanic’s affiliated corporate entities, has substantial market power, whether Pozzolanic has taken advantage of substantial market power, and whether certain conduct by Pozzolanic had the effect, or likely effect, of substantially lessening competition.
1766 As already mentioned, at the centre of the analysis of defining the boundaries of a market is the notion of substitutability. As Professor Maureen Brunt observes, as a practical methodology, one should start with the product of the relevant respondent firm in a particular case “and seek to identify close economic substitutes for all relevant levels of production and distribution, whether in buying or selling”. Those substitution possibilities might be sought for a range of alternative prices of the defendant “but crucially in relation to a competitive price” [original emphasis]. The aim of the exercise is to identify the constraints upon the price and production policies of the relevant activity of the firm in question (“Market Definition” Issues in Australian and New Zealand Trade Practices Litigation (1990) 18 ABLR 86 at 104-105).
1767 Mr Houston observes that this enquiry is aided by the SSNIP test usually at a margin of between 5% and 10% above the price level that would apply under conditions of effective competition assuming that the prices of all other products remain constant. Mr Houston says that a SSNIP is only feasible when all current and potential sources of close substitutes for the firm’s products have been included in the defined market to which the SSNIP is applied. If, following a SSNIP, consumers would switch their demand to other products, and/or alternative suppliers would enter the market (potentially from other geographic locations) and begin supplying the sales of the hypothetical monopolist firm, the imposition of a SSNIP would then not be profitable and thus the relevant market would need to be expanded to include those alternative products and additional geographic locations which bring about important competitive constraints.
1768 Mr Houston observes that market definition can be approached systematically by starting with the narrowest possible set for each of the product and geographic market dimensions and then progressively widening those dimensions to incorporate additional products and geographic areas, until the boundaries of the market ultimately are established. The relevant market will be the narrowest set of products and geographic areas that enables a hypothetical monopolist controlling that group of products and geographic area to sustain (non-transitory), profitably, a small but yet significant price increase. The inquiry, however, involves testing whether a SSNIP can be imposed “so as to increase prices by a small amount above the competitive level” [original emphasis] (Ex-31, para 73). Also, the reliable application of the SSNIP test requires sufficient quantitative data to permit the calculation or assessment of the competitive price for the product in question generally by reference to a cost and profitability analysis, benchmark prices or any analysis of the firm in question that reflects its own assessment of what would constitute a competitive price (para 76). At para 78, Mr Houston observes that price and quantity data is not sufficiently available to undertake “a formal, comprehensive SSNIP test so as to explore quantitatively the role of all potential substitutes for flyash”. Mr Houston observes at para 78 that his analysis is “largely qualitative, and necessarily involves the exercise of judgment on the potential degree of demand and supply-side substitution”.
1769 At para 79, Mr Houston observes that Pozzolanic’s activities, put simply, comprise the purchase of one product and the sale of another, involving the acquisition of unprocessed flyash from power stations and then the supply of concrete grade flyash to concrete manufacturers, after particular processes are deployed by Pozzolanic, although this simplistic description understates the nature of the activities undertaken by Pozzolanic at the power stations.
The upstream market
1770 As to the product and functional dimension concerning unprocessed flyash, Mr Houston says this at paras 83 and 84:
[Product dimension]
83 The upstream market involves the procurement of an essential input. Before a business can sell concrete grade flyash to concrete manufacturers it must first acquire unprocessed flyash. Because there are no alternative products that are plausible substitutes for unprocessed flyash, the appropriate product market definition is straightforward. Specifically, I conclude that the relevant product market is the acquisition of unprocessed flyash.
[original emphasis]
[Functional dimension]
84 … Although its [unprocessed flyash] “production” is not the result of decisions independent of that to generate power, power stations do make distinct decisions as to how best to dispose of their unprocessed flyash, which involve choices between its supply for use in downstream markets or its disposal as waste. The nature of these decisions implies that the supply (and acquisition) of unprocessed flyash is a distinct economic function of power stations.
[emphasis added]
1771 The conclusion reached by Mr Houston at para 84 is supported in the evidence of the power stations described in earlier Parts of these reasons. Moreover, the evidence of Mr Blackburn and also Mr Druitt makes plain that a collection of daily processes were applied by Pozzolanic to the treatment and handling of unprocessed flyash (such as daily testing of flyash in the manner set out in the quality manual and other ash management steps) as part of enabling Pozzolanic to either produce classified flyash for sale or be sure that flyash collected in particular parts or zones of a power station satisfies the relevant standard for sale as a product exhibiting particular characteristics.
1772 Although some flyash qualifies as concrete grade flyash (and particularly fine grade flyash) without a processing or “production” step by Pozzolanic, the bundle of steps undertaken by Pozzolanic staff in conducting daily liaison with power station operators, determining which hoppers to exploit or campaign, managing the transfer plant and equipment and dealing with all aspects of the collection, handling and testing (and also classification) of flyash removed from the hoppers, represents the practical and necessary features of a separate functional activity, enabling of the next functional step, of selling concrete grade flyash to, in the main, concrete producers.
1773 In that sense, on the evidence, I accept that the supply and acquisition of unprocessed flyash is, in every practical sense, a distinct economic function.
1774 As to the geographic dimension, Mr Houston notes at para 86 that in the period the subject of these proceedings, Pozzolanic acquired flyash from power stations located in SEQ (in the map at Annexure D). Pozzolanic, of course, also collected flyash from the Central Queensland power stations of Callide and Gladstone. The map at Annexure D shows that Pozzolanic regarded the SEQ power stations as having immediate locational advantage and that there is a degree of overlap between each of the power stations in SEQ from the perspective of an acquirer of unprocessed flyash.
1775 Mr Houston applied a SSNIP test to determine whether individual power stations within the SEQ area are sufficiently substitutable so as to fall within a single geographic market. At para 87, Mr Houston concludes that the geographic market is no narrower than SEQ. At para 88, he concludes that the scope of the market is unlikely to extend beyond SEQ as a small increase in the price of unprocessed flyash from SEQ power stations “would be not nearly sufficient to overcome the substantially greater costs associated with transporting unprocessed flyash from further afield”. Having examined transport cost data from Swanbank, Tarong, Tarong North, Millmerran, Bayswater and Callide C power station sites, to Brisbane and the Gold Coast, Mr Houston concludes that a SSNIP by SEQ power stations would be unlikely to result in buyers procuring unprocessed flyash from more distant geographic locations. Much of the transport cost data is examined in earlier Parts of these reasons in relation to the movement of fine grade flyash. I accept Mr Houston’s evidence on this issue.
1776 Mr Houston concludes that the prevailing price for unprocessed flyash in SEQ power stations of about $5.00 - $10.00 per tonne “would at least need to treble before the transport cost differential associated with acquiring [unprocessed flyash] from Bayswater or Callide C power stations would allow those sources of [unprocessed flyash] to be a viable substitute [a rivalrous substitute for unprocessed flyash from SEQ power stations]”. The transport cost data is further examined in relation to the downstream market. Apart from transport cost differentials, an acquirer seeking out a substitutable source of unprocessed flyash outside the geographic area would need to incur the cost of processing, testing and storing flyash.
1777 The evidence of Mr Clarke and other participants of seeking to acquire access to a source of unprocessed flyash within the SEQ area supports the notion that those participants believed and accepted that access to unprocessed flyash from a power station source in Queensland was essential to engaging in rivalrous supply of cgfa to concrete producers and others in SEQ.
1778 As to the temporal dimension, the period of time over which the conduct in these proceedings is measured provides a sufficiently long period for relevant substitution possibilities to be measured.
1779 Having regard to FAA’s experience (as given in evidence by Mr Clarke) that rivalry in the supply of cgfa to customers in SEQ and near northern areas of New South Wales immediately adjacent to SEQ required access to a source of flyash from SEQ power stations; the evidence of other participants already discussed at [Parts 21 to 26], that those participants actively sought out arrangements (other than on a spot or episodic basis) with SEQ power stations for access to SEQ sourced flyash; and, QCL’s own assessments in its documents of the need to secure the sources of supply of unprocessed flyash in SEQ by bidding for and winning the power station contracts under tender, I am satisfied that there subsisted, at the relevant times, an SEQ market for the supply and acquisition of unprocessed flyash. Unprocessed flyash may have required “processing” by classification to isolate particles satisfying the grade requirements for cgfa stipulated by Pozzolanic, or, depending upon the hoppers deployed or campaigned at particular power stations, no further processing step may have been necessary. The processes anterior to supply of cgfa required daily testing and other operational steps to ensure that flyash extracted from the hoppers met the quality requirements, or required treating to meet the quality requirements.
1780 In the functional sense, there existed a separate functional market for the supply and acquisition of unprocessed flyash as an input from which concrete grade flyash might be produced by classification or otherwise isolated, tested, stored, handled and delivered to batching plants in SEQ and the near parts of Northern New South Wales.
1781 There was thus an upstream market for the supply and acquisition of unprocessed flyash throughout an area described as South East Queensland from power stations located in SEQ, and I so find.
The downstream market
1782 In defining the boundaries of the so-called downstream market, Mr Houston discusses the application of a SSNIP test.
1783 However, Mr Houston also identifies that there may be a distortion in the outcome of the test in circumstances where the price to which the test is applied is a price which reflects a price setting which is the result of an exercise by a firm of a substantial degree of power in an area of transactional activity. Mr Houston says that in such circumstances, the application of a SSNIP test to prevailing market prices, so derived, risks defining the product and geographic dimension of the market “inappropriately widely, and overstating the degree of competitive constraint” (para 95). That risk is said to be manifest in the period under consideration in these proceedings because Pozzolanic was “effectively the sole supplier of concrete grade flyash in SEQ” (para 96). Mr Houston says that since Pozzolanic had secured that position by reason of its contracts with the SEQ Tarong and Swanbank power stations, Mr Houston would expect a profit maximising firm “to attempt to increase prices for fine concrete grade flyash to the point where any further increase would be unprofitable” (thus extracting maximum possible monopoly rent). In other words, Mr Houston would expect Pozzolanic to price fine grade flyash up to the price of the closest substitute (excluding sources of flyash in SEQ controlled by Pozzolanic).
1784 The distortion Mr Houston perceives, in applying a SSNIP to a price charged by Pozzolanic to concrete manufacturers, is the resulting impression that concrete grade flyash produced in SEQ can be a substitute for cement or for imports of flyash from more distant locations. Mr Houston at para 98 says this:
98. … In circumstances in which Pozzolanic was the sole supplier of concrete grade flyash in SEQ and is not capacity-constrained, it is unremarkable that import and cement prices are proximate. A profit maximising firm supplying virtually the entire SEQ market can be expected to raise its prices to a level just below that of the next available substitute. However, this does not demonstrate that application of a SSNIP test warrants the product or geographic dimensions of the market being expanded.
1785 Pozzolanic was, in essence, the sole supplier of concrete grade flyash in SEQ. Some sales of Bayswater and Eraring flyash occurred into Queensland (as discussed shortly) but the evidence overwhelmingly establishes that virtually all of the cgfa sold in SEQ for use in concrete production was sourced by Pozzolanic and sold by QCL. QCL enjoyed approximately 85% of the sales of cgfa in the SEQ area. Pozzolanic enjoyed contractual rights which gave it a preferential position in relation to access to flyash from SEQ power stations. Pozzolanic and QCL conducted their analysis of market pricing by reference to the benchmark of the next best alternative price that would otherwise be available to a concrete producer and it supplied cgfa only on a delivered price basis. Although Mr Arto considered that QCL was constrained by competition for flyash brought into South East Queensland from Bayswater and Eraring Power Stations, he described Pozzolanic’s market share as “high” or “very high”.
1786 Two factors suggest that if it were not for Pozzolanic’s position as virtually the sole supplier of concrete grade flyash in SEQ, the principal source of competitive constraint would have come from other suppliers of concrete grade flyash sourced from SEQ.
1787 The first is that when the Tarong and Millmerran expression of interest and tender processes commenced, FAA and Transpacific and others sought to secure a source of supply of SEQ flyash in order to compete with Pozzolanic and introduce rivalry into the supply of concrete grade flyash in South East Queensland. Until that opportunity, those companies had not, or had not been able to, secure access to a reliable source of flyash in SEQ and had not engaged in transactional rivalry with Pozzolanic. The correspondence, already discussed, from Transpacific and FAA to the power stations put that view to the power stations in unmistakeable terms. So too did the representatives of Wagner, Nucon and IFB.
1788 The second is that Pozzolanic itself took the view in its budget documentation (ATB 4.1) for 2002 that the price of concrete grade flyash would fall by $10.00 per tonne in the event that a competitor secured a contract for the removal of flyash at Millmerran Power Station i.e. an SEQ source. Plainly enough, entry by a rival would be likely to result in the rivalrous supply of cgfa with an impact on price, or volume or both, as Mr Arto recognises. Moreover, the documents comprising the two critical briefing documents provided to the Board of QCL leading up to the decision to enter into the Millmerran Contract contemplated that should a rival secure one or other of the SEQ contracts under tender, there would be a significant impact upon the EBIT earnings of QCL and the volume of sales (a loss of 250,000 tonnes and $6 million of EBIT) (Ex-35A, PPAA-1 and PPAA-2). That risk was not perceived or reasoned to arise out of supply of cgfa into Queensland from Eraring or Bayswater notwithstanding that southern parts of the Gold Coast and parts of the immediate Northern New South Wales area were, to some degree, contestable in terms of the delivered cost to a concrete producer of cgfa from Pozzolanic, based on an SEQ source, and an alternative supply based on an Eraring or Bayswater source.
1789 The material risk put to the Directors in the Board papers was perceived to be a function of a rival securing a source of concrete grade flyash within SEQ. Thus, the higher prices (at least as measured by Pozzolanic’s view about a $10.00 impact should Millmerran ash be available to a rival, or Pozzolanic’s view about attrition in its EBIT earnings in the face of competition) might well reflect Pozzolanic’s strong position as the sole supplier of cgfa in SEQ, although the price in SEQ absent a rival in SEQ sourcing SEQ flyash, might arguably have something to do with factors relating to the quality, reliability and consistency of the flyash and therefore other than dominant unconstrained supplier pricing.
1790 In order to assess and account for the impact of such other considerations, Mr Houston calculated a “cement equivalent” price of concrete grade flyash across regions (para 101). Mr Houston also calculated the cement equivalent price of cgfa as a ratio of the cement price across different regions so as to better understand whether Pozzolanic might have been able to set flyash prices closer to those of cement, relative to suppliers of cgfa in other regions (such as New South Wales) who otherwise faced competition from other suppliers of locally sourced flyash.
1791 Mr Houston’s assumptions and methodology and the calculations are set out in his report. Mr Houston observes that the ratio is considerably lower in New South Wales (where contestability exists) than SEQ, from which Mr Houston infers that Pozzolanic is able to set its prices for cgfa much closer to those prices prevailing for cement, than suppliers operating in New South Wales. This conclusion suggests to Mr Houston that absent Pozzolanic’s position as the sole supplier of cgfa in SEQ, the principal competitive constraint would have come from other suppliers of cgfa produced in SEQ.
1792 Returning to the application of the SSNIP test, Mr Houston concludes at (para 105) that application of a SSNIP test to a “hypothetical competitive” price strengthens his conclusion that suppliers of cement and suppliers of concrete grade flyash from more distant locations do not comprise part of the downstream market.
1793 Mr Houston conducted an analysis based on a “hypothetical competitive” price over the years from 1 July 2000 to 1 October 2005 (having regard to Pozzolanic’s own assessment made at the time of the Millmerran tender that fine grade flyash prices would fall by $10.00 per tonne should a rival win the Millmerran contract).
1794 The methodology employed is this.
1795 First, a $10.00 reduction reflects Pozzolanic’s assessment of a likely competitive price going forward into 2002.
1796 Second, a hypothetical competitive price might therefore be constructed by taking the actual delivered prices charged over the period by QCL to CSR (Rinker), Hanson (Pioneer) and Boral to particular batching plants of those companies and reducing those prices by $10.00 per tonne.
1797 Third, having so constructed the hypothetical competitive price, the $10.00 margin above the competitive level can be struck and examined as a percentage of the constructed competitive price. To take an example, at 1 July 2001, the net delivered price (after rebate) of Tarong flyash to CSR’s batching plant at Eagle Farm (from Wacol storage) was $62.19. The constructed competitive price is then $52.19. $10.00 represents a 19.16% uplift over the competitive price. Many examples of this methodology can be examined having regard to the data at ATB 2.10 for SEQ batching plants.
1798 Fourth, by examining Pozzolanic’s delivered prices, it can be seen that Pozzolanic was able to sustain prices, to its buyers, exceeding the constructed hypothetical competitive level, in all cases, by greater than 5% - 10% above the hypothetical constructed competitive level. In the particular example above, a hypothetical competitive price is $52.19 per tonne for fine grade flyash. A 5%, 7.5% and 10% uplifted price over the hypothetical competitive price would be $54.80, $56.10 and $57.41 respectively, whereas Pozzolanic’s delivered price was $62.19.
1799 In the result, Mr Houston says at para 107 that the SSNIP analysis:
… suggests that suppliers of [cgfa] imported from outside of SEQ and sellers of cement were not in a position to constrain SEQ prices to competitive levels. Rather, absent Pozzolanic’s position as virtually the sole supplier of [cgfa] in SEQ, the main competitive constraint would come from other suppliers of [cgfa] produced in SEQ.
1800 As to the product dimension of the market, AS 3582.1 recognises that, in principle and, in fact, concrete manufacturers can use either fine, medium or coarse grade flyash in the production of concrete. Each of these grades is a grade of concrete grade flyash. The product supplied by Pozzolanic, as the predominant supplier of cgfa in the period the subject of these proceedings, was fine grade flyash. The particle size of Pozzolanic’s product exceeded, in the main, 75% and generally ranged between 80% to 85% of the particles passing a 45 micron sieve. Thus, virtually all of the flyash sold into the SEQ market was fine grade concrete grade flyash. Some quantities of Bayswater flyash were sold into SEQ and that flyash was also fine grade.
1801 The evidence from the industry participants including Pozzolanic, QCL and Cement Australia suggests that concrete producers sought out and thus exhibited demand for fine grade flyash for use in concrete production. Some suppliers of pre-mix concrete believed it necessary, by and large, to use fine grade flyash in concrete production largely because the unit cost of production of a cubic metre of concrete is reduced by using fine grade flyash as a partial substitute for cement at the approximate ratio of one kilo of fine grade cgfa for one kilo of cement (up to 25% to 30% of the cement volume) rather than higher amounts of flyash for each kilo of cement replaced in a mix when medium or coarse grade flyash is used in the mix. Some industry participants do not accept that even with fine grade, the substitution ratio is one for one. Some independent concrete producers who had attempted to secure access to SEQ power station sources of flyash for their own use, and supply to others, believed they had to match Pozzolanic’s product of fine grade flyash.
1802 Mr Keating gave evidence that he was focussed upon the utility of “high-grade flyash” (Ex-13, para 22). Mr Forbes, however, gave evidence that the grade of flyash used in concrete does not significantly affect the strength of the concrete and there is no practical reason why fine grade flyash must be used in a mix, as required by the Queensland Department of Main Roads, for example. Mr Forbes, however, recognises that because customers perceive fine grade flyash is better than coarse grade concrete grade flyash and customers consider flyash at 80% passing a 45 micron sieve is superior, IFB proposed to offer for sale concrete grade flyash at “80% grade”. Mr Forbes described this grade as the grade “traditionally supplied” by Pozzolanic (Ex-30, para 18).
1803 The contracts Pozzolanic struck with a number of concrete customers (and major customers), however, did not prescribe only fine grade flyash as the product the subject of the contracts.
1804 Notwithstanding the market preference for fine grade flyash and the disposition of participants to match Pozzolanic’s product, it remains possible, however, to substitute other grades of flyash for fine grade flyash so long as those grades meet the standard for concrete grade flyash. Since medium and coarse grade flyash are technically workable substitutes for fine grade flyash in concrete production, the product market ought not be defined, in principle (having regard to s 4E of the Act), in the narrowest sense as confined to only fine grade flyash if there are practical or real substitutes for the product.
1805 The question to be determined however is not only whether medium and coarse grade flyash meeting the requirements of AS 3582.1 are technical substitutes for fine grade flyash in concrete because the specification is met, but whether on the evidence those other grades of flyash were treated by buyers and sellers in any market transactions (or otherwise) as products “substitutable for, or otherwise competitive with” fine grade flyash. Section 4E is framed in inclusive terms so as to define a market as “including” goods substitutable for or otherwise competitive with fine grade flyash. The Act treats all product substitutes, or products otherwise competitive with the relevant product, as products within the market so that the market is not too narrowly drawn in a way that distorts a determination of the degree of the corporation’s market power or competition effects. This is why s 4E is consistent with the notions of substitutability set out in Co-operative Milling.
1806 There is, however, a practical element to it.
1807 If the evidence suggests that market participants did not regard other grades of concrete grade flyash as product substitutes, and the only product, participants treated as the product for use in concrete production was fine grade concrete grade flyash (perhaps because Pozzolanic as the predominant supplier had established fine grade as the benchmark product for concrete production), coarse and medium grades of flyash (although exhibiting properties making these grades capable of use in concrete production) may not be either substitutes for fine grade flyash or product grades otherwise competitive with fine grade concrete grade flyash.
1808 The weight of evidence suggests that on the demand side, customers in the periods in question in these proceedings made demand for fine grade flyash. While some of QCL’s contracts with customers refer to concrete grade flyash meeting the Australian Standard (fine, medium, coarse), the Pozzolanic product supplied for use in concrete under these contracts was Pozzolanic’s fine grade flyash product at least at the 75% grade and generally at a grade of about 85% passing a 45 micron sieve. In some of the offer letters for the supply of concrete grade flyash put by QCL to customers, QCL reserved the right to substitute one source of flyash for another (Tarong/Swanbank). Quality questions in relation to the capacity to substitute one for the other and yet maintain a flyash product at the prescribed 85% grade, called for close review of the testing protocols adopted by QCL, as Mr Blackburn explains.
1809 The evidence of Mr Panuccio at [1743] to [1745] concerning the compressive strength of concrete made using Millmerran ROS flyash as compared with concrete made using Tarong fine grade flyash, and all of Mr Vanderstaay’s evidence in Part 25 makes plain that in 2007 (and 2008), Millmerran ROS flyash (not solely fine grade flyash) was capable of being used on a “sound technical basis” in Mr Vanderstaay’s view (Ex-28, para 41), for supply to the Queensland Department of Main Roads for use in the Department’s projects, comprised of either medium grade or alternatively coarse grade flyash.
1810 The Department accepted such flyash in concrete supplied to it in substitution for fine grade flyash, subject to Mr Vanderstaay imposing ratio adjustments to the specification for the particular concrete mix.
1811 This evidence at least suggests that the proper inclusive scope of the product market is a market for fine grade flyash and its substitutes which broadens the product market to a market for concrete grade flyash and not simply a market for fine grade. Mr Vanderstaay gave evidence that because either coarse or medium grade Millmerran flyash has a lower proportion of fine grade particles than fine grade flyash, it is necessary to adjust the concrete specification so as to require the concrete supplier to add more medium or coarse grade concrete grade flyash to the mix to achieve equivalent concrete performance to that achieved using fine grade flyash. In the particular case of Millmerran ash, Mr Vanderstaay required a minimum cementitious content of 25% flyash which he considered would achieve an equivalent “durability” requirement as that achieved by using 20% fine grade flyash (Ex-28, para 41.2). The basis for Mr Vanderstaay’s views are set out in Part 25.
1812 This substitution possibility is consistent with the examination by IFB in June 2007 of the use of Millmerran ROS flyash in concrete production rather than just fine grade flyash purchased from Pozzolanic. Although use of Millmerran ROS flyash would require adjustments to the batch mix by increasing, in this analysis, the cement proportion of the mix, a concrete producer would nevertheless derive a financial advantage of greater than $30.00 in using Millmerran ROS flyash and thus the substitution possibility was a real one.
1813 These things should, however, be noted.
1814 First, Mr Vanderstaay’s evidence goes to substitution events that occurred beyond the period in issue in these proceedings (i.e. after 31 December 2006). Nevertheless, in testing product substitution possibilities, Mr Vanderstaay’s evidence of actual product substitution in concrete production suggests that coarse or medium grade flyash has been treated, in fact, as capable of substitution for fine grade flyash so long as the grades used are concrete grade flyash and adjustments to the specification for the concrete mix are made to ensure that the durability requirements and other performance characteristics of the concrete are present.
1815 Second, I do not accept that there is a market for each separate grade of flyash. I accept that there is, on the evidence, very significant demand for a product called fine grade flyash at least meeting the 75% grade threshold and in the main a product of the order of 85% grade.
1816 Third, the overwhelming body of evidence from the industry participants is to the effect that the demand for concrete grade flyash from concrete producers is a demand for a fine grade product. That result is almost certainly due to the influence and, in truth, dominance, of Pozzolanic in shaping the features of that demand as the dominant supplier of that particular product. I find that the downstream product is fine grade concrete grade flyash. When I refer to concrete grade flyash in the downstream market throughout these reasons, I am referring to a product understood as fine grade concrete grade flyash.
1817 Fourth, even though Professor Hay has simply accepted Mr Houston’s analysis of the product market (and market definition generally) for the purposes of his own analysis of other issues, Professor Hay contends in his second report that “conclusions about economic issues in this case do not turn on whether the market in which Pozzolanic sells fine concrete-grade fly ash is defined as fine concrete-grade fly ash or concrete-grade fly ash”.
1818 Fifth, as to cement, the evidence suggests that if a hypothetical monopolist of concrete grade flyash imposed a SSNIP, demand-side substitution to cement would not follow, due to the extent of the price difference between the two products notwithstanding that (based on the hypothetical competitive price construct), concrete grade flyash was priced above the competitive level. Mr Houston also conducted an analysis of a cement equivalent price for concrete grade flyash and compared that price to cement prices. I accept that the product market does not include cement although cement pricing, on the evidence of market participants, was an influence on concrete grade flyash pricing. Mr Maycock explains that relationship, as mentioned later in these reasons.
An integrated product supply
1819 Pozzolanic and QCL in the period leading up to September 2002 and then to 31 May 2003 (and thereafter by Pozzolanic and Cement Australia) supplied its flyash product only on a delivered price basis rather than offering either a delivered price or an ex-bin price with the buyer arranging its own transportation. Delivered pricing was therefore an integral element of QCL’s product supply and I accept that in defining the market so as to test, at least for s 46 purposes, whether a relevant corporation enjoyed market power, it is artificial to separate out facets of delivery or transportation controlled by Pozzolanic, as a separate service in a separate market. Buyers of concrete grade flyash had no choice on delivered pricing in dealing with Pozzolanic. They were offered terms only on the footing of a delivered price. That approach was no doubt designed to take account of utilization (rather that by-pass) of Pozzolanic’s logistics arrangements involving tanker fleets and intermediate offsite storage arrangements. The nature of the product supply was an integrated product – service – supply.
Three further questions
1820 Further questions are whether the evidence establishes that, although Pozzolanic treated Tarong (and later also Tarong North) and Swanbank flyash as supply side substitutes (subject to daily testing protocols), and the Pozzolanic tender to Millmerran suggested that Millmerran ash might be hard to place into the concrete market for reasons of little remaining unmet South East Queensland demand for concrete grade flyash (a so-called saturated market) rather than any other reason for difficulties in placement, first, is the market an SEQ market in which Millmerran flyash is a substitute for other SEQ ash sources resulting in an SEQ concrete grade flyash market comprising all SEQ ash sources (in the relevant years)?; second, are the sales of Bayswater and Eraring flyash into SEQ a factual foundation for concluding that Bayswater and Eraring were sources of substitutable flyash constraining Pozzolanic thus extending the boundary of the market to include a wider geographic area comprising other substitutes in the wider area (outside SEQ and including the Hunter Valley power station sources)?; and, third, are other ash sources in Queensland such as Callide and Gladstone within the geographic market?
1821 There is no doubt that in the period leading up to the decision to enter into the Millmerran contract of 30 September 2002, QCL assumed that Millmerran flyash would likely be concrete grade flyash contestable in supply to concrete producers with Tarong and Swanbank flyash. Millmerran flyash represented, for analytical purposes, a $10.00 per tonne threat to delivered pricing by QCL and a substantial threat to the EBIT earnings in the flyash business should the Millmerran contract not be won. The impact upon QCL’s flyash business might have been thought to have engaged the following kind of analysis. First, what would the position be if Pozzolanic won both the Millmerran and Tarong contracts?; what if Pozzolanic failed to win either contract?; what if Pozzolanic won Millmerran but not Tarong?; and, what if Pozzolanic won Tarong but not Millmerran? Although, of course, Millmerran flyash was untested and unknown because the power station had not been built, Pozzolanic assumed for the purpose of decision-making in bidding and ultimately contracting for the Millmerran source, that it would likely be contestable (subject to quality assessment protocols) and Pozzolanic and QCL acted behaviourally upon the assumption.
1822 Questions later arose after the commissioning of the first Millmerran unit about the quality of the Millmerran ash primarily centred around the colour variability of the ash. It will be necessary to examine the colour variability issue later in these reasons but two general things can be noted now. First, Cement Australia contends that it continued to make vigorous and consistent efforts to resolve the colour variability issues so as to determine the suitability of the ash for use in concrete applications generally. Second, the colour variability of the Millmerran flyash due to factors concerning the unburnt carbon content of the flyash particles, the composition of the particles and the morphology of the ash, was said to make it unusable in some concrete applications (such as external panels where colour consistency and aesthetic appeal were critical) but not necessarily unusable in non-colour sensitive locations such as building floor spans, foundations and other like applications. In other words, for some applications it may have proved to be a possible substitute, but not others. The colour variability and the utility of the Millmerran ash is discussed in these reasons. However, Millmerran ash at the time of the bidding for the Millmerran contract was seen as a likely substitutable source of ash, within the SEQ unprocessed ash market, and a source of concrete grade ash, subject to ash quality testing, in the SEQ concrete grade flyash market, and likely contestable with Swanbank and Tarong ash.
1823 As to ash sources from Callide and Gladstone, there is no suggestion in the evidence that QCL was generally substituting flyash from those power stations for flyash from Tarong, Tarong North or Swanbank in product supply to its customers, unless unusual circumstances arose, such as, the Gladstone flyash being brought into the SEQ market for supply to buyers during the period of the water restrictions commencing from 2007, recognising that the 2006 volume was essentially negligible.
1824 As to purchases into SEQ of concrete grade flyash sourced from the New South Wales power stations, the following considerations are important.
1825 First, whether the nature of Pozzolanic’s control over sources of unprocessed flyash is characterised as an exclusive right, or a right of first choice or otherwise, Pozzolanic plainly enough exercised substantial control over the sources of SEQ unprocessed flyash out of which concrete grade flyash was either processed or isolated, in the period up to September 2002 and after February 2003 (and thereafter Pozzolanic and Cement Australia enjoyed that degree of influence).
1826 Second, Pozzolanic supplied, as a question of fact, virtually all (>85%) of the concrete grade flyash supplied in South East Queensland in 2001 and 2002 (approximately 278,000 tonnes in 2001 and over 300,000 tonnes in 2002). In 2002, the sales of Swanbank cgfa were 44,807 tonnes and sales of Tarong cgfa were 271,932 tonnes (316,739 combined) (see [613] and [679]). ACH supplied 27,261 tonnes out of Eraring into Queensland in 2001 (possibly 30,000 tonnes over the entire year) and 48,430 tonnes in 2002 (see the statistics at [856] and [860].
1827 Third, Nucon purchased small quantities of Bayswater flyash in the 2001/2002 financial year and entered into the Hyrock five year purchase contract on 1 January 2003 purchasing flyash ex-bin at Hyrock’s supply point at the Bayswater Power Station and arranging its own transport to Nucon batching plants.
1828 Fourth, the purchases of cgfa from New South Wales power stations are nevertheless a relatively small volume of the cgfa sold and supplied in SEQ. The volumes purchased by Nucon in the financial years ending 30 June 2004, 2005 and 2006 are set out in Part 21.
1829 Fifth, Pozzolanic sold concrete grade flyash in SEQ only on a delivered basis.
1830 Sixth, Nucon and Wagner sought to mitigate the imperatives of the transport costs in bringing New South Wales power station flyash into Queensland by engaging in “backhauling” flyash into Queensland from forward transport by those companies of other products into New South Wales wherever possible although the opportunities to do so were limited.
1831 Seventh, Nucon and Wagner made very considerable efforts to secure a source of flyash in SEQ rather than purchase concrete grade flyash from Bayswater and organise and meet the transport costs of bringing Bayswater flyash to their various batching plants. So too, IFB vigorously sought to secure a source of flyash from power stations in SEQ for supply to concrete producers.
1832 Eighth, QCL in its delivered pricing applied an analytical tool of identifying the next best alternative price (or cost) open to a concrete producer when confronting the option of purchasing concrete grade flyash from Pozzolanic as compared with the next best option open to that buyer. The concrete producers, on the evidence, analysed the economic efficiency of the purchase options by comparing the delivered price to the buyer’s batching plants, as determined by Pozzolanic, with the delivered cost to those batching plants the buyer would incur in purchasing flyash ex-bin at Bayswater and paying the cost of transporting Bayswater flyash into South East Queensland and more particularly to each batching plant.
1833 Ninth, FAA’s experience in implementing its August 1999 action plan (see [890]) for the sale of concrete grade flyash into Queensland was that efforts to reduce the transport costs of moving cgfa to Murwillumbah nevertheless resulted in a landed cost of cgfa at Murwillumbah of $56.34 per tonne. Further costs would necessarily be incurred in moving cgfa into SEQ to contest supply to the buyers supplied by QCL. The total comparative costs (including transport costs) incurred by QCL in supplying Tarong concrete grade flyash (and Swanbank cgfa) for the financial years ending 30 June 2001, 2002 and 2003 are set out at [1338] to [1343] and the production costs are set out at [1355]. The transport cost advantages enjoyed by Pozzolanic and QCL, having regard to the analysis of the transactions set out earlier in these reasons, are such that the election by some independent concrete producers to purchase concrete grade flyash from New South Wales power stations is not in any practical or realistic sense the expression of an expanding geographic boundary of rivalrous substitution possibilities by New South Wales cgfa suppliers contesting and constraining Pozzolanic and QCL’s capacity to charge more and give less. Rather, the election by these buyers to purchase Bayswater sourced cgfa (from Hyrock) is emblematic of non-rivalrous next best alternative pricing by an SEQ supplier enjoying substantial control of SEQ flyash sources by reason of its contracts; predominant market share; and a capacity to dictate delivered pricing terms of product supply constrained only by the landed cost to batching plants at southern overlap areas of the outer edge of the geographic boundary.
1834 The downstream market is a market for concrete grade flyash in SEQ and probably includes some overlap areas immediately adjacent to the SEQ region in northern New South Wales.
PART 29
Market power
1835 Subject to the further discussion contained in this Part, I am satisfied that on 30 September 2002 when Pozzolanic and Pozzolanic Industries entered into the Original Millmerran Contract, Pozzolanic and QCL enjoyed a substantial degree of power in the SEQ concrete grade flyash market for the reasons set out below. On some occasions, I have cross-referenced these conclusions to earlier paragraphs of the reasons. However, the support for these conclusions is not simply confined to the specific cross-references. The conclusions arise out of the evidence I have accepted:
1. At 30 September 2002, the Tarong Contract of 24 August 1999 (due to end on 1 September 2001) had been extended, in effect, on 5 December 2000 by a new agreement on the same terms, to expire on 1 September 2002. That agreement was extended on 26 July 2002 to 30 November 2002 and extended again on the same terms to end on 28 February 2003: [363] to [382].
2. Accordingly, at 30 September 2002, a contract reflecting the Clause 3 formulation of rights under the 24 August 1999 contract was on foot as between TEC and Pozzolanic.
3. Clause 3 entitled Pozzolanic to any and all concrete grade flyash Pozzolanic obtains from the Tarong hoppers, and processes in Pozzolanic’s plant, to the standard of fine grade flyash under AS 3582.1. Clause 3 contemplated that flyash would be extracted from the hoppers on Units 1 to 4 being those hoppers to which Pozzolanic had, by reason of incumbency since 7 June 1984 at Tarong, connected its plant and equipment. Pozzolanic had also installed plant and equipment downstream of the hoppers.
4. The parties to the contract (by clause 10.6) regarded themselves as “in a long term relationship” in respect of the power station “site”, the adjacent power station land and the land on which Pozzolanic’s plant was located [377] and each would work diligently towards a new agreement that would accommodate the strategic objectives of both, beyond the term of the agreement: [378].
5. Pozzolanic had extracted flyash from Zones 1, 2 and 3 of the electrostatic precipitator zones for each of the four generating units: [340], [343], [352] to [355]. Flyash was not extracted from Zones 4, 5 and 6 for reasons of health and safety having regard to the fineness of the particles in those zones.
6. TEC was operating a continuous flyash disposal system requiring close engagement between TEC and Pozzolanic staff: [344], [345], [349] and [350].
7. The scope of Pozzolanic’s collection and handling equipment at Tarong was extensive and is described in Mr Druitt’s evidence.
8. The recited long term relationship between Pozzolanic and Tarong; the advantage of incumbency; the degree of interconnection between Tarong plant and equipment and Pozzolanic collection and extraction equipment and also Pozzolanic’s equipment downstream of the hoppers; the necessary daily liaison and engagement between staff of the two organisations and the nature of the rights conferred on Pozzolanic under the contract, gave Pozzolanic a substantial degree of control both practically and in fact, over the extraction of concrete grade flyash at Tarong.
9. Historically, the extraction of flyash at Tarong had been undertaken by Pozzolanic to the exclusion of all others.
10. Moreover, Pozzolanic enjoyed and exercised a right to any and all concrete grade flyash obtained from Zones 1, 2 and 3, on all four of the Tarong generating units.
11. In a practical sense, Pozzolanic enjoyed exclusive access to Tarong ash for the purpose of enabling Pozzolanic to obtain any and all concrete grade flyash meeting the fine grade standard.
12. Tarong represented Pozzolanic’s most significant source of flyash in SEQ for the processing of flyash by classification into concrete grade flyash of the relevant standard or for the isolation of concrete grade flyash meeting the fine grade standard through collection, handling and testing processes, from raw flyash collected, particularly in, Zones 2 and 3 of the electrostatic precipitator zones for each of the four Tarong units.
13. Tarong flyash was the dominant source of flyash as an input for Pozzolanic’s supply of fine grade flyash to its customers or potential customers.
14. Tarong had taken no steps, itself, to engage in the functional activity of processing unprocessed flyash or subjecting unprocessed flyash to a collection, handling and testing regime for the purpose of producing or isolating concrete grade flyash either to the standard of fine grade or any other grade under AS 3582.1 and supplying concrete grade flyash to concrete producers or market intermediaries supplying concrete grade flyash to users.
15. Thus, neither TEC nor the previous owners of the Tarong Power Station had manifested any disposition to “forwardly integrate” from the functional activity of generating electricity into the functional activity contemplated by point 14. The owners, from time to time, of the Tarong Power Station, and in particular TEC, had elected to supply unprocessed flyash to a single off-taker, Pozzolanic; granted rights to Pozzolanic to all and any concrete grade flyash obtained by Pozzolanic from flyash produced at the power station as a waste by-product (in Zones 1, 2 and 3); and was content to take or share in the “product rents” arising in Pozzolanic by receiving from Pozzolanic a royalty per tonne of concrete grade flyash product taken or paid for by Pozzolanic.
16. TEC was not interested in forward integration into the downstream market fundamentally because it did not want to compromise (or take its attention away from) the electricity undertaking which represented its core business and from which it generated very substantial earnings: [347].
17. TEC in the period up to 30 September 2002 was not entertaining the possibility of granting rights to a third party (a further off-taker) to establish plant and equipment for the collection, handling and processing of Tarong flyash on the power station site in conjunction or in parallel with Pozzolanic. TEC preferred to have a single off-taker on site under contractual arrangements for the purchase and removal of flyash, fundamentally for reasons of efficiency and safety in the management of the site and continuity in the processes surrounding the removal and extraction of flyash as part of a continuous flyash removal process necessarily bound up with base load production of electricity at the power station through the burning of coal.
18. Although TEC had taken the position reflected at point 17, TEC was willing to entertain the possibility of transactional supplies of flyash to a third party on other than a continuous supply contract footing but no such requests had been made of TEC for supply on such terms.
19. By force of Pozzolanic’s relationship with TEC as earlier described and the content of the supply contract on foot (over the major SEQ source of reliable flyash), Pozzolanic, by 30 September 2002, had established itself as the dominant supplier, and, in effect, the virtual single supplier of concrete grade flyash in South East Queensland. That position was strengthened by its contract with CS Energy in relation to the Swanbank Power Station which although it contributed a much smaller volume of concrete grade flyash (between 30,000 and 48,000 tonnes per annum depending on particular circumstances), it nevertheless gave Pozzolanic substantial control over the two SEQ sources of flyash from which concrete grade flyash could be either produced or isolated for sale to concrete producers or others in the SEQ concrete grade flyash market.
20. By 30 September 2002, Pozzolanic and QCL regarded themselves as the virtual single supplier of concrete grade flyash in SEQ. Senior officers of each company (Mr Ridoutt and Mr Wilson with the assistance of Mr Chalmers) had undertaken an analysis, for the purposes of briefing Mr Arto as incoming Managing Director, and briefing the Board of Directors of QCL, of the strategic threats to QCL’s flyash business recognising Pozzolanic’s success in establishing itself as the dominant or single supplier (by volume of sales) of virtually all concrete grade flyash supplied in Queensland and, relevantly for these proceedings, in SEQ. Mr Arto gave evidence that he regarded Pozzolanic as the dominant supplier in the market and explains, in commercial terms, that notion. Those observations of Mr Arto are set out later in these reasons.
21. QCL thus enjoyed together with Pozzolanic a very substantial or “high” or “very high” share of the transactions in the market for the supply of concrete grade flyash to concrete producers in SEQ.
22. QCL was able to adopt a pricing policy of supplying its concrete grade flyash product to buyers on a delivered price basis only, and it did so throughout the period relevant to these proceedings.
23. By enjoying the discretionary power or ability to price the supply of its product on a delivered price basis only, Pozzolanic and QCL were able to deploy Pozzolanic’s tanker fleet as it chose according to its own discretionary judgments about the efficiency of its own logistics activities and was able to utilise as part of its supply policy all of the logistic infrastructure and intermediate storage facilities integrated into the processes for supplying concrete grade flyash from a power station to a buyer’s plant, whether by direct supply to a batching plant or by supply via intermediate storage facilities. A buyer was unable to purchase concrete grade flyash ex-plant at Tarong or Swanbank and arrange its own transport directly to its batching plants (thus eliminating potential inefficient costs incurred by Pozzolanic in the handling and transportation of flyash, recouped out of a delivered pricing).
24. Delivered pricing selected by Pozzolanic as the only supply price available to a buyer enabled Pozzolanic to structurally control the network of logistic arrangements and assets used in the movement of flyash supplied to buyers without constraint.
25. Apart from Pozzolanic’s (and QCL’s) election to price on a delivered price basis, QCL was able to impose a delivered price at a buyer’s batching plant constrained only by the landed cost a buyer would confront in purchasing concrete grade flyash ex-bin from a New South Wales power station (Eraring or Bayswater) and incurring the transport cost of that flyash to SEQ and, more particularly, each of the buyer’s batching plants.
26. In making these delivered price decisions and deploying a next best alternative pricing methodology, QCL was not constrained by workable competition in SEQ as rivalry in the supply of concrete grade flyash to concrete producers in SEQ necessarily required a rival to secure access to an SEQ source of unprocessed flyash enabling the processing and production of concrete grade flyash (by classification) or the isolation of concrete grade flyash through collection, handling and testing procedures at a power station through the utility of plant and equipment deployed at the station arising out of appropriate contractual arrangements with the power station owner.
27. Pozzolanic’s control over the SEQ sources of supply of unprocessed flyash as an essential input to the functional activity of supplying concrete grade flyash to concrete producers in SEQ made it, virtually or practicably, impossible for a potential entrant to compete for the custom of buyers supplied by QCL and Pozzolanic. FAA, the company with the strongest incentive to enter the SEQ concrete grade flyash market by reason of its close shareholder relationships with major buyers, was unable to execute upon its August 1999 strategy (RCTB 544) to supply concrete grade flyash into SEQ, first, because the transport cost disadvantage (to Murwillumbah and beyond) was significant as compared with Pozzolanic’s transport costs to the batching plants of the major buyers from Tarong and Swanbank, and second, FAA did not have a contract with an SEQ power station for the supply of an essential input to rivalrous engagement in the SEQ market for concrete grade flyash.
28. Pozzolanic’s contracts with Tarong and Swanbank thus presented a high barrier to entry by a potential rival into the upstream market for the acquisition of unprocessed flyash and the supply of concrete grade flyash in the SEQ concrete grade flyash market.
29. Apart from the contractual arrangements at Tarong, Pozzolanic had enjoyed a contractual relationship with the owners of the Swanbank Power Station from at least well before June 1993. A new contract had been entered into with Pozzolanic on 10 September 1993 consisting of a five year supply contract which commenced on 1 January 1994. On 9 September 1998, CS Energy confirmed a variation of the contract extending it from 1 January 1999 to 31 December 2002 with an option in Pozzolanic to extend the contract to 31 December 2004 on the footing that Pozzolanic had been able to achieve sales reaching 48,000 tonnes over 12 consecutive months in a relevant period.
30. By 30 September 2002, Mr Michael Wilson, had on 11 July 2002 advised CS Energy that Pozzolanic had satisfied the conditions governing the option and thus Pozzolanic was exercising the option to extend the contract (ATB 30.10).
31. Accordingly, by 30 September 2002, Pozzolanic enjoyed substantial control over the sources of South East Queensland flyash due to the nature and character of the contractual rights it enjoyed with the owners of both power stations and the practical degree of engagement with both power stations in terms of the integration of its plant and equipment with the power station facilities and the degree of engagement between the staff of both organisations.
32. Apart from the disposition of the power station owners to have only one operator engaged under contract for the purchase and removal of flyash, a proponent seeking to establish itself in an operational way at either Tarong or Swanbank (or Tarong North) would need to confront some particular logistical difficulties including these: first, a site for the construction and installation of a new entrant’s processing plant would need to be identified, approved by the power station and plans drawn and approved; second, agreement would need to be reached about the protocols governing the removal of some of Pozzolanic’s extraction equipment from particular hopper outlets or the making available of other hopper outlets; third, the particular hoppers available for third parties would need to be determined taking account of decisions by the incumbent to “campaign” particular hoppers on particular days for the collection of flyash consistent with its own contractual entitlements; fourth, the logistical constraints of the movement of people, trucks and relocation of particular plant and equipment would need to be either agreed upon or the subject of engagement between power station operators and the staff of the off-taking entity. None of these things would represent insuperable barriers to entry provided that power station operators elected to accommodate a second off-taker and the contractual arrangements with the incumbent made it possible, having regard to the scope of rights granted to the incumbent.
33. By reason of its dominant market share and its position as virtually the sole supplier of concrete grade flyash in the SEQ market, Pozzolanic and QCL established a business model which enabled QCL to derive the profit margins reflected in the financial statistics set out earlier in these reasons and particularly at Part 20.
34. One of the significant new entrant possibilities which might have constrained Pozzolanic’s discretionary power to charge more and give less was a potential intervention of an entrant incurring the capital cost of establishing a grinding mill and electing to purchase unprocessed flyash from a power station and either grinding that flyash to the consistency of a fine grade product or inter-grinding it with another input such as slag and then supplying, or offering to supply, ground fine grade flyash or a flyash slag blended product for use by concrete producers in rivalry with fine grade flyash supplied by Pozzolanic at QCL’s delivered price.
35. Emblematic of this new entrant possibility is said to be the putative threat of entry by Sunstate which by 30 September 2002 had two substantial grinding mills in SEQ (each with a capacity of 500,000 tonnes) which could, it is said, so easily have been deployed in the grinding or inter-grinding of flyash. Moreover, Nucon operated a small grinding mill at Wakerley and it too could have been deployed, it is said, in the grinding of flyash. A third mill was later established by Sunstate adding a further 500,000 tonne capacity in the SEQ region.
36. There are two reasons why the presence of Sunstate and its latent grinding capacity which, with relevant incentive, might have caused it to adjust its output mix and begin supplying ground flyash or inter-ground flyash slag blends in rivalry with Pozzolanic’s flyash product, did not operate as a constraint upon Pozzolanic. The first is that having regard to the evidence of Dr Nairn, Sunstate had chosen, as its strategic path, the development of particular cement blends as its product offering. Throughout the period of Sunstate’s operations, Sunstate had never descended, until 2007, into the market for the supply of fine grade flyash (see the history of Sunstate’s commercial activities and its choice and volume of product offerings at Part 13 and the evidence of Dr Nairn). Dr Nairn, who previously had directly seen and experienced Pozzolanic’s operations firsthand as an employee and was well familiar with its scale, gave evidence that he felt Sunstate could not successfully or reasonably challenge Pozzolanic’s position in the market for the supply of concrete grade flyash. He said that he and Mr Young, the CEO, had formulated the “strategy” for Sunstate which did not involve contestability with Pozzolanic in the sale of flyash (Ex-9, para 59). The commercial ground on which Sunstate would stand, until 2007, was the sale of cement blends only.
37. The second is that Pozzolanic simply did not actually regard the threat of entry by Sunstate into the SEQ concrete grade flyash market as a constraining threat in the supply of concrete grade flyash in the SEQ concrete grade flyash market notwithstanding whatever threat Sunstate may have represented to Pozzolanic in the supply of cement blends in Pozzolanic’s cement business. In analysing the strategic threats to the flyash business for the purposes of the Board papers, no particular emphasis was given to the operations of Sunstate so far as the flyash business was concerned. There is no suggestion in any of the evidence that the putative threat of entry by Sunstate which was never, in fact, entertained by Sunstate until about the second half of 2006, and never manifested in Sunstate’s commercial market behaviour until 2007, operated as a constraint upon Pozzolanic’s delivered pricing methodology or otherwise constrained Pozzolanic from charging more and giving less. Ultimately, the possibility of engaging in the activity of grinding unprocessed flyash and offering ground concrete grade flyash for sale occurred to Mr Ward in 2006 and by 2007 Sunstate was engaged in rivalry in the supply of the product. Until then, however, Sunstate kept to its path of supplying cement blends and non-rivalry with Pozzolanic in concrete grade flyash supply. Until 2007 (or possibly by mid 2006), the threat of entry by Sunstate was not a real threat.
38. As to Wakerley, the scale of the plant was small and the particular arrangements with the tenant meant that it was not available in any practical sense for grinding operations for Nucon’s concrete production activities.
39. The application of s 46(3) of the Trade Practices Act is considered later in these reasons.
Professor Hay’s view of pozzolanic’s market power
1836 Professor Hay observes that market power on the supply side is the ability of a firm profitably to maintain price above a competitive level for a sustained period, and market power is ultimately a “matter of degree” (Ex-81, para 10). Professor Hay notes that once the market has been defined properly, economists (and others) routinely infer market power from a significant market share although the inference will not be drawn where the barriers to entry by new firms are low; or expansion by existing firms is readily possible; or the presence of substantial buyers makes it impossible for the firm to maintain prices significantly above the competitive level.
1837 A firm (or a group of firms) can have monopsony market power, as buyer(s), by enjoying the ability profitably to depress price below a competitive level for a sustained period.
1838 Professor Hay contends that inferring market power from a firm’s historically high market share assumes a “high degree of stability” in a firm’s market share “over time” (Ex-81, para 11). It follows for Professor Hay that should an important change in the circumstances of the market occur or be imminent, such as a firm’s contracts for a significant portion of its inputs be about to expire, the inference of market power that economists would draw as a matter of analysis from the fact of a firm’s high market share, may not be warranted.
1839 Recognising that each expert economist drew no distinction between pozzolanic and QCL, Professor Hay said this at para 14 of his first report:
It is my opinion that, at the time of the Millmerran tender process, between August 2001 and September 2002, pozzolanic did not have a substantial degree of market power. While it had a very large share of the fly ash business in SEQ up to and through the period, there was no assurance that this situation would prevail going forward. As the tender process began, pozzolanic’s existing contracts for ash from Tarong and Swanbank were expiring in about a year, and there was no guarantee that pozzolanic would be successful in the renewing those contracts. (Toward the end of the Millmerran tender process, the Swanbank contract would be extended for two years.) At this time, pozzolanic was not vertically integrated and it did not have long term contracts with its major customers. Moreover, Flyash Australia (FAA), which was a joint venture among pozzolanic’s three major customers, Hanson, Readymix, and Boral, was tendering for both the Tarong and Millmerran contracts. Certainly, therefore, pozzolanic did not have any monopsony power vis a vis the power stations given the competition from FAA… With respect to its power as a seller, if either of FAA’s bids were successful, there was a significant likelihood that pozzolanic’s market share would collapse almost immediately. In such circumstances, pozzolanic had no substantial degree of market power on either the buying side or the selling side of the alleged SEQ market.
[emphasis added]
1840 It follows for Professor Hay that although pozzolanic enjoyed a very large share of the flyash business in SEQ up to and through the period of the Millmerran tender between 6 August 2001 and 30 September 2002, pozzolanic did not have a substantial degree of market power in that period because the uncertainty surrounding pozzolanic’s existing ash contracts at Tarong and Swanbank meant that there was “no assurance” that pozzolanic’s very large market share “would prevail going forward”, and uncertainty also surrounded the outcome of the Millmerran tender process.
1841 At 6 August 2001, pozzolanic’s Tarong contract was to end on 1 September 2002. On 26 July 2002, it was extended to 30 November 2002, and in November 2002 it was extended again to 28 February 2003. At 6 August 2001, pozzolanic’s Swanbank contract was to end on 31 December 2002. On 11 July 2002, pozzolanic exercised the opinion to extend the term of that contract to 31 December 2004.
1842 In the period from 6 August 2001 to 30 September 2002, Professor Hay identifies three other factors affecting the degree of uncertainty surrounding pozzolanic’s contractual position. First, pozzolanic was not vertically integrated. Second, pozzolanic had not put in place long term contracts with its major customers. Third, FAA as a joint venture company of pozzolanic’s three major buyers (Hanson, Rinker and Boral) was tendering for the contracts at Tarong and Millmerran.
1843 Plainly, Pozzolanic did not enjoy monopsony power as against the power stations.
1844 In the concrete grade flyash market in SEQ, pozzolanic was confronting in Professor Hay’s assessment, a significant likelihood that its market share would “collapse almost immediately” should FAA win either of the contracts at Millmerran or Tarong. Thus, in Professor Hay’s view, pozzolanic had no substantial degree of market power on the supply side at 30 September 2002 when it contracted with Millmerran and had no market power in the period 6 August 2001 to 30 September 2002 due to the uncertainty in the contractual rights on a forward looking basis. Professor Hay maintained this view throughout his cross-examination.
1845 Pozzolanic’s market power at 30 September 2002, however, was not simply based on an inference drawn from a very high market share. Pozzolanic’s market power lies in all of the factors identified in the propositions set out earlier in Part 29. The contractual rights by which pozzolanic exercised substantial control over the Tarong and Swanbank sources of flyash were, however, central to QCL’s market power in the SEQ concrete grade flyash market and represented what Mr Houston described as an “insuperable barrier” to entry (Ex-31, para 149).
1846 I accept that uncertainty over an imminent horizon in the continuity of a firm’s contractual rights to an essential input influences the answer to the question of whether the firm continues to enjoy market power during the period leading up to the imminent resolution of the uncertainty and, specifically, whether the firm has market power at the time of engaging in the contended conduct contravention. However, as Professor Hay points out, market power is a question of degree and so too is the question of uncertainty.
1847 There is no sound razor’s-edge black and white proposition that a monopolist firm facing uncertainty of some kind going to the source of its market power, loses its market power once uncertainty arises.
1848 It is the extent of the vulnerability that matters.
1849 It is truly a question of degree not of kind.
1850 By that I mean, the absolutism of a normative rule that uncertainty in the renewal of the contractual rights negates market power subsisting at the commencement of the period of uncertainty, fails to take account of the degree or extent of the uncertainty over the relevant rights and the role that uncertainty actually plays in an applied practical way in altering behaviour. Those rights, at some relevant point in the chronology, may become seen as enduring in the long-term, or not.
1851 Information flows about the bidding processes and decisions made by the grantor of the rights along the way to final decision-making continue to inform the probabilities of whether it is as likely as not that pozzolanic will secure the Tarong contract; whether it is more likely than not; and whether there is a reasonably sound or high degree of expectation (or high probability) that the Tarong contract will likely be awarded to pozzolanic (perhaps a probability of the order of 70%). Parties facing transactional uncertainty are constantly updating the probability distribution of, in this case, securing a renewal of the contractual rights at Tarong, against the background of all the relevant contextual factors.
1852 Apart from the analytical difficulty of simply applying a rule of kind that, fundamentally, uncertainty, over the rights negates market power (where the contractual rights are a foundation source of the firm’s market power), Professor Hay’s proposition seems to leave out an important step in the economic reasoning by failing to ask, how does uncertainty, by itself, translate into a loss of market power if it is accepted that the firm enjoyed market power at the commencement of the period of uncertainty? Is it said that uncertainty results in a constraint upon the discretionary power of the firm to charge more and give less, or stand above workable competition, or dictate supply terms, or increase delivered supply prices to batching plants, or engage in any of the other expressions of market power? It seems to be necessarily implicit in Professor Hay’s view that once uncertainty arises, no question of any analysis of constraints upon market power relevantly arises because there simply is no market power to be constrained: i.e. there is no substantial degree of power in QCL or Pozzolanic in the relevant market. In such a case, the economic principle necessarily being put is that the threat of rival entry is so real and so imminent that the stable foundation upon which market power has rested in the past is undermined to the point where discretionary power to act free of workable competition is entirely extinguished by uncertainty over the rights.
1853 It is important to remember that the question being addressed here is whether the firm had a substantial degree of market power at the time of the conduct event in question. An entirely different question is whether “uncertainty” contributed to a contended legitimate degree of rational apprehension about whether the Tarong contractual rights would or would not be renewed in the tender process, causing pozzolanic and QCL decision-makers to act on a contended legitimate business rationale of securing the Millmerran contractual rights (to take, or pay for, flyash on the terms agreed), as a risk management step against the possible loss of the Tarong contract, in circumstances where the Millmerran contract came to a head before the resolution of the Tarong contract. This second question, although related to the first, goes to the question of whether the relevant corporation “took advantage” of market power in engaging in the relevant conduct event. These two questions, however, share some common factual considerations.
1854 The present question is simply whether it is correct to say, as Professor Hay contends, in a forward-looking way, that once uncertainty arose over whether the Tarong and Swanbank contractual rights would be renewed beyond 28 February 2003, and 31 December 2002 (and by 11 July 2002, beyond 31 December 2004), respectively, in the context of the Millmerran uncertainty, Pozzolanic had no market power, or no longer had any market power, in the SEQ concrete grade flyash market, that is, no substantial degree of power in the relevant market.
1855 It is true, of course, that Professor Hay reaches his opinion not just as a function of the role uncertainty plays but as a result of the conjunction of uncertainty over the rights, the contribution those rights made to Pozzolanic’s very high market share, Pozzolanic’s lack of vertical integration, a lack of long term supply contracts, the burden of the threat of entry by FAA as a joint venture entity of Pozzolanic’s three major buyers, and his assessment of the impact of FAA securing one or either of the two contracts.
1856 In principle, it is the possibilities of substitution of one source of supply of concrete grade flyash for Pozzolanic’s flyash product, in response to changing prices, that sets the limits of Pozzolanic’s ability to give less and charge more and, in that sense, it is the substitution possibility itself that operates as the constraint. However, the constraining effect of substitution possibilities eliminating market power assumes that buyers can switch to a supplier, other than Pozzolanic, that can supply the product (or its substitutes) in response to Pozzolanic’s changing prices. The measure of the potential for constraint is whether there can be strong substitution, at least in the long run if given a sufficient price incentive. Critical to the materiality of a rival substitution possibility is a rival actually securing access to a flyash product in SEQ so that buyers can ultimately switch to a substitute source of supply, in SEQ.
1857 However, rhetorically, what substitution choices did a buyer actually enjoy between August 2001 and 30 September 2002 confronted with daily decisions throughout the period, of needing to purchase flyash to enable batching plants to continuously make concrete for pre-mixed delivery to construction sites at various projects when pours were required, day after day, every day. Such buyers could not switch to an alternative supplier or secure a better price just because of “uncertainty” in the upstream contracts between Pozzolanic and the power stations.
1858 So, the application of these principles to the circumstances of this case suggests, on Professor Hay’s view, that viewed from August 2001 to September 2002 but looking forward over the long run, the possibility that a rival such as FAA might secure a source of unprocessed flyash at Tarong (and potentially Swanbank later in time) would immediately set the limits of Pozzolanic’s ability to give less and charge more by throwing up the possibility of future supply side substitution in response to changing prices. The uncertainty surrounding the outcome of the tender for the new Millmerran ash would have the same effect taken in conjunction with the uncertainty surrounding the Tarong ash contract at the same time.
1859 Professor Hay says that the imminent threat to Pozzolanic was very real because should FAA win either contract, Pozzolanic’s market share would likely “collapse almost immediately”.
1860 I accept that a substantial challenge to the renewal of Pozzolanic’s contractual rights at Tarong (as the foundation contract) and the new rights at Millmerran, by an informed or experienced and resourced tenderer may diminish, in principle, the degree of market power of Pozzolanic and QCL as compared with the degree of market power enjoyed by those firms during periods when the contractual rights are on foot but not in a way which subjects those rights to future competitive tender in the near term.
1861 The question, however, remains one of degree not simply of kind.
1862 Determining whether either corporation had a substantial degree of power in the relevant market during the period of uncertainty involves, in part at least, (apart from the rhetorical question above) examining the extent of QCL and Pozzolanic’s vulnerability to non-renewal and their perception of whether uncertainty was operating to constrain their ability to maintain prices above a competitive level and stand above workable competition. The nub of the matter for Professor Hay seems to be that since market power on the supply side is measured in terms of the ability of a firm profitably to maintain price above a competitive level for a sustained period, uncertainty undermines the ability of the firm to maintain price above a competitive level for the required sustainable period in a forward-looking way.
1863 While recognising that uncertainty is one of the factors against which a judgment must be made about the degree to which a corporation might be able to sustain a price above a competitive level (having regard to its historical ability to do so before uncertainty arose about the future sustainability of the rights), it nevertheless remains relevant to understand how uncertainty operates as a constraint upon behaviour, recognising that Pozzolanic enjoyed a substantial degree of power in the market (which Professor Hay attributes to Pozzolanic’s very high market share) at the point of intervention of uncertainty.
1864 What then were the contextual circumstances in which uncertainty over the renewal of Pozzolanic’s contractual rights arose and continued to subsist along the continuum to 30 September 2002? Many of these events are set out in Part 18. Nevertheless, the following matters should be noted.
1865 The dates of expiration of the Tarong and Swanbank contracts as at 6 August 2001 have already been noted. Throughout the period of uncertainty, Pozzolanic continued to have, at least, a contract with Tarong, as extended, on the earlier terms conferring substantial control in Pozzolanic over Tarong ash, until 28 February 2003. Those rights, on different terms, were ultimately secured under the Original Tarong Contract of 26 February 2003.
1866 The Swanbank contract was extended to 31 December 2004, on 11 July 2002.
1867 In the 2002 QCL Consolidated Budget of 14 November 2001, the observation is made that sales of Tarong ash would reduce by 5,000 tonnes per month from July 2002 as Millmerran ash enters the market (ATB 4.1). The budget papers observe that although Pozzolanic’s Tarong contract expires in August 2002, the budget assumed that the contract would be renewed. At least in terms of budget setting in November 2001, QCL was prepared to act upon the assumption that the Original Tarong Contract would be renewed.
1868 In the Pozzolanic Quarterly Report of December 2001 (ATB 4.10), Mr Wilson observes that following the submission of Pozzolanic’s EOI to Tarong Energy, Pozzolanic representatives were invited to make a presentation along with FAA and Adelaide Brighton (who subsequently withdrew). Mr Wilson notes that Tarong Energy would proceed with a tender involving Pozzolanic and FAA; the “deadline is mid-January”; and Pozzolanic was “hopeful to have a contract in place by March” [2002]. Mr Wilson also notes that MPA had become the preferred tenderer at Millmerran for the coal and ash handling elements although no decision had been made about “ash sales”. Mr Wilson notes that several discussions had taken place with Pozzolanic about the ash sales and MPA would be starting on the site in January 2002.
1869 By January 2002, Pozzolanic was the in principle preferred tenderer at Millmerran. FAA progressively diminished as a threat of new entrant rivalry at Millmerran although it strengthened its efforts and its bids at Tarong. Transpacific continued to press its bid at Millmerran.
1870 On 26 February 2002, FAA revised its bid at Tarong.
1871 In Pozzolanic’s “January – February 2002” report (RCTB 502), Mr Wilson observes that Pozzolanic and FAA had submitted tenders to Tarong Energy and that numerous discussions had taken place since lodgement. Mr Wilson notes that FAA is “particularly keen since missing out on Millmerran”. Mr Wilson notes that Millmerran is yet to make a decision concerning ash sales and that Transpacific “is being particularly aggressive and [FAA] was not successful”. Mr Wilson notes that the “MPA/[Pozzolanic] bid is preferred from an operational point-of-view” [emphasis added].
1872 On 4 March 2002, Mr Wilson gave Mr Arto a summary briefing note by email (for a meeting on 6 March 2002) setting out the bidding position for the contracts at Millmerran and Tarong (including Tarong North), and the contractual position at Swanbank (Ex-35A, PPAA-1). To secure the Tarong contract (as against FAA), Mr Wilson advised Mr Arto that Pozzolanic would need to bid $2.6m per annum indexed to CPI for 10 years to secure the contract. On 6 March 2002, Pozzolanic, as the preferred tenderer at Millmerran, revised its Millmerran bid. The ash sales contract at Millmerran was expected to be completed by May 2002: [725].
1873 In the QCL Report of March 2002 entitled “Ash market in SEQ March 2002”, the potential new Tarong/Tarong North contract is discussed (and so too is the Millmerran contract) (ATB 30.7). The report notes that Pozzolanic is the preferred tenderer for ash sales at Millmerran and Millmerran is hoping to finalise the ash sales contract by early May 2002. The report also notes that Pozzolanic had been “told unofficially that [it] is the preferred tenderer” at Tarong and that a “contract is currently being prepared”. Risks associated with the loss of either contract are set out in the report. At p 4 of the report setting out an appendix summarising Pozzolanic’s “Current Ash Contracts in Queensland” is: “Tarong finalising new ash contract for Tarong and Tarong North”.
1874 On 2 April 2002, Mr Klose reflected upon the criticality of securing both the Millmerran and Tarong contracts and said in a memorandum to the Executive Management Group that the additional costs of securing both contracts was estimated to be $3m but these additional costs “will be offset by increased ash prices”. In Pozzolanic’s report for “March-May 2002”, Mr Wilson notes that Pozzolanic is “unofficially the preferred tender[er] at Tarong” and that “Negotiations are continuing over a proposed contract”. Mr Wilson observes that Tarong “is hoping to get approval for the contract at their July board meeting”. Mr Wilson also notes that Pozzolanic and MPA had been announced by Millmerran as the “preferred tenderer for ash sales from Millmerran” and that the “contract, which will be with [Pozzolanic], is still being negotiated”.
1875 In the “June-July 2002” Pozzolanic report, Mr Wilson observes that Pozzolanic’s contract with TEC “has been extended for 3 months while they finalise the new contract” and that the contract has been held up “due to concerns by their lawyers”. Mr Wilson also observes that the “Ash Purchase Agreement” with Millmerran continued to be negotiated and should be signed in August. Mr Wilson also notes that on 24 June 2002 Pozzolanic achieved the 48,000 tonne target at Swanbank “giving us an extra 2 years on our contract”. In the “August-September 2002” report, Mr Wilson notes that discussions with Tarong Energy about the ash contract were continuing and that it was still hoped to finalise a new agreement before the current extension to the end of November expires. Mr Wilson notes that Pozzolanic had won a tender for the management of “furnace ash” at Tarong North and the contract would start in early October 2002. Mr Wilson also notes that the Ash Purchase Agreement with Millmerran had been finalised.
1876 Mr Ridoutt presented an “Ash Market in SEQ September 2002” report to the Board of QCL (Ex-35A, PPAA-3). In that paper, Mr Ridoutt notes that the Millmerran agreement is complete and is being prepared for signing. The key elements of the contract are set out in a chart. The background to the negotiations are set out in a letter from Pozzolanic’s solicitors attached to the report. The report notes that if Pozzolanic does not sign an agreement, Millmerran will negotiate an agreement with Transpacific which would, in all probability, match the terms of Pozzolanic’s offer. The report notes that negotiations for an ash sales agreement with Tarong are still ongoing. The key elements are set out in a chart. The report says that Tarong’s lawyers are “holding up the contract” and “Their concerns centre around the trade practice implications of the contract”. As a result, a three month extension of the existing Tarong contract had been negotiated. The report notes in a conclusionary way, about the Tarong contract discussion, that: “While we have not been officially offered a new contract, we are confident that a new contract will be secured for the following reasons”. The report then sets out two reasons as the foundation for that confidence. The first is that Pozzolanic had been “involved with reviewing the draft contract” which had been “written around our offer and our capabilities”. The second is that Pozzolanic had “just been verbally awarded a minor 6-month contract to manage the furnace ash at Tarong North that starts on 3 October 2002 and is conditional on having a current ash sales agreement with Tarong”. The report notes that Tarong is “now awaiting formal contract documents for a review and execution”. The minor furnace ash contract mentioned in the report is the contract referred to by Mr Wilson.
1877 The September 2002 Board report adds the factor that that contract is conditional on Pozzolanic having a current ash sales agreement with Tarong Energy. The report notes, however, the consequences for Pozzolanic should the Tarong contract go to FAA with the likely diversion of 72% of Pozzolanic’s sales (being the sales to the three major buyers), flowing to FAA.
1878 In the “October–December 2002” Pozzolanic report, Mr Wilson notes that the Tarong Energy Board had approved the ash contract with Pozzolanic “subject to final negotiations” and that the existing contract had been extended to the end of February 2003. Mr Wilson notes that it is intended to start the new contract with Tarong on 1 March 2003. Mr Wilson also notes that the Ash Purchase Agreement with Millmerran had been finalised and the first payment had been made. Mr Wilson also notes that little testing of the Millmerran ash had taken place due to inconsistent operating conditions at the power station.
1879 In the “January–February 2003” Pozzolanic report, Mr Wilson notes that the new Fly Ash Agreement with Tarong Energy had been finalised on 1 March 2003.
1880 In September 2001 Pozzolanic implemented a $3.00 per tonne increase although for Pioneer and CSR the increase was $2.64. Prices were increased in the first quarter of 2002. On 19 November 2002 Pozzolanic advised Nucon of new, delivered only pricing terms, for the supply of fine grade flyash from Swanbank and Tarong for each of the nominated batching plants. The new prices would commence on 1 December 2002 and be subject to further increases (subject to the consideration set out in the letter). On 28 June 2002, QCL revised its delivered pricing for flyash and communicated those decisions to the major customers by that letter: see the discussion at [1332] to [1342] as to the price increases to major QCL customers.
1881 I do not accept that uncertainty from August 2001 arising out of the commencement of the procurement processes at Millmerran together with the procurement processes at about the same time at Tarong, both of which endured throughout the period until 30 September 2002, had the effect of extinguishing Pozzolanic’s substantial degree of market power subsisting before August 2001. For present purposes, I make no distinction between Pozzolanic and QCL.
1882 The question is whether Pozzolanic had a substantial degree of market power at the time of engaging in the contended conduct contravention on 30 September 2002. By the end of September 2002, Pozzolanic had been the “preferred tenderer” at Millmerran since January 2002. FAA had not been a threat in the Millmerran tender process since January/February 2002 although Transpacific remained a vigorous presence at Millmerran, should the contract with Pozzolanic not conclude. Pozzolanic, however, had been preferred at Millmerran from an “operational” point of view since January/February 2002. Negotiations for a contract with Pozzolanic at Millmerran had been under discussion under the preferred tender arrangements from March 2002 and a contract was expected to be finalised by May 2002. Pozzolanic had been the preferred tenderer, unofficially, at Tarong since March 2002 and a contract was said to be being prepared by Tarong with Tarong officers hoping to obtain Tarong Energy Board approval by July 2002. By September 2002, the position had advanced to the point where the Millmerran Agreement had been completed and was ready for signing and Pozzolanic officers were, in their own terms, confident that a new contract would be secured at Tarong for the two particular reasons mentioned earlier. QCL’s pricing behaviour was not constrained by uncertainty in the contractual arrangements.
1883 Subject to the s 46(3) considerations, having regard to all of the above matters, I am satisfied that the features that characterised the substantial degree of market power enjoyed by Pozzolanic before the period of uncertainty commenced, continued to operate or subsist such that when Pozzolanic entered into the Millmerran contract on 30 September 2002 it had a substantial degree of power in the South East Queensland market for concrete grade flyash.
Section 46(3)
1884 As earlier mentioned, s 46(3) of the Trade Practices Act provides that in determining, for the purposes of s 46, the degree of power that a corporation(s) has or have in a market, the Federal Court is required to have regard to the extent to which the conduct of the corporation(s) is constrained by the conduct of competitors, or potential competitors of the corporation(s) in that market; or by the conduct of persons to whom or from whom the relevant corporation(s) supplies or acquires goods or services in that market. To what extent, therefore, was the conduct of QCL or Pozzolanic (or later, the conduct of Cement Australia) constrained by the conduct of competitors; potential competitors; and, persons to whom or from whom those companies supplied or acquired goods or services in that market?
1885 Pozzolanic acquired flyash from the power stations under the various contracts already mentioned and subjected that flyash to a range of processes designed to either produce or isolate concrete grade flyash for sale to producers of concrete, in the main. Neither Pozzolanic nor QCL was constrained by the conduct of the power stations. The power stations were predominantly interested in the continuity of the power generation undertaking. The power stations were content to share, by way of a royalty, in the revenue derived by QCL in selling concrete grade flyash in the SEQ concrete grade flyash market, Pozzolanic having subjected unprocessed flyash to the various processes earlier described so as to isolate a product capable of description as concrete grade flyash. The potential constraints arising out of the conduct of competitors have already been discussed and those constraints were not such as to give rise to the conclusion that QCL did not enjoy a substantial degree of power in the SEQ concrete grade flyash market.
1886 QCL fundamentally supplied concrete grade flyash to concrete producers. In the September 2002 Board paper, Pozzolanic describes Boral, CSR and Pioneer as corporations that accounted for 72% of the South East Queensland flyash market. The executive management of QCL and Pozzolanic responsible for the flyash business took the position in that Board Report that should Pozzolanic enter into the Millmerran contract but not secure the Tarong contract, the available flyash market remaining after 72% of the sales switched to FAA (being sales to FAA’s ultimate shareholder customers of BCSC (a Boral subsidiary) and Australian Cement (a joint venture between CSR and Pioneer) would be 85,000 tonnes which suggests a South East Queensland flyash market of approximately 303,570 tonnes per annum in 2002 having regard to 2001 sales experience.
1887 It seems to be one of the very few areas of common ground between the parties to these proceedings that the concrete grade flyash market exhibited a considerable degree of concentration. This view is reflected in the “Millmerran Ash Sales Briefing Note” of 28 June 2002 discussed in evidence with Mr Arto (a Pozzolanic/QCL document). The Cement Australia flyash analysis (ATB, Vol 18.05) sets out a discussion under the heading “Flyash Usage” – “Volumes by customer” of the sales of flyash to Rinker, Hanson and Boral. Only 21% of sales are made to independents. The source of the analysis is Mr Murray Adams and the document reflects upon the 2005 budget. 100% of the South East Queensland sales is said to be 378Kt of which Rinker, Hanson and Boral account for almost 80% of the sales.
1888 The 8 November 2002 submission to the ACCC in relation to Project Jacaranda, put to the Commission by Australian Cement and QCL recognised that CSR and Pioneer acquire almost 100% of their cement requirements from ACH and QCL in Queensland, New South Wales, Victoria and Tasmania. The concentration reflected in relation to cement sales is consistent with the concentration reflected in relation to flyash. [REMOVED TO THE CEMENT AUSTRALIA CONFIDENTIAL SCHEDULE]
1889 Mr Arto gave evidence that the flyash business in Australia was new to him. However he considered that CSR, Pioneer and Boral could leverage their buying power as customers to extract price concessions, and because ACH was a cement company controlled by Pioneer and CSR, those buyers could also use ACH to develop flyash operations in the market. Mr Arto described these two companies as being “much more difficult for us to manage” (T, p 1221, lns 39-47). Mr Arto’s views about these buyers are discussed later in these reasons. Mr Maycock regarded each of these three companies as large multi-national companies and engaging with them was always something of a “commercial arm-wrestle”. Mr Maycock said that he had great respect for the capacity of CSR, Pioneer and Boral to arm-wrestle with QCL over prices and terms. In Mr Maycock’s evidence he describes the reasons for QCL pursuing a merger with ACH. I will not repeat that explanation here as it is dealt with in the consideration of Mr Maycock’s evidence.
1890 Notwithstanding these considerations, I am satisfied that, taking into account the concentration in the market and the negotiation dynamic over price and other terms, these countervailing considerations concerning the conduct of CSR, Boral and Pioneer, were not such that a conclusion can be reached on the evidence that QCL did not enjoy a substantial degree of power in the SEQ concrete grade flyash market. In Professor Hay’s analysis of whether it is right to say that QCL and/or Pozzolanic (bearing in mind that he makes no distinction between those companies for the sake of the analysis) enjoyed a substantial degree of power in the SEQ concrete grade flyash market, Professor Hay focuses upon whether the uncertainty surrounding the contractual rights had the effect of extinguishing QCL/Pozzolanic’s market power derived from what he describes as its very high market share. Professor Hay does not contend that any market power subsisting in QCL/Pozzolanic by reason of that market power could not be characterised as a substantial degree of market power due to constraints imposed upon QCL/Pozzolanic by CSR, Boral and/or Pioneer.
1891 All of the characterising features earlier described which give rise to the conclusion, on the evidence, that QCL enjoyed a substantial degree of market power in the SEQ concrete grade flyash market remain defining features of the market notwithstanding the degree of concentration in flyash sales to CSR, Pioneer and Boral (in all, 72% of sales) and the capacity those companies enjoyed in exercising bargaining power with QCL both on price, rebates and other terms.
1892 I am satisfied on the evidence, and find that at the moment in time when Pozzolanic entered into the Millmerran contract on 30 September 2002, QCL had a substantial degree of power in the SEQ market for concrete grade flyash. I am also satisfied that Cement Australia continued to enjoy that degree of market power throughout the period 2003 to 31 December 2006.
1893 The next question is whether QCL or Pozzolanic or both “took advantage” of its substantial degree of market power for a prescribed purpose and I now turn to that question.
PART 30
Taking advantage of market power – the organising principles and related considerations
1894 The Commission puts its central contention on this footing at para 655 of its closing submissions:
The conduct in this case that is alleged to have involved a taking advantage of substantial market power was conduct related to the entry into and maintaining of the contract for flyash from Millmerran Power Station. The essence of the case is that Pozzolanic was entering into, and maintaining, a contract to acquire an input at a cost that made no commercial sense for anybody that did not have existing substantial market power in the downstream market because QCL, and subsequently Cement Australia, could not recoup the cost (including the opportunity costs) of the contract by selling flyash from Millmerran in the downstream market. Put more simply, for any corporation without substantial market power, the contract could only be anticipated to be loss-making.
[emphasis added]
1895 As to the economic principles, Professor Hay at paras 15 to 19 of his first report (Ex-81) expresses these opinions. The phrase “taking advantage of market power” connotes anticompetitive conduct that would not be possible, or more precisely, would not be profitable for a firm without market power. Since a firm without market power could do almost anything that a firm with market power could do, if the firm without market power is willing to expend and lose a substantial amount of money, the proper inquiry is whether only a firm with substantial power could profitably engage in certain conduct. Professor Hay observes that the general test of whether conduct by a firm constitutes the taking advantage of market power is “whether under similar circumstances a firm without substantial market power would act similarly” [emphasis added].
1896 Professor Hay concludes these observations by saying that “If there are legitimate business reasons for the conduct so that even a firm without substantial market power would behave similarly, then the conduct does not constitute taking advantage of market power”. Applying these tests identified by Professor Hay involves examining the evidence of the firm’s business reasons for the conduct (as opposed to purpose) and asking whether those business reasons constitute “legitimate business reasons” in the sense of whether even a firm without substantial market power, in similar circumstances, would act similarly. “Legitimate” in this sense is used by Professor Hay to connote an ordinary business rationale (i.e. a business rationale that explains the firm’s conduct as something other than a use of the firm’s market power).
1897 Mr Houston in his first report (Ex-31) at para 212, observes that the notion of an “ordinary business rationale” means “the desire of firms to maximise profits and so to make decisions that are directed to meeting that objective, in the context of an effectively competitive market”. At para 211, Mr Houston observes that “by entering into the Original Millmerran Contract and further by its subsequent decisions that had the effect of maintaining the total quantity of flyash available to it, Pozzolanic acquired additional unprocessed flyash when it already had sufficient quantity available to meet the entire forecast demand for concrete grade flyash in SEQ”. Mr Houston says that this assessment leads him to the inference that Pozzolanic had no ordinary business rationale for the conduct in question. The principle at para 210 underlying that conclusion is that a “profit maximising firm operating in a workably competitive market would not ordinarily commit to acquire an essential input or additional production capacity that it did not need, to satisfy the reasonably anticipated demand for its product”. Doing so, in a workably competitive market, is likely to have, in Mr Houston’s view, the effect of placing a firm “at a cost disadvantage relative to its rivals”.
1898 In the joint report (Ex-33), each of the experts came to this position on the economic tests to be applied. It is also convenient to mention the position each expert adopted on the application of the tests to the relevant facts although the evidence as to that question will be examined in the following Part.
Taking Advantage of Market Power
Hay and Houston generally agree on the nature of the economic inquiry needed to establish whether a firm has taken advantage of its market power.
Hay defines this as whether “only a firm with substantial power could profitably engage in certain conduct” … . If there are “legitimate business reasons” for the conduct so that even a firm without substantial market power would behave similarly, then the conduct does not constitute taking advantage of market power ...
Houston expresses the test in terms of whether a firm has the ability to engage in conduct that is not explicable by reference to an “ordinary business rationale” … which he defines as “the desire of firms to maximise profits and so to make decisions that are directed to meeting that objective, in the context of effectively competitive markets ...
Hay and Houston each examined three aspects of Pozzolanic’s conduct for purposes of assessing whether that conduct represented a taking advantage of market power: a) entering into the Original Millmerran Contract; b) entering into the Amended Millmerran Contract and making the First Election to Proceed; and c) initiating the Second Election to Proceed.
Houston concludes that, by virtue of its substantial power in the downstream market, Pozzolanic had the ability to engage in the identified conduct … and that this ability was not available to any other party during the relevant period … Houston undertakes an economic assessment of Pozzolanic’s conduct by reference to the profit-maximising standard in order to determine whether it could otherwise be explained by reference to an ordinary business rationale … and concludes that, in each instance, Pozzolanic’s conduct cannot be so explained …
Based on the facts he has been given regarding Pozzolanic’s business reasons for its conduct, Hay believes that, even if Pozzolanic had market power, it was not taking advantage of such power because its behaviour in all three instances can be explained as rational profit-seeking conduct that would be undertaken even by a firm without significant market power ...
1899 In examining the evidence, I ask whether a profit maximising firm operating in a workably competitive market could in a commercial sense profitably engage in the conduct in question having regard to the business reasons identified by the witnesses, assuming such a firm is confronted with similar circumstances to those confronting Pozzolanic of asking itself whether it should enter into the Original Millmerran Contract on 30 September 2002 (and later engage in the further steps of maintaining the contract).
1900 In answering that question, a practical judgment must be brought to bear having regard to the identified so-called legitimate or ordinary business rationale informing the decision-making of the firm in question in all the circumstances. Those similar circumstances in which a hypothetical firm might be called upon to decide the questions confronting Pozzolanic will, however, reflect a hypothetically competitive market in which all aspects or sources of Pozzolanic’s substantial degree of market power are stripped away so as to neutralise its market power. In all other respects, the hypothetical market will reflect the circumstances of the actual market: Commerce Commission v Telecom Corporation of New Zealand Ltd [2010] NZSC 111.
1901 In such a hypothetically competitive market, Pozzolanic would be confronting rivalrous supply of flyash in the concrete grade flyash market in South East Queensland. Alternatively, the uncertainty surrounding the renewal of the Tarong contractual rights might be treated, for this purpose, as if it had the effect of eliminating Pozzolanic’s substantial degree of market power such that Pozzolanic could not, by reason of the uncertainty, price its product above the competitive level. Whatever the mechanism of the construct, the point is that in a hypothetical, workably competitive market, judgments about such a firm engaging in the conduct must be made in circumstances where a profit maximising firm would need to take account of the constraints imposed by workable competition.
1902 The question, put simply, is whether a firm profitably could have engaged in the conduct in question in the absence of a substantial degree of power in the relevant market. Because that question involves a hypothetical construct it must be answered by applying an objective test but one which takes into account the legitimate business reasons identified by the firm for engaging in the conduct.
1903 However, that question is not to be disengaged from the conduct to the extent of asking a slightly abstracted and less relevant question of whether, for example, a firm confronting uncertainty about the continuity of its sources of a critical input would bid and contract for, in a workably competitive market, an additional source of flyash should it become available, rather than a more focused question of whether such a profit maximising firm functioning in a workably competitive market would bid and ultimately contract for the acquisition of such an input on the terms upon which it actually contracted. Would it have been profitable for such a firm, so constrained, to engage in the very particular conduct under challenge?
1904 In Melway Publishing Pty Limited v Robert Hicks Pty Limited (2001) 205 CLR 1 (“Melway”) at 16 [24] and [25], Gleeson CJ, Gummow, Hayne and Callinan JJ observe that the prohibition which applies under s 46(1) of the Act to a firm that has a substantial degree of power in a market, is against taking advantage of that power for the relevant prescribed purpose and although there are two aspects of that prohibition, they are inter-related. The practical significance of that relationship may vary according to the particular circumstances of the case. The expression “take advantage of” does not mean anything materially different from “use” market power: Melway [26]; Queensland Wire. However, the important thing is the manner of use in the sense that the corporation must use its market power in a manner made possible only by the absence of competitive conditions: Queensland Wire, Dawson J at 202 and 203. In Queensland Wire, Mason CJ and Wilson J observed that it was only by virtue of BHP’s control of the market and the absence of other suppliers that it was able to engage in the contravening conduct of withholding supply. If it can be demonstrated that Pozzolanic as a profit maximising firm operating in a workably competitive market could in a commercial sense profitably engage in the conduct in question having regard to the ordinary business rationale identified, it follows that the corporation has not used its market power in a manner made possible only by the absence of competitive conditions. This approach is consistent with the observations of McHugh A-CJ, Gummow, Callinan and Heydon JJ in NT Power Generation Pty Ltd v Power and Water Authority (2004) 219 CLR 90 at 135 and 136 [124]; Rural Press at 76 [52], Gummow, Hayne and Heydon JJ; and Seven Network Ltd v News Ltd (2009) 182 FCR 160 (“Seven Network”) at 382, Dowsett and Lander JJ.
1905 The reference to the notion that a contravention of s 46 involves a corporation using its market power in a manner made possible only by the absence of competitive conditions, needs to be considered having regard to these further observations of the High Court. In Melway at 23 [51], Gleeson CJ, Gummow, Hayne and Callinan JJ said this:
Dawson J’s conclusion that BHP’s refusal to supply QWI with Y-bar was made possible only by the absence of competitive conditions does not exclude the possibility that, in a given case, it may be proper to conclude that a firm is taking advantage of market power where it does something that is materially facilitated by the existence of the power, even though it may not have been absolutely impossible without the power. To that extent, one may accept the submission on behalf of the ACCC, intervening in the present case, that s 46 would be contravened if the market power which a corporation had, made it easier for the corporation to act for the proscribed purpose than otherwise would be the case.
[emphasis added]
1906 In Seven Network (the decision of the primary judge) [2007] FCA 1062 at [2642], Sackville J adopted that formulation from Melway as the expression of the governing test to be applied in determining whether a contravention of s 46 might arise in the circumstances of the particular case. In a given case conduct that is materially facilitated by market power or conduct which is made easier for the corporation by its market power constitutes a use of market power. The inquiry however which is to be undertaken to determine whether a corporation has used its substantial degree of market power is the inquiry identified by the High Court in Rural Press by Gummow, Hayne and Heydon JJ at 76 [52] of whether the corporation which is alleged to have contravened s 46 could have engaged in the same conduct in the absence of market power: Seven Network, Dowsett and Lander JJ [974] and [975].
1907 In Rural Press at [51] Gummow, Hayne and Heydon JJ observe that the words “take advantage of” do not extend to any kind of connection at all between a firm’s market power and the purposes described in s 46(1). The phrase does not encompass conduct which has the purpose of protecting market power but has no other connection with that market power. Taking advantage of something is not identical with conduct protecting that thing. At [51], their Honours said this:
To reason that Rural Press and Bridge took advantage of market power because they would have been unlikely to have engaged in the conduct without the “commercial rationale” – the purpose – of protecting their market power is to confound purpose and taking advantage. If a firm with market power has a purpose of protecting it, and a choice of methods by which to do so, one of which involves power distinct from market power and one of which does not, choice of the method distinct from the market power will prevent a contravention of s 46(1) from occurring even if choice of the other method will entail it.
[emphasis added]
1908 The point of distinction emphasised in these observations is that it is the use of market power (for a prescribed purpose) which is at the centre of a contravention of s 46(1) of the Act. That use must be such that the method of use is made possible only by the corporation’s market power, that is, only by the absence of competitive conditions: Queensland Wire, Dawson J and Mason CJ and Wilson J, or materially facilitated by the absence of competitive conditions. The further point developed in their Honours’ observations at [51] in Rural Press, is that there is no contravention of s 46(1) of the Act when a firm with market power acts with the purpose of protecting it, so long as the method of so acting does not engage a method of use of market power.
1909 In Seven Network, Sackville J at [2652] identified a number of propositions derived from the reasoning in Rural Press which led his Honour to address inferences or conclusions that might (or might not) be open as to the use of market power assuming an inverse fact. In other words, the fact that a firm lacking market power would not have acted in the way the firm actually did act, does not necessarily demonstrate that the firm’s conduct, as it actually occurred, is materially facilitated by its existing market power (i.e. is a use of its existing market power).
1910 That notion may have had some resonance in this case as it might have been said that since Pozzolanic was confronting uncertainty in the renewal of its longstanding relationship at Tarong (with a new set of contractual rights), and the Millmerran contract came along first in time, Pozzolanic’s decision-makers had to enter into the Millmerran contract almost at any price (on the particular terms) so as to risk manage the possibility of having no ash out of Tarong, and although a firm without market power would not have contracted on the terms adopted (if it be the case), that circumstance does not necessarily demonstrate that the firm’s conduct, as it actually occurred, was materially facilitated by its existing market power. However, Mr Arto makes plain in his evidence that in his view as Managing Director in entering into the Millmerran contract for Pozzolanic (and Mr Maycock treated it as a “given”) (T, p 1357, ln 8), the contract had to be profitable in the sense that Pozzolanic as a profit maximising firm could rationally enter into the Millmerran contract, for all the business reasons for which he contends, and it would be profitable to do so, in the contract’s own right.
1911 Although the contravention must be established on the balance of probabilities in terms of determining whether the firm has taken advantage of its market power, Mason CJ and Wilson J in Queensland Wire observed, in applying the hypothetical construct of BHP operating in a competitive market, that “it is highly unlikely that [BHP] would stand by, without any effort to compete, and allow the appellant to secure its supply of Y-bar from a competitor” [emphasis added] and in NT Power Generation, McHugh AC-J, Gummow, Callinan and Heydon JJ asked at [124] whether it would be “very unlikely” that the Power Authority, had it been operating in a competitive market, would have been able to stand by and allow a competitor to supply access services to NT Power Generation. At [124], their Honours observed that the Power Authority took advantage of its market power because it was only by virtue of its control of the market for the supply of the transportation of electricity along its transmission and distribution infrastructure and the absence of other suppliers that the Power Authority could in a commercial sense withhold access to its infrastructure. Their Honours concluded at [124] that if the Power Authority had been operating in a competitive market for the supply of the relevant services it would be very unlikely that it would have been able to stand by and allow a competitor to supply access services.
1912 In assessing whether it would have been very unlikely or highly unlikely that in a workably competitive market Pozzolanic, as a profit maximising firm, could have entered into the Original Millmerran Contract on the terms actually accepted by it on 30 September 2002, it is important to have regard to the costs incurred by Pozzolanic as a profit maximising firm and the benefits such a firm would derive from engaging in the contract on those terms.
1913 In terms of the prescribed purpose, a subjective test is applied to determine whether the decision-makers and relevant actors on behalf of Pozzolanic and QCL held the relevant purpose when said to be engaging in the conduct said to constitute a taking advantage of market power.
PART 31
Professor Hay’s opinion evidence concerning the “legitimate business reasons” for the action taken by Pozzolanic and QCL
1914 Professor Hay was asked to express an opinion on these questions (among others): first, having regard to the materials provided to him, did he consider that QCL took advantage of its alleged substantial market power in the contended SEQ concrete grade flyash market by causing Pozzolanic to enter into the Millmerran contract; second, having regard to those materials did he consider that Pozzolanic took advantage of its alleged substantial market power in the contended SEQ concrete grade flyash market by entering into the Millmerran contract. These questions are questions 4 and 5 in Professor Hay’s first report.
1915 In answering those questions Professor Hay draws no distinction between Pozzolanic and QCL.
1916 Professor Hay’s view is that even if he assumes that Pozzolanic had a substantial degree of market power in the SEQ concrete grade flyash market, he does not believe Pozzolanic took advantage of that market power. That follows for Professor Hay because, having regard to the facts he has been asked to assume as to Pozzolanic’s business reasons for tendering for (and entering into) the Millmerran contract, those reasons were “legitimate business reasons” for the actions taken in each case. Professor Hay concludes that Pozzolanic, in his view, would have behaved similarly in the absence of substantial market power. Professor Hay says that this conclusion is reinforced for him by the similar terms of the tenders submitted to Millmerran and the conduct of the other participants in the tender process.
1917 Although Professor Hay observes that all the assumptions relating to the Millmerran tender and the subsequent contract are “potentially relevant” to his view, Professor Hay offers a summary of the principal business reasons adopted by Pozzolanic and QCL based on the facts he has been given and asked to assume. The Statement of Factual Assumptions For Expert Economist (the “Assumptions document”) upon which Professor Hay relies is a document of 102 pages which sets out a heavily footnoted sequence of factual contentions (446 principal paragraphs) by reference to an index addressing 53 topics and sub-topics. Relevant third party pricing information is set out in documents described in Annexure 2 to the Assumptions document. The footnotes to the Assumptions document refer to a number of primary documents but in the main, each factual contention is cross-referenced (by footnote) to particular paragraphs in the affidavits of senior managers of Pozzolanic and QCL, the affidavits of Power Station witnesses, or the affidavits of third party witnesses (or their documents).
1918 I have examined the Assumptions document as an independent document and, more particularly, I have examined Professor Hay’s principal report and his other reports, and the opinions he expresses with a view to identifying not only Professor Hay’s considered opinion on the various questions but also those factual assumptions upon which he particularly relies as a basis for his view that Pozzolanic and QCL did things for particular business reasons, and that those reasons were legitimate business reasons which would have caused Pozzolanic to act in the same way in the absence of the assumed substantial market power.
1919 One of the difficulties lies in determining the extent to which the assumed facts correspond with the facts as ultimately found and whether Professor Hay’s opinion properly takes into account facts relevant to the questions he was asked to answer, such as, the impact on the profitability analysis in the September Board Paper (Ex-35A, PPAA-3), of Pozzolanic entering into the Millmerran contract on the terms agreed (in circumstances where loss of the Tarong contract would reduce Pozzolanic to using Millmerran flyash to supply only 45,000 tonnes to the market per annum) having regard to Pozzolanic’s election to cross-subsidise MPA Energy’s reduction in its Materials Handling Services contract sum. Pozzolanic agreed to subsidise MPA Energy in an amount of $900,000 over 7 years ($128,571 per annum). Since the value to Pozzolanic of the Millmerran contract on the assumed basis above was said to be $135,000 giving rise to a margin of $2.99 per tonne, in the assumed scenario, an adjustment for the direct cost of subsiding MPA Energy’s reduction would reduce the value to approximately $6,429 or, put another way, 0.14 cents per tonne. That margin on the identified cost base of $2,790,450 would represent a rate of return on the total costs deployed (as identified in the profitability schedule) of 0.000005%. In other words, the contract would not be profitable but it would not be loss making either assuming a price of $65 per tonne, also assuming the price could be sustained in a contestable market.
1920 In addition, Professor Hay relies upon many factual assumptions drawn from the Assumptions document that recite facts drawn from paragraphs of the affidavit of Mr Michael Wilson, the Manager of Pozzolanic reporting to Mr Ridoutt, and the affidavit of Mr Des Chalmers, the Manager of Pozzolanic from 1998 until 2000 and then Sales Manager (cement and flyash) for QCL and from 2003 until 2005, for Cement Australia. However, although the respondents filed an affidavit sworn by Mr Chalmers, that affidavit was not relied upon by the respondents. The respondents also filed an affidavit sworn by Mr Michael Wilson which was not relied upon in the proceeding. The Assumptions document contains 115 references to facts drawn from paragraphs of Mr Chalmers’ affidavit and 102 references to facts drawn from paragraphs of Mr Wilson’s affidavit. Professor Hay says that all of the references in the Assumptions document are potentially relevant to his views. In the facts Professor Hay focuses upon as more particularly informing his view, there are many references to facts drawn from the Assumptions document reliant on the affidavits of Chalmers and Wilson.
1921 There are also footnotes, however, in Professor Hay’s reports to facts drawn from the affidavits of Mr Arto and many other references to assumptions found in other affidavit evidence.
1922 A question later addressed in these reasons is what inferences (if any) ought to be drawn from an election on the part of the respondents not to call evidence from Mr Chalmers, Mr Wilson and also Mr Ian Ridoutt. The Commission contends that the failure to call these senior managers in the context of other evidence of their engagement in relevant events gives rise to an inference that their evidence would have been unhelpful or adverse. The respondents say that the Commission could have called any or all of these witnesses in its own case.
1923 For present purposes however, I simply note that Professor Hay’s opinion is, in significant part, at least, cast adrift from its mooring.
1924 Accordingly, I propose to examine the evidence of those witnesses of Pozzolanic and QCL who were relied upon, on the question of the business reasons actuating their conduct or the conduct of each corporation, and then examine whether the findings about those matters, compared with the facts upon which Professor Hay’s opinion rests, reconcile, so as to render Professor Hay’s opinion anchored to a proper foundation of fact. It will be necessary, therefore, to examine the evidence of the particular witnesses in some detail both as to the facts and in order to deal with the Commission’s contention that, in the case of the two principal witnesses on these questions leading to entry into the Original Millmerran Contract, aspects of their evidence ought to be rejected.
1925 The first witness giving evidence of these matters was Mr Philippe Arto, QCL’s Managing Director from February 2002 until 19 April 2003 during the period of the negotiation and signing of the Millmerran and Tarong contracts. Mr Arto was not only a Director of QCL and Pozzolanic, he was the Managing Director of QCL. He represents the bridge between the Board and the Executive Management of the QCL undertaking and its subsidiaries through the Executive Management Committee comprised of Mr Arto and those senior managers reporting to him.
1926 The second witness was QCL’s Chairman, Mr Jerry Maycock.
1927 Before examining the evidence of these men, I will briefly identify the basis identified by Professor Hay for his opinion. Professor Hay’s opinion goes to the factors that would, in principle, inform the decision-making of a person acting in a workably competitive market who is called upon to decide whether a profit maximising firm “would behave” (as Professor Hay frames the consideration at para 20 of Ex-81) in a similar way to the way Pozzolanic behaved by engaging in the particular transactions. It is in this sense that expert opinion is of some assistance in aiding and understanding of what an economist would regard as “legitimacy” in economically rational decision-making, although, of course, Professor Hay is not an engaged experienced Director confronting decisions of this kind in the daily life of operating substantial industrial companies.
1928 Professor Hay identifies the principal business reasons actuating the conduct of the corporations, based on the assumed facts he was given, as these.
1929 First, in September 2002 when Pozzolanic considered whether to enter into the Original Millmerran Contract, it was not certain it would conclude a supply agreement with Tarong. The possibility that Pozzolanic might have no other significant flyash source was “a reason to secure the Millmerran supply”.
1930 Second, Swanbank ash was poor quality, variable flyash of small volumes. Gladstone and Callide B ash generally went to Central and Northern Queensland and Victoria.
1931 Third, demand for concrete grade flyash was growing. Pozzolanic needed more flyash to meet demand in Victoria and other regions.
1932 Fourth, Pozzolanic calculated that if it lost the Tarong contract, entry into the Millmerran contract would be marginally profitable under the contract terms (at $3 per tonne), assuming the Millmerran flyash was good quality concrete grade flyash.
1933 Fifth, even if Pozzolanic could be certain of securing a supply agreement with Tarong, Pozzolanic’s business strategy included providing “continuity of supply” to customers; ensuring “consistency in quality” of its concrete grade flyash offering; and establishing “different points of supply [sources] in Queensland to enable the [flyash] business to operate more efficiently”. Thus, tendering for both contracts was consistent with Pozzolanic’s business strategy.
1934 Sixth, the volume commitments undertaken in the contracts for the two power stations took into account Pozzolanic’s “forecast demand” for concrete grade flyash in SEQ. In addition, gaining access to new ash provided “new development opportunities not just in relation to concrete-grade flyash”. Professor Hay notes that Mr Wilson thought that Pozzolanic’s interests were served by securing access to flyash not only for sale to concrete producers but also for “developing non-concrete-grade flyash opportunities”. Also, Pozzolanic could develop uses for “bottom ash”. Pozzolanic would also be able to pursue its “strategy of providing power stations with total ash management services”.
1935 Seventh, more broadly, Pozzolanic considered that increasing access to flyash sources through the new Millmerran contract and the Tarong contract would enable the planned expansion of Pozzolanic’s flyash supply “throughout Queensland and Victoria and possibly into NSW and New Zealand”.
1936 Eighth, having both contracts would enable Pozzolanic to “diversify” its sources of flyash and “create a supply buffer” putting the flyash business in a “stronger position from which to manage short or long-run outages or operational changes at either one of the two stations”.
1937 Ninth, Pozzolanic had to risk manage its contractual obligations to supply flyash on a “regular basis to meet the bulk of its large customers’ requirements” recognising that the volume and quality of raw material from the power stations is variable. Apart from the particular demands of Pozzolanic’s supply contracts with customers, a “central element” of a supplier’s service is providing “reliable supply” of “a consistent quality of flyash”. However, power stations make decisions affecting the volume and quantity of available unprocessed flyash for treatment “without regard to the impact on off-takers of flyash”. Further, power stations are subject to changes beyond their control which affect the volume and quality of the flyash they produce. Pozzolanic “managers” and “board members” were aware of the “risks” created by the “asymmetry” in the interests of the power stations and off-takers, and took those risk into account in “formulating business strategy” including the decision to enter into the Millmerran agreement.
1938 Tenth, “short-run supply shocks” leave suppliers of flyash vulnerable to “stockouts” caused by scheduled and unscheduled power station “shutdowns” and “outages”. These events can last for “a couple of weeks”. Breakdowns can occur in any part of the plant and equipment deployed by Pozzolanic. Seasonal effects alter demand for electricity causing variation in the volume and quality of the ash. These variations may result in insufficient volume of acceptable quality flyash at a power station and the solution is to “manage” customers by bringing in ash supplies from other power stations. Mr Michael Wilson said that in his period of management of Pozzolanic from April 2000 to May 2003, occasional shutdowns and outages at Tarong would cause flyash to be “trucked from Gladstone and Callide B instead of Tarong”. In 2007, drought conditions caused Pozzolanic to bring Gladstone and Eraring flyash into SEQ. Professor Hay notes Mr Zeitlyn’s “hindsight view” that sourcing flyash from Millmerran might have been advantageous once the drought events became apparent.
1939 Eleventh, thus it follows from the considerations at the tenth point above, that “multiple”, “unpredictable” and “uncontrolled contingencies” affecting the quantity of flyash coming from the power stations made “seeking alternative sources of supply a rational business strategy”.
1940 Twelfth, demand is also subject to “short-run and medium-run shocks”.
1941 Thirteenth, flyash suppliers face long-run risks and by securing access to multiple sources of flyash, a firm protects itself against long-run contingencies. Professor Hay notes that at September 2002 Pozzolanic’s contract with Tarong was to expire on 30 November 2002 and the Swanbank contract would expire on 31 December 2004. The Callide B contract could be terminated on twelve months’ notice by either side after June 2003 and the Gladstone contract could be terminated with four years’ notice after June 2003. Thus, Pozzolanic had no assurance that once TEC called tenders, Pozzolanic would be the preferred off-taker at Tarong.
1942 Fourteenth, FAA was a credible bidder for Tarong and Tarong North, and Transpacific and FAA were credible bidders for Millmerran.
1943 Fifteenth, a power station can alter its operating profile and convert from a base load station to a peak load only station, or close down entirely, significantly affecting the supply and quality of available flyash.
1944 Sixteenth, contracts with power stations are multi-year arrangements and power stations prefer to have only one or only a small number of off-takers on site. Therefore, to maximise the likelihood of gaining long-run access to sufficient flyash for long-run supply, firms may elect to follow a strategy of bidding for supply contracts “as and when” those contracts become available.
1945 In answering questions 4 and 5 and giving emphasis to the particular facts just mentioned, Professor Hay relies upon approximately 62 references to facts drawn from the affidavit of Mr Wilson and approximately 65 references to facts drawn from the affidavit of Mr Chalmers.
1946 Before examining the evidence of Mr Arto and Mr Maycock, I will set out a short assessment of the bids and tenders made by Pozzolanic, Transpacific and FAA which reflect the value proposition attributed by each to the contracts to be let at Millmerran and Tarong (and Tarong North).
PART 32
An analysis of the value of the bids for Millmerran and Tarong and aspects of the chronology of the bidding process
Events leading up to the Original Millmerran Contract
1947 On about 6 August 2001, Millmerran Operating Company (“MOC”) issued invitations to a number of companies to tender for a Materials Handling Agreement. Proposals were to include terms specifying the minimum amount of ash to be purchased, the price to be paid for that ash, the term of the agreement, the establishment of an ash quality assessment system and the construction and operation of proposed plant (RCTB 532).
1948 On 14 September 2001, Transpacific submitted a conforming tender to MOC. Transpacific proposed to purchase a minimum of 30Kt of ash in the first year, 102Kt in the second year, and 120Kt in year three to year seven, at $10.10 per tonne. Transpacific contemplated the construction of a weighbridge, three storage silos, a beneficiation plant, a laboratory, an administration centre (and associated staff amenities), transfer lines, control systems and a minor workshop and storage facility. The estimated written down value as at 31 December 2008 was $1,678,500. Transpacific sought additionally that MOC would not sell or grant access to ash to a third party without their consent, and that it have the option to extend the contract beyond 2008 (Ex-24, DJH-4).
1949 On 18 September 2001, Pozzolanic submitted a conforming tender and a non-conforming tender to MOC. The conforming tender contemplated a minimum purchase of 63.8Kt of ash in the first year, 110.4Kt in the second, 120Kt in the third, 128.4Kt in the fourth, 132Kt in the fifth and sixth, and 120Kt in the seventh, all at $5.50 per tonne. Pozzolanic proposed the construction of a beneficiation plant, a storage silo, transfer lines, a weighbridge and truck driver facilities and amenities. The value of this plant was said to be $600,000. This proposal was conditional upon favourable results of ash testing (ATB 30.04).
1950 Pozzolanic’s non-conforming tender was submitted on the same day in these terms. For each of the seven years of the contact, upon being granted an “exclusive agreement for sale of ash into the cementitious market”, Pozzolanic would pay $5.50 per tonne of concrete grade flyash, and $0.55 per tonne for non-concrete grade flyash, conditioned ash and bottom ash. The guaranteed minimum payment was stipulated to be $1,100,000 per annum (reduced to $550,000 in the first year), regardless of the volume of ash removed. Pozzolanic proposed to install the same plant as described in their conforming tender, and the proposal was said to be “designed to encourage Pozzolanic to develop as many opportunities as possible, particularly low-value applications.” This tender was also conditional upon favourable results of ash testing (ATB SB 2.16A).
1951 On 19 September 2001, Flyash Australia submitted its conforming tender to MOC. FAA proposed the purchase of a minimum of 42.372Kt of ash in the first year, and 92.496Kt for years two to six (and the balance of term, i.e. for the whole or part of the year seven). FAA proposed a tiered pricing system which offered $11.00 a tonne for the first 50Kt, $5.50 for the next 25Kt, and $2.75 for the next 125Kt. Above the 200Kt threshold, there would be no royalty paid. The plant to be installed was to include diverter valves, a feed silo, a classifier (capable of processing ash at 50 tonnes per hour), two storage silos and a weighbridge. The facility was to be almost completely automated, and was to have a written down value of $2,150,000. FAA’s proposal stipulated that Year 1 of the contract was to commence after the “Commissioning” period (which was understood to be the first anniversary of the agreement’s commencement date). It was also proposed that if the ash was found not to be commercially viable, and a new contract could not be negotiated, no other contract would be offered to a third party for a period of two years (Ex-39, SDC-2).
1952 In summary, as at the closing date for tenders, 19 September 2001, Transpacific’s tender was worth (to MOC) $303,000, in the first year, $1,030,200 in the second, and $1,212,000 per annum for years three to seven, for a grand total of $7,393,200. Pozzolanic’s conforming tender was worth to $350,900 in the first year, $607,200 in the second, $660,000 in the third, $706,200 in the fourth, $726,000 in the fifth and sixth, and $660,000 in the seventh, for a grand total of $4,436,300. Pozzolanic’s non-conforming tender was worth $550,000 in the first year, and $1,100,000 for year two to year seven, for a grand total of $7,150,000. FAA’s tender was worth $466,092 in year one, and $735,614 in years two to six (and the balance of term), for a grand total of $4,879,776.
1953 Events then unfolded as follows.
1954 On 30 October 2001, Mr Hunt presented a report to Mr Gamble summarising the tenders submitted by Transpacific, Pozzolanic, and FAA. He concluded: “On paper, the Flyash Australia offer appears the most attractive, provided they back up in writing the verbal offer of double the tendered minimum ($989,978, for a grand total of $6,405,960) payment per year…With parent company markets for flyash their marketing position appears sound…”(Ex-24, DJH-6). The amount of $989,978 assumes a volume of 185Kt rather than 92.496Kt, and the amount of $989,978 derives from the tiered FAA pricing described earlier, applied to 185Kt. The apparent reason for FAA’s oral offer of doubling the minimum volume to 185Kt, although unexplained, is likely the same explanation as the one proffered to TEC during the concurrent Tarong Contract tendering process, namely, “due to both ash supplies [a reference to Millmerran and Tarong] being tendered simultaneously, legally binding tender offers had to be submitted to both parties. This required us to halve our guarantee equally between the parties to ensure our commitments made in our tender offers could be sustained if we were to win both contracts” (Ex-39, SDC-33). Mr Hunt’s view was not just based on the numbers but took account of FAA’s entire proposal including the notion of guaranteed sales to its shareholder customers.
1955 On 1 November 2001, Mr Wilson and Mr Ridoutt on behalf of Pozzolanic met with Mr Thatcher (a mining consultant engaged by MOC), Mr Cameron and Mr Smith of MOC. Pozzolanic reiterated its guaranteed payment of $1,100,000 per annum (but including now year 1, for a grand total of $7,700,000), and increased its offer per tonne from $5.50 to $8.80 (Ex-24, DJH-7). Following this change, on 17 December 2001, Mr Hunt prepared another report for Mr Gamble in which he recommended, based on the “ramp up”, that “Millmerran Power negotiate an agreement with [Pozzolanic] since Pozzolanic offer the highest revenue” (Ex-24, DJH-12).
1956 On 29 January 2002, Mr Wilson and Mr Ridoutt again met with Mr Cameron, Ms Knox and Mr Hunt to discuss the Pozzolanic tender. On 1 February 2002, FAA was informed by Mr Hunt that FAA “was unlikely to be considered for the shortlist of candidates for the collection and marketing of fine grade fly ash from the Millmerran Power Station” (Ex-24, DJH-17).
1957 Shortly thereafter, on 11 February 2002, FAA formally withdrew its tender.
1958 On 26 February 2002, Mr Hunt emailed Ms Knox suggesting “it might be worth giving [Pozzolanic] a heads up” regarding, among other things the issues, “exclusive agreement”, “ACCC” and “minimum return” (Ex-24, DJH-14). Mr Wilson and Mr Cameron met with Mr Hunt and Ms Knox on 28 February 2002 and were told that Transpacific’s bid was “more aggressive”, that it “addressed realistic market potential” and that “Millmerran was looking for a guarantee of 135t at $10-10”, that is, a guarantee of 135Kt per annum at $10.10 per tonne (ATB SB 3.21). Mr Wilson responded to this information with a letter to Mr Cameron on 6 March 2002. In it, Pozzolanic increased its offer to a minimum guarantee of 135Kt per annum, at $10.10 per tonne, for a grand total of $9,264,500, including up front discounts (ATB SB 3.22).
1959 On 13 March 2002, MOC wrote to Pozzolanic to inform it that Pozzolanic had been selected as “first place bidders” for the tender, but that “final award” was subject to ongoing negotiations (ATB 4.31). Transpacific was informed of this by another letter on 14 March 2002 (Ex-13, DFK-3).
1960 MOC provided a draft Ash Purchase Agreement to Pozzolanic on 20 March 2002 (RCTB 535). From this date, MOC and Pozzolanic were engaged in contractual negotiations regarding a wide spectrum of issues including ash pricing, payment, ash testing, the accepted standard of concrete grade flyash, permissions with regard to the construction of plant and the parties’ respective rights of termination. These discussions appear to have been quite tense at times, so much so, that some MOC personnel, including Mr Gamble and Ms Knox, suggested on numerous occasions (23 April 2002 (RCTB 14), 31 May 2002 (RCTB 398) and 20 June 2002 (RCTB 399)) that tender negotiations to be commenced with Transpacific or FAA.
1961 However, on 30 September 2002, the Original Millmerran Contract was executed between MPP (by MPM), Pozzolanic and Pozzolanic Industries. It commenced on this date (although the first operating year would begin on 1 January 2003) and was to remain in force for seven years. It could be terminated, or the guaranteed minimum reduced, at any time after 31 December 2006 by Pozzolanic upon 60 days notice to MOC. Consideration was $10.10 per tonne of concrete grade flyash, and the minimum quantity to be removed was 135Kt per annum.
1962 In relation to the chronology discussed above, two days after Mr Hunt’s internal MOC report of 30 October 2001 in which FAA was said to be the “most attractive” offer ($6,405,960) due to, most notably, “parent company markets”, Pozzolanic submitted a revised offer on terms ($7,700,000) which persuaded Mr Hunt, by the time he circulated his second internal MOC report of 17 December 2001, that Pozzolanic’s tender was now the “recommended” one such that he was compelled to tell FAA (on 1 February 2002) that, notwithstanding that FAA was initially the best choice, FAA was unlikely to be shortlisted. FAA then formally withdrew from the tender process on 11 February 2002.
1963 So far as the chronology is concerned, it seems that on the evidence, despite Pozzolanic never having been given the “heads up” in relation to the aforementioned issues prior to the meeting of 28 February 2002, (as suggested by Mr Hunt) Pozzolanic was able to respond, in less than a week, to Transpacific’s “aggressive” bid ($7,393,200) and “realistic” view of market potential, with a revised offer of a minimum of 135Kt per annum, at $10.10 per tonne ($9,264,500), which is a further increase of $1,564,500 on its previously augmented offer.
1964 There seems to be a significant discrepancy between the tenderers in terms of their estimates of the quantity of ash which can be extracted from Millmerran, particularly in the first year of operation. As mentioned previously, all tenders were conditional upon Millmerran ash being a marketable product. However, the Transpacific tender contemplated that for the first six months of year one, it could not guarantee that any ash would be able to be extracted from Millmerran. This was presumably due to the fact that no plant would be in place to extract that ash, and the period of six months would be the minimum period required to install it. Even then, Transpacific estimated that the plant, once installed over six months, was only capable of extracting 5Kt per month, or 30Kt for the remainder of year one. FAA’s proposal contemplated a “Commissioning” period (one year in duration), before the commencement of year one of the contract itself, in which the plant required to extract ash could be, as the name suggests, commissioned. FAA’s estimate of the quantity of ash which could be removed in year one, given one entire year to commission the plant, was only 42.372Kt. Pozzolanic, on the other hand, contemplated being able to remove from Millmerran 135Kt for every year of the contract, from start to finish.
Events leading up to the Tarong Contract
1965 Although it will be necessary to examine in some detail the exchanges between Pozzolanic and TEC in the context of the particular provisions, some of the events leading up to entry into the Tarong Contract were these. On 9 August 2001, TEC and Tarong North Pty Ltd (collectively “TEC”) wrote to Pozzolanic inviting the submission of an EOI for the sale and removal of bulk fly ash at Tarong and Tarong North Power Stations (collectively “Tarong”) (RCTB 509). Transpacific received a similar invitation on 14 August 2001 (Ex-13, para 39), and on about 20 August 2001 Mr Collingwood, on behalf of TEC, advertised for EOIs to the market at large (Ex-17, para 21).
1966 In early September 2001, TEC issued documents regarding EOIs for sale and removal of bulk fly ash at Tarong, designated “TE363/01 – Sale and Removal of Fly Ash at Tarong & Tarong North Power Stations”. A timetable contemplated lodgement of EOIs by 19 October 2001, lodgement of tenders by 13 December 2001, and the awarding of the contract by February 2002 (ATB 2.7).
1967 On 1 October 2001, Pozzolanic submitted its EOI and Capability Statement to TEC. It outlined among other things, its intention to install truck loading facilities at Tarong North to improve access to run-of-station (ROS) material, and its willingness to “facilitate different ash products to third parties, particularly non-concrete grade ash” (ATB 3.9).
1968 On 13, 16 and 17 October 2001, Adelaide Brighton, Transpacific and FAA respectively submitted their EOIs to TEC (Ex-17, ENC-5; Ex-13, DFK-4; Ex-39, SDC-27). At some point prior to the closing date for EOIs, 19 October 2001, Clean Energy Products, Envirospheres and Bowquip also made submissions.
1969 On 24 October 2001, a “First Stage Evaluation of EOIs” was conducted by Mr Collingwood, Mr Taylor (TEC) and Mr Franklin (TEC). EOIs were assessed against 12 criteria, including strategic focus, business experience and innovation. Mr Collingwood ranked the EOIs, in order from highest to lowest, as Pozzolanic, FAA, Adelaide Brighton, Transpacific and Clean Energy Products. Mr Collingwood commented in relation to FAA that they “have offered guaranteed access to stakeholder companies – Boral, CSR Pioneer” (Ex-17, ENC-6).
1970 On 2 November 2001, TEC wrote to Pozzolanic, FAA and Adelaide Brighton informing them that they had been short-listed for the tender process (ATB SB 5.96; Ex-39, SDC-28; Ex-17, para 30). On the same date, TEC wrote to Transpacific advising it that it had not been short-listed (RCTB 8). Presumably Clean Energy Products, Envirospheres, and Bowquip were also informed at or around this date they would not be invited to tender.
1971 On 7 November 2001, Pozzolanic and FAA both confirmed to TEC they wanted to remain on the short list (RCTB 509; Ex-39, SDC-29). On 23 November 2001, Adelaide Brighton wrote to TEC saying that as a result of “detailed market research into the power generation, ash production and market opportunities in Queensland” it had concluded that an “oversupply of ash” exists and in combination with “the defensive tactics that we would expect from the existing marketer of Tarong ash [Pozzolanic], it will make a third entrant’s position untenable” (Ex-17, ENC-8).
1972 On 27 November 2001, personnel from both Pozzolanic and FAA met with Mr Collingwood, Mr Taylor and Mr Hughes (TEC) and made a presentation for their respective company’s tender process (ATB 4.7; Ex-39, SDC-30). Later that same day, Mr Collingwood, Mr Taylor and Mr Hughes conducted a “Final Stage Evaluation”. Scored against 10 criteria, Pozzolanic outscored FAA both in Mr Collingwood’s assessment, and by the group collectively (RCTB 9).
1973 By letters dated 28 November 2001, Pozzolanic and FAA were both invited to submit a formal tender, noting that TEC’s preference was for a fixed consideration (with CPI increases) and a guaranteed minimum tonnage for a fixed term (Ex-17, ENC-11; Ex-17, ENC-10).
1974 On 9 January 2002, FAA submitted its tender to TEC. The proposed term was a minimum of 10 years, with 5 year “options reviewable on the commercial value of the fly ash”. The minimum guaranteed quantity was stated to be 92.5Kt per annum, although this “could be increased to 185,000 tonnes/annum if Tarong was the sole source of fly ash for Flyash Australia”. The consideration was a tiered pricing system which offered $11.00 a tonne for the first 50Kt, $5.50 for the next 25Kt, and $2.75 for the every tonne up to 92.5Kt. Consideration per tonne could also “be increased…if Tarong was the sole source of supply of fly ash for Flyash Australia”. The plant proposed “will (almost) mirror the plant that is already installed… The only exception being that the plant will be controlled externally via modem links reducing the number of personnel on-site”. The tender also stated:
Flyash Australia is the only company that can guarantee access to the cementitious materials market for fly ash, through our Stakeholder Companies. But due to both ash supplies [again, in reference to Millmerran and Tarong] being tendered simultaneously, legally binding tender offers had to be submitted to both parties. This required us to halve our guarantee equally between the parties to ensure our commitments made in our tender offers could be sustained if we were to win both contracts.
1975 FAA also identified, through their stakeholder companies, under-developed markets which could be supplied with ash from FAA, at a volume of approximately 100Kt per annum (Ex-39, SDC-33).
1976 On 17 January 2002, Pozzolanic submitted its tender to TEC. Pozzolanic expressed a preference for a seven year term with a three year notice period, described as “an initial 10 year Agreement”. The minimum guaranteed tonnage per annum was said to be 200Kt (for both concrete grade and non-concrete grade ash), “reviewable every five (5) years”, to allow for the development of “a market for a considerable amount of non-concrete grade ash in the long term”. Three options were proposed. Option A was a fixed sum of $2,000,000 per annum. Option B was a fixed sum of $1,000,000 per annum plus $5.00 per tonne for concrete grade flyash, as well as $0.50 per tonne for non concrete grade flyash. Option C had no fixed sum but offered $10.00 per tonne for concrete grade flyash and additionally $1.00 per tonne for non-concrete grade flyash. As the incumbent processor, Pozzolanic did not detail plant proposals. However, Pozzolanic suggested that some of its existing equipment should be moved to promote “savings in labour, electricity, and R&M”. The tender specified (p 3) that “Pozzolanic would have rights to all types of ash, excluding cenospheres, with exclusivity for concrete-grade ash” (Ex-17, ENC-12).
1977 In summary, as at the closing date for tenders, 18 January 2002, FAA’s proposal was worth (to TEC) $735,625 per annum for a grand total of $7,356,250. Alternatively, in the case of exclusivity being granted to FAA, its bid was $989,978 per annum having regard to the tiered rates applying at the volume thresholds up to 185Kt rather than 92.4Kt, for a grand total of $9,900,000. Pozzolanic’s tender was worth (taking into account the 200Kt minimum guarantee) $2,000,000 per annum for a grand total of $14,000,000 (to TEC) regardless of which payment Option TEC eventually chose.
1978 Events then unfolded as follows.
1979 On 30 January 2002, TEC (Mr Collingwood) wrote to Pozzolanic (Mr Wilson) seeking resubmission of certain parts of its tender.
1980 On 11 February 2002, FAA wrote to TEC clarifying its offer, advising that it was willing to consider an agreement that was non-exclusive, and that it would be “pleased to consider and explore, if directed by [TEC], joint arrangements with others in order to maximise the potential for the sale of Tarong Ash” (Ex-39, SDC-34).
1981 On 13 February 2002, Mr Collingwood replied to Pozzolanic’s letter of 7 February 2002. TEC requested Pozzolanic to “limit your proposal to concrete grade ash only” and asked Pozzolanic to submit an entirely separate proposal for non-concrete grade ash (ATB 4.17). Pozzolanic responded by letter on 18 February 2002 and increased the consideration for Option A to $2,500,000 per annum (for a grand total of $17,500,000 over seven years). It also detailed the criteria it proposed to use to evaluate the suitability of the flyash for use in concrete, being the modified AS 3582.1 described earlier in these reasons (ATB 4.19).
1982 On 19 February 2002, TEC requested FAA to make a final submission in relation to its tender (Ex-39, SDC-35). On 26 February 2002, FAA submitted its revised offer (Ex-39, SDC-36). FAA gave a take or pay commitment of 120Kt per annum at $8.00 per tonne on a non-exclusive basis, and on an exclusive basis, a guarantee of 220Kt per annum at $8.00 per tonne. The value of this offer to TEC was $960,000 per annum on a non-exclusive basis (for a grand total of $9,600,000 over 10 years), and $1,760,000 per annum on an exclusive basis (for a grand total of $17,600,000 over 10 years).
1983 On 27 February 2002, Pozzolanic met with TEC to discuss the tender (ATB 4.22).
1984 On 18 April 2002, Mr Collingwood sent Mr Wilson a draft “Miscellaneous Services Agreement” including two annexures containing provisions particularly adapted to the Tarong transaction noting that sending the documents did “not infer in any way that Pozzolanic [had] been awarded the contract”. The draft agreement and annexures contemplated, among other things, that the winning entity would be “entitled to any and all Concrete Grade Fly Ash” extracted by the contractor from the TEC “Ash Transfer Points”. In the event of the quality or quantity of ash deteriorating significantly, the parties would re-negotiate the contract conditions in good faith. The winning contractor would remove a minimum of 200Kt per annum. TEC would be entitled to terminate the agreement, at any time, by written notice without cause, but not unreasonably (RCTB 517).
1985 Clause 4.5 of Annexure 1 was in these terms:
The Flyash Company [the putative bid winner] agrees to supply and sell Concrete Grade Fly Ash to TEC or TEC appointed third parties, in accordance with AS 3582.1-1998 under the pricing schedule shown in the payments nominated in Annexure 2, Clause 1 – Remuneration for TEC or TEC appointed third parties in any application that TEC considers suitable, including for cementitious use in portlands cements or mortars. TEC may choose to purchase Concrete Grade Fly Ash from others if TEC considers it necessary.
1986 Annexure 2, Clause 1, contemplated that Pozzolanic would be paid a margin of 5% on the costs of supplying TEC or TEC nominated third parties with concrete grade flyash compliant with AS 3582.1. Clause 7.1 provided for Pozzolanic facilitating the supply of ROS flyash to TEC or TEC nominated third parties which would also be supplied at cost plus 5% under Annexure 2, Clause 1. Further exchanges took place between Mr Collingwood and Mr Wilson on 12 March 2002 and 15 March 2002.
1987 On 14 May 2002, Mr Ridoutt sent an email to Mr Wilson commenting upon the Tarong document (MSA 1). Mr Ridoutt and Mr Wilson thought the agreement should cover “all Fly ashes”. Clause 4.5 was regarded as “very difficult” and the pricing in Annexure 2, Clause 1 was said by Mr Ridoutt to be insufficient to cover Pozzolanic’s risk. As to the guaranteed volume to be taken of 200Kt, Mr Ridoutt’s view was that Pozzolanic would accept an obligation to make “all efforts” to remove that volume but the ultimate amount taken would depend upon the concrete market for the ash and the contracts Pozzolanic had with its concrete customers. As to the term, Mr Ridoutt said that the draft contemplated a fixed term of seven years with an option only in TEC to extend by three years rather than the term of 10 years. Mr Ridoutt thought that if the term was to be seven years plus a three year option period, either side should be able to extend it. The Annexure 2, Clause 1 margin of 5% was seen by Mr Ridoutt as TEC simply seeking to use Pozzolanic’s facilities and pay only the “variable cost”.
1988 On 15 May 2002, Mr Wilson set out all of these points in a letter to Mr Collingwood (ATB 5.1) and, in particular, the points concerning the “best efforts” on the 200Kt guaranteed volume; suggested a term of seven years with a “rolling 3 year notice period” starting at the end of the initial seven year period; a general questioning of the need for cl 4.5; and the need for Pozzolanic to be paid “market rates” under Annexure 2, Clause 1.
1989 By no later than 31 May 2002, Pozzolanic was regarded internally at TEC as the preferred tenderer.
1990 TEC met again with Pozzolanic on 6 June 2002 to discuss the draft (ATB 5.17). Pozzolanic and TEC continually exchanged updated drafts with their associated comments. An exchange occurred on 10 September 2002 in which TEC introduced an incentive payment plan which contemplated consideration within the range of $2,500,000 to $3,000,000 per annum depending on the tonnage (from less than 100Kt to more than 500Kt) removed (Ex-17, ENC-21). Pozzolanic replied with an amended plan on 30 September 2002 (Ex-17, ENC-22).
1991 On 28 July 2002 (ATB 5.28) and again on 7 November 2002 (Ex-17, ENC-25), TEC approved an extension of Pozzolanic’s existing contract for a period of three months while negotiations were underway.
1992 On approximately 7 February 2003, a formal recommendation was made to the TEC Board that the tender from Pozzolanic for a period of six years be accepted at a base amount payable of $16,704,000 (indexed to CPI) (Ex-17, ENC-33). Following a set of three emails exchanged between TEC and Pozzolanic on 26 February 2003 regarding the final form of certain clauses, the Tarong Contract was executed on that date (RCTB 390). It commenced on 1 March 2003 and was to remain in force for five years. It could be extended in increments of three years, by mutual agreement (cl 15). It could be terminated, with 12 months written notice by either party up to 1 March 2008 which, in Mr Collingwood’s submission to the TEC Board, rendered the agreement as having a six year term. Pozzolanic was to pay $2,600,000 per annum if they removed less than 50Kt, $2,500,000 per annum if they removed 50Kt to less than 150Kt, $2,400,000 per annum if they removed 150Kt to less than 350Kt, $2,200,000 per annum if they removed 350Kt to less than 450Kt and $2,100,000 per annum if they removed more than 450Kt (RCTB 390).
1993 These further matters should be noted.
1994 At the close of the tendering period, the FAA offer was worth $7,356,250 (or, in the case of exclusivity calculated on a volume of 185Kt, $9,900,000) over the 10 year life of the proposed contract with TEC. The Pozzolanic offer was worth, assuming TEC selected the payment Option (out of Options A, B and C) designated by Pozzolanic as having the lowest level of associated “risk” (and scaled over a proposed contractual period of seven years), $14,000,000. FAA’s price, at the close of tenders, based on 185Kt per annum was $9.9M. Pozzolanic’s tender price at $14M was based on 200Kt per annum over seven years. Pozzolanic’s revised 18 February 2002 proposal over seven years amounted to $17.5M and FAA’s revised 26 February 2002 proposal amounted to $17.6M, over 10 years, assuming TEC was willing to embrace an exclusive agreement. TEC was unwilling to do so. FAA’s non-exclusive proposal, over 10 years, amounted to $9.6M based on 185Kt. Its lower closing tender proposal at $7.356M was based on 92.5Kt.
1995 On 11 February 2002, FAA withdrew from the Millmerran tender process, in order to concentrate, according to Mr Wilson’s email to Mr Arto of 4 March 2002, on its bid for the Tarong Contract.
1996 On 26 February 2002, FAA submitted its revised offer of 120Kt per annum to TEC on a non-exclusive basis, and 220Kt on an exclusive basis at $8.00 per tonne (and offered to forego other supply opportunities). Since FAA had, by this point, discontinued its pursuit of the Millmerran contract, FAA’s bid to TEC was, in effect, a bid for the higher volume on an exclusive basis. At the same time, Pozzolanic had also revised its offer, resulting in a minimum guarantee proposal of $2,500,000 per year. Therefore, standardising the respective bids over a seven year term based on an equivalent minimum guarantee of concrete grade flyash of 200Kt per annum, the FAA proposal assuming the exclusive basis, was worth, to TEC, $1,760,000 over seven years amounting to $12,320,000. The Pozzolanic offer was worth, to TEC, $2,500,000 over seven years amounting to $17,500,000.
1997 By 13 March 2002, Pozzolanic had been told by MOC that its revised commercial bid of 6 March 2002 of a minimum guarantee of 135Kt per annum at $10.10 per tonne ($9,264,500 over the term) had, in effect, resulted in Pozzolanic being selected as preferred tenderer and “first place bidder” subject to on-going negotiations. In April and May 2002, Pozzolanic was discussing the terms of a possible contract at Tarong and Tarong North with TEC although, of course, important aspects of the proposed agreement in each case remained to be resolved. On 15 May 2002 Mr Wilson, for Pozzolanic, sent correspondence to both MOC and TEC discussing, in both instances, the draft terms of the proposed contracts with each power station (Ex-24, DJH-19; Ex-17, ENC-15).
1998 In the letter to Ms Knox of MOC, Mr Wilson acknowledges that the negotiations are for “a 7-year agreement that will be worth close to $10 million”. Pozzolanic’s negotiations with MOC were concerned with managing its “risk profile”, in relation to the possibility that MOC would attempt to sell concrete grade flyash to any third party at a price and on terms more favourable than those agreed between Pozzolanic and MOC.
1999 In the letter to Mr Collingwood of TEC, Mr Wilson says that the negotiations are for an agreement in which Pozzolanic “guarantees to take the title and remove a [minimum] of two hundred thousand (200,000) tonnes per annum of Power Station Ash”. At the time this letter was sent, the consideration being offered was, at minimum, $2,500,000 per annum for seven years ($17.5M).
2000 On 30 September 2002, the contract between MOC and Pozzolanic was executed.
2001 On the same date, Pozzolanic sent to TEC its latest comments regarding the draft Tarong Contract. In those comments (notwithstanding that Pozzolanic had just secured 135Kt per annum of concrete grade flyash from Millmerran), Pozzolanic proposed an amended tiered incentive payment plan to TEC which contemplated Pozzolanic being “entitled to any and all concrete grade fly ash the contractor extracts from TEC Ash Transfer Points”. The highest tier provided for a payment of $2.35M for greater than 500,000 tonnes. The practical effect of this proposition seems to be that there is virtually no amount of concrete grade flyash that TEC can produce that Pozzolanic will not be entitled to, having regard to the volume of raw unprocessed flyash needed to produce 500Kt of concrete grade flyash from Tarong. The volumes and associated consideration of each level of the incentive payment plan were adjusted on a number of occasions. However, at execution of the Tarong Contract on 26 February 2003, the highest tier appeared as “450,000 tonnes or more”, “2.1 Million”. By 26 February 2003, Pozzolanic had secured 135Kt of concrete grade flyash out of Millmerran and a right to 450,000Kt or more from Tarong (at least 585,000Kt per annum). A question is whether these volumes had the practical effect that no other potential supplier of concrete grade flyash in the SEQ concrete grade flyash market could access flyash from Tarong (or Millmerran).
2002 In Pozzolanic’s September 2002 Board Report, CSR, Pioneer and Boral are described as accounting for 72% of the total demand for concrete grade flyash in the SEQ flyash market (ATB, Vol, 5.30). The remaining 28% of the market is said to constitute 85Kt. Assuming that to be so, 100% of the demand for concrete grade flyash in SEQ as at September 2002 (bearing in mind that the Millmerran contract was signed on 30 September 2002), according to Pozzolanic, was only 303.57Kt per annum.
PART 33
The evidence of Mr Philippe Arto and the business reasons informing his decisions
2003 As already mentioned, Mr Arto is the Managing Director and Chairman of the Executive Committee of Siam City Cement Public Company Limited, in Thailand, a Holcim Group company. Between 22 February 2002 and 19 April 2003, Mr Arto was a Director of Pozzolanic, Pozzolanic Industries and QCL.
2004 Between February 2002 and March 2003, Mr Arto was the Managing Director of QCL. Mr Arto’s immediate predecessor in the role was Mr Townsend. Mr Arto reported to Mr Maycock, the Chairman of QCL and Area Manager for Australia and New Zealand for the Holcim Group. During Mr Arto’s period as Managing Director of QCL, the General Manager, Sales and Distribution, for QCL was Mr Ian Ridoutt who reported to Mr Arto. Mr Wilson was the Manager of Pozzolanic and he reported to Mr Ridoutt.
Mr Arto’s first affidavit of 17 February 2010
2005 Mr Arto gives this primary evidence in his affidavit sworn 17 February 2010 (Ex-35A) which I will describe in the language Mr Arto uses to describe his particular recollections of particular events.
2006 When Mr Arto commenced in the role of Managing Director in February 2002, he undertook a three week “handover” period with Mr Townsend who had been appointed to the role of Deputy Chief Executive Officer of Holcim (United States). During the handover period, Mr Townsend briefed Mr Arto about the QCL and Pozzolanic businesses and about the cement and flyash industries in Australia generally. Mr Arto says that in the handover period he had a number of discussions with Mr Townsend and he particularly recalls one such discussion in which he says that Mr Townsend said words to this effect:
We are hoping to use QCL’s fly ash business to grow the business generally. So we need to establish different points of supply in Queensland in order to enable the business to operate more efficiently by developing a better network to reliably supply customers and to ship more fly ash into Victoria and possibly New South Wales and New Zealand.
2007 Mr Arto says that during the handover period, he was given operational briefings and further information by Mr Ridoutt and Mr Wilson concerning the flyash business. This information included an email from Mr Wilson to Mr Arto, copied to Mr Ridoutt, dated 4 March 2002 entitled “Ash Contracts in SEQ – Background Information” which Mr Arto exhibits to his affidavit (Ex-35A, PPAA-1). Mr Arto could not recall the detail of the email (set out at [1109]) from that time. Nevertheless, Mr Arto says that he would have received and reviewed it at the time. The email represents a background briefing for the purposes of a proposed meeting on Wednesday, 6 March 2002. Mr Arto said that he could not specifically recall attending a meeting with Mr Wilson at around the time the email was sent to him.
2008 Mr Arto said at para 12 that as a result of the handover, discussions and briefings that he received, he recalled that in or around March 2002, he understood these things.
2009 First, the demand for flyash for use in concrete was growing and as a result QCL needed more flyash for supply into Victoria and possibly New South Wales and New Zealand.
2010 Second, Pozzolanic was a party to contracts with the Tarong and Swanbank Power Stations for the supply of flyash and both contracts were about to expire.
2011 Third, Pozzolanic was participating in tenders for flyash supply contracts with Tarong Power Station and the Millmerran Power Station.
2012 Fourth, in these tenders, Pozzolanic was competing against FAA, a company whose shareholders comprised Pozzolanic’s three major customers in Queensland, namely, Hanson, Readymix (Rinker) and Boral.
2013 Mr Arto says at para 13, that against the background of the matters described at para 12, the Board of Pozzolanic considered whether Pozzolanic should enter into agreements with both the Tarong Power Station and the Millmerran Power Station for the purchase of ash. At para 14, Mr Arto says that he has very limited independent recollection of the Board discussions in relation to the decision to enter into each contract with each power station. However, at para 15, Mr Arto says that he has been shown two Board papers directed to these questions. The first Board paper is the document earlier mentioned in these reasons entitled Ash Market in SEQ March 2002 (the “March Board paper”) (Ex-35A, PPAA-2). The second Board paper also earlier mentioned is entitled Ash Market in SEQ September 2002 (the “September Board paper”): see [1114] to [1123] as to the March Board paper; and [1137] to [1144] as to the September Board paper.
2014 At para 16, Mr Arto says that at the time of swearing his first affidavit he could not specifically recall whether he had received these documents (at the time). However, the usual practice within Pozzolanic at the time was that Board papers were circulated to the Board members prior to any Board meeting and Mr Arto says that his usual practice was to review the Board materials. Thus, he considers it likely that he received these Board papers and that he reviewed them at the time.
2015 At para 17, Mr Arto says that although he cannot specifically recall who presented the Board papers at the Board meeting, it is more likely than not that Mr Ian Ridoutt presented each paper to the Board. At para 17, Mr Arto says that he does not have any detailed recollection of the Pozzolanic Board meetings at which the March and September Board papers were discussed. Nor does Mr Arto have any detailed recollection of the Pozzolanic Board’s discussion resulting in the Board decision to approve Pozzolanic’s entry into contracts with both Tarong and Millmerran Power Stations.
2016 Mr Arto says at para 18 that to the best of his recollection at the time of swearing his affidavit, Mr Arto held the following views at the time in considering whether Pozzolanic should enter into the Tarong and Millmerran flyash supply contracts.
2017 First, entering into the contract with Tarong Power Station was an obvious decision as doing so effectively renewed Pozzolanic’s existing agreement with Tarong which was due to expire in late 2002.
2018 Second, if Pozzolanic and QCL wanted to grow its flyash business, entering into a contract with Millmerran power station, as an additional power station was also a logical decision.
2019 Third, Mr Arto approved of the proposal to enter into each contract provided that entry into each contract was likely to be profitable for Pozzolanic.
2020 Fourth, in order for the proposal to be profitable, Mr Arto considered that Pozzolanic must be able to sell sufficient flyash to receive a return on its investment and grow its flyash business.
2021 Although Mr Arto could not recall the precise details of the discussions conducted at the Pozzolanic Board meetings of March and September, Mr Arto says at para 19 that there was a general discussion about the risks faced by Pozzolanic if it did not obtain either the Tarong contract or the Millmerran contract. Mr Arto observes at para 19 that having regard to his recent review of the March Board paper he notes that under the heading “Risks”, the following observation occurs:
Loss of either contract (Tarong or Millmerran) may result in a loss of up to 250,000t and an EBIT of $6 million. However, there are some risks associated with securing both the new contracts for 7+ years ...
2022 Mr Arto says at para 20 that he could not recall the specific analysis that was conducted concerning that matter but Mr Arto could recall that part of the logic supporting the decision to approve Pozzolanic’s entry into both contracts was the fact that Pozzolanic faced the risk that if FAA was successful in obtaining either the Tarong contract or the Millmerran contract, Pozzolanic would lose not only a source of supply but also potentially its three major customers as FAA was owned by Pozzolanic’s three major customers.
2023 Mr Arto says that he could recall that in or about March 2002, the Pozzolanic Board gave an in principle approval that Pozzolanic enter into both the Tarong and Millmerran contracts, conditional on the finalisation of the contracts on acceptable terms. Mr Arto says that as Managing Director of the QCL Group and a Director of the relevant subsidiaries, Mr Arto signed both the Millmerran contract and the Tarong contract on behalf of Pozzolanic and Pozzolanic Industries. Mr Arto could not recall the precise detail of the contracts. Mr Arto at para 22 says that consistent with his general practice at the time, it is likely that prior to participating in the discussions at the Pozzolanic Board meeting and the decision to approve the execution of each contract, Mr Arto reviewed the key terms of both contracts. Mr Arto says at para 22 that to the best of his recollection, and consistent with his general practice at the time, he considers that prior to participating in the Board decisions, he did the following.
2024 First, he reached an agreement with Mr Ridoutt and Mr Wilson on the key terms of each contract because he was aware that those individuals had conducted the negotiations for the contracts.
2025 Second, he directed the Company Secretary, Mr Schodel to review the contracts for the purposes of execution.
2026 Third, he directed external legal advice to be obtained about them.
2027 Fourth, he reviewed the external legal advice Pozzolanic obtained about them.
2028 Mr Arto exhibits to his affidavit a copy of the Minutes of the Pozzolanic Board Meeting held on 9 September 2002 (Ex-35A, PPAA-6) dealing with the Millmerran contract but at the time of swearing his affidavit he could not specifically recall the precise details of the Board discussion. The Minutes exhibited to his affidavit are the Minutes of the Meeting of Pozzolanic Industries which was the guarantor of the contract entered into by Pozzolanic as buyer and MPP as the owner of the power station. However, Mr Arto says at para 23 that he recalls these things.
2029 First, the Board discussed the legal advice obtained from the external lawyers.
2030 Second, the Board discussed whether the Millmerran contract was likely to be profitable for Pozzolanic.
2031 Third, he participated in the discussion about whether the contract was likely to be profitable for Pozzolanic.
2032 Fourth, he participated in the Board’s decision to approve entry into the Millmerran contract on the basis that it would be a sensible way to grow Pozzolanic’s business by providing an additional source of flyash.
Mr Arto’s second affidavit of 3 September 2010
2033 Mr Arto swore a further affidavit on 3 September 2010 (Ex-35) in which he gives further primary evidence about particular topics. In his second affidavit, Mr Arto said these things which I will describe in the language Mr Arto uses to describe his particular recollections of particular events.
2034 In his earlier affidavit, Mr Arto had said that in or around March 2002 as a result of the handover discussions, Mr Arto understood that the demand for flyash for use in concrete was growing and, as a result, QCL needed more flyash for supply into Victoria and possibly New South Wales and New Zealand. At para 5 of his second affidavit, Mr Arto said that as at 2002, he understood that there was a very positive potential for growth in QCL/Pozzolanic’s flyash business for these reasons.
2035 First, the Australian market for construction materials was expected to display a continuous long term growth although there would be cycles up and down over the short term. QCL’s cement business was basically “sold out” with domestic and export sales. The capacity utilisation of cement production was very high with the result that there was little scope for further growth in cement sales without losing QCL’s export activity.
2036 Second, flyash was already being sold by QCL/Pozzolanic into Victoria and New Zealand and there was the potential to increase sales in these regions and in other markets accessible by sea. Mr Arto says that given the importance of logistics costs for any bulk material, it can be cheaper to transport flyash by sea rather than by road, and it can be cheaper for Pozzolanic and QCL to use a large vessel to transport flyash all the way to Victoria rather than transporting flyash a few hundred kilometres in Queensland using transportation by truck.
2037 Third, Mr Arto understood that there was scope to increase flyash sales to existing customers on the footing that as at 2001 flyash represented about 16% of all sales of cementitious products and since flyash can constitute (replace) up to 25% to 30%, this meant that there was scope for further sales and scope to increase penetration with small and medium customers to the level reached by larger and more sophisticated customers. Mr Arto considered that the use of flyash could be increased by improving the quality of the flyash and therefore improving the amount of flyash which could be used in a mix would lower the clinker content in the cement mix and reduce the cost of the mix for customers.
2038 Fourth, Mr Arto thought that there would be growth in the flyash business because Holcim was very supportive of developing the use of mineral components, mostly flyash and slag, as an alternative to clinker-based cements due to concerns about carbon emissions.
2039 Fifth, growth in flyash sales was attractive to QCL/Pozzolanic because it did not require significant capital investment unlike the investment in promoting cement.
2040 As to QCL’s relationship with its major customers, Mr Arto says this at para 10. QCL’s three major customers represented about 60% - 70% of cement and flyash sales. Those customers were also competitors. As a result, there was almost no negotiation on price when the contracts with major customers came up for renewal. The major customers would simply tell QCL the price which was based on their calculation as to the import price which they would have been able to obtain. The relationships with major customers were “tough” for QCL. Mr Arto says that in this role, it was the first time he had experienced a situation where major customers were also competitors of the company. Mr Arto says that the major customers were in a “very strong position” and could have substantially eroded QCL’s profitability over time. The strong position of QCL’s customers was one of the key motivations for the merger between QCL and ACH in 2003.
2041 As to the discussions concerning Tarong and Millmerran, Mr Arto says this at para 12.
2042 So far as the approval of the Board to pursue contracts to obtain flyash from both Millmerran and Tarong is concerned, it was relevant to that decision that QCL/Pozzolanic did not know whether it would win the competitive tender with either Tarong or Millmerran. Mr Arto says that QCL/Pozzolanic had the advantage of having a relationship with Tarong but this was no guarantee that it would win the Tarong tender. In the case of Millmerran, QCL had no such advantage over third parties in the competitive tender.
2043 Mr Arto says at para 13 that in the September Board paper there is a reference in section 2 to the approval previously granted by the Board to enter into long term contracts at Millmerran and Tarong to secure flyash supply at both power stations “if signed simultaneously”. Mr Arto says at para 13 that it is his understanding that these words simply mean that QCL/Pozzolanic should seek to sign both contracts, not that they should be signed at the same time. Mr Arto says that it would be impossible to sign both at the same time and it would not make sense to impose such a condition. Mr Arto says that he cannot recall there ever being a suggestion that one contract would only be signed if the other contract were also signed. Mr Arto says that the approval to enter into the Millmerran contract was not conditional on Pozzolanic securing the Tarong contract.
2044 Mr Arto says at para 14 that he strongly believes that QCL/Pozzolanic would still have pursued a contract with Tarong even if the Millmerran contract had been awarded to a third party. Mr Arto says that he would have recommended that course of action to QCL/Pozzolanic as the overall strategy of attempting to grow the flyash business and the need to preserve an ability to supply QCL’s customers required such a course.
2045 Mr Arto says at para 15 that he was aware in 2002 that there were certain advantages arising out of having more than one power station source of supply of flyash. Since there are outages at power stations due to unplanned shutdowns or planned maintenance from time to time and since the quality of flyash varies from one power station to another, it is useful to have multiple sources of flyash. Multiple sources of flyash also makes it possible to reduce logistics costs by making use of the proximity of a particular power station to particular customers. Significant fluctuations in flyash production at any given power station also makes having multiple sources desirable. Mr Arto says at para 15 that in approving the decision to pursue both the Tarong and Millmerran contracts, he considered these particular advantages of having access to more than one source of flyash.
2046 As to the relevance and utility of Swanbank ash, Mr Arto says that in 2002 he understood that the Swanbank Power Station might close and that this was therefore unlikely to allow QCL/Pozzolanic to sustain its strategy of attempting to grow the flyash business of QCL/Pozzolanic. In Mr Arto’s view, flyash from Swanbank was very marginal.
Mr Arto’s further evidence
2047 Mr Arto gave this further evidence, in cross-examination.
2048 The Holcim group of companies adopted a standard “five-year road map plan or simulation called a [FINPLAN]” for forecasting future sales, financial and technical objectives, financial results and projected expenditures to meet forecast sales (T, p 1218, lns 30-47). Mr Arto said that the FINPLAN process had been used by him and was, as he put it, absolutely, part of his Holcim role in France in forecasting cement sales over five years (T, p 1219, lns 19-21). Mr Arto believed that the FINPLAN process applied to QCL when he arrived in February 2002 (T, p 1219, lns 7-10).
2049 The aim of the FINPLAN process is to make forecasts which allow the company to make future investments or determine the future financing needs of the company (T, p 1219, lns 40-43). The forecasting numbers projected in the FINPLAN for the first year are rigorously assessed as they actually represent the budget for the upcoming year, and the remaining four years are less easy to predict. Mr Arto assumed that QCL had undertaken the normal FINPLAN analysis for forecasting future demand for flyash consistent with Holcim’s usual process, although he could not precisely recall the position.
2050 The role at QCL in February 2002 was a “new environment” for Mr Arto. Mr Arto was briefed by Mr Townsend on the market and competition. Mr Arto’s critical role for the first three to four months, at the request of Mr Maycock, was to assess QCL’s strategy and formulate opinions designed to address QCL’s perceived vulnerability to high concentration in the customer base represented by customers (purchasing 60% of QCL’s cement sales) who were also competitors of the cement business. Although cement was the primary concern, concentration in the flyash sales was also a concern.
2051 A “key concern” of Holcim, having built, through QCL, a new cement production plant at Gladstone two years earlier, was seeing a “lower level of margin generally speaking compared to other Holcim operations” and a very high dependency on or exposure to key customer competitors. The flyash business was new to Mr Arto. However, Mr Arto considered that CSR, Pioneer and Boral could leverage their buying power as customers to extract price concessions. Also, because ACH was a cement company controlled by Pioneer and CSR, those buyers (together with Boral) could also use ACH (or FAA) to develop flyash operations in the market, and they were “much more difficult for us to manage” (T, p 1221, lns 39-47).
2052 One possibility, although perhaps not a likelihood, should one of these customer competitors obtain a contract at Millmerran or Tarong was that they would not purchase flyash from QCL (T, p 1222, ln 20).
2053 Mr Arto said that QCL’s strategy was to keep its customers including key customers and that required QCL to have the resource available. Because QCL did not know which contract would go first, it had to look at both contracts. Mr Arto said location was also a factor as one station (Tarong) was more competitive as a source of flyash supplied to customers north of Brisbane (and at the Sunshine Coast), and the other (Millmerran) was more competitive for customers south of Brisbane to the Gold Coast, due to the “pretty obvious” differential transport costs reflected in the actual selling price (which could be as significant as 10%) into the respective locations (T, p 1222, lns 25-45).
2054 This locational advantage, as Mr Arto saw it, of having both sources was discussed with QCL’s sales and marketing manager (T, p 1223, ln 4), as a benefit from having two locations instead of one although Mr Arto could not recall any written analysis of this factor (T, p 1223, lns 42, 43).
2055 As to the demand for flyash described at para 12(a) of Mr Arto’s first affidavit, Mr Arto saw demand in Queensland as falling into two different parts. In the central and northern part, QCL was sending flyash to New Zealand (and possibly Noumea), and Victoria. Victoria was growing fast. In south Queensland, growth in demand was driven by trend line growth in the housing market which, long term, was about 2% to 3% with cycles, although in 2002 Mr Arto said that QCL had seen a big upswing in demand for cement and flyash of 14% or 15%.
2056 The second element of the anticipated growth in demand was that demand for flyash among the major customers (representing between 60-70% of QCL’s flyash sales) was “saturat[ed]” (T, p 1224, ln 14) but there was a remaining opportunity to increase sales to smaller less sophisticated customers.
2057 Logistics costs meant that Tarong and Swanbank flyash supplied south Queensland and not central or northern Queensland or Victoria. Millmerran would be a source of flyash for south Queensland and northern New South Wales and not for northern or central Queensland due to distance (transport costs) (T, p 1224, lns 25-42).
2058 However, as to the export market, Mr Arto said that he had a “little bit of a different view” as he thought it could be possible to actually take flyash from either Tarong or Millmerran to Brisbane and load ships. Although the costs of doing so would be higher than using Gladstone or Callide ash (out of Gladstone), “it could still [have been] possible” (T, p 1224, lns 42-45). Mr Arto accepted, however, that at March 2002 it was not a “rational thing to do” because central Queensland flyash was cheaper and so activating the logistics costs associated with taking Millmerran or Tarong ash to Brisbane for export “would not have made sense”. Mr Arto thought it could have made sense depending on flyash prices, the costs and the risk of CO2 emissions quotas adding to the cost of cement production, rendering greater use of flyash as a cement substitute, possible (T, p 1225, lns 1-22).
2059 As to these considerations, however, Mr Arto accepted that when he was forming a view about whether Pozzolanic should enter into contracts with both Tarong and Millmerran, it was no part of a three to five year forecast horizon that flyash from either station would be transported to Brisbane for export (including to Victoria) although an additional source, as a contingency substitution solution, for central Queensland ash and CO2 emissions considerations, was taken into account in his thinking. Mr Arto accepted that so far as he was aware, nobody within QCL or Pozzolanic, at March 2002, had undertaken any analysis of the profitability of using Millmerran or Tarong flyash for transportation to Brisbane for export (T, p 1225, lns 24-39).
2060 As to the rationality in business decision-making of assessing profitability, Mr Arto accepted that in making a rational business decision to pay for a source of flyash a decision-maker would need to assess whether paying for that source would be profitable (T, p 1226, lns 16-20) which would involve an analysis of where that source of flyash could be sold and at what price (T, p 1226, lns 21, 22). Mr Arto accepted that if it was contemplated that a source of flyash should be acquired for sale, for example, for export to New Zealand, Mr Arto, as a rational business man, would have expected to see a profitability analysis of such an enterprise and so far as he was aware, there was no such analysis.
2061 Mr Arto again conceded (T, p 1226, ln 30) that regarding south Queensland, there was no QCL plan to export flyash using Millmerran or Tarong flyash, to New Zealand, because it would have been cheaper to take flyash from central Queensland, rather than southern Queensland.
2062 As acquiring both sources of flyash (Tarong and Millmerran) was not part of a QCL plan to supply possible export markets out of Brisbane, Mr Arto was asked to identify the basis, at March 2002, for his belief that QCL or Pozzolanic should enter into both the Millmerran and Tarong contracts.
2063 Mr Arto said that when he joined QCL in February 2002 there was a “sense of urgency” because the Tarong contract was due to end in August and the Swanbank contract, described by Mr Arto as a very small contract, would end in December 2002. Therefore, QCL “had to do something”. Both Tarong (and Tarong North) and Millmerran were in bidding processes. Mr Arto said this (at T, p 1226, lns 43-46):
So our first priority was to keep a source and ideally the preferred source was Tarong because this is where we already had installation, and this was where we had the highest volume of flyash available. So our intent was to preserve our source and to be as competitive a supplier as possible.
2064 Mr Arto also said this.
2065 Because the two bidding processes were running in parallel QCL “could not take the risk to just go after one bidding process and potentially lose [the] tender” (T, p 1227, ln 4). Mr Arto said that QCL had to follow both processes at the same time. QCL did not know which tender it would win or whether it would win both bids. Mr Arto said that QCL also knew that its biggest competitor, FAA, was actively bidding on both power stations (T, p 1227, lns 5-9). At some point, the Millmerran process began going faster than Tarong, and Pozzolanic became the preferred tenderer at Millmerran. At the same time, QCL was making progress at Tarong. Tarong was, for Pozzolanic, “a much better source”. Pozzolanic had installations at Tarong. Pozzolanic knew the quality of the flyash. Millmerran flyash was unknown (T, p 1227, lns 15-22).
2066 Mr Arto accepted that the March Board paper set out the reasons why QCL should enter into both the Millmerran and Tarong contracts. Mr Arto said that Mr Ridoutt would prepare the flyash marketing and sales sections of Board Reports. Mr Arto does not recall whether he discussed the March Board paper with Mr Ridoutt before the Board meeting. Mr Arto was asked whether he agreed with the reasons set out in the March paper and said that he agreed with the remark at Point 3 that “Pozzolanic’s objective is to be the preferred ash manager in Queensland”.
2067 Point 4 of the paper identifies the following risk:
Loss of either contract (Tarong or Millmerran) may result in a loss of up to 250,000 [tonnes] of fly ash and an EBIT of $6 million. However, there are some risks associated with securing both of the new contracts for 7+ years. [The risks and the appropriate corresponding actions are then set out in a chart in the paper.]
2068 As to that risk Mr Arto said this (at T p 1228, lns 32-35):
I think it’s clear that if one of the contacts went to any third party, there would be an impact on the fly ash market in terms of volume and price. And we can speculate on what kind of impact would have taken place in terms of volume or price depending on the third party.
2069 Mr Arto also said (at T, p 1228, lns 36-38):
… when we look at the risk, to mention the risk to the board, we take kind of a strongest possible case, where this risk could be a loss of up to 250,000 tonnes of fly ash and be up to $6 million.
2070 Mr Arto accepted that the starting point of the consideration of this risk is that if any other party obtained either the Millmerran or Tarong contract there was a risk of a loss of market share and a loss of EBIT (T, p 1228, lns 30-43), with the March Board paper reflecting a “worst case” scenario (T, p 1228, ln 46) of an EBIT loss of $6m out of QCL’s total EBIT at that time which was approximately $100M. Mr Arto considered the risks confronting Pozzolanic as including “another supplier in the market” and “one of [QCL’s] customers supplying himself” and accepted that addressing these risks was “a component” of the decision to attempt to secure both contracts (T, p 1229, ln 15) although “the important component” was “to keep our ability to supply the customers and be a competitive supplier to these customers” (T, p 1229, lns 20-23).
2071 In terms of the component of “keeping the ability to supply the customers”, Mr Arto accepted that he was not suggesting that there was insufficient volume available at Tarong to enable QCL to supply its customers (and QCL assumed that Tarong North could be a further source), but that pursuing and having both contracts:
… would put us in a better position in terms of logistics, in terms of reducing our risk regarding quality, reducing our risk regarding shut down; that these power stations shut down for a few weeks of maintenance from time to time. So for me, having several sources is always better than having just one.
(T, p 1229, lns 33-37)
2072 Mr Arto accepted that if QCL won the contract at Tarong and Tarong North, those sources “would probably have given us a reasonable quantity of fly ash compared with our needs” (T, p 1229, lns 45, 46) which would probably be good for “a number of years” depending upon the assumptions adopted.
2073 Mr Arto accepted that if Tarong flyash gave QCL a reasonable quantity of flyash compared to its needs for a number of years, the danger or “one of the risks” in not being able to supply existing customers (if QCL had Tarong) was that a competitor operating in the market using Millmerran ash might take part of QCL’s market share. Mr Arto, however, said there were also “other reasons” for wanting Millmerran flyash, as earlier identified by him.
2074 As to future growth in demand for flyash as a business reason for Pozzolanic entering into both the contracts, Mr Arto accepted that the March Board paper does not explicitly suggest, as any part of the reasoning for entering into both contracts, a need to be able to supply future growth in demand (T, p 1230, lns 18-20). Mr Arto considered, however, that the statistics at point 6 of the March 2002 Board paper showing 2001 actual sales of 288,000 tonnes and estimated 2003 sales of 331,000 tonnes implicitly suggests a growth forecast “but the document doesn’t address [future growth in demand] in terms of a sentence” (T, p 1230, lns 10-17).
2075 At T, p 1230, ln 21, Mr Arto was asked:
And it is fair to say it was no part of the decision-making process of QCL to attempt to enter into both contracts, so far as you were aware, that the two power stations were required [by QCL] to meet future growth in demand?
2076 Mr Arto in reply emphasised what he described as his key point about growth in demand by saying:
Again, my key point is not the growth in demand in the first few years. I think if we assume reasonable growth, I agree that Tarong and Tarong North were probably able to support the growth. If we look at other factors I mention, logistic costs, quality and ability to offset the impact of a shut down-breakdown of a power station, it was better to have more sources than just one.
2077 Counsel for the Commission put to Mr Arto that so far as Mr Arto knew, the decision to attempt to enter into both contracts “had nothing to do with” securing sufficient flyash supply to meet future growth in demand. Mr Arto regarded the phrase “nothing to do with” as a “bit of a strong statement” and said that in light of the surge in demand QCL had seen in 2002 with growth of 15% and 16% Mr Arto was “not convinced that the existing installation was able to supply enough flyash” because not only does QCL look at the annual demand it “looks at peak demand and the ability [of] the fly ash station to produce fly ash on certain day[s] for the demand coming into the fly ash station” [emphasis added]. Mr Arto accepted (T, p 1230, lns 40-42) that:
… the document [the March Board Paper] doesn’t mention growth. I agree with you. But, again, I think we are much better off to go over these cycles of demand with two sources than just one.
2078 And at T, p 1231, ln 6, Mr Arto said:
… assuming a growth of a few percent per year, the Tarong source was probably sufficient to cover the following five years. Now, considering the fluctuations of growth of any given year, I think we had a safer network with two locations than just one.
2079 Mr Arto said that this notion of fluctuations on days in any given year was discussed with Mr Ridoutt. Mr Arto said that “for us” fluctuations in growth in any year was not the “compelling reason but it was a significant factor to be taken into consideration” in trying to secure both contracts (T, p 1231, ln 15). Mr Arto accepted that the southeast Queensland market was “well-developed” and “already at a highly developed stage” although not properly described as “saturated” (T, p 1231, lns 20-24).
2080 Mr Arto explained the sources of information available to him and his approach to decision-making in entering into both contracts, in this way. Before the March 2002 Board meeting, Mr Arto did not read QCL’s tender to Millmerran (T, p 1231, lns 25-26). Mr Arto did not seek out any information about what the tender contained beyond the information presented in the Board Papers (the March and September papers): T, p 1231, lns 28-29. As to seeking out information about the price QCL was bidding for the Millmerran contract, Mr Arto said that he was “really relying on Ian Ridoutt to prepare this bidding and to ascertain this price” because it “was difficult for me to form an opinion on what this price should be” (T, p 1231, lns 32-33). Mr Arto said (at T, p 1231, ln 37) that his level of understanding of QCL’s profitability of entering into both the Millmerran and Tarong contracts “is as described in these Board Papers, and looking at the numbers, this was good enough for me” (T, p 1231, lns 38-39). In this context, Mr Arto also returned to Holcim’s focus on acceptable margins, an area of concern mentioned early in Mr Arto’s evidence. In this context, he added (at T, p 1231, lns 39-41):
We had objectives from Holcim to achieve about 30, 33 percent, a big margin on cement and mineral components product like fly ash and slag, and this was meeting our targets.
2081 One of the important considerations therefore for Mr Arto was that in securing both contracts, QCL would secure a “big margin” in the QCL flyash business of the order Holcim regarded as consistent with its margin objectives for Holcim companies and, having seen the “numbers” in the Board papers, this was “good enough” for Mr Arto.
2082 Mr Arto also said that until giving his oral evidence in cross-examination, he had never seen Pozzolanic’s non-conforming tender to Millmerran of September 2001 (T, p 1240, ln 27). His knowledge as at September 2002 about the tendering was “reflected in the board documents” (T, p 1240, ln 32) and Mr Arto’s “level of knowledge” on the terms of the documents was “[no] more than” the information contained in the Board papers. Mr Arto said he could not recall any discussions with Mr Ridoutt, the team leader of the negotiations, about the terms of the tender to Millmerran before September 2002 (T, p 1240, lns 36-39). Mr Arto says that he did not receive any information from Mr Ridoutt or anybody else within QCL or Pozzolanic about the tender price to Millmerran other than the information contained in the March and September Board papers (T, p 1240, lns 41-44).
2083 Mr Arto recalls that the September 2002 Board paper was presented to the Board meeting (T, p 1231, ln 44; p 1232, lns 26-27). At pp 2 and 3 of the September Board paper in relation to the Tarong contract, the observation is made that:
… While we have not been officially offered a new contract, we are confident that a new contract will be secured for the following reasons:
• We have been involved with reviewing the draft contract which has been written around our offer and our capabilities;
• We have just been verbally awarded a minor six-month contract to manage the furnace ash at Tarong North that starts on 3 October 2002 and is conditional on having a current ash sales agreement with Tarong. We are now awaiting formal contract documents for review and execution.
[emphasis added]
2084 Mr Arto accepted that this was the view of the negotiating team led by Mr Ridoutt (T, p 1233, lns 10-13) which included Pozzolanic’s manager, Mr Michael Wilson, who reported to Mr Ridoutt (T, p 1242, lns 16-26). Mr Arto said that he “was never personally involved in the negotiations at any step of the process”. When asked whether he trusted Mr Ridoutt’s judgment, Mr Arto said: “if somebody says he is confident you will listen to what he believes”, and as at September 2002 Mr Arto “heard this view and we resolved on that basis to approve the Millmerran contract” (T, p 1233, lns 18, 19). Mr Arto further explained his view about Mr Ridoutt’s above references to the state of the Tarong negotiations in this way (at T, p 1233, lns 21-28):
Our view was that Tarong was the preferred source, so we were happy to hear that we are still in the process with Tarong, and that our negotiations were optimistic or positive about the negotiations. Still we had the view that having the two sources would be better for our company, and nevertheless, without having any assurance that Tarong could be closed, we decided to pursue our objective and to reduce our risk, to close the Millmerran deal.
[emphasis added]
2085 Mr Arto said that although he had no reason to doubt Mr Ridoutt’s confident view as at September 2002 of obtaining a contract with Tarong, “you only know for sure when the contract is signed” (T, p 1233, lns 30-34), and although QCL “hoped” to “be able to close the deal” FAA was “still in the game to try to obtain Tarong” (T, p 1233, lns 45, 46).
2086 Mr Arto explained his thinking in discounting or “downgrading” Mr Ridoutt’s confident view, in this way:
… 20 years of professional experience … as long as a deal is not closed, its not closed and at the last minute somebody else – a competitor would take advantage and sign a different deal. So … as long as the deal was not closed, we could not take it for granted that we would complete it.
2087 Mr Arto did not accept that as at September 2002 it was “imperative” for Pozzolanic to enter into a contract with Tarong. Mr Arto only accepted that it was an “objective”. Nor did Mr Arto accept that he was willing to do “whatever it took” to secure a contract with Tarong. Mr Arto identified the rationale for a contract at Tarong in this way (at T, p 1236, lns 38-42):
We make rational economic decisions. I mean, obviously there is an amount of money we were not prepared to pay to get this contract, so we don’t want to do whatever it takes. [We have the objective to have] a very efficient network to supply fly ash to our customers, and there was obviously a limit to what we could do … to do this … to achieve this.
2088 Mr Arto described his role as managing director, concerning Millmerran, as “to check the strategy purpose, the business case and the legal aspects” of the transaction (T, p 1241, lns 22-23). Mr Arto said that as to the tendering process, that was “fully delegated to Ian Ridoutt and his team” (T, p 1241, lns 46, 47) and Mr Arto was not involved “in any means”. Discussions about progress occurred at monthly Executive Committee Meetings. Mr Arto said that he had many chances to meet regularly with Mr Ridoutt “[b]ut we did not discuss the terms of the tender” (T, p 1242, ln 5) nor the price of QCL’s tender to Millmerran. Mr Arto said his knowledge of price was confined to the March and September Board papers (T, p 1242, lns 9, 10). Mr Arto however accepted that Mr Wilson’s briefing email of 4 March 2002 set out prices in preparation for Mr Arto’s “first real briefing on both tenders” at the meeting arranged for 6 March 2002 between Mr Ridoutt, Mr Wilson and Mr Arto.
2089 Mr Arto accepted that Mr Wilson’s briefing email sets out QCL’s current profitability at Tarong of $7.3M EBIT on 2001 sales of 247,000 tonnes; and the price QCL would need to offer Tarong to win the contract (as against FAA), of $2.6M (indexed) over 10 years (with new plant at Tarong North in 2003 of between $1M-$1.5M). Mr Arto accepted that Mr Wilson’s email also set out the terms Pozzolanic would need to propose for Millmerran of 135,000 tonnes per annum at $1.242m over seven years (indexed) and capital expenditure of $1.5m in 2002. Mr Arto could not recall seeking any “justification” from Mr Wilson or Mr Ridoutt for the proposed prices the subject of the recommendation. Mr Arto said that Mr Ridoutt and Mr Wilson had been in the company for many years and they had come up with “a proposal”. He thought it reasonable to trust them and because QCL “had a lot of relationships already with the power stations through MPA”, Mr Arto assumed that Mr Ridoutt and Mr Wilson “had some inside information from the power stations on what was expected” (T, p 1244, lns 11-19). Mr Arto says that what he recalls of the briefing on 6 March 2002 about the tenders as to why Pozzolanic should enter into each contract was first, to solve the problem of the expiration of the existing contracts and, second, to make sure QCL and Pozzolanic could continue to improve the flyash business in south east Queensland.
2090 Mr Arto does not recall any wider discussion at the meeting with Mr Ridoutt and Mr Wilson of the reasons QCL ought to enter into each contract on the particular terms recommended to Mr Arto, although “part of the discussion was to make sure the business case would make sense in the end” (T, p 1244, lns 38-40) in the sense of providing a justification for the amounts paid. Mr Arto says the business plan would be made later on, as part of the five year plan containing forecasts including the higher costs paid to the power stations and the new selling price and volume.
2091 Mr Arto accepted that a business plan justification for offering the particular prices would need to identify the volume of flyash likely to be sold from each power station, the price to be paid and the profit to be derived. Mr Arto regarded the March Board paper as containing a business forecast at least for the following year.
2092 Mr Arto also said that the meeting of 6 March 2002 was a briefing meeting only and he was not asked by Mr Ridoutt or Mr Wilson to approve prices. Nevertheless, on 6 March 2002, Mr Wilson send a letter to MPA (for referral to Millmerran) increasing Pozzolanic’s offer to $10.10 per tonne (over a guaranteed 135,000 tonnes per annum indexed over seven years). Mr Arto said he did not approve the increased price offer. Mr Arto said that Mr Wilson may have needed Mr Ridoutt’s authority to increase the offer but it was not Mr Arto’s decision to approve the offer and it did not come from him (T, p 1245, lns 41-43).
2093 Mr Wilson’s letter increasing Pozzolanic’s ash payment offer for Millmerran Ash was sent attached to an email sent by Mr Wilson to Mr Cameron at MPA under the reference “Response to Millmerran” on 6 March 2002 at 6.17 p.m (ATB 4.27).
2094 Mr Arto accepts that he discussed with Mr Ridoutt and Mr Wilson in the meeting the sums that would have to be offered to secure each contract as reflected in Mr Wilson’s email, but at this time, Mr Arto says he had no decision to make on the price question because the process was “dedicated to Mr Ridoutt” and, in any event, a contract would eventually need to be signed by Mr Arto. In addition, capital expenditure would need to be approved by the board. Thus, in Arto’s view, Pozzolanic and QCL could later approve or disapprove anything arising out of Mr Ridoutt’s negotiations (T, p 1246, lns 1-8). Mr Arto says no approval for a bid price was sought from him, and Mr Arto says that he:
… thought that Ian Ridoutt, with the history of the relationship, and the responsibility [for] this profit centre, was in a better position than I was [to] determine which price was necessary for one, [to win the bid], and for two, to make an acceptable profitability for the company.
2095 Mr Arto said that Mr Ridoutt had authority to negotiate and make offers, “knowing that in the end, he would need my approval [and would need Mr Arto] to sign the contract and commit the company” (T, p 1246, lns 27-29). Mr Arto, on this topic, returned to the adequacy of the numbers and said (T, p 1246, lns 35-37):
[Mr Ridoutt] briefed me, and gave me the numbers … and gave me the prospect that these numbers … were likely to make us successful, and secondly that these numbers would make sense for the company, going forward, in terms of profitability.
2096 Counsel for the Commission put to Mr Arto that Mr Ridoutt’s explanation given at the 6 March 2002 briefing about why securing each contract would be profitable at the prices proposed had nothing to do with meeting future growth in flyash demand and future sales. Mr Arto rejected the phrase “nothing to do with growth”, and said: “I don’t think we had any speculation of very high growth rates”, and “growth was not the main driver behind the proposal of Ian Ridoutt” [emphasis added] (T, p 1247, ln 2; lns 8, 9).
2097 Mr Arto did not accept that Mr Ridoutt had told him that the main driver for the offers at the suggested prices was that if QCL lost one of the contracts a competitor would take some of QCL’s market share and QCL’s EBIT would potentially fall substantially. Mr Arto said that this was “just one of the risks” to be considered in both contracts. Mr Arto said that the “driver was to keep our business and to make ourselves [as] competitive as possible to supply our customers with fly ash” (T, p 1247, lns 14-16). Mr Arto said he could not recall Mr Ridoutt identifying another reason for winning each contract.
2098 On 28 March 2002, a “Capex Expenditure Request Summary” (a “Capex Request”) was prepared and proposed by Mr Wilson and recommended by Mr Ridoutt concerning a proposed QCL investment of $3.5M in Tarong North and Millmerran plant and equipment (ATB 30.9). Mr Arto accepted that Mr Ridoutt’s March Ash Market 2002 Board paper attached to the Capex Request was the explanation for the request. Mr Arto accepted that he had reviewed and approved the Capex Request and signed it on 2 April 2002, as explained by the attached Board paper, for submission to the Board (T, p 1248, lns 6-32). Mr Arto accepted that by signing his approval of the Capex Request he was indicating to the Board that the explanation was a sufficiently complete and accurate explanation of the Capex Request for the board’s consideration and thus, decision-making. Mr Arto accepted that normally, in Holcim, a “more detailed calculation spreadsheet” showing the investment and the return would be present and, “it doesn’t appear here”. Mr Arto was surprised that there was no “extensive financial appendix” to the Capex Request. Mr Arto assumed that the Capex Request document and attached March Board paper “is what we have”. Mr Arto said: “We had to make our decision” (T, p 1248, lns 42-46).
2099 Mr Arto accepted that normally the Board of a Holcim company would expect to see a Capex Request of $3.5M supported by a financial analysis setting out why the investment ought to be made and how it would be profitable to make the investment. Mr Arto thought it possible that since these events were eight years ago, processes may have been different. However, Mr Arto accepted that he was not suggesting that a financial analysis would not have been required of QCL at the time of the formulation of the Capex Request to support a capital expenditure of $3.5M.
2100 A proposition was put to Mr Arto that he knew that there was no proper financial analysis in support of the Capex Request. Mr Arto said that he did not remember a “specific [financial analysis]” in support of the request. Mr Arto accepted that a proper financial analysis would have contained an analysis of the production resulting from the capital expenditure; the volume of product that would be sold; and the price of the product, all with the aim of establishing that the capital expenditure would result in an acceptable return in profit. Mr Arto also accepted that such an analysis is the orthodoxy of the Holcim procedure (T, p 1249, lns 33-46; T, p 1250, lns 1-2).
2101 As to that orthodoxy, Mr Arto said that some times such a procedure is not necessary where, for example, as here, the Capex risk can be seen by its nature (T, p 1250, lns 6-7). Where capital expenditure is required for safety, maintenance, environmental reasons, the analysis would be done “with a shortcut … where the alternative of not doing the Capex is clearly negative for the company” (T, p 1250, lns 7-10). Mr Arto was asked whether the Capex Request fell into the category that the risk of not expending the capital was so clearly negative that no financial analysis was necessary. Mr Arto said the context of the present matter was that if nothing was done, and QCL and Pozzolanic had no contract at all, it was easy to see how much QCL would lose (T, p 1250, lns 14-17), and added (at T, p 1250, lns 17-19):
So I think the case was relatively straightforward that allowing this investment, subject to concluding the agreements and winning the bids, was a very obvious decision for the company.
2102 As to the question of whether the risk was so obvious that no financial analysis was required, Mr Arto said this (at T, p 1250, lns 29-34):
I’m saying that the analysis is clearly a bit too simple here. It should have been more sophisticated. I think I am disappointed to see that we had – that I had accepted this analysis as simple as it is presented here, but the – I think the rationale of this capex was to be consistent with the objective to sign both contracts and to secure the business of the company in fly ash going forward.
[emphasis added]
2103 Mr Arto was asked whether by signing the Capex Request, he agreed with that part of it recited in these terms:
SIGNIFICANT STRATEGIC BENEFITS
Securing the contracts at Tarong and Millmerran will maintain our ash sales to our existing customers. Loss of either contract may result in a loss of up to 250,000 t of fly ash and an EBIT of $6 million.
2104 Mr Arto accepted that statement as a “fair statement” recognising that the second sentence is a “worst-case scenario” (T, p 1251, lns 7, 8). Mr Arto was further pressed about the Capex Request not containing any financial analysis dealing with the things Mr Arto would “usually cover in justifying a capex request” and said (T, p 1251, lns 45, 46; T p 1252, lns 1-2) that “the people who presented this capex assumed that the attached document [the March Board paper] was detailed enough to support the capex they were presenting”. At T, p 1252, ln 4, Mr Arto accepted that his reference to “the people who presented the capex” included Mr Arto as one of those people.
2105 Mr Arto said he regarded the attached March Board Paper as giving QCL “very strong reasons” to invest the capital, and the 2003 prospective or estimated results for profitability satisfied, for Mr Arto, the objectives of keeping the business; keeping the capacity of supplying customers; and continuing to improve QCL’s results (T, p 1252, lns 6-10).
2106 Mr Arto was asked about the statement in the March Board paper describing the “risks associated with [Pozzolanic] securing both of the new contracts for 7+ years”. The first risk is described as “Imports from NSW or Asia” and the “Action” or mitigation comment is this: “Cost structure of importing fly ash should prevent large volumes of ash from Asia; Use NBA [next best alternative] analysis from NSW power stations to determine ceiling for ash pricing in SEQ”.
2107 Mr Arto thought that Mr Ridoutt and his team had analysed “the numbers” and he assumed that some estimates had been done which led Mr Arto and the team to not consider this a major risk although it was considered to be a constraint on QCL’s pricing (T, p 1253, lns 14, 15; 27-30). As to next best alternative pricing, Mr Arto accepted that transport costs were a very large component of the costs of supplying flyash to the concrete market and that Pozzolanic would attempt to determine how much it would cost someone to supply ash into SEQ from a New South Wales power station. Mr Arto accepted that that cost would, always, be largely determined by transport costs and ex-power station plant costs.
2108 Mr Arto did not accept that there was a very large difference between transport costs from Tarong to Brisbane as compared with transport costs from Bayswater to Brisbane. Mr Arto could not recall any calculations on that topic although he recalled that when QCL increased prices by about $10.00 (per tonne), some customers switched to Bayswater suggesting to Mr Arto that the difference was not making it impossible to bring flyash from Bayswater into SEQ. Mr Arto did not accept that such a result arose because the price in SEQ was so high that a supplier could afford to transport ash from Bayswater and still use that flyash profitably.
2109 Mr Arto regarded the pricing of flyash as relevant to the price of cement which represented a ceiling price for flyash, and secondly, the customer had other alternatives depending upon the location and the particular proposal from another flyash supplier.
2110 As to competition, Mr Arto accepted that if there had been a competitor able to supply flyash from Millmerran, that competitor could have driven down the price that Pozzolanic could have charged for supplying flyash out of Tarong (T, p 1254, lns 19-21). Mr Arto said that a competitor could also have developed a volume of sales, without impacting the price “to a great extent”. Also, customers could have purchased blended cement and flyash from Sunstate for their concrete operations. Thus, in Mr Arto’s view, there were a number of alternative sources for customers (T, p 1254, lns 22-26).
2111 Mr Arto was asked this question:
… do you agree that if there had been one supplier from Millmerran [and] a different supplier from Tarong, that would have led to increased price competition in the south-east Queensland market for the fly ash?
2112 Mr Arto responded:
It seems like an obvious question. If you increase the number of competitor[s], there is increased competition, yes.
2113 Mr Arto did not accept that it was also obvious that one likely result of increased competition would be a lowering of flyash prices, because that result would depend upon the dynamics of the market and Mr Arto could not speculate on what could have happened in different circumstances which included, in Mr Arto’s view, the proposition that QCL took making it possible for third parties to buy flyash from Tarong and Millmerran, seriously.
2114 Although the table at Point 6 of the March Board paper says that the 2002 budget had been prepared on the footing that the average selling price of flyash for SEQ for that year would reflect a lower selling price of $57.00 per tonne as compared with the 2001 actual average sale price due to the loss of the Millmerran ash contract, thus reflecting an assumption that a rival selling Millmerran flyash in competition with Pozzolanic’s Tarong flyash would result in a price reduction in SEQ of $10.00 per tonne, Mr Arto regarded this assessment as a conservative one for budget purposes, reflecting conservatism because people’s bonus depends on achieving the budget to some extent (T, p 1255, lns 19-22).
2115 Mr Arto observed that the budget was formulated on an assumption which was simply “one possible scenario in the market” (T, p 1255, lns 42-43). Another scenario involved loss of volume but the scenario in the paper involved a lowering of price and in any event the budget was probably prepared some time towards the end of 2001 when Mr Arto said that he was “not yet in charge of the company”. The “loss of price” scenario reflected “what was thought of back in October 2001” and at that time “the teams thought that the budget would be built with a slightly increased volume and potentially lower price under the circumstances described by this note [the loss of the Millmerran ash contract footnote]”. (T, p 1256, lns 2-5). The following exchange then occurred with Mr Arto:
And the circumstance was a cause and effect relationship, was it not? Loss of the Millmerran ash contract to somebody else would lead to a lower average selling price?
--- Yes.
And you had no reason to doubt the realism of that estimate, did you?
--- No. I mean, if another competitor and another source, there will be an impact either [on] price [or] volume or both, obviously.
2116 A further risk of securing both contracts, identified at Point 4 of the March Board paper was the risk of “New power stations in SEQ”. Mr Arto said he saw that circumstance as a risk and regarded a consideration of new sources of ash or competition in the forthcoming years as a normal business risk to be analysed (T, p 1256, ln 26; 30-31). Mr Arto was then asked (T, p 1256, lns 33-35):
And it was a risk because if that eventuality occurred, there was a prospect that [Pozzolanic] would receive lower prices for its fly ash and lose market share; correct?
--- Like any business, absolutely.
2117 Mr Arto also observed that the risk as described in the 2002 budget represented a reduction in QCL’s EBITDA of less than $1 million which was approximately one per cent of QCL’s EBITDA.
2118 A further risk described at Point 4 of the March Board paper was the risk of “Product manufacturers distribute ash into market”. To mitigate that risk, so described, the Board paper says this:
We are negotiating some protection in the contracts for this possibility. Further to this, a product manufacturer should only be able to get run-of-station fly ash, which will require processing to be suitable for the concrete market.
2119 Mr Arto said that the issue of “negotiating some protection in the contracts” was the “key issue to resolve” between the power station and QCL. Mr Arto said that the power stations did not want any sort of exclusivity on the one hand, and QCL was trying to secure a return on its investment by having “protection” which meant “some sort of preferred customer status” for Pozzolanic and QCL as the largest customer (and one making capital investments at the power station), on the other hand. Mr Arto said that “we wanted to ... find this balance between obtaining this preferred customer status and not locking [up] the source itself” (T, p 1257, lns 18-25).
2120 Earlier in Mr Arto’s evidence he had said (at T, p 1241, ln 15), that he was not aware at any time before the Board meeting of September 2002 that Pozzolanic had requested of Millmerran as part of its tender document in September 2001 “an exclusive agreement for sale of ash into the cementitious market to justify [our] investment” and that “exclusivity was not something we had as an objective” (T, p 1241, ln 30). Mr Arto said that as to this third risk set out at Point 4 of the March Board paper, he fully understood as at March 2002 the objective mentioned in the Action box at Point 4 of being able, as he described it, to supply ash to other parties but also to find a way of securing a return on QCL’s investment (T, p 1257, lns 26-30). Mr Arto said that at March 2002, he did not know that Pozzolanic had asked for exclusivity, and that he and the Chairman Mr Maycock “knew that exclusivity was not an option” (T, p 1257, lns 36-39). Mr Arto said that he did not know that Mr Maycock had signed the tender for the Millmerran contract. Mr Arto said that he and Mr Maycock had retained Clayton Utz to assist QCL in developing the contract and “part of their mandate was to help us find a solution which did not include exclusivity” (T, p 1258, lns 1-2).
2121 Mr Arto said that QCL did not want to limit access of other parties to ash from the Millmerran Power Station.
2122 Mr Arto put the matter this way:
We wanted the contract to be fair to us, still make it possible for them to access the source of flyash, but to be fair to us in terms of being the largest customer and making financial commitments over a number of years.
2123 Mr Arto said that the protection being sought was protection against “the loss of our status as a preferred customer”. Mr Arto said the power stations had the same objective as Pozzolanic and QCL of ensuring that the contract could not be interpreted as exclusive in any sense. Mr Arto said that, as at March 2002 at least, he did not want to see a position where the company commits to payments for a number of years, makes the capital investment and then sees the power station sell “exactly the same fly ash even at a lower price the following day” (T, p 1258, lns 31-34). Mr Arto said:
… we wanted to commit for years but to have a preferred status compared to somebody else who would just come and buy on a spot basis or on different terms.
2124 Mr Arto said that the notion captured in the Action box on this topic was that Pozzolanic receives ROS ash and the flyash has to be processed to make it suitable for the concrete market. Therefore, if somebody wants ready-made flyash suitable for the concrete market they can either buy it from QCL or some other company, or if they want to buy ROS flyash, they will have to implement a process for making it so it is suitable for the concrete market (T, p 1259, lns 14-21). Mr Arto said that there was no constraint confronting a third party negotiating an agreement with a power station except for “what is referred to in the contract with us” (T, p 1259, lns 32-33) and, in any event, ROS flyash had other uses. Mr Arto said that to the extent that a third party wanted to make “proper fly ash for concrete, you need to have [processing treatment]” requiring an investment of about “1 or 2 million dollars, to have the capability to process and store the fly ash” (T, p 1259, ln 38; lns 24-26). Mr Arto regarded it as possible, physically, to divert the flow of flyash into two streams and have another processing station which would require “relatively small [scale] equipment” (T, p 1259, lns 39-41).
2125 Mr Arto did not accept that he wanted to have available to Pozzolanic “whatever fly ash was coming out of the station on a daily basis to meet [Pozzolanic and QCL’s] requirement for processed fly ash”. Mr Arto put the matter this way (T, p 1260, lns 10-13):
We wanted to have enough fly ash for our own needs, and if I compare how much we produce and use compared to the total production of fly ash of these stations, there was plenty available for third parties to come in and set up another business.
[emphasis added]
2126 Mr Arto also said this (T, p 1260, lns 35-39):
We wanted the contract to make it possible for power station[s] to supply raw fly ash to a third party and in that eventuality, we wanted to have some protections from a commercial standpoint regarding either the price or our ability to terminate the contract or renegotiate [it] ...
[emphasis added]
2127 Mr Arto was taken to p 4 of the March Board paper which sets out a summary of the current contracts Pozzolanic held with Queensland power stations. Under the schedule, the paper notes this: “It is important to note that there is a good possibility of getting an extension for the Swanbank contract. This would take this contract out to 2004”. Mr Arto said that he did not read any of the existing contracts. He was satisfied with the summary at p 4 (T, p 1261, lns 1-2). Mr Arto said that he did not know that the Pozzolanic/Swanbank contract gave Pozzolanic an exclusive right to take flyash from Swanbank.
2128 On 2 April 2002, Mr Peter Klose sent a memorandum to the Executive Management Group or Executive Committee comprised of Mr Arto and his “direct reports” (ATB 4.39). Mr Klose was the Business Development Manager for QCL and reported directly to Mr Arto as secretary to the Executive Committee. Mr Klose worked on projects. Mr Arto did not recall Mr Klose’s memorandum but accepted that he would have received the document providing the Committee with an “Update on QCL Group Position Analysis and Strategic Options 2000-2005”. In the memorandum, Mr Klose says that the issues raised in the document are “particularly focussed on those items to be discussed during the April 2002 Business Planning Sessions”. Those sessions commence the Business Planning Sessions which are usually completed “with numbers by September”.
2129 At p 5 of the memorandum addressing QCL’s control of Secondary Cementitious Materials, Mr Klose says that the threat of a second flyash supplier in the Queensland market remains current and both Transpacific and FAA are tenderers for the Millmerran and Tarong Power Station contracts. Mr Klose observes that “The ability to secure these contracts is vital in retaining value to the Pozzolanic business” and that the current estimates to secure the contract involve an additional cost of $3 million per annum “but this will be offset by increased ash prices”.
2130 Mr Arto accepted that the ability to secure these contracts was “very important in retaining value to the Pozzolanic business” (T, p 1263, lns 29-30) although Mr Arto regarded the word “vital” as a strong word.
2131 In the March Board Briefing paper, budgeted total flyash sales for South East Queensland for 2002 were 297,000 tonnes as compared with 2001 actual sales of 288,000 tonnes, an increase of 3.125%. The 2003 estimate reflected a projected increase in sales over 2002 of 34,000 tonnes to 331,000 tonnes, an increase of 11.44%. Projected 2003 sales represented an increase on 2001 actual sales of 43,000 tonnes or an increase of 14.93%. As to the recoupment of the additional $3 million in costs by offsetting price increases, Mr Arto said that throughout 2002 QCL was faced with a very strong surge in demand for cement and flyash and was considering increasing the cement price and also the flyash price by $10.00. Mr Arto said that QCL had “reached a point where the fly ash business would not be able to improve further in the next five years, but … our objective was to try [to] maintain the same level of profitability we had in the fly ash business” (T, p 1264, lns 15-18). In other words, volume growth would be difficult looking five years out but profitability ought to be preserved.
2132 Counsel for the Commission put to Mr Arto that the idea underlying the notion that the additional costs would be offset by increased ash prices was that QCL would be able to increase ash prices if it had both supply contracts from Millmerran and Tarong because there would then be no effective competitor selling flyash in the South East Queensland concrete market. Mr Arto rejected that proposition and said that the intention was to try and maintain the profitability of the flyash business but QCL could not guarantee, by any means, doing so. Mr Arto said that price increases were not “fully implemented” and some customers bought flyash from other sources. Mr Arto said that “our forecast was that we would not be able to fully pass on this [increase] to the customers” (T, p 1264, lns 27-30; 36-37).
2133 As to the relationship between securing both contracts and the opportunity to recoup additional costs through price increases (whether “signing both contracts would trigger the price increase”) (T, p 1264, ln 43), Mr Arto also said this:
I think I want to also correct my previous answer to your question. You were asking whether signing both contracts would trigger the price increase. I think the logic was not this one. The logic was, “We want to sign new contracts. These new contracts will be at the higher [cost] and [our management task] is still to try to improve our result, and we will try, through increased prices, and at that time, as the market was going very strong, we believed that there was a potential for price increase”.
[emphasis added]
2134 Mr Arto was pressed with the notion that he understood that part of the reason there would be potential for a price increase would be Pozzolanic securing both contracts, and no effective competitor selling flyash in the SEQ concrete market. Mr Arto did not accept the QCL faced no effective competitors. Mr Arto said, as he had earlier said in evidence, that the competitors were Sunstate in providing flyash cement blended products, and flyash from New South Wales, although Mr Arto had no knowledge of the “numbers” or the “analysis”. Mr Arto said that Mr Klose was “a bit [expansive] in his wording and “we can never say we will obtain a price increase” [emphasis added].
2135 In his second affidavit (Ex-35, paras 5-9), Mr Arto describes the factors that helped to explain Mr Arto’s statement in para 12(a) of his first affidavit in which he said that in around March 2002 he understood that the demand for flyash for use in concrete was growing and as a result QCL needed more flyash for supply into Victoria and possibly New South Wales and New Zealand. Mr Arto (at T, p 1267, lns 42-45) accepted that he was not intending to indicate, by paras 5-9, that a future increase in demand for flyash was some part of the rationale for entering into the Millmerran and Tarong contracts. Mr Arto made further reference to para 12(a) of the earlier affidavit (Ex-35A) which he said referred to demand growth for flyash for Victoria, New South Wales and New Zealand but which “we know [the ash] does not come from south-east Queensland”. However, Mr Arto regarded para 4 of the second affidavit as containing a more general statement that demand was growing and the relevance of the general reference to demand growth (T, p 1268, lns 14-18) is:
… to recognise that there was a moderate growth over the long term for fly ash in south-east Queensland, and a moderate potential for further substitution to cement and I am not suggesting that a huge growth would be the key driver for acquiring the contract with one of two power stations as such.
2136 Mr Arto explained that the point of his second affidavit was to explain his view in 2002 that there was potential for long term growth in the market for fly ash sales which “offered QCL the potential to expand sales to some extent … to support a sensible growth – not a huge growth rate but a sensible growth rate for the flyash business in south-east Queensland” (T, p 1268, lns 34-38). Mr Arto explained the point of these references in this way (T, p 1268, ln 42 to p 1269, ln 3):
All of these reasons suggested that we had to enter into at least one contract. It does not, as such, support two sources. Other reasons I mentioned [earlier] support two sources. But the growth, as such – but to some extent, for a number of years, would probably have been enough with the Tarong source. The Millmerran [ash], we didn’t know the quality, the quantity was lower, so Millmerran was probably not as good a source to continue to support the growth as Tarong was. … These reasons support one good source. The question [being addressed] was not two versus one [in] the context of the growth of the market.
[emphasis added]
2137 Mr Arto regarded the one good source as being Tarong and it was QCL’s preferred objective. Mr Arto said that if we had to have only one, we would certainly have preferred Tarong.
2138 In Mr Arto’s second affidavit, Mr Arto supports his propositions by reference to slides drawn from a document described as Ex-35, PPAA-1, which is the “QCL Business Plan” dated 12-14 September [2002] under the reference Philippe Arto and Gary Sherlock. Mr Arto says that Slide 12 (mis-labelled 2) shows that capacity utilisation for cement was very high and thus there was little scope for further growth in cement sales without losing QCL’s export activity and, in part at least, that meant there was opportunity for increased flyash sales. Mr Arto accepted that Slide 12 addresses capacity utilisation for the whole Australian industry and is “completely unhelpful in determining what QCL’s capacity utilisation of cement was” (T, p 1269, lns 31, 32). Mr Arto accepted that the real factor was “the utilisation of our own cement capacity, which I believe was close to its potential” (T, p 1269, lns 15, 16).
2139 Mr Arto accepted that probably (although he did not remember exactly), the document referred to in his affidavit is a presentation made by Mr Arto to a Holcim Group meeting in Singapore in 2002. At Slide 51, some of the key strategic issues for QCL are identified including “Customer Concentration” meaning more than 50% of QCL sales are made to three customers who are also the major cement competitors in other States. Another key strategic issue for QCL is described as: “QCL has excess capacity with currently only low margin opportunities”. Mr Arto said, however, that he could not characterise QCL as having “excess capacity”. Mr Arto said that QCL’s operational efficiency was close to 80% (although Mr Arto could not recall the number exactly) and Holcim’s assessment is that normal capacity utilisation is close to 85%.
2140 On that basis, Mr Arto regarded QCL as “running very close to full capacity” (T, p 1270, lns 1-2) rather than having “excess capacity”.
2141 Mr Arto described the basis for that view as his understanding that QCL was exporting clinker to local competitors in some states, or ACH, and the remaining clinker was being exported with the result that QCL did not have any additional clinker for export. Mr Arto was asked to reconcile the notion that QCL’s “cement business was basically sold out with domestic and export sales” (para 5 of Mr Arto’s second affidavit) with Mr Arto’s statement in the QCL Business Plan he presented in which it is said that “QCL has excess capacity with currently only low margin opportunities”. Mr Arto said that QCL had excess capacity, as compared with “domestic sales in cement” and, in that respect, QCL was actually running at full capacity thanks to sales to competitors like Sunstate or ACH or, sales to export which gave QCL lower margins. However, the plant was sold out.
2142 Mr Arto accepted that the reasoning in his affidavit was that because domestic cement capacity was basically sold out, with no more cement able to be sold into the domestic market, an opportunity presented itself to sell flyash instead (T, p 1270, lns 25-28). Mr Arto did not accept that the reasoning in the affidavit was incorrect. He said that QCL wanted to keep Sunstate as a customer for clinker, and QCL needed cement to supply growth in the market. Mr Arto said that “it was good for us to have enough fly ash to also grow” (T, p 1270, lns 30-34).
2143 The following exchange took place in relation to para 7 of Mr Arto’s second affidavit and his references to Slide 13 in the presentation:
Q Now, can I take you to paragraph 7 of your second affidavit? You say: I understand that there was scope to increase fly ash sales to existing customers. And then you refer to Slide 13 of the presentation, as showing that, as at 2001, fly ash represented about 16 per cent of all sales of cementitious products … [Slide 13] refers to the use of bulk fly ash in the cement industry in Australia generally doesn’t it?
A It does.
Q It does not relate to the use of fly ash by QCL’s customers in south-east Queensland, does it?
A … it’s illustrative of the argument. It’s not the data we need to support the argument. The data we need [is] the actual sales of fly ash in Queensland versus [the] sales of cement.
Q Well do you agree that the data in slide 13 is useless to support the argument you seek to advance in paragraph 7 of the affidavit?
A It’s not enough to support the argument. I think the real data [would] allow us [to] form a view on this argument.
2144 Mr Arto was pressed to identify the foundation for the view set out in para 7 of his affidavit that there was scope for QCL to increase flyash sales with small to medium customers to the level reached by larger and more sophisticated customers. Mr Arto said that flyash sales in SEQ were about 300,000 tonnes, and the cement sales were about 700,000 tonnes (or so) and thus the market was probably over 1,000,000 tonnes in SEQ. Since the ratio of flyash sales to the cement market would be in the range 20-25%, Mr Arto considered that there was some potential for “further penetration” but he “would agree it was limited potential” (T, p 1271, lns 27-34). At T, p 1281, lns 44-46, Mr Arto accepted that on that arithmetic, flyash sales in SEQ were between 25 and 30% of total sales volume, already.
2145 On 28 June 2002, Mr Ridoutt sent an email at 8.06 am to Mr Des Chalmers and Mr Michael Wilson saying that he had organised a meeting with Mr Arto for 2.30pm that day for Mr Ridoutt, Mr Chalmers and Mr Wilson to give Mr Arto “a compelling story of why Intergen should award us the contract and make sensible decisions about distribution of their ash” (ATB 5.22). Mr Ridoutt asked Mr Chalmers and Mr Wilson to pull the relevant information together. A briefing note was prepared dated 28 June 2002 (ATB 5.20). In cross-examination, Mr Arto said that the briefing note was not for him, and this was the first time he had read the document. Mr Arto did not recall having seen the memorandum. Mr Arto was also shown a memorandum dated 25 June 2002 under the heading “Briefing Note Millmerran Ash Sales” (ATB 5.19). Mr Arto did not recall having received the memorandum of 25 June 2002. The 28 June 2002 memorandum begins by saying “Further to the previous briefing note, there are some other issues that should be considered”. Mr Arto did not regard the 25 June 2002 memorandum as one directed to him.
2146 Mr Arto accepted that a meeting occurred on 28 June 2002.
2147 Mr Arto thought that the point of the meeting was to discuss how Pozzolanic and QCL “could address both parties’ desire to have an agreement compliant with trade practices and to discuss the commercial aspects of this contract which would allow sale to third parties, with the support of Clayton Utz” (T, p 1272, lns 24-27). Mr Arto said that he could not really recall a meeting but he assumed from the email that there must have been a meeting. However, Mr Arto recalled that he had a number of discussions as to how “this objective of having a legally compliant contract and commercial terms which would be acceptable to both parties” (T, p 1272, lns 35-36), could be achieved. Mr Arto said that in the course of discussions about a legally compliant agreement neither Mr Ridoutt nor Mr Wilson told Mr Arto that the original non-conforming offer had been one which required exclusivity. Mr Arto said he knew that exclusivity was a red flag and a sensitive issue which led him to obtain legal advice about the contract.
2148 Mr Arto was asked these questions (T, p 1273, lns 41-47; p 1274, lns 1-19):
Q Did Mr Ridoutt explain to you what the issue was about trade practices compliance in the negotiations between QCL and Millmerran?
A Well, he explained to me in simple terms that initially, the intent of both parties was to have a clear solution where we take responsibility for the ash and we sell the ash and we run our business, and the power station were happy to have us taking care of everything. So it was a simple business deal in principle. And later on, lawyers on both sides got involved and rang the warning bell and [said] “What you want to do is simple, but we cannot do it exactly as you want. We have to ensure that your transaction is compliant with trade practice, and what you want to do, as simple as it is, cannot be done exactly how you want to do it, as a simple business deal where we take all the ash and we take care of it”. So we – on that basis, we said, “Okay, we need to change the terms that were initially thought of without taking into account the restrictions of the Trade Practices Act.
Q So you understood from Mr Ridoutt’s explanation that a reasonably simple business deal involved Pozzolanic taking all the ash; is that right?
A Well, I don’t know which side it came from. I think the power station wanted also somebody to take the ash … . I did not know the terms of the tender … . whether it was considered that several operators could be also taking ash at the same time. I think Pozzolanic wanted to secure a certain quantity of ash and to have a preferential position vis-À-vis other potential parties taking ash from the power station. If they have considered an exclusivity agreement, this may have been problematic.
[emphasis added]
2149 Mr Arto said he understood the “original simple deal that Pozzolanic would take all the ash” as meaning that the power station wanted to have an operator that would fulfil its objective of having somebody use as much ash as possible instead of putting the flyash into a landfill, and at the same time get the best possible value for their ash, from the flyash produced from the ash (T, p 1274, lns 25-35).
2150 In the 25 June 2002 memorandum (ATB 5.19), the observation is made at p 2:
Trade Practices Issues
Our non-conforming offer to InterGen included the proviso that we get exclusivity for concrete grade fly ash. Prior to the announcements of Pozzolanic as the preferred tenderer, InterGen made it clear that they did not have any intent to sell ash to other parties. Within a couple of meetings their position changed to one of wanting the ability to seek additional revenue from ash sales. We have expressed our concern about entering such a contract.
[emphasis added]
2151 The memorandum notes that a number of suggestions had been made by QCL to “reduce our risk profile” developed in conjunction with Clayton Utz and they involved a right in Pozzolanic to seek a price re-negotiation in the event that Millmerran sells concrete grade flyash to any third party at a price and on terms more favourable than those agreed with Pozzolanic. Negotiations with Pozzolanic would then be required and Pozzolanic would have the ability to elect to terminate its agreement. The second suggestion involved a yearly contract whereby Pozzolanic enjoyed the sole discretion to extend each year up to seven years and the only reason not to extend would be limited to not being able to compete in the market place.
2152 Mr Arto was asked about his understanding of Mr Ridoutt’s suggestions of the arrangements that Pozzolanic should try to put in place rather than the original simple business deal. Mr Arto said that he acknowledged that Pozzolanic had to give access to third parties to the flyash from the power stations both at Millmerran and Tarong, and therefore, Mr Arto says he tried to find commercial terms which would accommodate that access but which would still give Pozzolanic a realistic possibility of having a proper return on the investment and the financial commitments made to each power station (T, p 1274, lns 40-44).
2153 Mr Arto could not recall whether he discussed with Mr Ridoutt the suggested substituted arrangements set out on p 2 of the 25 June 2002 memorandum. Mr Arto thinks there may have been a discussion of a number of terms relating to price or extension or termination, although Mr Arto does not recall the content of the discussion. Mr Arto recalls that his “own position” was to have the lawyers provide an opinion as to whether “these terms were acceptable and to have Ian Ridoutt tell me whether these terms would still make sense from a business perspective” (T, p 1275, lns 10-13).
2154 Mr Arto was asked whether his position was that Mr Ridoutt talked to him about possible terms for protecting Pozzolanic’s interests but did not show him the memorandum in the course of the briefing. Mr Arto again said that he did not recall the briefing, and the memorandum was not needed “because we were not at the point where we would discuss specific drafts of any contract or agreement”. Mr Arto said the discussion concerned a matter of principle that “we could not and we should not make this deal exclusive, and therefore we had to find an acceptable solution with different commercial terms and which would have to be negotiated” (T, p 1275, lns 20-22).
2155 Mr Arto said that he could not recall, at all, the briefing memorandum of 28 June 2002 (ATB 5.20).
2156 The following exchange occurred in relation to the 28 June 2002 memorandum.
Q You see what is said in the briefing note under the heading Ash Market … “The fly ash market is truly saturated in Queensland thanks to the efforts of Pozzolanic over a number of years.” Are you telling the Court that neither Mr Ridoutt nor anybody else in QCL ever made a statement of that type to you .. up to September 2002?
A I don’t recall this statement.
Q Did anybody say to you, “The fly ash market in Queensland is saturated”?
A Again, I don’t recall this statement ...
2157 As to the state of penetration of flyash into the concrete market in Queensland Mr Arto said that his view was that large customers had already achieved a “very high level of penetration” whereas smaller ones had “not achieved that same level” which suggested to Mr Arto that further growth in the market was to be targeted at the small customers representing maybe 30% of the market and linked to the general growth in the construction industry in SEQ. Mr Arto said that he could not recall anybody within QCL discussing that view with him.
2158 Page 2 of the 28 June 2002 memorandum contains what is described as a breakdown of the current “value proposition” (determined on the basis of the 2001 figures) for QCL. The amounts seem to be QCL’s EBIT by reference to each of Tarong, Swanbank, and Central Queensland in amounts of $7.3M, $0.7M and $2.7M, respectively (and offsetting head office costs) resulting in total EBIT (excluding Millmerran) of $5.7M, or $3.7M (including Millmerran and the revised Tarong contract). Mr Arto said that he could not recall a discussion about the table on p 2 of the memorandum. Mr Arto said that when it comes to assessing the impact of the contracts on QCL’s EBIT or EBITDA, Mr Arto had regard to the March and September Board papers.
2159 Mr Arto said that he did not remember having seen the table.
2160 Mr Arto was asked further questions about Pozzolanic’s tender to Tarong.
2161 Mr Arto said that he had not seen the tender document before September 2002 and to the best of his recollection he did not ask to see it. Mr Arto was asked whether he came to understand that Pozzolanic had indicated a willingness to Tarong to guarantee revenue from 200,000 tonnes per annum of flyash and that one option offered by Pozzolanic was a fixed payment to Tarong of $2M per annum. Mr Arto said that he understood Tarong was interested in guaranteed revenue but he did not know of the options put. His knowledge was confined to the information in the Board papers.
2162 Mr Arto said that he did not know that Pozzolanic’s tender to Tarong had sought exclusivity in respect of concrete grade ash. When asked whether it was Mr Arto’s position that Mr Ridoutt had never explained to him that Pozzolanic’s tender proposal had sought exclusivity with respect to concrete grade flyash, Mr Arto said: “I don’t remember having this discussion with [Mr Ridoutt]” (T, p 1283, lns 27-29). Mr Arto said that he recalled a discussion in March 2002 during a Pozzolanic Board meeting in which Mr Maycock said that Pozzolanic and QCL should be extremely careful in relation to exclusivity and the implications of the contracts. Legal advice was to be taken. Mr Arto said that he did not discuss the legal implications of the bid with Mr Ridoutt because Mr Arto felt he did not have the skills to do so. Mr Arto said (T, p 1284, lns 14-18):
My priority was to win the bid against [FAA], that was my – the driving force for us … to keep – the source of fly ash and to be able to continue to supply these major customers. It was not such a dramatic issue whether somebody else would have access to the fly ash and develop an alternative supply in the market, which we made open in both contracts, actually.
2163 Mr Arto was asked further questions about the protection he sought to achieve in the negotiations with the power stations to mitigate the perceived risks earlier spoken about. Mr Arto said that each contract was to be absolutely open to the possibility of a third party obtaining “access to the raw ash” and, in the case of each contract, QCL negotiated with the power station to “reduce our exposure” which meant that “we wanted to have a shorter contract or have an exit option in the contract, in case the market environment would be different because a third party would have access to the ash, and this is what we actually did” (T, p 1284, lns 22-30). The following proposition was put to Mr Arto:
What you were seeking protection against was the effect of a third party having access to the ash from one of these power stations; correct?
2164 Mr Arto explained his position in this way:
No. That is not what I call “protection”. We were negotiating these contracts in the sense of being a preferred customer, making a long-term commitment and investment, taking a large volume, and the contract did not mention, obviously, any exclusivity, so they made it possible for a third party to go and negotiate with the power station, access to the raw ash. Having this in mind, we reflected on our investment and our risk, and we re-negotiated some terms to reduce our exposure to this risk by reducing the duration of the contract, or having an exit possibility.
[emphasis added]
2165 Mr Arto accepted that the risk of another party obtaining access to, for example, Millmerran ash and processing that ash to sell flyash to concrete producers in the SEQ market was a “market risk” that could happen in any market, that is, an actual risk in the market that somebody could go to the same supplier and develop a new business. Mr Arto took the view that should such a situation occur, it “would create risk for us, and that we should therefore reduce the exposure in terms of the length of the contract we had with the fly ash stations” (T, p 1285, lns 9-11). Mr Arto accepted that one response to the risk, in the Millmerran contract, was to adopt a provision which permitted Pozzolanic to terminate the contract on 60 days’ notice after 31 December 2006 and pay $50,000.00 per month amounting to $600,000.00 per year rather than the minimum amount of $1.3M per year (as indexed annually). Mr Arto said that Pozzolanic was seeking to reduce its exposure for the relevantly remaining period by 50% of the payments (the remaining three years after 31 December 2006).
2166 Mr Arto said that he did not give consideration to the effect of that provision on decision-making, within Millmerran. In response to the question of whether it occurred to Mr Arto that, for Millmerran to decide to permit access to a second off-taker, Millmerran would have to form a view that the benefit derived from a second off-taker would need to off-set the risk that it would lose approximately $700,000.00 (50% of an annually indexed base of $1,353,000.00), Mr Arto said: “I think the logic was that if they would give access to another offtaker, they would hope for a higher volume or a better price, and therefore more than offset the 50 per cent loss for the last three years of the contract”. The business case for Millmerran, in Mr Arto’s view could be either volume or price or term (T, p 1285, lns 35-38).
2167 Mr Arto assumed that Millmerran’s acceptance of the provision “[made] sense to them” so that any apparent switch would be a possibility for Millmerran to consider and determine whether “there was an offer in terms of either volume, or price, or both, which could make it attractive” (T, p 1287, lns 1-2).
2168 Mr Arto was asked whether at any time up to the September Board meeting of QCL he had seen a graph indicating QCL’s forecast demand in SEQ for flyash, of the kind set out on p 4 (ATB 4.15) of Pozzolanic’s tender to Tarong. Page 4 contains a graph under the statements: “The following graph shows our forecast for the concrete grade ash market in South East Queensland”. The graph is followed by a table setting out potential revenue to Tarong power station under proposed Options A, B or C based on the forecast sales of concrete grade flyash. The forecast shows sales by the end of calendar year 2002 of 294,000 tonnes (294k) and by the end of calendar years 2003, 2004, 2005, 2006, 2007, 2008 and 2009 the forecast volumes were 322k, 350k, 369k, 378k, 377k, 345k and 319k.
2169 Mr Arto said that he had never seen the graph (reflecting the volume predictions). He did not understand the graph. Mr Arto said the graph more or less matched what his expectation had been in terms of growth although he did not understand the downturn in the last two years. Mr Arto was asked whether he had asked Mr Ridoutt, Mr Wilson or Mr Chalmers whether they had obtained demand forecasts for flyash sales in SEQ. Mr Arto said that he could not recall exactly asking and getting an answer to such a question but he assumed that there were numbers and calculations reflecting growth forecasts for flyash sales. Mr Arto assumed that the business planning process required demand forecasts to be undertaken.
2170 Mr Arto was asked whether he recalled “seeing numbers” produced as a result of such a forecast. Mr Arto could not recall seeing numbers relating to a demand forecast for flyash.
2171 Mr Arto was asked:
Q Any time before the board meeting of September 2002, did you ask to see the numbers for the forecast demand for fly ash in south-east Queensland?
A I did not. I relied on the forecast for 2003 and very strong trend in 2002, and the general view that, through the cycles, the overall general trend for [the] construction market was in the range of three per cent growth per year and my personal view was that fly ash … had the possibility to penetrate more, especially through small customers, and there was also at Holcim some research done regarding the technical possibilities to go even beyond 30 per cent, and a lot of pressure from [the] Holcim group to reduce CO2 emissions … . So … I thought that a three per cent growth per year was a minimum, and that we could have cycles, like [those] in 2002, with 15 per cent growth in any given year.
2172 Mr Arto accepted that the business planning process within QCL involved doing research and obtaining available statistics consisting of general economic indicators such as housing trends and infrastructure demand in order to derive forecasts of demand. Mr Arto accepted that the graph demonstrated cyclical movements showing a peak demand in 2007 with demand falling away in the later years. Mr Arto was asked whether his own views about demand represented an appropriate basis to commit QCL to entering into a contract with Millmerran which would cost $1.3M per year. Mr Arto said that his own views or feelings about demand was only a “small part” of the decision and that even the graph demonstrated that over the period of the contract there was “quite a significant growth from 270[K] to close to 380[K] tonnes” (T, p 1288, lns 44-47).
2173 As to capacity, Mr Arto said that prior to the Board meeting in September 2002 he did not ask for management’s analysis of the amount of concrete grade flyash which could be produced from the Tarong and Swanbank power stations (T, p 1289, lns 1-6; 26-29).
2174 Mr Arto was asked whether, in order to determine whether contracts with the Tarong and Millmerran Power Stations were needed so as to meet either existing or future demand, Mr Arto would have needed to know the production capacity of Tarong and Swanbank. Mr Arto responded by saying that the Tarong site would probably provide enough capacity for a few years and the benefit of the Millmerran site was the virtue of having another location which gave the flexibility earlier described by Mr Arto. In answer to the specific question, when pressed, Mr Arto said that he did not accept that in order to determine whether contracts should be entered into with both Tarong and Millmerran, it was necessary to know the production capacity of Tarong and Swanbank because, it is not easy to describe what is the “capacity” of “this kind of industrial setup” and moreover, “this capacity limitation was not a key factor in the decision making” (T, p 1290, lns 1-2) [emphasis added].
2175 That response led to this question (T, p 1290, lns 4-14):
Q Well, let’s be clear, then ... It was not a key factor in the decision making process that additional-capacity from Millmerran might be needed to meet current or future demand in south-east Queensland; correct?
A I want to be precise here. If we had only Millmerran, I think we might have run into issues regarding volume. Not even knowing about the quality ... I think the volume of raw ash was in the range of 1 million tonne, so extracting up to 400,000 tonnes of concrete-quality ash was not obvious. So I think Millmerran alone could have been a problem. Regarding Tarong … I don’t know what this potential capacity could be, but it did not come as a constraint [upon] our decision to go after Millmerran.
[emphasis added]
2176 Mr Arto was then taken to ATB 4.36 which contains Pozzolanic’s assessment of the SEQ flyash market for the years 2001 to 2009 inclusive, set out in a table and a bar chart. Mr Arto said that he had never seen these figures prior to the Board meeting in September 2002 and when asked whether he had seen any figures for forecast demand in concrete grade flyash in SEQ prior to the September 2002 Board meeting, Mr Arto said he could not remember specifically but he thought that by September “we already had our finplan forecast, and I must have seen this finplan forecast by then” (T, p 1290, lns 25-31).
2177 Mr Arto accepted that the figures he saw on the FINPLAN forecast were the figures set out in the table and the bar graph which represented a numerical version of the data in the graph contained in Pozzolanic’s tender document as earlier discussed with Mr Arto, except that Mr Arto noted that the FINPLAN contains a projection over only five years. Thus, Mr Arto thought that he could have seen only the first five years of the forecast demand data. As to the data over the years 2001-2009, the base year is 2001 which suggests an SEQ flyash market of 280,000 tonnes. The projection assumes “a variation” of a 5.7% increase on that year for the following year resulting in a market in 2002 of 296,000 tonnes. The projection assumes a 10.1% increase on the 2002 figure resulting in a market in 2003 of 326,000 tonnes. Each year then makes an adjustment for the particular variation. In the period between 2007 and 2008, the market projection declines from 387,000 tonnes to 352,000 tonnes and declines again in 2009 by 5%.
2178 Mr Arto had previously indicated that two power station sources would not be needed for approximately the first five years but that an additional source might be needed after that. Mr Arto said that that was not exactly his view. His view was that “our preferred power station was Tarong because of larger volume, [it was] the existing installation and … location”. Mr Arto said that “We thought we would have a better network and a better backup in terms of volume, quality, logistics, service, interruptions, having another power station, and that’s the basis of the decision made (T, p 1290, lns 43-47).
2179 Mr Arto accepted that the basis for the decision was that having a second source was “a better backup” for the reasons Mr Arto had identified. Mr Arto understood that Millmerran would provide a minimum volume of 135,000 tonnes. Tarong had no minimum volume ascribed to it but an annual payment based on “about 10.00 to 11.00 or 12.00 dollars per tonne” meant that the “expected volume minimum from Tarong would be around 200, 220 or [230] thousand [tonnes]” (T, p 1291, lns 2-7). Mr Arto explained that (T, p 1291, lns 7-10):
... basically, the level of Tarong was very close to the level we had overall in 2001 – 2000, 2001, I think – and Millmerran was bringing additional volume [that] we could see from the demand going into 2003. So both power stations were contributing to this volume for the following years.
2180 Mr Arto was asked how he was able to formulate those views without knowing the production capacity of Tarong. Mr Arto said that the ash flows continuously at the power stations and Pozzolanic captures maybe 50% of it. Mr Arto said that in a perfect world Pozzolanic would capture all the ash all the time, storage would be greater and trucks would be available to move it, all the time. However nobody can ever achieve that position, in any practical or operational sense, and power stations usually sell up to 25% to 30% of their total available flyash.
2181 A proposition was then put to Mr Arto that he did not seek information from management about either the theoretical capacity or, alternatively, the practical capacity for the production of flyash from Tarong or Swanbank prior to the September Board meeting. Mr Arto responded (T, p 1291, lns 25-26):
We did not have an analysis and any number describing the capacity of these power stations.
2182 The following exchange then occurred.
Q And you didn’t ask for any number, either theoretical or practical, did you?
A I did not – this was not a key element of the discussion. I think occasionally we had some shortage from time to time but I did not have data to analyse this issue.
Q All right, so let’s be clear. You didn’t have any data about overall capacity, either theoretical or practical, correct?
A The data I had was the capacity of the total amount of fly ash.
Q That is the total amount produced by the power stations?
A Produced by the power station. I did not have the data regarding the potential maximum production of concrete fly ash from each power station.
Q And you did not have the data about the practical maximum production of fly ash from each power station either, did you?
A That’s right.
Q And you didn’t ask for it because you did not regard it as being of any relevance to your decision making process, correct?
A As I said, it was pretty obvious that Millmerran did not have the capacity to satisfy all our needs regarding Tarong. We did not discuss this capacity because Tarong was already supplying and I didn’t know how much more potential Tarong actually had.
Q All right. And do I understand you to say you had no data about what the shortfall was from short term occurrences; is that right?
A That’s right.
Q You did not ask anybody within management questions such as: “How often do we have a shortfall?” or “How big is the shortfall?” or “What problems does such a shortfall create?” Correct?
A I don’t remember asking these questions.
Q All right. I take it, it follows that you didn’t regard the answers to those questions as being of any relevance to the decision to enter into these contracts, correct?
A Again, our primary objective was to keep Tarong and we had these two bidding prices so again, Millmerran was not enough. Tarong was probably enough for a few years and this is how we made our decision.
Q Yes. And you didn’t make your decision by reference to the question “Do we need Millmerran to cover the temporary shortfalls?” Did you?
A We discussed Millmerran as bringing additional benefits in terms of backup, logistic[s], [and] quality to serve the market.
[emphasis added]
2183 As to back-up, Mr Arto observed that the power stations are large industrial units which sometimes have breakdowns and which undertake maintenance programmes that can extend for a few weeks. However, the construction market requires concrete all the time. Mr Arto therefore thought it “a good idea to have an alternative flyash source in case of such interruption[s]” (T, p 1292, lns 20-24). Mr Arto accepted that in this context it would be interesting to have information about how often shortfalls had occurred. Mr Arto accepted it might possibly be necessary to know the size of the shortfalls if they had occurred, and it would be part of the analysis to know how in the past Pozzolanic had dealt with shortfalls, in deciding whether it was a good idea to secure an alternative source to deal with interruptions.
2184 Mr Arto accepted that he had not asked whether there had been shortfalls in the past.
2185 Mr Arto was asked whether he agreed with counsel for the Commission that “no part of the decision making process to enter into the Millmerran contract … was justified by the need to meet shortfalls”. Mr Arto said (T, p 1293, lns 42-46):
I agree with [you] that we did not do any - probably enough thorough analysis of all these factors. It was relatively obvious to all of us that having two locations would provide, in the end, a better flexibility, a better backup, better opportunities to face shortfall[s] because bringing fly ash from Gladstone is more expensive than bringing [it] from Millmerran to go to Brisbane. So it was relatively obvious that it was better having the two sources. We did not do an extensive analysis as you suggest.
2186 Mr Arto added “again, we wanted to have one and we had to chase two and the first we got was Millmerran” (T, p 1294, lns 6-7).
2187 Counsel for the Commission put to Mr Arto that from at least March 2002, the Board decided to enter into both contracts. Mr Arto accepted that the Board wanted Pozzolanic to go after both contracts. However, at March 2002, Pozzolanic did not know the conditions of each contract and thus at this point, there was no approval to sign both contracts. It was a direction “to go after both contracts”.
2188 Mr Arto was asked about the role of quality considerations in determining whether to enter into a contract to acquire a particular flyash source, whether Millmerran or Tarong or otherwise. Mr Arto accepted that he did not seek any information from anybody within QCL or Pozzolanic about whether, in the foreseeable future, there was likely to be an issue about the quality of Tarong flyash. Mr Arto said that concrete producers want a consistent flyash product and they assume that it is easier to secure consistency by seeking flyash from the same source. Mr Arto said that different power stations have different operations and different coal sources and therefore the flyash produced will exhibit different characteristics, “but that’s the essence of our business: to use different sources – different limestone, different ash – to at the end offer a good product for the customers”.
2189 Mr Arto was asked about transport costs.
2190 Mr Arto said that he could not recall having any discussions with management about questions such as what the natural market for flyash from Millmerran might be. Mr Arto said that, for him, the respective volumes under each contract were allocated on the footing that Millmerran would provide flyash for about one-third of the market demand represented by allocating 135,000 tonnes to Millmerran, and having regard to the fixed annual payment to be made to Tarong divided by the cost, the volume allocated to Tarong was about 220,000 tonnes which represented “two-third/one-third in the way the volume would be allocated to the market”.
2191 Mr Arto said that, after eight years, he could not recall a discussion with anyone in management, at any time before the September 2002 Board meeting, of the question of whether there was a saving in transport costs in using Millmerran flyash in any part of the SEQ market. Mr Arto was taken to the map at ATB 4.15 (Annexure D to these reasons). Mr Arto said that looking at the map and not being extremely familiar with the roads and the logistics, “I just thought that having two locations would offer more potential for optimisation than just one”. Mr Arto said that he did not have specific numbers for this view (T, p 1296, lns 3-5). Mr Arto did not recall asking anybody in management “to produce numbers showing comparative transport costs”.
2192 Mr Arto was asked whether his view, that it was a good thing to have two contracts, was based upon an intuitive feeling, absent the numbers, that there might be some savings in transport costs. Mr Arto said that his view was based on a little bit more than intuitive feeling. Mr Arto said that the experience of bulk transportation is that the transport costs are probably 25% or 30% of the delivered cost to customers. Mr Arto said (T, p 1296, lns 16-18):
So if we have two locations instead of one, if we could organise the backhauling of fly ash against cement deliveries, from my experience, there should be some logistic benefits.
[emphasis added]
2193 Mr Arto was asked what experience enabled him to say that there would be some logistic benefit by using Millmerran ash for part of the market as compared with Tarong ash. Mr Arto said this (T, p 1296, lns 22-27):
The plain experience that having several locations allowed [us] to organise deliveries and transportation in a more efficient way than just having one. As an example, if we had only the Millmerran contract going to Noosa, it takes 100 kilometres more than coming from Tarong. So obviously this area of the market is best served by Tarong. I’m assuming there are other areas of this market which are best served by Millmerran versus Tarong.
2194 Mr Arto was asked this question:
Q Well, in order to make a decision to enter into a contract costing you $1.3 million a year, if any part of that decision was based on the notion you’d have transport cost savings, you’d want the numbers in detail, wouldn’t you?
A I don’t think this was part of the business case to make the decision. I think the business case is reflected by the paper submitted to the Board in March and September, respectively, and this business case is already convincing enough that we didn’t have to go through extensive calculations of – regarding other potential benefits which appeared to be real and were already intuitively convincing.
[emphasis added]
2195 Mr Arto was then asked:
Q Now, the other potential benefits, as I understand you, are the benefits of covering potential shortfalls, this transport cost saving benefit, something to do with quality, is that it? Is that the other benefits?
A That’s it. The backup in case of quality issues, the logistic optimisation, backup in case of shortfall resulting from overhaul or maintenance or power station stopping for some time, as it happens. So it was intuitively better to have more sources than less.
2196 Mr Arto was asked whether he had discussed these potential benefits with anybody else on the Board in the course of the decision-making process in September 2002. Mr Arto could not recall any specific discussions although he assumed that he would have discussed the “geographical set up” with Mr Ridoutt. Mr Arto thinks he discussed these benefits with Mr Ridoutt before the Board meeting but he has no specific recollection. Mr Arto recalls that he discussed “the benefits of having these two contracts” but he does not have a specific recollection.
2197 As to backhauling, Mr Arto accepted that the notion of backhauling cement from Brisbane after delivery of Tarong or Millmerran flyash into Brisbane, at points along the way of the return journey to Tarong or Millmerran, was “not part of the business case which was analysed and presented [to the September 2002 Board meeting], this was an additional benefit” (T, p 1297, lns 22-24; 38-41).
2198 Mr Arto was taken to his earlier evidence that Millmerran was about 100 kilometres closer to the south-end of Brisbane and the Gold Coast than Tarong. Mr Arto accepted that the difference between the two is negligible. Mr Arto was asked to identify the basis on which he thought that there was $7 to $8 per tonne cost saving in transporting flyash from Millmerran to the Gold Coast as opposed to transporting it from Tarong to the Gold Coast. Mr Arto accepted that he probably made an incorrect estimate to make the point he was seeking to develop.
2199 Mr Arto was asked that given his realisation of the mistake about distances, is it the case that there were no transport logistical benefits in taking ash from Millmerran as compared with taking ash from Tarong.
2200 Mr Arto said that some markets are closer to Millmerran than Tarong and certainly Swanbank is closer, and there may also be markets in New South Wales which may be accessible in a better way for Millmerran ash than Tarong.
2201 A proposition was then put to Mr Arto that in order to determine transport logistic benefits, it is not sufficient to just consider distances. It is necessary to consider the allocation of vehicles within the logistics system. Mr Arto said that many factors had to be considered: “including distance, traffic, road, type of roads and the freight management and whether we deliver [to] our customers or whether our customers pick up in locations, it’s a very complex topic”.
2202 Mr Arto was then asked:
Q And you couldn’t possibly base a decision on a transport logistics saving without doing that very complex analysis, could you?
A Yes, and I said that this was not a critical element of the decision, just a perceived additional benefit from having another source in a different location.
[emphasis added]
2203 However, Mr Arto said that his view was that “having a power station 200 kilometres south from Tarong would put us closer to New South Wales and give us new market opportunities” (T, p 1299, lns 39-40). Mr Arto said that this was simply his “personal understanding” of the opportunity presented by a new location. Mr Arto accepted that “we did not have an analysis of the logistic[s], of the market we could access from here, in New South Wales. But … it seemed to me that it was in a better location than Tarong to go into this market”. Mr Arto accepted however that QCL did not undertake any analysis at the time of what parts of New South Wales might be opened up by having a contract with the Millmerran Power Station.
2204 On the question of profitability, Mr Arto believed that the two Board papers demonstrated that already in 2003 based on the forecast volume, even with the new fees or royalties paid to the power station, QCL was able to maintain its level of profitability in the flyash business. Mr Arto said that he could not recall a document where “we have the proper cashflow forecast and internal rate of return as we normally do for a capex decision”. Mr Arto said that the Board had a forecast for 2003 showing that even with the new conditions with the power stations which were required to obtain the contracts, QCL would be able to “more or less” maintain its level of EBIT in the flyash business. Mr Arto said he had in mind the two Board papers, in making these observations.
2205 In relation to QCL’s position in the market, in the context of the merger discussions, described as “Project Jacaranda” with Hanson and Rinker, Mr Arto was asked whether it was part of his reasoning process that he needed to make QCL an attractive merger proposition for the other parties. The proposition was put that part of the attraction of QCL from the perspective of Hanson and Rinker was that QCL had the flyash business in Queensland and it was very much the dominant supplier of flyash throughout Queensland. Mr Arto said this (T, p 1301, ln 43 to p 1302, ln 2):
I’m careful using the word “dominant” because I know it has a legal sense, but in the sense I am familiar with, which is high - very high market share above a certain threshold, I think you can characterise QCL as being dominant, although – I mean, yesterday I referred to the pricing level of fly ash compared to cement. This pricing level was 50 per cent [below] cement because we also had fly ash from New South Wales competing, or potentially competing, in our market.
[emphasis added]
2206 Mr Arto accepted that the SEQ portion of the market was the largest portion of the Queensland flyash market. Mr Arto described the position confronting QCL if either one of the two contracts was lost, in these terms (T, p 1302, lns 18-26):
If we lost Tarong to [FAA], for example, that would be probably the most dramatic scenario, so this is why we were really trying to do our best in terms of the offer to Tarong. If we had lost Millmerran [to FAA], maybe the consequences would have been less. If we lost either contract to another competitor or a new entrant in the business, we could make scenarios regarding the potential impact on volume or price. At the end of the day, in the worst case scenario, we were talking of $6 million of EBIT versus [$100 million], so it was a significant part of QCL and we wanted to keep it ...
2207 Mr Arto accepted that if FAA won one of the contracts, and primarily the Tarong contract, and to a lesser extent the Millmerran contract, they would be in a position to supply themselves, and this would be a negative factor in terms of the attractiveness of QCL in the merger discussions.
2208 Mr Arto accepted that QCL’s absolute primary objective was to win the Tarong contract.
2209 Mr Arto was asked to describe his recollection of the Board discussion of 9 September 2002 concerning whether the Millmerran contract was likely to be profitable to Pozzolanic. Mr Arto thought that the discussion recognised that QCL had to pay a higher price for procuring flyash, on average about $7 or $8 more per tonne than QCL had previously paid, as Mr Arto recalled it. The question for the Board was whether QCL would be able to maintain its profitability by increasing the price in the market. There were two considerations taken into account in the discussion. The first was the short-term situation in the market reflecting, approximately a 15% increase in demand during the 2002 year. This was, in Mr Arto’s view, reflecting a very strong market. This was a positive signal that price increases would be possible.
2210 The second consideration was the competition for flyash from New South Wales. Mr Arto believes that the two largest power stations in Australia, Bayswater, and another, were basically giving away flyash for free to avoid stockpiling flyash. The price of this flyash was just a matter of a couple of dollars of processing and then the addition of the transportation costs. Mr Arto says this factor mostly determined QCL’s price of flyash in the Brisbane market. So, for Mr Arto, it followed that QCL was not absolutely certain that it would be able to recover the additional price paid for the flyash but “we thought” that given the short-term good market perspective, QCL had some room to increase the price. The Directors told Ian Ridoutt that his team would have to work on the price to try to recover the additional cost of the flyash. Mr Arto said that the Board recognised that there was an additional cost to be paid to the power station to achieve each contract and asked management to do its best to try to maintain the profitability of the company. The discussion was about recognising an additional cost. Management had submitted an increased price going out to 2003 to support their proposal. The Directors challenged Ian Ridoutt as to whether he thought it possible to achieve the proposed price increase adopted in the 2003 forecast to mitigate the impact of the additional cost of flyash on QCL’s profit and loss statement (T, p 1303, lns 41-47; p 1304, lns 1-28). Mr Arto said it was his personal view that the short-term situation was “rather positive” in achieving some price increase. However Mr Arto was not at all certain that QCL could achieve full recoupment of the additional cost it had to pay for the flyash. Mr Arto’s view was that the Board could not conclude that this was something “anybody could guarantee” (T, p 1304, lns 46-57; p 1305, lns 1-3).
2211 Mr Arto was asked whether he had formed a view that it was likely that QCL could partly recoup the additional cost of flyash by increasing prices. Mr Arto said that at this time, QCL had announced in April 2002 price increases in cement. QCL had experienced a strong demand. Mr Arto thought that QCL could probably achieve some price increase in flyash. However QCL had some information that some customers were buying flyash from Bayswater. Mr Arto said that he thought that achieving a price increase was a difficult task and that the sales team would have to deal with the price increase, customer by customer, in the field (T, p 1305, lns 16-21). Mr Arto explained that in the course of discussions in the September 2002 Board meeting concerning the profitability of the Millmerran contract, the Directors were trying to maintain or improve QCL’s profitability “and we said that an important part of that task would be for the sales team to try to increase the price in the following years”. Mr Arto said that such a discussion took place with Mr Ridoutt at the Board meeting (T, p 1305, lns 27-34, 36-37). Mr Arto did not accept that the discussion involved the notion that in order for the sales team to be able to increase prices, it was necessary for Pozzolanic to enter into the Tarong contract. Mr Arto said that “we actually entered into the Millmerran contract without having the certainty of closing the Tarong contract, which took a lot of commercial discussion and many months to be finalised” (T, p 1305, lns 41-44). Mr Arto said that increasing the price in the following years was not linked to securing the Tarong contract.
2212 This exchange occurred (T, p 1306, lns 14-41):
Q Did it occur to you, when you were talking about price increases, that if you failed to enter into the Tarong contract, bringing about a price increase would be more difficult?
A Absolutely, yes … Well, it’s a possibility, definitely.
Q Was it your assumption that Pozzolanic would enter into the Tarong contract and therefore that prospect was irrelevant?
A … Maybe I want to come back on this previous point. If [FAA] was the winner of the Tarong bid, the obvious option would have been for them to supply themselves. It was not obvious that they would supply third parties in the market. … Because in this competitive relationship … when a competitor takes an initiative in our market, we tend to prepare a counter-response somewhere else in their market, or we react on the price ... so there are many competitive behaviours we can imagine which would have taken place in [these] circumstances.
Q … Was the discussion [about the profitability of entering into the Millmerran contract] can we increase prices whilst maintaining our present market share?
A I think the situation was that we were ready to close the Millmerran contract. We were still fairly positive on the possibility that we might close the Tarong contract as well, and, subject to … the final discussions, obviously. And assuming that we would have closed the Tarong contract, we would recognise that – we were recognising the additional cost on our fly ash, and naturally said to the sales team, as a challenge ... your job in the next few years will be to try to recover this in the market.
[emphasis added]
2213 In terms of the probabilities, Mr Arto said this (T, p 1306, lns 44-46) when the proposition was put to him that his final answer suggested that part of the assumption he made was that Pozzolanic and QCL would have the Tarong contract:
Well, in terms of likeliness, I cannot give you a number, but we were more confident that we would close the contract than anxious that we would not, even though there were still a number of roadblocks on the way.
2214 Mr Arto explained the factors which suggested to him that Pozzolanic enjoyed a preferred position with the power stations. At (T, p 1307, lns 19-29), Mr Arto said this:
... the Tarong contract was our first priority and in the process we had to tender for both contracts to increase our chances to at least get one, … on the power station side, actually both Millmerran and Tarong wanted us. I mean, we were very quickly recognised as their preferred partner, because beyond the concrete fly ash they saw us as having more potential to handle and manage their maintenance with [MPA], as having more potential to develop other utilisations for non-concrete quality fly ash, as being able to use our waste management business to use their bottom fly ash, which is contaminated waste. So they were more supportive of us as a bidder than other competitors. So this is why we felt that we had this unofficial, at the time I think unofficial preferred status with Tarong, subject to the actual final discussion and closing.
[emphasis added]
2215 Mr Arto was asked whether it was right to say that as at September 2002 the negotiations between Pozzolanic and Tarong were about the topic of which clauses could be inserted into the contract to protect Pozzolanic’s investment in Tarong so far as the possibility of third parties taking ash was concerned. Mr Arto said that he thought that, by then, the key terms concerning volume and cost per tonne were more or less defined but the transaction could not be completed because the lawyers had said, on both sides, that although they understood what the parties were trying to do in terms of the “very simple” transaction Mr Arto had earlier described, the lawyers had said it could not be done “like this because this nice partnership you have together has to be open to third parties” (T, p 1307, lns 38-39). The negotiations concerning securing a position that reconciled the mutual interests of both parties in circumstances where at any time a third party could enter, reach agreement with a power station, plug in, get the ash and make concrete grade flyash, involved extensive negotiations.
2216 Mr Arto was asked further questions about the September Board paper.
2217 Mr Arto was asked whether the paper went to the September Board meeting as justification for the decision to enter into the Millmerran contract. Mr Arto said he thought that was correct. He could not say whether the paper went to the QCL Board meeting. He could not recall whether the paper was put before the Pozzolanic Board, with a summary of it put to the QCL Board, or whether it went to both Boards. On p 2 of the September Board paper, the observation is made that negotiation of the Millmerran Ash Purchase Agreement is complete and is being prepared for signing. The key elements of the agreement are set out in a letter from Clayton Utz is attached. The paper tells Directors that if an agreement is not signed by Pozzolanic with Millmerran, Millmerran will negotiate an agreement with Transpacific which is “particularly keen to re-enter the ash market in Queensland, and will with all probability match our offer”. Mr Arto says that he saw the September paper during the Board meeting. Mr Arto was asked whether he saw the paper before it went to the Board meeting and approved it. Mr Arto said (T, p 1309, lns 32-34): “I certainly saw the paper during the board. I cannot recall – you know, Ian Ridoutt was a member of this Board. He would present the document, maybe [he sent] it to me the day before … in any case, I accept the paper as it is”.
2218 Mr Arto was asked:
And you regard it as being a relevant fact in the decision-making process that if Pozzolanic did not enter the agreement it was likely that Transpacific would enter an agreement with Millmerran. Is that right?
2219 Mr Arto explained the relevance of the observation as being “information” provided to the Board by Ian Ridoutt that in the eventuality that QCL or Pozzolanic at the last minute walked away from Millmerran, Millmerran would have to find somebody else, and Transpacific is one possibility, as the Directors knew that FAA had already walked away from the Millmerran contract. The proposition was put to Mr Arto that the statement in the Board paper was more than that Millmerran would have to “find somebody else”, it was a statement that if Pozzolanic or QCL passed up entering into a contract, it was likely that Transpacific would enter into the contract.
2220 Mr Arto accepted that that was the information Ian Ridoutt was providing.
2221 Mr Arto was pressed to say whether he regarded that fact as “relevant” to the decision-making process concerning whether Pozzolanic should enter into the Millmerran contract. Mr Arto said that he regarded the statement as “information, among others, which was submitted to our board, yes” (T, p 1310, lns 2-4).
2222 Page 3 of the September Board Paper contains some observations on the topic of “Loss of Tarong”. It says that if the Tarong contract is not secured it will go to FAA and thus sales of flyash to Boral, CSR and Pioneer in the SEQ flyash market will go to FAA. The paper notes that those three buyers account for 72% of that market. The paper notes that the available market left would be 85,000 tonnes of which 40,000 tonnes would most probably be supplied from Swanbank with the result that securing a contract at Millmerran as a source of flyash for servicing 45,000 tonnes of market demand per annum “would be marginally profitable”. On the calculation at Point 4 of the paper, the margin would be $2.99 per tonne assuming a price of $65.00 per tonne based on next best available pricing of Bayswater flyash. The assumed volume is 45,000 tonnes and the profitability analysis takes no account of any contribution to overhead costs. Total costs would be, on the analysis, $62.01 per tonne which includes a royalty paid to Millmerran of $30.73 per tonne which essentially assumes a royalty payment of $1.353M distributed over 45,000 tonnes. The total value of the contract to Pozzolanic and QCL would be a $135,000, represented by a margin of $2.99 per tonne across 45,000 tonnes ($134,550.00), which represents a margin return of 4.82% on the listed total costs per tonne of $62.01.
2223 Mr Arto did not accept that the profitability analysis arising out of an assumed loss of the Tarong contract meant that Pozzolanic should not enter into the Millmerran contract, standing alone, without the Tarong contract. Mr Arto said that the Millmerran contract was “less interesting” than Tarong “because of the location”, and in the end, Tarong would have to find somebody to take care of the ash. Mr Arto said that “at least having Millmerran [meant] we could stay in business as a starting point with a source of flyash, otherwise we would just walk away from both contracts, which was never, obviously, an option we would be agreeable to” (T, p 1310, lns 17-23) [emphasis added]. Mr Arto said that as to the costs, QCL treats overhead costs as fixed costs and does not take them into account in making decisions on specific items of the business.
2224 Mr Arto was asked about the implications, for decision-making by Pozzolanic and QCL on entering into the Millmerran contract, of the contribution Pozzolanic had agreed to make in cross-subsidising the reduction in price given by MPA Energy to Millmerran of $1,080,000.00, under MPA’s contract. If Pozzolanic entered into the Millmerran contract, it would pay a total of $900,000.00 over seven years to MPA Energy as compensation for MPA’s price reduction with Millmerran. That amount amortised over the seven years of the Millmerran contract would amount to $128,571.00 each year which, if taken into account in a profitability analysis, would reduce the annual value of the Millmerran contract from approximately $135,000 to $6,429 per annum or $0.14c per tonne (over 45,000 tonnes) rather than $2.99 per tonne, assuming a straightforward calculation adjusting the profitability table at Point 4 of the September 2002 Board paper, absent any other consideration.
2225 Mr Arto said (T, p 1311, lns 9-12):
Okay, so we are saying this Millmerran contract was marginally profitable, assuming we would still keep the Swanbank Power Station contract and in the same Board paper we say we are still fairly confident that we can proceed with the Tarong contract, it’s still the same scope.
[emphasis added]
2226 Mr Arto was asked whether, taking into account the compensation payment to MPA Energy, the dollar profit per year justified an expenditure of more than $1.3M per annum. Mr Arto said this (T, p 1311, lns 18-22):
That would be a low profitability deal, I would accept that. If, as a standalone deal, assuming the price of fly ash does not increase, assuming the market does not increase, assuming our market share does not increase. I mean, all these assumptions being made, you have a very low profitability case with a standalone contract, it seems.
[emphasis added]
2227 Mr Arto was then asked:
And of course, to get any profit at all, one has to assume that the price of $65 a tonne can be maintained, correct?
2228 Mr Arto agreed and said that “many parameters come into play for sure” (T, p 1311, ln 25). That exchange led to this question and response (T, p 1311, lns 27-32).
Q Is it the case, then, that the decision to enter into this contract, the Millmerran contract, was always on the basis that [Pozzolanic] would enter into the Tarong contract?
A We did not have a 100 per cent guarantee because the contract was not closed. We had a good level of confidence that, subject to final negotiations, we would be able to enter the contract because basically, both parties, Tarong and ourselves, had an agreement in principle to finalise this contract.
[emphasis added]
2229 Mr Arto was then taken to the letter attached to the September Board paper from Clayton Utz to Mr Wilson dated 3 September 2002 (Ex-35A, PPAA-3). The letter notes that significant discussions had taken place between Pozzolanic and Millmerran in relation to securing the supply of ash, particularly concrete grade flyash, in favour of Pozzolanic whilst still enabling Pozzolanic to compete with lower priced ash should that occur in the future. The letter then notes that during the negotiations Millmerran had said that it was extremely sensitive to any provisions that might be seen to have any trade practices implications and, as a result, Millmerran would not contemplate an exclusive arrangement over the seven year term of a contract in relation to concrete grade flyash. The letter notes that a number of options were discussed with Millmerran each of which were rejected by Millmerran. The letter notes that after an intensive one day negotiation session, the parties reached a position reflecting, at least as described in the letter, two elements. First, Pozzolanic could terminate the agreement at any time after 31 December 2006 on 60 days’ notice, or Pozzolanic could reduce its minimum quantity of concrete grade flyash required to be taken, also on 60 days’ notice (although the letter does not recite the event which would give rise to an entitlement in Pozzolanic to exercise the termination right). Second, if Pozzolanic terminated the agreement, it would be required to pay $50,000 per month for the balance of the term less a pro rata of any lump sum payment made for the relevant operating year.
2230 As to the reference in the Clayton Utz letter to Millmerran’s refusal to contemplate an exclusive arrangement for concrete grade flyash over the seven year term, Mr Arto was asked these questions (T, p 1312, ln 41 to p 1313, ln 12):
Q You understood, as at the September board meeting; that Pozzolanic had proposed an exclusive arrangement with respect to concrete-grade fly ash, didn’t you?
A I understood that, up to some points, the negotiations were done without any legal considerations or support, and later on, we also received advice from Clayton Utz regarding the terms of the contract. So I don’t know at what point we actually – or the negotiating team realised that what they had in mind as a simple deal that they might have called exclusive was not something which was achievable as being legally compliant.
Q Well, you understood that Pozzolanic had wanted an exclusive deal didn’t you?
A Up to some point, I understood that the Pozzolanic team wanted to have a simple contract, and I don’t know if – when the “exclusive” word appeared. I haven’t read the tendering [and] I haven’t seen the [draft] version of the contract.
Q And you understood, at least as at the date of the September board meeting, that Millmerran had refused to contemplate any form of exclusive arrangement, didn’t you?
A Absolutely.
[emphasis added]
2231 Mr Arto was then asked about the three options set out in the Clayton Utz letter canvassed with Millmerran in light of its refusal to accept an exclusive arrangement, all of which were rejected by Millmerran. Mr Arto could not recall whether, before the September Board meeting, he was aware of whether those three options had been discussed with Millmerran and rejected by their negotiators. This matter was a task for Mr Ridoutt and his negotiating team.
2232 Mr Arto said that he did not tell or instruct Mr Ridoutt of the “commercial objective” he wished Mr Ridoutt to achieve in the negotiations with Millmerran. Mr Arto said that he “left it completely up to [Mr Ridoutt]”. Mr Arto said: “I delegated to him the negotiation of this contract. And he had done this since the beginning, and he was in charge of closing this contract in acceptable terms” (T, p 1313, lns 19-24; 31-32; 34-36).
2233 Mr Arto was asked the following questions and responded as follows (T, p 1313, lns 38-42; p 1314, lns 5-9):
Q And did you understand that the commercial objective that he was trying to achieve was the closest practical equivalent to express exclusivity?
A No, this is not how I understood it, because if we look at what was actually implemented, there is nothing which suggests any exclusivity. It’s basically a revision of either the duration of the penalty for early termination.
Q In any event, you say you were unaware that these options had been canvassed with Millmerran; is that right?
A Not any more than what’s in the document. I know they had day-long meetings covering many options on both sides and it was delegated to Ian Ridoutt to negotiate.
2234 Mr Arto said that his understanding of cl 5 of the Millmerran Ash Purchase Agreement was that Millmerran had to make available ash to enable Pozzolanic to take 135,000 tonnes of ash during the year and that, effectively, Pozzolanic could choose when throughout the year it took ash making up that total (T, p 1314, lns 26-34). Mr Arto accepted that, potentially, Pozzolanic could take ash one month and then no ash the next month and so on, although Pozzolanic would need to take account of supply obligations to customers who might have difficulty switching from one flyash source to another.
2235 A proposition was put to Mr Arto, standing in the shoes of a second potential off-taker for Millmerran ash, that if the potential second off-taker knows that Pozzolanic has a contract which obliges the power station to give Pozzolanic access to ash to make 135,000 tonnes of flyash, and Pozzolanic might take all the ash one week and none the next, and so on, it would be practically impossible for a second off-taker to conduct its business relying on supply from that power station. Mr Arto said this (T, p 1315, lns 1-6):
I don’t believe so. I believe that the flow of ash coming out of the power station is a daily flow. The annual .. quantity was .. over a million tonnes, so .. we were only taking a small part of the ash flowing out of the power station, even if we were on the 135,000 tonnes level so from my view, technically, that’s why it was possible for another party to have a significant amount of ash every month.
2236 The following exchange then occurred (T, p 1315, lns 8-27):
Q You knew, didn’t you, that the fly ash supply business required the capacity to make regular supply to customers.
A Yes.
Q The fly ash supply business was not practicable if, for example, for two weeks at a time, the supplier had no access to fly ash to be able to supply customers, correct?
A It would be more difficult but I don’t see how this could happen.
Q Well, it could happen if you were second in line at a power station and the first in line took all the ash for two weeks, couldn’t it?
A In theory it could but I don’t think we had the capacity to take 100 per cent of the ash. If I think in terms of annual volume, we could take it monthly with the same reasoning. We were ... planning on selling 135,000 tonnes, assuming a yield of 50 per cent [which] means that we need twice this volume to sieve out the biggest fraction of the ash. That would still be 260,000 tonnes out of a million or more, so we would only take 25 per cent of the flow of ash in our process. So it would mean that to take the whole quantity for a given week or a given month, we would have to take four times this amount … and ensure we could physically process and store the amount of ash to be able to do that, so I don’t think this was a practical obstacle to a third party being able to treat the ash.
2237 Mr Arto accepted that a third party would need to install a classifier at Millmerran as a second off-taker to be able to sell flyash into the concrete market or take Millmerran ash to a grinding station. Mr Arto accepted that such a person would need to establish loading silos and a weighbridge and incur capital expenditure of at least $2M, at about the same order of magnitude as Pozzolanic would incur. Mr Arto did not accept that a second off-taker would be dependent upon notice from Pozzolanic about how much flyash Pozzolanic would be taking as first off-taker, in order to be able to conduct business as a second off-taker in the production of concrete grade flyash. Mr Arto said that Pozzolanic could not physically take 100% of the ash coming out of the power station and he rather thought that a third party would be able to secure access to an outlet valve at the station.
2238 Mr Arto was then taken to the Tarong contract which he signed.
2239 Mr Arto said that he had read some of the specific clauses and he had browsed through the entire document. Mr Arto had visited the station but did not recall the configuration of the Tarong Power Station. Mr Arto did not recall that Pozzolanic took ash from Zones 1, 2 and 3 of the 6 zones with respect to each of the four generating units. Mr Arto was not familiar with the physical organisation of the generating units and related hoppers. Nor did Mr Arto understand that it was only from Zones 1, 2 and 3 that flyash was extracted from Tarong Power Station for sale to the concrete market. Mr Arto did not see Pozzolanic’s position as one in which it had first access to all flyash from the power station which was usable for the production of concrete grade flyash. Notwithstanding how Pozzolanic’s rights might be described or characterised, Mr Arto said, “but in any case, we were looking at 200,000 tonnes of concrete quality flyash which may [require] 400,000 tonnes of raw flyash out of a total of two million, so this is only 20 per cent of the whole flyash flowing from the power station, if I remember correctly.”
2240 Counsel for the Commission put the second off-taker hypothesis to Mr Arto in relation to Tarong, in these terms. If, standing in the shoes of a second off-taker, a first off-taker has first right of access to all ash which is usable to make concrete grade flyash, it makes it a very unattractive financial proposition to attempt to run a fly ash supply business as a second off-taker at Tarong. Mr Arto’s view was this (T, p 1317, lns 2-7):
I don’t know about that. I think again, the volume of fly ash we were processing here was only a small part of the volume of fly ash available. If you look at the contract itself, I think in this one there is a scale of considering up to 500,000 tonnes of fly ash in terms of annual feed back to the station, so we were only planning on taking 250,000 tonnes at this point. So I think, based on the quantity, it was possible for a third party to have access to the source.
2241 Mr Arto accepted, as making sense, the notion that Pozzolanic’s physical operation on the Tarong site involved employees of Pozzolanic determining on a daily basis which hoppers would be used to produce flyash based upon assessments of quality and that Pozzolanic employees would choose the flyash which was most suited to processing in making concrete grade flyash. Mr Arto was asked whether these circumstances would give rise to an obvious disadvantage for a second off-taker in respect of all four generating units. Mr Arto took the view that if the power station really wanted to have a third party, it could give access based on the existing contract. Mr Arto accepted that practical arrangements would have had to be addressed with two operators running on the same site but nothing in the contract suggested that this would have been impossible (T, p 1317, lns 23-28).
2242 Mr Arto was asked about his understanding of the effect of cl 7 and whether it operated in this way: a third party wishing to secure access to ROS flyash had to obtain that ash through Pozzolanic, and Pozzolanic was only required to use its best endeavours to supply it rather than assume an obligation to supply it.
2243 Mr Arto regarded a best endeavours clause as a demanding clause but said that he had not gone through the technical operation of the clause in any detail. Mr Arto observed that in respect of both Millmerran and Tarong, the spirit of the agreement from Mr Arto’s perspective, was that both sides wanted to have an agreement which was legally compliant so if there was “some trick played in the subclause of the document”, Mr Arto said he was not aware of it and that was never part of his objective. Mr Arto said that he was relying upon Mr Ridoutt and Mr Wilson to develop the contract. Mr Arto was focussing on the commercial terms and the legal advice in developing the contract (T, p 1318, lns 10-15; 18-20; 24). The negotiating team of Mr Ridoutt and Mr Wilson were dealing with the commercial objectives of volume, price and minimum annual payments. As to security of supply, Mr Arto said that the duration of the Tarong contract had to be re-negotiated and “We decided to [take] it down to five years to reduce our exposure to the risk of having a third party developing new operations on the site.
2244 Mr Arto was asked about cl 12.3 of the Tarong contract which Mr Arto described as “a very critical clause”. Mr Arto was asked whether there was a draft of the Tarong agreement, which included cl 12.3 in the form of the final agreement, at the time that Mr Arto signed the Millmerran Agreement on 30 September 2002. Mr Arto said that his level of understanding of the terms was captured in the Board documents in the summary table describing the contract with the result that in September 2002 the term was a fixed payment (of $2.6M per annum indexed to CPI). Mr Arto accepted that cl 12.3, in part, provided that Pozzolanic was required to pay $2.4M to Tarong whether it took 150,000 tonnes or 350,000 tonnes. Mr Arto was asked these questions and responded in the following way (T, p 1319, lns 13-29):
Q … So if one is looking at having the Tarong and Millmerran contract, the sort of range of concrete grade fly ash you’re [taking] to supply the south-east Queensland market was within that range, wasn’t it, 150,000 to 350,000 tonnes?
A It was in the top of that range, in the range of [330,000] or plus forecasted for three and the following years, yes.
Q And did you understand this to be the case: that, in effect, every tonne you supplied from Millmerran was a tonne you didn’t supply from Tarong?
A Yes there was a total volume which had to be shared between the two stations, yes.
Q So that [for] every tonne you supplied from Millmerran, the cost per tonne from Tarong increased. Do you understand that?
A Yes, I see your point. We have basically more or less a fixed fee in Tarong, which is marginally reduced depending on the quantity. So it makes the average cost for the quantity lower, depending on the total volume, and we have a cost per tonne with a minimum volume in Millmerran. So the two are linked, and probably along the lines you described before.
2245 Mr Arto was asked whether at any time before he signed the Millmerran contract, he discussed that concept with Mr Ridoutt and Mr Wilson. Mr Arto thought that the concept was coming mostly from the power stations. Tarong was focussed on the revenues. Millmerran was more focussed on securing a minimum amount of flyash off-take. Mr Arto said that he did not discuss, with Mr Ridoutt and Mr Wilson, the notion that a tonne of flyash sold from Millmerran was a tonne not sold from Tarong with the consequence previously mentioned. Mr Arto said that it was obvious that a tonne sold by one station was not a tonne sold by the other and at September 2002 the information available to Mr Arto “was basically [the information] which was presented to the Board meeting [of] an annual fee and this can be also seen as an incentive to increase the volume from Tarong” (T, p 1319, lns 45-47).
2246 Mr Arto was asked whether he agreed with the proposition that he did not think entering into the Millmerran contract could be financially justified by any profit that might be made from the sale of non-concrete grade flyash. Mr Arto said: “I think this was a marginal consideration in making the decision to enter into the Millmerran contract” (T, p 1320, lns 23-24). Mr Arto accepted that “We were not anticipating or – we were not including benefits from this secondary activity in our business case” (T, p 1320, lns 31-32).
2247 Mr Arto accepted that in considering any justification for entering into the Millmerran contract, he did not take into account the notion that one day there might be a drought in Queensland which might have had some effect on the availability of flyash and so therefore Pozzolanic and QCL should “have the Millmerran contract”. Mr Arto said that he had never heard about that prospect in any of “our” reasoning.
2248 Mr Arto was taken to para 23 of his affidavit of 17 February 2010 (Ex-35A) in which he says that he recalls participating in the Board’s decision to approve entry into the Millmerran contract “on the basis that it would be a sensible way to grow Pozzolanic’s business by providing an additional source of flyash”. Mr Arto was pressed with the notion that the statement was not true and that he did not regard entry into the Millmerran contract as a sensible way to grow Pozzolanic’s business. Mr Arto said that this was only part of the reasons considered at the time. It contributed to Pozzolanic’s options to grow the business. Mr Arto observed: “I think there were other reasons also behind our decision” (T, p 1321, ln 28).
PART 34
The assessment of Mr Arto’s evidence
2249 I have extensively examined Mr Arto’s affidavit and oral evidence in considerable detail. I have done so because my abiding impression of Mr Arto’s evidence in the course of the trial was that, put anecdotally, he was “over-egging the pudding”. By that, however, I do not mean to suggest that Mr Arto was being untruthful. I am sure that he genuinely believed many of the explanations he gave for decision-making in entering into the Millmerran contract for Pozzolanic when giving his primary evidence.
2250 Mr Arto suggested that a part of the reason for entering into the Millmerran contract was the utility of Millmerran ash in the possibility of export supply of flyash to New Zealand and possibly Victoria. In cross-examination Mr Arto accepted that there was really no rational financial basis, having regard to the logistics costs, for entering into the Millmerran contract for that reason, especially when compared with the logistics costs of shipping flyash out of Gladstone sourced from the Callide and Gladstone Power Stations. Mr Arto rather thought that another reason for entering into the Millmerran contract was its proximity to the Gold Coast as compared with flyash supplied from Tarong to that region, and the transport differential for buyers would be meaningful. Mr Arto accepted that he was confused about that matter.
2251 Mr Arto thought that there might be back-haul advantages in entering the Millmerran contract because trucks returning to the Millmerran power station could deliver cement to points along the way but ultimately Mr Arto accepted that this was not really part of the informing features of decision-making about entering into the Millmerran contract.
2252 On the broader question of transport logistics, Mr Arto in cross-examination accepted that a decision to enter into the Millmerran contract could not have been based upon transport logistics savings without undertaking a very complex analysis of the logistics advantages derived from supplying flyash sourced from Millmerran as compared with Tarong and Swanbank. Mr Arto accepted that this consideration was not a “critical element of the decision” but just a “perceived additional benefit from having another source in a different location”. Also, Mr Arto conceded that transport cost savings were not “part of the business case to make the decision”.
2253 Mr Arto also accepted that entering into the Millmerran contract could not be financially justified by any profit that might be made from the sale of non concrete grade flyash. Mr Arto accepted that QCL was not anticipating or including benefits from this “secondary activity” in its “business case”.
2254 Mr Arto also accepted that the externality of a drought in Queensland having some effect upon the availability of flyash was not part of the reasoning for entering into the Millmerran contract.
2255 Mr Arto also accepted that the notion in his affidavits that entering into the Millmerran contract was “a sensible way to grow Pozzolanic’s flyash business” by providing an additional source of flyash represented only part of the reason, and there were also other reasons behind the decision. As to the last matter, Mr Arto seemed to accept that less emphasis should perhaps be attributed to the notion of “growing the flyash business”, at least as a central reason for entering into the Millmerran contract.
2256 Mr Arto has very little recollection of the discussion at the two critical Board meetings in relation to the matters raised by the March and September Board papers. Mr Arto also has no real recollection of the briefing note of 25 June 2002 or the memorandum of 28 June 2002. No doubt, that is because the events occurred about eight years earlier. Mr Arto, however, has a good recollection of one conversation at his initial briefing by Mr Townsend in February 2002, and he particularly recalls being told that QCL “hoped to grow the flyash business generally” and a part of that “objective” was the need to establish “different points of supply in Queensland” in order to enable the business to operate “more efficiently” by developing a “better network to reliably supply customers and to ship more flyash into Victoria, New South Wales and New Zealand”.
2257 Mr Arto’s first affidavit is quite short and essentially swears the issue. The second affidavit provides content to the matters asserted in the first affidavit, in terms of material facts, and also deals with some other matters.
2258 Mr Arto’s central position can be put quite simply.
2259 First, he says that he had before him the March and September Board papers and these documents, in effect, define the limits of his understanding of the matters material to his decision-making, apart from some features of his own experience which, as to the flyash business in Queensland, was limited.
2260 Second, he was new to the role and he had senior executives reporting to him upon whom he relied, very much. They included Mr Ridoutt and Mr Wilson. Mr Arto is quite emphatic in his reliance upon Mr Ridoutt and Mr Wilson in undertaking (or causing to be undertaken) whatever analyses may have been necessary to determine a financial analysis that resulted in the propositions ultimately put to the Board. Mr Arto says that he assumed there must have been some assessment of future demand undertaken by these executives although he has no recollection of seeing a future long-term demand forecast analysis. It goes further than that, because Mr Arto understood that Mr Ridoutt and Mr Wilson were actually responsible for the negotiating positions about the pricing and other terms of the bid to Millmerran (and Tarong) although ultimately the Board would need to approve the terms and conditions of any proposal to enter into a contract with Millmerran (MPP/MOC), and Mr Arto would need to approve and sign any contract. Also, the Board would need to approve the necessary capital expenditure. Although these senior executives had the carriage of the negotiations, it must be remembered that Mr Arto was the chief executive, of the executive management group, and he represented the bridge between management and the Board.
2261 It seems counter-intuitive that Mr Arto as the incoming Managing Director had nothing whatsoever to do with instructing his senior executives, Mr Ridoutt and Mr Wilson, on a price to be put to MPA Energy for referral to Millmerran, which would have the commercial effect of lifting Pozzolanic’s bid price to $1,353,000 per annum indexed over seven years amounting to a value proposition of $9,264,500.
2262 However, Mr Arto says that he did not approve the proposed price on 6 March 2002 at the meeting convened to brief him on the relevant matters about both contracts. He says that Mr Wilson may well have needed Mr Ridoutt’s approval but, certainly, as Mr Arto recalls, he was not asked to approve, and did not give an approval, to offer such a price. Mr Arto also makes the point that, at that moment in time, he was not called upon to do anything in the nature of signing a contract and thus he was not relevantly engaged in a material executive way in that part of the process. Mr Arto says that the Board might later have decided that the price, risk and capital expenditure, associated with whatever negotiating position Mr Wilson and Mr Ridoutt took (together with Mr Chalmers or otherwise) and put to Millmerran, might not ultimately be supported by the Board.
2263 This is a position in stark contrast to the enabling rationale adopted by Mr Maycock in approaching matters on the footing that management should have a clear indication of the negotiating position open to them that they might adopt with external parties, so that they are not later embarrassed by not being supported by the Board. Presumably, that negotiating position would in the first instance be approved by the Chief Executive Officer. Also, Mr Wilson’s communication of the increased offer concerning Millmerran was sent by him by emailing the letter of offer at 6.17pm on the evening of the afternoon on which Mr Ridoutt and Mr Wilson met with Mr Arto.
2264 Having regard to Mr Arto’s understandable lack of recollection of the discussions at the Board meetings, his lack of recollection of the briefing notes of 25 June 2002 and 28 June 2002, and his lack of recollection of either the meetings with Mr Ridoutt and Mr Wilson, or the content of those meetings, it seems to me that the documents, and particularly the two Board papers put before Mr Arto, are a much safer guide to the content of his decision-making. More importantly, it is absolutely plain from Mr Arto’s evidence, that the deliberative decision-making about negotiating strategies and the positions Pozzolanic and QCL might take in relation to each contract, during the negotiations were, if not determined by Mr Ridoutt and Mr Wilson, nevertheless, fundamentally influenced and informed by their thinking.
2265 Mr Arto makes the point that he did not necessarily accept the force of their thinking as reflected in the two Board papers but it is clear that Mr Ridoutt and Mr Wilson were expressly authorised by the Managing Director to be fully engaged in formulating the negotiating positions for Pozzolanic. Mr Arto described these matters as being “delegated” to Mr Ridoutt and Mr Wilson although, of course, positions taken by them would need to be brought to the Board. However, Mr Arto’s position seems to be that decision-making in relation to critical negotiation steps and positions did not need to be brought to him for prior approval. Ultimately, only the final proposition would be put to the Board. Unfortunately, there is no evidence from Mr Ridoutt or Mr Wilson or Mr Chalmers.
2266 Third, Mr Arto’s position is quite clear on the central features of his decision-making about Millmerran. He came to the role of Managing Director with an understanding that Holcim was concerned about the lack of appropriate margins in the cement business having regard to the substantial capital investment in the new facility. He also knew, as a Holcim man, that Holcim sought to achieve margins in the flyash business of the order of between 30% and 33%. Mr Arto described this as “a big margin” on cement and mineral components products like flyash and slag. Mr Arto saw, from the Board papers, that QCL’s profitability of entering into both the Millmerran and Tarong contracts satisfied the necessary margin and, for Mr Arto, that was “good enough”. That is why Mr Arto was not particularly concerned about looking for a long-term profitability analysis or any long-term demand forecast or any document analysing the physical capacity to produce concrete grade flyash (at Tarong, in particular), or Swanbank. Mr Arto was not looking for such a capacity analysis or any document along the lines of Mr Druitt’s extensive evidence about capacity constraints at Tarong necessitating Pozzolanic to seek out access to another flyash source. My impression of Mr Arto in the course of his evidence was that he was struggling to support his view that there was a long-term need for Millmerran ash (over a seven year horizon) based upon projected demand for flyash in SEQ or elsewhere. In fact, Mr Arto made it plain that he was focussed upon the 2002 budget figures, the 2001 actual sales (and margin) and the projection for 2003.
2267 Mr Arto could see from the two Board papers that entering into the Millmerran and Tarong contracts was necessary to preserve QCL/Pozzolanic’s margin in the flyash business and preserve its market share. In truth, for Mr Arto that was, in essence, the beginning and the end of the matter subject to the fundamental matter mentioned shortly, as to the Millmerran Contract. The imperative was to preserve the Holcim EBIT margin in the flyash business and, the market share. By that observation I mean that Mr Arto was not seeking out any financial analysis or demand forecast meeting the rigour and orthodoxy of the Holcim five year FINPLAN requirements. Mr Arto did not recall seeing any future demand forecast over five or seven years. He felt that there would be general long-term growth. On the question of demand, Mr Arto added in the course of his evidence the additional observation that one important aspect of demand, informing his decision-making about Millmerran, was the need to deal with fluctuations during the course of a year, that is, daily fluctuations in the production of flyash at a power station and that securing access to additional source would, in effect, smooth out the management of daily fluctuations in the course of a 12 month period, year to year.
2268 Fourth, the much more fundamental matter for Mr Arto as to Millmerran was this.
2269 QCL did not have a long-term contract with Tarong. Plainly enough, it had a short-term contract in the sense that the prevailing contractual arrangement with Tarong had been extended pending the determination of the tender process at Tarong. Mr Ridoutt had told the Board (and for present purposes I am focussing upon Mr Arto’s decision-making), in the September 2002 Board paper, that the negotiating team was confident that a new contract would be secured for two fairly important reasons. First, Mr Ridoutt and Mr Wilson had been involved in reviewing the draft contract which had been “written around” Pozzolanic’s offer and Pozzolanic’s capabilities. Second, Mr Ridoutt told the Board that Pozzolanic had been told that it had been awarded a minor six month contract to manage the furnace ash at Tarong North commencing on 3 October 2002, and that contract, although minor, was conditional upon Pozzolanic having a current ash sales agreement with Tarong. Plainly, Mr Ridoutt was not contemplating the short-term Tarong extension contract pending the resolution of the tender, as satisfying the description of a “current ash sales agreement with Tarong”. He was telling the Board that the grant of the minor contract was conditional upon Pozzolanic securing the ash sales agreement, going forward, with Tarong.
2270 Mr Arto said that he “heard this view” in September 2002 and the Board resolved on that basis to approve the Millmerran contract. Mr Arto put the negotiating team’s view about the probability of securing the Tarong contract as telling the Board that Pozzolanic was “still in the process with Tarong”; that negotiations were “optimistic” or “positive”, but that without having an assurance that the Tarong contract could be closed, the Board elected to pursue an objective of reducing risk by closing the Millmerran contract. Mr Arto’s position was that until a contract was actually signed with Tarong, the deal was not closed and the Board could not take it for granted that Pozzolanic would complete it.
2271 It is true, of course, that the contract with Tarong is not in place or in Pozzolanic’s “back pocket” until the contract is signed. However, it seems plain from the March and September Board papers that by September 2002, Pozzolanic had a high threshold of confidence that it would likely secure a contract with TEC and I so find. The Board papers also make it plain that Pozzolanic’s objective was to secure a contract with both Millmerran and Tarong, and I so find. The reason for that could not be more plain as the Board papers from the briefing team having the carriage of the matter are telling the Board that unless Pozzolanic secures both contracts, a loss of either contract would result in a substantial loss of volume of 250,000 tonnes and an erosion in the EBIT margin of the flyash business in South East Queensland of something of the order of $6M. Mr Arto says that this view was a worst-case scenario but whatever the margin of error or exaggeration that might be thought to be encapsulated in that view from Mr Ridoutt, there is no doubt that the Board was being told, in the plainest way possible, by the principal experienced managers in whom they trusted and to whom they had entrusted the negotiations, that risk-managing QCL/Pozzolanic’s market share (of volume) and profitability measured by the EBIT margin in the flyash business, required QCL/Pozzolanic to enter into both the Millmerran and Tarong contracts.
2272 That was the message that Mr Arto understood from the Board papers, and for him, the merits of the matter were all in the margin numbers, lining up with Holcim’s benchmark expectations.
2273 Professor Hay expressed the opinion (rather than a fact he was instructed to assume) that if Pozzolanic lost either contract its market share would collapse virtually immediately (Ex-81, para 14). I have no doubt that Mr Arto, as an experienced Holcim engaged businessman, had already formed precisely that view at the time of these events. Although there is, it seems to me, a degree of reluctance or perhaps obfuscation in Mr Arto’s evidence around the likely market share/volume/price impact arising out of a rival securing a major source of flyash and entering the market in which Pozzolanic enjoyed a high market share, high profitability and a resultant high EBIT margin in the flyash business in SEQ, Mr Arto accepted that a new entrant at either Millmerran or Tarong would give rise to competition; there would be counter-responses; one likely possibility was price tension and another was a volume solution which may or may not have involved significant price contestability.
2274 I am satisfied that, so far as Mr Arto was concerned, his position was that in order to secure the margin in the flyash business which Holcim required as its benchmark margin for flyash and slag, it was necessary for Pozzolanic to secure both contracts. The reason for securing both contracts was to prevent a rival from obtaining a contract with either power station so as to ensure that Pozzolanic preserved its market share thus avoiding the kind of market share collapse Professor Hay perceived, and to prevent an erosion in the EBIT margin in the SEQ flyash business consequent upon contestability within the new field of rivalry defined by the new entrant.
2275 That reason is a substantial purpose guiding the conduct of entry into both contracts, so far as I am presently concerned with Mr Arto’s evidence. It was the reason being propounded by Mr Arto’s negotiating team of Mr Ridoutt and Mr Wilson. By September 2002, the negotiating team was telling Mr Arto and the Board that should Pozzolanic not enter into the Millmerran contract on the negotiated terms, Transpacific, as an aggressive bidder, would likely enter into a contract with Millmerran and match Pozzolanic’s terms. There is, no doubt, so far as Mr Arto’s thinking was concerned, that Pozzolanic entered into the Millmerran contract for a substantial purpose of preventing a rival (including Transpacific) from securing the contract and placing Pozzolanic’s volume and margin metrics under substantial contestable pressure.
2276 Mr Ridoutt was told by the Board that his role was to recoup, as best he could, the additional cost incurred by Pozzolanic and QCL in securing both contracts, and in particular, the additional cost of doing business in the flyash market of having to pay for the Millmerran ash, whether it be taken or not and whether Pozzolanic might be successful in finding some market space for the Millmerran flyash, whether in the SEQ concrete grade flyash market or in new markets, assuming they might be able to be cultivated.
2277 Mr Wilson and, in particular, Mr Chalmers set about sending out letters of price increase to all buyers including the major buyers of Boral, CSR and Pioneer setting out the price increases which would apply (and the dates of application) at each batching plant.
2278 As the High Court has made plain, it is methodologically flawed to infer taking advantage of market power, even from such a transparently plain purpose of seeking to prevent entry into the market of a rival so as to preserve market share and EBIT margins. However, there is nothing wrong, so far as s 46 of the Trade Practices Act is concerned, with taking steps to preserve market share and high EBIT margins, of the Holcim kind for a flyash business, if the preservation conduct does not involve a method which uses market power as the method of achieving the purpose.
2279 So, the question really is whether, in engaging in the conduct of entering into the Millmerran contract for the business reasons and purposes I have found, so far as Mr Arto’s decision-making is concerned, the conduct involved a taking advantage of market power. The answer to that question turns on whether a corporation in the position of Pozzolanic, without market power, and thus operating in a workably competitive market, could profitably enter into the Millmerran transaction on the terms and conditions of that transaction.
2280 At the threshold, I have no doubt whatsoever, that a corporation in the position of QCL/Pozzolanic, with market power, confronting the possibility that a long-term flyash business developed in SEQ since 1984 in reliance upon a primary contractual relationship with a source of supply such as Tarong, might well see itself as, at risk, by reason of a possible loss of the Tarong contract and would rationally seek to enter into a contract with a new entrant source of supply at Millmerran, once it became available, just as a corporation without market power and without Pozzolanic’s history and commercial relationships, could seek (and did seek) to do.
2281 A businessman in the position of a director of Pozzolanic would not rationally refuse to bid for Tarong and bid only for Millmerran ash. Millmerran ash was a new source of ash. It was unknown and unproven.
2282 Similarly, such a businessman would not rationally refuse to bid for Millmerran, and simply assume that a contract with Tarong would be won. Such a businessman, reasonably confident that a contract with Tarong would be won, would not necessarily withdraw its bid to Millmerran if the Millmerran tender process was proceeding to closure before closure of the Tarong tender process, unless perhaps, the closure of the Tarong tender process had become an entirely formal matter of simply execution of a document reflecting all of the terms already and plainly agreed.
2283 It stands to reason, as a matter of business rationality, that Pozzolanic would tender for and seek to obtain a contract with Millmerran, and that QCL would take steps to cause its wholly owned subsidiary Pozzolanic, to enter into a contract with Millmerran. It would, no doubt, do so on the footing that the ash would likely be able to be sold into the SEQ market for concrete grade flyash, to concrete producers. Unless and until, Pozzolanic actually secured a contract with Tarong, Pozzolanic would rationally seek to risk-manage its exposure to a fundamental loss of market share and EBIT margin in the flyash business, by bidding for and seeking to secure the Millmerran contract.
2284 However, as Mr Arto makes plain, and as Mr Maycock embraces, the contract with Millmerran had to be “profitable” in its own right. For the Board, it was, as Mr Maycock says, “a given” that the Millmerran contract had to be profitable.
2285 I return therefore to the question of, could a corporation in the position of QCL/Pozzolanic, absent market power, profitably enter into the Millmerran contract on the terms and conditions reflected in the document of 30 September 2002, assuming a workably competitive market. Professor Hay makes no real or explicit analysis of the costs and benefits of Pozzolanic entering into the Millmerran contract on the terms and conditions of the Millmerran document. Professor Hay says that he can see the costs incurred by Pozzolanic and he can see the benefits of Pozzolanic securing the continuity of its flyash undertaking. It seems to me that the analysis of whether a corporation, absent market power, might profitably enter into a contract on the terms and conditions of the Millmerran contract, requires a more detailed analysis of the costs and benefits than those identified by Professor Hay.
2286 There are two considerations on the question of profitability that seem to me to be important.
2287 The first is the consideration that in the September Board paper, the directors were being told by management that should Pozzolanic enter into the Millmerran contract and not win the Tarong contract, the Millmerran contract would remain profitable in the sense that it would generate a margin of $2.99 per tonne on each of the 45,000 tonnes of flyash which would be isolated and sold from Millmerran (assuming quality conformity). A margin of $2.99 on a price of $65.00 (assuming the price could be sustained in a contestable market) represents a margin of 4.6% which is, however, between 25.4% and 28.4% less than Holcim’s benchmark margin range for flyash of 30% to 33%.
2288 No doubt, Mr Arto would have regarded a margin of this order as wholly unacceptable when looking at the Millmerran contract as a standalone proposition. Mr Arto was asked about the profitability analysis. Mr Arto accepted that once the cross-subsidisation by Pozzolanic’s MPA Energy’s price reduction to Millmerran was also factored into the analysis, the Millmerran contract was “marginally profitable” or a “deal” of “low profitability” as a standalone transaction. Factoring in the cross-subsidisation payment on an annual basis, virtually all of the profitability (of $135,000 per annum) was extinguished as explained earlier in these reasons. Mr Arto, whilst accepting that the Millmerran contract was marginally profitable, observed that “in the same Board paper, we say we are still fairly confident that we can proceed with the Tarong contract” and thus “[i]t’s still the same scope” [emphasis added] (T, p 1311, ln 12). It is not clear whether Mr Arto attributed little weight to the profitability calculation as a standalone exercise because he was “fairly confident” that Pozzolanic would “proceed with the Tarong contract”, and thus the analysis was, in truth, entirely irrelevant to him. Mr Arto accepted that by September 2002, Pozzolanic had an agreement in principle with Tarong to finalise the contract and that Pozzolanic had “a good level of confidence” that Pozzolanic would be able to enter into a contract with Tarong, subject to the final negotiations.
2289 No emphasis was attributed by Mr Arto in his principal affidavit to the profitability of the Millmerran contract as a standalone transaction.
2290 The second consideration, however, is this.
2291 At the close of tenders on 19 September 2001, Transpacific had tendered a value proposition over seven years of $7,393,200. This proposition was described by Mr Hunt as an aggressive bid. Pozzolanic’s conforming bid comprehended a value proposition of $4,436,630 but more importantly, its non-conforming tender comprehended a value proposition of $7,150,000 over seven years. By comparison, FAA’s value proposition over seven years was $4,879,776 although, should FAA have secured an exclusive agreement the value of its bid based on 185Kt was $6,405,960. Pozzolanic amended its bid on 1 November 2001 to increase it to $7,700,000 an increase of $550,000. As indicated earlier FAA withdrew its tender on 11 February 2002 which left Pozzolanic and Transpacific as the bidders for the contract. Mr Hunt and Ms Knox told Pozzolanic that Transpacific’s bid “addressed realistic market potential” and was “more aggressive”. That challenge caused Pozzolanic to revise its bid, presumably on the assumption that Transpacific’s bid was more favourable than the Pozzolanic revised bid at $7.7M, to a guaranteed minimum of 135Kt per annum at $10.10 per tonne resulting in an amended value proposition of $9,264,500. The difference between Transpacific’s aggressive bid and Pozzolanic’s further amended bid to $9,264,500 is $1,871,300, over seven years which is $267,328, per annum.
2292 There is, no doubt, that Pozzolanic’s responsive bid of 6 March 2002 to $9,264,500 represented a significant uplift in response to the challenge to secure the Millmerran contract.
2293 It seems to me, however, that when account is taken of the circumstance that Transpacific as a potential new entrant corporation into the SEQ concrete grade flyash market, with no market power, in either the upstream or downstream markets as defined in these proceedings, and particularly the downstream SEQ concrete grade flyash market; no incumbent relationships or contracts; no specialised deployed tanker fleet of the significant kind operated by Pozzolanic; no network of intermediate storage facilities; and no possibility of a contract at Tarong, was able to frame a competing bid at a tender price within $267,328 per annum of Pozzolanic’s bid (recognising all of the features of market power enjoyed by Pozzolanic at that moment in time), the comparative Transpacific bid, is powerful evidence that a corporation with no market power was adopting a substantially similar bidding position to the position adopted by Pozzolanic, with its market power.
2294 I infer from that comparative bidding process that because a resourced and serious tenderer in the form of Transpacific, without market power, is shown to be capable of adopting a substantially similar bidding position to that adopted by Pozzolanic, Pozzolanic’s bid was not made possible simply or only by reason of its market power. That follows because a corporation without market power, assuming a workably competitive market, was, in fact, able to bid a price for an industrial contract of this kind that was within $267,328 per annum of Pozzolanic’s bid, with all of the advantages of market power previously described.
2295 Ultimately, these assessments are a matter of judgment, but it seems to me that the Transpacific bid (and the value proposition inherent in it) is not so significantly less than the Pozzolanic bid that one could conclude that Pozzolanic has reached the terms and conditions of its tender, and ultimately the contract terms including price, on a supra-competitive basis, by which I mean, adopting a price which only a company with market power could embrace.
2296 In other words, put anecdotally, Pozzolanic’s bid was not so far “out of the ballpark” of a bid by a corporation without any market power at all as to say that Pozzolanic necessarily used its market power in framing the terms and conditions of its commercial bid, and ultimately the contract terms as adopted by Millmerran. Moreover, the September 2002 Board paper put to the directors by management, contained the observation that should the directors decide not to enter into the Millmerran contract, on the terms put to the directors by the negotiating team, Transpacific would enter into a contract and would likely “match” Pozzolanic’s terms and conditions.
2297 When considering whether the Millmerran contract is one which Pozzolanic profitably could have entered into absent market power whilst engaging in rivalry within the construct of a workably competitive market, the other features of the market (apart from the features of market power), as they subsisted in fact, need to be kept in mind.
2298 One of these features was the historical reality that Pozzolanic had been engaged in the flyash business since 1984. It was very unlikely that Pozzolanic, assuming the construct of no market power, would have easily accepted the commercial or business position that prudentially it would simply abandon the flyash business by not entering into a standalone Millmerran contract on the terms presented, and simply go out of the flyash business entirely. That is not to say that Pozzolanic’s long-term engagement in the flyash business (particularly its position in SEQ) meant that it could “irrationally” strike a standalone contract at Millmerran within the construct of a workably competitive market, but it might well condition the attitude of directors as to how far Pozzolanic might legitimately go in testing the boundaries of what might be thought to be a profitable standalone Millmerran contract in all the circumstances.
2299 A rational businessman looking at the terms and conditions of the Millmerran contract and asked to assume that the Tarong contract might possibly be lost (even if that possibility had receded, as it had in this case, to a position where Mr Arto and senior management thought that Pozzolanic had a good chance of winning the Tarong contract), could decide to enter into the Millmerran contract as the then only way of staying in the flyash business in SEQ, and as a way of enabling Pozzolanic to try and make something of what market opportunities might be left as rivalry and service offerings played out. One view might be: “let’s at least stay at the table and see what we can do”, rather than go out of the SEQ flyash business entirely.
2300 I accept that this was a material and substantial factor informing Mr Arto’s thinking and decision-making. A substantial and major consideration, however, informing Mr Arto’s thinking and decision-making was that Pozzolanic had to enter into the Millmerran contract on the commercial terms negotiated by Mr Ridoutt and Mr Wilson so as to preserve Pozzolanic’s market share and EBIT margin in the flyash business by preventing a rival (including Transpacific) from gaining access to a source of contestable flyash at Millmerran. Notwithstanding that clear business reasoning and the purpose informing Mr Arto’s mind, the financial terms of the Millmerran contract, put to the Directors, were not so far beyond the bid of Transpacific as to lead to the conclusion that Pozzolanic’s bid was either only made possible by its market power or that Pozzolanic’s bid was necessarily materially facilitated by Pozzolanic’s market power.
2301 Even though the profitability of the Millmerran contract on a standalone basis was well below the Holcim/QCL/Pozzolanic benchmark margins, those margins reflect the margins of incumbency and dominance rather than margins derived from a field of workably competitive rivalry. It follows, at least so far as the assessment of Mr Arto’s evidence is concerned, that objectively viewed, QCL/Pozzolanic did not take advantage of its market power in entering into the Millmerran Contract but nevertheless a substantial purpose of Mr Arto in entering into the contract was to prevent a rival securing access to unprocessed flyash from Millmerran and to prevent the entry of a potential competitor into the market for the supply of concrete grade flyash in the SEQ concrete grade flyash market, because Mr Arto was very concerned to ensure that QCL preserved its market share, its volume, its revenues and its EBIT margin which were seriously at risk should QCL/Pozzolanic lose either the contract at Millmerran or the contract at Tarong to a rival and particularly a serious rival such as FAA or Transpacific.
2302 These conclusions are based upon the evidence relating to Mr Arto’s engagement in decision-making about entry into the Millmerran contract having regard to his pivotal position as not only a director of Pozzolanic, but the Managing Director and Chief Executive Officer of Pozzolanic.
2303 I propose to now consider aspects of the evidence of Mr Maycock in relation to these questions concerning Pozzolanic’s entry into the Millmerran and Tarong contracts. In examining Mr Maycock’s evidence it is also convenient to consider his evidence in relation to matters which go beyond the period up to the end of February 2003.
PART 35
The evidence of Mr Maycock
2304 Mr Maycock has had long experience in the cementitious industry. He was the CEO of Milburn Cement, a Holcim New Zealand company from 1988 until 1992 when he became Managing Director and CEO of QCL. He remained in that role until 1998. He was a Director of Pozzolanic from 1992 to 1998 and a Director of other QCL group entities. In 1998 he became the Area Manager (including Australia) and Senior Vice-President of Holcim and non-executive chairman of QCL. Upon the merger in May 2003, Mr Maycock became the non-executive chairman of Cement Australia. Mr Maycock concluded his employment with Holcim in 2004 although he remained the independent non-executive chairman of Cement Australia until 30 June 2006. Since 2004 Mr Maycock held the role of CEO of CSR for three years, and at the time of giving evidence he was the Chairman of AGL Energy Limited.
2305 Mr Townsend replaced Mr Maycock as CEO of QCL in 1998 and Mr Arto replaced Mr Townsend in February 2002.
2306 The CEO of QCL reported to Mr Maycock as Chairman and as the Senior Holcim Executive in Australia. In June 2003 Holcim formed, by merger, the partnership with ACH controlled by CSR and Pioneer. In June 2003, Mr Leon was appointed CEO of Cement Australia reporting to Mr Maycock.
2307 From 1998 Mr Maycock’s role as non-executive Chairman involved reviewing Board papers, attending Board meetings and acting as the Senior Holcim Executive in such processes as annual budgeting and strategic reviews of the operations of QCL and later Cement Australia. Mr Maycock’s principal point of contact with management was the CEO although Mr Maycock would engage with other managers at Board meetings, occasionally. Mr Maycock said that he would receive the Board papers about a week before the meeting. He read them before the meeting. If he was concerned about something it was entirely likely that he would talk to the CEO about it. However, Mr Maycock’s practice as Chairman was not to become involved in management decisions.
2308 One aspect of Mr Maycock’s role after 1998 as the Senior Holcim representative concerned the review and approval of budgets and strategic plans. An important aspect or “value driver” of the budget is product price levels. Testing the “sensibility” of the pricing assumptions was Mr Maycock’s “main involvement” in the budgeting process. As to strategy, Mr Maycock was engaged in assessments (essentially concerning aspects of the cement part of the business) of the “macro” view of Australian trends, imports, import parity pricing, and aspects of national supply and demand. Because flyash pricing “was very largely pegged to the price of cement” most of QCL’s focus was on cement. Mr Maycock regarded flyash pricing as a “black art” based on its hypothetical value as a substitute for cement, as a function of the substitution rate of flyash for cement (25%-30%), which enabled QCL to calculate theoretically what someone could afford to pay for flyash and be better off by using it rather than cement (T, p 1341, ln 38). QCL’s rule of thumb however was that flyash prices were 50% of the cement price. It was difficult to increase the price of flyash without an increase in the price of cement. Prices for cement and flyash would often be changed at the same time. The flyash price would usually be slightly less than the cement price (T, p 1351, lns 30-33).
2309 Mr Maycock said that he had great respect for the capacity of CSR, Pioneer and Boral as large multi-national companies to commercially arm wrestle with QCL over prices and terms.
2310 In November 2001, Mr Maycock began the merger discussions for Holcim with ACH. A lot of the negotiations were conducted between Mr Arto and the CEO of ACH. Mr Maycock said that the reason for pursuing the merger was that the strategic position of QCL was not seen as particularly strong because although QCL had a strong cement production capability, it had limited downstream cement consumption as it had no interest in ready-mix concrete or other businesses consuming a lot of cement. Although ACH, Pioneer and CSR were large consumers of cement, they had limited cement production capacity and bought cement from third parties. There was thus a natural commercial fit between the two organisations and little overlap. Pioneer and CSR represented between 50% and 60% of QCL’s cement production.
2311 QCL, in Mr Maycock’s view, faced a number of risks. As to cement which represented the overwhelming majority of Holcim/QCL’s deployed capital investment, one risk confronting QCL was that ACH might install additional cement capacity and supply themselves stranding QCL with surplus capacity. QCL’s responsive entry into the ready-mix concrete business in competition with Pioneer and CSR would have been “extraordinarily expensive and time-consuming” (T, p 1337, ln 13). Alternatively, those companies might have built importation facilities in Brisbane. As to flyash, Mr Maycock said the risks confronting Pozzolanic were similar because Pioneer and CSR represented a large proportion of Pozzolanic’s sales and those companies might seek supply elsewhere, supply themselves and strand Pozzolanic with surplus capacity. Flyash, however, was peripheral to the merger negotiations. The merger was completed without the future flyash supply contracts being put in place. The existing “customary arrangements” with Pioneer and Readymix continued.
2312 From November 2001, Mr Maycock saw FAA as a potential competitor in SEQ with QCL’s flyash business.
2313 Mr Maycock saw these further risks confronting that business. There were technical risks with the power stations because security of supply was not guaranteed should a power station develop a problem and not produce as much electricity. Flyash production would fall. If a power station failed to maintain its equipment, ash supply might be interrupted and be variable in quality. The installation of nitrous oxide burners might adversely affect the production of quality flyash. Although power stations had a revenue incentive to maintain supply, the value of producing electricity heavily outweighed the value of the ash component of their undertaking. As to the commercial challenges, the economics of producing concrete depended on achieving cost savings from using flyash instead of cement. The concrete companies therefore were concerned to get very consistent supply of consistent quality flyash so as to make a consistent concrete product. Pozzolanic needed to supply a consistent flyash product and do so, on time. Pozzolanic had to manage a resilient supply chain capable of accommodating variables in demand and supply. The measure of that resilience was described by Mr Maycock in this way (T, p 1340, lns 37-46; T, p 1341, lns 1-2):
... we always try to have enough capacity to assist [buyers], either production capacity or storage capacity, so that we could supply through periods of volatility in demand or production. We sort of tended to [believe] you [had] to have more capacity than you might notionally require, and typically, we would look to have at least 20 per cent more capacity than we actually forecast we would need. And ideally, you would have more than one supply source, because if something disastrous happened … rather than have to interrupt supply completely, you could at least try and persuade customers to take ash from another source, even if it was slightly different. Often they would prefer to do that than have no supply at all. So in an ideal world, you would have more than one source of supply so you weren’t exposed to those technical risks ... at any given power station.
[emphasis added]
2314 As to the notion of 20% spare capacity, Mr Maycock was taken to an extract from the Cement Australia Board Report for the Board meeting of 23 August 2004 (ATB 13.35) in which it is said in the context of a discussion of “Supply vs Demand SE Qld & N NSW” that it is necessary to have 20% extra capacity at power stations to account for “seasonal demand and power station shutdowns”. Mr Maycock was asked whether at any time in his period as non-executive chairman of the Board of QCL and then Cement Australia, it had ever been suggested by management that there was in place some sort of “rule that 20 per cent extra capacity was required to account for seasonal demand and power station shutdowns”. Mr Maycock said that there was no “rule” as such but that he understood it to always have been the case that the flyash business would try to have sufficient capacity either in production or in intermediate storage or both, to cater for unusually high demand or problems with supply (T, p 1455, lns 24-40). Mr Maycock was asked whether August 2004 was the first occasion when he was informed by management, either from QCL or later Cement Australia, of the notion that management would strive for 20% extra capacity beyond that actually required. Mr Maycock could not recall when this notion was first mentioned and he found the 20% number “unremarkable”. Mr Maycock accepted that such a number may have been first mentioned specifically at about August 2004 although he could not recall.
2315 Mr Maycock said that his understanding of “typical arrangements” struck with power stations was this. Supply contracts were generally long-term, up to 10 years. Pozzolanic would install collection equipment and maybe processing equipment. Payments to the power stations involved a fixed price plus a variable per tonne component. Often there would be (T, p 1343, lns 18-23):
... some sort of assurances about giving Pozzolanic priority over the certain sources of ash at the power station or some such arrangement to give a reassurance that putting the capital into the power station wouldn’t be [wasted]. So there was usually some form of priority given to Pozzolanic at the given power station. If not total exclusivity, at least a form of priority over certain ash streams.
2316 Power stations would look for competitive bids every time a contract came to a natural end and was being re-tendered, to try and maximise their revenue under whatever new contracts they were able to sign.
2317 As to the Tarong relationship, Mr Maycock said that Pozzolanic regarded renewal of the contract as “highly desirable” as one of Pozzolanic’s two main sources of ash (along with Gladstone). The advantages of Tarong ash were long-term reliability in quality; ash production from a stable coal supply; relatively accessible in distance to the market in SEQ; economical to truck flyash into the main consuming areas of SEQ; and Pozzolanic had a lot of sunk capital on the Tarong site. Tarong North was seen as an “interesting adjunct to the main Tarong [station]”. As to the Millmerran tender, Mr Maycock’s view was (T, p 1345, lns 40-44):
... Millmerran was viewed as potentially another supply source for Pozzolanic, not quite as attractive as Tarong but sort of a next best alternative, so to speak, so the company was interested in adding another supply source ... for its longer term development in Southeast Queensland.
[emphasis added]
2318 As to the demand for cementitious products in 2002, Mr Maycock said that he was “quite bullish” about the economic prospects for SEQ. Mr Maycock saw cement consumption as a function of GDP growth. Holcim had built a cement plant at Gladstone with “surplus capacity” for the first five to 10 years to accommodate growth. If total cementitious demand was growing, so too would demand for flyash. Mr Maycock said that Holcim and the Board were also quite bullish about future demand. Mr Maycock saw growth in cement consumption as generated by infrastructure projects and residential housing demand, as the “main drivers”. As to the Millmerran and Tarong tenders, in late 2001 and early 2002, Mr Maycock’s views about demand growth for cementitious products informed his general attitude to the tenders (T, p 1346, lns 44-46) “in a general sense … because we were concerned to make sure that Pozzolanic had a robust supply chain and ideally had more than one source of supply for any given market”.
2319 Mr Maycock said that this was the view of the QCL Board and the view of Mr Sperry who was a member of the executive Board of Holcim and was on the Board of QCL. Mr Maycock said that the senior executives, and probably the Board, recognised the risk of Pozzolanic having too much flyash should it pursue both contracts although Mr Maycock was not “unduly” concerned (T, p 1347, lns 1-11) because (T, p 1347, lns 14-18):
... increasingly with sort of a Holcim hat on by that stage, I’d been kind of indoctrinated into a long term view of these markets, by which we talk decades in some cases ... we were always very concerned to make sure that we had [supply] chain capability that would keep up with market growth and enable us to grow market share if we could.
[emphasis added]
2320 This decade long, long-term view, is said to be part of the Holcim culture (T, p 1347, lns 20-21) particularly on the cement side reflecting a need to have a “very strong production platform ... sourcing capability”. In the cement business Holcim thinks in “multi-decade sort of time frames” because the cement assets are “extremely capital intensive”. A cement plant is designed for a 40-50 year life. Mr Maycock adds this observation at (T, p 1347, lns 32-35):
Now, fly ash is [a] much less capital intensive business but ... it was an important ancillary part of the QCL business. So I think the same long term thinking probably coloured our attitude to Pozzolanic in a way as well.
[emphasis added]
2321 Mr Maycock said that Holcim was also pushing its companies to increase the use of slag and flyash to reduce CO2 emissions on the manufacture of cement. Also, the long-term introduction of low nitrous oxide burners and the pressure to use cheaper coal would be likely to affect the quality of the ash. Mr Maycock said that the risk management strategy therefore was to “diversify your sources of ash so that you had some options” (T, p 1348, lns 38-39). Mr Maycock concludes these remarks by saying (T, p 1348, lns 44-45):
... I think that any opportunity to gain a second source of supply, major source of supply in south-east Queensland was interesting for those reasons.
[emphasis added]
2322 Mr Maycock said he had no recollection of the substance of the Board discussion on 11 April 2002 of the Capex Request dated 28 March 2002 for the installation of plant at Millmerran and Tarong North (T, p 1355, lns 44-46; p 1356, lns 1-4) although Mr Maycock recalls that he supported the proposal. A capital expenditure of $3.5 million represented about 10% of QCL’s annual capital investment (T, p 1357, lns 1-4). Mr Maycock explained, in the following way, the general enabling view or approach adopted by the QCL Board in assisting management in their on-going negotiation of commercial positions to be adopted on behalf of the company (T, p 1356, lns 15-22):
... the theory was that where there was kind of a contingent commitment to spend capital, the board should approve it before the management went off and committed the company to do something. So it was like an enabling resolution, which the management then knew, if they went off and negotiated a contract on substantially the proposed terms, they weren’t going to come back to the board and find themselves embarrassed by not getting the capital. So that’s a reason why [the Capex Request] would be considered ... at this relatively early stage, so to speak.
[emphasis added]
2323 Mr Maycock said that he expected “as a matter of formality” that one or both of the contracts would come to the Board for approval. Having approved the Capex Request, Mr Maycock did not contemplate, at the time, that that matter would be reconsidered and said (T, p 1356, lns 31-33):
... I think, theoretically, if, based on this approval, the management was able to negotiate one or both of those contracts substantially on the terms mentioned here, that was it, from a board perspective.
2324 Mr Maycock was supporting the proposal because Tarong was Pozzolanic’s “single largest source, so obviously the company was keen to renew that contract” and Millmerran was “potentially another important source for [SEQ] that would enable [us] to diversify our sources and grow with the market” (T, p 1356, lns 37-40). Mr Maycock thought that the Board was persuaded that it “made sense to see whether we could get both”. Also, Mr Maycock supported securing the contracts on the footing that “obviously we expected them to be profitable for the corporation which. … I take as a given” (T, p 1357, lns 8-9).
2325 As to the seven “key indicators” for the flyash business both overall and in terms of its performance in SEQ (based on the Tarong and Swanbank Power Stations) for 2001, set out in the March Board paper for Directors, Mr Maycock regarded the information as a “factual context setting piece” which he probably “would have not focussed a lot on, frankly” (T, p 1347, lns 27-29). Mr Maycock regarded the observation at Point 3 of the March Board paper that Pozzolanic’s strategy was to secure both contracts and therefore maintain the supply of flyash to customers as the expression of Pozzolanic’s objective to be the preferred ash manager for Queensland power stations, in this way (T, p 1357, lns 43-46):
It’s something of a motherhood statement in a way, but ... this was the business of Pozzolanic ... to present itself to new and existing power stations as the best manager of ash, both from an operational ash handling point of view and maximising sales from the power stations ... that was the sort of mantra of Pozzolanic.
[emphasis added]
2326 As to the options confronting Pozzolanic in the tendering processes, Mr Maycock did not recall thinking about whether Pozzolanic would bid for only Millmerran or only Tarong ash. Mr Maycock doubts whether he would have thought seriously about bidding for Millmerran and not Tarong. It “would be pretty odd not to pursue [Tarong]” as it was the “established supplier” and “we had a lot of equipment there” (T, p 1358, lns 11-19). Millmerran was an “unknown quantity” (T, p 1358, ln 19). Mr Maycock has no recollection of considering tendering only for Tarong ash. The “argument” for tendering for Millmerran was “really to provide a back-up for Tarong, and as a growth platform for the future” (T, p 1358, lns 29-30). As to the proposed terms of the contracts set out at p 2 of the March Board paper, Mr Maycock had no particular view about them. He has no recollection of any discussion about the foreshadowed risks at Point 4, and the particular risk that loss of either contract may result in a loss of 250,000 tonnes and an EBIT loss of $6M. Nor can Mr Maycock recall any discussion of the foreshadowed risks associated with “securing both of the new contracts for 7 years” (T, p 1359, lns 8-28). As to the three particular boxed risks at Point 4, Mr Maycock thinks the Directors did address the risks created by the combined capacity of the two sources of ash but his recollection is “very fuzzy” and he “would hesitate to be [more] specific” (T, p 1359, lns 33-34).
2327 Mr Maycock described the table at Point 6 of the March Board paper setting out 10 key indicators relating to the 2001 actual performance of the flyash business for SEQ, the 2002 budget and the 2003 estimate, as management seeking to set out some of the key figures for the Board’s information. Mr Maycock could not recall considering these data at the meeting or prior to the meeting (T, p 1359, lns 43-46). Mr Maycock could not understand why the 2002 budget assumed a price of $57 per tonne due to a loss of the Millmerran contract compared to $67 per tonne for 2003 as Millmerran ash would not be entering the market until 2003. As to Mr Maycock’s view at, 11 April 2002, of Pozzolanic’s capability to use both Tarong and Millmerran ash, Mr Maycock said he thought (T, p 1361, lns 11-12) that “we knew that in the early years, [Pozzolanic] probably wouldn’t use all of [the] capability” but “in the longer term, we were optimistic that there would [be] substantial growth in the market and that we would be able to utilise more of the ash from both these stations” (T, p 1361, lns 14-16).
2328 As to the September 2002 Board paper for the 9 September 2002 meeting, Mr Maycock has no recollection of any Board requirement that the contracts be signed simultaneously. Mr Maycock recalls some discussion at some point of such a topic but “it was felt not to be very realistic” (T, p 1362, lns 15-18). Mr Maycock thinks he would have approved of the key elements of the agreements set out at Point 3 of the September Board paper. Mr Maycock has no particular recollection of the remark under Point 3 of the Board paper that if Pozzolanic did not sign the Millmerran agreement, Millmerran would sign with Transpacific who was keen to re-enter the ash market in Queensland and would, in all probability, match Pozzolanic’s offer. Mr Maycock does not recall reading the section of the paper addressing negotiations with Tarong or the key elements of the draft Tarong ash sales agreement.
2329 At T, p 1370, lns 3-18 this exchange occurred:
Q Mr Hutley (for the respondents): … what attitude did you have to the continuing pursuit of negotiations for the Tarong contract in the light of the resolution to enter into the Millmerran contract?
A I don’t believe that the decision to enter into the Millmerran contract affected the company’s intention to pursue the Tarong [contract] on whatever timetable was commercially sensible.
Q Did you agree with that intention, as you perceived it, of the company?
A I believe so at the time, yes.
Q Why?
A Well, I think I was satisfied commercially that that was a sensible course of action for the company to follow.
Q For what reason?
A ... if we were able to obtain either or both of the contracts, that [would] be a satisfactory outcome. Better to achieve both for the reasons [earlier discussed by Mr Maycock], but if we achieved either/or, [that] was better than achieving nought.
2330 Mr Maycock does not recall, in any detail, how he understood the remark at Point 4 of the September Board paper under the heading “Loss of Tarong” that based on year-end forecasts, the loss of the Tarong supply would result in an EBIT loss of about $6.3M. However, Mr Maycock does recall “having a general view that management may have somewhat exaggerated the case in coming to that view” but Mr Maycock does not recall “the assumptions that went into calculating that 6.3 million number” (T, p 1370, lns 29-31).
2331 Mr Maycock gave this further evidence, in cross-examination.
2332 Mr Maycock reasserted his view that although he thought that in the early years of both contracts (if won by Pozzolanic) there would possibly be surplus ash to its needs, nevertheless in the longer term, there would be a need for flyash from both power stations. Mr Maycock regarded the longer term as represented by five to 10 years. In the context of being asked why he thought a need for ash in five to 10 years made it necessary to enter into a seven year contract with Millmerran in 2002, Mr Maycock explained the virtue of incumbency, as he saw it, from his considerable experience in dealing with power stations, in these terms:
... it was more common than not to be able to negotiate extensions to existing contracts or to renew existing contracts. That had been our experience. So the incumbent producer of fly ash at a given power station tended to have an advantage when it came to what happened at the end of the contract, because there would be capital sunk in the power station; they would be very familiar with the power station and the people who run the power station. So whilst there was certainly no guarantee, our experience was that, you know, if you did a good job and you had been established for a seven or eight year contract, or whatever, you had a pretty fair chance of getting it renewed or extended … I mean … that’s an intangible aspect of the consideration, but the principal reason was to have enough volume and to have enough diversity of supply (T, p 1381, lns 9ff).
[emphasis added]
2333 As to forecast projections of demand, Mr Maycock says he is sure he saw various projections but cannot recall them and, speaking for himself, he would have been informed by his own experience and views about the Queensland market which may have been supplemented by a specific forecast or presentation. As to the price tendered to Millmerran, Mr Maycock had no involvement in that decision and his knowledge of the profitability of the contract was confined to information presented in the March and September Board papers. Mr Maycock did not necessarily accept the propositions in the Board papers. Mr Maycock thinks it highly unlikely that he read the September 2001 non-conforming tender to Millmerran. He had no knowledge prior to the submission of the tender that it sought an exclusive agreement for the sale of ash into the cementitious market. Mr Maycock did not know that the Tarong tender also sought exclusivity for concrete grade flyash but it would not have surprised him to find Pozzolanic seeking “a degree of exclusivity in return for investing the capital and developing the market for fly ash” (T, p 1381, lns 28, 29).
2334 Mr Maycock said the company would normally seek some sort of priority access to ash as part of entering into contracts. Mr Maycock was taken to documents in which Pozzolanic described itself as currently enjoying “single supplier status for ash in Queensland”. Mr Maycock could not recall any discussion with management about that topic although he recalls that Pozzolanic sought to be the “preferred ash supplier in Queensland” (T, p 1385, lns 10, 11) and Pozzolanic sought to advance that idea through a concept called “total ash management”. Mr Maycock accepted that that concept involved Pozzolanic suggesting to power stations that it could look after all of the stations ash-handling requirements. Total ash management included obtaining contracts under which Pozzolanic acquired flyash for sale to concrete producers. Mr Maycock accepted that this aspect was “by a wide margin, the most profitable aspect of Pozzolanic’s dealings with power stations” (T, p 1385, lns 36, 37). Mr Maycock accepted that total ash management was an approach which Pozzolanic sought to take up, with every power station that produced flyash capable of being processed and sold to concrete producers, as a function of growing its business. Mr Maycock accepted that Pozzolanic had looked for opportunities to enter into a contract with every power station in Queensland which had flyash for processing and sale to concrete producers, at one time or another, so long as there was a “viable market for the ash”. Mr Maycock did not accept that Pozzolanic sought to be the only supplier of concrete grade flyash but it sought to be the preferred supplier, and sought to achieve preferential positions in its contractual arrangements with power stations (T, p 1386, lns 21, 22).
2335 Mr Maycock could not recall any discussion in November 2001 about the notion that QCL’s loss of a single supplier status would adversely impact upon QCL’s annual EBIT by between $1M and $6M. Mr Maycock had no recollection in the period up to March 2002 of discussions at Board level or with management about QCL’s flyash strategy. At March 2002, Mr Maycock understood QCL’s flyash strategy as one of seeking to continue its traditional business of being the preferred ash manager and ash marketer for stations that were in a position to supply the market (T, p 1387, lns 32-34). This was the “business model”. The deployment of this model meant that should a new station come on line, Pozzolanic would seek to be the preferred ash manager, and ash supplier, so as to grow its business in the market. This objective was not pursued in isolation from the market. “Economic dimensions” had to be taken into account. Pozzolanic did not do it “for the fun of it”. “ Longer-term market growth” and the desirability of “diversified sources of supply” were features of those economic dimensions (T, p 388, ln 12).
2336 Mr Maycock accepted that usually QCL undertook an analysis of profitability before committing to expenditure and the analysis would involve examining the cost of the resource, the volume of product that might be sold, the price and the profit margin. This was the QCL practice, although it depended upon the size of the investment. For a discretionary investment on new activity such as $1.35M per annum over seven years, a proper financial analysis of the profit would have been required. Mr Maycock does not recall seeing such an analysis for the Millmerran expenditure. Mr Maycock said he just did not know whether one was undertaken. He could not recall asking to see any such financial analysis.
2337 As to the consequences of contestability particularly in the context of the 2002 budget formulated on an assumption of a price drop of $10 per tonne due to potential competition from a rival using Millmerran ash, Mr Maycock accepted that should a competitor obtain access to a source of flyash in SEQ, one scenario, at least, was that there would be a likelihood that flyash prices would fall, although such a result was not inevitable. Mr Maycock accepted that “one of a number of possible scenarios” was a price fall, and another possibility was that a rival might elect to reduce its volume and its costs and try and keep its prices at the same level as Pozzolanic. Mr Maycock said that he doubted whether any of the possible combinations of responses would result in Pozzolanic maintaining its EBIT in the face of competition from a rival selling Millmerran ash but he had not “done the maths” (T, p 1390, ln 36). Mr Maycock accepted that if there was going to be an additional source of supply into the SEQ market, Pozzolanic would suffer a loss of market share (T, p 1395, lns 30-32).
2338 Mr Maycock viewed management’s assumption of a potential loss of market share from ash sourced by others out of Millmerran as “mathematically” reasonable but said that whether, as a matter of commercial judgment “it’s reasonable, to my mind, is a separate question” (T, p 1395, lns 36, 37). Mr Maycock observed that the assumptions inherent in the 2002 budgeting process seemed to assume certain consequences in terms of volume and price should a rival secure Millmerran flyash. Mr Maycock said that he had no reason to believe that the assumptions were an “unreasonable set of assumptions” although whether the scenario derived from those assumptions was most likely or not was something that Mr Maycock could not express a view about. Mr Maycock would not go beyond accepting that, assuming someone else won the Millmerran contract, and one assumed a loss of volume or a reduction in price as at, for example, November 2001, those consequences would bring about a “mathematically logical” result of a loss of market share (T, p 1397, lns 6-10). Mr Maycock was not in a position to express any view about the reasonableness of an assumption of a reduction in price of $10 per tonne at November 2001 or a second half 2002 reduction in EBIT earnings in the flyash business of $2.8M.
2339 As to the Capex Request of 28 March 2002, Mr Maycock said that such a decision would generally be a QCL Board decision taken by directors, Mr Arto and Mr Maycock, even though expressed as a Pozzolanic decision. Mr Maycock said that such a decision “would generally take into account the views of QCL’s directors, given that Pozzolanic was a wholly-owned subsidiary, and it effectively was a division of QCL” [emphasis added] (T, p 1398, lns 38-40). It was also quite common for members of the executive management group to make presentations to the Board about matters of substance before the Board.
2340 As to the March 2002 Board paper supporting the Capex Request, Mr Maycock agreed that it was “very light on financial analysis, on its face” (T, p 1399, lns 29, 30). It looked “unusually light on”. As to the proposition that loss of either contract may result in a loss of up to 250,000 tonnes of flyash and an EBIT loss of $6M, Mr Maycock said he had no recollection of looking at or discussing that proposition, at the time, and in retrospect, it seems “an extraordinary number”.
2341 Mr Maycock could not recall seeking any explanation of the supporting March 2002 paper or any aspect of the Capex Request, at the April 2002 Board meeting. Although Mr Maycock seemed to be confused about aspects of the March 2002 Board paper, he was not suggesting that the document lacked any clarity at the time he approved the Capex Request. Mr Maycock was taken to the statement in the March 2002 Board paper that Pozzolanic’s objective was to be “the preferred ash manager for Queensland power stations” and that Pozzolanic’s “strategy was therefore to secure both contracts and therefore maintain the supply of fly ash to our existing customer base”. Mr Maycock understood those remarks as Pozzolanic seeking to be preferred so as to improve and grow the business over time, although he accepted that no part of the March 2002 Board paper gave any indication of how entering into both the Millmerran and Tarong contracts would result in Pozzolanic “growing the business over time”.
2342 Mr Maycock did not recall having any view about whether entering into both contracts was to “maintain the supply of flyash to Pozzolanic’s existing customer base”. As to the proposed term of seven years for both contracts, Mr Maycock said his own view, based on his macro assessment of the prospects for the Queensland cementitious products market, was that over a five to 10 year horizon he expected that there would be an opportunity to sell flyash from both stations. Mr Maycock could not recall what forecasting reports or data were available to him or the Board at that time.
2343 Mr Maycock could not comment on the proposition put to him that there was simply no profitability analysis undertaken for the use of Millmerran ash over the five to 10 year horizon. Mr Maycock accepted that if such analysis had been done, he would normally expect to have seen the analysis in the document justifying the Capex Request (T, p 1404, lns 30, 31).
2344 Mr Maycock said that a part of his thinking in supporting entry into the Millmerran contract was that there might be either outages or changes to ash quality at Tarong over time. As to ash quality, Mr Maycock thought there might be changes to the coal source at Tarong and low nitrous oxide burners might be required to be installed, for environmental reasons. Mr Maycock could not recall, however, that the information presented to tenderers for the Tarong contract contained the observation that the majority of coal supplied to Tarong (and Tarong North when commissioned) would be from the Meandu Mine and the coal source would remain the same until at least 2010.
2345 Mr Maycock accepted that he had “no specific recollection” in either, Board discussions, or discussions with management, about any link between Pozzolanic’s attempt to win both contracts and concerns about the introduction of low nitrous oxide burners. As to outages, Mr Maycock said that in weighing that consideration “[one] would have to have a qualitative view … a sort of, intuitive view of the cost [to Pozzolanic and QCL] of Tarong or Swanbank … failing to deliver [ash]” (T, p 1405, lns 30-32). However, Mr Maycock accepted that if a concern about outages informed decision-making about entry into the Millmerran contract he would have expected to have seen that consideration discussed in the Board paper, although it might have been done orally (T, p 1405, lns 41, 42).
2346 In examining the risks set out in Point 4 of the March 2002 Board paper, Mr Maycock accepted that the identified risks are generally in the category of risks that some other party might obtain access to a source of flyash which could be processed and sold into the SEQ concrete grade flyash market. Mr Maycock did not accept that the proposition underlying the risk analysis was that obtaining both the Millmerran and Tarong contracts would secure all sources of supply of flyash in SEQ, and that objective might be thwarted if an additional source of supply became available during the life of the contracts.
2347 As to the risks, Mr Maycock accepted that the identifying risk of “new power stations in SEQ” suggested that there might potentially be another source of ash on the supply side at some point in SEQ, adding capacity, and one risk for Pozzolanic was that a competitor might obtain such ash. Mr Maycock accepted that such an event clearly would open the possibility, at least, of additional sources of supply which would manifest itself in various ways in the market, possibly including a reduction in price and possibly including the taking of some of Pozzolanic’s market share (T, p 1410, lns 1-7).
2348 A further identified risk was that one of the power stations would grant access to ROS ash to third parties “particularly for different applications” (non concrete grade applications) and such a third party might regard it as worthwhile to install classification equipment and then compete with Pozzolanic in the concrete market (T, p 1410, lns 24-27).
2349 As to the September 2002 Board paper, Mr Maycock accepted that management had certainly presented to the Board, at earlier meetings, a strategy of securing both ash contracts and signing the contracts simultaneously. Mr Maycock regarded this strategy as unrealistic but it was certainly proposed in earlier meetings (T, p 1410, lns 35-47). Mr Maycock thought that the Board had not accepted the “simultaneous approach the first time around” (T, p 1411, lns 25, 26).
2350 Mr Maycock could not recall whether he read the section of the September 2002 Board paper setting out the consequences for Pozzolanic of a loss of the Tarong contract. Mr Maycock accepted that CSR, Pioneer and Boral accounted for about 72% of the SEQ flyash market and that it was “theoretically correct” that if FAA won the Tarong contract those sales would switch to FAA. Mr Maycock said such an outcome would be “undesirable” but he could not say whether the projection of the remaining available market was accurate or not (T, p 1414, ln 32). Mr Maycock did not recall, either prior to or at the Board Meeting in September 2002, considering the question of what would be the effect upon QCL, if QCL won the Millmerran contract but FAA won the Tarong contract. Mr Maycock accepted that Pozzolanic was “very keen” to renew the Tarong contract.
2351 It was a major contract and had long been a major source of ash to Pozzolanic.
2352 Mr Maycock did not agree with the proposition that if QCL obtained the Millmerran contract but not the Tarong contract, it would not have made “business sense” to obtain the Millmerran contract alone, because, Mr Maycock would rather have had one source of ash than no ash, so that Pozzolanic could continue to compete in the ash market (T, p 1415, lns 1-14). Mr Maycock accepted that the Millmerran contract involved expenditure of $1.3M per year over seven years, and capex of $2M, in order to produce ash for sale. Mr Maycock said that he would not have relied solely on the analysis of profitability in the Board paper to form the opinion that it was worthwhile having the Millmerran contract as a standalone contract. Mr Maycock regarded the scenario described in the Board paper as being “extremely pessimistic” and that “in reality, it was most unlikely, if Pozzolanic had another source of ash at Millmerran, that it would lose that amount of volume”. Pozzolanic “would have found ways to compete in the market” and there were various possibilities which might have produced “outcomes somewhere between the two … polar positions” set out in the Board paper (T, p 1415, lns 16-36). Pozzolanic might have competed on price and also on the service offering to concrete companies. The rivalry would have seen competition between Pozzolanic offering ash from Millmerran and FAA offering ash from Tarong. Mr Maycock put the position in these terms (T, p 1416, lns 7-12):
… I’m not saying [Millmerran ash is] better than Tarong. All I’m saying … is that faced with a choice of having zero sources of supply effectively, if you set aside Swanbank, or having one from Millmerran which is somewhat unknown, but at least is geographically similarly located to Tarong, I think it’s not surprising that Pozzolanic would have chosen to pursue the Millmerran opportunity.
[emphasis added]
2353 As to the Tarong contract, Mr Maycock could not recall whether he accepted management’s expressed confidence that Pozzolanic would secure a new contract at Tarong. Mr Maycock said the contract negotiations were long and somewhat unpredictable and it was “finally only done when it was signed, in both cases” (T, p 1416, lns 39, 40). Mr Maycock could not recall reading, at the time, the statement that if Pozzolanic did not sign the agreement, Millmerran would negotiate an agreement with Transpacific which would in all probability match Pozzolanic’s offer. Mr Maycock said he would always have assumed that a competitor would step in if Pozzolanic was not successful. Mr Maycock could not recall whether he had a view about the effect, Transpacific’s entry into the SEQ market might have had, upon QCL’s EBIT from its flyash business. Mr Maycock described the influences informing his decision-making in this way (T, p 1418, lns 7-19).
… in reaching [the decision to enter into the Millmerran contract], I, obviously, read this [the September 2002 Board Paper], I might have accepted some of it, all of it, none of it, but I had, also, access to other information, other experience, and other views which, sort of, cumulatively, led me to conclude that it was sensible for the company to pursue the Millmerran contract. I don’t recall what the mixture of those sources of information was now, that long ago, but there were always … other pieces of information or other thoughts in addition to what was printed in a board paper that went into making decisions … I think I would have, probably, accepted some but not, necessarily, all [of the content of the September 2002 Board Paper].
[emphasis added]
2354 Mr Maycock said he had no recollection of what, if any, parts of the 2002 Board paper he disagreed with or whether, in fact, he disagreed with any part of it. However, Mr Maycock said that he rather thought that he would have viewed the projection of losses of market share in section 4 of the paper as being “somewhat extreme” (T, p 1418, ln 45). As to the general matters, Mr Maycock said he had a “generally positive view” of the market position as to future demand, and he also had reservations about continuing to rely “on a sole source of supply for the south Queensland market”.
2355 As to the Tarong contract, Mr Maycock said that the Board had no real role to play in determining the price to be offered. Management’s role was to tender, in a way that met Pozzolanic’s long-term objective, of growing a profitable flyash business. Mr Maycock expected management to undertake whatever financial analysis was necessary in order to come up with a recommendation mixed with a qualitative analysis involving the risks associated with other supply sources, which would be difficult to actually quantify. Pozzolanic’s tender for the Tarong and Tarong North contract contains the observation that Pozzolanic “would have rights to all types of ash, excluding cenospheres, with exclusivity for concrete-grade ash”. Mr Maycock was not aware that the tender sought exclusivity “but that would have been quite normal” and seeking exclusivity in both the Millmerran and Tarong tenders “was part of the balance that was necessary to justify investing capital at the two stations” (T, p 1420, lns 17-24).
2356 Mr Maycock had a view that exclusivity was desirable (at Tarong, for example) “because that was the way in which these fly ash contracts were normally negotiated anywhere” (T, p 1420, lns 37, 38). The purpose of seeking exclusivity was “to reduce the risk that the capital would be invested at the power station and then the power station would turn around the next day and encourage someone else to install similar equipment and render the business case less viable” (T, p 1420, lns 40-44). Mr Maycock accepted that that risk, as just identified, was a “risk of a competitor obtaining concrete grade ash in the power station” (T, p 1420, lns 46, 47). As to exclusivity Mr Maycock said this (T, p 1426, lns 9-18):
So what I understood to be the position was that in exclusivity, Pozzolanic, in return for investing the capital and doing all the work to develop the market and sell the ash ... sought access preferentially to the higher quality streams of ash so it had to spend less time and money – possibly didn’t have to do much at all, actually, to convert them to saleable product. But that didn’t mean [that] someone else couldn’t come along and get access to one of the lower grade qualities of ash, install more equipment, and spend more money per tonne converting it to concrete grade ash, and that was quite often the case even if there were ... nominal exclusivity of access to concrete grade ash.
2357 Mr Maycock accepted that the above broad concept would be applied at each power station depending upon the terms of the actual contract and the physical configuration of how Pozzolanic’s equipment attached to the power station. Mr Maycock said that Pozzolanic had a desire for preferential access to the higher quality ash because that ash obviously reduced the costs of producing a concrete grade product. Mr Maycock was then asked these questions and responded in the following way (T, p 1426, ln 35, to p 1427, ln 10):
Q And did you understand it to be the case that if Pozzolanic had preferential access to the higher quality ash, that reduced the likelihood that a competitor would be prepared to commit money and resources to take the lower quality ash?
A It certainly raised the bar – raised the hurdle, if you want to say, to other people developing and investing to do so.
Q And that was part of the desired effect of this broad exclusivity from Pozzolanic’s point of view, wasn’t it?
A Well, it was really a quid pro quo between the power station and Pozzolanic.
Q By that do you mean this, that if we, Pozzolanic, are going to take your ash, we want to be able to sell it and make money out of it?
A And invest capital in the process, yes.
Q … We want to be able to make what we regard as an adequate return from the ash which we sell; correct?
A Over the life of the contract, that’s correct.
Q And one way, from Pozzolanic’s point of view, of making it possible to obtain that adequate return was to have in place provisions which made it undesirable, from a competitor’s point of view, to come in second and try to take the residue of the ash; correct?
A Well, I think that was simply a consequence of Pozzolanic achieving a preferred position, was that, you know, that may have been the outcome.
[emphasis added]
2358 Mr Maycock did not regard seeking exclusivity at Millmerran as a means of protecting Pozzolanic’s investment at Tarong which might otherwise have been eroded had a competitor obtained access to Millmerran ash. Mr Maycock said the two contracts were “looked at on their respective merits”. Mr Maycock seemed to accept that “in general terms” he understood that management knew of Pozzolanic’s general approach to exclusivity in the way Mr Maycock had described exclusivity and that management knew of Mr Maycock’s expectation (and presumably that of the Board) that management would pursue that exclusivity in the broad way Mr Maycock had described it, as best they could (T, p 1427, lns 27-30). Mr Maycock did not accept that he expected management to secure, as far as possible, conditions of the contract which would deter competitors from making investments to obtain flyash which could be sold into the concrete market. Mr Maycock accepted such a consequence as simply being a corollary of trying to get the best position for Pozzolanic that could be obtained. Mr Maycock accepted that the two notions were inextricably linked in the sense that “if you have a competitive situation and someone wins, then by definition, someone loses, and that is the nature of these tender processes” (T, p 1428, lns 4-14). Mr Maycock accepted that it was his expectation that management in the negotiations with Tarong and Millmerran would, as far as possible, achieve for Pozzolanic the broad concept of exclusivity Mr Maycock had spoken about, and the extent to which management would succeed, would depend upon the attitude of the other party to the negotiations in each case (T, p 1429, lns 34-46).
2359 Mr Maycock was taken to the letter from Clayton Utz dated 3 September 2002 attached to the September 2002 Board paper, and in particular the comments about the termination provision, at any time after 31 December 2006 on 60 days notice, and the other elements of the clause. Mr Maycock could not recall turning his mind to that provision, nor giving consideration to the effect of the provision on Millmerran in terms of the notion that for Millmerran to enter into a contract with a second off-taker, it would need to satisfy itself that that contract would more than recoup the money it might lose if Pozzolanic exercised its option of early termination under the contract.
2360 As to the graph (within the Tarong tender) for the period January 2002 to January 2010 showing demand peaking in 2007 and falling away thereafter to 2010, (ATB 4.15), Mr Maycock had no recollection of seeing that graph or a numerical demand forecast in those terms. Mr Maycock was taken to the projections of concrete grade flyash to be sold out of Tarong for the years 2002 to 2009 inclusive and asked to compare those numbers with the total SEQ flyash market as set out on p 2 of the market assessment at ATB 4.36. On average there is only a seven tonne difference each year between the assessment of the total SEQ flyash market and the tonnes to be supplied out of Tarong, but for 2009 where the total SEQ flyash market is said to 335,000 tonnes and the volume to be supplied out of Tarong is 319,000 (a difference of 16,000 tonnes). Mr Maycock could not recall seeking management’s view in 2002 about the extent to which a source of flyash other than Tarong was necessary to meet forecast demand in SEQ up to and including 2009.
2361 Mr Maycock could not recall any discussion at Board level or with management between March and September 2002 to the effect of Mr Klose’s memorandum of 2 April 2002 (ATB 4.39) that it was “vital” to retaining value in Pozzolanic’s flyash business to secure both the Millmerran and Tarong contracts. Nor did Mr Maycock recall any discussion to the effect that the additional cost of securing both contracts (said by Mr Klose to be $3M) would be off-set by price increases.
2362 Mr Maycock was certainly generally aware that the prices of flyash in New South Wales were lower than those in Queensland. His view about why that was so was this: since FAA was owned by the three major concrete companies, and those companies represented about 90% of the volume of sales, it would be likely that some form of transfer pricing was in place between FAA and the concrete company shareholders.
2363 Mr Maycock was taken to the Board report for the Cement Australia Board Meeting of 26 June 2003 (ATB 8.10). Mr Maycock accepted that, at June 2003, he understood that if the ash at Millmerran met the contractual requirements, Pozzolanic would be obliged to install classification equipment. Mr Maycock could not recall giving consideration to the Board report which observed that the failure of Millmerran ash to reach the contract limits would give Pozzolanic “some flexibility” in the requirements for installing capital equipment as required under the contract. Mr Maycock said that it was the intention, in entering into the Millmerran contract, that if the ash proved to be of marketable quality, Pozzolanic would install equipment and start selling it. Mr Maycock accepted that one of the purposes for Pozzolanic’s entry into the Millmerran contract was to enable it to deal with short-term supply shortages, such as outages, if they occurred (T, p 1445, lns 1-6), and thus ash from Millmerran would need to be available for sale (T, p 1445, lns 31-33).
2364 Mr Maycock gave this evidence about the use of ash generally and in particular, the use of Millmerran ash.
2365 Mr Maycock accepted that if flyash from Millmerran, even after classification, was not capable of being used as concrete grade flyash, then it could never be useful as a method of dealing with short-term supply shortages, subject to the notion of what might be a short-term shortage. Mr Maycock did not have a view, in June 2003, about whether colour variability in Millmerran ash would affect its acceptability to customers although he recalled that that matter became an issue at some point. Mr Maycock said that the variability in the colour was not the problem, although that circumstance would not help matters. If the ash turned out to be “a very different colour” from other ash that was available, it would make the ash harder to sell because some customers may not accept the different colour (T, p 1447, ln 36, 37). Selling the ash was not impossible “but certainly harder to market” (T, p 1447, lns 33-39). Usually, consistency of ash supplied to concrete producers was important, which meant that ash from the same source was usually desirable (T, p 1447, lns 42-45). Usually, concrete producers determined their mix designs by reference to the particular character of the ash supplied. Usually, Pozzolanic would not supply ash from a different source for say two or three days, to the ash normally supplied to a concrete producer, during the week, unless there was some compelling reason to do so, such as a shortage of supply. Otherwise, concrete producers would be disadvantaged by not fully understanding the characteristics of the new ash, and they might possibly need to alter their mix designs. If there was a “big difference” between the two ashes, most customers would prefer not to “chop and change” unless there was a supply shortage or some other crisis (T, p 1448, ln 19).
2366 Mr Maycock accepted, in principle, that should Millmerran ash generally be a “significantly darker ash than Tarong ash”, that circumstance would certainly lower the enthusiasm of concrete producers for purchasing it, because often concrete producers are involved in projects which require the supply of concrete over a number of days and weeks and their customers require consistency. A concrete producer supplying concrete to a project of a certain colour on one day, and concrete noticeably darker on a second day on the same project, would likely experience difficulties with its customer. Most batching plants of concrete producers in SEQ had only one silo for the storage of flyash and the same flyash would be used in different projects at particular times. Generally, producers did not have the capacity at batching plants to store flyash from two different sources (T, p 1448, lns 1-47). If the ashes were similar, however, there was much less of an acceptance problem.
2367 At September 2002, Pozzolanic had no means of knowing whether Millmerran ash would be regarded by concrete producers as “relevantly similar” to Tarong ash. Pozzolanic’s working assumption was that Millmerran ash would be a satisfactory alternative to Tarong ash until the contrary was proven (T, p 1449, lns 17-19).
2368 However, Pozzolanic had to manage any “discontinuity in the supply chain” on a regular basis in the sense that if it became necessary to switch a source of supply for reasons of shortage, or some supply chain problem, most customers, within reason, were able to do so. This was not a unique or highly unusual situation, although Mr Maycock had no engagement on these “routine operational issues”, at September 2002 (T, p 1449, ln 38). Mr Maycock had a general recollection that some time after September 2002, when it became apparent that the colour of Millmerran ash was an issue, consideration was given to whether it was feasible to try and direct the Millmerran ash at a particular geographic segment of the market to reduce the issue of switching concrete producers from one source of ash to another. Mr Maycock could not recall any discussion at Board level or any conclusion being put by management to the Board as to whether there was actually a market anywhere for Millmerran ash. The question of whether there was a market, and if so of what size, was a management issue, in Mr Maycock’s view.
2369 Mr Maycock was taken to p 24 of the May 2004 Board report prepared for the 28 June 2004 Board meeting (ATB 13.4) which contains this observation:
Of more immediate concern is the need to secure Millmerran power station as a source of ash for South Eastern Queensland and Northern NSW. Millmerran has had in place with CAPL [Cement Australia] a contract (take or pay) for some time. During the initial period CAPL has undertaken extensive testing of the ash to determine its marketability. Initial concerns, principally around colour variability resulted in an extension of the proving-up period, which is due to expire in July. We are confident that, properly treated Millmerran ash will be acceptable to the market. To secure this source we will need to exercise our option in July. Exercise will commit us to install collection equipment by mid-2005. Capex is earmarked in 2005 for this purpose. Board approval will be sought at the next meeting.
[emphasis added]
2370 Mr Maycock could not recall any discussions with management about the basis for Pozzolanic’s confidence that Millmerran ash properly treated would be acceptable to the market. Mr Maycock understood, at June 2004, in general terms that Pozzolanic had assumed an obligation to install processing equipment at Tarong North. Mr Maycock does not recall discussing with management any question of whether Millmerran ash would be required as a source of supply, as opposed to Tarong North ash, largely because, Mr Maycock regarded each source as a separate matter governed by separate obligations.
2371 Mr Maycock also recalls, at about this time (around June 2004), that there was “quite some contractual ambiguity” about whether or not Pozzolanic potentially had the right or opportunity in July 2004 to bring the Millmerran contract to an end, and if so why and on what terms (T, p 1452, lns 39-41).
2372 Mr Maycock recalls that there were a long series of negotiations about Millmerran ash as ash began to be tested. Mr Maycock had no recollection of whether, prior to 30 July 2004, Pozzolanic intended to tell Millmerran that the quality of the flyash did not fall within the “acceptable range” criteria in the contract but that Pozzolanic would proceed with the contract, as if it did. Such a matter would not necessarily go before the Board, in Mr Maycock’s view. Nor did Mr Maycock regard the matter that Pozzolanic might have a right to terminate the contract without penalty on that ground, as a matter which would necessarily be taken to the Board. Such a matter could well be “within management’s level of authority to act [upon] as they saw fit” (T, p 1453, lns 30, 31). Management’s authority was very broad (T, p 1453, ln 46). Mr Maycock accepted that if the effect of the decision recorded in Pozzolanic’s letter (Ex-62, SGC-62; signed by Ms Collins) to Millmerran of 30 July 2004 was to commit Pozzolanic to installing a classifier at a capital cost of $2M, that decision would require Board approval, assuming the commitment embraced by the letter amounted to a “new obligation” (T, p 1454, ln 4).
2373 As to the question of the various matters comprehended by the paragraph quoted from the Board report above, Mr Maycock said that the Board left this process to management and if management felt it was necessary to put something to the Board in terms of capital approval (as earmarked for 2005 or otherwise), the Board would deal with the approval when it was on the agenda (T, p 1454, lns 39-41). In March 2005, a capital expenditure request was made of the Board for the installation of a classifier at Millmerran which was approved between Board meetings. Mr Maycock accepted that the decision to approve the capital investment and proceed was a decision “characterised” as one falling between “the least and worst of the alternatives” T, p 1455, lns 1-4), as explained by Mr Maycock later in his evidence (mentioned shortly).
2374 Mr Murray Adams presented a flyash strategy paper to the Board of Cement Australia on 22 October 2004 (ATB 15.3). Mr Maycock accepted that Mr Adams was one of the two people who made the presentation. In the context of a discussion of supply versus demand for flyash in SEQ and northern NSW, the presentation at Slide 10 observes that installing capacity at either Millmerran or Tarong North would resolve the capacity issue in SEQ otherwise Cement Australia would be unable to supply the demand required for the 2005, 2006 budgets. The slide sets out a graph showing current SEQ capacity and the proposed installed capacity. Mr Maycock was asked whether, in order to determine which of the two options outlined by Mr Adams was preferable, the Board would have needed to understand the extent of the colour variability problem with Millmerran ash which might render it unacceptable to concrete producers. Mr Maycock thought the Board would have assumed that both options were valid operational options. Mr Maycock seemed to accept that the underlying assumption in the presentation, at that time, was that Millmerran ash was either, acceptable to concrete producers or had a reasonable prospect of becoming so (T, p 1462, lns 1-4).
2375 On 18 March 2005, Mr Leon sent an email to the directors of Cement Australia on the topic of the Millmerran classifier (Ex-42, CRZ-73). The email attached a paper in support of an “Expenditure Request” for a recommendation that Cement Australia proceed with its contractual obligations at Millmerran and build “buyers facilities” comprising a classifier and out-loading facilities at a capital cost of $2.52M. The project was said to have an internal rate of return of 33.3% (if Cement Australia is able to terminate the agreement after one year) with a net present value of $3.0M. The paper recommended that the decision, as to whether to terminate the Millmerran agreement or continue at renegotiated royalties, be deferred until the market size for Millmerran ash and possible new negotiated royalty levels were determined. Mr Maycock said a request of this kind would normally only be made between Board meetings if there were some deadline or urgency to the matter. Mr Maycock could not recall whether Mr Leon had identified any such urgency. Mr Leon’s email said that Pozzolanic was obliged to make the investment under the terms of its agreement with the power station. Mr Leon also said, in the first paragraph of his covering email:
We have delayed the investment as long as we dare and we are now obliged to act. I look forward to your support.
2376 On 18 March 2005, Mr Tom Clough (Holcim) sent an email to Mr Leon copied to Mr Maycock, Ms de Hayes (Rinker) and Mr Cadzow (Hanson) suggesting that Mr Leon’s proposition of spending $2.52M was not “terribly attractive” and that Mr Leon might try a bit harder to negotiate with Millmerran “on the colour and the fact that any reasonable person is going to see that the business is never going to be economic” (ATB 19.2). Mr Clough suggested that Cement Australia should use some of the capital cost to buy itself out of the contract. Mr Clough requested that the matter be looked at further. Mr Clough was also a member of the Executive Committee of Holcim. Mr Maycock regarded Mr Clough as a very sensible, successful executive with whom he had discussed Holcim’s business interests on a regular basis over several years.
2377 Mr Maycock regarded Mr Clough’s question as a sensible one although Mr Maycock did not regard negotiating an end to the Millmerran contract as the “best proposition”, when put in context. That context was, in Mr Maycock’s view, Cement Australia’s “three or four-year history of previous negotiations with Millmerran”. In Mr Maycock’s view, management was telling the Board that they felt they did not have any further opportunity to negotiate sensibly with Millmerran (T. p 1464, lns 10-31). Mr Maycock understood the first paragraph of Mr Leon’s email to convey that message (T, p 1465, lns 1, 2). Mr Maycock accepted that attempting to negotiate with Millmerran was likely to be unsuccessful (T, p 1465, lns 7, 8), based on the history that Mr Maycock had seen as a director over three or four years (T, p 1465, lns 11, 12). Mr Maycock did not ask Mr Leon to explain why Mr Clough’s proposition of paying some money to Millmerran to bring the contract to an end ought not to be explored with Millmerran, because Mr Maycock was satisfied with management’s conclusion that “of the alternatives available to [management], their proposal [as recommended to the Board] was the best of the options available” (T, p 1465, lns 26-28). Mr Maycock did not ask Mr Leon or anybody else in management whether they had considered the option of trying to negotiate a termination of the Millmerran agreement, as he probably assumed that management had done so (T, p 1471, lns 19-21).
2378 These matters were matters for management. Mr Maycock said that if he was satisfied with the capex proposal, but other directors had an issue, management would deal directly with those directors. Mr Maycock was not aware of anything which may have changed between March 2005 and December 2005 which gave management an opportunity to negotiate a termination of the Millmerran contract.
2379 On 21 March 2005, Mr Maycock sent an email to Mr Leon in relation to the Millmerran classifier and said this: “Chris perhaps you could address Tom’s [Clough] points, copied to the rest of the Board?” (ATB 19.05). Mr Maycock believed that he did not receive a written response from Mr Leon. The matter was addressed at the following Board meeting.
2380 Mr Maycock regarded the notion of terminating the Millmerran contract as involving a “reputational risk” for Pozzolanic, among other considerations. The question of whether attempting to negotiate an agreed end to the Millmerran contract might have involved reputational risk depended upon, in Mr Maycock’s view, the nature of the relationship then subsisting between Cement Australia and Millmerran and whether or not Cement Australia had “tested the patience of Millmerran too much, given [the] extensive history of previous negotiations” (T, p 1466, lns 36-46). Mr Maycock was concerned “on a subjective basis” about Pozzolanic and QCL ending up in a contractual dispute with Millmerran, given that Pozzolanic’s reputation was one of being a “reliable and successful partner in the fly ash business” (T, p 1471, lns 6, 7). Mr Maycock was content not to pursue the matter until he saw the Board papers of 21 April 2005.
2381 Mr Maycock accepted that by reason of his “longevity of history” from 1992 to 2005, in QCL and Cement Australia’s flyash business after 2003, Mr Maycock was the person, amongst the Board members, best placed to understand the history of QCL’s flyash strategy in SEQ (T, p 1467, lns 14-19). Mr Maycock could not recall whether he told Mr Leon QCL’s strategy or whether he spoke to him about the “preferred ash management approach” adopted by QCL. Mr Maycock thought that Mr Leon had just “inherited” that approach with the business and the management in the business (T, p 1467, lns 31-35).
2382 Document ATB Vol 19.6 is an email from Sueki Tan with the description “[Sueki Tan/CemAust]”. The email is addressed to Jenny R Stevenson and bears the subject description “Millmerran Classifier ER – PLS PRINT FOR CHRIS”. The reference to “ER” must be a reference to the “Executive Request” of March 2005 for capital expenditure for the installation of the classifier at Millmerran. The reference to Chris must be a reference to Mr Chris Leon. Under the subject line the word “DRAFT” appears and the document then sets out text starting with “Dear Tom”, nine paragraphs of text and concludes with “Kindest Regards Chris”. The email from Sueki Tan is dated 23 March 2005 at 2:05pm. The document appears to be a draft response by Mr Leon to Mr Tom Clough in response to the request made of Mr Leon by Mr Maycock of 21 March 2005 (ATB 19.5).
2383 Neither Mr Leon nor Ms Tan gave evidence in these proceedings. The document is not authoritatively identified by anyone who can speak to it directly. I have already admitted the document into evidence for the reasons given in an earlier Judgment and the question of the extent to which the document is treated as ultimately probative of a fact in issue is a question of the weight to be attributed to the document. For present purposes, the document is relevant in the context of Mr Maycock’s evidence in two respects. First, the draft contains observations about the contended strategy QCL had deployed in building a flyash business in Australia and Mr Maycock was asked, as already mentioned, whether he had briefed Mr Leon about QCL’s strategy which may have explained the source of the information in the document. Mr Maycock said that he could not recall if he had briefed Mr Leon on QCL’s historical strategy.
2384 Second, the following section of a letter was put to Mr Maycock:
It is probably wise to reflect on the QCL strategy and why they entered into this contract in the first place as it will help put this investment in context. Reference to Jerry will I’m sure be helpful. QCL had (and we’ve inherited) a large, very profitable Fly Ash business. This business exists in the midst of a market that has a huge Supply: Demand imbalance with Supply vastly outstripping Demand. QCL have managed to maintain their high margins by managing the Supply side very astutely. When Millmerran was built, it posed a major risk to the business and QCL needed to move decisively to protect its existing business. We have enjoyed the benefits of that protection and we need to make this investment to continue to do so.
2385 Mr Maycock, as the person with the longest engaged history with QCL’s flyash business, was asked whether at the time when QCL had the conduct of the flyash business up until June 2003, he agreed with the assessment set out in the draft email. Mr Maycock said that he would not have chosen those adjectives to describe the position. Mr Maycock accepted that from time to time, in that period, there was an “excess of supply over demand and, generally, that was the tendency”. Mr Maycock said he would agree with the quoted observations “to that extent” (T, p 1469, lns 21-22). Mr Maycock was asked whether, in 2002, when Millmerran was being built, it posed a “major risk” to the business of QCL. Mr Maycock described the position this way: “I think it’s a glass half full, or a glass half empty approach. It also provided an opportunity”. Mr Maycock did not accept that Pozzolanic entered into the Millmerran contract to protect QCL’s flyash business (T, p 1469, lns 38, 39).
2386 Paragraphs 6 and 8 of the draft response to Mr Clough are in these terms:
… a Millmerran Classifier gives us a valuable tool with which to bring our current supplier power stations (Tarong in particular) into line should they continue to court the concrete companies and competitors. Removal of our custom from these power stations is a powerful commercial negotiating tool, but we need to be able to have an alternative and this is where Millmerran comes in.
In summary we are proposing that we make this investment because we have exhausted our delaying tactics and we believe that the investment will provide what QCL intended: a valuable defensive tool. So that the likely financial outcomes of the investment are well understood we have sketched these but these are the likely consequences not the driver for the investment.
[emphasis added]
2387 Mr Maycock gave evidence that, in March 2005, he did not believe that Pozzolanic’s investment in a classifier at Millmerran would provide Cement Australia with a valuable defensive tool in Pozzolanic’s dealing with Tarong. Mr Maycock “certainly hoped” that the investment in a Millmerran classifier would prove to be financially successful over time and the options were laid out in the paper in support of the investment at March 2005 (T, p 1470, ln 41).
2388 Mr Maycock accepted that the March 2005 Capex Request for the Millmerran classifier sets out the sequence of events which would need to occur before Cement Australia’s exclusive right to terminate the Millmerran contract would fall in. The Directors of Cement Australia were told that having verified the quality of the ash at Millmerran, Cement Australia must build buyers facilities, a classifier and loading facilities, by 1 May 2005, in order to produce concrete grade flyash in quantities sufficient to make the operation economic and, having built those facilities, if the sale of flyash from Millmerran proved to be uneconomic, Cement Australia then had the exclusive right to terminate the agreement. Mr Maycock accepted that those circumstances formed the “essential background” against which the capital expenditure options were considered in the paper, and that that sequence of events had to occur before the opportunity to terminate the contract would arise (T, p 1472, ln 22 to p 1473, ln 8).
2389 Mr Maycock accepted that, essentially, the “genesis” of his concern about reputational risk for Pozzolanic was the notion at sub-heading 2.2 of the March 2005 Capex Paper that should Cement Australia decide not to build the classifier, or decide to terminate the contract before building “buyers facilities”, Millmerran would likely sue Pozzolanic for breach of contract (T, p 1473, lns 20-25). Mr Maycock also accepted that the difficult element about the decision whether to invest the capital and proceed or not, was that there were “no riskless options” and that one “possibility” or “risk” which was a “real one” was that having built the buyers facilities and classifier, the position could remain that, due to the high royalty payment of $1.3M per annum, and the variability of the colour, Millmerran ash would remain uneconomic.
2390 In the Briefing Paper, management advised the directors that Cement Australia believed there was a “high likelihood” that Millmerran ash would remain uneconomic after the construction of the classifier and the associated equipment, in any event. Mr Maycock could not assess the probability of that likelihood but accepted that there was a risk “to that effect”. The numerical assessment of the probability was unclear to Mr Maycock (T, p 1473, lns 36-47). Mr Maycock was taken to that part of “Option 2” of the paper that suggested that the likely volume of sales and likely price of Millmerran ash would prove to be uneconomic, and that, as to quality, flyash from Millmerran would be worse than other power stations in SEQ due to the colour variation in the ash. Mr Maycock accepted that the paper, had as part of its basis, a material risk that these observations would prove to be the case, as “clearly a material risk”. Mr Maycock was hesitant to characterise the risk as medium, high or very high (T, p 1474, lns 6-28).
2391 Notwithstanding these considerations, Mr Maycock said that he was persuaded to the view that the reputational risk of attempting to terminate the contract was too high and the “optionality resulting from building the facilities and seeing whether it would be possible to convert it to a profitable operation was worth having” (T, p 1474, lns 32-35). Mr Maycock said this (T, p 1474, lns 35-41):
The worst case was if the facilities were built and proved to be uneconomic then the equipment could be removed and at least part of the value … say half for the sake of the discussion, could be recovered and the equipment reused somewhere else. So that was the basis on which I felt [our] choosing between a series of quite unattractive options, that it was better to install the equipment. That’s what I believed at the time.
2392 Mr Maycock saw reputational risk, in attempting to terminate the contract, because management were telling the directors that they had essentially “exhausted the patience of the Millmerran management” and that is “what [Mr Maycock] understood to be the case” (T, p 1474, lns 43-46). The 23 March 2005 draft used the phrase in para 8, quoted earlier, “we have exhausted our delaying tactics” [with Millmerran]. The worst case, in Mr Maycock’s view, was that the contract would be terminated and the equipment removed. By November 2005, Mr Leon, in his report to the Board, was able to observe that the testing of Millmerran ash had determined that the ash was not of saleable quality (ATB 22.30). The report notes that the contract had been reviewed and it had been concluded that whilst Pozzolanic could not avoid the $1.4M payment for the year commencing 1 December 2005, Pozzolanic could give notice of termination and a letter would be given to Millmerran advising of Pozzolanic’s intention to terminate the contract. Mr Leon’s report was presented to the Board meeting of 16 November 2005.
2393 Mr Maycock was taken to a document at ATB 22.38 called “Board Budget Presentation 2006” for Cement Australia which was presented to the Board meeting of 16 November 2005. Mr Maycock accepted that the document recognised, as one of the budget risks which had to be managed for 2006, the notion of “Increased competition in fly ash in QLD”. Slide 44 entitled “Sales & Marketing”, sets out actual and forecast sales of flyash in Queensland for 2004 and 2005 and a “very rough budget” for 2006 and 2007. The 2004 actual sales for Tarong and Swanbank were 306Kt and 62Kt respectively. Forecast sales respectively were 363Kt and 32Kt. The 2006 budget contemplated 384Kt and 40Kt respectively and also 6Kt from Millmerran. In the context of a discussion about the correctness of these statistics, Mr Maycock accepted there was principally (T, p 1478, ln 25), a SEQ market for flyash which was serviced by the Tarong and Swanbank power stations, and the most proximate sources of supply to that market were Tarong, Swanbank and Millmerran.
2394 Mr Maycock accepted that a Board Report for a Cement Australia strategy meeting on 17 November 2005 accurately set out, “broadly speaking”, Cement Australia’s then existing flyash strategy. That strategy had been to focus on adding value to the power stations and looking after their needs “to such an extent that the desire and need to find other potential Fly Ash customers is low” (ATB 23.8). Mr Maycock saw the purpose of the strategy as to optimise financial returns to the power stations and Cement Australia. Mr Maycock said that such optimisation reduced the risk of Pozzolanic suffering stranded capital at the power stations, on the footing that, if the power stations had a low desire to seek out other flyash off-takers, Pozzolanic would be unlikely to find the capital invested at the power stations in performing the contracts, undermined by other flyash customers striking a relationship with the power stations. Mr Maycock accepted that the basis for investing capital at the power stations was to enable flyash to be produced for sale in the market, and the “commercial basis” of the investment would be affected if Pozzolanic’s market share was reduced (T, p 1481, ln 38). Mr Maycock accepted that Pozzolanic’s market share would be “potentially” affected if a competitor obtained access to flyash from a power station. Mr Maycock said that the “reduced probability” of a new entrant obtaining access to flyash from a power station was “just a logical consequence” of the “mutually beneficial commercial arrangement between the power station and Pozzolanic” (T, p 1481, lns 20-25).
2395 Mr Maycock did not accept that such a consequence was part of Cement Australia’s “rationale” for its strategy, as described. Mr Maycock regarded viewing the matter in those terms as putting the thinking “back to front” (T, p 1481, ln 28). Mr Maycock was asked to explain what aspect of the rationale for the strategy did not involve “reducing the risk of competition”. Mr Maycock said that the contracts with the power stations involved commercial considerations on both sides, with the power stations seeking to maximise revenue from the sale of flyash, and Pozzolanic investing capital to extract and process flyash for sale. Mr Maycock said that clearly Pozzolanic “wouldn’t be excited if the scenario changed” with the emergence or introduction of a competitor, in such a way that, “the whole commercial basis for the contract was undermined”. Pozzolanic’s aim was to reduce the incentive for the power stations to look for other outlets for the ash. However, the only thing Mr Maycock actually remembers about the strategy meeting of 17 November 2005 was the proposition that Pozzolanic should try to “flip the Royalty model such that Power Stations are bidding for our business rather than vice versa”.
2396 As to the notice of termination of the Millmerran Contract dated 1 March 2006 (Ex-42, CRZ-89), Mr Maycock was asked whether he would regard sending a letter of termination as inconsistent with the decision in March 2005 to approve the expenditure to install a classifier at Millmerran. Mr Maycock said no inconsistency would arise if circumstances had changed or contractual developments or quality developments in relation to the ash or other things had occurred, that made termination a sensible commercial course of action at that point. Mr Maycock thought that the Board was informed periodically about on-going discussions between Pozzolanic and Millmerran management and also there was on-going testing of the ash. Mr Maycock said that he was clear about his understanding as at March 2005 of the position based on Mr Leon’s memorandum (Ex-42, CRZ-73; the March 2005 ER paper). As to whether that understanding had changed between March 2005 and March 2006, Mr Maycock said this (T, p 1485, lns 30-33):
Well it’s clear that it was an evolving situation. Let’s say a pragmatic commercial situation between Pozzolanic and the Millmerran management. It changed over time.
2397 Mr Maycock believed that although the earlier position at March 2005 had been that the first step required Pozzolanic to build a classifier at Millmerran and then form a view about the quality of the flyash before an exclusive right to terminate arose, management by early 2006 was “attempting to work with Millmerran to get a mutually acceptable outcome, and that was where the matter rested” (T, p 1485, lns 36-38). Mr Maycock regarded decisions about Cement Australia’s flyash strategy as being, to a fair degree, fundamentally matters for management rather than the Board. Mr Maycock’s expectation was that management would tell the Board its plans and decisions rather than ask what steps should be taken, unless the role of the Board was engaged so as to approve “a capital project or the like” (T, p 1487, lns 32-39).
PART 36
Assessment of Mr Maycock’s evidence
2398 During the course of his evidence, I found Mr Maycock to be an impressive, experienced director with a long history in dealing with the business imperatives confronting commercial activity in the cementitious industry. I generally accept his evidence subject to the observations which follow. Mr Maycock’s evidence of his own reasons for deciding that Pozzolanic enter into the Millmerran contract can be reduced to the following matters, although I have taken the whole of his evidence into account and all of Mr Arto’s evidence.
2399 Mr Maycock thinks he probably saw demand forecasts of one kind or another over time but had no regard to a particular five or seven year, or as he regarded long-term, five to ten year demand side forecast. He did not seem to be influenced by any capacity data concerning Tarong or any of the contended constraints upon capacity of the kind that Mr Druitt extensively spoke about it. The March and September Board papers were the source of his decision-making information, although importantly, that information was supplemented by his own extensive experience of the cement and flyash businesses. The Board papers did not argue a case for Millmerran on the basis of projected demand over time or the need for a “back-up” source of ash or the criticality of diversity, or impending capacity constraints at Tarong. Nor did either paper argue for Millmerran as a necessary future platform for “growth of the flyash business”. Nor did the papers argue for Millmerran on the footing of likely coal supply volatility at Tarong (assuming it was won, as management thought at September 2002, it ultimately would be) or the problematic notion of outages, or the consequences for a flyash business of the adoption of low nitrous oxide burners.
2400 Nevertheless, I accept that these considerations were, at least, within the realm of the broad portfolio of thinking undertaken by Mr Maycock as influencing his decision-making.
2401 As to demand, Mr Maycock said he and the Board were “bullish” about demand over a five to 10 year horizon. Mr Maycock thought that diversity, and risk-managing potential technical problems at power stations, made Millmerran useful or “interesting” as “another source” of ash. Diversity of supply, growth of the flyash business, and Millmerran as a “back-up” were features of the “business reasons” suggesting to Mr Maycock that Millmerran was potentially another important source of ash for Pozzolanic.
2402 For Mr Maycock, the contract, however, had to be profitable.
2403 Mr Maycock had no real recollection of the Board discussion on 11 April 2002 of the Expenditure Request Summary prepared 28 March 2002 (ATB SB 3.26A) or the March Board paper supporting it. The notion that Pozzolanic should “secure both contracts and maintain supply to customers”, as the expression of QCL and Pozzolanic’s “preferred ash manager” business approach, was seen by Mr Maycock, oddly enough, for a formal board presentation, as nothing more than a “motherhood statement”. Mr Maycock, however, recognised greater commercial gravitas in that strategic notion when giving later evidence about it, as already described. Mr Maycock could not recall any discussion of the risk of losing 250Kt of volume and $6M of EBIT earnings, should either contract be lost to a rival. Mr Maycock could not recall any discussion of the other identified risks set out in the Board paper. As to the potential problem of trying to find something to do with the combined volume capacity, at least over the first five years, created by having both contracts, Mr Maycock said he was ‘very fuzzy” about that matter and would hesitate to be “more specific” than that. Mr Maycock cannot recall any discussion about management’s remarks in the paper that if Pozzolanic did not sign with Millmerran on the terms negotiated by management, Millmerran would enter into a contract with Transpacific and Transpacific would likely match Pozzolanic’s terms and conditions.
2404 Mr Maycock regarded management’s assessment of a potential loss of $6.3M in EBIT should Pozzolanic lose either contract as “somewhat exaggerated” and as “somewhat extreme”, and the assumptions underlying it were not clear. Mr Maycock could not recall any discussion with management about the notion of QCL enjoying a “single supplier status”, although Mr Maycock accepted that Pozzolanic’s aim was to be the “preferred ash supplier in Queensland” for all of the power stations’ “ash handling requirements” and that idea was promoted by QCL and Pozzolanic through the vehicle of “total ash management” solutions. Mr Maycock accepted that this was the QCL “business model”.
2405 Although Mr Maycock did not accept, as inevitable, the notion that prices for flyash would fall in the face of contestability by a rival supplying Millmerran concrete grade flyash into the SEQ concrete grade flyash market, Mr Maycock accepted that one scenario, at least, was a likelihood that prices would fall, and whatever the combination of volume or price strategies that might emerge or be adopted by a rival, Mr Maycock doubted whether QCL could maintain its EBIT margin in the business in the face of that conduct. Mr Maycock accepted that one outcome could be that Pozzolanic would lose market share.
2406 More fundamentally however, Mr Maycock said that confronted with the choice of having no source of supply at all should Tarong be lost (and Swanbank could be discounted for this purpose), on the one hand, and having Millmerran ash although unknown at the time, on the other hand, it was not surprising for Pozzolanic to pursue the Millmerran contract. At the time of signing the Millmerran contract, the Tarong contract could only be regarded as secure when and if “finally done”. At September 2002 the Tarong contract was not in that position. Mr Maycock said that he assumed that if Pozzolanic did not sign with Millmerran, a competitor would sign. As to the features of the September 2002 Board paper that influenced Mr Maycock in reaching his decision about entry into the Millmerran contract, he could not say or recall the mix of considerations, together with other information, taken into account by him in reaching his decision to support Pozzolanic’s entry into the Millmerran contract. As to the profitability of the Millmerran contract as a standalone contract, Mr Maycock did not accept the “extremely pessimistic” assessment in the September Board paper. Mr Maycock thought that Pozzolanic would have found a way to compete.
2407 In responding to many of the questions about the Board meetings at which the March and September papers were discussed, other Board meetings, papers and presentations to the Board and discussions with management, Mr Maycock said he had no real recollection of these discussions. In those circumstances, the documents are likely to be a surer guide to Mr Maycock’s decision-making aided, of course, by the extent to which Mr Maycock has an actual recollection of particular matters and other influences brought to bear in his thinking. I generally accept his evidence as to those recollections. I accept and find that the central feature of the thinking and business reasons adopted by Mr Maycock in deciding that Pozzolanic should enter into the Millmerran contract, and that QCL should make that happen by its capital expenditure approvals, was a concern that Pozzolanic could not be left in the position that it not pursue the Millmerran contract, and then later find that for, whatever highly unlikely reason might emerge, Pozzolanic had not secured the contract at Tarong, as it believed at 30 September 2002 it would be very likely to secure, once the negotiations were finally, done confined as they were, by then, to the non-commercial terms.
2408 However, in the absence of any detailed recollection of the actual discussion of the Board papers and particularly the September 2002 paper, I am satisfied that the burden of the analysis undertaken by senior managers Mr Ridoutt and Mr Wilson under the supervision of Mr Arto as an experienced Holcim senior executive, of the commercial risks confronting Pozzolanic should a rival secure a source of supply of ash at either Millmerran or Tarong, together with the analysis of the consequences for QCL and Pozzolanic should that risk emerge, measured by a postulated loss of market share, loss of volume, contestable supply pressure on price, earnings and margins, all formed a substantial reason in Mr Maycock’s thinking in deciding that Pozzolanic should enter into the Millmerran contract.
2409 Mr Maycock was the Area Manager and Senior Vice-President for Holcim for Asia and Australia. So far as his commercial experience in the cementitious industry is concerned, Mr Maycock grew up in the cementitious industry working in Holcim entities and he was, no doubt, entirely astute to and versed in Holcim’s benchmarks about margins both in the cement business and the flyash business. Mr Maycock recognised, in his evidence, the field of potential threats to market share should Pozzolanic not secure a contract at both Millmerran and Tarong. Mr Maycock also recognised the dynamic tension in the market which would arise from either Transpacific or FAA securing one or other of the contracts, although Mr Maycock had reservations about how that tension would necessarily express itself in terms of impacts upon volume, or price, or margins, or all of these things. Further, Mr Arto, as the Managing Director and the Chief Executive of the Executive Management Group, brought a very clear understanding of Holcim’s benchmark margins for flyash to the debate at the Board. Mr Maycock was the non-executive independent chairman of QCL although as the senior Holcim representative in Australia he had a role to play, as he said, in strategic discussions and reviewing budgets especially in relation to pricing. It should also be remembered that at September 2002 the Millmerran contract, absent Pozzolanic’s decision to enter into it, would likely go to Transpacific and the Board had been told that Transpacific would likely match the terms and conditions of the Millmerran value proposition. Mr Peabody, who had founded Pozzolanic, was aggressively seeking to re-enter the flyash market. Transpacific, unlike FAA, had no shareholder customer guaranteed sales. It would have to compete with Pozzolanic on price, service offering and other features to win contestable sales to the major concrete producers and the independents (assuming Pozzolanic secured Tarong).
2410 I am satisfied that one of the substantial purposes of Mr Maycock in deciding that Pozzolanic enter into the Millmerran contract on the terms ultimately embraced by Pozzolanic was to foreclose a rival’s (including Transpacific) entry into the SEQ concrete grade flyash market by preventing a rival from securing access to Millmerran flyash. Although Mr Maycock is not able to recall the mix of considerations discussed in the September 2002 Board paper or the scope and content, precisely, of the other matters, based on his own experience and judgment, that he took into account in reaching his decision that Pozzolanic enter into the Millmerran contract, it seems inevitable that Mr Maycock must have looked closely at the Board papers containing the best, most informed view of QCL and Pozzolanic’s experienced senior managers, of the economic or commercial consequences for QCL and Pozzolanic should either contract be lost. Mr Maycock no doubt took those assessments into account. In making this observation, I recognise Mr Maycock’s evidence about the range of other influences he took into account, as earlier described.
2411 It seems to me very likely that Mr Maycock, having regard to his experience, undertook at least some form of relatively rudimentary financial sensitivity analysis by asking himself what position would the group be in if Pozzolanic won Tarong but not Millmerran; won Millmerran but not Tarong; won both contracts; won neither contract. I have no doubt whatsoever, that these sorts of questions were examined by Mr Maycock and the ultimate objective was to win both contracts. Businessmen and women conduct business undertakings as profit maximising exercises in which revenues, costs and margins in supplying products and services are the centre focus. Normally, contestability in workably competitive markets constrains a firm to incurring only those costs which are the efficient costs of production, supply and distribution of products and services. A firm that enjoys very high market share or something in the nature of dominance, as Mr Arto defined that term, might enjoy the discretionary power of being able to stand above the need to achieve efficient costs or address the kind of constraints on prices that characterise true contestability. Nevertheless, even such a firm in deciding whether to undertake new projects or enter into industrial contracts of the kind characterising the Millmerran contract, is focussed upon actual and budgeted performance according to all of the usual benchmark standards ultimately resulting in a measurement of the firm’s EBIT and EBITDA. I have no doubt that Mr Maycock was very focussed on these matters as he looked at these possibilities or opportunities and the relativity between taking up or losing those opportunities, and the position the company might find itself in commercially, either way in such eventualities.
2412 However, the position remains that Mr Maycock says that the profitability analysis in the September Board paper was unduly pessimistic of Pozzolanic’s position should it contract with Millmerran on the terms negotiated by management, but nevertheless failed to secure the Tarong Contract. Other features of contestable supply meant it likely that Pozzolanic would have found a way to compete and make it work as a source of supply for sale into the market for the sale of flyash to concrete producers, in Mr Maycock’s view of it at the time.
2413 For the reasons earlier mentioned, taken together with Mr Maycock’s evidence of likely factors going beyond the pure profitability numbers, I am not satisfied that Pozzolanic’s entry into the Millmerran contract is explicable as only made possible by the use of Pozzolanic’s market power at 30 September 2002 or materially facilitated by Pozzolanic’s market power, for the reason that a corporation in the position of Pozzolanic in a workably competitive market could have entered into the Millmerran contract on those terms and conditions in the circumstances confronting QCL and Pozzolanic. It also follows, at least so far as the assessment of Mr Maycock’s evidence is concerned, that objectively viewed, QCL/Pozzolanic did not take advantage of its market power in entering into the Millmerran Contract. Nevertheless, a substantial purpose of Mr Maycock in entering into the contract was to prevent a rival securing access to unprocessed flyash from Millmerran and to prevent the entry of a potential competitor into the market for the supply of concrete grade flyash in the SEQ concrete grade flyash market, because Mr Maycock was, like Mr Arto, very concerned to ensure that QCL preserved its prevailing market position, its market share, its volume, its revenues and its EBIT margin which were seriously at risk, on the advice of management, should QCL/Pozzolanic lose either the contract at Millmerran or the contract at Tarong.
2414 A further question to be addressed is the extent to which any Jones v Dunkel (1959) 101 CLR 298 inferences might be drawn from the failure on the part of QCL and Pozzolanic to call evidence from Mr Ridoutt and Mr Wilson, especially having regard to the close level of engagement and dependency (in Mr Arto’s view of it) between Mr Ridoutt and Mr Wilson on the one hand, and Mr Arto on the other, and the role those two senior managers played in formulating the propositions put to the Board in the two Board papers informing the decision-making of both Mr Arto and Mr Maycock. The principles guiding the circumstances in which Jones v Dunkel inferences might be drawn by the trier of fact from a failure of a party to call evidence are set out in Part 40.
2415 I am satisfied, having regard to those principles, that a proper and natural inference is open, and ought to be drawn, from the conjunction of the failure of QCL and Pozzolanic to call evidence from Mr Ridoutt, and Mr Arto’s evidence about the role of Mr Ridoutt, that Mr Ridoutt’s evidence on the question of the purpose informing the decision-making of Pozzolanic, would not have been helpful to QCL and Pozzolanic and Mr Arto and Mr Maycock. Mr Arto’s evidence places both Mr Ridoutt and Mr Wilson, as senior and experienced executives, at the centre of the discussions and formulation of the bidding strategy and the purposes informing the decision to try and secure both the Millmerran and Tarong contracts. Mr Arto gave evidence of his substantial reliance upon Mr Ridoutt, in particular, although Mr Wilson was also pivotal to these matters.
2416 Mr Maycock said that he had regard to the Board papers prepared by Management. The failure to call Mr Wilson makes the drawing of the inference additionally compelling. The inference is not drawn in the absence of other evidence. It is drawn because there is a proper basis for properly and naturally drawing the inference on matters which plainly called out for an answer from Mr Ridoutt and Mr Wilson. Those individuals naturally fell within the camp of the respondents. No doubt, the election not to call Mr Ridoutt and Mr Wilson was conditioned by the circumstance that evidence would be given about this part of the controversy by the Directors, Mr Arto and Mr Maycock. That decision was probably taken, as a matter of litigation tactics, before Mr Arto gave his oral evidence (his extensive and detailed evidence in cross-examination as compared with his very limited primary affidavit evidence) of the full field of considerations informing his thinking, and in particular, his evidence in cross-examination of the extent of his delegation, dependency and reliance upon Mr Ridoutt and Mr Wilson on the matters the subject of the bidding and the analysis contained in the two Board papers. Once Mr Arto made it plain that he relied so heavily upon Mr Ridoutt and Mr Wilson, there is no proper explanation for the failure to call these individuals, in the respondents’ case, to give evidence (except, of course, by then it was too late). Certainly, no explanation was given for the failure to do so.
PART 37
Entry into the Amended Millmerran Contract and aspects of the evidence as to demand and capacity after July 2004
The Commission’s essential contentions
2417 The Commission’s essential contentions in relation to the Amended Millmerran Contract, drawn from its written submissions, are this.
2418 In July 2004, Pozzolanic had an option to terminate the Original Millmerran Contract. At that time, the merger had been completed. Cement Australia had no need for concrete grade flyash produced from Millmerran’s unprocessed flyash and no obvious market had been identified for it. Rather than terminate the contract when the opportunity arose, Pozzolanic waived its right to end the contract and entered into the Amended Millmerran Contract which had the effect of extending the Original Millmerran Contract and imposing obligations on Pozzolanic to install plant at Millmerran. The Commission contends that Cement Australia, by causing Pozzolanic in July 2004 to enter into the Amended Millmerran Contract and waive its rights to bring it to an end, took advantage of its substantial degree of power in the SEQ concrete grade flyash market in contravention of ss 46(1)(b) and (c) of the Trade Practices Act, because, continuing with the Millmerran contract, as varied, could be profitable only because Cement Australia could continue to charge supra-competitive prices for the supply of concrete grade flyash to recoup the incurred costs of the continuing obligations under the contract as amended.
2419 That conclusion arises, it is said, in circumstances where at July 2004 neither Cement Australia nor Pozzolanic had taken any commercial quantities of flyash from Millmerran under the Original Millmerran Contract; the annual payments specified in the Original Millmerran Contract had been paid; Cement Australia did not need flyash from Millmerran to meet the demand of its actual, or potential, customers for concrete grade flyash; and, the supply of unprocessed flyash available to Pozzolanic from SEQ power stations other than Millmerran, and the volume of concrete grade flyash that could be produced from flyash supplied at those other power stations, each year, substantially exceeded the demand, actual and potential, for concrete grade flyash from customers in the SEQ concrete grade flyash market at July 2004.
2420 The Commission contends that the Amended Millmerran Contract was entered into for the purposes of preventing any competing acquirer entering the SEQ unprocessed flyash market; deterring or preventing any person from engaging in competitive conduct in that market; preventing any competing supplier entering into the SEQ concrete grade flyash market; and deterring or preventing any person from engaging in competitive conduct in that market.
2421 The Commission contends that CAH, Pozzolanic, Pozzolanic Industries and Mr Leon were knowingly concerned in the relevant statutory sense in Cement Australia’s contravention of s 46(1) in causing Pozzolanic to enter into the Amended Millmerran Contract.
2422 Apart from these contentions, the Commission contends that Pozzolanic contravened s 45(2)(a)(ii) by entering into the Amended Millmerran Contract as provisions were adopted which had the purpose and effect, or likely effect, of substantially lessening competition in the upstream and downstream markets. Pozzolanic contravened s 45(2)(b)(ii), it is said, by giving effect to those provisions, and Cement Australia contravened that section by giving effect to the provisions by funding Pozzolanic’s entry into the Amended Millmerran Contract. CAH, Cement Australia, Pozzolanic Industries and Mr Leon are said to have been knowingly concerned in the relevant sense, in Pozzolanic’s contraventions of s 45(2).
2423 I propose to deal with the chronological evolution of the events at the heart of these contentions and address relevant questions in relation to the market and market power, so far as it relates to the position at July 2004, later in these reasons, and also the contentions in relation to s 45.
2424 I find that the relevant events relating to this question are those as set out in this Part 37.
The relevant events
2425 Clause 2.1 of the Original Millmerran Contract recognised that Pozzolanic would undertake the necessary tests to determine whether the quality of Millmerran flyash fell within the “Acceptable Range” for concrete grade flyash under the contract. Acceptable Range was defined to mean compliance with AS 3582.1 and the Critical Limits in Schedule 2. Clause 2.2(a) required Pozzolanic to keep Millmerran informed as to the progress of the testing and provide a written report, each month, commencing from “Substantial Completion of Unit 1”. Within three months of that date (21 December 2002), Pozzolanic was required to provide Millmerran with “an initial non-binding report setting out the status of its investigations to that point”. The report was to contain a non-binding indication of the buyer’s opinion of the likelihood that Millmerran flyash would fall within the Acceptable Range for concrete grade flyash. Clause 2.2(b) required Pozzolanic to complete the necessary investigations and notify Millmerran, not later than nine months (22 June 2003) after substantial completion of Unit 1, whether or not the flyash fell within the Acceptable Range for concrete grade flyash, and whether it could be “practically and economically converted” into “Concrete-grade Fly Ash”. Concrete grade “Fly Ash” means, under the Original Contract, flyash graded according to AS 3582.1 and falling within the Critical Limits in Schedule 2.
2426 In the January 2003 Millmerran Coal Combustion By-Products (“Ash Quality Report”) (Ex-24, DJH-30), Pozzolanic notes that due to the failure of the power station to operate for sustained periods under full load, the full sampling and testing programme proposed by Pozzolanic had been delayed. Instead, a limited programme of evaluating ROS flyash being produced had been undertaken to identify the general chemical and physical properties of the flyash. A total of 10 sample points had been established for testing ash fractions collected at each zone of Unit 1. A bulk sample would be collected in February 2003 for beneficiation trials. The report observes that while the Millmerran “run-of-station flyash” does not meet the required limit of 85% passing a 45 micron sieve, it was “sufficiently close to this value (average of 60% passing) that Pozzolanic [is] confident that with further processing … a product can be produced that will have a fly ash quality in the acceptable range for concrete-grade use”. Apart from comments about SO3 and the silica content, the report suggests that the chemical composition of the flyash is quite uniform and “should not be a cause of quality variations”. The LOI value was below the maximum limit of 3.0%.
2427 The February 2003 Ash Quality Report reflects a similar finding.
2428 The “Critical Limits” test results in the March 2003 report suggest that the average flyash fineness was 55%. All samples showed an LOI of less than 3.0%. The ash quality was said to be very consistent with only a small change occurring over the period of the tests. Some classification of the flyash was occurring in the ash collection system with a daily range between the individual hoppers of 45% to 65% passing a 45 micron sieve being common. The highest average fineness for any zone was 60%. The samples showed an SO3 value typical for low sulphur black coal. The silica content was considered to be sufficiently high for the flyash to exhibit the required activity to act as a pozzolan. The report observes that the chemical analysis of the different samples produced very similar results indicating that the chemical composition of the flyash produced at Millmerran was quite uniform and should not be a cause for quality variations.
2429 On 19 June 2003, Pozzolanic’s Manager, Mr Klose sent a letter (Ex-39, SDC-83) to Mr Hunt at Millmerran advising that test results had indicated a low relative strength in the range 82% to 89% which fell short of the relative strength requirement of 95%. Mr Klose suggested that additional tests of classified Millmerran flyash above 90% fineness would assist in determining whether higher relative strengths would be obtainable, as a practical matter. Mr Klose sought an extension of the cl 2.2(b) period, from 22 June 2003 to 3 October 2003. In the June 2003 Ash Quality Report, Pozzolanic observes that some of the benefits shown to exist in using the classified flyash, in the “Relative Strength” testing from March 2003, had not been reflected in the flyash testing in concrete samples in the range 37MPa to 38MPa. Additional test work was said to be required to determine the relationship between fineness in the flyash and strength development in concrete. A number of tests had been conducted concerning concrete strength at four days, seven days and twenty-eight days.
2430 In the March/May 2003 Board Report prepared for the Board meeting of 26 June 2003 (ATB SB 3.38A), the report notes that sales of flyash to the end of May were 2% below budget for Queensland and sales in SEQ were 8.6% below budget for the year. As to flyash, the report notes that preliminary testing had been carried out on Tarong North flyash. The report notes that the Tarong contract called for the installation of processing equipment in the Tarong North Unit and investigations were under way to optimise compliance with the agreement. As to Millmerran, the report notes that the “Relative strength” test results demonstrated that the contract requirements had not been satisfied. The report also notes that:
… Intergen have agreed to delay the strict timetable requirements of the contract and allow retesting of the ash. The failure of the ash to reach contract limits gives us some flexibility in the requirements for installing capital as required under the contract. Intergen have not agreed to any delay in the installation of processing equipment on the Millmerran unit, however, discussions are ongoing.
[emphasis added]
2431 Mr Clarke gave evidence that he was responsible for the preparation of the commentary about the flyash business for inclusion in the Cement Australia Board reports. Notwithstanding the results of the preliminary testing at Tarong North, and the optimisation of compliance with the requirements to install processing equipment at Tarong North, Mr Clarke gave evidence that, at this stage, he was “fairly convinced” that Cement Australia would need Millmerran ash as part of Cement Australia’s long-term assessment of likely supply and demand (T, p 1616, ln 44). It is, however, correct to say, that Mr Clarke had a little difficulty in identifying the basis for his view about likely scenarios of supply and demand. The strategy team, led by Mr Bailey, had been asked to go away and do the mathematics on the flyash market in general, because Cement Australia “had a number of fly ash issues on the table”. Mr Clarke doubted that it was ever contemplated that Cement Australia would use ROS ash from Millmerran. The likelihood was that plant would need to be installed and Millmerran ash would need to classified or beneficiated in some way.
2432 Mr Clarke, as author of that part of the Board Report, was asked what he meant by the notion that the relative strength results reflecting a failure of the ash to reach the relative strength requirements of the Critical Limits (95%), would give Cement Australia “some flexibility” in the “requirements for installing capital” as required under the Original Millmerran Contract. Mr Clarke understood that the developments concerning the failure of the ash to reach the relative strength requirements would give Cement Australia “more time to plan and overcome” the relative strength problem in concrete made using Millmerran flyash (T, p 1616, lns 35-36). Mr Clarke said that he would have been concerned had the relative strength problem been left unresolved and Cement Australia then found itself obliged to install plant and equipment and deploy the relevant capital at Millmerran.
2433 On 4 July 2003, Mr Gamble, Millmerran’s Plant Manager, wrote to Mr Ridoutt confirming an extension of the date for notification under cl 2.2(b) from 21 June 2003 to 3 October 2003 (Ex-65, DJB-28).
2434 On 14 July 2003, Mr Bob Smith of Cement Australia sent an email to Mr Klose raising a background query about deployment of flyash in the market place and, in particular, the deployment of the Tarong North and Millmerran ashes (ATB 9.4). Mr Smith asked the following questions:
Having looked at a couple of projects for the ash division, predominantly Tarong, Tarong North and Millmerran, I have a couple of queries that you may or may not be able to comment on.
As I understand it we are looking to introduce 2 new ashes into the market place, Tarong North and Millmerran.
Will we be differentiating between tarong and tarong north ashes?
Do we have a specification for our desired product (tarong north & Millmerran)? Have we done an analysis on beneficiation of the ash to produce concrete grade ash [versus] intergrinding run of station ash? This would save the capital costs of installing classifiers and rejects disposal. It is likely that classified Tarong north ash will out perform our current tarong ash and therefore will there be parity pricing on the two? There may well be handling problems with classified ash from tarong north especially in humid weather (a bigger problem on the coast)[.] Have we defined any potential markets for these ashes? Aside from contractual obligations do we have any tonnages in mind (plant capacity and provision to expand)?
These may be basic questions and perhaps some answers are not apparent at this time but if possible could we have some broad discussion around these issues next time [you’re] in town.
2435 Mr Klose responded on 15 July 2003 and said this:
You raise a number of interesting points that are all part of the problem that the concrete market is already fully supplied with ash and the introduction of two new ashes is something that we really don’t need. The reality is, however, that these [ashes] are or could be on the market and that we have some but not total control over their use.
To add to your list I would include
Do nothing and pay Millmerran money not to take any?
Which configuration of ash/ashes give maximum contribution margins whilst securing supply?
How do we best protect against others taking ash from Millmerran if we refuse?
I think that a meeting of relevant stakeholders would be the best way to handle some of the strategic issues which will then precipitate answers to your other questions. Perhaps the best way is to get the relevant info together, e.g. contracts, current quality data etc and then arrange a meeting of relevant stakeholders. This could include [Darryl Blackburn, Rob Druitt, Des Chalmers, Ian Orchard, Ken Rice, Bob Smith and Peter Klose].
As there is another 2+ weeks of this project I suggest that this be scheduled in the week commencing the 4th of August … I am happy if you want to pull this together[.]
[emphasis added]
2436 Mr Smith then took steps to convene a discussion about the strategic issues as suggested by Mr Klose by sending an email to the nominated individuals directed to the subject of a “Flyash Strategic Review”. Mr Smith put the matter on this basis:
Due to the possible introduction of 2 additional ash sources in SEQ we are looking to review our overall strategy on how we can best manage the over supply of ash into the market. In order to maximise the effectiveness of this review we are seeking input from as many stakeholders as possible.
The 5th of August has been suggested as a tentative date to meet here at Milton …
[emphasis added]
2437 The meeting was convened on 5 August 2003 attended by each of the individuals Mr Klose had nominated in his email (ATB SB 3.40). The recited objective of the meeting, as the earlier emails suggested, was to “Develop a strategy to best manage the over supply of ash into the market whilst maximising contribution margins”. The topics relevant to that question involved a presentation by Mr Klose about impacts upon the ash business as a result of project Omega; an overview of the current status of contracts with the ash producers; current ash sales and tonnage source and quality; the introduction of new ashes from Millmerran and Tarong North; the optimum quality of the ash needed by Pozzolanic; current plant capacities; threat of new players; whether intergrinding was an option or simply a myth; and an assessment of the capital requirements for new and upgraded plant.
2438 On 18 August 2003, Ms Sueki Tan sent an email to all the Directors copied to three Cement Australia executives attaching a “Special Report 7.2 Updated Forecast for CA Board Meeting Wed 20Aug” (ATB 9.10). The attachment from Sueki Tan was a forecast for the period from August 2003 of Cement Australia’s EBIT calculations. The forecast suggested that to December 2003 flyash sales ex-QCL were expected to remain above budget and flyash sales ex-ACH had been adjusted because the budget had incorrectly included an October price increase for flyash spread over the whole year. The EBIT forecast is a confidential and sensitive document which Ms Sueki Tan, Mr Leon’s executive assistant, was sending to all the Directors of Cement Australia and a number of executive managers.
2439 On Wednesday, 20 August 2003, the Board of Cement Australia met.
2440 The August 2003 Ash Quality Report concerning flyash testing summarised the progress on the extended sampling and testing programme and noted that delays were expected with the final report date. A schedule of flyash sampling, collection and run classification trials, was to occur on 25 July 2003 but had been delayed until 19 and 20 August 2003 due to a Unit 1 outage. Laboratory sample testing had been completed by 22 August 2003. Laboratory testing was expected to be completed by September 2003. An analysis of the test results would be undertaken on 26 September 2003 with a complete and final report presented on 3 October 2003. The report notes that during the sample collection exercise on 19 and 20 August 2003, “a distinct colour variation was observed between the two samples”. This variation had not been observed from other samples. The report notes that, as a result, daily samples would be taken from the hoppers to observe the extent of the colour variation. Moreover, the report notes that while processing the flyash, Pozzolanic staff observed “significant difficulty in handling the fly ash” compared with other flyash with which they had experience. Further investigations were to be undertaken into “the handability of the fly ash as this will impact on plant design”. As to the buyer’s facilities, the report notes that a site visit was conducted on 2 July 2003 to determine options and preliminary layout drawings for further study for extracting flyash into a classification plant.
2441 On 24 September 2003, LEK Consulting (“LEK”) presented its Final Discussion report (still marked “Draft”) entitled “Strategy Review” (Ex-60, GGB-147). On 25 September 2003, Mr Maycock formulated a draft memo to Mr Urs Bieri, copied to Mr Reaney, Mr Manning and Mr Leon (ATB 9.21). That memo refers to the final presentation by LEK to the Cement Australia Board on 24 September 2003. The particular aspects of the report discussed by Mr Maycock were aspects of clinker capacity; issues concerning ABL and some aspects of the issues as between Pozzolanic and Boral. Mr Maycock also observes that “Flyash prices in NSW are too low”. On 25 September 2003, Mr Maycock sent his memorandum to Mr Leon for comment. As to flyash, LEK postulated “several potential scenarios involving increased competition for Pozzolanic”. LEK took the view that lower flyash prices in Queensland would almost certainly be reflected in lower concrete prices. The potential scenarios were these:
Increased competition for Pozzolanic in Queensland in the medium term could arise from either of two scenarios
- An entry by Sunstate (or Boral) could result in a loss of Pozzolanic volumes equal to ~50% of the independent concrete market and 100% of Boral’s concrete market (~160Kt)
- A collaboration by independent concreters to source flyash directly from power stations could reduce Pozzolanic volumes by about 75% of the independent concrete market (~90Kt)
While an entry by Sunstate or Boral (probably through FAA) is not expected to have much effect on flyash prices, an independent entry could bring market prices down toward cost levels (loss of up to ~$30/t). This would almost certainly be leaked to concrete customers
[emphasis added]
2442 These observations led to LEK’s recommendation that Cement Australia should consider selling 50% of Pozzolanic to lock in the value of the current position. Mr Maycock saw no advantage in divesting 50% of Pozzolanic to Boral according to his memo of 25 September 2003. LEK’s recommendation to that effect was also put in the context at Slide 30 of the report that “Queensland flyash returns are above those experienced in NSW, but could decline in the medium term if competitors are able to successfully enter the market”. LEK suggested that any flyash price reduction in Queensland would probably pass through to concrete users and this would lead to a loss of profits for Cement Australia. Mr Maycock could not recall whether he held a view at September 2003 about the proposition that Queensland flyash returns could decline in the medium term if competitors were able to successfully enter the market (T, p 1438, lns 24-26). Mr Maycock could not recall any discussion by the Board of LEK’s other suggestion that Cement Australia should raise flyash prices in New South Wales (T, p 1438, lns 28-30).
2443 On 26 September 2003, Mr Ridoutt sent an email to Mr Leon in which he sought to provide Mr Leon with some information on the subject of “Flyash Strategy in QLD” (ATB 9.23). Mr Ridoutt said this:
Please find attached a Board paper from April 02 requesting approval for capital expenditure that supported our strategy to win the new contracts at Tarong and Millmerran and maintain our single supplier status position in the QLD Flyash market.
I thought this paper was more detailed but it was condensed for the Board meeting and although [condensed] it provides some interesting info [but it] does not have the depth and detail to cover all the issues you are now facing.
It is very pleasing that this strategy has worked extremely well and performance has been much better than forecast, however like any matter it will need to be managed and tweaked a bit where necessary in the south Brisbane and Gold Coast to ensure that things are kept under control.
[emphasis added]
2444 In October 2003, Pozzolanic produced another Ash Quality Report (ATB 9.40).
2445 The report recites that it is produced so as to meet the requirements of cls 2.2(a) and (b) of the Original Millmerran Contract. The report is based on a series of tests commencing in August 2003 and is to be read in conjunction with the reports from November 2002 through to September 2003. In the introduction, the report notes that although the results of the tests show that Millmerran flyash can be used to produce concrete of an acceptable quality, the ash failed to meet the Acceptable Range criteria for the purposes of the Ash Purchase Agreement. The report notes that, in addition, variations in colour of the Millmerran flyash found during the August test programme could present difficulties in the commercial use of the flyash. The extent and cause of the variability was not known. The classified product also presented difficulties in handling. However, further work would be required to determine whether the handling properties would be an impediment to the “commercial use of the ash”. The report notes these things:
“Run of station” fly ash fineness does not meet the required limit of 85% passing 45 [micron] sieve. Through classification, however, the “run of station” ash was successfully processed into a product in excess of 85% passing 45 [micron] sieve.
The [LOI] results for “run-of-station” fly ash of 0.9% and for processed fly ash between 0.2-0.8% was below the maximum limit of 3.0%, and both were in the acceptable range.
The Relative Strength values obtained for the March tests were found to be in the range of 82%-89% which is below the Acceptable Range criteria for relative strength of 95% as specified in Schedule 2. In addition the August test results, which were classified to a higher fineness level of 88-92% were also found to be below the Acceptable Range criteria.
The concrete strengths obtained from both the March and August samples were in the range between 37MPa and 39MPa which is an indication that the fly ash can be used to produce a concrete suitable for some markets.
[emphasis added]
2446 As to colour variation, the report says this:
Colour Variation
Samples taken in the August test programme exhibited a large variation in colour not detected in earlier test sampling. Millmerran ash is characterised by a dark colour despite a relatively low LOI. Significant variation in colour has been observed in the samples obtained without a significant change in LOI, indicating that normal residual carbon is not the source of colour variation. Large changes to colour variations will affect customers with colour sensitive projects and limit the market application of the ash. Lighter ashes are also preferred by most customers as these produce lighter coloured concretes which are more versatile in colour sensitive applications.
Further investigations have been undertaken in an attempt to understand the nature of the colour variation. Samples of Millmerran classified fly ash were sent to Sigma Energy Solutions, however, no direct evidence was found for the darkening of the ash particles …
[emphasis added]
2447 The report notes that the August flyash samples were tested to analyse the colour index of the samples in order to determine a quantitative assessment of the colour variability. In the colour index, 0 represents black and 100 represents white. Two units of change in the spectrum over 100 units can be detected by the human eye. Table 3 of the report contains a colour index for Millmerran flyash described as light flyash. Three samples of light coloured flyash of a fineness of 86.5%, 89.9% and 93.1% were measured on the colour index at 67.34, 67.26, and 67.17 (moving therefore towards the lighter end of the colour index). Dark Millmerran flyash rated 57.37 on the colour index. The report concludes that there are 10 index units of variation between the light and dark coloured Millmerran flyash and 20 index units of variation between the dark Millmerran flyash and current flyash available in the market.
2448 The report concludes that the ash does not fall within the Acceptable Range for concrete grade flyash due to the failure to reach the Relative Strength limit of 95% but otherwise the ash meets all of the requirements of the Acceptable Range criteria. The report concludes that the flyash can be used to produce a concrete suitable for some markets. The report also concludes that variations in the colour could have an impact on the ability to “practically and economically convert the flyash into concrete-grade flyash”. The report recommended changes to the Ash Purchase Agreement so as to enable an extended testing programme to be undertaken.
2449 On 9 October 2003, Pozzolanic sought an extension of the time required by cl 2.2(b) for the completion of the necessary investigations into the quality of the Millmerran flyash (Ex-24, DJH-29).
2450 On 31 October 2003, Mr Polistchuk of Cement Australia sent Mr Blackburn a report in relation to the relative strength results of tests concerning Millmerran flyash (Ex-66, DJB-9). Four samples of ash at a fineness of 86.5%, 88.9%, 89.9% and 93.1% were tested along with Tarong North ash at 86% and Tarong ash at 86%. The 28 day relative strength results show a relative strength for the four Millmerran samples of 90%, 90%, 93% and 92% respectively. The Tarong North sample achieved a relative strength of 92%. The Tarong sample achieved 93% and a Swanbank sample achieved 91%.
2451 On 4 November 2003, Mr Klose sent an email to Mr Clarke, Ms Collins, Mr Chalmers and Mr Blackburn on the topic of Millmerran ash quality arising out of the findings in the October Ash Quality Report (ATB SB 3.45).
2452 Mr Klose said this:
1. Clause 2.2(b) of the contract states that Pozzo must advise (by 31st of October) whether or not the fly ash from Millmerran is
(a) within the Acceptable Range (as defined in the contract,) and
(b) can be practically and economically converted into concrete grade fly ash
2. If the ash doesn’t fall within the acceptable range then either party has the right to terminate the contract.
3. Results for testing indicate the following
(a) The ash fails to meet the relative strength criteria set out in schedule 2 of the contract and therefore the ash fails to be within the Acceptable Range of the contract
(b) Colour variations are of some concern in using the ash, as the ash is very dark and the colour variable (note we believe that a Wagner would not worry about this: but our large customers would!)
(c) If the colour and usage within the market can be managed/solved then in other respects the ash will make concrete-grade fly ash.
4. Since the ash fails to meet the acceptable range we have no choice but [to] inform Millmerran of this.
5. I have spoken to David Hunt at Millmerran and indicated the outcome of these results together with our belief that subject to satisfactory resolution of variability and colour issues that the ash can probably be used. I have also indicated Pozzolanic’s desire to meet and discuss these issues so as to move forward with the contract. David Hunt also expressed a desire to meet and further these discussions.
(update: David Hunt has contacted me again and is concerned with Pozzo’s intention. As such I have suggested that we do not send an official reply until after our meeting. This gives us the maximum flexibility and leaves open options that will not trigger termination).
6. The significance of the above results are obvious.
(a) The “Acceptable Range” criteria were placed in the contract to protect Pozzo. (We may now terminate the contract within 14 days of notification if we so desire)
(b) The mutual right to terminate the contract means that Millmerran, upon notification, has a period of 14 days to terminate the contract.
[emphasis added]
2453 Having said those things, Mr Klose set out his perception of the three scenarios open under the contract conditions. He described them in these terms:
(i) Both Millmerran and Pozzo fail to terminate i.e. the current contract remains in place. This implies Pozzo must install a plant by May 2004 and we must pay our next royalty payment ($1.235m. Note this is placed in the balance sheet and expended monthly to the P & L).
(ii) Millmerran terminates. This implies that they have another equally favourable options. We must determine their NBA in order to determine at what point they would do this. (This was [less than] $1.235m when FAA were included in the bidding process). This would include what Wagner’s ABL and Peabody [Transpacific] would now offer.
(iii) Pozzo terminates: This implies that we get back last year’s payment of $1.2m and avoid the $2m capex. This now opens up Millmerran to others. (I can’t see why we would do this).
[emphasis added]
2454 Mr Klose regarded these circumstances as providing the foundation for a negotiation with Millmerran. He took the view that Option (iii) was simply not an option. The Relative Strength issue, however, had in his view opened up a point of negotiation and thus the current contract remaining in place would not be the logical starting point. Mr Klose thought that Cement Australia would need to try and determine Millmerran’s new next best alternative option to a new arrangement with Pozzolanic, and Pozzolanic would need to “see to what point we can push back the current contract conditions”. Mr Klose proposed that a good outcome for Pozzolanic would be to maintain the current royalty payment, or reduce it, and also to “defer/eliminate/minimise the capex commitment”.
2455 Mr Klose proposed that a draft notification under cl 2.2(b) be prepared reciting the failure of the ash to meet the Acceptable Range criteria. Mr Klose said it should incorporate a statement that subject to the satisfactory resolution of colour and variability issues, the ash is suitable for use as concrete grade ash. A negotiating strategy ought to be prepared around one of three options, and they were identified by Mr Klose as these:
Option 1. Both parties ignore the 95% relative strength result and Pozzo ignores the colour variation issue and the contract remains in place. [The Cement Australia] board must sign off on new plant for an ash that may have significant market issues (CA board will be very nervous about this given the current Collie fly ash air entrainment problem) therefore this is going to be difficult.
Option 2. Pull out of contract – I would indicate that since both parties have invested so much time and effort to date that this would not be the preferred outcome.
Option 3. Extend the current quality notification period. This would include (i) extension of further 6 months to determine quality, (ii) require the involvement of Millmerran power as the colour variation is a “fly ash factory” issue and not controlled by Pozzo, (iii) either a stay on further royalty payments, or refund of the second year’s payment as well as the first year if the quality is unacceptable.
[emphasis added]
2456 On 5 November 2003, Mr Blackburn sent Mr Klose, Ms Collins, Mr Salisbury, Mr Druitt and Mr Rice an updated Action Plan which recognised that David Hunt had been advised by Mr Klose of the outcome of the testing and that a meeting would be convened with Millmerran to determine the “next step”, on 12 November 2003. On 28 November 2003, Mr Klose sent an email to Mr Clarke advising that further to “our desire to keep the contract I have arranged payment of the annual Millmerran royalty payment which is due on the 30th November (>$1.2m)”. The payment required the authorisation of Mr Clarke and others.
2457 Clause 3 of the Original Millmerran Contract recognised that Pozzolanic was solely responsible for constructing, operating and maintaining the buyer’s facilities as defined under the Original Millmerran Contract and by cl 3.3, the buyer agreed to construct those facilities so that they would be completed to the satisfaction of Millmerran, and in all respects ready for operation, by 1 May 2004. Mr Klose, in his assessment of the three options, contemplated that one possibility was that neither party would terminate the contract under cl 2.6(a) of the Original Millmerran Contract within fourteen days of notification of the failure of the ash to meet the Acceptable Range criteria and the current contract would simply remain in place. Another option was that Millmerran might terminate, although Millmerran would be unlikely to do so, in Mr Klose’s view, unless Millmerran had another “equally favourable option”, and Pozzolanic would need to identify where Millmerran’s next best alternative transaction might come from (whether Wagner, ABL, Transpacific or possibly FAA).
2458 Had Pozzolanic elected to terminate the contract under cl 2.6(a), Millmerran would have been obliged under cl 2.6(b) to refund the lump sum payment. Mr Klose considered that terminating the contract would open up Millmerran as a source of ash to others, and Mr Klose could not see why Pozzolanic would do that. The Relative Strength issue, causing the flyash to fail to meet the Critical Limits criteria, was seen by Mr Klose as providing negotiating leverage with Millmerran’s operating entity. The objective was to see to what extent Pozzolanic could secure a reduction in the annual lump sum payments and capital expenditure commitment under the Original Millmerran Contract.
2459 It is correct to say, as the Commission contends, that both Mr Clarke and Ms Collins in cross-examination accepted that the message being conveyed to them by Mr Klose was that Pozzolanic ought not terminate the Original Millmerran Contract as that would open up Millmerran ash to others. For Mr Clarke, extending the Millmerran contract would have the benefit of “securing” for Pozzolanic “another source of flyash” in Queensland. In particular, that source of supply would be in the SEQ catchment and would represent a source in addition to Tarong, the imminently available Tarong North flyash, and Swanbank ash.
2460 Mr Clarke also recognised that Mr Klose had made it clear that the ash had not only failed to meet the Relative Strength criteria set out in Schedule 2 but that colour variations in the ash was a matter of concern to Mr Klose “in using the ash” because the ash was found to be very dark and the colour variable as well. Mr Klose had said that although Wagner might not worry about these two issues, Pozzolanic’s major customers would worry about it. However, Mr Klose’s message was that if the colour and usage within the market could be either, solved entirely or managed, then “in other respects” the ash would make concrete grade flyash, for the purposes of the agreement. Mr Clarke could not recall whether the “colour variability issue” (although the issue was actually two-fold concerning both “variability” and the ash being “very dark”) had been “quantified” in the sense of trying to determine how much of the ash produced at Millmerran might be able to be sold, assuming a continuing colour variability problem. Mr Clarke’s view about the need for Millmerran ash (as an expansion upon his observation at para 257 of his affidavit that he believed Pozzolanic would need Millmerran flyash “to satisfy the markets in the foreseeable future”), was this (T, p 1461, lns 4-10):
... by the words “the markets”, I mean the market, the collection of fly ash sources [that] would be required at a certain level to meet a certain demand and I hadn’t figured out, and nor did I think it was necessary at that moment in time, to say which plants or which products or which specific geographies or generally speaking, it would be tributary in terms of transport, so [for] central and western Queensland, northern New South Wales and a degree into south-eastern Queensland and perhaps even the outer metro of Brisbane.
[emphasis added]
2461 Mr Clarke said that Cement Australia would need Millmerran flyash to satisfy the market he was thinking about in the foreseeable future because “the existing sources of supply were at capacity and we didn’t see that there was much option for increasing more ash from existing sources, with the possible exception of Callide” (T, p 1461, lns 14-16). Mr Clarke also thought that Millmerran flyash, with its colour variability problem, might nevertheless be able to be sold into applications involving pipes, blocks, bricks or in a bagged form (T, p 1639, lns 33-35). Mr Clarke said that his view was that Cement Australia would overcome the technical problems as Cement Australia had done, and others had done, at other problem stations. At November 2003, Mr Clarke said that Cement Australia was perplexed about the source of the colour variation problem because normally, the general source of a darker colour in ash is a carry-over of carbon (particularly if the mills at the power station are badly operated), but Millmerran flyash had low LOI and therefore low carry-over of carbon. The position therefore was a little anomalous (T, p 1461, lns 20-28).
2462 On 22 December 2003, Ms Collins, the Manager of Pozzolanic, prepared a note of the proposed changes to the Original Millmerran Contract reflecting the intention of both parties, arising out of a meeting between Millmerran representatives and Pozzolanic representatives in November 2003, to continue the contract as “originally intended” but subject to “the colour variation being satisfactorily resolved”. Ms Collins’ note says: “[the following] proposed changes are meant to reflect this”. The material proposed changes were these: the revised testing programme would be carried out and a report on the investigations would be provided in May 2004 (cl 2.2(a)); a final report on the investigations would be completed in July 2004 (cl 2.2(b)); the repayment of the first year’s lump sum payment would be replaced with repayment of the second year’s lump sum payment (cl 2.6(c)); the buyers facilities would be installed before May 2005 (cl 3.3); and, cl 4 as to termination would be deleted in view of the termination provisions in cls 2.6, 6.8, 16.5, 17.8, 26 and 28.1.
2463 On 4 December 2003, Mr Dennis Franklin, the Manager of Tarong North, sent an email to Mr Rice of Cement Australia attaching the Minutes of a meeting addressing the “removal of Tarong North flyash” during the period 8 to 12 December 2003. Flyash would start being taken on 8 December 2003 for five days and based on the experience during the five day period, the process for taking routine ash from Tarong North would be developed. Routine “harvesting” of Tarong North ash was “likely in March next year”.
2464 On 8 December 2003, Ms Collins, as Pozzolanic’s Manager, prepared a note of the preliminary issues confronting Pozzolanic in relation to a range of topics including the contractual issues, strategic questions, and logistics and capital issues. Ms Collins perceived that the contractual issues included the need to retain the Millmerran contract with a justification for the proposed capital expenditure. Ms Collins noted that a commitment existed to take Tarong North flyash on request and a request had occurred. Pozzolanic was experiencing reduced availability of ash from Tarong. Pozzolanic saw a need to tie up Tarong North “bottom ash” to “avoid sale to others”. The capital requirements were said to be $400K to secure Millmerran and $500K to fulfil the Tarong Energy and Tarong North contracts. On 9 December 2003, Ms Collins sent a copy of the “issues note” to Mr Clarke and noted that the issues note had been formulated in consultation with “Peter and Rob” (Mr Klose and Mr Druitt).
2465 On 7 January 2004, a meeting took place between Ms Knox and Mr Hunt on behalf of Millmerran and Mr Blackburn and Ms Collins for Pozzolanic. A file note of the meeting was prepared by Ms Collins. At the meeting Mr Blackburn presented the latest colour test results in a monthly report.
2466 The December 2003 Ash Quality Report notes that sample collection, under the testing programme developed to identify the cause of the colour variation in the flyash, had commenced on 3 December 2003 from both units. The samples were compared to a colour chart providing a rating between one and five in order to allow comparison with other operational data collected at the power station. Neither, load variation in Unit 1, nor oxygen in Unit 1, nor the dust burden, appeared to have a relationship with the “average colour” of flyash in Unit 1. The report notes that in Unit 1, the ash colour on 4 December 2003 was dark with a range of 2 to 5. On 24 December 2003, under similar operating conditions, the ash was lighter at 1.5. In Unit 1, the average colour of 1 on 15 December 2003 increased to 3 on 17 December 2003 and then reduced to 1 on 23 December 2003. The report says that the “results show a high degree of variation in the colour of the ash similar to the samples taken in August ’03” and “significant colour changes occurred between days in both Units”.
2467 Pozzolanic proposed obtaining additional operational data from Millmerran and undertaking a review of whether the colour variation might be related to reducing the operational conditions in the boiler. “Reducing conditions” is a reference to undertaking combustion with less than ideal oxygen present. Pozzolanic proposed preparing an hypothesis for further testing. A meeting note of 7 January 2004 notes that there was extensive discussion of the further analysis required and the need for further tests. Ms Knox requested that future reports include information on the Acceptable Range test results or a statement of Pozzolanic’s position of the ash quality with respect to the Acceptable Range criteria. Mr Hunt accepted in evidence that Pozzolanic’s request for additional data from Millmerran was reasonable and that MOC would participate and assist in the process (T, p 933, lns 29-38).
2468 As to the proposed contract changes identified in Ms Collins’ note, Ms Knox and Mr Hunt observed that they were concerned about the time taken to date to establish the quality of the ash and they did not want any more “shifting end dates”. They sought and received from Ms Collins agreement that the newly proposed ash quality confirmation date of July 2004 was a “firm commitment”. Ms Knox sought clarification that Pozzolanic was proposing a delay until May 2005 in the date for construction of the buyer’s facilities due to delays with the Millmerran unit coming on line and the merger arrangements. Ms Knox was to review the quality section and determine the changes acceptable to Millmerran, especially in relation to the Acceptable Range criteria. The note records that all of the participants agreed that each of them had a goal “to develop a successful ash supply partnership”. Ms Knox and Mr Hunt said that they had concerns about the relationship with Pozzolanic to date.
2469 On 27 January 2004, Ms Collins sent an email to Mr Christy at CS Energy attaching the draft ash agreements for Callide and Swanbank and seeking a date for preliminary discussion of those documents.
2470 The February 2004 Pozzolanic Business Report prepared by Ms Collins notes that further sampling and investigation of Millmerran ash had progressed the understanding of the colour variation problem. Two phone conferences and a meeting on-site had been held in February 2004 to discuss the continuing investigation. No further response had been received to Pozzolanic’s proposition to Millmerran to defer the contract decisions by one year. As to the market developments, Ms Collins notes that sales of Tarong ash were at record levels for February. Total sales were 11% above budget. Sales from Swanbank and Central Queensland were below budget and the total EBIT earnings were below budget. The February 2004 Pozzolanic Report, when mentioning the ash colour investigation was making reference to the January 2004 Ash Quality Report.
2471 The January 2004 report notes that additional unit data had been provided by Millmerran. There appeared to be no correlation between the operating parameters and the colour of the ash. The test regime was unable to determine whether the dark colouration of the Millmerran ash was produced in reduction conditions. A test called the Maggoteaux test produced inconclusive results. The samples were tested for oxides to determine whether any relationship existed between the presence of oxides and colour. There appeared to be no distinct relationship in the nine oxide results between the presence of oxides and the colour results. Nor was there any apparent relationship between the visual rating of the samples and the LOI result from testing on the limited data available. The University of Queensland Chemistry Department was commissioned to conduct testing on a light and a dark sample of the ash to determine the extent to which the LOI readings reflect the carbon content of the ash particles. The test results demonstrated that the LOI test was providing an accurate result of the actual percentage of carbon in the flyash particles. The report identifies the scope of the investigative work including conducting a literature search; discussions with organisations to try and characterise the material causing the dark colour in the ash; discussions with the University of Queensland to conduct further test work; additional testing according to C Mill and step changes in the load profile for the station, among other things. Additional data was to be obtained and further investigations were to be conducted into whether the colour variation might be related to reducing conditions in the boiler.
2472 Mr Hunt accepted that the tests being proposed by Ms Collins represented a “reasonable scientific undertaking to advance determination of the problem” (T, p 934, lns 37-38). At Point 5 of the report, Pozzolanic notes that although the flyash did not fall within the Acceptable Range as it failed to reach the relative strength limit of 95%, “this strength deficiency does not preclude the ash from being used in some markets” and “it is not of primary concern to us”. The “main concern was that the colour variation affects our ability to economically and practically convert the flyash into concrete-grade flyash”. The testing regime was designed to isolate the source of the problem and the means to control it so as to decide by July 2004 whether the flyash could be practically and economically converted into concrete grade flyash. Mr Hunt accepted that Pozzolanic was dedicating an enormous amount of work into the problem (T, p 936, lns 30-47).
2473 On 5 February 2004, Mr Chalmers sent an email to Mr Clarke and Ms Collins in relation to steps being taken by Global Cement to try and source flyash from Callide C. Mr Chalmers notes that Global had sent a truck to Callide C to collect ash, probably for the supply of cementitious material to the Eidsvold Weir Project, under contract to AbiGroup. Mr Chalmers notes that Callide C has made no commitment to Pozzolanic as Pozzolanic has made no commitment to Callide C. Mr Chalmers says that he estimates that the capital cost of installing pipework and other plant into Callide C would be $330K to gain a “primary position there”. This would represent “< $1 per tonne of ash in Queensland for one year – compared to the potential loss of $10-20 per tonne across the board if an alternative supplier is available”.
2474 Mr Clarke accepted that in relation to the investment at Callide C, Mr Chalmers was reflecting the view, in his email to Mr Clarke of 5 February 2004, that Pozzolanic ought to make the investment to gain a “primary position” at Callide C and “get first go at the ash”, and that should Pozzolanic not make the investment, Pozzolanic faced a potential loss of $10 to $20 per tonne across the Board if an alternative supplier entered the Callide C (T, p 1743, lns 1-11). Mr Clarke, however, said that that view of Mr Chalmers was not the justification or the basis for putting equipment into Callide C.
2475 On 9 February 2004, Mr Chalmers sent an email to Mr Clarke setting out his views about market developments in relation to a discussion he had with Mr Ray Neilsen of Neilsens concerning flyash supply. Mr Chalmers reported that Mr Neilsen had spoken of a written offer of supply of classified Bayswater flyash at a price of $69.90 per tonne delivered to his batching plants at Wacol and Brendale buying ash directly from the power station operator at $6 per tonne ex-works, rather than Hyrock. Mr Chalmers reports that Mr Neilsen had investigated buying Bayswater flyash from Hyrock and transporting it to Brisbane. The landed price was just under $80 per tonne and since QCL/Cement Australia was charging $80 per tonne, Neilsen did not proceed. Hyrock was thought to be charging $12 per tonne ex-works. Mr Chalmers says that Cement Australia supplies flyash to Neilsen at $85 per tonne with a rebate of $5 per tonne (net $80), “dependent upon Neilsen purchasing all its requirements from Cement Australia”. Mr Chalmers notes that the travel distance from Bayswater to Neilsen’s northside plant is about 830km, which would involve a transport cost of at least $58-$60 per tonne, and with a $6 payment to Bayswater, “it doesn’t leave a real lot to pay for capital etc”. Mr Chalmers concluded that Neilsen’s proposal to buy classified Bayswater flyash from Aggi “doesn’t seem to stack up to me”.
2476 The February Ash Quality Report confirmed no apparent relationship between LOI and fineness, and colour variation. At 2.2.1 of the report, Pozzolanic notes that it was able to identify a Japanese report with references to colour issues in flyash. Pozzolanic says that it is attempting to translate the report “in-house” to determine if the data is of relevance. The University of Queensland had been commissioned to conduct analytical work on the flyash particle size distribution.
2477 On 22 February 2004, Mr David Page, a research officer from the Department of Chemical Engineering at the University of Queensland sent an email to Mr Blackburn attaching an interim report on the nature of the carbon as a colouring agent in the Millmerran flyash samples. Mr Page notes that he has faxed off a copy of a Japanese Paper, although it is not very helpful as it is in Japanese and the images are not very good. Some observations are made about suggestions which might be inferred from the abstract for the paper. On 25 February 2004, Ms Collins sent an email to Mr Blackford attaching a copy of the Japanese Paper. Ms Collins says that the paper might give Pozzolanic an indication of whether the “mineralogy, carbon characteristics, boiler operating conditions etc may be the cause of the colour variation”. Mr Blackford’s wife, who is Japanese, had a look at the paper. Although not skilled in the science, Mr Blackford’s wife attempted to try and understand the sense of the paper. In the result, either Mr Blackford or his wife or both thought that the English synopsis was faithful to the content of the paper. The paper attempted to classify ash particles into five different types by chemical and physical properties and postulated that the overall colour is related to the proportions of the five different types of particles comprising each ash sample. Other observations are also made. Mr Blackford’s email response to Ms Collins and Mr Blackburn was adopted and pasted into an Ash Quality Report.
2478 On 12 March 2004, a meeting occurred between Mr Hunt and Ms Collins, Mr Blackburn and also Mr Stevens of MPA Energy Services. In the minutes, MOC is noted as having advised that Unit 2 would be out of service for eight weeks from 5 April 2004. The February Ash Quality Report was tabled. The Japanese Paper had not been translated although it suggested some effect on colour of oxides. The Minutes note work by the University of Queensland on particle size distribution and the University of Perth (actually, Curtin University) on the “glass phase effect” of iron. Other issues noted are variability in the coal seam material although stockpiles are blended into two day stockpiles. MOC agreed to provide further information to Pozzolanic. MOC was to check whether any correlation arose with light and dark ash due to baghouse temperatures particularly in relation to Unit 1. MOC was to examine variation in oxide distribution in coal supplied and a further trial would be established to determine oxide variability in the coal supply and the effect upon ash colour variation. MOC was to co-ordinate that matter.
2479 On 15 March 2004, the Executive Committee of Cement Australia met. The Managing Director’s Report for January/February notes that assessment of the “viability of [Millmerran] ash for concrete production” was continuing. Flyash volumes supplied by Pozzolanic are said to be 3% “below plan” in Queensland (at 5.4 of the Report) although (at 5.1) the sales volume of flyash in Queensland is said to be “1% ahead of plan”, and Mr Clarke who is responsible for the sales and marketing section, mentions the activities of Global Cement by observing that Cement Australia had defeated a strong bid from Global Cement for the Burnett River Dam Project although “Global had secured supply to the Eidsvold Weir Project through access to Callide B run-of-station flyash”. Mr Clarke describes Global’s success as a “worrying development”. On 5 March 2004, Ms Collins sent an email to Ms K Steinert, an accountant, and Mr Wrigley, an analyst working for Mr Clarke, in which Ms Collins comments upon aspects of the capital expenditure on a number of projects including capital expenditure for a classifier at Callide C. Ms Collins notes: “The Callide C classifier expenditure may well need to be brought forward depending on the strategic assessment [of] a competitor accessing this ash”.
2480 On 12 March 2004, Global Cement wrote to Pozzolanic enquiring about flyash supplies from Swanbank and noted that there was an excess of flyash produced from the power station not taken by Pozzolanic. Global sought to purchase any excess flyash available, and sought to obtain information about the product quality. The letter was referred to Ms Collins for discussion.
2481 On 19 March 2004, Mr Hunt sent an email to Ms Collins, Mr Blackburn and Mr Stevens copied to Mr Conomos (an MOC engineer) attaching an analysis of coal deliveries sampled from January and from February. Mr Hunt’s staff was attempting to determine whether there were statistically significant variations in the coal volumes delivered. Some samples showed “not very much” mean variation but other samples did reveal a variation.
2482 On 6 April 2004, Mr Hunt sent an email to Mr Blackburn, Ms Collins and Mr Stevens attaching ash colour correlation work carried out by Mr Conomos. Mr Hunt observes that the best correlation to date explaining colour variation seems to be the presence of excess oxygen suggesting that combustion conditions in the boilers were influencing colour. Mr Hunt said that Millmerran had anticipated such a correlation but had not seen it manifested to date. Mr Conomos in his analysis of the data says that ash colour was given a colour rating from one to five with five being the darkest. A reading was taken by comparing a sample visually with a reference colour. One of these visual readings was taken from each of the 14 baghouses for each Unit and then averaged to give a single ash colour reading for each unit. Temperature readings were taken from the flue gas after passing the air heater and before entering the baghouse. Readings were also taken from the gas in the exit duct of the boiler before the gas is passed through the air heater. No correlation could be seen between ash colour and the readings of power output, dust emissions and flue gas temperature. The ash colour would vary even when these data remained relatively constant. Mr Conomos observes that excess oxygen gave the only noticeable correlation with flyash colour. The Unit 1 data contained a spike in excess oxygen. The Unit 2 data did not contain any dramatic changes but a general trend emerged that excess oxygen corresponded with a darker flyash. Mr Conomos supports the report with extensive statistical information and graphs.
2483 On 28 April 2004, Professor Dong-ke Zhang, a combustion expert from Curtin University in Perth, sent an email to Mr Blackburn in relation to the testing of Millmerran flyash. Professor Zhang observes that CSIRO had not completed the Scanning Electron Microscope (SEM) cross-sections of the samples from Millmerran. Professor Zhang said that quantitative research on one dark and one light ash sample revealed that mullite is the dominant phase in both ash samples. Particular leeching tests of the dark ash resulted in a degree of change in colour. Particular tests ruled out the possibility of heavy metals being the cause of the dark colour. Glass phases (quartz and mullite) did not respond to leeching agents and nor would carbon respond. Professor Zhang had conducted a particle size distribution analysis on both the dark and light colour ashes. The dark ash sample had more “fines” than the light ash and visual inspection suggested that the fine fraction is darker than the coarser fraction. Professor Zhang’s remarks could only be “qualified” observations without the CSIRO SEM cross-section results. Professor Zhang thought that the mullite dominance suggested that the ash particles were subjected to high temperatures over a long period of time. Early melting of the minerals had the effect of encapsulating carbon in the form of soot, as well as iron, probably in the form of magnetite. Depending upon the amount of captured iron and soot, the ash appeared to be darker (more soot) or light (less soot). Professor Zhang said that there was a greater proportion of free fine soot in the dark ash causing him to suspect that carbon in the form of captured soot held the key to the colour problem. Professor Zhang said that the SEM cross-section held the key to his encapsulation hypothesis but in the meantime he proposed further tests including size fractionation of both dark and light ashes; further leeching of both light and dark ashes; a range of particular experiments; quantitative analysis of all data obtained so far; and, some critical analyses of the coal.
2484 Coal seam variability may have been thought to be part of the cause of the problem. MOC agreed to check whether variations in temperature in the baghouse correlated with light or dark samples of flyash.
2485 On 29 April 2004, Mr Blackburn sent Professor Zhang’s email to Mr Chalmers. Mr Chalmers responded on 5 May 2004 identifying two perspectives. The first was that Cement Australia could carry out the suggested work with a view to demonstrating to Millmerran, in negotiations, the difficulty of using the ash and also to demonstrate the scope and complexity of the investigation under way. Alternatively, Cement Australia could consider the issue as a “straight technical investigation that is viewed only on its direct value”. Mr Chalmers’s assessment of the work done and the information already available was that Millmerran appears to be a “fairly typical fly ash” and “frankly none of the info below is new or unexpected”. Mr Chalmers was sceptical about the value of the proposed coal mineralogy tests. Mr Chalmers noted that the SEM cross-section results held the key to the hypothesis propounded and suggested that those results be obtained with the other proposed work being put on hold.
2486 On 10 May 2004, Mr Hunt sent an email to Ms Collins and Mr Blackburn about flyash handling and utilisation. That email forwarded an email from Mr Devir dated 22 April 2004. Mr Hunt had spoken to Mr Devir about his concerns regarding the handling and utilisation of Millmerran ash, highlighting problems relating to flyash unloading and the need to understand control variations in the ash colour. Mr Devir worked for HRL Technology which carries out specialist tests in the electricity industry. Mr Devir makes some suggestions about ash handling and as to variations in colour, he thought the level of unburnt carbon is an unlikely cause. Mineral composition within the coal was the possible likely cause. Mr Devir said that due to his strong background in coal mineralogy and flyash transformations in boilers, flyash sample preparation using particular separation methods, and experience in the use of scanning electron microscopy, Mr Devir thought that he would be able to identify the cause of the variations in flyash colour. Mr Hunt passed on this information to Pozzolanic as part of its analytical work.
2487 On 12 May 2004, a meeting took place between Mr Hunt, Mr Conomos, Ms Collins, Mr Blackburn and Mr Stevens. The March 2004 and April 2004 Ash Quality Reports were tabled by Pozzolanic at the meeting. The Minutes note that the March report was suggesting that “fine carbon” was contributing to ash colour. CSIRO would be completing some work for Curtin University. The April report notes that the participants are awaiting the results of the CSIRO testing. MOC advised the participants of recent changes in the operating conditions (from 1 May 2004). The nature of the changes were outlined. The Minutes note that Unit 1 had recently been returned to full load. There appeared to be better distribution of secondary air to the burners which was changing the combustion conditions. Particles size distribution may have changed. Pozzolanic had obtained bulk ash samples on 5 May 2004. That ash was about three on the colour scale. The parties agreed to carry out ash sampling from all 14 feeders and check ash colour under the existing Unit 1 conditions.
2488 Mr Hunt accepted that, at this meeting, Millmerran was advising that “highly material operating conditions” were changing within the power station and that these changes were “highly material”, potentially, to the quality and characteristics of the flyash (T, p 944, lns 39-45). Mr Hunt also accepted that what was happening throughout the period from 2003 to 2006 was Millmerran, in effect, struggling with problems in the plant, and MOC was “of necessity” having to change the conditions which would operate upon the flyash, and these changes were leading, particularly in relation to colour, to large swings in colour variation from time to time (T, p 945, lns 1-6). Mr Hunt also accepted that these swings in colour variation arising out of changes to the operating condition were a complicating factor, as he understood it, in trying to get to the bottom of the colour variation problem because, as the operating conditions varied, so the investigations that had to be made to take account of the new operating conditions also varied.
2489 On 17 May 2004, a Cement Australia Executive Committee Meeting occurred. The April Board Report for 2004, considered at that meeting, notes that to the end of April 2004 the sales volume of flyash was 12.5% ahead of budget although revenue was only 4.8% ahead of budget due to the impact of a deferral of a planned price increase from 1 April 2004. The EBIT margin was ahead of the budgeted EBIT margin. As to the descriptive part of the report concerning flyash production, the report notes that investigations continued throughout April into the quality of the Millmerran flyash “ahead of the decision required in July regarding installation of production facilities”. The report also returns to the topic of Global Cement and notes that Global is taking Callide C flyash for a local project and enquiries (by Global) have been made about taking unsold flyash from Swanbank. The report notes that “production facilities” are being designed for Callide C to allow Pozzolanic to utilise this flyash supply.
2490 Professor Zhang’s final report for Stage 1 work concerning a “preliminary investigation into the causes of dark coloured flyash from Millmerran’s coal-fired supercritical boilers” is dated 17 May 2004 and was distributed to Mr Blackburn. The summary of the findings is that the dark flyash contains smaller particles and more porous and amorphous glass phase particles than the light flyash, and the differences in the flyash colour were caused by particle morphology rather than the chemical composition of the particles. Also, the occurrence of dark coloured flyash may be correlated with the furnace operation and combustion conditions. Professor Zhang suggests that these correlations require careful planning and experimentation. It is not necessary to set out the detail of the report. The report describes a series of leeching tests designed to provide a visual aid for identifying the possible causes of the dark coloured ash. The report contains a series of photographs. The report describes the particle size distribution analysis and the qualitative and quantitative analysis of the samples. At Part 7, the report discusses the analysis of the SEM image analyses and the SEM cross-sectional images for the light and dark ash samples. Many of the images of the samples taken from Units 1 and 2 are incorporated within the report.
2491 In the report Professor Zhang notes that both the light and dark ashes, “despite the significantly different colour appearances have remarkably similar chemistry make-up, although a marginally small difference in the carbon content is observed”. As to Professor Zhang’s hypothesis about encapsulated soot, the SEM cross-sections show carbon inclusions in glass phases but the occurrences of those inclusions are virtually equally frequent in both dark and light coloured flyash samples. However, what is strongly evident from the SEM results is the differences in particle size distribution, glass morphology and composition. The amorphous glass phase is more present in the dark ash than the light ash while mullilte is more present in the light ash than the dark ash. The evidence clearly established, in Professor’s Zhang’s view, that a combination of particle size effect, and the glass morphology, may have caused the colour variations. Small particles appear darker than large ones. More porous particles appear darker than solid particles. The notion that flyash colouring could be correlated with excess oxygen in the flue gas was thought to be mere speculation. Professor Zhang confirmed these observations in his conclusion and added the observation that the morphology of the dark and light coloured flyash can be related to furnace operation and combustion conditions.
2492 Four recommendations were made including the need to carefully develop the correlation between ash colour ratings and combustion conditions which, when done, would not only provide a meaningful explanation of the causes of the dark coloured flyash but would also hold the key to remediation of the problem.
2493 Mr Hunt accepted that Professor Zhang’s hypothesis had to be investigated and pursued by Pozzolanic.
2494 On 1 June 2004, Mr Blackburn sent an email to Mr Stevens and Ms Collins about the Millmerran flyash samples. In that email Mr Blackburn is reporting that Mr Hunt had suggested that Pozzolanic look at the oxides in the coal to see what changes had occurred. On 1 June 2004, Professor Zhang sent an email to Mr Blackburn saying that CSIRO’s SEM lab had produced images of the cross-sections which showed carbon inclusions in glass phases. Mr Blackburn sent the email to Mr Chalmers and Ms Collins. Ms Collins responded on 1 June 2004 asking whether Professor Zhang had access to all of the load and colour analysis that Pozzolanic had tabulated and graphed. Ms Collins observes that sometimes the dark ash seems to be the finer ash and then the ash is darker either at low load or full load. Unless Pozzolanic could say that 90% of the time the result is produced at high load or by finer ash, then no clear answer was merging.
2495 In June 2004, Ms Collins prepared the Pozzolanic Business Report. The report notes the receipt of Professor Zhang’s report which raised further questions and suggested further testing. The business report notes that meetings were held on-site at Millmerran to review the test programme and to further the design of the facility. A load of flyash was collected from Millmerran for classifying at Tarong and trialling in a concrete plant. The report notes that a proposal for a “total ash management” contract was put to Tarong North in early June. As to the market matters, the report notes that sales of Tarong flyash “continued at record levels”. The “SEQ market remaining strong in June”. Calendar year to date sales (to 30 June 2004) of flyash from Tarong were 19.3% above budget. Sales from Swanbank were 14% above budget. Sales of Gladstone flyash were 9.9% below budget. Total sales in Queensland were 9.742% above budget. The EBIT margin was 10% above budget.
2496 In June 2004, Sandra Collins compiled a document for a Board budget presentation. The document is entitled: “YED 04 Budget and YED 05 Forecast, Pozzolanic Enterprises”. The presentation consists of a series of slides. Under key tasks and critical success factors, Ms Collins notes the installation of a classifier at Millmerran by 1 May 2005. The key risks confronting Pozzolanic are said to be “competition in the south-east and central markets” and “softening market volumes and prices”. The 2004 budget for tonnages is said to be Tarong 260,654/t; Swanbank 57,846/t and Millmerran 25,000/t. The forecast tonnages for 2004 for those sites are 291,225/t; 61,888/t; and 0, respectively. The 2005 tonnages for those sites are 351,000/t; 56,000/t and 10,000/t respectively. The 2006 tonnages for those sites are 367,000/t; 60,000/t and 10,000/t respectively. The tonnages for Gladstone in the 2004 budget, 2004 forecast, and 2005 and 2006 forecasts, are 139,000; 133,257; 134,000 and 137,000, respectively.
2497 Ms Collins framed the following considerations about the 2004 budget as compared with the 2004 forecast, taking into account Tarong, Swanbank, Gladstone and Millmerran. First, the forecast suggested an increase in sales volume over the budget of 2%. Second, Production costs would rise. Third, the Millmerran EBIT contribution would be down due to a one year deferral of plant installation and the budgeted sales of 25,000 tonnes from Millmerran had not been met, although the prepayment of $1.325M had been made.
2498 As to the 2005 and 2006 budget assumptions, Ms Collins projected an increase in sales volume of 59,000 tonnes in 2005 and 28,000 tonnes in 2006 across Tarong, Swanbank, Gladstone, Melbourne and Millmerran (87,000 tonnes in all). Production at Tarong is projected to increase in 2005 by 60,000 tonnes, and in 2006 by 16,000 tonnes (76,000 tonnes).
2499 On 2 June 2004, Ms Collins sent an email to Mr Chalmers attaching the first draft of a document called “Queensland Ash Development Plans, Board Briefing Paper 28 June 2004”. This document is the first draft of the development of a paper which was to be put to the Directors in support of a proposal to continue the Millmerran contract. In the email, Ms Collins describes the attachment as an outline for the paper. Ms Collins asks Mr Chalmers to develop some content in relation to each of the four bullet points under the heading “Market Growth”.
2500 Ms Collins’ “outline paper” notes that by 31 July 2004, Pozzolanic is contractually obliged to commit to building ash facilities at Millmerran by 1 May 2005 or, terminate the contract. Ash, sold into SEQ in calendar year 2003, was 333,000 tonnes; into NSW 17,000 tonnes; into central Queensland 63,000 tonnes; into north Queensland 64,000 tonnes and into Victoria 137,000 tonnes. The source of those volumes was Tarong (312K/t); Swanbank (42K/t); Callide (60K/t) and Gladstone (180K/t). Ms Collins notes that all Callide flyash is exported to Victoria as a 50/50 blend with Gladstone ash. Only Gladstone ash is sold in central and northern Queensland. The draft sets out Ms Collins’ perception of the position concerning the contractual arrangements for Millmerran and Tarong North. Ms Collins says that “protracted and difficult negotiations” conducted with Millmerran resulted in an agreement to investigate the properties of the ash and make a decision about ash quality by July 2003. The decision point was extended to July 2004 to facilitate further testing. Ms Collins says a “further extension is unlikely”. The paper notes that a decision taken in July 2004 to proceed would require a facility to be installed and operating by 1 May 2005. The contract term continues until 2010. As to Tarong North, Ms Collins notes that notice was given that the quality of the ash is suitable, in April 2004, and ash from Tarong North is being trucked to supplement volumes from Tarong. Ash extraction facilities must be installed at Tarong within 12 months of notice.
2501 Under the heading “Proposed Solution” Ms Collins recommends the installation of a silo, pipe work, a classifier and weighbridge to take ash from Millmerran power station; add a classifier to the Callide B facility to process ash from the Callide C power station. The capital costs would be $1.6M to $1.8M for Millmerran to be operational in April 2005. The capital cost for Callide would be $1.4M “to be installed asap”. The capital cost of the containers would be $1.2M. Under the heading “Next Steps”, Ms Collins notes that should the Board’s response to the Briefing Paper be positive, tenders would be let to determine the final cost of construction of the facilities. Ms Collins says that expenditure requests, supported by detailed justifications, will be submitted to the Board for approval at the meeting on 21 August 2004, and the Board would be requested to approve by 31 July 2004 “the continuance of the Millmerran Ash Agreement with the understanding that capital will need to be justified and approved in August to meet the contractual start up date of 1 May 2005”.
2502 Mr Chalmers prepared a document on 8 June 2004 entitled “Market Issues – Millmerran Fly Ash” which seems to be a response to the email from Ms Collins requesting development of a contribution to the paper on the topic of “Market Growth”. Mr Clarke was asked about the document and he could not recall seeing it on or shortly after 8 June 2004 (T, p 1666, lns 1, 2). Mr Clarke accepted that it was “quite likely” that if he had asked anyone to prepare the draft paper, he “would have asked Des” (T, p 1666, lns 5, 6). Ms Collins did not see the document in June 2004. The document contains these observations:
Millmerran fly ash adds significant volume to an already over-supplied fly ash market in Southern Qld. While the market for fly ash is growing to a moderate extent in this area, several factors affect the opportunities available for Millmerran fly ash. These factors are:
• The addition of Millmerran is not a small increment in the supply side for the region, increasing the availability of fly ash by about 40%
• Millmerran is not a significantly better fly ash than the others available
• Millmerran fly ash has no significant locational advantage
• There are potential colour problems with Millmerran fly ash, and it is not yet clear that the underlying cause of this colour variation has no other detriment to its use in concrete
• Bayswater fly ash is being “imported” from NSW – this stems from [next best alternative] pricing rules being ignored in the last round of fly ash price increases. This is a superior fly ash and it is cost competitive with local product
• Because of the colour issue, Millmerran fly ash is not readily interchangeable with the other local ashes (Tarong and Swanbank).
2503 The document then notes that Tarong and Swanbank flyash are the two sources of ash used in SEQ. The Tarong flyash has been used for 20 years; represents 300Kt per annum; is reasonably reactive; is very consistent and widely accepted. Swanbank ash has been used for 35 years and the current volume is said to be about 50Kt per annum. It is reasonably reactive but has limited volume. The document notes that Millmerran flyash is yet to be used commercially. It appears to have similar reactivity to Tarong flyash but there is uncertainty as to quality, in particular the colour and the nature of the LOI. The document notes that given its proximity, any attempt to obtain a “pricing relativity as between Tarong and Millmerran flyash” would draw adverse comment from end users and particularly Wagner. Such concern would be raised with the power station directly and it would create pressure from the local concrete producers to be able to cart flyash from the power station. The author notes that although Millmerran flyash would “technically be interchangeable with Tarong ash except for the colour” there would be “little advantage in dong so”.
2504 The document also notes that if Millmerran flyash is to be used in the “Qld/NNSW concrete market place” it will be necessary to do so in a way that minimises the impact of the ash and, potentially, creates some advantages. The document notes that given the substantial history of use of Tarong and Swanbank flyash in SEQ, the Millmerran ash should be placed in the market in northern New South Wales. The document notes that Tarong ash is supplied as far south as Coffs Harbour and the margin is low. The document suggests that Millmerran is closer to northern New South Wales than Tarong “with a potential $10/tonne transport cost saving”. The document also notes that to try and introduce Millmerran flyash into the general SEQ market as a third source would require some sort of “price/quality/technical differentiation”. The document also notes that any volume converted to Millmerran in SEQ, “would affect the economics of the Tarong operation”.
2505 On 8 June 2004, Ms Collins sent an email to Mr Clarke, attaching another draft version of the Board Briefing Paper as earlier described, also dated 28 June 2004. Ms Collins accepted that the attachment to the email was compiled by her. By 8 June 2004, Ms Collins was formulating her views, in the paper, in this way. As to market growth, Ms Collins says that some further growth in demand is expected in the next 12 to 18 months on top of what had been a recent period of “very high demand in Queensland”. Ms Collins says that when the expected downturn arrives, flyash demand for concrete will parallel the demand for cement and it will be necessary to find more supplementary uses for flyash, to “consolidate the supply/demand balance”. Another feature of market growth was thought by Ms Collins to be that with ongoing supply issues from established FAA sources in New South Wales, an opportunity existed to supplement supply into northern New South Wales from southern Queensland and Millmerran is “best placed to do this”. Ms Collins says that Millmerran ash meets the required standards and it has a transport cost advantage over Tarong with the result that from “both sales and logistics perspectives, sourcing flyash to this region would be advantageous”. Exporting flyash was said to be opportunistic. Ms Collins then examines each source of available ash. Millmerran is the newest base load station source; Tarong North ash was being introduced into the Tarong blend; Gladstone is a high cost power station and operates mainly during maximum demand rather than as a base load station; Gladstone demand load operation gives rise to a reasonable probability that Gladstone will operate only four units for extended periods in coming years; only small volumes of Callide C ash have been utilised in the three years since commissioning; Kogan Creek Power Station would likely be commissioned in 2008; and Stanwell ash is not in demand. Ms Collins then describes a range of quality considerations about the ash from each station and as to Millmerran ash Ms Collins says this:
While Millmerran ash can be upgraded for use in concrete and it has low carbon content, it is a darker ash and has shown some variability in colour. Investigations, in conjunction with the Millmerran Operating Company, are pin-pointing the cause. Classification and process quality control is expected to provide a consistent coloured concrete-grade ash.
2506 In the June 2004 Board Report for the July 2004 Board meeting, Mr Leon notes in the Board Report that as to flyash (recognising that FAA is proportionally consolidated in the accounts from May 2004 with year to date adjustment) the 30 June 2004 sales for six months were very slightly ahead of budget. As to Queensland flyash supply, the Board Report notes that a briefing paper has been prepared detailing the overall Queensland flyash position including contractual arrangements with suppliers (p 10 of 29). As to SEQ, flyash sales for June were 27.8% above budget reflecting a high level of building activity, and 19.2% above budget year to date (YTD) to 30 June 2004. Sales to Boral were expected to decrease over the winter months. Queensland flyash sales overall were 19.2% above budget for June and 9.1% above budget YTD to 30 June 2004. Sales were “expected to remain strong”. Sales in northern New South Wales were 8.5% above budget for June and 7.9% above budget YTD. The report notes that Pozzolanic had increased its YTD EBIT contribution ahead of the budgeted contribution. Total sales ahead of budget were said to be “reflecting strong markets in central and southern Queensland” (p 18 of 29). The report says that extensive research on Millmerran flyash continued ahead of the decision required by 31 July 2004 concerning the continuation the Millmerran contract. The report also notes that trucking of Tarong North flyash for blending at Tarong had commenced.
2507 On 11 June 2004, Ms Collins sent Mr Chalmers an email concerning “Comalco ash” and the CARS Project, to ask about the “potential threat of the steam process putting ash onto our market”.
2508 On 14 June 2004, Ms Collins sent an email to Mr Chalmers on the subject of “market impact” and asked him how much of the 500,000 tonnes per annum of the Millmerran flyash production Wagner or others would be likely to take if Pozzolanic “walked away” from Millmerran. Ms Collins also asked for Mr Chalmers’ view of the likely “price impact” on SEQ sales and the likely “number of tonnes” to be affected, should Pozzolanic walk away from Millmerran. Also, Ms Collins wanted to know Mr Chalmers’ view of how much flyash Global Cement would likely take from Callide over the next few years and what would be the “effect on our bottom line” of that. Finally, Ms Collins asked Mr Chalmers whether he thought there was another contender, like Boral, that would “help themselves at Callide or Millmerran before long if we left it to them”.
2509 Ms Collins asked these questions of Mr Chalmers because she thought that if the ash was decent ash and Pozzolanic walked away from it, the company would lose some customers if someone else could supply flyash more cheaply, from Millmerran, than Pozzolanic. Ms Collins accepted that she wanted to know the possible effect upon Pozzolanic if someone else set up in competition by selling ash from Millmerran, and she believed it was of interest to find out the possible consequences for Pozzolanic of choosing not to set up plant at Millmerran. That matter was of “interest” to her because it was relevant to the question of how does Pozzolanic “justify proceeding with the Millmerran contract”. Ms Collins also accepted that she was seeking from Mr Chalmers the “detail” of the “impact” of competition from Millmerran ash both on Pozzolanic’s prices, and its sales volumes, should someone else commence selling ash out of Millmerran, and wanted to understand the effect upon the Pozzolanic business of not having the Millmerran ash because that circumstance was relevant to the decision of whether Pozzolanic should go ahead with the Millmerran contract itself.
2510 Ms Collins accepted that if Pozzolanic pulled out of Millmerran there was a likelihood a competitor would enter and sell Millmerran ash, if the ash was of a marketable quality. Ms Collins accepted that she had in mind, at the time, that a competitor from Millmerran could affect Pozzolanic’s prices “to the extent that we too could affect our prices by having a plant there”, and by that qualification, Ms Collins meant that if a plant at Millmerran could produce classified ash for supply to, say, a northern NSW customer, more cheaply than Pozzolanic could otherwise do so, it was possible that some other persons supplying ash from that plant would be able to do the same thing.
2511 Ms Collins accepted that she had an expectation at the time that any competitor from Millmerran would be able to undercut Pozzolanic’s prices to some extent if Pozzolanic was not at Millmerran (T, p 2174, lns 15-47, p 2175, lns 1-39).
2512 On 15 June 2004, a meeting took place between Mr Hunt, Mr Conomos, Ms Collins, Mr Blackburn and a representative of MPA Energy Services. No report for May was tabled. The latest data for Unit 1 showed no significant variation in colour in the samples. MOC noted significant change in baghouse performance in Unit 1 after 1 May 2004. However, the minutes note that the latest data shows ash generally darker on Unit 1 after 1 May 2004 with some variation across the hoppers. Also, MOC indicated that Unit 1 baghouse performance had deteriorated in recent weeks. Unit 2 had returned to service that day and a four week outage was planned for Unit 1 in the September/October period. The Curtin University work was indicating that darker ash is more porous with smaller particles. The parties agreed to sample ash from Unit 2 after 10 to 14 days of service. Mr Hunt gave evidence that Unit 2 at that time had been out of operation for nine weeks.
2513 On 16 June 2004, Mr Chalmers sent Ms Collins an email in response setting out his view that “the amount of ash around is starting to be embarrassing”.
2514 On 16 June 2004, Ms Collins sent an email to Mr Clarke, attaching a further edited version of the Board Briefing Paper (dated 28 June 2004). The first changes concerned corrections to the sales volumes. The corrections were minor. Sales of ash into SEQ in 2003 were 336Kt rather than 333Kt as earlier described and sales into Victoria were 116Kt rather than 137Kt as previously described. The second change concerned the adoption of a discussion of the “Financial Considerations”. As to that topic, Ms Collins said this:
Pozzolanic has traditionally been operated with low capital investment given the impermanence of the contracts with power stations (see the attached Financial Summary). The capital investments proposed are for installation of refurbished silos, structures, pumping vessels, classifiers and buildings.
If a competitor lowers the price by $10/t about $3M per annum in SEQ and several hundred thousand dollars around Callide will be reduced from the Pozzolanic EBIT.
[emphasis added]
2515 The last sentence of those observations under the heading “Financial Considerations”, was deleted from the version of the paper that went to the Executive Committee meeting with the papers for that meeting on 21 June 2004. The “Financial Summary” referred to by Ms Collins in her edited version of the paper on 16 June 2004 consisted of a schedule setting out the financial performance and capital investments made by Pozzolanic over seven years from 1997 to 2003 including total sales each year by volume. That Table forms part of the version of the paper that went to the Executive Committee meeting on 21 June 2004.
2516 On 16 June 2004, a further version of the Board Briefing Paper was sent by email to Ms Collins by Ms Sullivan, the personal assistant to Mr Clarke, Mr Reeves (General Manager Operations) and Mr Thomas (General Manager Supply Chain) with a request that Ms Collins amend the paper “accordingly”.
2517 On 17 June 2004, Ms Collins sent an email to Mr Clarke copied to Ms Sullivan and Sueki Tan taking up some “urgent amendments” to the paper. This version adopts the “Financial Performance and Capital Investments” schedule. There are also some changes to the text. Under “Market Growth”, the position adopted in the amended paper is that major impacts in the Victorian market “will have a direct effect on the Queensland supply position”. The Victorian market was thought to be able to grow from 116Kt to at least 180Kt per annum. Under the heading “Contractual Arrangements” these observations were adopted at the end of the first paragraph:
To relinquish the contract would see Millmerran seek an alternative partner. FAA could be blocked, a likely contender could be Boral, a customer of [Cement Australia] who would establish an owner supply and competitor facility with significant impact on fly ash market dynamics in Queensland.
[emphasis added]
2518 Ms Collins in her email to Mr Clarke observed that she had compiled some figures for the market forecast spreadsheet which Mr Clarke had suggested, although without the increased Victorian demand, the forecast spreadsheet of demand “did not stack up to much”. Ms Collins also asked this question:
Is a sentence like this warranted somewhere in the document or is this what we are avoiding completely?:
“If a competitor lowers the price by $10/t, about $3M per annum in SEQ alone will be reduced from the Pozzolanic EBIT”?
2519 The sentence that Ms Collins was asking about was substantially along the lines of the sentence she had adopted in her earlier commentary of 16 June 2004 quoted above.
2520 Mr Clarke accepted that his primary concern in discussing the forecast with Ms Collins was to try and justify both the Callide C expenditure and the continuation of the Millmerran contract on the basis that plant at both locations was necessary to meet future demand. Mr Clarke also accepted that Ms Collins was telling him that, having examined the numbers, the figures did not stack up so as to demonstrate sufficient future demand to justify capital expenditure at both locations to meet demand (T, p 1701, lns 16-24). Again, Mr Clarke denied that the real reason why it was thought that the Millmerran contract should be continued was to prevent a competitor entering the SEQ flyash market (T, p 1701, lns 26-28).
2521 Clearly enough, Ms Collins adopted the observation in her version of the paper on 16 June 2004 because that reflected her view as the Manager of Pozzolanic and, equally clearly, Ms Collins was persuaded to the merits of that view because she asked Mr Clarke, in substance, whether the Board Briefing Paper should reflect the view that if the price of flyash is reduced by $10 a tonne by reason of competitor entry at Millmerran, about $3M per annum of Pozzolanic’s EBIT would be lost in the SEQ part of the flyash business. Presumably, Ms Collins would not have raised that matter again had she not felt, first, that it reflected her informed view as a skilled business addressee of the question because of her knowledge of the Pozzolanic flyash business, and second, that, that matter, was something the Board might want to know about. Ms Collins holds a Masters of Business Administration. She previously worked as an adviser at Macquarie Bank in devising, assessing and completing strategic transactions such as mergers and acquisitions, financial structuring, divestments, capital raising, take-overs, and take-over defences. It is unlikely that she would frame and adopt an assessment of competitive impacts which was not thought through or simply a casual reference. The draft paper developed by Ms Collins is a Board Briefing Paper. According to Mr Clarke, the paper was being developed for submission to Directors to seek their approval to a continuation of the Millmerran contract (T, p 1693, lns 4-25).
2522 Mr Clarke was asked about Ms Collins’s observation that if the Millmerran contract was not continued, competitor entry at Millmerran might lower the price of flyash by $10 per tonne resulting in about $3M per annum being reduced from Pozzolanic’s EBIT in SEQ. Mr Clarke denied this was a reason for affirming and amending the contract. Mr Clarke characterised the statement as a “sensitivity” analysis on the footing that if the price is lowered and there is a $3M debit to the EBIT, then that is a sensitivity Ms Collins felt she needed to raise. Mr Clarke accepted that he understood the sentence was directed to the result of a competitor taking the Millmerran contract, but that was simply Ms Collins’s view and “she’s an operator”. Mr Clarke thought more appropriate language would have been if the price falls, rather than if a competitor lowers the price. Mr Clarke says prices can fall for hundreds of reasons. Mr Clarke accepted that a “possible” major reason why price might fall was that if a decision was made by Pozzolanic not to continue with the Millmerran contract, and a competitor secured Millmerran ash as a source of supply, the price might fall. Mr Clarke rejected the notion that any part of the justification for proceeding with the Millmerran contract was the consideration that if Pozzolanic did not continue in the Millmerran arrangements, a competitor probably would take the ash and prices might fall by $10 a tonne. Mr Clarke accepted that he would have thought that someone at the Board level might have asked that question but he did not raise it (T, p 1702, lns 10-43; p 1703, lns 1-41).
2523 Nevertheless, Mr Clarke accepted that it was relevant to the question of whether Pozzolanic ought to continue with the Millmerran contract, that a competitor might take the Millmerran ash source and compete with Pozzolanic resulting in a reduction in flyash prices (T, p 1704, lns 22-26), although Mr Clarke could not recall ever “writing it or having a discussion about it as being a critical issue for us” (T, p 1704, lns 25, 26). Mr Clarke said that sensitivity about pricing was an issue for him because customers were shareholders, but that fundamentally in weighing up the “go, no go decision” for Millmerran, the issue of a competitive threat at Millmerran was not thought about by him (or others), and that if Pozzolanic exited Millmerran, because it could not resolve quality issue, “then it was highly likely that other folks wouldn’t [resolve it] either”. However, Mr Clarke accepted that he regarded his statements in the Board paper that relinquishing the Millmerran contract would see Millmerran seek an “alternate partner” (and although FAA could be blocked a likely contender could be Boral who would establish an owner supply and a competitive facility with significant impact on flyash market dynamics in Queensland” (T, p 1705, lns 39, 40), as accurate at the time. Mr Clarke regarded the observations about Boral and FAA as relevant to the Board’s decision about whether to continue with the Millmerran agreement (T, p 1705, lns 42-44) and, put more broadly, discussions about who might become a competitor if the Millmerran contract was relinquished was, “obviously relevant to the decision” to go, or not to go, from Millmerran.
2524 On 18 June 2004, Ms Collins sent an email to Mr Clarke and said this:
I am at the Power Station with Peter and I have put info from both Peter and Des [Chalmers] into the spreadsheet as our first rough estimate of where the tonnes come from and go to.
The net effect is that additional tonnage in Vic requires classification capacity at Callide, exports to NZ on top will require additional classification at NRG and classifier capacity at Millmerran is progressively utilised in all scenarios if FAA is not to substantially increase capacity.
I will go over the spreadsheet again on Monday to ensure that there are no serious mistakes in it.
2525 The preparation of this spreadsheet by Ms Collins with the help of Mr Postle and Mr Chalmers seems to be the first general attempt to bring together data about likely future demand and supply of flyash in a range of areas or catchments, at least for the purposes of determining Pozzolanic’s position in relation to the Millmerran contract and the merits or otherwise of making the necessary capital investment at Millmerran. The second paragraph of Ms Collins’s email seems to take up the point Ms Collins was developing with Mr Clarke in her email of 17 June 2004 that the market forecast spreadsheet did not stack up to much without increased Victorian demand.
2526 The attached spreadsheet is a “Fly Ash Market Sourcing Forecast” for the years 2003 to 2008. The spreadsheet suggests sales of Gladstone ash into north Queensland of 63Kt in each of 2003 and 2004, with no sales in 2005, 2006, 2007 or 2008. Flyash into north Queensland would be sourced from Callide C in those later years in volumes of 75Kt, 77Kt, 75Kt and 72Kt respectively.
2527 In central Queensland, flyash would be sourced from Callide B in 2005, 2006, 2007 and 2008 in volumes of 60Kt in each of those years. Gladstone would supply 57Kt, 73Kt, 15Kt, 18Kt, 15Kt and 13Kt from 2003 to 2008 respectively.
2528 In South East Queensland, Tarong would supply 290Kt, 300Kt, 300Kt, 300Kt, 300Kt, 300Kt from 2003 to 2008 respectively. Tarong North would supply, in those years, 0Kt, 5Kt, 30Kt, 41Kt, 35Kt and 14Kt respectively. Swanbank would supply 40Kt, 45Kt, 45Kt, 45Kt, 40Kt and 40Kt over those years. Millmerran would supply 0Kt, 0Kt, 15Kt, 15Kt, 20Kt and 20Kt over those years. In northern New South Wales, Tarong would supply 12Kt, 15Kt, 15Kt, 15Kt, 15Kt and 15Kt over those years. Millmerran would supply 0Kt, 0Kt, 10Kt, 25Kt, 25Kt and 25Kt into northern New South Wales over those years and Swanbank would supply 4Kt, 5Kt, 5Kt, 10Kt, 10Kt and 10Kt over those years.
2529 As to Victoria, Gladstone would supply 59Kt, 60Kt, 135Kt, (2005) 135Kt, (2006) 133Kt (2007) and 120Kt (2008) over those years into Victoria. In 2003 and 2004 FAA supplied 24Kt and 14Kt into Victoria.
2530 In Queensland, the aggregated anticipated demand from these power stations for the supply of flyash into Queensland is 458Kt, 491Kt, 540Kt, 556Kt, 546Kt and 519Kt respectively for 2003, 2004, 2005, 2006, 2007 and 2008.
2531 As to the role of forecasting, Ms Collins, on 18 June 2004, together with the help of Mr Postle and Mr Chalmers, attempted to estimate where Millmerran ash might be supplied. Ms Collins accepted (from an operations perspective rather than a marketing perspective) that if the forecasting task was being done properly, as part of deciding whether to proceed with the Millmerran contract, the analysis would require examining the sales forecast; assessing the likely revenue to be derived from those sales; assessing the likely expenditures, and deciding whether the revenue justified the expenditures. Ms Collins accepted that she did not undertake that task and said that she did not know why she had not done so. Ms Collins rejected the proposition that proceeding with Millmerran was simply “all about keeping competitors out and that is all that mattered”. Ms Collins said that she examined the problem of where Millmerran flyash might be placed and likely future sales from an operations point of view and her goal was to secure long-term good supplies of ash and reduce the risk of supply to Pozzolanic’s customers. Ms Collins accepted that she did not do some of the analysis that could have been done, nor the type of analysis Ms Collins accepted as the proper analysis to be done, in deciding whether to proceed. Ms Collins said that she thought she had undertaken a useful analysis of the type that one would reasonably expect to be done to justify a decision to proceed with the contract “but looking back, I believe I did not” (T, p 2183, lns 12-46; p 2184, lns 1-3).
2532 Although Mr Chalmers was the person responsible for sales and marketing in SEQ and Northern NSW, with some overlap with the NSW sales and marketing general manager, Ms Collins did not attempt to find out from Mr Chalmers what the appropriate sales forecast might be for SEQ and Northern NSW for Millmerran ash, because Mr Clarke was asking for an opinion “from an operations point of view and we gave it” (T, p 2182, lns 45, 46; p 2183, lns 1-9).
2533 Shortly after this email of 18 June 2004, the Board Briefing Paper was put in the final form by Ms Collins in which it went before the Executive Committee meeting on 21 June 2004.
2534 The Board Briefing Paper continues to recite as an Executive Summary, the mission statement reflected in Ms Collins’s version of the paper attached to her 17 June 2004 email, that is:
The mission of Pozzolanic Enterprises (100% owned) is to expand CAPL’s ash preparation, despatch and transport capabilities in Queensland to meet the forecast market growth, to secure future suitable ash sources and to seek royalty reduction opportunities.
Millmerran … is a potential source that has been under investigation and development for this purpose.
By 31 July 2004, Pozzolanic is contractually obliged to commit to building ash facilities at Millmerran ... by 1 May 2005 or to terminate the contract. It is recommended that the Board endorse confirmation of the contract and in-principle commitment of the necessary Capex subject to full engineering and financial analysis.
2535 The final paper incorporates the earlier comment that whilst Pozzolanic has coped with “local supply” in a “period of very high demand” in Queensland “some further growth is expected in the next 12-18 months”, although a downturn was “expected” and when it occurs, the demand for flyash from concrete producers would generally parallel demand for cement, in which event, it would be necessary to find supplementary uses for flyash so as to consolidate the supply/demand balance. The report also reflects the variation earlier mentioned that should Pozzolanic relinquish the Millmerran contract, the power station would seek an alternative partner and although FAA could be blocked, a likely contender for an arrangement with Millmerran could be Boral. Boral would likely establish a facility to supply itself and also compete with Pozzolanic “with significant impact on flyash market dynamics in Queensland”. Millmerran is described as the lowest cost Queensland producer operating not far from the home base of the “major independent customer Wagner’s Concrete”. Tarong North is described as ash being gradually introduced into the Tarong blend.
2536 On 21 June 2004, an Executive Committee meeting of Cement Australia was held. It had before it Ms Collins’s “Queensland Fly Ash Development Plans Board Briefing Paper” (dated 28 June 2004) for consideration.
2537 On 28 June 2004, Mr Murray Adams, a Cement Australia analyst, sent an email to Ms Collins attaching what he describes as a “re-write” of the “Queensland Fly Ash Development Plans” paper. Mr Adams held the position of “Strategy and Business Development Manager” for Cement Australia. He was new to the company having been appointed on 7 June 2004. He had been in the role for three weeks by the time he re-wrote Ms Collins’ paper. Mr Adams reported to Mr Bailey. Mr Adams had been asked to assume the role of producing the Board Briefing Paper and he was requested to prepare a flyash market analysis. The email attaches a template for the insertion of market forecasts by tonnage and by State for the years 1999 to 2008. The template contemplates the insertion of “market share” information in tonnage for 2004 and a range of financial information relating to total sales, price, EBIT margins for the years 1999 to 2003 for Queensland, Victoria and New South Wales. Data for FAA is to be included. The re-write of Ms Collins’s paper was the first part of his task, and the template went to the second task of pulling together a flyash market analysis and presumably a forecast. Mr Adams’s email says this:
Subject: Board paper data requirements
Sandra,
Let me know what you can and cannot provide.
This is a first pass at a re-write, however it is only done with bullet points and will [require] some further work. It does however outline the story I hope. If I have missed anything, or got anything obviously wrong, please let me know.
Doing this will be a good learning process for me as to what the [Executive General Managers] and board expect from this kind of thing.
Cheers
Murray
2538 Although Mr Adams was new to Cement Australia, the propositions he advanced for comment by the senior managers were these:
Pozzolanic Enterprises, highly profitable monopoly of the Qld fly ash market is under threat from new entrants in Global Cement and potentially Boral. PE propose to minimise the damage to their margins and volumes that will result through increased competition by locking out, where possible, their competitors from access to available supplies. This will be achieved by taking up contracts with Millmerran and Callide B and agreeing to invest in these facilities. This move is seen as the most beneficial for all shareholders.
2539 Mr Adams notes these other features of the “situation” confronting Pozzolanic:
CAPL’s monopoly of the Qld market is currently under threat from Global Cement and possibly Boral
• The supply of fly ash from Gladstone Power Station is likely to become less reliable as it will likely operate as peak demand top-up in future.
• The CAPL right to install ash facilities at Millmerran, the newest and lower cost Qld power station … will expire on 31 July 2004
• Millmerran power station is best placed to supplement constrained NSW supply from established Fly Ash Australia Sources
• Boral, a customer of CAPL, are likely to be interested in taking up a contract with Millmerran, should CAPL forego the right to take this ash. This would establish a competitor and erode the CAPL volumes.
• Global Cement is known to have progressed a contract with CS Energy to take Callide C fly ash and is currently supplying to a local dam project
• CAPL only take small volumes and currently have no facilities at Callide C which produces very high quality ash
• Global Cement have recently approached PE asking what ash is not being used from Swanbank.
2540 Mr Adams also notes that supply into Victoria from Gladstone is limited by shipping availability and the capacity of the silos in Gladstone and Melbourne. Mr Adams says that Hanson and Rinker’s interests are best served by the introduction of new competitors in Queensland to reduce prices, however Holcim’s interests are best served by maintaining the current industry and pricing structures. Mr Adams says that Hanson and Rinker are unlikely to allow Boral access to low cost flyash at Millmerran. He also says that lower flyash prices in Queensland will benefit all concrete manufacturers, however only Hanson and Rinker benefit through shareholder investments in Cement Australia. The ultimate proposition is that Pozzolanic should defend its market share and high quality supply sources by taking positive action on Millmerran and Callide C by installing the required equipment to take ash.
2541 Mr Adams’ “re-write” of Ms Collins’ paper, which in truth is an entirely fresh paper on the same topic, attaches two Tables setting out a range of matters, by power station, such as utilised ash, quality of the ash, plant and equipment required and the capital cost of the plant. Many of these brief observations appear to be drawn from the earlier documents which must have been available to Mr Adams, or, alternatively, the information Mr Adams has incorporated in his paper must have come from speaking with Pozzolanic and/or Cement Australia managers. A number of the comments reflect concerns already mentioned in the earlier documents.
2542 On the same day that Mr Adams emailed his paper and template to Ms Collins, 28 June 2004, Ms Collins responded at 5.41pm with some threshold advice to Mr Adams before commenting on some specific matters.
2543 Ms Collins said this:
I am not sure what guidance Colin has provided [Colin Bailey], but I was under firm instructions from Shaun not to say anything that may have TPC implications wrt competition. Rather the additional facilities needed to be justified on securing enough supply to meet the future demands from our customers and to provide the quality they require. My aim was to provide enough information so that the analysis/discussion can be done on the spot without needing to be spelled out.
2544 As to particular matters, Ms Collins points out that Mr Adams’s observations about Hanson and Rinker pricing incentives were misplaced because the flyash pricing arrangement for shareholders had been negotiated by Mr Clarke as part of the merger with Holcim. As to the template, Ms Collins said that she had entered estimates of the ash available and used. Ms Collins said that she had “stuck with stating” the Callide C and Millmerran volumes that might be used (at only 5 tonnes and zero tonnes respectively) because these two sources “are the exposures” for Pozzolanic. Ms Collins says that Stanwell ash could be used but is not as attractive for a number of reasons including distance from the market and variability in the ash.
2545 Ms Collins’s responsive assessment of the concrete grade flyash available in 2003 at Tarong, Tarong North, Callide B, Callide C, Swanbank, Gladstone and Millmerran was 600Kt, 150Kt, 60Kt, 600Kt, 60Kt, 230Kt and 500Kt respectively. As to the flyash used by Pozzolanic from those stations, Ms Collins’ assessment was 310Kt, 0Kt, 58Kt, 5Kt, 44Kt, 180Kt and 0Kt, respectively.
2546 One aspect of the response by Ms Collins to Mr Adams’s email ought to be noted. Ms Collins felt it necessary to make it plain to Mr Adams, in response to the content of his paper, that she had been “firmly instructed” by Mr Clarke not to say anything that had trade practices implications with respect to competition, rather than make it plain to Mr Adams that the content of the paper was simply wrong and entirely misconceived the Cement Australia and Pozzolanic strategy or business model being deployed in the conduct of the flyash business. The parts of the paper Ms Collins corrected were concerned with the flyash pricing arrangements with the shareholders as determined by Mr Clarke at the time of the merger. Mr Adams had asked Ms Collins to point out if he had “got anything obviously wrong”.
2547 The Commission attaches significant emphasis to these exchanges as evidence of Pozzolanic/Cement Australia’s purpose in putting the amended Millmerran arrangements in place.
2548 In her primary evidence, Ms Collins said that the comments of Mr Adams in his paper attached to his email to Ms Collins of 28 June 2004 indicated to Ms Collins that Mr Adams misunderstood Pozzolanic’s flyash strategy and he had therefore misrepresented the strategy in his draft. The real strategy was to “develop suitable supplies of ash to meet our on-going demand” (T, p 2222, lns 20-26). The strategy was set at a very high level in Cement Australia. Ms Collins discussed the strategy with Mr Clarke a number of times including in January 2004. Mr Clarke articulated the strategy as “[t]o develop suitable fly ash supplies to meet our on-going demand” (T, p 2222, lns 32-45). Ms Collins in her principal affidavit evidence said that she had never heard anyone within Pozzolanic or Cement Australia articulate a Pozzolanic strategy which was consistent with the strategy Mr Adams had advocated in his paper, namely, that Pozzolanic ought to lock out competitors in order to maximise profits by minimising the damage to margins and volumes from competition. Ms Collins contended that it was “fine for everybody to maximise their margins and their volumes” but the issue was “the part of his strategy associated with locking out competitors”.
2549 Ms Collins believed that Mr Adams “had the wrong idea” (T, p 2223, lns 6-21).
2550 Ms Collins regarded her email of 28 June 2004 at 5.41pm as making it plain to Mr Adams that he had misconceived the strategy. Ms Collins said she believed she had provided enough information to Mr Adams to understand Pozzolanic’s actual strategy by telling him that additional facilities needed to be justified by securing enough supply to meet future demand from customers and to provide the quality flyash required by customers (T, p 2223, lns 32-46). Ms Collins explained that Mr Clarke had given her firm instructions “not to say anything that may have TPC implications [with respect to] competition”, when Ms Collins made the mistake of misunderstanding and misrepresenting Pozzolanic’s strategy with regards to bottom ash movement at Tarong North (T, p 2224, lns 10-23). Ms Collins said that Mr Clarke’s advice was “we’re not in the business of controlling the competition, we’re in the business of maximising our market share” and that writing the words Ms Collins had previously written “had the potential to inadvertently cause to arise issues with trade practices” (T, p 2224, lns 24-29).
2551 Ms Collins said the message she was seeking to give to Mr Adams was the same message that Mr Clarke had given to her (T, p 2225, lns 46, 47) and although it may have been inappropriately written, “that’s what was intended” (T, p 2225, ln 47). Ms Collins said that that was how she had worded the email and she had given the history of it. Ms Collins accepted that Mr Clarke had not directly given Ms Collins an instruction that the additional facilities needed to be justified by securing enough supply to meet future demand from customers, but that was the understanding she had (T, p 226, lns 14-18), and that understanding arose out of discussions Ms Collins had with Mr Clarke (T, p 2226, ln 19).
2552 Mr Clarke was asked whether he had told Ms Collins about the things she should avoid saying in a Board Briefing Paper and whether he told Ms Collins that she should not say anything that may have trade practices implications with respect to competition. He said, “absolutely”. Mr Clarke said that he wanted Ms Collins not to make statements that were inappropriate, rather than, trying to avoid things being recorded in writing which might reflect reasoning underlying a decision which suggested contraventions of the Trade Practices Act. Mr Clarke said he was well aware of the Boral decision in Victoria and his recollection was that the original decision turned upon some inappropriate language to do with competitors and thus Mr Clarke was sensitive to these sorts of comments. Mr Clarke said that Ms Collins just should not have a discussion, in an inappropriate fashion, in a Board paper, at all, about anything that might have trade practices implications with respect to competition. Mr Clarke said that the Boral experience caused him to make sure that people under his control did not engage in anything that was anti-competitive.
2553 On 28 June 2004, the Cement Australia Board met. A discussion of demand and the dynamics of meeting market demand occurred. At 5.4, p 24 of 36, these observations are contained in the Board report for directors:
Meeting demand for fly ash across the Eastern States has become increasingly problematic in the past year. Demand in Melbourne has far exceeded our capability to supply this year resulting in extraordinary costs for both shipping and trucking. We are currently experiencing tight supplies in NSW and anticipate potential shortages in the fourth quarter as a result of peak demand from projects and reduced availability with power station shoulder demand and maintenance outages.
There has been little investment in fly ash capability in all locations in recent years, which finds us close to capacity at present. The investment required to assure us of meeting market demand will need to be made in supply chain and in ash production. Analysis is under way in supply chain … in FAA .. and in Pozzolanic.
In Queensland our imperatives are two fold:
To ensure we can meet short-term demand from existing sources and;
To ensue we secure additional sources of fly ash from power stations not currently being utilised.
Meeting short-term demand spikes in Melbourne can be achieved through investment at Callide C. Increasing capability there will allow us to supply North Queensland from Callide and redirect Gladstone (currently fully committed) ash to Melbourne. Investment in incremental improvements at Gladstone will also be required in time.
Of more immediate concern is the need to secure Millmerran power station as a source of ash for South Eastern Queensland and Northern NSW. Millmerran has had in place with CAPL a contract (take or pay) for some time. During the initial period CAPL has undertaken extensive testing of the ash to determine its marketability. Initial concerns, principally around colour variability resulted in an extension of the proving-up period, which is due to expire in July. We are confident that, properly treated Millmerran ash will be acceptable to the market. To secure this source we will need to exercise our option in July. Exercise will commit us to install collection equipment by mid-2005. Capex is earmarked in 2005 for this purpose. Board approval of the capex will be sought at the next meeting.
[emphasis added]
2554 These observations from the Board Report were prepared by Mr Clarke.
2555 On 6 July 2004, Ms Collins sent an email to Mr Lennon attaching a draft letter dated 1 July 2004 which sets out a number of proposed variations to the Original Millmerran Contract. The changes in that version of the letter reflected the changes Ms Collins negotiated when Pozzolanic found itself unable to agree to install buyer’s facilities by 1 May 2004.
2556 On 13 July 2004, Professor Zhang sent an email to Mr Blackburn attaching informal responses to questions that had been asked of him about his earlier report such as, how did you conclude that both light and dark ashes have the same amount of carbon, from particular test results Professor Zhang identified. Seven Group A questions were asked of Professor Zhang and two Group B questions. Mr Hunt had agitated the question of examining whether the colour variation was coal derived. On 13 July 2004, Mr Blackburn sent an email to Mr Hunt advising that the test results had come in but they raised more questions. Mr Blackburn said that the tests were pointing towards carbon but an additional type of carbon or carbon compound in the dark ash. Pozzolanic said that it was pursuing testing to identify the nature of that material.
2557 In the June to July 2004 Ash Quality Report, Pozzolanic notes that samples collected from the baghouse hoppers on Units 1 and 2 continued to exhibit variations in colour. Four dark and four light samples were submitted to the Darra laboratory for further testing. The report extensively quotes extracts from Professor Zhang’s report (and various graphs from the report) and notes that additional testing had commenced. The report sets out the results of tests involving the leeching of samples in hydrochloric acid. The dark ash samples leeched to a noticeably lighter colour. Little variation can be seen in the leeched and non-leeched lighter samples. Further MOC data was to be examined and further investigation of the role of “reducing conditions” was to occur.
2558 On 14 July 2004, Ms Collins sent an email to Mr Adams in relation to Millmerran and said that by “taking up a contract with Millmerran, the logistics cost of supplying the growing North NSW market from Tarong and NSW stations can be reduced and further investment in Tarong can be minimised”. Ms Collins observed that by 31 July 2004 Pozzolanic was contractually obliged to either terminate the contract or commit to completing the construction of ash facilities at Millmerran by 1 May 2005.
2559 On 14 July 2004, Ms Collins sent an email to Mr Lennon saying that she would send him a facsimile of the clauses Pozzolanic wanted to change so that those changes could be taken up with Mr Clarke when he returned the next day.
2560 On 19 July 2004, Cement Australia produced a further Ash Quality Report in relation to the Millmerran ash. The report reflects upon the results of the tests of the August 2003 samples and comments on the results of the July 2004 sample. The testing programme focussed upon concrete performance in the laboratory and then in the field. The comparative results from the testing programme are set out in a Table. Since the tests were performed only 11 days before the report, the test data is said to be incomplete. However, in summary, the laboratory batch tests suggested that there may be a concern in achieving similar air content when using Millmerran ash although the field trials did not replicate that problem evident in the laboratory. Mr McGurgan’s report finds that the chemical and concrete properties obtained in the testing programmes indicate that Millmerran flyash is acceptable in the market place. Mr McGurgan says that “what the test data does not show is the variability in colour” and “although purely aesthetic, variation in colour will be a major issue to our customers”. On 21 July 2004, Mr Blackburn sent Mr McGurgan’s report to Ms Collins with the comments of Mr Cusack, Cement Australia’s Group Product & Process Technology Manager, observing that if it were not for the colour issue then it seemed that Millmerran would be a satisfactory ash. Ms Collins responded on 21 July 2004 to Mr McGurgan’s report by sending an email to Mr Blackburn saying that Pozzolanic would need a draft final report to table for Millmerran on the following Wednesday.
2561 On 23 July 2004, Ms Collins sent the report to Mr Clarke.
2562 On 20 July 2004, Ms Collins put another version of the proposed variation to Mr Lennon for Mr Clarke’s consideration. Ms Collins advised Mr Clarke by another email on 20 July 2004 that Millmerran was content with the formulation of the clause provided a commitment was made by 31 July 2004 and the facilities were operating by May 2005. The 2005 payment to be made in December 2004 would be non-refundable. Pozzolanic would be required to give 6 months notice of termination. Further exchanges took place between Ms Collins and Mr Hunt about the clauses on 26 July 2004 and 28 July 2004.
2563 The parties entered into a letter of variation on 28 July 2004.
2564 The clauses were amended in these respects: the date for an initial non-binding report setting out the status of Pozzolanic’s investigations and its non-binding indication of the likelihood that the ash would fall within the “Acceptable Range” criteria was extended to 31 July 2004 (cl 2.2(a); the date for completion of investigations and notification under cl 2.2(b) of whether the ash fell within the Acceptable Range criteria and whether it could be practically and economically converted into concrete grade flyash was extended to 31 July 2004; if termination occurred under cl 2.6(a) after the lump sum contract payment for the second operating year (2004), the seller must repay that payment within 30 days of notice of termination being received (cl 2.6(b)); if termination occurred after the date of payment of the lump sum for the third operating year (2005), the payment for the second operating year would not be repayable by the seller (cl 2.6(b)(ii)); the buyer would have no right to terminate the agreement under cl 2.6(a) after the date for construction of the buyers facilities under cl 3.3 (cl 2.6(c)); Pozzolanic would be required to construct the buyers facilities for the purposes of cl 3.3 by 1 May 2005 (cl 3.3).
2565 Apart from these changes, cl 4 was deleted entirely and replaced with a provision entitled “Termination by buyer” that operates in this way: if at any time after the construction of the buyers facilities and before 1 January 2007 Pozzolanic determines that the Millmerran flyash does not fall within the Acceptable Range criteria for concrete grade flyash, and can not be practically and economically converted into concrete grade flyash, then Pozzolanic is entitled to give notice to Millmerran of those two circumstances (a cl 4(a) notice); if Pozzolanic gives such a notice to Millmerran, then the independent verification protocol in cl 2.3 of the Original Contract applies; if following a cl 4(a) notice, Millmerran notifies Pozzolanic that it accepts Pozzolanic’s determination, or independent verification determines that the flyash does not fall within the Acceptable Range criteria or cannot be practically economically converted into concrete grade flyash, then either party may terminate the contract by notice given within 14 days, in which event, the termination date will be six months after the notice of termination; if the termination date occurs after Pozzolanic has made the third operating year lump sum payment (2005) the seller has no obligation to refund that payment; if the termination date occurs after the payment of the lump sum payment for the fourth operating year (2006) or any subsequent operating years, Millmerran shall repay to Pozzolanic an amount calculated under the formula.
2566 Further, an amendment was made to cl 42.1 of the contract extending the term of the contract to eight years by amending the definition of “Expiry Date”.
2567 The amendments to the Original Contract are recorded in a letter on the letterhead of Millmerran Power Partners. The agreement to the amendments was signed for Pozzolanic by Ms Collins.
2568 On 30 July 2004, Ms Collins sent a letter on behalf of Pozzolanic to Millmerran Power Partners and Mr Gamble at the power station under cl 2.2 of the agreement as amended, in these terms:
We have extensively tested the Millmerran fly ash with the support of Millmerran Power through extensions of time under the [30 September 2002 Agreement], and report that the quality of the Fly Ash does not fall within the Acceptable Range (as defined) for concrete-grade fly ash and it is yet to be determined if it can be practically and economically converted into concrete-grade fly ash.
In recognition of the amendments to the Agreement set out in your letter of 28 July, Pozzolanic Enterprises is prepared to proceed with the contract as though an independent verification conducted under Clause 2.3(b) had found that the ash falls within the Acceptable Range for concrete-grade fly ash and can be practically and economically converted into concrete-grade fly ash.
The continuing steps concerning investigations into the quality of the Millmerran ash and related matters
2569 On 30 July 2004, a meeting took place between Mr Hunt, Mr Conomos, Ms Collins and Mr Blackburn. The June report was tabled. Some results from the Curtin University work were presented. MOC advised that the power station had been running with five mills at times and ash samples needed to be taken under these conditions. MOC reported that it intended carrying out some tuning of control loops and combustion. Mr Hunt accepted that tuning of control loops and combustion was something he was contemplating so as to investigate the efficient running of the power plant. Mr Hunt agreed that he was conscious that that matter could potentially be another “confounding influence” upon the problem of colour variation (T, p 948, lns 21-32).
2570 On 13 August 2004, Sigma Energy Solutions (“Sigma”) produced a report prepared by Mr Shipperley, for Pozzolanic. The report is an examination of light and dark flyash from Millmerran. The report concludes that the results of the testing indicate that the dark colouration is due at least to two factors. The first is the presence of a fine coating of carbon, similar to soot, which contributes to a minor degree to the dark colour. The thin layer of carbon has a low mass but a “relatively high colour coverage” reflected in the relatively low LOI for the respective samples. The second, or major contributing factor to the dark colour, appears to be the hydrochloric acid soluble nonsiliceous mineral phases, most likely iron based, present in the samples. The report concludes that the colour differences in the samples are due to the presence of different oxidisation states of iron.
2571 Mr Hunt accepted that that view has been maintained as the source of the colour variation, since that time. However, Mr Hunt also accepted that it would be fair to say that since then the emphasis has moved towards an examination of the oxygen content of the burning process and its influence upon the matters noted by Sigma. Mr Hunt accepted that further examination has occurred to try and determine the inter-reaction between the factors identified by Sigma and the oxygen content of the burning process. From August 2004 throughout 2005 and throughout the first half of 2006, this process of investigation had been under way to test that inter-relationship. Mr Hunt accepted that one of the problems that he had observed with the operation of the burning chambers was the distribution of oxygen throughout the chamber. MOC was experiencing concentrations of high oxygen in some parts of the burners and low oxygen in other areas which was affecting the burning process. Further, modifications had been proposed to the inlet to the baghouse to try and address high differential pressure and high gas flows into the baghouse. The boiler tuning would have an influence on the combustion process. In Mr Hunt’s email of 25 August 2004 to Mr Blackburn, he says that he has discussed boiler tuning with MOC’s boiler engineer to try and reduce excess oxygen in the combustion process. Mr Hunt notes that “our common burner windbox makes tuning of individual burners difficult”. He also says that MOC had attempted to reduce excess oxygen so as to reduce mass flow through the baghouse and reduce auxiliary power, although reducing power too far leads to other consequences (T, p 948, lns 34-49; p 949 1-32). Mr Hunt accepted that there was a design problem in the plant. Mr Hunt also accepted that all of these things he had talked about could be, in effect, “influencing causes” on the colour variability problem (T, p 949, lns 44-45).
2572 On 21 October 2004, Mr Shipperley sent an email to Mr Blackburn commenting upon a report provided to Sigma by the School of Physics and Materials Engineering at Monash University in relation to two ash samples. The report is entitled “Mossbauer Spectroscopy Analysis Report No 1 to Sigma Energy Solutions”. Mr Hunt said he did not understand the report but he understood that it was being undertaken by Pozzolanic to address the colour variation problem. On 4 November 2004, Sigma sent a report to Mr Blackburn reviewing the Mossbauer Analysis document. The Mossbauer analysis report was said to confirm Sigma’s earlier conclusions and the mechanism for the production of these darker ashes was thought to be the result, in the combustion process, of “localised areas of highly reducing or fuel rich conditions within the furnace close to the burners”. Monitoring carbon monoxide in the flue gas, prior to the air heaters, was thought to be a means of predicting the formation of these darker ashes.
2573 Mr Hunt accepted that the theory being propounded was that pockets of low oxygen in the burners were perhaps producing colour variations and that these areas of low oxygen might explain the “intense variability” occurring and the “very significant swings in variability”, because these pockets of low oxygen could not be wholly predicted (T, p 950, lns 11-27). Mr Hunt accepted that by this time, 4 November 2004, he was “getting towards some idea of the problem which [he] could address”.
2574 On 3 February 2005, Mr Druitt sent an email to Mr Adams and Mr Blackburn setting out draft notes on flyash from Millmerran. As to flyash sourcing options, Option 1 involved installing a classifier and other equipment at Millmerran at a cost of $2M, by the third week of February 2005. Mr Druitt says that “inconsistency of colour limits market penetration [although], colour may be able to be managed by permanent on-site tester/operator”. On 4 February 2005, Mr Adams sent an email to Mr Blackburn asking for a copy of AS 3582.1, the results of tests showing that Millmerran ash did not meet the Acceptable Range criteria under the contract, and asking whether Millmerran ash might be able to be classified in commercial quantities at Swanbank.
2575 On 8 February 2005, Mr Klose sent an email to Mr Adams, copied to Mr White, Mr Blackburn, Ms Collins and Mr Lennon. Mr Klose says that Mr Ridoutt and Mr Wilson were involved in original negotiations although they no longer work for Cement Australia. Mr Klose says that he was involved from May 2003 to December 2004. Mr Klose attaches his earlier email of 4 November 2003 setting out the options. Mr Klose explains his thinking at the time in this way: “in essence I was trying to delay committing to capital equipment whilst still maintaining the contract since CA did not have any new markets for the ash and there was a question of how to handle the colour variation” [emphasis added]. On 16 February 2005, Ms Collins sent an email to Mr White about the Comalco ash and attached the earlier email of 16 June 2004 from Mr Chalmers in which he explained the factors influencing his thinking about that ash, including the notion that “the amount of ash around is starting to be embarrassing”.
2576 On 14 February 2005, Mr Chalmers sent an email to Mr Druitt, Mr Blackburn and Mr White on the topic of testing requirements for new ashes. In that email Mr Chalmers says that there is a need to put together information on the performance of the ROS ashes “given things happening in the market” at that time. Mr Chalmers said there was a need to understand the performance of the products and their variability so that Cement Australia could make some sensible decisions about how to handle various threats emerging in the market. In SEQ, Cement Australia would need to understand the performance of Tarong North ROS and Millmerran ROS relative to Tarong fine-grade as the base.
2577 On 26 April 2005, Mr White wrote to Mr Hunt setting out five propositions in relation to Pozzolanic’s proposed installation of an ash plant on-site, including that the Board had approved the capital expenditure. Mr White said that the plant could not be installed by 1 May 2005 but he was confident of installation by the end of 2005. Mr White said that Pozzolanic was “able to continue monitoring of the ash produced at Millmerran” and would have “potential markets well developed by the time the facility is completed”. Mr White requested an extension of the deadline to 31 December 2005 according to a revised schedule.
2578 Millmerran agreed to the request on 3 May 2005.
2579 Mr White’s letter was sent to Mr Hunt by email on 26 April 2005. Mr Hunt responded by asking whether there had been any further progress in finalising plant plans and off-take equipment, and also whether any further testing was proposed in the short term. On 18 May 2005, Mr White sent an email to Mr Hunt, copied to Mr Blackburn, saying that Cement Australia was about to commence a longer term testing programme aimed at determining clearly the variation in colour, fineness and LOI. Mr Blackburn was to provide Mr Hunt with a copy of the plan. Mr White said that a broadly based benchmarking programme on ash performance was being undertaken which would determine the relativities between Millmerran ash and other ash products in the market. Mr White also said that “to a significant extent the outcome of the trials will determine options for Millmerran ash but we are looking at utilisation in niche areas at present”. Mr White said that “we are also developing non-concrete uses that will be suitable for Millmerran ashes”. Mr White expected to have more definitive plans in July when concrete test data would be available.
2580 Mr Hunt accepted that this position was a reasonable response to the state of information then confronting Pozzolanic and Millmerran about Millmerran ash. Mr Hunt said that he could not assess the impact of any colour variation on the sale of the ash. Mr Hunt accepted that he was aware that there were, in effect, very large swings in colour of the Millmerran ash and that he was seeing it, day-to-day (T, p 950, lns 40-48; p 951, ln 1). Mr Hunt accepted that some of the best scientists had said that it was difficult to ascertain the cause of the problem although there were some indications about that. Mr Hunt accepted that Pozzolanic was telling Millmerran that a long term analysis was being put in place to seek to get to the bottom of the problem and Mr Hunt had acceded to that approach. On 10 June 2005, Mr White sent an email to Mr Hunt attaching a letter setting out an ash testing and reporting programme. The purpose of the testing was said to be to build a data base that would support decision-making in marketing and placement of the ash. The attached programme, to be co-ordinated by Mr Blackburn, contemplated concrete testing of ROS by 15 July 2005; concrete testing of classified ash by the same date and hopper testing with samples being rated to a colour scale by the same date, although other tests would continue.
2581 Mr Hunt accepted that he had agreed with the testing proposal. Mr Hunt said that he understood that Pozzolanic still had issues with colour variation and wanted to explore it further and Millmerran had been participating in the investigations for something of the order of two years. On 10 August 2005, a meeting took place between Mr Hunt, Mr Druitt, Mr Blackburn and Mr Tonner from MPA. The progress in the testing was reported to the meeting. Recent testing indicated darker colour ash from Unit 2. Some mill classifier adjustments were to be made. Bulk sample testing was due to commence. Pozzolanic would test recent dark and light samples and try and determine whether they were formed under reducing conditions. In July 2005, the Ash Quality Report says this:
Colour ratings on fly ash hopper samples significantly increased from previous results. The average colour rating for Unit 1 was 4.6. The previous average was 2.0 on a larger sample number. The average colour rating for Unit 2 was 3.8. The previous average was 1.9 on a larger sample number. ..There were several hoppers that had a rating of 7. The previous testing scale only went to 5. We need to investigate this colour change more closely.
2582 Mr Hunt accepted that this report was saying that the colour variability problem had become worse and what had been a colour rating of 5 had now become a rating of 7 and the increase in the scale rating had been a result of darker hues visually appearing. Mr Hunt accepted that the variations had become more dramatic. Mr Hunt also accepted that Millmerran had adjusted its operating protocols throughout the period; these adjustments could have been “compounding factors” in the variability; the new processing was producing greater variation in the colour; and, this variation accorded with Mr Hunt’s visual observations in relation to the ash (T, p 952, lns 17-37). Mr Hunt also accepted that Mr White’s letter to MOC of 11 October 2005 accorded with Mr Hunt’s understanding of the position at that time. Mr White said that the testing programme over the last six to eight weeks had given cause for concern. In previous studies the colour range between 1 and 5 had been considered manageable but the most recent sampling periods had resulted in two additional colour bands, 6 and 7, at the darker end of the scale, being adopted. Mr White contended that this type of variation had very serious implications for the future ability to sell ash into the concrete market.
2583 Mr White then set out a series of investigations to be undertaken.
2584 From October 2005, colour testing of the ash was conducted by Ms Stern for Pozzolanic and apart from using a colour chart, Ms Stern used a light meter to measure variability. The light meter produced results in the range 1 to 7. Various reports were produced attaching colour charts and data sheets which were sent to Mr Hunt. The data sheets had represented visual colour ratings from 1 to 5. From 2005 the rating had changed by adding two further scales at grades 6 and 7. Mr Hunt accepted that the data sheets he was being given demonstrated the increased variability being experienced in the colour of the ash. The data sheets identified the sample date, sample time, the operator and the hoppers from which the samples were taken. In effect, a colour rating was being given to ash produced from particular hoppers on particular dates.
2585 Mr Hunt accepted that in the period from 11 November 2005 to 5 April 2006 he regularly received reports setting out the results of tests on Millmerran ash samples. Mr Hunt accepted that the reports purported to reflect measurements of colour testing by reference to a scale from 1 to 7. In January 2006, Pozzolanic produced an Ash Quality Report. In the summary, Pozzolanic notes that there are no obvious patterns of colour in relation to possibly related parameters but the current data are insufficient to reach any conclusion. The report says that oxygen and thus reducing conditions were strongly indicated as a factor in ash colour. The report suggests that there is little prospect that a plant to manufacture concrete grade ash would be able to manage colour to any degree by storage and/or blending. Customers “will not accept the colour variation likely from Millmerran ash”
2586 On 1 February 2006, Mr Neil Anderson from InterGen sent an email to Ms Obersky, copied to Mr Gamble, Mr Hunt, Mr Mills and Mr de Stefani. In that email, Mr Anderson says that Millmerran forecast ash revenue going forward needs to be reviewed because InterGen believed that Pozzolanic had genuine issues with the Millmerran ash and until the issues had been resolved, Millmerran could not assume the current position would continue beyond 30 November 2006. Mr Hunt accepted that he agreed with the proposition at the time that Pozzolanic’s issues in relation to Millmerran ash were genuine (T, p 956, lns 32, 33).
2587 By February 2006, Mr Hunt believed that the colour variation problem had reduced to some consistency with ash falling broadly between grades 5 and 7 and that because the level of oxygen had a major impact on variability, controlling excess oxygen meant that some level of control over the problem had emerged.
2588 Mr Hunt was asked some questions about a meeting he is said to have had with Mr Panuccio. Mr Hunt said that his organisation had never produced 10 mortar cubes or 12 mortar cubes of flyash in ascending order so as to show a continuous grading of the flyash colour from the lightest to the darkest. Mr Hunt also said that Millmerran did not prepare any photographs which illustrated 5 or 6 mortar cubes lined up from the lightest to the darkest and then a second photograph with 5 or 6 mortar cubes from the next lightest through to the ultimate darkest example of the ash.
2589 Mr Hunt said that the only photographs that Millmerran had were those produced by Pozzolanic. Mr Hunt said that he had no recollection of meeting with Mr Panuccio and laying out two photographs side by side with a continuing sequence of mortar cubes displaying colour variations in Millmerran flyash and then putting in front of those photographs a row of approximately 10 cylinders of flyash so as to demonstrate different colour tones in the flyash, aligned with photographs. Mr Hunt said he had no recollection of doing that at all. That was partly because the grades of colour were being assessed across a range from 1 to 5 in a colour chart and then, from 2005, grades 6 and 7 were added due to the increasing darkness in the samples. Mr Hunt had no recollection of ever being given a colour chart that included grades 6 and 7. Mr Hunt said that his discussions were held with Mr Forbes from IFB and Mr Panuccio was present at those discussions. Mr Hunt could recall discussing colour with Mr Forbes but not Mr Panuccio.
2590 Mr Hunt was shown a series of reports produced by Ms Stern up to and including the end of 2006. Mr Hunt agreed that the bundle of reports represented reports that would have come to his attention on or about each of the dates each email bears reflecting Ms Stern’s assessment of the colour.
2591 Although I have generally accepted the evidence of Mr Panuccio, I accept the evidence of Mr Hunt on the issue of the mortar cubes and photographs of colour samples. I also accept Mr Hunt’s evidence concerning the colour problems associated with the Millmerran ash, and his evidence generally.
Considerations going to the contended market demand for flyash and related considerations
2592 Mr Clarke and Ms Collins contend that Pozzolanic and Cement Australia were confronting the dynamic of increasing demand for concrete grade flyash which, looking forward, would be unable to be met from the sources of flyash available to Cement Australia and, in particular, Tarong, as the capacity to extract additional flyash from Tarong to meet anticipated demand was proving difficult.
2593 Mr Clarke exhibits a range of monthly financial reports relating to the flyash business to his affidavit which are said to support growing demand. Those reports are to be found at SDC68 of Mr Clarke’s affidavit, Exhibit 39, and they begin with Pozzolanic’s report for December 2003 through to and including Pozzolanic’s report for July 2004. The documents are numbered sequentially starting with the first page of the December 2003 report (marked p 1421 through to the first page of the July 2004 report (marked p 1431)
2594 Unfortunately, the sequential bundle of documents is jumbled up and pages are missing. For example, the 2003 December report has, as its second page, YTD sales and other volume and financial statistics for the year ending December 2002 rather than December 2003. The February 2004 report has no second page at all. The March 2004 report has no second page. The April 2004 report has as page 2 the YTD volume and financial statistics to February 2003 rather than April 2004. The May 2004 report is actually correct in the sense that page 2 provides volume and financial statistics to the end of May 2004. The June 2004 report is coherent. The July 2004 report has no second page and thus no volume or financial statistics. Accordingly, it has been necessary to otherwise locate coherent copies of the relevant reports. Some statistical data has already been mentioned drawn from the Board reports.
2595 ATB6.18 is the Pozzolanic report for the period October to December 2002. The report, however, shows the YTD statistics for the 12 months to the end of December 2002. As to Tarong, YTD sales were 8.1% ahead of budget at 266.5Kt (being 20,031 tonnes above budget). YTD sales to 31 December 2001 were 246.6Kt. Swanbank sales to 31 December 2002 were 29.8% above budget (being 13,110t above budget). YTD sales to 31 December 2001 were 41,149. Central Queensland and North Queensland sales were 3% and 6% below budget respectively. Total Queensland sales were 6.8% above budget and 437.7Kt. YTD Queensland sales to 31 December 2001 were 387.7Kt.
2596 Sales, YTD 2002 into Victoria were 28.7% above budget (at 136.1Kt) (being 31,377t above budget). YTD sales into Victoria to 31 December 2001 were 110.1Kt. YTD EBIT from sales of Tarong flyash was well above budget. So too was the EBIT result for sales of Swanbank and Central Queensland ash.
2597 ATB10.5 is the Pozzolanic report to December 2003. In the narrative part of the report, 2003 is said to have represented a record year for Pozzolanic ash sales. Tarong production was an all time record at 312,000 tonnes. YTD sales to 31 December 2003 from Tarong were 307.6Kt (being 13,656t above budget). Swanbank YTD sales were 4,290t below budget. Central Queensland sales were 22,983t above budget and North Queensland sales were 17,558t above budget. Total Queensland sales were 32,349t above budget at 476.3Kt.
2598 Sales into Victoria were 7,536 t above budget at 136.05Kt. Actual YTD EBIT from sales from Tarong, Swanbank, Central Queensland and Victoria were, in each case, above budget.
2599 In the June 2004 report which represents the first six months of the financial (calendar) year, sales at Tarong and Swanbank were 19% and 14% above budget. The volume above budget was 24,510t and 3,902t respectively. Gladstone sales were 10% below budget. Total Queensland sales were 10% above budget at 243.3Kt or 21,625t above budget.
2600 Sales into Victoria were 16% above budget at 74.1Kt or 9,959t above budget. The YTD EBIT in Tarong and Swanbank were above budget. By July 2004 sales out of Tarong and Swanbank were 20% and 12% above YTD budgets and Gladstone was 12% below the YTD budget. Sales into Victoria were 11% above budget. In the narrative part of the June report, Pozzolanic says that sales of Tarong ash continued at record levels and high Victorian sales compensated for suppressed central and north Queensland sales. In the July report, sales are said to be 373Kt or 9% above budget. The actual figures appear to be 374,909t or 10% above budget.
2601 At 21 June 2004, the Board Briefing paper suggested Victorian flyash market growth to 180Kt per annum. Achieving that projection was said to be constrained by storage, logistics, shipping and silo capacity at Gladstone and Melbourne. A relativity between the Victorian and Queensland markets was noted, to the effect, that “major impacts in the Victorian market” would have a “direct effect” on the Queensland supply position. Ms Collins had noted that whilst Pozzolanic was coping with local supply in a period of very high demand in Queensland (up to June 2004), some further growth was expected over the next 12 to 18 months (July 2005 to December 2005) followed by an expected downturn and that when it came, flyash demand would generally parallel cement demand. It would be necessary to find supplementary uses to “consolidate the supply/demand balance”. The Millmerran Power Station was said to be best placed for supplementary supply into Northern NSW and Southern Queensland and both from a sales and logistics perspective, sourcing flyash into northern NSW from Millmerran “would be advantageous”. Ms Collins notes some features of the colour variability debate and says that Pozzolanic and MOC are attempting to identify the cause of that variability. Ms Collins notes that Millmerran ash can be upgraded for use in concrete although it is darker and variable in colour.
2602 That discussion reflects the only analysis in the then proposed Board paper both in terms of capacity, utilisation, and an assessment of the factors influencing market growth. Ms Collins observes that decision-time is arriving in relation to the contract as a further extension beyond 31 July 2004 would be unlikely. Relinquishing the contract would see Millmerran with another partner and the likely contender would be Boral. Boral would supply itself. Cement Australia would lose its sales to Boral. Boral would have a competing facility in the market.
2603 The assessment made by Ms Collins for the Board was that a competing facility of that kind would have a “significant impact on flyash market dynamics in Queensland”. As to the role of Tarong North at this point, Ms Collins notes that the ash quality was notified by Pozzolanic as suitable in April 2004 and that Tarong North flyash was being trucked to Tarong to supplement volumes from Tarong. The capacity of the Tarong North plant was estimated as at least replacing the production capacity of Zone 1 at Tarong.
2604 In June 2004, Ms Collins compiled her Board Budget presentation for the 2004 budget and 2005 forecast. Ms Collins budgeted the sales from Tarong at 260.6Kt, although the forecast tonnages adopted were 291.2Kt. The budget for Swanbank was 57.8Kt and the forecast was 61.8Kt. For 2005 Ms Collins forecast sales from Tarong of 351Kt, and for 2006 367Kt. For Swanbank, the projection was 56Kt and 60Kt respectively. At June 2004, Ms Collins forecast that in 2005 Pozzolanic would sell 59,000 tonnes of flyash from Tarong more than it sold in 2004 (increasing to 351Kt) and in 2006, it would increase sales over 2005 by, 16,000 tonnes to 367Kt.
2605 On 18 June 2004, Ms Collins and Mr Postle formulated the spreadsheet of forecast demand from 2003 to 2008 which contemplated Gladstone supplying Victorian flyash in 2005, 2006, 2007 and 2008 at 135Kt, 135Kt, 133Kt and 120Kt respectively, which seemed to give some content to the expansion in sales into Victoria which would lend authority to the market forecast Ms Collins had spoken about in her 17 June 2004 email. According to the 18 June 2004 forecast, Tarong would supply 290Kt in 2003, and 300Kt in years 2004 to 2008. Tarong would supply small amounts of ash into northern NSW of 12Kt in 2003 and 15Kt in the years 2004 to 2008. Millmerran would supply 0Kt in 2003 and 2004, but would supply 10Kt, 25Kt, 25Kt and 25Kt into northern NSW in the years 2005 to 2008. Swanbank would supply small amounts into northern NSW in the period 2003 to 2008, of 4Kt, 5Kt, 5Kt, 10Kt, 10Kt and 10Kt, over those years.
2606 In responding on 28 June 2004 to an email from Mr Adams, Ms Collins set out an assessment of the volumes of flyash she thought available in 2003 from the Queensland power stations and the flyash available was this: Tarong (600Kt); Tarong North (150Kt); Callide B (60Kt); Callide C (600Kt); Swanbank (60Kt); Gladstone (230Kt) and Millmerran (500Kt). Ms Collins’ assessment of utilisation of ash from those respective stations was, in 2003, 310Kt, 0Kt, 58Kt, 5Kt, 44Kt, 180Kt and 0Kt, respectively.
2607 Ms Boman (at CB-1 of Exhibit 52) notes the actual sales of flyash (by invoiced quantity) from 2001 to 2008 across 17 product categories. The relevant ones for present purposes are sales of bulk flyash from the nominated power stations. Ms Boman’s statistics for sales of flyash into Victoria accords with Ms Collins’s adjusted figure for 2003 of 117Kt. Sales in 2002 were 116.2Kt. Sales into Victoria for the years 2004 to 2008 were 104.1Kt, 98.3Kt, 109.2Kt, 96.8Kt and 89.4Kt, respectively. Sales of Tarong bulk flyash, from 2001 to 2008 were 242.9Kt, 272Kt, 311.2Kt, 308.9Kt, 350.4Kt, 378.5Kt, 292.8Kt, and 325.8Kt, respectively. Swanbank sales, over those years were 34.5Kt, 44.7Kt, 36.5Kt, 40.9Kt, 26.8Kt, 17.1Kt, 21.7Kt and 17.5Kt respectively.
2608 On 6 July 2004, Mr Adams sent Ms Collins an updated version of the Board Briefing Paper concerning Pozzolanic’s development plan.
2609 The draft paper says that by taking up a contract with Millmerran, the high logistics costs of supplying the “growing north NSW market from Tarong can be reduced”. The paper suggests that the “eastern States” will grow by 11% in 2005 with some opportunity to supply 50Kt per annum to New Zealand, and as new more efficient power stations are brought on line the older stations will become swing plants with likely adverse impacts on the quality of the ash.
2610 Pozzolanic is said to be balancing two supply and demand areas being, Central and Northern Queensland and Victoria (Area 1), and, South East Queensland and Northern NSW (Area 2). The northern NSW market is said to be growing and Millmerran is well located to supply this area more economically than Tarong or Tarong North. The paper recommends that Pozzolanic takes up the option of sourcing flyash from Millmerran.
2611 The draft paper suggests that the Area 1 flyash market from 2003 to 2008 will be sourced from Gladstone at these volumes: 179Kt (2003), 209Kt (2004) and, from 2005 to 2008, 230Kt each year. The current capacity of Gladstone at July 2004 is said to be 230Kt. Volume from Callide B in the years 2003 to 2008 is said to be, 57Kt, 73Kt, 75Kt, 78Kt, 75Kt, 73Kt, respectively, and the current capacity in July 2004 is 60Kt. The volume from Callide C in those years is said to be 0Kt, 0Kt, 75Kt, 77Kt, 75Kt, 72Kt and the current capacity at July 2004 is said to be 600Kt. The growth from 2004 to 2008 is said to be, 11.9%, 27.8%, 1.3%, -1.3% and -1.3% respectively.
2612 The draft paper suggests that the Area 2 flyash market from 2003 to 2008 will be sourced from Tarong at these volumes: 302Kt in 2003 and 315Kt in years 2004 to 2008. The current capacity at July 2004 at Tarong is said to be 600Kt. Volume from Swanbank in the years 2003 to 2008, is said to be 44Kt, 50Kt, 50Kt, 55Kt, 50Kt and 50Kt. The capacity at July 2004 was said to be 60Kt. Millmerran will contribute in those years 0Kt, 0Kt, 25Kt, 40Kt, 45Kt, 45Kt respectively. The capacity at July 2004 was said to be 500Kt. Tarong North would contribute 0Kt, 5Kt, 30Kt, 41Kt, 36Kt and 14Kt respectively, in those years. The current capacity at July 2004 was said to be 150Kt. Growth in 2004 is said to be 7.1% over 2003, and in the years 2005 to 2008 growth is said to be 12.5%, 7.4%, -1.1% and -4.9% respectively.
2613 The paper notes that the options of taking up supply from Callide C and Millmerran will expire on 31 July 2004 unless Pozzolanic agrees to install classification equipment by April 2005.
2614 Mr Adams’s draft paper of 6 July 2004 bears no relation to his draft analytical paper of 28 June 2004. In his later paper, Mr Adams seems to have taken Ms Collins’s advice to heart of justifying the additional facilities on the footing of demonstrating the need to secure enough supply to meet the future demands from Pozzolanic’s customers and provide the quality ash they require (as recited in her email of 28 June 2004 at 5.41pm).
2615 On 6 July 2004, Ms Collins sent some suggested amendments to the paper to Mr Adams Those changes made reference to supply constraints experienced in relation to the southern power stations and added this observation: “A competitor is gearing up to install equipment at Callide C and an opportunity currently exists to install plant there in the preferred configuration. Deferring this installation for any time will result in suboptimal access to Callide C ash”. As to Millmerran, Ms Collins says that proceeding with Millmerran would avoid investment in additional facilities in Tarong in the short-term. Ms Collins makes no change to the statistics relating to the market sourcing forecast for 2003 to 2008 except that she adds the observation: “Current capacity is not our facilities but the potential classified ash available if facilities were unlimited” [emphasis added].
2616 On 7 July 2004, Mr Adams produced a further version of the paper. The Board is asked to endorse confirmation of the contract and commit to the necessary capital expenditure. As to Area 2, further considerations are adopted. The northern NSW market is said to be growing and FAA is believed to be having difficulties meeting demand from the Eraring Power Station and Millmerran is well located to supply this market more economically than Tarong or FAA. Also, the paper notes that Tarong flyash handling equipment may require an upgrade in order to increase capacity and supply the growing northern NSW market. Further, a process change at Tarong is said to have reduced the amount of high quality fine ash available to Pozzolanic. The Tarong ash is being supplemented by blending it with flyash sourced from Tarong North. Some small investment between $200,000 and $300,000 will be required at Tarong North to facilitate an increase in this flyash supply.
2617 The paper adds the observation that relinquishing the contract would see Millmerran seek an alternative partner, removing the opportunity for Pozzolanic to supply the growing northern NSW market more cost effectively. The paper adopts Table 2 “Power Station Information” which sets out eight columns of information three of which are “Available Ash (ktpa)”, “Utilised Ash (ktpa)”, and “Ash Facilities capacity”. The paper adopts the note: “*In order to access the ash available it may be necessary at some power stations to install further ash facilities”.
2618 As to those matters, Table 2 says this:
| Station | Available Ash | Utilised Ash | Ash Facilities Capacity |
| Tarong | 600ktpa | 310ktpa | 310ktpa? |
| Tarong North | 150ktpa | Small amounts for blending | 5ktpa? |
| Swanbank | 60ktpa declining … | 44ktpa | 45ktpa? |
| Callide B | 60ktpa | 60ktpa | 60ktpa |
| Gladstone | 230ktpa declining … | 180 ktpa | 180ktpa |
| Callide C | 600ktpa – very high quality | Small amounts for blending | 0ktpa |
| Millmerran | 500ktpa | None currently | 0ktpa |
2619 As to the quality of Millmerran ash, Table 2 observes that the ash has low carbon, is darker and the colour variable. Pozzolanic expects these characteristics to be controllable.
2620 Another version of the paper was produced on 23 July 2004 by Mr Adams. In this version Mr Adams adds the observation that the date of 31 July 2004 is an extended date by one year and Cement Australia has been paying take or pay lump-sum amounts of $1.3M each year since December 2002 although the second payment is refundable. The paper says that a capital expenditure request would need to be prepared and presented to the Board seeking approval by 23 August 2004 for capex at Callide of $1.4M; Millmerran $1.8M; Tarong North $0.3M. The capital investment at Millmerran is said to have the benefit of reducing Pozzolanic’s distribution costs of supplying parts of northern NSW and avoids an investment of $3M in additional facilities at Tarong. The investment of $0.3M at Tarong North to supplement supply from Tarong is said to have the benefit of deferring $3.M in additional facilities at Tarong. A further Capex request was foreshadowed of approximately $14M to $16M for the installation of a 20-30Kt silo at Port Melbourne. The final statistics are these:
| Station | Ash Available (ktpa) | Current Capacity (ktpa) |
| Gladstone | 230 | 230 |
| Callide B | 360 | 60 |
| Callide C | 600 | 15 |
| Tarong | 600 | 350 |
| Tarong North | 150 | 50 |
| Swanbank | 60 | 60 |
| Millmerran | 500 | 0 |
2621 A further version of the paper was produced at some time after 31 July 2004 (ATB Vol 13, T3). This version of the paper is in the same terms as Mr Adams’s version of 23 July 2004 (ATB Vol 13, T21) except that it is formatted in a different way and there is a change to the flyash market sourcing forecast for the years 2003 to 2008. The forecast is in these terms:
| Station | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | Current capacity | Current maximum Util % |
| North & Central Qld & Victoria & NZ [Area 1] | ||||||||
| Gladstone | 179 | 209 | 180 | 180 | 180 | 180 | 230 | 91 |
| Callide B | 57 | 60 | 75 | 78 | 75 | 73 | 60 | 100 |
| Callide C | 0 | 13 | 75 | 77 | 75 | 72 | 15 | 87 |
| Tarong | 4 | 1 | 0 | 0 | 0 | 0 | ||
| Stanwell | 1 | 0 | 0 | 0 | 0 | 0 | ||
| FAA | 24 | 14 | 0 | 0 | 0 | 0 | ||
| Total | 266 | 297 | 330 | 335 | 330 | 325 | 305 | 97 |
| Growth | 11.9% | 27.8% | 1.3% | -1.3% | -1.3% | |||
| Station | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | Current Capacity | Current Maximum Util % |
| South Qld and North NSW [Area 2] | ||||||||
| Tarong | 302 | 315 | 315 | 315 | 315 | 315 | 350 | 90 |
| Tarong North | 0 | 5 | 30 | 41 | 36 | 14 | 50 | 10 |
| Swanbank | 44 | 50 | 50 | 55 | 50 | 50 | 60 | 83 |
| Millmerran | 0 | 0 | 25 | 40 | 45 | 45 | ||
| FAA | 0 | 0 | 0 | 0 | 0 | 0 | ||
| Total | 349 | 373 | 420 | 451 | 446 | 424 | 460 | 81 |
| Growth | 7.1% | 12.5% | 7.4% | -1.1% | -4.9% | |||
2622 Ms Collins was taken to a further version of the “Board Briefing Fly Ash Development Plan” document (ATB Vol 13, T 33). Ms Collins accepted that it looked like a document she would have prepared but she could not be sure. Ms Collins seemed to accept that the document may have been prepared on 17 August 2004 (T, p 2236, lns 44-47; p 2237 ln 1).
2623 The paper recites, as to Millmerran, that by completing Pozzolanic’s contract with Millmerran, the logistics costs of supplying the growing northern NSW market from Tarong and NSW stations could be reduced and further investment in Tarong avoided. A failure to complete the contract would expose Cement Australia to “potential compensation claims and will install a competitor”. Ms Collins accepted that at August 2004 she had no financial data which established that logistics costs could be reduced by supplying ash from Millmerran to northern NSW. Ms Collins said she was relying upon her understanding of the costs (T, p 2237, lns 16, 17). Ms Collins also, ultimately accepted, that the reference to installing a competitor was a reference to a competitor being installed at Millmerran should Pozzolanic fail to complete the contract. Ms Collins accepted that her reference to Millmerran seeking an “alternative partner” was a reference to Millmerran commencing to sell flyash to a competitor (T, p 2237, lns 14-46; p 2238, lns 46, 47). Ms Collins said she thought the Board ought to have that information about likely competitor entry (T, p 2239, lns 5-7) at Millmerran.
2624 On 7 August 2004, Ms Collins sent an email to Mr Clarke attaching a draft Capex Request for capital expenditure at Millmerran and Callide. At this point, Ms Collins was not aware of whether the Board had considered the earlier briefing papers prepared by Ms Collins or those prepared by Mr Adams. Ms Collins had simply received an instruction from Mr Clarke to sign and send the letter of 30 July 2004 to Millmerran (T, p 2231, lns 12, 13).
2625 In the document, Ms Collins says that since Millmerran is a similar distance from Toowoomba as Tarong, the flyash can be used to supplement the supply of south-east and south-west Queensland, as well as northern NSW. As to volume, Ms Collins says that by 2006 Pozzolanic predicts that the SEQ market will have increased by 70Kt over the 2003 volume of 333Kt and in that time an additional 40Kt will be required from SEQ for northern NSW customers. Ms Collins says that to meet this increased demand, additional classification capacity is required either at Tarong, Tarong North or Millmerran. Ms Collins accepted that the 7 August 2004 document was compiled by her (T, p 2231, lns 20-22). Although Ms Collins had framed additional classification capacity as being required from one or other of the three power stations, Ms Collins said that her own view was that Pozzolanic would need to classify ash from Millmerran and Tarong North, and she had held that view since January 2004 or so.
2626 Ms Collins was questioned about the commerciality of the decision in July 2004 to amend the Millmerran contract. Ms Collins accepted that when that decision was made, Pozzolanic had two existing sources of supply, Tarong and Tarong North and her view was that the increase in demand she had foreshadowed could be met from either of those sources (T, p 2233, lns 15-19). As well, Ms Collins accepted that Pozzolanic had a contract with Millmerran and had the option to terminate it, at least up until 30 July 2004, and if Pozzolanic did not terminate the contract it would be required to pay $1.3M each year for some years and deploy $2M in capital expenditure at the site (T, p 2233, lns 21-25). Ms Collins did not accept that affirming the contract (and amending it) would only be sensible if doing so was a less costly means of meeting demand than meeting it from Tarong or Tarong North. Other factors that had to be considered were questions of risk and not having “all our eggs in one basket at Tarong” (T, p 2233, lns 27-36). Ms Collins identified the benefits of the capital investment as enabling Pozzolanic to meet market demand in northern NSW and SEQ, and also the virtue of “securing access to a large new ash supply in a competitive market” and that “we were lucky to have an extra supply that had the potential for meeting a lot of market growth” (T, p 2234, lns 9, 10).
2627 On 13 August 2004, Ms Collins sent an email to Mr Adams asking him to calculate the net present value (NPV) and internal rate of return (IRR) derived by Pozzolanic should it “go for the minimalist Option 2 on p 5 of this ER (they should be bad)?” Option 1 was described as “staying as we are” which meant renegotiating the contract, with no facilities being deployed. Option 2 was “Minimal Investment” which meant minimal ash collection facilities with no classification. Option 3 involved installing a classifier and related equipment at Millmerran. Ms Collins understood that even a minimalist capital investment would result in a very bad NPV and IRR because Ms Collins believed that Pozzolanic needed a classifier in order to increase the supply of ash so as to generate the revenue to produce “a decent NPV and IRR” (T, p 2235, lns 1-25). Ms Collins could not recall working out how much flyash Pozzolanic would need to sell from Millmerran in order to generate a decent NPV or IRR, by which I assume, she means an IRR which achieves the internal Cement Australia “hurdle rate” for project investment.
2628 At p 5 of the document Ms Collins says at Point 2, that only small tonnages of ROS Millmerran ash are likely to be sold and lump sum payments for tonnages below the minimum quantity make Millmerran ash “uneconomic”, and nor is it an option to take the ash to either Swanbank or Tarong to be classified as the reject ash could not be disposed of, into the ash dams at either station. Ms Collins said that she did not have any idea how much more Millmerran flyash might be sold if a classifier was installed although it would be (more than 10,000 tonnes), more than otherwise. Ms Collins gave evidence that in relation to her Point 2 observations, she did not know whether she believed, at the time, that the minimum quantity was 135,000 tonnes. She said she did not know that number. However, in the background discussion at p 2 of her paper, Ms Collins observes that “[f]or up to 135,000 tonnes of fly ash taken each year, a Lump Sum Payment of $1.3235M is paid annually in advance [and] [t]his is indexed and additional payments are required for additional tonnages”. Ms Collins understood that whatever volume might have been taken, $1.3235M was payable by Pozzolanic.
2629 Ms Collins was not sure what she meant by the notion that tonnages below the minimum quantity would make the Millmerran contract uneconomic but she knew that there would be “some number that would be the point at which it would become economic” (T, p 2236, lns 5-36). Ms Collins did not accept that she believed in August 2004, or when giving evidence, that unless Pozzolanic could sell the minimum volume of 135,000 tonnes “or something close to it” the Millmerran contract was uneconomic.
2630 Ms Collins prepared a Board Expenditure Request document on 26 August 2004 (T, p 2239, lns 20, 21). That document sets out key performance indicators to be audited within twelve months of the commissioning of the classifier. The KPI for year one was the sale of 50,000 tonnes of classified Millmerran ash and for year two the KPI was 75,000 tonnes. Ms Collins accepted that the document reflected her belief that in order for the capital expenditure to be “worthwhile” Pozzolanic would need to sell more than 50Kt in year one, and more than 75Kt in year two (T, p 2240, lns 1, 2). Ms Collins said that she believed that those volumes were possible (T, p 2240, lns 5, 6), based on her few decades of experience as an operations manager dealing with fluctuating markets (T, p 2240, lns 16, 17).
2631 Ms Collins was asked about the formulation of the 2004 budget and the 2005 and 2006 forecasts (ATB Vol 12, T9) and more particularly the production forecast for 2004 and the budgets for 2005 and 2006 (ATB Vol 14, T 13). In addressing the production forecast document, Ms Collins accepted that it was her responsibility to see it produced and she contributed to it. Ms Collins accepted the production forecast at Tarong was an increase from 291Kt in 2004 to 351Kt in 2005 and 367Kt in 2006 resulting in growth to 31 December 2006 of 76Kt, and that sales volume to 31 December 2006 would increase by 87Kt. Therefore, almost all of the projected growth would come from Tarong. The forecast did not incorporate any notion of first year sales of Millmerran classified ash at 50Kt or in the second year 75Kt.
2632 Ms Collins said that because, at this point, no Millmerran plant had been built; the quality was not ultimately known; and its performance in the market was unknown, a conservative assumption was made that any expansion in the market would have to be met from Tarong (T, p 2241, lns 12-18). Ms Collins accepted that a production cost schedule of 14 October 2004 set out anticipated tonnages to be supplied from various sources for the 2004 budget and the 2005 and 2006 forecasts. The tonnage for Millmerran for 2005 was 10Kt, and also 10Kt for 2006. Ms Collins said that she believed Pozzolanic could sell 10Kt and far more than that “if we could sell ash to people” (T, p 2242, lns 15-20) and as to 50Kt in 2005, Ms Collins believed that her past experience enabled her to make that assessment (T, p 2242, lns 28-30).
2633 On 14 October 2004, the Executive Committee met and a presentation was made of the Cement Australia Flyash Strategy by Mr Adams. Slide 4 suggests that investment in Tarong will take up 27Kt of growth in SEQ as will investment in Millmerran (another 27Kt). Slide 10 suggests that installing capacity at either Millmerran or Tarong will resolve the capacity issue in SEQ otherwise Cement Australia will be unable to supply the 2005, 2006 budgets. Slide 10 suggests securing proposed capacity which would result in a buffer or margin above demand reflecting a utilisation limit of 80% of proposed capacity. On 14 October 2004, Mr Adams sent Ms Collins an email saying that the flyash presentation went well and that Mr Leon had a number of requests, including that Pozzolanic would need to demonstrate (make good) the two key drivers of the investment projects, that is, sales demand and utilisation limits of approximately 80 to 85% are defensible.
2634 Ms Collins understood Mr Adams to be saying that in comparing available supply with demand, Pozzolanic works on the basis that only 80% to 85% of supply is actually “utilisable”. Ms Collins accepted that prior to 14 October 2004, Mr Adams had not asked for any assistance to demonstrate that the 80% to 85% utilisation figure was accurate. Ms Collins thought that Mr Adams relied upon his own “personal experience of operations and industry” although Ms Collins did not know whether Mr Adams had any experience in the operation of flyash production plant. Ms Collins accepted that she had no statistics which could assist her in determining whether such a utilisation rate was right or wrong, other than her own observations in close association with the plants.
Some further aspects of Mr Clarke’s evidence
2635 There are some further aspects of Mr Clarke’s evidence that need to be addressed. Mr Clarke was taken to the version of the “Board Briefing Queensland Fly Ash Development Plan” (at ATB Vol 13 T 3). Mr Clarke accepted that the Table containing forecast demand for the years 2003 to 2008 was the work of employees of Cement Australia. The part of the Table dealing with forecast demand for SEQ and northern NSW shows forecast demand peaking in 2006 at 451Kt. Of that demand, 315Kt is sourced from Tarong. 41Kt comes from Tarong North; 55Kt from Swanbank and 40Kt from Millmerran. The royalty payment at Tarong referrable to 315Kt was a payment of $2.4M which represents a royalty payment to Tarong of $7.61 per tonne. The royalty payment for Millmerran was $1.353M irrespective of the volume taken. Assuming volume of 40Kt supplied from Millmerran, the royalty per tonne would be $33.82 per tonne. The differential between those two royalty rates per tonne is $26.21. The proposition was put to Mr Clarke that in order for logistic or locational benefits to make it worthwhile to sell ash from Millmerran, as opposed to Tarong, the savings would need to be greater than, at the very least, the royalty differential (as put to Mr Clarke, in an amount of $22 per tonne although actually $26.21).
2636 Mr Clarke accepted that on “pure economics”, he could not disagree with the proposition. Mr Clarke denied that his justification for continuing the contract was to prevent Millmerran ash becoming available to the competitor (T, p 1721, lns 5-28).
2637 Mr Clarke accepted that it was apparent from the documents that the Board had not been asked, at any Board meeting before 31 July 2004, to approve the continuation of the Millmerran Contract, at least in terms of any formal Board paper being put to the Board notwithstanding that a Board paper had been in the course of preparation from at least 16 June 2004, and had not been submitted to the Board. Mr Clarke could not comment upon any conversations that might have taken place between Board members and Mr Leon or others.
2638 Mr Clarke was clear in his recollection that Mr Leon authorised him to approve the amendments to, and continuation of, the Millmerran contract although Mr Clarke did not know whether Mr Leon had informally discussed the matter with the Board (T, p 1721, lns 18-23). At 16 June 2004, it was Mr Clarke’s view that the Board would be asked to approve continuation of the Millmerran contract (T, p 1693, lns 23-30). Mr Clarke said that he recalled discussing the justification for the extension decision with Mr Leon and, in particular, Mr Clarke’s clear recollection was that Pozzolanic needed to get an extension “to do more work on this thing” (T, p 1721, lns 25-27).
2639 Mr Clarke said his recollection was that, that is all he had to say to Mr Leon, and Mr Leon said to go ahead (T, p 1721, lns 29, 30). Mr Clarke accepted that Mr Leon was apparently content to act upon whatever reasons Mr Clarke held for seeing the need for an extension of the Millmerran contract because, it was “reasonable to assume that Mr Leon had some confidence in my abilities” (T, p 1721, lns 32-34). Mr Clarke said he was sure that he and Mr Leon “went through” the numbers relating to “the supply/demand balances” a number of times which was a discussion “in the context of the whole flyash market” (T, p 1721, lns 41-45). Mr Clarke said he and Mr Leon broadly talked about the economics of the flyash business (T, p 1722, lns 6, 7).
2640 Mr Clarke accepted that he presented the “Cement Australia Flyash Strategy” to the Cement Australia Board in October 2004 (T, p 1723, ln 5). Mr Clarke said it was his job, essentially, with management, to make forecasts of future demand (T, p 1691, lns 35, 36). Mr Clarke explained the process in this way. In order to justify capital expenditure at Millmerran, Mr Clarke would have to be able to identify what tonnage of ash could be sold from Millmerran. Mr Clarke said that Pozzolanic would work backwards from the supply demand balances in the market and answer the first question, “do we need it” (T, p 1692, lns 21-34). Mr Clarke notes, in the presentation, that as a result of discussions at the August Board meeting, a full strategic review of the investment options for flyash, including investment in the Callide and Millmerran classifiers, was to be undertaken with expenditure requests to be submitted to the Board in November. Mr Clarke observes in his October presentation that a full strategic review had now “established the business case” for those investments including an investment in a new silo in Melbourne. Mr Clarke said he understood that statement to be true.
2641 Slide 3 says that Cement Australia will run out of flyash capacity in north and south Queensland in 2005 due to forecast growth in Victoria from 135Kt to 180Kt by 2006; forecast north Queensland demand growth from 135Kt to 180Kt by 2006; and forecast SEQ flyash demand growth from 380Kt to 460Kt by 2007. Mr Clarke said that these statistics were based on “conclusions” reached by the “study team” (T, p 1723, lns 29-32).
2642 Slide 4 analysed SEQ options on the footing of investing in Tarong to take up 27Kt of growth in SEQ and investing in Millmerran to also take up 27Kt of growth in SEQ. Mr Clarke accepted that this discussion of Millmerran and Tarong was concerned only with demand in SEQ and at Slide 10 Mr Clarke observed that installing capacity at either Millmerran or Tarong North would resolve the capacity issue in SEQ. By this time (October 2004), the decision to extend and amend the contract had been taken and implemented, and the Board was not then in a position to decide that SEQ demand might be met by either investing capital at Tarong North and terminating the Millmerran contract, or electing to affirm the contract and make the investment only at Millmerran. Mr Clarke said that it was clear to him that the Board agreed with the earlier strategy and had there not been acquiescence in the decision to affirm the Millmerran arrangement, management would not have done so. Mr Clarke accepted that the Cement Australia flyash strategy paper was the first attempt to “come up with a detailed in globo market analysis” and it was the first time that the numbers justifying a decision to spend money at Millmerran were put to the Board to this “degree” (T, p 1724, lns 20-43).
2643 Mr Clarke was asked about the graph in Slide 10 which shows a demand line and a capacity line, calculated by striking 80% of the actual available capacity in SEQ and northern NSW. The “proposed capacity” represented an 80% utilisation calculation of the actual available capacity in the relevant region. Mr Clarke said that Pozzolanic always had to have more capacity than the nominal capacity so as to get through outages and swings in seasonal demand. Mr Clarke said that power stations are not going to be able to produce 100% of the notional flyash production in any given year due to fluctuations in production attributable to a range of factors, and so an estimate of 80% was thought to be “reasonable”. Mr Clarke accepted that such a figure was not based upon any statistical analysis of outages or days lost but was simply an estimate that he regarded as reasonable based on his “experience”.
2644 At Slide 11 of Mr Clarke’s presentation, Mr Clarke says that an investment in Millmerran would result in $1.9M of capital investment; a volume uplift of 27Kt per annum; cash flow revenue of $1.2M per annum; an NPV of $8.6M; and an IRR of 57% with “payback” over 2.5 years. The slide also sets out the comparative statistics for Tarong North. Mr Clarke says the NPV calculation would have taken into account capital expenditure, operating costs, royalties, logistics and all revenues so that the two calculations were made on a like for like basis. In particular, the project economics would have included a royalty to the power station in both cases based on whatever the proper royalty calculation was according to the contractual arrangements. The Tarong North calculation reflected an NPV of $9.3M and an IRR of 51%.
2645 Slide 11 observes that there are “no logistics or royalty savings brought about by either investment merely increased volumes”. Mr Clarke said that meant there were “no cost savings in logistics” (T, p 1727, lns 18, 19). Mr Clarke accepted that this was the first occasion on which any form of analysis, “on a gross sense”, revealed there were no cost savings on logistics at Millmerran. Mr Clarke accepted that the only analysis that “counts for decision-making” is the analysis in the “gross sense” (T, p 1727, lns 21-30). Mr Clarke was asked whether, if Pozzolanic was in a position where it had not made a commitment to Millmerran as it had at 28 and 30 July 2004, and was assessing the Tarong North option, one of the things that would have been apparent is the notion that if Pozzolanic elected to “go with Tarong North”, Pozzolanic would have saved $1.35M each year in Millmerran royalties because Pozzolanic would have been able to terminate the Millmerran contract. Mr Clarke accepted the force of that notion if the question was whether it was “one or the other” rather than “both”, that is, if it had been “a simple choice between Tarong North or Millmerran”.
2646 Slide 12 of the presentation observes that the capital investment at Millmerran will take advantage of the current $1.3M take or pay obligation “and may deter other flyash investors”. Mr Clarke accepted that that observation was regarded as relevant by him and “the team” to the decision-making on capital investment and “one of the options or one of the issues” that the team thought the Board ought to know about was the notion that exercising the Millmerran option would deter other flyash investors (T, p 1727, lns 34-45). Mr Clarke regarded Slide 12 as recognising that there was a contract with Millmerran and there was therefore a “starting point” that had to be taken into account in contrast to a decision-making circumstance where there was no arrangement in place at Millmerran.
2647 In the assessment of those things “for” and “against” capital investment at Millmerran, Mr Clarke did not make any reference to the colour variability problem and the notion that it might be very difficult to sell Millmerran ash to anybody. Mr Clarke said that he thought, by then, “we had done the ash colour thing to death” and “we, the ash team, had come to the view that we had overcome that as being a major concern” and, by October 2004, the ash team regarded the colour problem as “over” or “sufficiently under control” (T, p 1728, lns 4-21). By October 2004, Mr Clarke’s view was that Pozzolanic “could sell Millmerran ash”, although he doubted whether the ash team ever believed they would be able to sell the ash “for any application” (including exposed applications). Mr Clarke said he continued to believe that there was a “limitation” on the market for Millmerran ash and that at least one facet of that limitation was that it would not be acceptable to customers who wished to use it in exposed applications (T, p 1728, lns 23-41). The consequence of that view, in Mr Clarke’s assessment, was that Millmerran ash was unlikely to be acceptable to “some plants of any customer involved in that sort of work” (T, p 1728, lns 43-45). It followed for Mr Clarke that “a proportion of the metropolitan market in Brisbane” would not accept Millmerran ash (T, p 1729, lns 1-2).
2648 Mr Clarke accepted that the aim of the strategy presentation was to identify the best option to be pursued to be able to meet “growth and demand in the market generally”, and in order to achieve that objective, Pozzolanic would need to have available to it ash that was sufficiently acceptable in the market. Mr Clarke said that he did not accept, at the time, that it was an inevitable conclusion to be reached in weighing the options, that if the colour variability of Millmerran ash was taken into account, the market increase would need to be met from Tarong North, and nor was that view the view of the team at the time (T, p 1729, lns 13-30).
2649 However, Mr Clarke observed that the “quantitative or qualitative feel was that we needed them all [Millmerran, Tarong and Tarong North] to cover the market” and the “qualitative feel was we needed them all to cover the market [because] we couldn’t guarantee putting all our eggs in one basket” (T, p 1730, lns 30-41). Mr Clarke did not accept that Pozzolanic had no intention to go ahead with Tarong North. He believed that there was, no doubt, that both investments would be made (T, p 1731, lns 12, 13).
2650 Mr Clarke accepted that if he had held a different view to Ms Collins (when she said in her paper that some further growth was expected in the next 12 to 18 months but when the “expected downturn” arrived flyash demand for concrete use would parallel cement demand making it necessary to find more supplementary uses to consolidate the supply demand balance), he would probably have taken Ms Collins to task on it. Mr Clarke was asked, if a reasonable view could be held that an expected downturn in the market for flyash would occur after about 18 months, on what basis did Mr Clarke think that Pozzolanic would require flyash from Millmerran within the life of the Millmerran Contract? Mr Clarke said this (T, p 1694, lns 37-42):
As I’ve said, the essence of making a decision about Millmerran [is] it’s not a 12 to 18 month decision, and it’s not even a decision about the life of the contract. It’s about a long-term arrangement. To give you an example, my recollection is that Flyash Australia, and it’s the only one that is clear to me, had been operating at Eraring for nearly 20 years .. So these are long-term relationships.
2651 Mr Clarke was asked whether his thinking was that Cement Australia should commit to the Millmerran contract not because flyash would be required during the life span of the contract to meet demand but because flyash would be required after the contract had come to an end, to then meet demand. Mr Clarke said that he would want to secure a source into the “foreseeable future” (T, p 1695, lns 1, 2). Mr Clarke said: “I can’t say that I thought that we wouldn’t need it during the life of the contract. We would need Millmerran ash. I can’t remember whether it was in 18 months, 5 years or 10 years” (T, p 1695, lns 7-8). Mr Clarke was asked on what basis he thought that having the Millmerran contract, which had a fixed term and fixed expiration date, gave him any assurance of continuity of supply after the contract had expired. Mr Clarke said (T, p 1695, lns 19-27): “I guess it’s the confidence of experience, that rolling over contracts and getting them extended had been our experience in the past… based on relationship, investment and performance”. Mr Clarke also accepted that in June 2004 Tarong North represented an acceptable and available source of flyash and he had no reason to not believe that the volume of concrete grade flyash available from Tarong North was about 150,000 tonnes per annum once appropriate plant was installed (T, p 1697, lns 30-45).
2652 Mr Clarke was asked about the operation of the most favoured nation clauses in Pozzolanic’s contracts with major customers. A proposition was put to Mr Clarke that if another supplier obtained Millmerran ash and sold it into a geographic region where one of Pozzolanic’s major customers had a batching plant, and the ash was being sold more cheaply than the price Cement Australia was charging for Tarong ash, an MFN obligation would arise irrespective of issues about the colour of the flyash, because Tarong and Millmerran flyash would have approximately the same “relative strength” characteristics. Mr Clarke generally agreed with that proposition. Mr Clarke also said that “prima facie” he agreed with the proposition that even small sales of Millmerran ash by a competitor could have a profound effect on the income which Cement Australia could earn from its flyash sales, although arguments would arise about whether ash with “particular limitations” put forward for MFN considerations, would trigger an obligation in respect of ash that did not exhibit those limitations (T, p 1738, lns 31-44).
2653 Mr Clarke accepted that he held the view that Millmerran colour-variable ash could be sold to concrete producers who were using it for “non-exposed applications” (T, p 1739, lns 1-3). Mr Clarke also accepted that the sale of any flyash including colour-variable flyash by a supplier could have a profound effect on the profitability of Cement Australia’s flyash operations and that Mr Clarke was alive to that possibility from the time he was in the “cement business” (T, p 1741, lns 39-47). Mr Clark, however, did not accept that preventing a competitor from obtaining access to Millmerran flyash so as to prevent the effects he had earlier discussed, was a major factor in the decision about Millmerran.
2654 It is also convenient to now mention aspects of the matter concerning the email from Sueki Tan to Ms Stevenson on 23 March 2005 at 2.05pm which is the draft of a proposed email to be sent by Mr Leon to Mr Clough at the request of Mr Maycock in response to Mr Clough’s email to Mr Leon of 19 March 2005. In Mr Clough’s email he questions the commerciality of the recommendation to invest $A2.52M in installing a classifier at Millmerran power station. Earlier in these reasons, I noted Mr Maycock’s evidence about aspects of this draft email put to him. The draft email was not reduced to final form (or so sent). The subject matter of the email seems to have been discussed by Directors at a Board meeting. Sueki Tan seems to have sent material to directors and managers on behalf of Mr Leon, as a general practice. For example, Ms Tan sent confidential EBIT calculations to the Directors. I infer that the email is a draft, dictated or at least formulated, by Mr Leon. I also recognise that because the document is a draft and not reduced to a final form and sent, the observations by Mr Leon may not have been framed in the way in which he would wish to describe relevant events had he been doing so in a reflective final form. Nevertheless, it seems to me that Mr Leon’s draft observations are, at least useful, in identifying a line of thinking from Cement Australia’s senior management executive at the time. Impressionistically, at least, Mr Leon’s views on Cement Australia’s market position were these:
We’ve [Cement Australia] inherited [from] QCL a large, very profitable Fly Ash business. This business exists in the midst of a market that has a huge Supply: Demand imbalance with Supply vastly outstripping Demand. QCL have managed to maintain their high margins by managing the Supply side very astutely. When Millmerran was built, it posed a major risk to the business and QCL needed to move decisively to protect its existing business. We [Cement Australia] have enjoyed the benefits of that protection and we need to make this investment to continue to do so.
The attempted take-over by Boral of ABL last year put the spotlight on the Fly Ash business in Australia. The ACCC (our regulator) has been concerned to ensure that our contracts with power stations don’t restrict competition. The concrete companies and competitors have increased their interest in obtaining their Fly Ash directly from the Power Stations and by-passing Cement Australia. Peabody (ex Pozzolanic), Numans (from the Gold Coast), Jerry Wong (Cement Trader) and Sunstate (Boral/ABL) are all trying to obtain Fly Ash from Power Stations. Under these circumstances our defence of the Fly Ash business will need to be decisive and we will need to be careful not to transgress the Trade Practices Act.
2655 I accept that these paragraphs reflect the thinking of Mr Leon at about 23 March 2005 and represent a fair reflection of his assessment of the position Cement Australia’s flyash business enjoyed in the market; his own assessment of the supply demand imbalance in that market; and a synopsis of some of the threats confronting Cement Australia in the conduct of the flyash business.
2656 Mr Maycock accepted, when these paragraphs were put to him, that although he would not embrace the adjectives used in the draft email, in the period under discussion there was an excess of supply of ash over demand, as a general tendency. These observations simply reflect Mr Leon’s line of thinking at the time which needs to be judged in the context of all the evidence on the questions in issue. These comments may or may not have been the subject of qualification had Mr Leon turned his mind to settling a final form of his remarks setting out the information he regarded as important in answering Mr Clough’s concerns.
Market power at June 2004
2657 Earlier in this Part, I said that I would address the circumstances relating to Cement Australia’s market power at June 2004. I do not propose to dwell at any length on that topic. I have, however, had regard to all the transport cost data, although I do not propose to analyse that data here.
2658 I find that Cement Australia had a substantial degree of power in the SEQ concrete grade flyash market in June/July 2004. In July 2004, Pozzolanic had a seven year contract with MPP/MOC. Pozzolanic also had a contract with TEC in relation to flyash produced at Tarong and also Tarong North, over the term of that supply contract. Pozzolanic continued to have a contract with Swanbank power station. These power stations were the power stations most proximately located to the SEQ market. Ms Collins accepted that, by October 2004, she understood the position to be that Cement Australia controlled 96% of the sales of concrete grade flyash in the market. Cement Australia not only had a substantial degree of power in the SEQ concrete grade flyash market, but in every practical sense, Cement Australia dominated the market for the supply of flyash, especially in the commercial sense in which Mr Arto described that notion.
2659 A buyer seeking to purchase concrete grade flyash in SEQ could only acquire that flyash from Cement Australia, for all practical purposes, if the buyer was seeking a source of flyash produced at a SEQ power station Buyers, such as Nucon, seeking to exploit a supply side substitution possibility had to turn to purchasing flyash from a power station in New South Wales such as Bayswater, Mount Piper or Eraring, and then make arrangements for the transport of the flyash to the various batching plants in and along the market catchment. Cement Australia priced the supply of flyash on a delivered pricing basis only, on the footing of setting a delivered price measured against the next best alternative displacement cost a buyer would incur in purchasing flyash from a New South Wales power station and meeting the cost of delivery to the relevant batching plants. The Nucon volumes in the years 2003 and 2004 purchased from a New South Wales power station producer and transported into SEQ were quite small, in the context of Cement Australia’s sales. These transactions did not constrain Cement Australia’s pricing methodology or practices. In fact, Pozzolanic price rises continued to occur, generally.
2660 Under a contract between Cement Australia and Boral of 7 November 2003, Cement Australia supplied 90% of Boral’s requirement for concrete grade flyash to its batching plants for a period of five years, subject to the terms of the document. Cement Australia supplied the requirements of Boral, Hanson and Rinker and sales to those producers amounted to approximately 73.8% of all flyash sales in the SEQ concrete grade flyash market in 2003 and 2004. The statistics relating to the volumes supplied by QCL and then Cement Australia in the SEQ market have been mentioned extensively previously and I do not propose to repeat them here. I have considered, in the context of the 2003 and 2004 position, the transport costs statistics, the volumes of flyash sold, the volumes imported into SEQ by Nucon and others, the transport and back-haul costs, the comparison between the delivered prices charged by QCL/Cement Australia in 2003 and Cement Australia in 2003 and 2004, on the one hand, and the costs incurred by producers in landing flyash at their various batching plants purchased from Bayswater, Mount Piper and Eraring, on the other hand. I have also considered the profitability margins relating to sales of concrete grade flyash supplied from Bayswater, Eraring, Mount Piper, Swanbank and Tarong to various batching plants. I have also taken into account the considerations required by s 46(3) of the Trade Practices Act in determining whether Cement Australia enjoyed a substantial degree of market power in July 2004.
2661 I accept that in September 2003 LEK considered that Cement Australia and Pozzolanic faced competitive potential threats of entry by Sunstate or Boral and if either entry occurred, Pozzolanic could lose 50% of its sales to the independent concrete producers and all of its sales to Boral (representing 160Kt of sales in total). I also accept that LEK had suggested that a collaboration of independent concrete producers were trying to source flyash directly from the power stations and by-pass dealing with Cement Australia as the seller/supplier in SEQ. One solution to the first problem was seen by LEK as Cement Australia selling 50% of Pozzolanic to Boral to “lock-in” a shareholder, buyer, stakeholder commitment to those sales. Mr Maycock saw no advantage in doing so. I also accept that Cement Australia saw Boral as a new entry threat at Millmerran should Cement Australia cause Pozzolanic to walk away from Millmerran. I also accept that Global Cement was seeking out flyash supplies from Callide C (and succeeding at least for one major project and also seeking a flyash supply arrangement with Pozzolanic for Swanbank ash). Sunstate, of course, did not reach a commercial view as to entry into the flyash product supply market until 2006 and entry occurred in 2007. Notwithstanding these threats of possible entry discussed by LEK in its strategy analysis, none of these possibilities result in the conclusion that in July 2004 Pozzolanic had lost substantial control over the sources of SEQ unprocessed flyash or that Cement Australia’s power in the SEQ concrete grade flyash market was anything other than a substantial degree of power in that market. That is not to say that the threats were not real or that Cement Australia regarded these market possibilities as something that did not need to be addressed in some responsive fashion.
2662 Having regard to all of the evidence directed to each of the considerations just mentioned, I am satisfied that Cement Australia enjoyed a substantial degree of power, in July 2004, in the SEQ market for concrete grade flyash.
Findings
2663 I make the following findings in relation to Pozzolanic’s entry on 28 July 2004 into the variation of the Ash Purchase Agreement having regard to all of these events.
2664 In the period from about June-July 2003 to July 2004 the essential judgment made by Cement Australia was that in looking critically at the supply/demand balance (to use Mr Clarke’s term) in the SEQ market for flyash including opportunities to supply flyash into northern New South Wales, the market was “over supplied” with flyash. That was Mr Maycock’s view, “in general”. It was Mr Klose’s view in July 2003 and he thought the market was “fully supplied” with the result that Cement Australia “really did not need these two new ashes” (Tarong North and Millmerran). The problem of over-supply and the need to manage margins was the point of the 5 August 2003 strategy meeting convened by Mr Smith and Mr Klose with other management. Mr Clarke’s ultimate assessment was that he was “fairly convinced” that Cement Australia would need the ash and particularly the Millmerran ash to meet demand in the long term although he could not really say when, or where, the ash would be deployed. It would, however, be needed he thought, during the life of the contract. Mr Clarke thought that some uses could ultimately be found for the Millmerran ash notwithstanding the colour darkness and variability issues.
2665 Mr Chalmers thought in June 2004 that deploying the Millmerran ash ought to be focused on northern New South Wales and some differentiation in the product would need to be identified. Mr Chalmers thought, in essence, that ash tonnes sold out of Millmerran would be tonnes not sold out of Tarong and sales of Millmerran ash might affect the economics of the Tarong operation. That displacement notion seems to have had continuing currency in Cement Australia because as late as 18 March 2005, Mr Adams in his Capex Request paper attached to his email of 18 March 2005 to Mr Leon notes, in calculating the NPV and IRR for the options set out in that paper, a series of assumptions that should a classifier be installed at Millmerran, Cement Australia would sell 20,000 tonnes of Millmerran ash at $70 per tonne and “20Kt of Tarong ash sales are displaced”.
2666 In June 2004, Mr Chalmers described Millmerran ash as adding “significant volume to an already over-supplied flyash market”. In June 2004, Ms Collins described one of the risks confronting Cement Australia as softening market volumes and prices in SEQ. In the development of her versions of the Board Briefing papers developed in June and July 2004, Ms Collins recognised that although there had been a period of strong demand in SEQ (particularly in the first half of calendar 2004), demand would continue to reflect some improvement for 12 to 18 months and a downturn was then expected which would require supplementary uses to be found for the Millmerran ash so as to “consolidate the supply/demand balance”.
2667 Mr Chalmers’s view is consistent with Mr Leon’s draft observations in the draft email earlier mentioned.
2668 The view that emerged in July 2004 was that logistics costs could be reduced by taking up Callide C classified ash and using it to secure the northern Queensland market while re-directing Gladstone ash to the growing Victorian market. The 6 July 2004 paper suggests that the “high logistics costs” of supplying the growing northern NSW market from Tarong could be reduced. This notion fundamentally became one of the articulated sustained “forecast” rationales for the decision of 28 July 2004 to affirm and enter into the amended Millmerran Contract. The difficulty with that rationale is that the projected volumes from Millmerran are very small and no logistics savings were ever demonstrated. Moreover, although securing Callide C may have enabled a re-direction of all Gladstone ash to Melbourne, with the Callide C classified ash servicing northern Queensland demand, neither of these developments had anything to do with logistics savings in the SEQ market.
2669 I am satisfied that the emphasis attributed to the need to affirm and amend the Millmerran Contract so as to meet growing demand in northern New South Wales is overstated and over-emphasised as a rationale for the decision to enter into the amended contract. The projected sales of Millmerran ash do not support a need for the ash to meet demand for ash in northern New South Wales. The logistics savings were never properly analysed at the time or made good as a business reason for preserving the Millmerran Contract, as amended. The judgments made by Mr Clarke and Ms Collins were intuitive. They were estimates, but not estimates based on any rigorous or informed analysis of demand, revenues, costs, rates of return or other benchmarks ordinarily examined in reaching a commercial decision about project engagement.
2670 In making these observations, I am satisfied that Mr Clarke and Ms Collins believed that at some point in the life of the contract, the Millmerran ash might be needed but they are, it seems to me, simply confused due to the passage of time about the burden of the imperatives actually forming the basis for the decision to affirm and amend the Millmerran Contract. Some intuitive notion or “gut feel” of a need for the Millmerran ash, at some point in the life of the contract, was, I accept, a reason on the part of Mr Clarke and, ultimately, Ms Collins, in Pozzolanic’s entry into the amended Millmerran Contract. There is no direct evidence from Mr Leon of his thinking. Mr Leon did not give evidence. Mr Clarke says that Mr Leon was willing to rely on Mr Clarke’s reasoning because Mr Leon was said to have confidence in Mr Clarke’s abilities. That may be so, but Mr Leon did not give evidence.
2671 Notwithstanding Mr Clarke’s reasoning based on his largely intuitive view of a need for the Millmerran ash at some point during the contract term (or as it might be extended), it is nevertheless plain that a substantial purpose of Mr Clarke in deciding that Pozzolanic enter into the amended contract (although not the only purpose) was a purpose of preventing a competitor from securing a commercial relationship with Millmerran Power Station and obtaining access to Millmerran ash and then entering the market for the sale of concrete grade flyash in the SEQ concrete grade flyash market in competition with Cement Australia. Ms Collins was sounding the same warning bell for the Directors. Mr Clarke gave evidence about his high regard for Mr Chalmers’s views about market developments and supply/demand matters related to sales. Mr Chalmers had warned of the effect upon sales and margins should Callide C fall to a competitor. Global Cement was in mind at the time. Mr Chalmers had also warned about the steps Neilsens were taking. Ms Collins had warned of the effect on price and margins should a competitor enter the market through an arrangement with Millmerran in the event that Pozzolanic/Cement Australia walked away from Millmerran.
2672 I do not propose to repeat all of the chronological and factual examples of these concerns otherwise set out in this Part. I have had regard to all of them. It is enough to say that based on the documents and those matters accepted by Mr Clarke and Ms Collins, that the consequences for Cement Australia of not amending and extending the Millmerran Contract, in terms of competitor entry and the spectre of rivalry based on Millmerran ash was a matter Ms Collins was particularly concerned about and felt ought to be agitated with Mr Clarke and built into the Board paper for the Directors. Ms Collins had the carriage of the development of the Board Briefing paper in the period up to the making of the decision in July 2004, until Mr Adams was retained to assume the role of re-writing the paper and looking at financial data and re-casting the paper on the preferred “justification” basis.
2673 I do not accept that the remarks of Ms Collins about a $10 price reduction for flyash and the consequences for Cement Australia’s EBIT margin in the flyash business in SEQ were simply a constructed “sensitivity” calculation of the effect upon Cement Australia’s EBIT margin if one assumed a price reduction of $10 per tonne for one of a hundred possible reasons. Ms Collins was saying in plain and unmistakeable terms to Mr Clarke that should a competitor enter (upon Pozzolanic walking away from Millmerran) the price would likely drop by $10 per tonne and the effect upon the EBIT margin in the flyash business would be significant. Ms Collins had asked Mr Chalmers for his view on the likely volumes lost at Millmerran should a competitor secure access to the ash.
2674 Mr Clarke was also astute to Boral’s potential entry at Millmerran. Mr Clarke found Global Cement’s agitations and its success at Callide “worrying”. Mr Clarke and Ms Collins expressly deny that competitor entry and the possible consequences for price and margins formed a consideration in the reasoning for deciding to amend and extend the Millmerran Contract. I do not accept their evidence on this issue as it cannot stand in the face of the documents but I do accept that each of them looking back to the events believed that to be so. However, it cannot be so when all of the evidence is considered, and in this sense Mr Clarke and Ms Collins although seeking to assist the Court’s analysis of the events, are simply confused.
2675 Mr Clarke put arrangements in place to preserve and amend the Millmerran Contract by instructing Ms Collins to sign the 28 July 2004 letter for Pozzolanic after discussing the matter with Mr Leon. Mr Clarke’s recollection of the conversation with Mr Leon is of a very brief discussion after considering, at some point, the “supply/demand balance” numbers. Mr Clarke wanted to justify the decision on the basis of forecast demand and logistics savings. There were no logistics savings made out on any logistics analysis and Tarong North ash was readily available as a supplementary source of ash for northern New South Wales (upon installation of a classifier). Cement Australia had substantial excess flyash capacity available to it at the time of the extension decision and the actual budget forecasts for sales of Millmerran ash in 2005 and 2006 were very modest indeed.
2676 A substantial purpose of Mr Clarke in Pozzolanic’s entry into the amended Millmerran Contract was that of preventing competitor entry at Millmerran and especially Boral’s entry at Millmerran. Mr Clarke says that Mr Leon was content to adopt Mr Clarke’s reasoning and his view of it. I am willing to accept that Mr Leon accepted Mr Clarke’s decision-making but I am not satisfied on the evidence up to the end of July 2004 of Mr Leon’s purpose in electing to accept Mr Clarke’s view of the Millmerran position.
2677 I consider later in these reasons the implications of Mr Leon’s election not to give evidence.
2678 The draft email sent by Sueki Tan of Mr Leon’s views suggests a purpose consistent with the preservation of Millmerran as a source of supply secured to Pozzolanic rather than others.
2679 Two things, however, need to be constantly recalled about s 46.
2680 The first is that financial power is not market power. A corporation with a strong balance sheet and substantial cashflows may have access to capital or debt or a mix of both, not available to other market participants. Its cost of capital or debt or its weighted average cost of capital and debt may enable it to enter into arrangements that would see project revenues deferred for a significant time. Such a corporation may be able to withstand fluctuations in the fortunes of a project or the failure of milestones to be reached as planned, of one kind or another. Such a corporation may have access to inter-group or parent financial facilities without the need to call on external facilities. Financial power, of course, is enabling of the capacity to make choices and adapt to changing circumstances, and in that sense, financial power confers adaptive power which may not be available to other market participants. The financial power to carry a project through a period of deferred revenues for one reason or another may be an example of such a power. However, enabling financial power of this kind is not market power.
2681 The second matter is that s 46 does not cast a prohibition upon a corporation from engaging in conduct undertaken for the purpose of preserving margins or market share or preventing a competitor from securing access to an essential input in a production process or preventing competitor entry into a market. Obviously enough, s 46 is concerned with purposes of these kinds but the prohibition operates upon “taking advantage” of “market power” “for” the relevant “purpose”. If there is either no market power subsisting in the corporation or no method of use of it (assuming the corporation enjoys a substantial degree of market power) in engaging in the conduct under challenge, s 46 is not engaged. Taking advantage of market power cannot be inferred from conduct demonstrated to have been undertaken for a purpose coincident with one or more of the purposes recited in s 46.
2682 It follows that notwithstanding that Cement Australia caused Pozzolanic and Pozzolanic Industries to enter into the amended Millmerran Contract in July 2004 for purposes that included a substantial purpose of preventing a competitor from securing access to Millmerran ash and preventing entry into the SEQ concrete grade flyash market, the question is whether in so acting for purposes that included that purpose, Cement Australia took advantage of its market power. The answer to that question involves asking whether a profit maximising corporation confronting the circumstances confronting Pozzolanic and Cement Australia in July 2004 in relation to the outworking of the Millmerran Contract, absent market power and thus operating in a workably competitive market, could have made a decision to preserve the Millmerran Contract; waive the non-compliance with the Acceptable Range Limits; and, amend it in the way Cement Australia did on 28 July 2004 leading to the letter of 30 July 2004.
2683 In answering that question, the starting point is to recognise that Pozzolanic had an executory contract on foot. There were a subsisting bundle of mutual rights and obligations between MOC/MPP and Pozzolanic/Cement Australia conferring benefits and burdens. A question had arisen between the parties as to whether the Millmerran flyash satisfied the definition of “Acceptable Range for concrete grade fly ash” which meant compliance with AS 3582.1 and the Schedule 2 Critical Limits. More particularly, a cl 2.2(b) question had arisen as to whether Millmerran flyash met that requirement and whether it could be “practically and economically converted into concrete grade flyash” (which meant compliance with AS 3582.1 and the Schedule 2 Critical Limits).
2684 One feature of those requirements was the Relative Strength Requirement of 95%. Colouration of the ash whether light or dark or variable is not part of AS 3582.1 or the Schedule 2 Critical Limits. However, MOC and Pozzolanic treated the requirement that the ash be capable of practical and economic conversion to concrete grade flyash as establishing a requirement that such conversion of the ash involved the resolution of the darkness and colour variability of the ash for the reason that concrete producers would be concerned about its use in concrete if the ash was sometimes light, sometimes dark, sometimes very dark and, in any event, highly variable. Both Pozzolanic and Cement Australia on the one hand, and MOC on the other, recognised that these colour considerations went to the question of whether in a practical and economic sense, concrete producers would be likely to accept the ash and if so, for what applications and in which areas of project activity undertaken by concrete producers.
2685 The step that Cement Australia and Pozzolanic took on 28 July 2004 was to amend the contract by extending the cl 2.2 deadlines, extend the contract by another year, delete the cl 4 “Termination” provision and adopt a new termination protocol that would operate on the footing of an assessment of the quality of the ash once tested, after processing, after the construction and operation of the classifier.
2686 Having regard to the evidence of Mr Hunt and the extensive documentation relating to the systemic and systematic ash trials in the period from June 2003 relating to the relative strength results, but more particularly the reports from August 2003 to July 2004 (for present purposes) concerning the colour variation, I am satisfied that a serious investigation (rather than a confected or cosmetic one) was being undertaken by Pozzolanic in conjunction with MOC to trial and solve the problem of a high degree of variability and significant darkness in the ash. I have read all of the extensive documentation relating to the tests and test results including the material put to Mr Hunt in cross-examination concerning the various trials and the overall testing regime. I have described some of it in these reasons. Pozzolanic was seeking advice from Professor Zhang, the University of Queensland Chemistry Department, CSIRO and Sigma. Professor Zhang’s glass phases hypothesis was being tested by CSIRO through the SEM cross-sectional analysis. MOC was adjusting the operating conditions of the burners particularly from 1 May 2004 which required further sampling and analysis. MOC was testing the operating conditions of the burners and testing coal samples. It was examining the excess oxygen issue in the burning process and undertaking tests of temperature conditions in the baghouse. It was trying to come to grips with tuning the operation of the burners to try and influence consistency in the ash and reduce variability and, particularly, darkness. Mr Clarke says that the colour issue “had been done to death” by October 2004 and the Pozzolanic ash team regarded the issue as “over” by then. At July 2004, however, the issue was under serious continuing examination. Mr Hunt accepted that the ash remained highly variable after 1 May 2004 and throughout, at least, July 2004. In fact, the analysis of the colour variability problem continued into 2006.
2687 A corporation without market power in the position of Cement Australia and Pozzolanic confronted with a problem of product quality in an industrial process application that may have rendered the product practically and economically unable to be converted into concrete grade flyash that concrete producers would take and use in the market in their projects, may well (and could have) elected to amend the supply contract to extend the period of investigation to enable a final informed view to be reached about the quality of the ash and its capacity to be practically and economically used by the major buyers. Such a corporation, without market power, may (and could have) elected to amend the Millmerran Contract on terms that extended the period of the contract by one year to provide an additional period to recoup some of the lost contractual time. Such a corporation might well have amended the termination arrangement to provide for a new date for construction of facilities and the testing of ash in the form it would emerge from the newly constructed processing (classification) facility.
2688 The evidence of Cement Australia and Pozzolanic’s testing regime and Mr Hunt’s acceptance of the scope of the problem and the reasonableness of the investigative steps undertaken by Pozzolanic, at least up until 31 July 2004 (but, in truth, beyond), together with Millmerran’s own scientific and technical work of some complexity (such as the excess oxygen analysis and the postulations of Mr Conomos reflected in his report) leads me to find that Cement Australia did not take advantage of its market power by causing Pozzolanic and Pozzolanic Industries to enter into the amended Millmerran Contract. Cement Australia’s conduct is not conduct that only a corporation with market power could have undertaken. The circumstance that Cement Australia had the financial resources to absorb or withstand a deferral in the Millmerran project revenues (at whatever threshold of sales that might have been derived had the contract been able to be implemented according to the original milestones, recognising that ultimately Cement Australia modelled its NPV and IRR calculations on sales of 20Kt per annum of Millmerran ash at $70 per tonne - $1.4M), is not the expression of market power.
2689 If, however, continuing participation in the Millmerran Contract, even assuming a successful resolution of the ash darkness and variability problem by the end of the extended period for determining finally that issue (and taking account of the operational time required to produce ash and generate cashflows), was recognised at July 2004 by Cement Australia management as simply loss making and therefore uneconomic on any view of it, a profit maximising corporation operating in a workably competitive market confronting that circumstance would be unlikely to amend the contract, deploy the capital (at that time $1.8M - $2.5M) and make the lump sum payments over the remaining period of the contract (Years 3 to 8 at $1.353M per annum amounting to $8.118M (unindexed)).
2690 The decision to enter into the amended Millmerran Contract was taken in July 2004. At that time, a number of options were examined, the preferred one being the option of building the facilities and terminating the contract after one year. That option, in the March 2005 paper, was said to reflect an NPV of $3.0M and an IRR of 33.3%. Mr Maycock thought that the analysis as at July 2004 involved a different approach of looking at the risk position Cement Australia would be in should the ash later prove to be unmarketable, and in that case, Cement Australia could remove the plant and probably retain, in Mr Maycock’s view, about half the value of the invested capital of $2.5M resulting in recoverable value of $1.26M; see the return of one year of the lump sum payments; and arrest future payments for the remaining years.
2691 I am not satisfied that a view was firmly held within Cement Australia at June/July 2004 that the contract was hopelessly uneconomic such that there could simply be no economic point in amending the milestones for determining the final quality of the ash; extending the contract; and establishing a new termination protocol based upon an assessment of the ash after the construction of processing facilities which might make the ash “practically and economically” usable as concrete grade flyash. Also, Mr Maycock considered that the avoidable cost of going ahead (if the ash ultimately proved to be unmarketable) was half the capital, the balance term payments each year of $1.35M and recoupment of one year of the former payments of $1.35M.
2692 I accept that Ms Collins gave evidence that she could not recall working out (particularly by 31 July 2004) precisely how much classified flyash Cement Australia would need to sell from Millmerran to generate “a decent NPV and IRR”. I also accept that Mr Clarke could not really elevate his own assessment above being “fairly confident” that Cement Australia would need Millmerran flyash at some point in the long term, and probably towards the end of the contract life, expecting that incumbency would carry Cement Australia into a longer term relationship after 31 December 2010 when the Millmerran ash would be required later in time. Mr Clarke regarded these assessments as being based, generally, on time frames of 10 or 20 years which, of course, was well beyond the life of this contract. Also, Ms Collins, looking back at the events, accepts that the analysis that she “could have done was not done” although she said that she believed that she had attempted to make a proper assessment at the time.
2693 At least at July 2004, I accept that, objectively viewed, over the economic life of the contract, as might be extended and varied to 31 December 2010, such a contract was not so hopelessly uneconomic that a profit maximising corporation with no market power operating in a workably competitive market could not have elected to amend the contract to allow a reasonable period of time to undertake a continuing analysis of, and finally determine (according to the work then being done on the problem), the causes of the colour variability problem and thus the practical and economic marketability of the processed Millmerran flyash, as it might emerge, from the proposed processing facilities, for sale in the market.
2694 However, I am satisfied that a substantial purpose of Mr Clarke in amending the Millmerran Contract was a purpose of hindering or preventing a rival from securing a relationship with MPP/MOC (and thus access to Millmerran unprocessed flyash) for processing for sale into the concrete grade flyash market. Mr Leon did not give evidence. I infer his evidence would not have helped Pozzolanic or Cement Australia. I accept that based on Mr Clarke’s daily interaction with Mr Leon, Mr Clarke had a proper basis for believing that Mr Leon accepted and respected Mr Clarke’s abilities and his assessment of decision-making on questions such as whether the Millmerran Contract ought to be amended or not. I find that Mr Leon gave his authority to Mr Clarke to amend the contract and instructed him to put in place the proposed changes to the particular clauses. The operative purposes on the evidence were those of Mr Clarke. The evidence does not reveal Mr Leon’s own thinking on the purpose for amending the Millmerran Contract but he instructed Mr Clarke to put the amendment in place and a substantial purpose of Mr Clarke was to substantially lessen competition in both the upstream and downstream markets.
PART 38
The second election to proceed at Millmerran; Issues in relation to Tarong and Tarong North; Aspects of the evidence of Mr White; and Aspects of the position in relation to Swanbank
The factual matters
2695 I find that the relevant events are those set out in this Part.
2696 On 23 August 2004 a Board meeting of Cement Australia was held. The agenda provides for a Managing Director’s Report by Mr Leon, a special report by Mr Blackford concerning a “2004 Forecast Update”, and a presentation of the “Cement Australia Supply Strategy” by Mr Leon together with Mr Clarke, Mr Bailey, Mr Thomas and Mr Reeve. That strategy presentation included the topic of the “Fly Ash Strategy” and “Fly Ash Development QLD & VIC”.
2697 A part of the strategy presentation concerned the Flyash Projects. As to the Millmerran classifier, the benefits of the project are said to be “secure fly ash supply in N NSW”; “defers major investment at Tarong”; and, “meets contractual obligations”. The three projects are presented with this observation for the Directors: “The flyash business will install new classification equipment at Millmerran and Callide C. Delaying these projects will risk losing the current contracts to competitors”.
2698 As to the strategy to maintain 20% reserve capacity, Mr Maycock gave evidence that there was no “rule” as such but that the business would try to have sufficient capacity either in “production or [intermediate] storage or both to cater for an unusually high demand or problems with supply” (T, p 1455, lns 31-40). Mr Maycock could not recall whether the 23 August 2004 presentation was the first occasion when a 20% extra capacity requirement emerged although Mr Maycock thought it an “unremarkable number” (T, p 1455, lns 45, 46). Mr Maycock could not recall any discussion at the Board meeting about the observation that delaying the investment at Millmerran and Callide C ran the risk of losing contracts at those stations to competitors. Mr Maycock could not recall thinking about whether there was any relationship between the identified “benefit” of installing new classification equipment at Millmerran and the avoidance of the risk of losing the contract at that station to a competitor.
2699 On 8 September 2004, Ms Collins sent an email to Mr Chalmers seeking a meeting to “map out” where Cement Australia aims to “get Millmerran ash into the market”. Mr Clarke had asked Ms Collins and Mr Chalmers to get together with the maps and concrete user locations (batching plants) and work out what was possible. Mr Chalmers said he was looking at tonnage increments of between 15Kt and 30Kt per annum. He observed that “initial work says that it won’t be easy, and has some other market ramifications”. Ms Collins and Mr Chalmers agreed to meet on 14 September 2004.
2700 Ms Collins accepted that September 2004 was the first time she had made “any attempt to come to grips with the detail of where [she] might be able to sell Millmerran ash”. Ms Collins had not done so prior to 31 July 2004 because she understood that the marketing people had in mind where they would introduce the ash. Ms Collins said that she did not have discussions with the marketing people but overheard discussions in marketing meetings that were not directed necessarily to her. That caused Ms Collins to believe that the marketing people reporting to Des Chalmers were dealing with the question. Ms Collins said that she thought it was the responsibility of Mr Chalmers to work out whether Cement Australia would be able to sell the Millmerran ash (T, p 2204, lns 1-46). Ms Collins said that Mr Clarke’s suggestion to look at the maps and user locations was the first time that he had spoken to her about working out what was possible in terms of getting the Millmerran ash into the market, so far as identifying which particular batching plants might be supplied. As to the geographic region, Mr Clarke had said to Ms Collins that the market for the ash was SEQ and northern NSW. Ms Collins accepted that she had not discussed with Mr Clarke the volumes that might be sold and she never asked that question of Mr Clarke (T, p 2205, lns 17-36).
2701 Ms Collins said she believed that Cement Australia could sell Millmerran flyash “if it was a satisfactory product but I was concerned that it might not be a satisfactory quality product and that is why I proceeded in the way I did, in the negotiations for the contract” (T, p 2207, lns 17-22). Ms Collins said that at September 2004 she believed that Cement Australia could sell Millmerran ash but she “didn’t know whether we could make it economically”. Ms Collins accepted that the first step in determining whether it could be made economically depended upon whether the colour variability problem could be overcome, and at September 2004, it had not been overcome, although Ms Collins believed that Cement Australia would be able to control “the variability through our process that we were installing” (T, p 2207, lns 25-38).
2702 The flyash strategy presentation on 14 October 2004 notes that the options for dealing with SEQ forecast demand included investing in Tarong to take up 27Kt of growth in SEQ or investing in Millmerran to take up 27Kt of growth in SEQ. Slide 10 sets out the demand graph for SEQ and shows the 80% utilisation notion as an aspect of dealing with the supply/demand issues for SEQ and NNSW. That slide says that installing capacity at either Millmerran or Tarong North would resolve the SEQ capacity issue, otherwise Cement Australia would be unable to supply the 2005 and 2006 budgets. Slide 11 says that building new classification capacity in SEQ is “an excellent investment at either location” and there were “no logistics or royalty savings brought about by either investment, merely increased volumes”. The 11 ECM members were told that the investment at Millmerran represented an NPV of $8.6M and an IRR of 57%. The Tarong North investment represented a higher NPV but a lower IRR at 51%. The two key “drivers” of either project would be demand and utilisation issues.
2703 Mr Leon took the view that Cement Australia would need to demonstrate that the “two key drivers” of the projects, sales demand and the utilisation limit of 80%-85%, were defensible. Mr Adams asked Ms Collins for help in explaining the “drivers” behind growth in north, central and SEQ and also the data for a slide explaining why 85% utilisation is the maximum.
2704 Ms Collins gave evidence that she understood there were logistic benefits arising out of an investment in Millmerran “but the net effect may well have produced [no benefit] from a modelling of the situation” and no modelling was ever undertaken (T, p 2243, lns 7-20). Ms Collins considered that her email in response to Mr Adams set out her understanding of what was happening in the markets. This email was her full response to Mr Adam’s request. Ms Collins understood Mr Adams to be saying that in examining available supply and demand only 80-85% of the ash is utilisable. As earlier mentioned, Ms Collins assumed that Mr Adams had made an assumption about utilisable capacity based upon his own assessment or experience (T, p 2244, lns 5-20; lns 28-44).
2705 Mr Zeitlyn had become the General Manager for sales and marketing for Cement Australia on 20 September 2004, taking over from Mr Clarke. Mr Zeitlyn had attended the ECM on 14 October 2004. Mr Zeitlyn could not recall reading the ash presentation at any time in 2004. He could not recall the presentation although he was present at the meeting and “listened to the discussion”. Mr Zeitlyn said that he understood, prior to the 14 October 2004 ECM, that a full strategic review was being carried out which included the question of the investment in a Millmerran classifier. Mr Zeitlyn said he knew before the end of 2004 that there was a colour variability issue with the Millmerran flyash and he understood the options being put to the ECM were to invest in Tarong North and take up 27Kt of growth in SEQ, or alternatively, to invest in Millmerran and take up that growth. Mr Zeitlyn said that he could recall discussions at the ECM along the lines that the problem with adopting the Millmerran option was that a colour variability issue made it difficult to sell Millmerran ash to anybody. Mr Zeitlyn said that, as to the merits of the Millmerran classifier, there were two main issues. The first was that Pozzolanic had a contract with Millmerran which required it to install a classifier. The second was that Millmerran gave Pozzolanic an alternative supply source to Tarong, and the view was, at that stage, that Millmerran ash would be used to supply the western regions of SEQ and down into NNSW (T, p 1766, lns 16, 17; p 1767, lns 33-37; lns 44, 45; lns 36-45; T, p 1769, lns 7-27).
2706 Mr Zeitlyn said that subsequent to the ECM of 14 October 2004 he formed a view about the merits of using Millmerran and/or Tarong North flyash. His view was that it was “preferable to have a separate source – a second source”. Mr Zeitlyn regarded Tarong and Tarong North as one contractual source, and Millmerran as a separate source. Although Tarong North was a physically separate power station and represented an additional source of supply to Tarong ash from January 2005 (with Tarong North ash increasing), Mr Zeitlyn linked Tarong and Tarong North on the footing that if Pozzolanic lost the contract, it would presumably lose access to both sources. Mr Zeitlyn said that he took steps to find out when the Tarong and Millmerran contracts would expire and although he cannot say when he formed his view, he nevertheless formed the view that Cement Australia needed the full extent of the capacity of one of those power stations in addition to the supply from Swanbank in the short-term, and in the long-term Cement Australia would need more ash than that (T, p 1770, lns 34-44; p 1771, lns 1-3). Mr Zeitlyn said that Cement Australia would need the full extent of either Tarong/Tarong North or Millmerran to meet the existing supply, and in order to meet growth, Cement Australia would need capacity beyond one of them.
2707 As to the impact of colour variability Mr Zeitlyn had this to say.
2708 At 14 October 2004, he was unclear about whether colour variability was a long-term issue or not. He was briefed about the colour variability problems. In the period between October 2004 and April 2005 Mr Zeitlyn had become aware of the nature and effect of the variability problem of Millmerran ash. Moreover, Mr Zeitlyn had made attempts to determine the effect of the problem on Cement Australia’s capacity to economically sell Millmerran ash. Mr Adams had responsibility for the preparation of the Millmerran classifier Capex Request which was to be presented by Mr Bailey to the Board, although Mr Zeitlyn said he would have reviewed it as would Mr Bailey and Mr Leon. Mr Zeitlyn accepted that he would have approved the Capex Request document for presentation to the Board before it was presented (T, p 1771, lns 14-45) because the Capex Request fell within the scope of his authority. Mr Zeitlyn accepted that he was aware that the colour variability of the Millmerran ash was “a problem that if it was not resolved, meant that it would be uneconomic” (T, p 1772, lns 9, 10). Mr Zeitlyn said that, by April 2005, he would have had advice that the colour variability problem, may or may not, be able to be resolved, and accepted that it was reasonable to say that, by April 2005, he had no basis to expect that the colour variability problem could be resolved so as to make the Millmerran flyash economic.
2709 Mr Zeitlyn also accepted that at the time he approved the Capex Request for the Millmerran classifier, he did not regard the Millmerran ash as being a useful source of ash to meet future demand, unless the colour variability issue was resolved. Mr Zeitlyn also accepted that by April 2005 he had no reason to think that the colour variability problem would be solved. Mr Zeitlyn also accepted that by April 2005 he did not hold the view that building a classifier was an appropriate way for Cement Australia to meet short-term demand shortages. Mr Zeitlyn also accepted that at no time after he approved Mr Adams’s Capex Request for submission of the Board, did he hold the view that building a classifier at Millmerran was an appropriate way of attempting to meet future demand, unless the colour variability problem could have been revised (by which I assume he means resolved): (T, p 1772, lns 12-46; p 1773, lns 1, 2).
2710 Mr Zeitlyn also said that he had been led to believe on a number of occasions that Millmerran (MOC) was of the view that the colour variability in the ash could be resolved and that members of the flyash team thought that it was possible that the colour variability problem could be resolved (T, p 1773, lns 4-8). Mr Zeitlyn recalled that Mr White had told him that MOC considered that the colour variability problem in the ash could be resolved. Mr Zeitlyn’s general recollection of Mr White’s view was “probably” that Mr White disagreed with MOC’s view, and Mr Zeitlyn said he was more inclined to take Mr White’s view than MOC’s view. In the result, Mr Zeitlyn accepted that it was fair to say that throughout 2005 the view he accepted on this topic was that it was “unlikely” that the colour variation problem could be resolved so as to make Millmerran ash a saleable commodity (T, p 1773, lns 10-35).
2711 On 22 October 2004, the Directors of Cement Australia group met. The Directors were Mr Maycock, Mr Clough, Mr Cadzow, Ms de Hayes and Mr Leon. Other alternate directors and members of senior management were present. This was Ms de Hayes’s first Board meeting. The Managing Director’s Board Report for the meeting (September 2004) observes that Global Cement continued to truck ash from Callide C and began progressing discussions with station management about a processing installation. Nucon is said to be trucking ash from Tarong North to Sunstate. The Board report says that management is concerned at the prospect of Transpacific (Peabody) re-entering the flyash markets in central Queensland. That company is said to be collecting flyash from a number of non-power station sources.
2712 The Board Report attaches a document “Cement Australia Flyash Strategy”. The Minutes of the Directors Meeting note that Mr Adams and Mr Thomas presented the report which Directors discussed. Mr Maycock accepted that Mr Adams was at least one of the two people who made the presentation that day. Slide 3 says that SEQ flyash demand is forecast to grow from 380Kt to 420Kt by 2006. North Queensland demand would grow from 128Kt to 156Kt and the Victorian forecast was from 135Kt to 180Kt. The slide says that Cement Australia will run out of flyash capacity in north and south Queensland in 2005. As to SEQ, the earlier options are re-stated of investing in Tarong and taking up 27Kt of SEQ growth, or investing in Millmerran to achieve the same result. Slide 10, like the earlier version, sets out a graph of current capacity and proposed capacity reflecting the 20% uplift notion earlier mentioned. The slide recites that installing capacity at either Millmerran or Tarong North would resolve the capacity issue in SEQ, otherwise Cement Australia would be unable to supply the 2005 and 2006 budgets. Slide 11 addresses the SEQ classifier economics repeating, as the earlier version did, that investing in classification capacity in SEQ is an “excellent investment at either location” reflecting a volume uplift in either case of 27Kt per annum, cashflow uplift, positive NPV and an IRR of 51% and 57% in the case of Tarong North and Millmerran respectively.
2713 The demand growth of 27Kt per annum is said to reflect the “increased building activity in SEQ”. The SEQ volume uplift of 40Kt in 2005 and 2006 is said to be met as to 13Kt by existing power stations and as to 27Kt by the new classifier. Slide 11 also notes that a “sensitivity analysis” has confirmed that even if the demand growth in SEQ is only 50% of the 2005/6 budget forecasts, the Millmerran investment is still financially attractive. Like the earlier version of the flyash strategy presentation, the “options” Slide 12 says that management recommends an investment at Millmerran which will take advantage of the current $1.3M take or pay contract in place, and may deter other flyash investors.
2714 Slide 18 tells the Directors that SEQ growth could drop from 40Kt per annum to 16Kt per annum and pricing to 65% of current prices before the Millmerran classifier investment begins to look unattractive. Slide 18, in effect, represents the sensitivity analysis mentioned at Slide 11. The analysis starts with a pricing base case, a price drop of 10%, a price drop of 20% and a price drop of 35%. It sets out the NPV and the IRR in each of those scenarios. It also sets out the base case for volume growth and five scenarios of growth from 20% to 60% less than the base case growth.
2715 Mr Maycock could not recall any discussion at the Board meeting about the appropriateness of the SEQ options of investing in either Tarong or Millmerran to take up 27Kt of annual growth. Nor could Mr Maycock recall a discussion of the Slide 10 suggestion that installing capacity at either Millmerran or Tarong North would resolve the capacity issue, otherwise Cement Australia would not be able to supply the 2005/2006 budgets. Mr Maycock could not recall any discussion about the status of the colour variability issue concerning the Millmerran ash, although Mr Maycock accepted, hypothetically, that if colour variability rendered the ash unacceptable to concrete producers, the Millmerran option would likely be a “false option”. Mr Maycock thought that the Board would have regarded or assumed that both options were “valid operational options”. Mr Maycock thought the assumption was that the Millmerran ash had a reasonable prospect of becoming acceptable to concrete producers (T, p 1462, lns 1-4). Mr Maycock expected that a financial analysis would normally form part of the “Capital Expenditure Request”.
2716 In the period to the end of 2004, Mr Clarke said that nothing had happened to change Cement Australia’s view of the state of the SEQ flyash market except that Cement Australia had probably underestimated the growth. Mr Chalmers was the man tasked with demand forecasts although the task of assessing economic indicators, forecasts of building construction activity, and the like, was undertaken centrally by Mr Clarke and Mr Blackford who undertook some economic modelling based on ABS statistics and data from BIS Shrapnel. That work would be overlaid with Mr Chalmers’ knowledge of particular projects. It was a “top-down, bottom-up type analysis” (T, p 1571, ln 43). Mr Clarke principally relied upon Mr Chalmers to give him advice about these issues as “he was the most knowledgeable guy in the business”. Mr Clarke regarded Mr Chalmers’ view as being one of “confidence that the colour variability issue could be overcome” but no “assurances” could be given. Mr Clarke understood Mr Chalmers to be saying that if the colour problem could not be resolved or managed, the ash was still going to be usable in some respects. Mr Clarke said that Mr Chalmers had agreed with him that the ash would be usable but probably not in “high tech concrete” which would rule out use of the ash in some of the batching plants of the major customers.
2717 On 26 October 2004, a strategy meeting arranged by Ms Collins took place. The risks identified included competitive price risk, entrepreneurial power companies, loss of Boral as a customer. The competition was seen to be coming from five sources: Bayswater (“low”), Global, Nucon, Peabody and Wagner’s. The issues included a discussion of an “exit strategy” for Millmerran including “tactical management versus competition”. It was at this meeting that Ms Collins made her hand-written notes which recognised that Pozzolanic enjoyed a market share of 96% of the Queensland flyash market. The items for discussion at the meeting also included a recognition of Pozzolanic’s previous business goals of attempting to “secure all known sources in order to maintain margin and volume”. Ms Collins recalled a discussion of that topic which she described as the “earlier goal of Pozzolanic” at the origins of the company when it belonged to Mr Peabody some 15 to 30 years earlier (T, p 2229, lns 21-36). The point of the discussion of that topic, according to Ms Collins, was to explain how Pozzolanic came to be where it is in the market, for the benefit of Mr Zeitlyn. Ms Collins did not accept that the discussion at the meeting concerned a current goal of trying to secure all known sources of flyash in order to maintain Pozzolanic’s (current) margin and volume.
2718 On 1 November 2004, Mr Zeitlyn sent an email to Mr Wrigley, a commercial manager attached to sales and marketing. Mr Zeitlyn asked Mr Wrigley to produce additional slides for the budget 2005 presentation directed to a summary of the market share position, customer mix and product mix. Slide 3 set out the Queensland flyash sales to end users for 2003 actual, 2004 forecast and the 2005 and 2006 budget forecasts. The 2003 actual was 441Kt and the forecast for 2004 was 467Kt (up 26Kt). The 2005 and 2006 figures were 491Kt (up 24Kt) and 514Kt (up 23Kt). Slide 18 sets out the risks to the budget and the mitigation steps that might be taken. One risk was a loss of independent supply contracts (at 150Kt) with mitigation directed to managing pricing versus MFN implications in vulnerable markets. Another risk was “price/volume impact of Flyash competition in QLD” and the mitigation step was to “implement flyash source strategy”. Marketing would be responsible for that action to be completed in January 2005.
2719 On 11 November 2004, Mr Adams asked Mr Wrigley by email to send him a spreadsheet setting out the flyash volumes supplied by Pozzolanic by customer for Queensland and NNSW. Mr Adams said that he urgently needed the information to “demonstrate the growth to our Board to justify the Millmerran and Callide investments”. On that day, Mr Wrigley sent an extensive spreadsheet to Mr Adams setting out that information by buyer by batching plant. The spreadsheet shows the 2005 and 2006 projections at 491Kt and 514Kt respectively. Mr Wrigley directed Mr Adams’s attention to the summary at the bottom of the Table. That summary shows this information.
| Power Station | 2005 | 2006 |
| Tarong | 304,600 | 320,100 |
| Swanbank | 59,000 | 62,000 |
| Millmerran | 10,000 | 10,000 |
| North NSW Ex Tarong | 4,838 | 4,548 |
| Gladstone | 117,400 | 121,100 |
2720 In the July/August final version of the “Board Briefing Queensland Fly Ash Development Plan”, Mr Adams had formulated a forecast for 2003 to 2008 (earlier mentioned) which, as to south Queensland and NNSW, suggested that Tarong and Tarong North sales in 2005, 2006, 2007 and 2008 would be 345Kt, 356Kt, 351Kt and 329Kt respectively. The current capacity at 2004 of Tarong was said to be 350Kt, with 315Kt in the each of the years 2004 to 2008 representing 90% of the then current capacity of Tarong.
2721 The current capacity of Tarong North was said to be 50Kt and in 2004 Pozzolanic was utilising only 10%, largely because the ash would not become properly available until January 2005 in which event 30Kt of sales was forecast for 2005. The Millmerran projections for 2005 to 2008 in Mr Adams’ forecast in the Board Briefing Paper were 25Kt, 40Kt, 45Kt and 45Kt, although in the Board presentation the Millmerran classifier was said to be necessary to supply 27 Kt of growth in the SEQ market.
2722 The October 2004 Managing Director’s Report for the November Board meeting notes that sales of flyash were below budget in October with YTD volumes slightly above budget. The report notes that the recent trend of “weaker sales continued in Pozzolanic’s biggest markets of Victoria and SEQ (under budget by 7% and 6% respectively)”. The report also notes that changes in Swanbank ash quality was observed again during the month coinciding with increased load output from the station, resulting in increased LOI. The report notes that Global Cement continued to truck ash from Callide C but “no further flyash [was] taken by competitors from Tarong North where Pozzolanic increased its trucking of ash to supplement the supply from Tarong Energy”.
2723 On 16 November 2004, Ms Collins sent an email to someone who is not identified in the header to the email. The topic is described as “Tarong North” and simply tells the addressee “do not keep this around”. Ms Collins’s email forwards an email, to the unidentified addressee, previously sent by her to Mr Zeitlyn, copied to Mr Clarke. At this point, Mr Zeitlyn had become Ms Collins’s direct superior. Ms Collins could not recall who the addressee was and thought it must have been sent to someone outside the normal group for communications on the relevant topic. The topic of the email was advice from the power station that Tarong North had commissioned a person to investigate the total ash market and advise Tarong North on how, and whether, they could secure disposal of a larger volume of ash. Mr Franklin on behalf of the power station said that if Tarong North could move more ash without jeopardising the Tarong volumes, a tender would be called for the Tarong North ash. Mr Franklin said he would know whether that path would be pursued, within a number of weeks. Ms Collins said this:
It is unclear and he could not explain how this fits in with our existing contract with Tarong to take any or all of Tarong North and Tarong ash. In it there is a requirement to have plant at Tarong North, to extract at least the equivalent of Zone 1 at Tarong, and any difference in opinion on the extent of the plant to be installed is to be negotiated in good faith. We have to date understood that our extraction and transport arrangements have met their requirements. …
There appear to be two steps necessary to respond if/when this tender arrangement eventuates: understanding our legal position as a result of our existing contract, and investigating what we can do in the market to move more Tarong ash in the next two years.
[emphasis added]
2724 Mr Zeitlyn was asked about this email from Ms Collins. Mr Zeitlyn’s view as to the flyash strategy was that Cement Australia ought to “have access to all sources of supply in South East Queensland”, and as he understood it that extended to “first access to all sources of supply” (T, p 1803, lns 21-32), although Mr Zeitlyn did not believe that having first access to all sources of SEQ ash supply meant that it became “commercially uneconomic” for a competitor to have second access to those sources of supply (T, p 1803, lns 34-36).
2725 On 8 December 2004, Ms Collins sent a letter to Mr Hunt referring to an October presentation Pozzolanic had made to Millmerran concerning the location of the Pozzolanic ash plant. On 13 January 2005, MOC responded and approved the proposed location of the facilities as detailed in identified drawings on condition that facilities would meet all the requirements of the Ash Purchase Agreement. MOC (Mr Gamble) requested Pozzolanic to “supply facility design details, and a timetable for construction”.
2726 On 13 December 2004, an ECM meeting occurred. The Minutes of the November 2004 ECM meeting note that the flyash business “needed an increased business focus instead of its current operational focus”. Mr Zeitlyn and Mr Leon discussed the leadership of the flyash business and the need for a more broadly based business leader rather than an operational person. This led to the replacement of Ms Collins with Mr White. The ECM papers include the November 2004 Managing Director’s Report. Under “Projects Status Report – October 2004”, the Millmerran classifier is said to be subject to an assessment of the flyash strategy, with data still being collected. Mr Zeitlyn is said to be responsible for the Expenditure Request submission to the Board with a target approval of February 2005. YTD flyash sales for SEQ were 9.8% above budget. In NNSW, YTD sales were 4.1% above budget.
2727 Mr Christopher White swore two affidavits in the proceeding: Ex-74, sworn 25 July 2010 and Ex-75, sworn 4 April 2011. Mr White is the Business Manager of Fly Ash for Cement Australia and has held that position since January 2007. In the period 1 January 2005 to 31 December 2006, Mr White held the position of Business Manager Fly Ash, Lime, Off-White Cement, for Cement Australia. Prior to that appointment, Mr White had had no responsibility for the Pozzolanic flyash business although he had previously worked for Cement Australia. In his role from 1 January 2005, Mr White assumed responsibility for the Pozzolanic flyash business in addition to his existing responsibilities at that time. From January 2005 to 1 October 2009, Mr White reported to Mr Zeitlyn.
2728 From January 2005 until the present, the following people reported to Mr White: Mr Ken Rice, Manager, responsible for operational aspects of the flyash business at Tarong and Tarong North Power Stations until April 2009; Mr Postle, Manager, responsible for operational aspects of the flyash business based at Gladstone and Callide Power Stations; Mr Blackburn, Manager Ash Development and Swanbank, responsible for the operational aspects of the flyash business based at Swanbank; Mr Druitt, Engineering Manager; Ms Boman, Fly Ash Accountant (1 February 2005 to 1 December 2007) and Mr Short, Mr Collins and Ms Wilson. Mr White says in his first affidavit (Ex-74) that he is uncertain of the extent to which his recollection of events is independent or based upon a more recent review of the documents over the period in issue, or both. I have had regard to all of the provisions of Mr White’s affidavits.
2729 Mr White has never been responsible for selling flyash to customers. Those matters were, at all relevant times, the responsibility of Mr Zeitlyn. Mr White, however, was aware from shortly after early 2005 that Cement Australia had “most favoured nation” (“MFN”) provisions in its arrangements with Hanson and Rinker which began with cement supplies (but also applied to flyash during 2005 and 2006). The MFN arrangement concerned “a formula for working out a price at a particular point which had to be as good, or better, than other prices available to other people in the market at that particular location” [emphasis added] (T, p 2371, lns 36-45).
2730 On 14 December 2004, Mr Adams sent an email to Mr Chalmers concerning his flyash strategy document. Mr Adams asked for Mr Chalmers’s help in “segregating the flyash customers” into those that wanted to have “quality ash” and those that “did not really care about quality”, and in particular “variability in the carbon” content of the ash. Mr Adams also sought help in working out which customers were the most profitable customers, which he said would mostly be determined by an assessment of volume and prices, transport costs, royalties and power station costs.
2731 On 16 December 2004, Mr Adams sent the flyash strategy presentation to Mr Chalmers and that afternoon Mr Chalmers responded by email, critical of the analysis, in which he said this:
I have had a read of the strategy document. I am not sure where to start on comments. I think we need to get face to face or at least discuss this over the phone. While I understand that this is a hypothesis development exercise, I think that the basic information used in the development work so far has been missing either or both a reasonable understanding of the fly ash situation in Qld or the history of the industry so far.
Fly ash has successfully traded on a “smoke and mirrors” situation for decades in which (a) Pozzolanic controlled the fly ash sources in the state, and people thought they had no access (and in some cases didn’t), and (b) there was not a lot of knowledge in the concrete industry about how ash worked (in detail).
The smokescreen is being eroded by natural attrition and by problematic pricing policies (Qld and NSW) of the last few years, as well as efforts of a couple of people to break the barriers. The concrete market saturation by the product, and the increasing availability of fly ash have both helped to accelerate the erosion of the previous m………..[monopoly] position.
I believe a better description of the basics is necessary to properly look at future options.
The “customer segregation” model has little merit in my view. Much of the info you are seeking is known, and I don’t believe we should be doing segment analyses and profitability analyses until the scoping has been reviewed.
Hate to be a killjoy, but will call you to explain more in detail next week.
2732 On 29 December 2004, Mr White who had recently assumed the role from Ms Collins, sent his Agenda for a “Fly Ash Action Meeting” on 10 January 2005 to the six Senior Managers reporting to him including Mr Adams and Mr Chalmers, copied to Mr Clarke. The meeting would discuss Pozzolanic’s strategy and response in the context of Tarong North suggesting that within a few weeks it would allow a competitor to take ash. Mr White set out his view in the Agenda commentary, in fairly frank terms, by saying that Pozzolanic (and Cement Australia) had “probably moved past the point of no return in terms of maintaining the historical control of ash in Queensland that has generated such sustained high levels of profitability” [emphasis added].
2733 The content of this Agenda was based on discussions Mr White had had with Mr Blackburn, Mr Chalmers, Mr Rice, Mr Adams, Mr Klose, Mr Postle and Mr Druitt but not Ms Sandra Collins (T, p 2372, lns 18-26). Mr White’s discussions with these Senior Managers led him to understand that historically Cement Australia (or QCL) “had control of ash in Queensland … in terms of being essentially the sole supplier” (T, p 2373, lns 5-8) or the “only significant supplier of ash in the general market” (T, p 2369, lns 15-16) and the “dominant [supplier] in South East Queensland” (T, p 2369, lns 30-31). Mr White also understood from these discussions that other parties were going to be supplied ash from power stations, particularly Tarong (T, p 2374, lns 10-16) including Tarong North (T, p 2374, lns 19-20).
2734 Mr White suggested in his Agenda document that a new model was necessary, better suited to the emerging new environment. In the “Future options” part of the Agenda, Mr White identifies one option as “Managing competitors – new ideas about controlling access to ash”. Mr White’s explanation of that notion reflects a recurring explanation in his evidence about physical access to ash. Mr White said (T, p 2374, lns 38-46; p 2375, lns 1-23) that the control of access was one of the critical things that Pozzolanic had tried to achieve where it established itself at a power station.
2735 A supplier might supply ash from a power station such as Tarong North but if the supplier did not have physical control of the load-out facilities (silo etc), they would simply have a “supply of ash” but no “control” over maintaining the proper operational condition of the facilities upon which supply was dependent. If, however, Pozzolanic was connected to the hoppers (where the ash collects assuming that the station is operating) there would be nothing outside Pozzolanic’s control affecting access to the ash. However, if Pozzolanic’s competitor is also connected to the hoppers, Pozzolanic’s control of access to ash is either diluted or removed. Mr White gave evidence that, in that sense, Pozzolanic wanted to be able to “manage” its competitors and look at “new ways” of controlling how much ash competitors might access.
2736 However, Mr White did not accept that these considerations were directed to limiting the ability of competitors to compete. Rather, the consideration was that the more people that were taking ash from the hoppers, the less security and reliability of supply each party would enjoy. Pozzolanic sought to maintain “as much control over that supply as possible” to support its business.
2737 The objectives for the 10 January 2005 meeting involved reviewing the history of the flyash business, defining Cement Australia’s current position, looking at the options for the next two years, determining a preferred option and preparing the outline of an implementation plan. The strategic goals set out in the document were said to be: secure revenue/profitability and growth opportunities; strengthen Pozzolanic’s hold on the power stations; increase competitor barriers to entry; and ensure that the three big customers were tied to Pozzolanic/Cement Australia in the long-term. The memorandum talks about “cluster issues” and says that the SEQ cluster is driven by Tarong as the (SEQ) flyash “source”, and Gold Coast, Brisbane and the Sunshine Coast were seen as “markets”. Cluster issue 1 was concerned with competitor access to Tarong North which was perceived to be an issue due to Tarong North’s dissatisfaction with Pozzolanic’s commitment to that point, and the solution or option was seen as installing equipment and increasing off-take from Tarong North. Another issue was said to be “Tarong plant capacity” and back-up caused by insufficient ash for daily requirements, short periods to stock-out with unit failure. Installed equipment would solve that problem. Another issue was “competitor access to Swanbank” and that problem would be solved by Pozzolanic “committing to take most of the Swanbank ash”. The fifth issue was seen as “limited growth in concrete market with saturation achieved for most flyash applications”. The option or solution to that problem was to “secure non-concrete applications”. The sixth issue was the “need to place Millmerran ash” due to “plant being constructed but ash quality problems” existed. The options were to either “abandon Millmerran” or sell [the ash] as a niche product”.
2738 Mr White proposed a solution to the SEQ cluster issues. He put his proposal in these terms:
This solution is one of many – it is a starting point for analysis and represents a low risk and low implementation costs.
• Remove Swanbank ash from concrete market
Problem. The differential in Swanbank/Tarong performance in concrete testing has reached a level where Swanbank is difficult to sell and the situation is getting worse.
Solution. 35kt to Sunstate as mineral filler, 45kt to Bulwer as mineral filler, 15kt for FAB [fly ash blend]. No concrete sales.
CAPEX.(est) $500k for ash sourcing equipment, silo.
• Install classifier at Tarong North
Problem. Taking Swanbank ash from the market will require an additional 40kt from Tarong, which is already at capacity with no real back-up. CA has a contractual obligation to install plant at Tarong North.
Solution. Install a classifier and pumping system to add product to current Tarong silo pack.
CAPEX (est) $1.5m for sourcing plant, classifier and transfer equipment.
• Market Millmerran as a niche product
Problem – Need to sell ash from Millmerran but Swanbank strategy removes original sales targets
Solution – Use Millmerran against NSW imports as [run-of-station] or low grade (variable colour) product targeted to Nucon etc. Use as secondary bottom ash source.
[original emphasis]
2739 Mr White’s conclusion arising out of this formulation was put in these terms:
This option provides one consistent high quality ash in SEQ, satisfies Swanbank with a low level of CAPEX, satisfies Tarong North in a way which strengthens our hold on them and provides a limited, quarantined opportunity for Millmerran. …
[original emphasis]
2740 As to “customer agreements/competitors”, Mr White noted that the key “sales exposure” for the ash business in Queensland was supply to Boral and the key “price exposure” was the MFN arrangement. Mr White thought that if Boral could be held to a five year or more supply agreement, then the volumes of ash available in the market would likely limit potential competitors to “run of station type ash sourcing installations”. Mr White thought that since the power stations were reluctant to impose take or pay obligations on competitors, Pozzolanic should ensure that royalties are at very high rates for the initial tonnes in future agreements and then insist that those rates apply to all takers of ash. A series of actions were identified with topics allocated to individuals. Mr Blackburn was allocated the action of continuing regular Millmerran testing with the focus on colour/LOI/fineness variability.
2741 On 6 January 2005, Mr Adams (Strategy and Business Development Manager), sent an email to Mr White attaching a copy of his slides in relation to the “Cement Australia Flyash Analysis” summarising his analysis. Mr Adams put his conclusion about the analysis in this way:
It appears to be telling us that Tarong is really the main game in fly ash and ensuring that we are the only player (or at least have a preferential pricing arrangement) is key. The issue at Callide with Global is far less important and should not distract us too much at present. I am waiting for SEQ power station quality data from David Farah, which will help us to understand the relevance of Millmerran, however it is clear (I think) that the priority should be to keep Tarong happy rather than keeping Millmerran happy. This is due to an immediate threat to our margins at Tarong. The threat from Millmerran is at least one step removed due to the potential for quality issues. ..
[emphasis added]
2742 In the presentation attached to the email to Mr White, Mr Adams says at Slide 5 that 70% of Pozzolanic’s margin in the flyash business is generated in the SEQ region. The slide graphs the profitability based upon the 2005 Pozzolanic budget. Slide 6 identifies the “at risk” volume in SEQ resulting in $2.7M in margin based on the 2005 budget. Slide 9 says that Tarong power station generates 64% of Pozzolanic’s margin in the Queensland flyash business before the allocation of corporate expenses (head office and other such allocations). In analysing the costs competitors might incur, the slide at Volume 17, Tab 18 (17-300), suggests that on a like for like royalty basis, Nucon would not be profitable in selling flyash out of Tarong based on 30Kt per annum due to a minimum royalty payment of $2.6M. Mr Adams observes that Tarong would be unlikely to price “on a fair sliding scale basis”. This view is consistent with Mr White’s view on 29 December 2004 that power stations would be reluctant to impose take or pay obligations on competitors. Mr Adams notes (at 17-301) that flyash is fully priced in SEQ relative to the cement price although flyash is under-priced, relative to cement, in NNSW and central Queensland.
2743 Mr White gave evidence that his impression of the analysis by Mr Adams was that many of the assumptions and statements in it were “unfiltered”, “overstated” and “not accurate”, especially the notion at Slide 2 that because the Queensland and Victorian markets only use 11% or 12% of the ash produced in Queensland, there was “a vast lake of ash waiting to be tapped” whereas extraction of ash was a function of infrastructure capacity at each station, which varied (T, p 2375, lns 35-47). Mr White accepted, however, that supply had exceeded demand for a long time (T, p 2376, lns 3-5) and that at the Tarong Power Station, Pozzolanic had first rights to the flyash (T, p 2376, lns 12-13). Mr White considered that a third party could install a classifier at Tarong and negotiate access to ash with TEC and Pozzolanic as a lot of ash “wasn’t used” and, of that ash, a large volume of it was suitable for classification (T, p 2376, lns 33-35).
2744 On 7 January 2005, Mr Adams asked Mr Chalmers to tell him the flyash competitors in Queensland; which power stations they sourced ash from; and the volumes taken. Mr Chalmers advised that the annual ash usage in Queensland, not controlled by Pozzolanic, was this: Global Cement was offering Callide flyash to a few Brisbane customers on a back-haul basis; if Boral is offered a good price for one of its Brisbane plants by Global, Boral would probably “put the weight on us for a price reduction which would flow on to the shareholders”; as to Bayswater ash the volumes were Nucon (at the Gold Coast) approximately 10-12Kt; Sunmix (in Brisbane and Beaudesert) approximately 5Kt; Ezymix (at Toowoomba) approximately 3-4Kt; HyTec (at Brisbane and the Sunshine Coast) approximately 12Kt; and Wagners (at Toowoomba) approximately 5-6Kt.
2745 On 12 January 2005, Mr White sent an email to Mr Adams concerning a presentation for an “integration meeting” the following Friday. Mr White had taken the slides prepared by Mr Adams addressing the numerical analysis of the flyash business and added some slides of his own (Slides 7 to 11) rather than modifying Mr Adams’s presentation. There were 12 slides in all. Mr White could not recall whether the integration meeting ultimately occurred (T, p 2379, lns 1-6; lns 15-17; lns 29-32). In the email of 12 January 2005, Mr White encouraged Mr Adams to focus, in terms of scenarios for the flyash business, on “the dichotomy of some how maintaining the status quo with maybe a bit of leakage at the edges verses the low price situation”, and a part of that status quo involved the “access to ash” notion earlier described (T, p 2379, lns 45-46; p 2380, lns 1-2).
2746 The flyash analysis of 12 January 2005 notes (at Slide 2) that Cement Australia supplied 95% of the Queensland flyash market generating an EBIT of approximately $21.00 per tonne. However, a “complication” had emerged with a number of small competitors recently entering the SEQ and Central Queensland markets. One feature of that complication was that competitors might introduce lower prices for Bayswater ash, Callide ash or Comalco ash which could affect Cement Australia’s prices for concrete grade flyash due to the MFN arrangements, for 80% of Cement Australia’s customers, unless the ash could be distinguished or differentiated in some way.
2747 A particular complication was seen as Tarong carrying out a market study with Nucon which would likely result in a supply contract with Nucon by mid to late January 2005. Another complication was the over-supply of concrete grade flyash available in Queensland with only 600Kt per annum out of a potential 3,000Kt per annum being used in concrete and the question for management’s analysis was, how would Cement Australia maintain its volume sales and margins in the face of new competition, so far as the flyash analyses was concerned.
2748 Mr White agreed with these elements of Slide 2 with the “possible exception” of the over-supply point measured as only 600Kt per annum used in concrete grade flyash out of a potential of 3,000Kt per annum (T, p 2380, lns 9-10). The presentation was to be made by Mr White. It was his presentation although he gave evidence that he wanted to preserve those aspects of it prepared by Mr Adams (T, p 2380, lns 26-47). Mr White gave evidence that, at this point, he disagreed with the notion that there was an over-supply of concrete grade flyash in Queensland because the notion of “oversupply” suggested, wrongly, a capacity to presently supply in excess of demand. Mr White was content to retain Slides 3 and 4 as prepared by Mr Adams on the footing that they were a “valid point of view”, although not Mr White’s view (T, p 2381, lns 32-33). Those slides emphasised that only 11% of Queensland produced ash was used and that Tarong accounted for 64% ($14M) of Cement Australia’s “pre-corporate [cost] allocation margin” in the Queensland flyash market.
2749 Pricing in SEQ was said, in the analysis, to be high enough to allow Nucon to economically import flyash from Bayswater despite the 800 kilometre distance involved (Slides 5 and 6). Mr White accepted these statements to be true having regard to Nucon’s activity of self supply (T, p 2382, ln 1; lns 20-25). In other words, the analysis was suggesting that Cement Australia had “priced into” the SEQ market contestable ash that rationally could never have entered the market (due to transport costs) but for Cement Australia’s delivered pricing premium derived from its control of 95% of the sales in the market.
2750 Cement Australia was said to control 80% of the Queensland volume through long term contracts with major customers which Mr White accepted to be a true statement of the position (T, p 2382, lns 15-18). Mr White accepted that Tarong was seen as the main generator of Cement Australia’s EBIT (Slide 6). Mr White accepted that prices charged for flyash by Cement Australia at Gold Coast batching plants at some stage became cheaper than prices charged at Brisbane batching plants notwithstanding that transportation costs would generally be expected to have made Gold Coast prices higher than Brisbane prices. Mr White gave evidence that he understood that competition from Bayswater ash being trucked 800 kilometres to SEQ, caused Cement Australia prices on the Gold Coast to be lower than its prices in Brisbane (T, p 2383, lns 1-13).
2751 As to margins, Mr White did not accept that margins were “at very high risk” (Slide 6) although they were at “some risk” on the footing that other parties might establish supply and offer lower prices than Pozzolanic with the expected result that “probably” Pozzolanic’s prices would have to fall, either because of the MFN provisions or simply because Pozzolanic wanted to win the business (T, p 2384, lns 6-17). The risk Mr White perceived in January 2005 was that someone might become an effective competitor in SEQ to Pozzolanic (T, p 2384, lns 23-25) by obtaining a source of ash in SEQ or elsewhere (T, p 2384, lns 27-30) with the risk that Cement Australia’s margins might fall as prices fell (T, p 2384, lns 32-35). Mr White’s assessment was that Cement Australia remained the largest seller of concrete grade flyash in Queensland. It was the only established operator and its relationships with the power stations were mixed (Slide 7).
2752 By Slide 8, Mr White offered two possible scenarios. The first scenario was to “attempt to maintain control through relationships and partnering with the power stations” which included control of access to flyash from power stations by potential competitors (T, p 2385, lns 24-26) and utilising the broader business offering of Pozzolanic (T, p 2385, lns 21-22) including non-concrete grade applications and research and development opportunities. Mr White gave evidence that Pozzolanic wanted to maintain control of access at the power stations “we needed to get ash from” (T, p 2385, lns 42-43).
2753 The second scenario was to accept price reductions as inevitable and protect margins by consolidating activities on the lowest cost power stations using volume purchases as a negotiating tool. This option at January 2005 involved only having activities at large volume sources rather than a broader footprint across all sources including minimal off-take situations (T, p 2386, lns 40-44) and, so far as SEQ was concerned, would definitely involve Pozzolanic pulling out of Millmerran (T, p 2387, lns 18-19) and focusing on Tarong and Swanbank (T, p 2387, lns 21-24; lns 31-32). It also involved accepting that prices would fall and therefore costs must be lowered (T, p 2390, lns 17-18). It would result in a loss of margin to some degree (T, p 2390, lns 23-26). Mr White accepted that Cement Australia giving up its presence at Millmerran would give rise to the potential of competitor activity at the station which would have an effect on market prices in SEQ (T, p 2388, lns 34-36). Mr White understood, at this time (January 2005), the Millmerran Agreement to be non-exclusive (T, p 2388, lns 46-47).
2754 Mr White was asked whether Pozzolanic’s installation of a classifier at Millmerran, as first off-taker, would make it practically very unattractive for a second off-taker to build their own classifier and stand behind Pozzolanic. Mr White said that such an outcome would depend upon the size of the classifier and the volume of ash it would require for processing.
2755 Mr White accepted that the “critical” aspect in supplying concrete grade flyash to the concrete market is ensuring “daily supply” and certainty about daily supply is essential (T, p 2389, lns 9-11).
2756 Mr White considered that a second off-taker, standing behind Pozzolanic’s prior entitlements, might be inclined to install a second classifier depending upon the relative volumes of ash produced at the power station and the volume requirements of the first and second classifiers.
2757 Slide 11 of the flyash analysis sets out the recommendations/issues in these terms:
• Scenario 1 is the obvious first choice as it protects current high profitability, provides growth opportunities in fly ash and allows time to prepare for Scenario 2.
• Scenario 1 requires prompt action to provide breathing space
• The priority action is to establish CEO level contacts so decision-making on ash is taken out of middle management hands. The implications of Scenario 2 should be make clear to the power stations as a likely consequence of actions to further open up access to ash.
• If we engage in the initial steps of Scenario 1 it will be difficult to turn back without rapidly precipitating Scenario 2
• The steps set out for Scenario 1 should be planned and scheduled to deliver significant results within 12 months and be fully implemented within 2 years
• Scenario 1 will require a much more aggressive and fast moving approach to ash opportunities particularly in the non-concrete grade areas
• CA should thoroughly analyse and prepare in detail for the various options for Scenario 2.
[original emphasis]
2758 Mr White regarded Scenario 1 as the “obvious choice” for Cement Australia as it would protect Cement Australia’s current high profitability, provide for growth and allow the company time to prepare for Scenario 2. Scenario 1 would require prompt action to provide breathing space (Slide 11) and the steps set out in Scenario 1 would need to be planned and scheduled so as to deliver significant results within 12 months and be fully implemented within two years. These steps would need to be taken rapidly in Mr White’s view (T, p 2391, lns 21-23). In the result, Cement Australia began to implement Scenario 1 by commencing the CEO level meetings at each power station (except Millmerran) with Mr White, Mr Leon, Mr Clarke, Ms Collins and Cement Australia’s General Manager, Supply Chain.
2759 At 11 and 12 January 2005, competitor access at Tarong was the subject of postulated flyash scenarios. Scenario 1 assumed that Nucon would secure 30Kt of Tarong flyash to supply customers otherwise using Bayswater flyash. On that assumption, the two possibilities with Scenario 1 were these. Scenario 1(a), called “hopeful”, was that market pricing would nevertheless stay the same. The second, Scenario 1(b), called “realistic”, was that Nucon would drop the price by $10 per tonne to increase its market share resulting in a volume loss to Cement Australia of between 10Kt and 20Kt and a triggering of Cement Australia’s MFN provisions effecting a $10 per tonne reduction in Cement Australia’s prices to its major customers. The pricing loss in this scenario would be $4M, and because of the high profit margin in the flyash sales, all of that lost revenue would go directly to the EBIT earnings line (reflecting a loss of $4.5M in EBIT). Not only was this seen as a “realistic” scenario, but its probability was seen, at least for the purposes of the analysis, as “high”.
2760 Scenario 1(c) also assumed 30Kt of Tarong flyash sales by Nucon to former Bayswater buyers, although in this scenario, Pozzolanic and Cement Australia would take the steps suggested by Mr White in his analysis to “better manage” the “Tarong relationship” and on that footing the “medium” probability was seen as the Nucon intervention having “no impact” on Pozzolanic and Cement Australia, with some additional increase in Tarong ash sales.
2761 Scenario 1(d) assumed the same elements as Scenario 1(b) except that 50Kt of volume would be moved by Pozzolanic to Millmerran and Pozzolanic would “regain $1-2M in Tarong royalties”.
2762 Scenario 2 was the “worst case” scenario in which many competitors enter the market; the market price collapses (presumably due to rivalry) to $25-$35 per tonne; the volume of flyash would rise to a market penetration rate of 28%-30% (well above the existing penetration rate analysis); Tarong would lose $2.4M in royalties due to costs pressures arising out of product contestability downstream; Cement Australia would lose $10-$15 per tonne in EBIT in the flyash business and 50Kt-100Kt of volume in the cement business as greater flyash was used in and by the market. The EBIT loss would be $15-$20M.
2763 Scenario 3 contemplated Pozzolanic and Cement Australia abandoning Tarong and using an extra 350Kt of Callide and Gladstone ash (assuming no royalty would be payable for that ash) and entering into a price war with Tarong. Scenario 4 was not developed fully.
2764 On 21 January 2005, the Queensland flyash strategy was presented to the ECM by Mr Adams. The presentation reflects the emphasis earlier mentioned. Emphasis is given to the high proportion (80%) of Cement Australia’s net margin earned in SEQ through sales to the three major customers. Slide 5 suggests that 21% of the volume of sales (to Independents) was “at risk” which accounted for $2.7M of Cement Australia’s EBIT margin in SEQ. Slide 11 continues the theme of Cement Australia’s “high” pricing having allowed Nucon to “economically import flyash from Bayswater”. Slide 12 generally observes that Cement Australia’s contracts “are expensive but do not offer any guarantees of exclusivity”. In identifying the features of the “situation” confronting Cement Australia, the notion that demand for flyash is growing and Cement Australia needs to invest in classification equipment in SEQ and Central Queensland is not apparent. Slide 14 sets out the conclusions and introduces the observation that Cement Australia has high cost royalty agreements that do not guarantee exclusive access to power stations.
2765 Slide 15 of the presentation sets out “the range of scenarios that could eventuate from the current situation [which] present significant downside risk with no upside”. The scenarios are then set out in these terms as “SEQ possible Endgame Scenarios”:
| ’05 – ’08 Probability | ||
| Great | • Tarong agree to supply new buyers but at a Royalty structure that does not allow for price reductions in the market | Medium |
| Good | • Tarong introduce new buyers who price at the current market rate with no impact on Cement Australia’s EBIT, or use for own consumption, or buyers sell into non concrete applications | Medium/High |
| Bad | • Tarong introduce new buyers who undercut current market rates by say $10/t thereby winning volume and invoking MFN’s – costs Cem Aust $4.5M. Cement Australia could retaliate by moving volumes to Millmerran. | Medium |
| Ugly | • Myriad competitors force prices down to cost plus a minimal margin of say $10/te, essentially relegating [C]ement Australia to being a delivery company. Loss of EBIT for Cement Australia $15-20M. Forces negotiation of zero royalties for all power stations and minimal margins for Cem Aust. No cash available to research new uses for flyash. | Low |
| Very Ugly | • The above scenario, reduction in margins to $10/t, occurs after Cement Australia have invested in Millmerran, Callide and MCF. | Low |
2766 The February 2005 meeting of the Executive Committee seemed to have before it a paper described as “Executive Briefing Paper February 2005” on the topic of “Millmerran Power Station Recommended Investment”. The paper notes that classified ash does not meet the relative strength requirement of 95% and there is also “a large degree of colour variability and darkness that will render the ash unpopular, if not unusable, with most discerning customers”. The paper also notes that under the terms of the amended Agreement of 28 July 2004, Cement Australia has the right to terminate the amended Agreement if, having built the buyers facilities, flyash produced from those facilities “turns out to be uneconomic”.
2767 Under the topic “Issues”, the paper notes that due to the colour variability, it is likely that most customers would be unwilling to buy the Millmerran flyash although some customers may be prepared to take it at a reduced price. The paper also notes that Cement Australia would need to sell at least 45Kt per annum of Millmerran flyash at $70 per tonne (recognising that Tarong ash is sold for $72 per tonne) in order to make a return on the investment of 50%. At $60 per tonne, 60Kt tonnes would need to be sold and at $50 per tonne 90Kt would need to be sold. The paper assumes that the term “economic” can be regarded as Cement Australia achieving at least a 15% return on its investment per annum which would amount to $225,000 per annum EBIT on an investment of $1.5M. The paper says that in order to supply volumes at 45Kt or more, of classified ash, Cement Australia would need to install a classifier (and the other identified facilities) at a capital cost of at least between $1.5-$2M. The paper observes that “one could reasonably argue that it is unlikely that Millmerran ash would ever be economic, unless Cement Australia [is] able to reduce the Royalty from a fixed $1.3M pa or unless dark and variable ash becomes popular” [emphasis added]. The paper also notes that Cement Australia has already shown Millmerran the drawings for a proposed classifier and weighbridge, and Millmerran is expecting an investment of this nature. Finally, on this topic, the paper says “it should be noted that Cement Australia [is] unable to meet the terms of the agreement and build a facility by 1 May 2005” [emphasis added].
2768 As to the pricing implications, the paper observes that Cement Australia could set the Millmerran “equivalence” at 50% which would differentiate it from Tarong flyash which would enable Cement Australia to sell Millmerran flyash at a lower price than Tarong without invoking the MFN clauses with major customers.
2769 At point 4, the paper sets out the investment options confronting Cement Australia. The first is to build the classifier, try to sell enough flyash to make the investment economic and, if not economic after six months, either terminate the contract or re-negotiate the contract. The second option involved the elements of the first option but also trying to re-negotiate the Millmerran royalty “up front”. Cement Australia perceived its leverage in such a discussion to be Millmerran’s recognition that it stood to lose the entire contract if the ash proved uneconomic after the installation of the facilities, and by negotiating a reduced royalty beforehand, Millmerran could “lock us in for a longer term, albeit at a lower, and more economic, royalty”. The third option involved refusing to build the classifier and other facilities on the basis that Cement Australia already knows the project would be uneconomic, although Cement Australia would continue to pay the royalty of $1.3M. The paper notes that, in these circumstances, Pozzolanic/Cement Australia would be breaking the contract with Millmerran and Millmerran might sue Pozzolanic for loss of earnings. The paper notes that because Cement Australia would continue to pay $1.3M each year in royalties for taking no ash, “there may be little damages”. Option 4 involved terminating the agreement before building the classifier and in that case, “Millmerran would certainly sue us for loss of earnings”.
2770 The paper then goes on to set out a tabulated comparison of Options 1, 2 and 3 based on an assessment of the cost, two NPV calculations and an IRR calculation. The table sets out the assumptions applicable to each option and the comparison assumes deployed capital of $1.9M. Option 4 is not assessed because a termination option cannot be financially evaluated as the “economics are defined by any potential litigation costs and damages awarded”. The assumption governing the calculation for Option 1 involves Cement Australia selling 20Kt at $50 a tonne; payment of the 2005 royalty at $1.3M; and a $10 per tonne royalty from 2006 onwards. Option 2 assumed 20Kt per annum at $50 per tonne and a royalty of $10 per tonne on the assumption of a re-negotiated royalty and thus no payment of the royalty at $1.3M.
2771 The recommendation arising out of the paper is that Cement Australia pursue Option 2 of trying to re-negotiate the royalty up front as part of a commitment to building the classifier and related facilities for $1.5M-$2M and try to sell enough flyash to make the investment economic. The paper recommends that Cement Australia should fall back to Option 1, if the negotiations on the royalty prove to be unsuccessful. Falling back to Option 1 “allows us to fulfil our contractual obligations, has the best NPV and maintains the Millmerran relationship in the longer term”. The recommendation recognises that, pursuing this option may require Cement Australia to write off the investment in 2006 should it be unable to make Millmerran flyash “economic” and should it be unable to re-negotiate a reduced royalty.
2772 On 28 January 2005, Mr White circulated the action steps to all the senior Cement Australia Managers arising out of the 21 January 2005 ECM which had considered the flyash strategy. As to the focus on Tarong and Tarong North, Mr White and Mr Zeitlyn would meet, essentially as soon as possible, with Mr Anderson and Mr Truscott of TEC as part of “Action 4 – need to continue to work with COO of [TEC]”. The point of the meeting with Mr Anderson apart from serving the perceived Pozzolanic need in Action 4 consistent with the strategy, was “to have a more direct discussion about how sales to Nucon could change things” and Mr White observed in his email to management, “we will try to get the control of Tarong North ash clear and out in the open as well”. Item 3 says this:
We will stay at Millmerran and use it to supplement supply out of Tarong.
Need to build facilities at Millmerran to do this, but not necessarily a classifier.
What is Minimum that we can put in to take out say 10-20kt of ash per year. Need to Follow up with Rob Druitt.
[emphasis added]
2773 As to Item 3, Mr White said that Cement Australia would need to finalise a plan to install the equipment needed for Millmerran as soon as possible. Mr Druitt was asked to put together a final costing and a construction timetable in order to talk to Millmerran personnel during the week of 7 February 2005. Item 5 involved working with Boral on re-drafting a flyash contract with the objective of trying to extend the contract as far as possible. Item 9 contemplates bringing forward the Expenditure Request for the Callide and Millmerran facilities and also the Melbourne facility with a due date of 15 March 2005. Mr White, Mr Adams and Mr Bailey would be responsible for each ER.
2774 On 3 February 2005, Mr Druitt sent an email to Mr Adams setting out a draft of the options for installing equipment at Millmerran. Mr Druitt observes in the options paper that inconsistency in the colour of the ash, limits market penetration although colour inconsistency may be able to be managed by “permanent on site tester/operator, operating costs circa + $100k per annum”. Mr Druitt says that there are no known volume sales opportunities for ROS ash.
2775 On 8 February 2005, Mr Klose forwarded an email to Mr Adams copied to Mr White, Mr Blackburn, Ms Collins and Mr Lennon, forwarding an email he had sent to Mr Clarke on 4 November 2003 setting out his assessment of Cement Australia’s options arising out the Millmerran ash failing, at that time, to meet the “Acceptable Range” requirements of the contract. In his remarks of 8 February 2005, Mr Klose explained his earlier position by saying:
In terms of the original negotiations, Ian Ridoutt and Michael Wilson were involved. Both of these folk no longer work with CA but are contactable if required.
I was involved from May 2003 – Dec 04 and attach a summary of options that were explored at this time. In essence I was trying to delay committing to capital equipment whilst still maintaining the contract since CA did not have any new markets for the ash and there was a question of how to handle the colour variation. Sandra is the best person to fill you in on all dealings after Jan 2004.
2776 On 9 February 2005, Mr Adams sent an email to Mr Zeitlyn attaching four slides that could be shown or presented to the power stations. Mr Adams attached his briefing paper to the email for Mr Zeitlyn’s “personal use only”. In the email, Mr Adams said: “Here are 4 slides that you can show the power stations. The flyash volumes are “directionally correct” only, and so you may get some pushback on the exact volumes of ash produced in each power station”. The point of the briefing paper was to set out Mr Adams’s perception of “what [Pozzolanic] wants to get across to the Power Stations”. Mr Adams set out his assessment of what Pozzolanic “should do at Millmerran”. The slides reinforced the earlier assessments by Pozzolanic and Cement Australia that only 11% of the Queensland and Victorian ash was being used and only 20% of the potential concrete grade flyash (if classified) was able to be used by concrete producers.
2777 As to Tarong, Mr Adams made his view plain, that Cement Australia had 80% of the concrete producers under contract; “competitor action” made Cement Australia’s margins vulnerable; if margins eroded, royalties to power stations would have to fall; margin erosion would require Cement Australia to “aggressively reduce” royalties payable to power stations; and the concrete market was “saturated” with flyash and therefore moving volumes, or introducing competitors, would not “grow any more sales”. Tarong flyash was said to account for more sales than all other power stations put together. This was said to be “a very good but also vulnerable position to be in”.
2778 The meeting with Mr Anderson and Mr Truscott referred to in the action steps took place. Mr Zeitlyn gave evidence that he did show the slides prepared by Mr Adams to the Tarong representatives to explain Pozzolanic’s perspective of the market and to show that the flyash market was saturated or, to use the phrase accepted by Mr Zeitlyn, that there was “far more flyash produced by power stations than could ever be sold”. Mr Zeitlyn accepted that in all probability, he explained that Cement Australia was the major supplier of flyash to the market with 80% of the concrete manufacturers under contract, and that Tarong represented sales of more flyash to concrete producers than all other power stations put together. Mr Zeitlyn accepted that it would have been a proposition, obvious to the Tarong representatives, that Tarong’s volume of more sales of flyash than all the other power stations put together, made Tarong vulnerable to having part of its sales diverted to another power station.
2779 As to the question of what Cement Australia should do at Millmerran, Mr Adams briefed Mr Zeitlyn with these observations. Cement Australia had an obligation to determine whether Millmerran flyash fell within the Acceptable Range for concrete grade flyash, under the “Ash Purchase Agreement”. Mr Adams sets out the elements of “Acceptable Range” from the contract. Mr Adams also set out the buyer’s obligation to give a non-binding report to the seller within three months of substantial completion of Unit 1, and the obligation within nine months to provide a binding report to Millmerran as to whether the flyash fell within the Acceptable Range for concrete grade flyash and whether the ash could be practically and economically converted into concrete grade flyash. Mr Adams notes that substantial completion of Unit 1 occurred on 21 September 2002 and reports were produced in April 2003 and October 2003. Mr Adams described aspects of the position in April 2003. As to October 2003, Mr Adams noted that colour difficulties presented issues in the commercial use of the flyash which could impact upon Cement Australia’s ability to economically and practically convert the flyash into concrete grade ash. As to the buyer’s facilities, Mr Adams noted that Cement Australia had agreed to construct those facilities by 1 May 2005.
2780 Mr Adams advised Mr Zeitlyn that Millmerran ash met the requirements of AS 3582.1 but did not meet the Critical Limits as defined in the contract. Nevertheless, Cement Australia had indicated its willingness to proceed. Mr Adams observed that in order to sell Millmerran ash, it must be classified and in order for the ash to be economic, Cement Australia would need to take at least 45Kt per annum and doing that would require 900 tonnes per week to be taken, or 36 truckloads, or approximately seven trucks per day, representing roughly one truckload every two hours. This level of truck movements would require a separate facility of between $1.5M and $2M in capital.
2781 Mr Adams then examined the question of - “Is the flyash from Millmerran going to be economic?” As to that, Mr Adams made four observations and then set out three options. As to the observations, Mr Adams said that given the difficulties with the colour of the ash, it was highly improbable that Cement Australia would be able to sell a great deal of the ash without lowering the market price significantly, that is, $10 per tonne or selling ash for $60 per tonne; Mr Adams said that the economics are such that in order to make a return on the expenditure of 15%, 45Kt of Millmerran flyash would need to be sold at $70 per tonne, and at $60 per tonne Cement Australia would need to sell 60Kt; the question therefore was whether Cement Australia would be able to sell 45Kt at $70 or $60 per tonne and deciding that matter was “impossible without trying”, however “it seems unlikely, given the problems with the colour”. Mr Adams then sets out his assessment of the options in this way:
| Option | Risks/Difficulties | Benefit | Cons | |
| 1 | Build “Buyers facilities” as implied by contract. A classifier capable of at least 45ktpa | Risk of making an uneconomic investment, however will save ongoing $1.3M royalty once the business has been proved uneconomic | Meets terms of contract Maintains the relationship Enables termination after 6 month if required | Difficult to sell to the board, especially as will probably have to build at Tarong soon. Also because sales are down on budget Low probability of success in selling 45ktpa |
| 2 | Indicate that the royalty and cost of classifier are such that the business will be uneconomic since the colour will limit sales to 30kt Negotiate a reduced royalty and continue with investment | Risk of litigation with Millmerran, however can fall back to building the classifier if required | Meets terms of contract Maintains the relationship Enables termination after 6 month if required Potentially reduce royalty | Undermines Cement Australia credibility |
| 3 | Indicate that the royalty and cost of classifier are such that the business will be uneconomic since the colour will limit sales to 30kt Terminate the agreement | Should have done this in July Risk of litigation Risk of competitor entry | Reduced royalty | Potential competitor entry at Millmerran |
2782 Mr Adams attached a schedule setting out the line items relevant to the “Millmerran Flyash Economics” showing a breakdown of the costs, the likely return on the expenditure on the facilities, the margin and the margin per tonne.
2783 On 18 February 2005, the Executive Committee of Cement Australia met. At the 18 February 2005 meeting, Mr Adams again reported on the status of his review of the market for flyash in SEQ. The Minutes note that Mr Adams’s analysis proceeded on the assumption that 15% was to be regarded as an “economic return” on the necessary investment. At the 18 February 2005 meeting, the “Executive Briefing Paper February 2005” under the heading “Millmerran Power Station Recommended Investment” was before the meeting. The document recommended that Cement Australia build the classifier for $1.5M-$2M; try to re-negotiate, from the outset, a lower royalty down from $1.3M to a royalty of the order of $10 per tonne; if not able to do so, try to sell enough flyash once the facility was built so as to make the investment economic; and, if not economic, then either terminate the contract or re-negotiate it.
2784 In terms of preventing sales of Millmerran flyash at particular prices which might trigger MFN obligations in Cement Australia’s principal contracts generally, Mr Adams recommended that Cement Australia determine the Millmerran flyash equivalence at 50%, as compared with Tarong, which would then enable Cement Australia to sell the flyash at prices less than the Tarong ash without triggering the MFN obligations to major customers.
2785 On 14 February 2005, Mr Chalmers sent an email to Mr Druitt and Mr Blackburn copied to Mr White asking for any information on the performance of ROS ashes “given the things happening in the market at the moment”. Mr Chalmers said that in SEQ, he needed to understand the performance of Tarong North and Millmerran ROS ash relative to Tarong fine grade ash as the base.
2786 On 18 March 2005, Mr Leon sent an email to the Cement Australia Directors attaching an Expenditure Request document for capital expenditure for the installation of the classifier at Millmerran and related buyers facilities. Mr Leon told the Directors that Cement Australia was “obliged to make this investment under the terms of our agreement with the power station”. Mr Leon also said that Cement Australia had “delayed the investment as long as we dare and we are now obliged to act”. Mr Leon looked forward to the support of the Directors for the submission. Mr Leon’s email expressed those comments in forwarding to the Directors an email from Mr Adams to Mr Leon of 18 March 2005 attaching the Capex Request for circulation to the Board.
2787 The Capex Request is an eight page document. These matters appear in the document:
1. Executive Summary
Cement Australia have a contract with [Millmerran] that requires them to build “buyers facilities” … by 1 May 2005. This request recommends expenditure to build a classifier at Millmerran providing additional capacity to supply flyash into the SEQ market, thereby meeting the terms of the contract that Cement Australia have with the power station.
In the event that Cement Australia cannot make the Millmerran ash business economic, and after building “buyers facilities”, we may exercise the right to terminate the contract and stop paying the “Take or Pay” of $1.3Mpa. The $1.3M royalty is contracted to continue until 31 December 2010 during which time Cement Australia will have paid out a further $7.8M.
This expenditure request recommends the expenditure of $1.87M to install a minimalist classifier, and associated pumps and pipework, storage silos and weighbridge. This project has an NPV of $0.6M and an IRR of 20% vs continuing to pay the ash royalty without taking or selling any ash [the base case]. The expenditure is part of the 2005 capital budget.
2788 The paper predicts that by 2006 the SEQ market will have increased by about 40Kt per annum beyond the 2004 volume of 380Kt. In that time, an additional requirement is forecast of 5Kt to 10Kt per annum from SEQ for supply to customers in northern NSW. The paper sets out some history of the contractual arrangements with Millmerran and says that Cement Australia, having verified the quality of the Millmerran ash, must build buyers facilities by 1 May 2005 in order to produce concrete grade flyash in quantities sufficient to make the operation at Millmerran economic. The paper notes that having built the facilities, should it emerge that the sale of flyash from Millmerran is uneconomic, Cement Australia has the exclusive right to terminate the agreement. The paper notes some of the history about the variability in the colour of the ash.
2789 As to the “Issues” (Point 2.2) identified by the paper, Mr Adams notes that should Cement Australia decide not to build the classifier or decide to terminate the contract before building the “buyers facilities”, Millmerran is “likely to sue for breach of contract”. Mr Adams notes that although laboratory and field trials indicate that classified Millmerran ash can be used successfully in concrete and meets AS 3582.1, variation occurs in the ash colour that is not usually experienced, and although the cause of the colour variation has been studied extensively, the cause has not been “conclusively identified”. In comparison with Tarong ash, Mr Adams notes that the colour variability and darkness of the ash is likely to make it unpopular with customers. The paper says Cement Australia “will only be able to sell this ash in the area local to [the] Millmerran site, where [Cement Australia ] can discount costs due to lower logistics costs”. Moreover, due to the high royalty payment of $1.3M per annum and the variability of the colour, Cement Australia has formed the belief that there is “a high likely-hood [likelihood] that Millmerran ash will remain uneconomic after they have constructed the classifier and associated equipment”.
2790 As to the “Needs” (Point 2.3), the paper says that Cement Australia “must proceed to the stage where they introduce Millmerran ash to the market” and in order to introduce concrete grade ash into the market from Millmerran, Cement Australia must install a classifier, a pump and pipework to convey the ash to the loading station, a loading silo and a weighbridge.
2791 The paper identifies four options much along the lines of the options earlier identified in presentations to the ECM. Option 1 was “stay as we are” and continue to pay the royalty until the expiration of the contract term without extracting and selling any flyash. Option 2 involved building the classifier; running it for six to 12 months; ascertaining the marketability of the ash produced from the classifier; and, re-negotiating the royalty and continuing to sell small volumes (10Kt to 20Kt per annum) into the market local to Millmerran. Option 3 involved building the classifier, running it for six to 12 months to ascertain the marketability of the classified ash and then terminating the agreement after one year. Option 4 involved terminating the agreement immediately.
2792 The paper observes as to Option 4 that Cement Australia has the option of approaching Millmerran and citing the colour variability as the rationale for the investment being probably uneconomic and, on that footing, propose the termination of the agreement. The paper says that in that circumstance, “Millmerran Power Station would almost certainly sue for loss of earnings”.
2793 As to Option 2, the paper summarises a description of the cost of the works at $2.52M. The proposal involves using a redundant but refurbished classifier from Tarong. The analysis assumes that the royalty could be re-negotiated to $200,000 per annum. The assessment also assumes that sales of 20Kt per annum of Millmerran classified ash at $70 per tonne in the area local to Millmerran will displace 20Kt of Tarong ash sales. It also adopts a $10 per tonne delivery cost to producers local to Millmerran. The classifier would continue to be operated after year one.
2794 Option 3 assumes that the classifier is constructed, operated for six to 12 months to ascertain the marketability of the ash and the agreement is then terminated. The same assumptions apply to Option 3 as Option 2 except that the agreement would be terminated, the classifier would therefore not be operated after 12 months, and contract lump sum payments of $1.35M (or some other re-negotiated rate) would come to an end.
2795 In comparing the options, Option 1 is said to be the least economic of the options with a negative NPV of $3.8M. As to Option 2, Cement Australia estimated that it would be able to sell approximately 20Kt per annum at $70 per tonne. The paper says that this volume and price would prove to be uneconomic with the result that Cement Australia would be able to either terminate the agreement after demonstrating that the market for classified Millmerran ash is limited, or re-negotiate the royalty. Cement Australia estimates that it would take approximately one year to “demonstrate” the limitations in the marketability of the ash. Cement Australia took the position in the paper that in demonstrating the sale of classified Millmerran ash is uneconomic, it would be “reasonable” to assume that any flyash business that does not return a positive EBIT margin on the project is uneconomic, and in order to return a positive EBIT margin, Cement Australia would have to sell at least 38Kt per annum at a price of $70 per tonne. Option 2 was predicated upon Cement Australia re-negotiating the royalty payment to a variable $10 per tonne in place of the fixed take or pay amount of $1.3M per annum. The paper observes that under a variable royalty arrangement, Cement Australia would be able to maintain the facility at “minimum ongoing cost” and use it to “supplement” Tarong ash when required. Further, maintaining a source of ash to Tarong would also provide leverage in Cement Australia’s negotiations with Tarong in re-negotiating the royalty terms in 2008.
2796 The paper suggests that supplying ash out of Millmerran would also help to meet the increasing demand for ash in 2006.
2797 In its assessment, Cement Australia assumes that 20Kt of Millmerran ash sales would displace 20Kt sales of Tarong ash and that zero incremental sales would be generated from Millmerran.
2798 Option 3 involved the termination option after one year having demonstrated that Millmerran classified ash is unmarketable. This third option is said to be the most financially attractive option although it would relinquish “the leverage over Tarong Power Station that having two sufficiently large ash sources would provide”.
2799 As to “quality”, the report notes that Millmerran ash “will be worse than other power stations in SEQ due to colour variation” and this will “affect Cement Australia’s ability to sell the ash and enable the termination of the agreement”. The paper then sets out a risk assessment directed, in part, to that matter in these terms:
Risk Assessment
There is a risk that Cement Australia will be unable to agree a definition of the terms “uneconomic” with Millmerran that gives leverage with which to terminate the agreement or renegotiate the Royalty level. In this instance, Cement Australia would continue to supply ash to the local area. The NPV in this instance would be negative $1.7M with a negative IRR. The only way to avoid this risk is to negotiate a new royalty upfront. Not investing in this classifier would mean Cement Australia breaking their contractual obligation with Millmerran Power Station. If this occurred, then Cement Australia would try to maximise the Revenue from Millmerran and in doing so, delay any investments that may in future be required at Tarong to meet increasing market demand.
2800 As to the recommendation, the paper notes that Options 2 and 3 both require a decision to proceed with building the buyers facilities at Millmerran. Management recommended to the Board in the paper that Cement Australia proceed with its contractual obligations at Millmerran and build the buyers facilities. The Directors were told that the project had a capital cost of $2.5M and returned an NPV of $3.0M and an IRR of 33.3% as compared with the “stay as we are” option, should Cement Australia decide to terminate the agreement 12 months after completion of the installation and operation of the classifier. Finally, management recommended that “the decision as to whether to terminate the agreement or continue at renegotiated royalties be deferred until the market size for Millmerran ash, and possible new negotiated royalty levels, are determined”.
2801 On 19 March 2005, Mr Clough (Holcim’s nominee) sent a responsive email to Mr Leon copied to the other Directors, Mr Maycock (Chairman), Ms de Hayes (Rinker’s nominee) and Mr Cadzow (Hanson’s nominee) in which he said this:
As I understand this you are spending A$2.52m in order to get out of a contract that costs you A$1.3m per year. With due respect that is not terribly attractive! Surely you can negotiate a bit harder on the colour and the fact that any reasonable person is going to see that the business is never going to be economic. You can negotiate for 18 months and still be better off than you are proposing, assuming you negotiate successfully. You can also afford to utilise some of the capital cost to buy yourself out of the contract as well as the colour and economic issues. Even for the power plant this years fee plus a share of the capital cost (if you have to) could be more rewarding than the investment and then termination of the contract. Out of interest if you do invest and then cancel who owns the equipment?
On balance, I’d request this was looked at a bit more.
2802 Mr Leon, as earlier found, formulated his draft response reflected in the Sueki Tan email. In the draft, Mr Leon framed his response to Mr Clough in this way:
I’m afraid you have misunderstood our proposal. We are proposing to spend (A$2.5m) at Millmerran because we are contractually obliged to do so (not to get out of an annual payout). These contractual obligations were entered into by QCL well before the merger. Since the merger and the formation of Cement Australia we have gone to considerable lengths to avoid the adverse financial obligations of the agreement including:
Delaying the installation of the “buyers facility”.
Reducing the cost of the “buyers facility” by using second hand equipment.
Used the colour issue to win the right to terminate the agreement if the operation is uneconomic.
Whilst these manoeuvres have been helpful, we have now clearly exhausted the patience of Millmerran and frankly we need to meet our contractual obligations or face the consequences.
2803 Mr Leon set out some other observations which have earlier been mentioned and were put to Mr Maycock about his assessment of Cement Australia’s position in the market as a legacy of QCL’s historical success. However, in the context of talking about Cement Australia’s contractual obligations, Mr Leon went on to say this:
It is probably worth highlighting that the Fly Ash contracts with Power Stations are not just about money. The Stations need to be seen by their Shareholders (often government) and the Community to be getting rid of Fly Ash in a constructive way. This is why we can’t always solve contractual issues with the stations by simply having a commercial settlement.
In summary we are proposing that we make this investment because we have exhausted our delaying tactics and we believe that the investment will provide what QCL intended: a valuable defensive tool. So that the likely financial outcomes of this investment are well understood we have sketched these but these are likely consequences not the driver for the investment.
2804 Mr Zeitlyn gave evidence that to the best of his recollection, the reasoning informing the decision to install a classifier at Millmerran was that by February or March 2005, the view had been formed that if Cement Australia terminated the Millmerran agreement without constructing a classifier, Cement Australia would thereby breach the terms of the amended Millmerran Ash Purchase Agreement. Mr Zeitlyn said that he thought, that reasoning, was held by “everybody”. Mr Zeitlyn said he had had a discussion with Mr Lennon at some stage leading up to the decision to install the classifier that satisfied him that his “own reading of the relevant clause of the agreement” rendered that view correct (T, p 1773, lns 46, 47; p 1774, lns 5-8). Mr Zeitlyn could not recall whether he had specifically discussed this question with Mr Leon although he could recall general discussions that he said would have taken place at the Executive Committee meetings about the topic.
2805 Mr Zeitlyn said he assumed or “imagined”, however, that he would have had a discussion about the matter with Mr Leon (T, p 1774, lns 10-13). Mr Zeitlyn said he could recall discussions at the Executive Committee meetings which “went to the issue of the contract” although his discussions about “possible justifications for building a classifier at Millmerran [were not] confined to Executive Committee Meetings” (T, p 1774, lns 25-27). Mr Zeitlyn said, of the discussions at the Executive Committee meetings, that he could “only recall the conclusion that we had a contracted position and it seemed unlikely [that] we would be able to exit from, or our advice was … we wouldn’t be able to exit from [the contract] and therefore we were obliged to install the classifier” (T, p 1774, lns 31-33). Mr Zeitlyn accepted that his recollection was that “the only basis put forward as a justification for installing a classifier at Millmerran was a contractual [obligation] Cement Australia had” (T, p 1774, lns 38-40). Mr Zeitlyn said that he had advice from Mr Lennon that Cement Australia had no other option (T, p 1774, lns 39, 41, 42).
2806 Mr Zeitlyn said that he believed he had had a discussion at some stage with Mr Lennon about the option of attempting to negotiate a termination of the agreement, perhaps by the payment of some monies, and Mr Lennon had “indicated to [Mr Zeitlyn] the sorts of damages that we might be up for but I don’t know if that was at an executive meeting or not”.
2807 Mr Zeitlyn accepted that his understanding of the rationale for building a classifier was to demonstrate that sale of classified Millmerran ash was uneconomic so that Cement Australia could then properly terminate the contract, if that event proved to be the case (T, p1775, lns 4-7). Mr Zeitlyn also accepted that it was his expectation that that event would prove to be the case (T, p1775, ln 9) and it was his expectation that if the classifier was built the contract would be brought to an end (T, p 1775, lns 11, 12). Mr Zeitlyn accepted that, in the meantime, the costs Cement Australia would incur would be, firstly, the costs of building a classifier and, secondly, the cost of one year’s take or pay lump sum payment of $1.35M whilst the classifier was under construction and steps were being taken to demonstrate that sale of the ash was not economic (T, p 1775, lns 14-21). Mr Zeitlyn also accepted that from Millmerran’s perspective, it would have expected to receive, if the classifier was built and the contract then terminated, a lump sum payment of $1.35M for the year the process was undertaken and then nothing after termination, assuming Cement Australia “went down that route” (T, p 1775, lns 23-27).
2808 Mr Zeitlyn did not accept that his understanding of Cement Australia’s exposure to damages was that if the contract was terminated before building the classifier, Cement Australia’s liability would be about $1.35M. Mr Zeitlyn said his understanding was that the exposure to damages if Cement Australia terminated the contract, without building the classifier, was the payment of all royalties due under the contract for the balance term of the contract. Mr Zeitlyn said that that view was expressed to him by Mr Lennon. Mr Zeitlyn said that he suspected he had discussed that view with Mr Adams as well, but he could not recall the matter specifically (T, p 1775, lns 29-38).
2809 Mr Zeitlyn accepted that this question of the extent of Cement Australia’s exposure to a claim was the sort of matter that he would ordinarily have expected to see included in an Capex Request put to the Board. Mr Zeitlyn also accepted that he could not recall any suggestion of an exposure, in Cement Australia, to the payment of all monies payable under the contract for the balance term of the contract, in the event of termination before construction of the facilities (T, p 1775, lns 40-47).
2810 Mr Maycock was also asked about decision-making in relation to the Capex Request.
2811 Mr Maycock’s evidence has already been mentioned in the course of discussing his evidence generally. However, in this context, Mr Maycock’s evidence should be further noted especially having regard to his position as the non-executive independent Chairman of Cement Australia Holdings and Cement Australia. On 21 March 2005, Mr Maycock sent an email to Mr Leon requesting him to address Mr Clough’s points raised in Mr Clough’s 19 March 2005 email about the merits of the Capex Request for Millmerran. Mr Maycock’s email undoubtedly gave rise to the formulation of the draft response reflected in the Sueki Tan email. As to the process of decision-making about the Capex Request, Mr Maycock said this.
2812 Mr Maycock believed that, in all probability, Mr Leon had probably spoken with Mr Clough, Mr Cadzow and Ms de Hayes about the proposal and, in all likelihood, received assent from each of them to the proposal with or without conditions attached. However, Mr Maycock simply did not have any direct knowledge of the interaction between Mr Leon and each of those Directors and he said he “certainly [did not] recall having personally a discussion with Mr Leon during that period” (T, p 1378, lns 11-18). Mr Maycock said that, by this time, he was an independent Chairman and was no longer working for Holcim. Because Mr Maycock saw himself as having no “let’s say economic authority to approve such matters”, he would have deferred to the wishes of the three shareholders with a direct economic interest in Cement Australia’s affairs (T, p 1378, lns 20-26). Mr Maycock had no recollection of discussing the question of whether the Capex ought to be approved or not with any of Mr Cadzow, Ms de Hayes, Mr Clough or Mr Leon. Nor did Mr Maycock recall being informed, at any stage prior to the 27 April 2005 Board meeting, that the Directors had decided to approve the Capex Request between Board meetings (T, p 1378, lns 28-34). Mr Maycock accepted the proposition that once he saw the Board papers for the meeting, he could see that an approval had taken place and ratification of the decision would be put to the Directors on 27 April 2005 (T, p 1378, lns 36-40).
2813 Mr Maycock gave evidence that he was in favour of Cement Australia proceeding with the Capex Request put to the Directors by Mr Leon (T, p 1374, lns 1-3). Mr Maycock described doing so as “being the better of several, somewhat undesirable options, frankly”. Mr Maycock explained the nature of the undesirable options and the basis for his belief in these terms (T, p 1374, lns 6-31):
Well, the options are set out in the attachment to the first email [Mr Leon’s email of 18 March 2005] in the paper. I won’t go through all those …, but I mean, basically, I think it seemed to me at the time that the reputation or risk for the company of not proceeding with its contractual obligations and having some sort of – who knows – legal dispute with Millmerran would have been rather unfortunate, to say the least, and that although investing the capital prima facie gave an unacceptable financial return, there was always the possibility that the ash would be accepted in the market, that it would become an perfect economic operation. Worst case is that the company would have the rights to eventually remove some of the equipment if it turned out not to be economic and could be demonstrated not to be economic, and although there would be some capital that was lost, at least the equipment could be dragged out and reused somewhere else. I mean, that was the nature of things like the classifiers that we’re talking about. Not all of the equipment, but at least some of it, would be able to be reused. So I think, on balance, my view was, it was probably better to give management the authority to spend the money, hope the economics and commerciality of the project turned out to be satisfactory, and then if not try and retrieve whatever value we could from the equipment. I think that’s – so I can understand the reason for Mr Clough’s hesitancy because he was coming into it, you know, new, so to speak. He didn’t have the background. And he was asking sensible questions, I think, from a director’s point of view, but I guess I’d had the somewhat dubious pleasure of, sort of, seeing the thing evolve, and being able to reach that conclusion.
2814 Mr Maycock said that he could not recall how Mr Clough’s points were addressed but having regard to Mr Clough’s seniority (as a Director and a person described as Holcim’s representative for North East Asia, South East Asia, Australia and New Zealand, Holcim Group Support (Zurich) Ltd), Mr Maycock is sure that Mr Clough’s points were addressed by management. Mr Maycock saw his email as a request to Mr Leon to contact Mr Clough and explain or elaborate upon the written proposal and “try and get Mr Clough comfortable with the management recommendation” (T, p 1374, lns 39-42). As to reputational issues of not proceeding to install the buyers facilities, Mr Maycock said this:
Well, Pozzolanic had a reputation, I believe, of being a very effective partner with power stations for the treatment and marketing of fly ash and that essentially was the business of Pozzolanic [and] had been so since its inception.
2815 On 30 March 2005, Mr Leon sent an email to the Cement Australia Executive Management Group by which he forwarded a copy of his email of 18 March 2005 to the Directors attaching a copy of the Capex Request of March 2005. In his email to the Executive Management Group, Mr Leon said that the Capex Request “had been approved on the following conditions”. First, Mr Cadzow had some concerns about the NPV calculations. Mr Leon suggested that Mr Adams “shares them with Jeremy Smith and convinces him that they’re OK”. Second, Mr Leon said that management needed to confirm with the Board that Cement Australia retains ownership of the equipment. Mr Leon requested Mr Zeitlyn to confirm that position to Mr Leon. Third, management would need to make a presentation to the 29 June 2005 Board meeting on Cement Australia’s “Fly Ash Strategy”. Mr Zeitlyn and Mr Bailey were asked to work with Mr Adams and Mr White to put the presentation together. Mr Leon said he would like to see the strategy well before it was taken to the Board and suggested that it be presented to the Executive Committee Meeting on 20 May 2005. This email was not sent to the Cement Australia Directors. Mr Maycock gave evidence that he did not see this email. Mr Maycock said that he had no recollection of participating at Board level beyond this period (March 2005) “in relation to any matters concerning the Millmerran proposal” (T, p 1376, lns 30-31).
2816 In April 2005, a Cement Australia “Leadership Conference” took place and a substantial “Strategy and Marketing” presentation was made to the conference. Under the section of the presentation described as “Acting as Leader Fly ash” a number of observations are made in slides drawn from the previous flyash strategy analyses. Many of the same slides are used. The overall position is set out in a situation summary for the attendees explaining Cement Australia’s position and the complications it was confronting, in these terms: “Situation Average EBIT margin approximately $21/te on fly ash in Qld and supply approximately 95% of the market; oversupply of concrete grade fly ash available in Qld with only 600ktpa out of a potential 3,000ktpa being used in concrete”; Complication Competitors have entered the market in SE and Central Qld in the form of Nucon ex Bayswater, Global at Callide and Transpacific at Comalco; Tarong are carrying out customer supply trials and Swanbank are receiving representations for supply from Nucon”. The question put to the conference was - What is the most effective strategy to maintain Cement Australia’s volumes and margins in the face of the new competition?
2817 On 26 April 2005, Mr White sent a letter to Mr Hunt at MOC in which he confirmed that plans, designs and cost estimates for the proposed ash plant at Millmerran had been completed; these estimates were submitted to the Board and the expenditure for the installation had been approved by the Board; discussions were being conducted with local Council about permits for the construction work; construction schedules were being completed; and Mr Druitt would supervise the project. In addition, Mr White said this:
It is obvious that we will not be able to meet the previously agreed deadline of 1 May 2005 for the completion of our ash facility and we regret this delay. At this point we are unable to confirm the final completion date but we are confident it will be before the end of 2005. In the meantime we are able to continue monitoring of the ash produced at Millmerran and we will have potential markets well developed by the time the facility is completed.
2818 Mr White requested Mr Hunt to consider an extension to the deadline to 31 December 2005 to provide for a revised Schedule. On 3 May 2005, Millmerran responded and approved an extension of the deadline for the completion of the Pozzolanic ash facility from 1 May 2005 to 31 December 2005.
2819 On 12 May 2005, the outline of a draft strategic plan for Pozzolanic setting out a range of options was prepared by Mr White as a result of his discussions with Ms Boman, Mr Postle, Mr Chalmers, Mr Druitt, Mr Rice, Mr Blackburn and Mr Robert Collins. According to Mr Zeitlyn, Mr White had developed the document as part of his role in helping to formulate a new strategy for the flyash business, as requested by Mr Zeitlyn. Mr Zeitlyn understood the strategy to represent the views, on the various issues and solutions, of Mr White and his group of managers. Whatever the consensus may have been, amongst that group, the document of 12 May 2005 is virtually identical with Mr White’s earlier presentation developed by him not long after Ms Collins was replaced by Mr White. Mr White, however, says that he did not recommend these options to Mr Zeitlyn for adoption. Mr White says they were merely options for consideration.
2820 In particular, the consensus (in the sense of the views in the paper based on the management discussions) as to the strategic goals for Pozzolanic remained the same in the 12 May 2005 document: “secure revenue/profitability growth opportunities; strengthen hold on power stations; increase competitor barriers to entry; ensure big 3 customers tied long term”. The consensus view reflected in the 12 May 2005 document, about the issue of: “Competitor access to Tarong North”, was that it had become an “issue” because Tarong North management had become “dissatisfied with [Pozzolanic’s] commitment to date” and the option in dealing with the issue was to “install equipment and increase off take from Tarong North”. The consensus strategic approach to flyash was one of considering the “sourcing to market relationship” as a way of accurately analysing the financial effects of all decisions.
2821 That view of the strategic approach gave rise to the two “sourcing to market” clusters mentioned earlier: the SEQ cluster; and the Central Queensland/Victorian cluster.
2822 The SEQ cluster was seen as being “driven by Tarong as the source” and “Gold Coast, Brisbane and Sunshine Coast as markets”. In the SEQ cluster, a further issue was: “Tarong plant capacity and backup”. The underlying cause of that issue was “insufficient ash for daily requirements, short period to stockout with unit failure” and the solution to the issue was to “install equipment and increase off take from Tarong North”. Another issue, relating to Tarong, was seen as “Tarong plant capacity and backup”. The cause was seen as a failure to manage logistics and stock levels to meet service level requirements of customers. The option was seen as “management of transport operations at Tarong and silos”. Further plant would need to be installed. Another issue was seen as “competitor access to Swanbank” and although the underlying cause was said to be concerns within CS Energy about competition questions, the solution to the problem was seen as Pozzolanic making a commitment “to take most of Swanbank ash”. A further issue for the SEQ cluster was seen as “limited growth in concrete market”. The underlying cause was seen as “saturation for most fly ash applications” and the solution was to attempt to secure “non-concrete applications”.
2823 The strategy document says that there are many solutions to the SEQ cluster issues but one solution would be to remove Swanbank ash from the concrete market partly due to the deterioration in the concrete performance of Swanbank ash; install a classifier at Tarong North; market Millmerran ash as a niche product; and try and develop markets for “bottom ash”. One of the difficulties in taking Swanbank ash from the market was seen as the need to produce an additional 40Kt from Tarong which was thought to be at capacity with no backup. The paper notes that Cement Australia has a contractual obligation to install plant at Tarong North, and the solution to the shortfall of 40Kt upon the removal of Swanbank ash, was seen as Cement Australia installing plant at Tarong North (classifier) and pumping system, “to add product to current Tarong silo pack”. The capital cost at Tarong North plant was estimated to be $1.5M. The recommended option or solution to the SEQ cluster issues was said to provide “one consistent high quality ash in SEQ” which would involve a lower level of capital expenditure at Swanbank and would satisfy “Tarong North in a way which strengthens our hold on them and provides a limited, quarantined opportunity for Millmerran”.
2824 Mr White was asked in cross-examination about aspects of the draft strategic plan and Pozzolanic’s views at this time. As to the strategic goal of increasing “competitor barriers to entry”, Mr White said that Pozzolanic’s principal concern was to increase the barriers to competitor entry to the “purchase of ash” (the sourcing of ash) “at better rates and conditions” than Pozzolanic (T, p 2393, lns 15-20); and others getting ash “on more favourable terms” than Pozzolanic (T, p 2393, lns 24-25). Mr White put it this way (T, p 2393, lns 29-34):
Our concern was at Tarong North, for example, that a competitor with a truck could arrive and load ash on a per tonne price, whereas we had a fixed lump sum royalty, a considerable one, and a large installation that we had been required to install and maintain, and we would, I guess, have wanted them to be paying more money or – and/or installing a similar level of equipment.
2825 Mr White was asked (T, p 2393, lns 36-37):
Q And was that because if they paid less money, they would have a cheaper cost base and might be able to undercut your price for concrete-grade fly ash?
A Precisely, yes.
2826 Mr White gave evidence that the overall aim was to minimise as far as possible, the risk that some competitor could sell flyash into the concrete-grade market at cheaper prices than Cement Australia (T, p 2394, lns 9-11). As to the goal of strengthening Pozzolanic’s “hold” on the power stations, Mr White saw this goal as positioning Pozzolanic favourably when contract renewals arose, and the notion of a hold, was one of establishing a relationship of dependency upon Pozzolanic to do certain things or take a particular volume of ash. In relation to this goal, the aim was also to minimise the risk of a competitor gaining access to concrete-grade flyash and selling it into the market “on more favourable terms” than Pozzolanic, or as the “lead taker” (T, p 2394, lns 23-33).
2827 As to Tarong North, Mr White understood, at this time (12 May 2005), that Pozzolanic had not “followed through” on its contractual commitment to install equipment at Tarong North, and that Tarong North or TEC, was “contemplating subsuming our first rights to ash to competitors” (T, p 2395, lns 1-10).
2828 The only option, according to Mr White, that addressed for Pozzolanic the possibility of Tarong North subsuming its first rights, to competitors, consistent with its own contractual obligation, was to “install equipment”. Electing not to install equipment and just letting competitors have access to Tarong North hoppers and off-take points, would not have addressed the second issue of concern to Mr White in the SEQ cluster, of Pozzolanic not having enough flyash to maintain supply. As to whether installing equipment at Tarong North was seen by Mr White as a way of dealing with the issue that competitors might secure access to Tarong North ash, Mr White explained Pozzolanic’s concern in this way (T, p 2395, lns 31-36):
… our concern was that once – if a competitor established, particularly if they connected a classifier to the hoppers at Tarong North … you wouldn’t want to come along [as] the second chance, and particularly at Tarong North, where the total volume of ash was more limited, and our option to use that right would be gone. We didn’t see that we would be able to insist on our rights if that occurred.
2829 Mr White was then asked (T, p 2395, lns 38-43):
Q So what you thought you should do was install a classifier and, in a sense, reverse that position so that no second off-taker would be interested in installing a second classifier and waiting behind you?
A Connected to those hoppers at Tarong North … yes.
2830 As to competitor access to Swanbank ash, Mr White understood as at 12 May 2005, that CS Energy “firmly intended” to sell ash to Pozzolanic’s competitors and his concern was that it would not be workable to have two people taking ash from Swanbank (T, p 2396, lns 7-8; lns 11-14). Mr White gave evidence that Pozzolanic contemplated taking most of the Swanbank ash as a method of supplying competitors using Pozzolanic’s equipment which would stop competitors also establishing equipment on site, and would result in competitors having to buy Swanbank ash from Pozzolanic (T, p 2396, lns 22-32). Mr White gave evidence that Pozzolanic wanted to achieve a situation where there was no duplication of equipment at Swanbank. The nature of Pozzolanic’s focus in this regard was described in this way by Mr White (T, p 2396, lns 42-47; p 2397, lns 1-2):
… the Swanbank site is a very – it is a small power station with small units and small hoppers and small spaces, small access roads and very limited space, and we – our facility there perches on the edges of curbs and loads direct on roadways and it just is a very difficult site in terms of traffic and access. And the proposals we had seen at that stage from other potential entrants were of some concern to us about our ability to maintain our operations with someone else also there.
2831 Mr White gave evidence that concerns about sales of Swanbank concrete grade flyash into the SEQ market were not the focus, as Swanbank ash quality was an issue at this time. The concern was put this way by Mr White (T, p 2397, lns 36-40):
The concern was that performance [of Swanbank ash] as concrete material [concrete grade ash] had declined significantly and there was a gap between Tarong and Swanbank which meant that the value of using Swanbank [ash] at its current value wasn’t justified, and customers were saying, “We don’t want to use this any more, we now want supply from Tarong”.
2832 It followed for Mr White that Cement Australia was at least considering withdrawing from Swanbank or finding other applications for Swanbank ash. Mr White saw the proposed commitment, described in his strategic plan of 12 May 2005 “to take most of the Swanbank ash”, as a way of maintaining Pozzolanic/Cement Australia’s sunk investment in Swanbank (T, p 2398, lns 1-11) although the analysis of the potential to profitably conduct an operation at Swanbank based on sales of non-concrete grade ash was at that time unclear. Mr White thought that a comparison of the relative cost of limestone and flyash (delivered to mineral filler sites) had been done and an assessment of the additional equipment requirements had been undertaken (T, p 2406, lns 43-47). However, Mr White gave evidence that he thought Pozzolanic was never certain it could profitably conduct a Swanbank operation based on sales of non-concrete grade ash (T, p 2398, lns 25-26).
2833 Mr White’s draft strategic plan suggests that Swanbank ash had become difficult to sell and the problem was getting worse. The perceived solution was that 35Kt of Swanbank ash would go to Sunstate as mineral filler to be added to ground clinker in making cement; 45Kt would go to Cement Australia’s own cement plant at Bulwer Island; and 15Kt would go to either or both of Sunstate or Cement Australia for production of a flyash blend cement.
2834 From around July or August 2005, Cement Australia ceased selling Swanbank ash as concrete grade flyash.
2835 This Swanbank non-concrete grade strategy however would “remove” the original sales destinations contemplated for Millmerran ash. The Millmerran ROS ash (which was non-concrete grade) was to be targeted at Nucon as part of Mr White’s plan, as Nucon was “happy to view the ash as filler material in concrete” (T, p 2400, lns 41-44). Millmerran ash at this time was in the Cement Australia budgets as a loss-making undertaking (T, p 2401, lns 29-30). Mr White’s own view about deploying the capital at Millmerran to build and install the classifier was that Cement Australia had a pressing need to spend that capital elsewhere (T, p 2402, lns 21-27).
2836 As to the advantages for Cement Australia in continuing to take Swanbank ash, Mr White gave evidence that Pozzolanic was being pressed to take a “high minimum take arrangement” and Cement Australia’s relationship with CS Energy required Pozzolanic to use its “best endeavours to find a home for Swanbank ash” which would probably have some consequence for the terms then under negotiation with CS Energy for Callide (T, p 2407, lns 11-17).
2837 As to Cement Australia’s price exposure to competition, Mr White’s view was that Cement Australia was not exposed, so much, to competition lowering prices and preventing it from competing, but rather a lowering of price in one area would have a “roll-out” effect with much bigger price competition consequences due to the MFN formula (T, p 2407, lns 30-35). The notion at Ex-74, CSW-1, Tab 10, p 58 that Pozzolanic should seek to ensure that initial royalties to power stations are set at “very high rates” in future agreements and insisting that power stations apply those rates to “all takers” (because power stations would be reluctant to impose take or pay obligations on competitors) was seen by Mr White as the expression of the “increase competitor barriers to entry strategy”, as earlier described by him. Mr White put it again in these terms in the context of the Callide experience (T, p 2407, lns 43-46; T, p 2408, lns 19-25):
Well, that was the increased barriers to entry [goal]. So that was basically saying …, either everyone should be on [pro rata] or everyone should be on lump sum, so if it’s going to be pro rata then the condition should be applied across the board. For example, at Callide Power Station we paid a reducing scale royalty, but the competitor who had the agreement at Callide C paid a flat royalty that was our average royalty and we felt that was an unfair advantage.
At Callide we had a per tonne scale … where the first tonne was $17 or something like that and then the next bracket of tonnes was 10 and the next was 6 and the next was 2. Our concern was that at that power station … we had paid an average royalty based on our spread across those brackets. The competitor, who had a much smaller volume than we did, came in and paid the same average royalty. And we considered that that was – as a volume taker – we should have a volume discount.
[emphasis added]
2838 This exchange then occurred (T, p 2408, lns 27-42):
Q I see, so you’re talking about the greater the volume the lower the average royalty you’re paying, in essence?
A That’s right.
Q But for the low volumes you end up paying the very much higher royalty?
A We pay a higher royalty, yes.
Q Right. And the aim of that exercise again was this, was it not? You anticipated that your potential competitors would take much lower volumes than you would take and, therefore, would have to pay a much higher average royalty, correct?
A Yes.
Q And your desire was that the much higher average royalty they would have to pay would discourage them from even embarking on the exercise of competing with you?
A Not necessarily. I think – our desire was that the higher average royalty would balance out the fact that they had no capital investment and no commitment to tonnes, no minimum take, whereas we had significant capital investment, significant commitment and – to minimum tonnes and to a significant volume.
[emphasis added]
2839 On 19 May 2005, Mr Druitt convened an Ash Strategy Meeting on site at Tarong North to discuss the tonnes Pozzolanic would require over the next 10 years; develop a strategy to supplement ash supply from Tarong North; determine the type of classifier to be installed (GE or Sturtevant); decide whether a weighbridge would be required; and, as to reject ash, the observation in the email is: “reject ash at TN dispose into TN silo”. The group would then meet with Tarong North’s Ash Manager, Mr Reedy.
2840 On 20 May 2005, a Sales and Operations Planning Meeting occurred. At that meeting, Mr Zeitlyn reported that “customers were refusing to accept flyash from Swanbank … since it changed its source of coal”. Mr Zeitlyn and Mr Klose were to report back to the group on measures necessary to reconfigure SEQ supplies (Swanbank, Tarong and Millmerran ash) to accommodate the quality issues at Swanbank.
2841 There would be no Swanbank sales of concrete grade flyash proposed.
2842 An Executive Committee Meeting was held on Friday, 20 May 2005 attended by Mr Zeitlyn and Mr Bailey, and Mr Leon and seven other Executive Managers. The Minutes do not suggest a discussion of the Cement Australia flyash strategy. The Schedule of Capital Expenditure in relation to major projects identifies the Millmerran classifier as an approved project with a forecast completion date of January 2006. The construction approval process is said to be underway with a final review of the construction plan in progress. Mr Blackford in Exhibit 60 at paras 158 to 160 describes his understanding of the capital expenditure approval process. Mr Blackford says that shortly after sending the Capex Request to Directors, Mr Leon told him that the Board did not wish to approve the expenditure of $2.5M at Millmerran because of the high level of uncertainty that the investment would produce an economic return. Mr Blackford refers to Mr Clough’s email raising the questions, earlier mentioned. Mr Blackford then refers to the email from Mr Leon of 30 March 2005 advising the Executive Members of the Board’s approval of the capex for the Millmerran classifier and related facilities.
2843 Mr Blackford said in his evidence that shortly after Mr Leon sent the Capex Request to the Directors, Mr Leon told him that Board did not wish to approve the expenditure of $2.5M at Millmerran because of the high level of uncertainty of an economic return. Mr Blackford said that his recollection was that Mr Leon, when speaking of this, was telling Mr Blackford about the discussion he was then having with the other Board members. Mr Blackford accepted that the discussion about the Millmerran capex was taking place between the March and April Board meetings. Mr Blackford accepted that his recollection was that by the time the Board meeting of 27 April 2005 occurred, the members of the Board had already resolved to approve the Millmerran capex.
2844 The Minutes of the Directors Meeting of 27 April 2005 as already mentioned record three items under the topic of “Capital Expenditure Approved Since the Last Meeting of Directors”, Item 05/22. Under that item, the Minutes note, as to “Fly Ash”, a resolution to approve the expenditure of $2.52M at Millmerran as described in the “Millmerran Classifier Final Expenditure Request of April 2005” which is actually a reference to the March 2005 Capital Expenditure Paper sent to the Board members by Mr Leon. The Minutes of the 27 April 2005 meeting of Directors seem, properly understood, to note the decision of the Directors between the two Board meetings to deploy the capital at Millmerran. Mr Maycock, as Chairman, had not participated in the discussion and had not been involved in the decision-making. It seems odd that a resolution of Directors would occur between Board meetings in circumstances where not all of the Directors were engaged in the discussion or decision-making, and ordinarily in the absence of each Director being involved and expressing a view, the topic would normally be dealt with in a meeting of Directors at which the topic would be discussed as a group.
2845 Nevertheless, Mr Maycock as Chairman of Directors seemed content not to be involved in either the discussions or decision-making because he saw himself as having no economic interest in the outcome. The true position might be, as a matter of construction, that the decision was actually made at the 27 April 2005 meeting on the footing that Mr Maycock raised no objection to the decision and all Directors were present to note and resolve to approve expenditure at Millmerran which, in a practical sense, had been already agreed to be expended by Mr Leon, Mr Cadzow, Ms de Hayes and Mr Clough.
2846 The short answer, however, is that on the evidence the Court simply does not know how the decision came to be made.
2847 At about this time, Mr White sent a letter (dated 30 May 2005) to Mr Christy at CS Energy Swanbank. He said that a rapid decline in the quality of the ash meant that the future volume of concrete grade ash was 0Kt-10Kt per annum. “Cement filler” would likely be 30Kt to 60Kt and other general fill applications would be 10Kt-20Kt. Mr White said that the ready-mix concrete market was “rapidly closing” for Swanbank ash and it would find its ash in competition with mainly quarried materials with much lower average prices and margins than cement (and, relatively, flyash). Mr White also said this:
One of our major problems is that we are tied in most situations to a take and pay situation whereas competitors, often sourcing from the same power station, are not. We cannot insist on exclusive access but we do want to make sure that if we make the biggest commitment we have the biggest commercial deal.
2848 CS Energy wanted to see a significant minimum volume for the proposed applications (cement filler, mineral filler etc); a growth mechanism in the contract; a simple flat royalty; and prompt completion of the contract renewal process which had been underway by that time for two years. Mr White made it clear from the schedule attached to his letter to Mr Christy that the future for Swanbank ash lay in non-concrete applications. One of the issues to be discussed was the topic of “surety of supply”. As to that matter, Mr White described Pozzolanic’s position in this way:
Pozzolanic has no issue with other customers sourcing ash from Swanbank. The critical issue is the ability to have priority rights to ash from the power station hoppers on a day to day basis, as without this it is not possible to sustain a continuous supply business. With the new non-concrete direction of the Swanbank ash business it should be possible to supply third parties on a more transparent pricing basis.
[emphasis added]
2849 Mr White saw the resolution of the surety of supply issue as Pozzolanic retaining “the current priority access clauses in the agreement”.
2850 On 8 June 2005, Mr White sent an update (Ex-75, CSW 4) of the Pozzolanic flyash strategy to Mr Zeitlyn and Mr Adams for the Executive Committee “for comment”. Mr White set out the assessment he had made at January 2005 and reasserted for the ECM the “key” considerations prevailing at that time. He noted that there were nine power station flyash sources and Cement Australia had supply agreements with seven; Cement Australia took only 20% of available concrete grade ash; competitors were attacking its position by trying to take ash from Tarong North (and Callide); Cement Australia supplied more than 90% of the Queensland market mainly from Tarong and NRG; Tarong represented 75% of the flyash business EBIT; ash supply agreements had high fixed payments but offered “no exclusivity of supply”; and competition supplied from within Queensland and New South Wales was threatening pricing.
2851 By this document, Mr White was able to report to the ECM (Point 2.2) that “despite all efforts, no competitor has been successful with Tarong North ash – in large part due to the unreliable supply using Tarong North equipment”. Also, Mr White reported that Nucon – “the main protagonist at Tarong North [has] requested an offer for supply of a low-grade ash product”. Mr White said that Global Cement had also taken Tarong North ash (and Callide ash). The relationship with the power stations was reported to have improved. The key goals had changed a little in their formulation. The first idea or goal (Point 3.1) was to develop an ash sourcing strategy that provided the “best operational, cost and power station leverage outcomes while maintaining barriers to entry for competitors”. The second goal was to strengthen the hold on key power stations by increasing their understanding of the value of having Pozzolanic as a partner. The third goal was to secure all significant volume, revenue and profitability growth and the fourth involved looking to lengthen supply agreement terms for non-shareholder customers.
2852 In this update of the strategy, Mr White described the two sourcing clusters earlier described and set out some of the critical ash sourcing issues for the SEQ cluster. They included the decline in the performance of Swanbank ash as compared with Tarong ash; the lack of capacity at Tarong to supply the additional 40Kt required if Swanbank ash was not saleable; Millmerran ash was unknown in terms of market placement and Kogan Creek would not be available until 2007.
2853 Mr White reasserted the “SQ sourcing strategy” of removing Swanbank ash from the concrete market and installing plant at Tarong North to supplement Tarong. The advantage of taking this last step was said to be that it “will greatly strengthen our hold on Tarong North and will make it more difficult for competitors to get steady useable ash supplies from this site”.
2854 Mr White then explained his notion of Pozzolanic “exerting a hold on the power stations”. Mr White identified three elements to it. The first was that the ash supply agreements provide a commitment to take and/or pay volumes that no other party can commit to. The second was that access to secondary ash markets that Cement Australia could bring to the power stations, through research and networks, were features that no competitors had available to them. The third was providing ash services that rely upon Cement Australia’s expertise, not available elsewhere.
2855 The further actions in Mr White’s update of the strategy involved re-negotiation of the Swanbank Agreement; conducting discussions with Nucon for ash supply from Swanbank; and, progressing the design and construction estimates for the Tarong North classifier and related facilities (among other things).
2856 The 8 June 2005 update was drawn by Mr White from his 12 May 2005 strategic plan and was prepared for Mr Zeitlyn to enable him to explain the ash strategy as at June 2005 to the ECM. The 8 June 2005 document reflects Mr White’s understanding of the strategy at that time having had the benefit of discussions with Mr Zeitlyn (T, p 2460, lns 4-6; lns 24-30). As to the first of the key goals of developing an ash sourcing strategy that “provided the best operational, cost and power station leverage outcomes while maintaining barriers to entry for competitors”, Mr White said this of the barriers to entry proposition (T, p 2461, lns 24-36), akin to his earlier observations:
A Our main concern was making sure that the financial deal available to anyone else wasn’t better than ours, and I guess, preferably, if they were a smaller volume offtaker, less attractive.
Q Now, as a matter of ordinary English usage, if you’re maintaining barriers to entry for competitors, that means they already exist and you’re trying to keep them; do you agree?
A Yes.
Q What barriers to entry for competitors existed at that time, so far as you were concerned?
A Well, we were maybe perhaps a bit unfortunate. I think our concern was that traditional barriers to entry, in terms of these graduated pricing schemes, didn’t seem to apply to anyone else coming in any longer and new entrants were just getting a flat rate at our average cost.
[emphasis added]
2857 On 17 June 2005, the “Qld Flyash Analysis Update” was presented to the ECM. Mr White was present by telephone. Mr White gave evidence that he had, “of course”, seen the paper and knew it was going to be presented to the ECM. Slides 7 to 13 represented the developments to June 2005, otherwise the slides were those of Mr Adams.
2858 Mr White reported to the ECM by Slide 7 that “no competitor had established successful sourcing at Tarong North” and in order to compete with Cement Australia, a competitor would need to classify Tarong North ash or size modify it by milling (T, p 2424, lns 5-8; lns 16-34), although only Sunstate was doing that as part of a mixing or blending process, using Swanbank non-concrete grade ash, to grind ash with clinker as an admixture step in cement production. Swanbank ash had shown a marked decline with all major Swanbank customers wanting to switch to Tarong ash (reflecting 40Kt of demand). Mr White gave evidence that he thought that it would be a good idea for Pozzolanic to invest $1.4M in a classifier at Kogan Creek to “ramp up volumes from 2007 in readiness for a cycle peak in 2009/2010” of about 550Kt which would exceed the combined capacity of Tarong and Tarong North (T, p 2425, lns 4-19). Mr White’s Slide 10 suggests an increase of volume sales at Swanbank of 40Kt of non-concrete grade ash for intergrinding: Sunstate (55Kt); Bulwer Island (40Kt); others (10-20Kt); and Nucon (20Kt) representing 130Kt to 135Kt in all. Capital expenditure of $500,000 would be required at Swanbank to facilitate these sales.
2859 By mid-July 2005, negotiations between Cement Australia and Sunstate for the supply of ash had come to an end. Cement Australia had offered a flyash price for cement blending purposes and a separate mineral filler price based, however, upon minimum supply, in all, of 35Kt per annum at a particular average price. Mr White gave evidence that technical issues caused Sunstate to reject the ash for “filler” purposes. Mr White gave evidence that the June 2005 estimates of volume sales of non-concrete grade ash out of Swanbank were based upon a comparative analysis of limestone sales. Mr White gave evidence that the large off-take volumes for Swanbank, suggested at June 2005, ultimately “evaporated” as the implications of Swanbank ash performance became clear (T, p 2428, lns 25-28). Mr White was asked this (T, p 2428, lns 43-47; T, p 2429, lns 4-6):
Q Well, in 2005 at any time did you have any basis for the view that you would actually be able to sell more than 100,000 tonnes of non-concrete grade Swanbank ash?
A Well, at times we had the intention and object of it. If you’re asking by the end of 2005 did we think we could do it, no, we didn’t, and that’s why we didn’t want to enter into a take-and-pay arrangement with … CS Energy.
Q And whilst you may have had the intention or objective did you actually have any basis, in fact, based upon third parties saying “we will buy this stuff” to regard your intention and objective as being a reality?
A Yes … we didn’t offer this to Sunstate out of the blue. It was a result of us making an offer, them expressing an interest. I mean … we just didn’t do it on the off-chance.
[emphasis added]
2860 Mr White explained that Slides 1 to 13 of the 17 June 2005 presentation (Ex-74, CSW-1, Tab 11, pp 59-71) represented the presentation material. The “backup” slides (Slides 14-19) were prepared for additional assistance of the ECM. Mr White gave evidence that they may, however, have been “gone through” in the formal presentation (T, p 2456, lns 7-21). As to Slide 18, Mr White gave evidence that the SEQ hypothesis by 17 June 2005 was to focus on high quality sources of flyash which involved focusing all SEQ effort on Tarong and Tarong North, and Swanbank, although Swanbank would be a source of non-concrete grade flyash. Cement Australia would pull out of Millmerran as being uneconomic (if contractually possible). A new ash processing facility would be installed at Tarong North to meet growing demand for flyash. Mr White gave evidence that the Board and the Executive had by this time, however, decided to continue at Millmerran.
2861 Mr White gave evidence that by May 2005, he had taken steps to review the contract with TEC in relation to Pozzolanic’s obligations to third parties and its obligations at Tarong North. Mr White gave evidence that he understood that Pozzolanic had to assess the Tarong North ash and determine whether it was usable as concrete grade flyash, and if so, install plant on-site. Mr White understood that by mid-2005 the obligation to install plant had arisen. Mr White also understood at the beginning of 2005, that Tarong was unhappy with Pozzolanic because the off-take of Tarong North ash entitled Tarong North to a “pro rata share” of the Pozzolanic royalty payments (which was not happening because no plant had been installed), and Tarong North was not seeing the volumes of ash removed for disposal that it thought appropriate.
2862 Mr White gave evidence that he also understood that once its plant was installed it had, in effect, first right to access Tarong North ash.
2863 Mr White’s 8 June 2005 Ash Strategy Update recognises, as part of the “SQ sourcing strategy” that installing plant at Tarong North to supplement Tarong would greatly strengthen Pozzolanic’s “hold” on Tarong North and “make it more difficult for competitors to get steady usable ash supplies” from the Tarong North site (Ex-75, CSW-4, p 50). Mr White gave evidence that this strategy was a reflection of the fact that once “we” had a classifier installed, “it would then effectively protect us from any other installation using Tarong North ash” (T, p 2470, lns 22-24). Mr White gave evidence that the notion of Pozzolanic having a hold on the power stations was not the expression of a commitment by power stations to deal with Pozzolanic (and no one else), but rather, the expression of a preference by power stations to deal with Pozzolanic (T, p 2470, lns 42-43).
PART 39
The installation of a classifier at Tarong North and further aspects of the evidence of Mr White
2864 As to Tarong North and Pozzolanic’s installation of a classifier, Mr White gave this evidence and I find that the relevant events are these.
2865 From early 2005, Pozzolanic wished to take steps to install a classifier at Tarong North. Mr White understood that one of the effects of installing a classifier at Tarong North would be that it would become uneconomic for any other potential off-taker to install a second classification plant to produce concrete grade ash at Tarong North. Mr White accepted that “that was our understanding, and vice versa as well” (T, p 2451, lns 27-34). Mr White accepted that whoever got in first at Tarong North would be the one who could produce concrete grade ash economically, and whoever got in second would not, in effect, bother to install plant, because it would not work economically for a second installer at Tarong North (T, p 2451, lns 36-40). A little later in his evidence, Mr White put it this way:
Q So far as Tarong North was concerned, I think you agreed with me yesterday that once Pozzolanic installed the classifier at Tarong North, it had first right to access to the ash from Tarong North; correct?
A Yes.
Q And the result of Tarong North installing a classifier … at Tarong North would be that no one else would bother to try to install a classifier at Tarong North; correct?
A I think our view was that if any party, regardless of their rights, installed a classifier first at Tarong North, no other party would, including ourselves, and given that we had bought and paid for first rights and an obligation to put a facility in, we felt that was what we should do.
Q Recognising that one of the effects of doing that would be that no other party would seek to install a classifier at Tarong North?
A Well, certainly, it was our hope that that wouldn’t happen, because we would consider that that would create a very difficult operation for us.
Q Well, it was not only your hope it wouldn’t happen; it was your expectation it wouldn’t happen; correct?
A Well, certainly.
[emphasis added]
2866 Mr White’s understanding at June 2005 was that Pozzolanic enjoyed first rights to the Tarong Power Station ash under the contract with TEC (T, p 2463, lns 20-21; lns 33-34). Mr White did not accept, however, that a second off-taker at the Tarong Power Station would have to wait to see each day how much usable ash was left over at the Tarong Power Station after Pozzolanic had taken as much ash as it wanted that day, and nor did he accept that once Pozzolanic had its plant in place, it was no longer feasible economically for a second off-taker to install its plant and then try and sell concrete grade flyash into the market. Mr White explained what he regarded as the “rational” method a third party would adopt to the assessment of installing plant, in this way (T, p 2463, lns 38-46):
I don’t think that’s a rational way of [looking at it]. I mean, if I was a third party offtaker wanting to take from Tarong [Power Station rather than Tarong North], I would go there. I would evaluate the amount of ash that was left over on each day, and I would make a decision about the viability based on that information. And if they have done that in 2005, they would have found that there was very large quantities of ash that could be classified to make concrete grade ash available every day. So … no one would build a plant and wait for ash. You would make some evaluation of availability beforehand.
[emphasis added]
2867 Mr White accepted that one of his concerns at June 2005 was that Pozzolanic’s installed plant at Tarong was operating at maximum capacity. Nevertheless, Mr White noted in evidence that Pozzolanic was only taking 30% of the available ash (T, p 2464, lns 5-8). Although Mr White was, at this point, being asked about his understanding at June 2005, Mr White was taken to his letter dated 6 July 2006 to Mr Ware at TEC concerning Pozzolanic’s then assessment of the current capacity of its plant at Tarong in the context of Pozzolanic’s capacity to discharge its cl 7.1 best endeavours obligation to provide ROS non-concrete grade flyash from its plant to TEC or a third party nominated by TEC, and also in the context of the question of the relativities between multiple off-takers on the Tarong site.
2868 The background to the letter of 6 July 2006 is this.
2869 On 6 July 2006, Mr White wrote to TEC setting out information in relation to the current capacity of the Pozzolanic installations at Tarong. In that letter, Mr White set out information which addresses each of the elements of cl 7.1(a) to (g) of the Fly Ash Agreement of 26 February 2003. Clause 7.1(a) contemplates that Pozzolanic will use its best endeavours to provide ROS non-concrete grade flyash from its plant to TEC or a third party nominated by TEC including the processing and handling of ROS non-concrete grade flyash through Pozzolanic’s plant “to the full limit of the capacity of the contractor plant”. Mr White’s letter is a statement of the “ability for Pozzolanic to meet its obligations” under this clause. As to cl 7.1(a), Mr White said this:
Pozzolanic extract [ROS] Non Concrete Grade Fly Ash from the Tarong power station ash hoppers each day once any concrete grade material has been removed. This takes 12 hours per day for on average 800 tonnes of material. In order to meet the production requirement of 1300-1500 tonnes per day a further 1000 tonnes of [ROS] Non Concrete Grade Fly Ash must be extracted for classification. All extracted ash is removed using pneumatic transfer pumps that currently operate at over 95% availability. These pumps shift the ash to one of two larger transfer stations that comprise much larger pumps to shift ash to the Tarong processing and dispatch facility. These transfer pumps are also operating at or beyond design capacity. Trucks also run from Tarong North 24 hours per day to supply more [ROS] Non Concrete Grade Fly Ash for classification. There is no additional capacity in these systems and if any can be found Pozzolanic is in need of it.
[emphasis added]
2870 Clause 7.1(b) addresses a best endeavours obligation upon Pozzolanic to grade ROS non-concrete grade flyash into “ash grades requested by TEC and third parties (to the extent possible)”. As to Pozzolanic’s ability to meet that obligation, Mr White said this:
Pozzolanic has two classifiers. These operate for differing periods depending on what quantity of ash can be supplied to them. While they would be able to classify for longer periods if more ash was available to them this cannot be achieved from either Tarong or Tarong North with current equipment. [The] storage facilities at Tarong are also very limited and every tonne of space is important as our Supply Chain can remove ash in trucks faster than Pozzolanic can produce [ash]. Storage is relied on to form a buffer against this difference in the early days of each week. It is not possible to classify more ash with current systems.
[emphasis added]
2871 Mr White’s letter goes on to address Pozzolanic’s capacity in relation to each of the remaining subclauses of cl 7.1. Mr White, however, addresses some “general matters” going to capacity and Pozzolanic’s ability to meet the cl 7.1 obligations and says this:
It is important to understand that “capacity” is not a fixed concept. To meet annual demand requires a daily capacity in excess of a pro rata fraction of the annual amount. Capacity has to cover plant failures, planned maintenance, power station outages (planned and unplanned), coal changes, ash quality changes, transport availability, and daily, weekly and seasonal fluctuations in demand. It is not feasible to release what appears to be excess capacity one day and require it back to cope with changes the next. The Tarong facility is currently operating at 60% above its design capacity. In the last 12 months there have been several instances when ash stocks have run to zero for SEQ even with the Tarong North classifier the existing Tarong plant will still be required to run at well above design capacity to meet demand. Should Pozzolanic enter into a further ash supply agreement with Tarong a significant investment will be made into additional capacity.
[emphasis added]
2872 The operational protocol therefore was this.
2873 Pozzolanic would each day extract, over 12 hours, 800 tonnes of concrete grade ash from the hoppers in Zones 2 and 3 at Tarong (T, p 2465, lns 44-45; T, p 2466, lns 4-5). Sometimes a small amount of concrete grade ash would be taken from the Zone 1 hoppers. In order to produce 1,300 to 1,500 tonnes per day, Pozzolanic would extract 1,000 tonnes of ROS non-concrete grade ash from Zone 1 for classification. Once the concrete grade ash was removed from, essentially, Zones 2 and 3 each day, the ROS non-concrete grade ash would then be removed from Zone 1, and all of the transfer pumps were operating at 95% availability with no additional capacity. Pozzolanic’s position was that if any additional capacity could be extracted, Pozzolanic would need it all. Mr White gave evidence that during the second half of 2005 and in 2006, Tarong North ROS ash was trucked to the Tarong plant to make up the necessary supply. Mr White gave evidence that Pozzolanic was not “always absolutely strapped for capacity” but was so, “more often than not” (T, p 2466, lns 36-38). Mr White did not accept that it followed from these operational protocols or constraints that had a second off-taker adopted the rational method of third party inquiry he had earlier suggested of asking what volume of ash could be expected to be available each day to a second off-taker, the answer would necessarily have been, “no ash”. Mr White gave evidence that even though Pozzolanic would take 1,000 tonnes of Zone 1 ROS Tarong ash for processing each day, 1,500 tonnes of Zone 1 ROS ash remained available to a second off-taker.
2874 That observation led to this exchange (T, p 2467, lns 1-24):
Q Well, are you suggesting, then that the second offtaker would have been able in some way, to put all its own pumping and transfer equipment in, into zone 1, to its own classifier? Is that what you’re trying to say?
A It could have, yes.
Q Are you suggesting that a second offtaker would have regarded that as being economically feasible?
A Well, I think you – obviously, there would have to be some form of amended arrangement to provide them some guarantee of volume, and probably the best arrangement would have been to [have] allocated hoppers within each unit to one party or another in the way that’s now proposed. But other than that, there’s no reason why that would have been feasible.
Q So just let me understand. Do you agree that unless Pozzolanic’s existing contract was amended so that a third party could be guaranteed volumes of ash, it was not economically feasible for [a] third party to be a second offtaker at Tarong Power Station?
A I would say that there would have to – I mean, if I was a third party offtaker, I would want some arrangement, but I would also, at July 2006, be reflecting that the agreement only had 18 months to run, and I would probably be negotiating around renewal or retendering of that agreement in terms of any arrangement that I might make.
[emphasis added]
2875 Mr White also gave this evidence (T, p 2468, lns 40-46):
Q And are you saying you formed the view that it was likely the second offtaker might want to build a classifier and wait behind Pozzolanic at Tarong Power Station?
A I don’t think we ever viewed or expressed it in those terms because, clearly, that wouldn’t be attractive. I think our view was that if someone was to obtain a right of access – and it seemed to be feasible at Tarong North, so I’m not sure why not at Tarong – then we would prefer that right of access to be at Tarong and, therefore, obviously, we viewed it as a feasible option.
2876 On 28 June 2005, Mr Cooper wrote to Mr Hatton at Tarong concerning ongoing access to flyash from the Tarong North silo facility. Mr Cooper’s letter, as discussed earlier in these reasons, was directed to securing a 10 week extension of the trials then under discussion. Due to identified difficulties Nucrush/Nucon had been experiencing, Nucon requested an extension of the trial period to 1 July 2005. In July, the ash trials were extended to 1 September 2005. The ash trials were further extended until 20 January 2006. However, due to the variability in the Tarong North flyash described earlier in the correspondence, Nucon abandoned any further trials in November 2005. On 21 November 2005, IFB entered into an agreement with Tarong North to take flyash on a trial basis until 20 January 2006.
2877 On 29 August 2005, Mr Neumann wrote to Mr Hatton at Tarong North reporting upon the completion of the winter trials using Tarong North flyash. Mr Neumann said that the early indications from the test data were that the Tarong North flyash was “variable and that it would definitely require classification for use on a commercial basis”.
2878 [REMOVED TO THE CEMENT AUSTRALIA CONFIDENTIAL SCHEDULE]
2879 On 2 November 2005, Mr Druitt and Mr White sent a letter to TEC (Mr Beasley and Mr Tellam) in relation to a proposal by Pozzolanic to conduct a preliminary site evaluation for the construction of a flyash out-loading facility at Tarong North. Pozzolanic observed that since an earlier meeting on 19 July 2005, it had experienced a “considerable increase in demand for ash from the Tarong and Tarong North Stations” that would require the completion of new plant as soon as possible so as to maintain future supply.
2880 Pozzolanic put its view of the flyash agreement to TEC and in relation to cls 4.4 to 4.6, Pozzolanic confirmed the following:
1. Pozzolanic has determined that Tarong North Power Station Ash is suitable for “use in cement”.
2. Pozzolanic wished to establish a plant to extract Concrete Grade Fly Ash from Tarong North Power Station.
3. The preliminary designs and drawings for this plant are submitted herewith for your consideration.
4. Pozzolanic request an extension of the Licensed Area to cover the proposed location of the plant shown in the attached drawings.
2881 Pozzolanic explains that the proposed facility generally involved a classifier plant on the Tarong North site adjacent to the fabric filter hoppers, a connecting overland pipeline to storage silos and a road truck weighbridge on TEC land east of the Tarong North station. Layout drawings were attached to the letter. Pozzolanic also pressed its proposal concerning the processing and sale of bottom ash. Pozzolanic said that its personnel were discussing the installation of backup ash handling equipment at Tarong North which, if installed, would form the extraction system to transfer ash from the station to the new ash plant on the proposed TEC licensed area. Pozzolanic sought general agreement from TEC to proceed as quickly as possible with the development of an ash production facility at Tarong North; general agreement that the proposed site was suitable for investigations as a likely location for the new plant; and approval to begin preliminary site work including site survey and geotechnical investigation. Pozzolanic said that it wished to receive written permission to proceed with the installation once these steps were completed and it hoped to have the plant installed by late 2006.
2882 On 14 November 2005, Mr White sent a letter to Mr Ware and Mr Tellam of Tarong North setting out his views of Pozzolanic’s future at Tarong and Tarong North power stations in the context of concerns about ACCC issues. A meeting had occurred with Mr Tellam on 10 November 2005 and Pozzolanic had agreed to set out an overview of its perception of its future at both power stations.
2883 As to the capacity of the stations, Mr White said that the current facility, extracting ash from the Tarong Power Station, and by truck from Tarong North, was operating at its “most optimistic” level of production capacity. Nevertheless, it could not provide assured supply to SEQ customers, it was said. Mr White said that Pozzolanic had been using Swanbank ash as a partial supply in SEQ for some years but coal changes had rendered that ash unsuitable for concrete use, placing pressure on Tarong as a supply source. Mr White said that the contract with TEC obliged Pozzolanic to construct plant at Tarong North should the ash prove to be suitable for concrete grade use. Mr White said that Pozzolanic had “signalled” its intention to proceed with the installation of plant for some time and had submitted plans for the project which had not resulted in any technical objections.
2884 Mr White said that Pozzolanic was seeking to consolidate its operations at Tarong and Tarong North (the SEQ cluster approach having discontinued focus on concrete use of Swanbank ash) “but this preference depends on the favourable outcome of a number of issues” including securing permission to construct the Tarong North ash sourcing facility; agreement “to allow purchase of the required volumes of ash from Tarong and Tarong North power stations”; re-negotiation of the current agreement conditions and “in particular the term of the Fly Ash supply agreement”. As to the volume and term, Mr White said that should Pozzolanic proceed with the construction of the Tarong North facility, Pozzolanic’s intention would be to take between 100,000 and 150,000 tonnes of flyash per annum from the new facility. The balance of the approximately 400,000 tonnes (250Kt to 300Kt) required from both power stations would come from the existing Tarong operation, in Mr White’s view. Mr White said that because of the “critical nature of the Tarong supply” and the “level of Pozzolanic’s investment”, Pozzolanic considered that a 10 year supply agreement, similar to a coal agreement, was required. Mr White said that if Pozzolanic was unable to “secure the ash supply [as described] from Tarong and Tarong North” Pozzolanic’s next best alternative was to “shift the entire existing demand to an alternative site”. Mr White said that a decision would need to be made within six months.
2885 Mr White gave evidence that if Pozzolanic was going to consolidate at Tarong and Tarong North (and proceed with the construction at Tarong North) and “put all [its] eggs in one basket”, it would want a “reasonable tenure” of 10 years at volumes per annum over the 10 years of 400Kt plus, per annum. The aim of the letter was to try and raise concern in the minds of TEC decision-makers that should such a commitment not be forthcoming from TEC, Pozzolanic would take its flyash extraction and processing activities elsewhere (T, p 2495, lns 26-29). Mr White accepted that he may have suggested to TEC that Millmerran Power Station was a credible alternative source of ash to the broader Tarong ash (including Tarong North) (T, p 2495, lns 34-39), although Mr White doubted whether TEC would have taken such a suggestion seriously (T, p 2495, ln 36). Other sources suggested to TEC were Urban Creek and Central Queensland (T, p 2496, ln 24). By this stage, Millmerran ash was not an attractive source of alternative ash for Pozzolanic due to the darkness and colour variability issues (T, p 2496, lns 42-43).
2886 The Cement Australia Strategy Briefing Paper directed to the topic of the “Fly Ash Strategy”, of 17 November 2005 sets out a number of observations about the difficulties emerging in the market. The paper suggests that the Queensland flyash market is seeing increasing competition due to power stations coming under pressure from the ACCC; independent producers approaching power stations at Swanbank, Callide and Tarong North with a view to setting up their own off-take facilities; power stations under pressure to see increasing volumes of flyash removed; and, new “players” being offered flyash at source at comparable prices to Cement Australia but without being required to accept take or pay obligations in the supply contracts. Like the earlier papers, this paper observes that there is “oversupply of Fly Ash in the Queensland market” and, the “concrete market is only large enough to make use of approximately 10% of the total ash produced by power stations”. The paper observes that it is clear that “the past, high cost ‘Add Value to Power Stations’ strategy … employed by Cement Australia is no longer working and there is pressure to switch to a low cost ‘Commodity’ style strategy”. The paper also observes that Cement Australia’s “past strategy in Queensland has been to focus on adding value to the Power Stations and looking after their needs to such an extent that the desire and need to find other potential Fly Ash customers [off-takers] is low”.
2887 On 25 November 2005, Chris Leon sent an email (sent by Sueki Tan) to Mr Maycock, Mr Cadzow, Mr Reaney, Mr Clough, Ms de Hayes, Mr O’Callaghan and Mr Cuthell. Mr Leon sent this email arising out of the Strategy Meeting with Directors on 17 November 2005 at which the flyash strategy was considered. As to that, the notes of the meeting confirm a move to a “supply strategy” focused on the most important sources, that is, Tarong and Callide with access to supplementary sources. The commercial approach would be to try and “reverse” the royalty model such that the power stations would bid for Cement Australia’s business (with its shareholder customers) rather than the reverse.
2888 On 29 November 2005, a number of emails were exchanged between Mr Druitt and Mr White, Mr White and Mr Zeitlyn, and Mr Zeitlyn and Mr White about steps being taken by Mr Alan Forbes to acquire and sell Tarong North ROS flyash to small independent concrete companies in SEQ. The exchanges were designed to identify the scale of the transactions, the customers, where the ash was going and such matters. Further exchanges along the same lines occurred between Mr White, Mr Zeitlyn, Mr Druitt, Mr Chalmers, Mr Postle, Mr Blackburn and Mr West between 6 and 12 December 2005. On 21 December 2005, exchanges took place between Mr West, Mr Zeitlyn and Mr Leon in relation to Neilsens’s concrete at Carole Park receiving a load of flyash on 20 December 2005 in a Wagners’s tanker. Mr Zeitlyn described this transaction to Mr Leon as “very alarming information”.
2889 On 3 January 2006, Mr Chalmers sent an email to Mr White telling him about Wagner’s tankers regularly appearing at Neilsens’s Wacol plant discharging material into Neilsens’s silo at the plant. Mr Chalmers was concerned because he perceived that it would not be long before Mr Prior from RMH would be pressing Cement Australia about it with a view to achieving a cement equivalence price adjustment. In anticipation of that possibility, Mr Chalmers observed that Cement Australia’s work to that date had shown that Tarong North flyash had a product value of about $20 per tonne compared with Tarong at $70-$75. Mr White responded by saying that Wagner takes about two loads (mostly B doubles) from Tarong North per day and that it would be very unlikely that the Tarong North ash would meet AS 3582.1, if the Tarong ash taken by Wagner is ROS ash, as it rarely exceeded 50% passing a 45 micron sieve. Mr West of Cement Australia responded to Mr White and Mr Chalmers observing that the material delivered to Neilsens might not be coming from Tarong North, but rather imported from Bayswater “which of itself is far more worrying than ROS Tarong North”. Mr Chalmers responded and said that he thought that the ash was not Bayswater ash and asked whether Bayswater ash is, in any event, a bigger problem than Tarong North ash being available to others. Mr Chalmers thought that the landed cost in SEQ of Bayswater ash was probably about $70-$75 a tonne and Tarong North ash delivered to batching plants would be no more than $50.
2890 On 10 January 2006, further email exchanges took place between Mr Chalmers, Mr West, Mr White and Mr McSweeney concerning Neilsens use of ash as carted to it by Wagners. Mr West in an email dated 10 January 2006 asked Mr Chalmers, copied to Mr White and Mr McSweeney whether:
... it would be worth drafting a letter to Wagners to the effect that we know about the TN ash being used at Carole Park (and now Windsor) and as a result can no longer provide technical support for the cement? Although that’s probably not entirely correct – maybe we cannot guarantee the performance of the cement in mix designs carrying the TN ash. It is a little hard because the cement should perform the same regardless. …
2891 On 18 January 2006, Mr Sharpe (Cement Australia) sent an email to Mr West copied to Mr Chalmers, Mr Druitt, Mr Blackburn and Mr White to say that he had been to Neilsens’s Windsor plant to obtain confirmation that the first load of Tarong North ash had been delivered to that plant in a Wagners’s tanker. On 20 January 2006, Mr Chalmers sent an email to Mr Sharpe copied to Mr West, Mr White, Mr Blackburn and Mr Druitt providing “more feedback” about trials of Tarong North ash by Neilsens and whether extra plant in the form of a classifier would be required to make Tarong North ash “acceptable”. Mr Chalmers doubted whether Neilsens had the skills to undertake the necessary tests. On 20 January 2006, Mr White responded to Mr Chalmers and said this:
All taking of Tarong North ash by third parties has been stopped by Tarong North. Third parties have been told that it is because the trial period for this activity has come to an end and Tarong North are [to] review options. Dennis Franklin tells us he is fed up with safety and environmental incidents associated with third party truck loading.
Thus the “trials” that various people say they are carrying out will not be continuing in the interim. This includes Sunstate who say they will start taking Swanbank ash again.
2892 In effect, all trials of Tarong North ash ceased on 20 January 2006. Further interim offers were made to a number of participants including Nucon and IFB in 2007. Sunstate was the only market participant to take ash under an interim offer in 2007.
2893 On 14 February 2006, Mr White sent an email to Mr Zeitlyn, copied to Mr Rice and Mr Druitt on the subject of a meeting he had had with Mr Tellam (Commercial Manager) and Mr Ware (Corporate Counsel) for TEC. In his email reporting upon the meeting, Mr White said this:
Tarong Position
Reminded us of March 2008 expiry [of agreement] with notice to be given March 2007. [Comments about ACCC] Because of this and our request for permission for TN installation they want to proceed in a way that will get us more certainty. They applaud our approach of seeking a longer term supply arrangement and are very aware of the value of us consolidating ash sourcing at Tarong. They only want to be sure the ACCC sign off on any arrangement.
Because of the dates of the agreement term they are proposing the following course of action. In March 2006, ask for [EOI] for the taking of ash from 2008 – 2010 and from 2010 onwards. They are interested in getting proposals of 10 years plus term. … From September 2006 – March 2007 a tender process will be conducted amongst selected EOI respondents. A final decision will be made prior to 1 March 2007. …
In the interim [TEC] will
Accept a request for us to install the classifier at TN but will clear this with the ACCC
Extend the licensed area in the agreement to provide for the arrangement
Proceed with any other facilitation we need to get more ash
Where [does] this leave CA?
We are in a very strong position to compete in any tender process. We have the chance to trade volume for value. But it is a high stakes competition for us. The timing suits us as we will know the outcome in early 2007 – about the time we would need to start the second stage of the TN installation (silos and weighbridge).
The arrangements [TEC] are seeking are exactly what we want. The process should clear the ACCC decks for Tarong at least. There are some risks given our ash pricing provisions with shareholders, could a competitor use this opening to make a supply offer? There may be some risks with Boral – will they see this as an opportunity to upset the Qld ash market?
There are issues with the change of coal in 2010, hence the splitting of the time periods but hopefully these will be understood by early 2007. [TEC] have indicated that they would be willing to work to maintain ash quality in their coal decision making.
We should hear more in the next week. In the meantime I am writing for permission for the TN installation today.
[emphasis added]
2894 On 14 February 2006, Mr White wrote to Mr Tellam (copied to Mr Ware and Ms Jennings at the ACCC) about aspects of Pozzolanic’s engagement with the Tarong North facility.
2895 Mr White said that Pozzolanic had an urgent need to improve the capacity and security of ash supply from the two Tarong power stations. Time had become too short to proceed with the previously proposed installation and Pozzolanic now wished to propose an “interim arrangement” that could be installed more rapidly. Consistent with the earlier observations, Mr White said that the budgeted demand for ash, to be met from Tarong and Tarong North power stations in 2006, was around 400,000 tonnes dedicated almost entirely to the SEQ market.
2896 Mr White said that during normal power station operations, under normal load with the “higher ash” coal being used, and all units operating at both power stations, the ash supply produced from the existing Pozzolanic plant “was only just adequate” to meet the demand for concrete grade flyash. Mr White said that the recent experience with Kingstream coal with “lower ash” production, had placed “severe strain on our production and transport capabilities”. Mr White said that the planned unit outage at Tarong in July and August (or any similar outage) would interrupt ash supply in SEQ unless action was taken to improve the production capacity “when power station operations are not optimal”. As to production capacity options and classifier operations, Mr White said this:
The main difficulty for ash production is the capacity of the current Pozzolanic plant. This plant can only classify a fixed volume of ash each day. During reduced ash generation periods at Tarong Energy, ash can be transferred from Tarong North for classification. This ash is of variable yield and once the throughput capacity of the classifier is reached, no further ash production is possible. In addition the transfer from Tarong North causes traffic problems both at the Tarong North general access silo where other ash customers are also trying to access ash and at the Pozzolanic plant where it interferes with normal loading and dispatch operations.
To overcome this we propose the installation of a classifier at the Tarong North plant. This would essentially be the same installation proposed for the complete Tarong North plant but as we have the equipment to hand it could be completed by May this year in time to cover the Tarong Energy unit outage. The classifier would provide a significant increase in the production and capacity of Pozzolanic and allow supply to be maintained throughout 2006.
Classifier Operations
The positioning of the classifier would be within the Tarong North plant area as suggested in earlier plans. Mr Rob Druitt will be visiting you in the next week to provide detailed plans and arrangement drawings for the proposal. The main operational details are as follows:
The classifier would integrate with the back up pumping systems Pozzolanic are installing for Tarong North and they would supply ash to the unit. The unused portion of ash would be returned to the Tarong North disposal system.
The classifier would have its own truck-loading bin directly underneath the classification unit. This would reduce congestion around the current general-purpose ash silo and speed up loading for all parties.
The production from the classifier would be ready for dispatch. While trucks would still have to cross the existing plant to weigh the cross-site traffic would be reduced by 50% or more.
The volume taken from Tarong North for the rest of 2006 by Pozzolanic would not increase much from the current take. The volume taken on any day would depend on the availability of ash from Tarong Energy. Availability of Tarong North ash to other customers would not be affected at their demand volumes to date.
[emphasis added]
2897 On 20 February 2006, Mr White sent an email to Mr Zeitlyn copied to Mr Druitt in relation to the Tarong North classifier. The email attached “Explanatory Notes” in relation to the investment. The Explanatory Notes contain these observations.
2898 The existing Tarong ash facility is said not to be able to maintain ash supply to SEQ in 2006. The notes set out production forecasts for each month of 2006 including the Tarong outage for July and August. The notes say that there is confidence in the production rate for Tarong at a volume below 1,100 tonnes per day (“tpd”) during normal power station operations. Annual demand required production, however, to be “confidently” 1,300tpd during normal operations and at least 1,200tpd regardless. This is said not to be possible with the existing installation, and production levels for these figures relies upon “high availability of Tarong plant, rationalisation of transport operations that is not yet completed, no transport problems and no unforseen power station outages or issues”. The two options were, first, to continue transferring ash from Tarong North to Tarong or, second, install a classifier at Tarong North. Under the second option, the installation would be modified to allow direct loading of trucks underneath the classifier from a small production bin. The classifier was said to be refurbished and ready for installation (from Millmerran) and the project could be completed in time for the July/August unit outage at Tarong. The notes observe that Tarong North had pointed out that the arrangement to load trucks within their plant operational area would not be permanent and Tarong North would expect Pozzolanic to commit to a storage and loading facility within 12 months of commencing the interim operation. The classifier would produce and load up to 400tpd within current transport constraints and the full production capacity, with storage silos, would be 800tpd.
2899 The notes observe that the option would avoid the current transfer cost of ash from Tarong North to the Tarong classifier of $3.00 to $4.00 per tonne. Stage 1 of the proposal would involve a classifier supported over a 40 tonne capacity product bin with a truck-loading chute. The classifier feed bin would be supplied by the backup ash pumping system Tarong North had commissioned from Pozzolanic.
2900 On 27 February 2006, Mr Druitt wrote to Mr Franklin at Tarong North about aspects of the flyash classification plant proposal. In that letter, Mr Druitt explained that the installation would be a Stage 1 installation of, ultimately, a two stage project. Mr Druitt said that the immediate need was to meet a high ash demand in SEQ and the classifier could be constructed quickly so as to provide sufficient production capacity for the 2006 demand. Mr Druitt explained that in order to use the classification plant, Pozzolanic would need to load trucks under the plant until Stage 2 of the project was completed in 2007. Mr Druitt explained that the Cement Australia Board had, on 27 February 2006, approved capital expenditure for Stage 1. Mr Druitt noted that TEC had given oral approval for the project subject to Tarong North approving the engineering and operational content of the proposal. Mr Druitt then went on to explain aspects of the project in greater detail.
2901 On 17 March 2006, Mr Millhouse for Tarong North sent Mr Forbes (IFB) a letter in the name of Mr Anderson in relation to the Tarong North flyash trials which ceased operation on 20 January 2006. The letter says that TEC is reviewing the results of the trial with a view to seeking expressions of interest for the sale of flyash from Tarong North and Tarong, commencing from March 2008. The letter says that as an interim measure Tarong North flyash could be provided on the terms of the letter. The removal and sale of flyash from both power stations is said to be “predominantly dealt with” under the Fly Ash Agreement between TEC and Pozzolanic. The letter also says that, in connection with that agreement, Pozzolanic is in the process of installing a temporary ash classifier at Tarong North which is to be installed between May and June 2006 but which would only be available for use by Pozzolanic.
2902 The letter also tells Mr Forbes that ash not taken by Pozzolanic from the classifier for use would be “directed to the [Tarong North] fly ash silo and will be made available under the Interim Offer set out below”. The letter requests Mr Forbes to note that having regard to that arrangement, “fly ash made available from the [Tarong North] fly ash silo following the installation of the Temporary Ash Classifier may differ in quality from the fly ash made available under the Trial Agreement”.
2903 The interim offer proceeded on the footing that the agreement with Pozzolanic did not cover the entire quantity of flyash available from Tarong North and that Tarong North flyash not required under that agreement could be provided from the Tarong North flyash silo on the terms set out in the Conditions of Sale of the “interim offer”. The interim offer would remain open for acceptance until 16 March 2006. Similar letters were written to Nucon, Sunstate and Transpacific.
2904 On 20 March 2006, Mr Forbes responded to Mr Millhouse and Mr Anderson setting out a number of comments about the history of the engagement between Tarong North and IFB and the difficulty that the proposed interim agreement would run only until 2 March 2007. Apart from that matter, Mr Forbes also said this:
I am also surprised to read that Pozzolanic will install a Temporary Ash Classifier at Tarong North in May/June and that not only will the product [from it] not be available to others (which I can understand, unless an appropriate toll charge can be agreed between the parties) but that ash not taken by them from the classifier will be directed to the [Tarong North] fly ash silo. If this includes coarse reject ash from the classifier it could significantly affect the variability of the particle size distribution of ash available to others and mean that the trials already conducted under the “Trial Agreement” may be irrelevant. Reject ash from this “temporary” classifier should be directed to waste, and not to product for sale to others. If the destination of reject ash from the classifier is not changed, other customers using Tarong North ash could fairly be described by Pozzolanic as “using the ash Pozzolanic rejects”. … It would also be interesting to note if, after installing this “temporary” classifier, Pozzolanic act to reduce their usage from [Tarong] in favour of [Tarong North], as this would indicate to me their intention to limit access by others to ash, even if it is surplus to their requirements.
2905 On 23 March 2006, Nucon wrote to Mr Anderson confirming its interest in TEC’s draft proposal for the supply of flyash from Tarong North. Mr Cooper said in his letter that he was concerned about the “process flow” for the classifier to be constructed by Pozzolanic at Tarong North. Mr Cooper attached a process flow diagram which suggested that classified ash would be pumped into a classified load-out ash silo and that reject ash from the silo would be pumped into the existing 700 tonne silo at Tarong North. Mr Cooper said that he was “extremely concerned” that the ash in the existing silo from which third parties take ash, would be “the equivalent of reject ash and it will be uneconomic and carry too high a risk to process for use in concrete”. Although the ash was thought to be suitable for use in concrete by Sunstate by blending unprocessed ash with their clinker for milling to blend a flyash blended cement product, use of the reject ash would otherwise be uneconomic, it was said. Mr Cooper proposed that the reject ash from the Pozzolanic temporary classifier ought to be “slurried and pumped via the existing TN system to the ash dam thus avoiding contamination of the product in the take-off silo”.
2906 On 27 March 2006, Nucon provided TEC with a final report concerning its flyash trials of Tarong North flyash. These results have been discussed earlier in these reasons. The trials were completed in November 2005. The end result of these extensive trials was a conclusion that:
Tarong North Fly ash is highly variable in quality and as such the product is unsuitable for use in concrete in its current form. It is concluded that the Raw fly ash will require considerable classification to achieve a finished product that complies with Australian standards [including AS 3582.1-1998”].
2907 On 21 April 2006, Mr White pursued discussions with Mr Franklin by email about the classifier installation project for Tarong North. Mr White wanted to confirm Mr Franklin’s permission to proceed with the project, secure a licence to occupy the site and confirm the local Council requirements which would need to be satisfied. At Item 4 of the email, Mr White said this:
Reject disposal and run of station ash quality for others.
There are a number of interlinked issues concerning the disposal of classifier reject and the ash supply to third parties from Tarong North. For Pozzolanic to separately dispose of reject adds very considerable cost to the project and potentially limits ash processing.
[emphasis added]
2908 Mr White said that the timeframe for completion of the project was “very tight” and if not completed before the commencement of the planned unit outage at Tarong, Pozzolanic would run out of ash in SEQ after the first week of the outage and thus, Mr White said he would like to start constructing of the temporary classifier as soon as possible.
2909 On 21 April 2006, Mr White sent a letter to Mr Anderson dealing with the topic of the expiry and renewal of the Fly Ash Supply Agreement. Mr White’s proposal was that the current agreement should be renewed for five to 10 years although it should set a volume entitlement of 600,000 tonnes per annum as Pozzolanic’s “total first rights off-take”. This would “ensure a known ash volume available” to Pozzolanic, and to others, and securing 600Kt would be acceptable to Pozzolanic provided the volume could be reviewed annually based on the off-take volumes of Pozzolanic and others. It would be essential, however, for Pozzolanic to have “the first rights to the volume of ash specified”. Pozzolanic would be content with a simplified, perhaps single, flat lump sum royalty payment.
2910 As to Tarong North, Mr White said this:
4. Enter a separate contemporaneous agreement for Pozzolanic to build, own and operate ROS supply facilities open to all at Tarong North. This would provide access to Tarong North ROS for other parties. Suggested terms are:
a. Tarong pay an annual lump sum to Pozzolanic for the capital, operation and maintenance of the facility (perhaps as a royalty rebate) for up to 50,000t per annum supply.
b. The facilities are high standard, weighbridge-equipped installations with electronic dispatch management.
c. The ROS available in the facilities is of the same general quality as the classifier feedstock used by Pozzolanic.
d. Commercial arrangements for third party purchasers will be with Tarong Energy, so they do not have to purchase from Pozzolanic.
e. The availability of ROS is subject to the daily ash production quantity of the power stations and Pozzolanic off-take within its volume limit.
If a third party required a significantly larger volume of ROS then Pozzolanic would work with Tarong in good faith to establish the cost and feasibility of supplying this material. Similarly, if supply of Tarong ROS was essential a proposal to achieve this could be developed.
2911 An attachment to Mr White’s letter of 21 April 2006 sets out a summary of “Agreement Renewal Issues” as between TEC and Pozzolanic, from Pozzolanic’s perspective. The attachment puts Pozzolanic’s position in this way:
The issues raised by Pozzolanic and Tarong for the renewal of the ash supply agreement are set out below:
Pozzolanic
Pozzolanic is very interested to continue an ash supply arrangement with Tarong and plans significant further investment to make Tarong the key ash source for all South East Queensland markets with a 2006 off-take of 400,000 tonnes. For this reason an EOI/Tender process is of great concern to Pozzolanic as a potential threat to security of supply. This is largely because it is not possible to mitigate this risk without considerable capital expenditure elsewhere which would make future investment at Tarong difficult.
Tarong
Third party supply – [TEC] wish to ensure third parties for the ash resource having the opportunity to gain access to ash that is available.
ACCC – Tarong Energy wishes to be assured that the future ash supply agreement does not attract any adverse interest from the ACCC.
[TEC] wishes to have only one operator on both power station sites.
Continued high off-take – [TEC] wishes Pozzolanic to continue to take the current and increasing volumes of ash.
Ash Quantities and Availability
… The current run of station dispatch facility at Tarong North is not suitable for a commercial dispatch operation, which limits access to ash for third parties. Overall ash volume is not a limiting factor. The table below indicates that while Pozzolanic takes a considerable volume there is a substantial volume of ash still available. The critical issue for Pozzolanic is access to sufficient volume during unit outages. This may limit volumes available to other parties.
[The table sets out flyash types available from Tarong and Tarong North by volume.]
Investigations currently underway to compare Tarong and Tarong North ash properties and performance indicate that there is little difference between the two materials.
Access to Run of Station Ash for Third Parties
Pozzolanic have conducted a detailed review of the practical issues involved in making run of station (ROS) available to third parties in a safe and cost effective manner. There are several issues to consider:
Location of a ROS dispatch facility. …
Equipment and capacity. If Pozzolanic is to extract, move and make ROS available this will increase the installed capacity required for all plant.
Quality and quantity. Quality and quantity of ROS from both stations is variable. Pozzolanic operational plans at present are to process the entire volume of Tarong North ROS through the new facility when the Stage 2 installation is completed. A larger volume of similar ROS is available at Tarong but the location and equipment issues are more difficult as most existing plant is at capacity and little suitable space is available.
Pozzolanic believe they could resolve the above issues within certain capacity limits (probably 50,000t at Tarong North). There is an issue that during unit outages at either power station the capacity to supply ROS would be reduced.
The cost of a facility including capital, operations and maintenance has been estimated at $500,000 per annum for 50,000t. This is based on the cost of silo/weighbridge installations and the current production costs for ash from our Tarong facilities.
2912 On 27 April 2006, Mr White met with representatives of Tarong North to discuss the classifier installation.
2913 On 28 April 2006, Mr White again wrote to Mr Tellam about the project. Mr White emphasised the need to commence construction of the facility within the following two weeks so as to complete construction of the classifier prior to the unit outage at Tarong. The arrangement was that TEC would provide permission to proceed promptly upon resolution of the “issue” concerning “disposal of reject ash”, and Tarong North would provide permission to proceed promptly with construction subject to approval of drawings and terms. The licence to operate would be “a right to operate” and nothing in the nature of a lease. As to reject ash, Mr White said this:
4. Reject Ash
The issue of reject ash was discussed. The main concern of [TEC] was the perceived effect on ash quality for third parties taking ash from Tarong North. Pozzolanic pointed out that the current quality is quite variable and the largest customer Sunstate had indicated a preference for coarser ash. In order to ensure run of station ash (ROS) was available to third parties the following options were identified. They are listed in order of simplicity to implement.
A. Timing of Tarong North Classifier Operations
Pozzolanic do not operate the classifier at Tarong North for a period each day during which third parties can load ROS. The suggested loading period was 8 hours during daytime possibly increasing to 12 after the unit outage depending on demand. Ash [slurrying] operations would be timed so that the classifier reject would be removed from the Tarong North silo at the beginning of the loading period.
B. Provide ROS at Pozzolanic’s Tarong facility
Pozzolanic could make ROS available at its Tarong facility by loading third parties with the current classifier feedstock (Zone 1 ash). This ash is quite similar to the Tarong North ROS. There would be some restrictions on the total volume that could be made available in this way.
C. Dispose of Reject to the Ash Hopper Overflow Pipeline
The ash hopper overflow carries 80l/s of water. This would be easily able to carry the reject ash volume to the ash dam. This option has some limits in terms of the total period for which it could be operated (12-18 months) and requires engineering verification.
D. Load Third Parties from the Classifier Feed Bin
This option is possible but the operational and traffic management issues make it a last resort option.
Pozzolanic is prepared to commit to either or both of options A and B. Option A requires the least change to current systems but option B would remove any restriction on Pozzolanic off-take at Tarong North. Pozzolanic also undertakes to assist with assessing the feasibility of option C and if able to be implemented safely and at a low cost would be happy to commit to this option provided it does not delay commencement of classifying operations.
Pozzolanic considers that these commitments should remove any obstacle to an approval to proceed with the Tarong North classifier based on ash supply to third parties.
[emphasis added]
2914 On 15 May 2006, Mr White sent a letter to Mr Tellam and Mr Anderson about aspects of Tarong ash supply during the 2006 unit outage. Mr White said that Pozzolanic was becoming concerned about its ability to complete the Tarong North project in time for the Tarong outage and agitated greater liaison with Tarong North to advance the project. Mr White said that Pozzolanic’s requirements for ash from Tarong North during the proposed Tarong outage had been reviewed against Pozzolanic’s “demand models”. Mr White attached three graphs going to those matters. Mr White said that based upon the data, Pozzolanic would “really need all the ash from Tarong North to make it through”. Moreover, Mr White said that even after the period of the outage, Pozzolanic would need to take into account that the value of the classifier at Tarong North is only realised if it operates at full capacity. Mr White said that initial projections of demand and supply assumed 400tpd at Tarong North. Mr White said that during the last month “underlying and project demand have both risen significantly” which would bring stocks below the critical limit for avoiding local stockouts to customers for a period of almost one month (as suggested in Figure 1 of the data).
2915 As to third party access to ash at Tarong North, Mr White said this:
During discussions about ash availability to third parties a few weeks ago Pozzolanic indicated that it may be possible to stop classification operations at Tarong North for 8 hours per day to allow others access to normal run of station ash. This would reduce ash production from Tarong North to 360tpd at maximum. This change increases the stock out period to over two months and increases its severity including significant periods of total stock outages in SEQ (Figure 2). This represents a major disruption to all construction activity in SEQ.
If Pozzolanic take all available ash from Tarong North (assume 820tpd with an average 55% yield of classified product) this can generate around 450tpd of product. This production rate just keeps ash stocks at above the local stock out level (Figure 3). Even at this rate Pozzolanic will be seeking to increase recovery rates from Tarong to the limit of equipment capacity to provide some buffer against equipment or other operational problems. This option is the only one that is acceptable to Pozzolanic from a risk viewpoint.
Ash for Third Parties
Given the above the only way for Pozzolanic to avoid a stock outage and provide ash to third parties is to make [Tarong] run of station available during the unit outage. We are not confident that we will be able to do this within the time available before the outage but we will look at all options. Longer term this is also the option that provides the greatest flexibility and certainty of ash supply to third parties as well as ensuring a more consistent quality that will be very similar to Tarong North ROS.
[emphasis added]
2916 Mr White strongly emphasised the “intense pressure within Cement Australia” to resolve these issues as soon as possible.
2917 On 29 May 2006, Mr Franklin wrote to Mr White in response to Mr White’s earlier letter of 27 February 2006. The letter is dated 29 May 2005 which, obviously enough, is a mistake as the letter is expressly responsive to the 27 February 2006 letter. By that letter, Mr Franklin gave approval for “the installation and operation of [a] temporary Classifier at the Tarong North plant for the off-take of cement grade fly ash”. The approval was subject to 20 conditions. Apart from matters relating to approval of the engineering drawings, permits, government approvals, insurances and workplace regulatory arrangements, Mr Franklin conditioned the approval on Pozzolanic ensuring that the “operation of the classifier will not restrict access by 3rd parties to the existing fly ash silo”. Conditions 18, 19 and 20 were these:
18. This approval is given subject to the existence of an appropriate contract between Tarong Energy and Pozzolanic for the removal of fly ash from Tarong North. Tarong North confirms that advice from Tarong Energy is that an appropriate contract exists but understands that an addendum to this contract will be prepared to allow for the off-take of Tarong North Ash via the classifier.
19. Upon advice from Tarong Energy and Pozzolanic that an appropriate contract no longer exists then this approval is withdrawn. Tarong North will have an option to purchase the Classifier at an agreed value. …
20. Connection to the proposed new silo storage complex and weighbridge will be subject to separate approval and conditions if and when it proceeds.
[emphasis added]
2918 On 30 May 2006, Mr White sent an email to Mr Zeitlyn, Mr Chalmers and Mr West arising out of a conversation he had with Mr Forbes. Mr Forbes had explained that his organisation had been offered trials with Tarong North ash which had been conducted. Mr Forbes was concerned that the trials had ceased and that terms offered to his organisation for the future were based upon accepting whatever ash might be in the Tarong North ROS ash silo. CS Energy had told Mr Forbes that Swanbank ash was not available and as to Millmerran, Mr Forbes had been told that Millmerran had an agreement with Pozzolanic and would not offer ash to him notwithstanding that the agreement was not exclusive. Mr White told Mr Forbes, among other things, that:
Tarong, Pozzolanic planned to process all Tarong North ash because we needed it and there would only be reject [ash]. We had offered numerous options to [TEC] to make other ash available [at Tarong North] but while we were willing to operate these [options] we would not pay for them so the decision was Tarong’s [decision]. We were not likely to proceed with Millmerran.
…
Pozzo and Cement Australia always had competed and would continue to compete vigorously to retain existing customers and obtain new ones. Pozzolanic had not had any influence on the offer of ash to third parties except where it restricted Pozzolanic activities or rights under contract. In fact we had offered several options to make such supply possible at Tarong. Tarong North had not communicated to us a positive experience in the operation of ash supply via the ROS silo and expressed relief that this would come to an end.
[emphasis added]
2919 In the Managing Director’s Board Report for May 2006, there is a report on the topic of “Pozzolanic Activities and Projects”. As to “Tarong”, the report says this: “Tarong North issues resolved, no run of station will be guaranteed for others. Tarong have issued EOI request despite Pozzolanic alternative”, and as to “Tarong North”, the report says this: “Classifier under construction – labour difficult to get, target completion 20 July …”.
2920 On 31 May 2006, Mr White wrote to Mr Franklin acknowledging the letter of 29 May 2006 concerning the approval to proceed with the classifier at Tarong North. Mr White said that Pozzolanic accepted all of the conditions in the letter except Item 19 concerning the sale of the classifier to Tarong North at an agreed value should an ash supply contract no longer subsist between TEC and Pozzolanic.
2921 Mr White said that Mr Forbes’s organisation was the only one seeking ROS rather than reject ash and that concrete applications seemed unlikely as the ash did not meet the Australian Standard. Mr Forbes was expressing concern that he had not been able to obtain a source of ash in the period it would take his organisation to establish at Millmerran. Mr White explained that Swanbank ash was being offered to customers and he might like to put a proposal to Mr White. Mr Forbes suggested that 50Kt would be required, if the price was right, and he would wish to collect it himself.
2922 On 18 May 2006, TEC had prepared a technical paper entitled “Disposal of Fly Ash from Pozzolanic’s Proposed Tarong North Classifier Plant” (Ex-21, RAH-3). The paper describes the proposal in this way. Flyash at Tarong North is removed from the flue gas by a bag filter system that drops ash into hoppers and onto a bucket conveyor into a 700 tonne flyash silo. The Pozzolanic proposal involved placing a classifier between the bag filter and the flyash silo with a separate bypass to be used when the plant is non-operational. From there, the ROS ash is mixed with water to form a paste which is pumped to the ash dam. The truck-loading system being operated to remove ROS ash from the Tarong North flyash silo by Pozzolanic and other off-takers was primarily designed for “emergency bypass use only”. That use represented a way of emptying the silo in case there was a system failure, with the pumping and associated equipment. The tonnage flow rates through the emergency chute for the off-take of flyash from the silo had caused a number of operational and maintenance issues and, as well, the seal coupling to the truck minimising dust hazard, had proved inadequate at times.
2923 The report observes that Pozzolanic had established a processing plant at the Tarong station and in order to obtain flyash from Tarong North, Pozzolanic trucked Tarong North ROS flyash from the Tarong North silo to the processing facility at Tarong for processing into concrete grade flyash. The flyash then not utilised was disposed of in the ash dam at the Tarong site. The continuing use of the loading facility at Tarong North was of concern to management at Tarong North.
2924 The Pozzolanic proposal for new plant involved installing a classifier which would also incorporate a new truck-loading facility. The raw Tarong North flyash would be processed through the plant to produce concrete grade flyash and then loaded directly into trucks. The flyash not utilised in this process (about 45% of total production of ROS ash) would be disposed of in the ash dam on the Tarong North site. The report observes that in order to increase the amount of ROS ash removed from the Tarong North site, thus minimising waste, Tarong North had decided to allow other third party users of flyash to access flyash at Tarong North on an initial trial basis which was implemented over a period of nine months. In January 2006, the trial was concluded to enable the results of it to be assessed. The assessment suggested that, according to the report, off-takers, apart from Pozzolanic, would be interested in continuing to take flyash on a larger scale and TEC was proceeding to put in place contracts for the sale of Tarong North flyash to those off-takers. Those arrangements would be in place for the period up to March 2007 when information from an EOI process would be evaluated. TEC’s EOI process would seek submissions for third parties to access Tarong North (or Tarong) flyash for the period March 2007 to March 2008, in conjunction with the current Pozzolanic contract; March 2008 to 2010; and in the period after 2010.
2925 The report observes that Pozzolanic’s proposal for the installation of classifier plant and a truck-loading facility at Tarong North would involve returning flyash from the classifier to the Tarong North ash silo which could affect the overall sizing quality of the ash in the silo. The report notes that for the major off-taker during the trial period this eventuality was not an issue due to the intended purpose of the ash once taken, but for others it was an issue. The report then examines four methodologies for dealing with reject ash from the proposed classifier to overcome the return of reject ash from the classifier to the Tarong North ash silo and the consequential affect on overall sizing of the ash in the silo. The four options were: redirect the flyash returned from the classifier to the ash hopper overflow; install a separate silo for the material which would then be fed into a particular phase of the ash disposal system; not operate the classifier at certain times of the day so that third parties would have access to Tarong North ROS for time periods of eight hours; and third parties take ash from the Pozzolanic facility at Tarong rather than Tarong North’s silo.
2926 In summary, the result of the analysis was that TEC and Tarong North’s investigation of the four available options from an operational and capital expenditure perspective revealed “no clear option for the short term to supply the other off-takers requiring ash from [Tarong North] of the same quality as during the trial period”. The report notes that Pozzolanic, under its current contract, has “first rights to take as much flyash as they wish from [Tarong] and [Tarong North]” and that the proposed contracts with other off-takers would only run until March 2007 and then all arrangements would be subject to the EOI process.
2927 The report concludes that none of the four options could be justified in the short term; Tarong North should allow Pozzolanic to build and operate a flyash classifier at Tarong North until the end of its current contract with waste product being returned to the Tarong North ash silo; contracts be put in place with third parties to allow them to take flyash from the Tarong North flyash silo but with no guarantee of quality being given; use of the Tarong North flyash silo off-take be at the discretion of Tarong North management; and the EOI process ought to enable third parties to suggest other options to TEC for the post-March 2007 period.
2928 In June 2006, Cement Australia produced a capital expenditure review as part of the FINPLAN for 2006-2010. In that document, Cement Australia identifies its capital expenditure requirements for Tarong, including the Tarong North classifier. As to the overall strategy, the document says that Cement Australia intends to expand the current Tarong site with a second weighbridge designed for B double transport adjacent to the current weighbridge. Classifiers would be moved adjacent to the power station precipitators which would allow the current transfer system to pump classified rather than unclassified ash which, in turn, would enable ash production to reach the capacity of the transfer stations to pump ash to the loading facility. The document says that Tarong North ash would continue to be transferred by truck but the rate of transfer would be determined by need, either strategic or operational. As to the Tarong North classifier, the review document says this:
Without the Tarong North classifier, shifting of the Tarong classifiers cannot be carried out without a serious supply disruption. Tarong North will also buffer against double unit outages at Tarong (which do happen) that could potentially cut 700tpd from the Tarong total output. Equipment at Tarong North is important strategically as it confirms the uncertainty about the quality of the Tarong North ROS.
2929 The three options identified by Mr White were these:
1. Continue with the current plan for a weighbridge and 1250t storage facility adjacent to Tarong North station. This option raises the issue of having “two” products from Tarong [and] limited ability to manage future changes.
2. Expand the current site with a second weighbridge (design for b-doubles) adjacent to the current bridge. In stages move the classifiers down to a location adjacent to the power station precipitators. This would allow the current transfer system to pump classified rather than unclassified ash essentially enabling ash production to reach the capacity of the transfer stations to pump ash to the loading facility. Put a 200t silo in the place of each classifier. Tarong North ash would continue to be transferred by truck but the rate would be determined by need (strategic or operational). This option offers further potential cost savings by reducing the need for Sunday and 24 hour weekday operations.
3. Essentially the same as option 2 for production rate but shifting the location of truck loading to a much more convenient site and enabling transfer from Tarong North by pumping. This option is much more expensive than the other two.
[emphasis added]
2930 In the paper, Mr White says that the analysis results in the conclusion Option 2 was favoured as it provided 36% more production capacity for only 10% more capital. Mr White said that from a production viewpoint, the lower efficiency of truck transfer from Tarong North would be offset by the higher efficiency of pumping operations at Tarong. Apart from outages, Pozzolanic would be able to keep transfers low. Mr White’s paper reflects in the same terms as quoted above the “strategic imperative” of equipment at Tarong North.
2931 Mr White accepted that this paper was “probably prepared” by him. Mr White gave evidence that, by this time, he “very clearly knew” that Tarong North ROS ash was “very variable” and it would be “quite difficult” to run a classifier using Tarong North ROS ash (T, p 2510, lns 1-7). Mr White did not accept the proposition that installing equipment at Tarong North was “important strategically”, as directed to confirming uncertainty “in the mind of third parties”. Mr White gave evidence that a classifier was installed at Tarong North because it was not feasible to continue a large-scale operation trucking ROS ash to Pozzolanic’s classifiers at Tarong. Pozzolanic wanted to take ash from the hoppers at Tarong North (rather than from the ROS ash silo), where the ash was not variable and feed that ash into a classifier (T, p 2510, lns 17-20).
2932 Mr White did not accept that Pozzolanic had installed a classifier at Tarong North to make the quality of the ash for third parties “more uncertain” (T, p 2510, lns 22-26). As to this issue, Mr White accepted that the reject ash from the classifier at Tarong North would be deposited in the ROS ash silo and thus it would receive both unprocessed ROS ash and reject ash from the classifier, once installed. Mr White also accepted that Pozzolanic had determined that there were different degrees of fineness in the ash in different hoppers at Tarong North with the result that Pozzolanic concentrated on the hoppers producing the “biggest yield” (the finest ash) when taking ash from the hoppers for classification. Pozzolanic knew of the different ash quality in different hoppers due to ash sampling based on ash taken from sampling points under the hoppers. Until the commissioning of the classifier, however, Pozzolanic did not take any ash for processing from the hoppers.
2933 All ash was taken from the Tarong North ROS ash silo, which was a mixture of ash from all of the hoppers, and taken by truck to the Tarong classifiers (T, p 2511, lns 1-24). Nevertheless, the mechanical handling and tipping system (loading the silo) resulted in a certain degree of ash separation so that ash at the bottom of the silo (heavier particles) tended to be a lot more variable than ash at the top (T, p 2511, lns 26-36).
2934 Mr White accepted that once the classifier was operating, the fineness of the ash in the ROS ash silo would necessarily be different from the pre-classifier fineness, first, because the fine ash rendering the biggest yield from the preferred sampled hoppers was being taken directly by Pozzolanic for classification and, second, reject ash from the classifier was also being pumped into the ROS ash silo. Thus, on average, the fineness of the ash in the silo after classification would have been coarser than the fineness of the ash entering the silo before the classifier was operating (T, p 2511, lns 38-46; p 2512, lns 1-14).
2935 On 26 July 2006, Mr Anderson sent a letter to Mr White in relation to the interim sale of flyash from Tarong North. Mr Anderson observed that under the TEC/Pozzolanic Agreement of 26 February 2003, Pozzolanic had “the first right to recover up to 100% of the ash extracted from the Tarong Power Station [Tarong] and the Tarong North Power Station [Tarong North]”; flyash not taken by Pozzolanic under the Agreement could be taken by TEC or made available to third parties at TEC’s discretion; and up until January 2006, TEC had allowed ash not taken by Pozzolanic under the Agreement to be made available to third parties from the Tarong North flyash silo. Mr Anderson said that a number of third parties had expressed interest in continuing to purchase Tarong North flyash not required by Pozzolanic under the Agreement, from the Tarong North flyash silo. Mr Anderson observed that Pozzolanic was installing a temporary classifier at Tarong North “to ensure the stable supply of ash under the Agreement during the planned outages at [Tarong] during the August and September 2006”. Mr Anderson said that TEC’s understanding was that the installation was expected to be completed by July 2006 but that the installation had been delayed, and, due to operational problems with the Tarong North truck-loadout system on the Tarong North flyash silo, Pozzolanic had proposed to repair the truck-loadout system and use the Tarong North flyash silo as the source of Tarong North flyash until completion of the temporary classifier by mid-September 2006, as expected. In the result, Mr Anderson, by reference to cl 7.1 of the Agreement, requested Mr White to advise TEC of the capacity of the Tarong North flyash silo to supply ash to third parties.
2936 On 28 July 2006, Mr White submitted a letter to TEC attaching Pozzolanic’s EOI in the sale and removal of bulk flyash from Tarong and Tarong North Power Stations. In the EOI, Pozzolanic made some observations about the relationship between daily and weekly off-take and matching demand, and also how third party issues ought to be dealt with. As to the relationship between off-take of ash and matching demand, Pozzolanic said (at p 8) that the reality of supplying ash products into the market (predominantly for supply to concrete producers) is that “demand varies each weekday, seasonally and with spot demand such as large projects”. Pozzolanic said that it would need to have the ability to take more ash in one day than the annual demand divided by 365 days. Pozzolanic said that current daily peaks between 1,800 and 1,900 tonnes and thus “a minimum acceptable tonnage would be 2,000 tonnes with the ability to take more subject to availability”.
2937 At p 12, Pozzolanic said as to third party access that it “… completely accepts the rights of any party [TEC] approves to get ash from [Tarong] and [Tarong North] to the limits imposed by any agreement with Pozzolanic” [emphasis added]. Pozzolanic then set out in the EOI what it described as “the limits of [its] involvement in third party activities”. As to those matters, Pozzolanic said that the installation of third party equipment and access to the ash collection hoppers at Tarong or the ash storage silo at Tarong North would not cause any difficulty from a physical access point of view as there was sufficient space to accommodate additional extraction equipment at Tarong and Pozzolanic did not plan to make regular use of the Tarong North ash silo. Pozzolanic said that if third parties commenced operation there would need to be processes in place to determine responsibility for operational incidents.
2938 As to the daily ROS ash supply, Pozzolanic said that third parties would need to be told about Pozzolanic’s first rights of ash off-take and the potential implications for third parties during periods of lower ash production for any reason so that those parties could put in place appropriate contingency measures.
2939 On 31 July 2006, Mr White responded to Mr Anderson’s letter of 26 July 2006. Mr White put Pozzolanic’s position in relation to access to the Tarong North ash silo, in these terms:
Due to a range of problems with low fly ash yield, ash quality changes and breakdowns in the loading system at TNPS [Tarong North] fly ash stocks for Cement Australia were well below target level prior to the Unit 3 outage at TPS [Tarong]. This means a greater requirement for ash over the next few weeks to recover.
On average, the weekly production possible with all the TNPS ash on week days does not quite meet demand during the TPS unit outage. Thus there is a greatly increased vulnerability to lowered production.
To manage this, Pozzolanic plan to take all TNPS ash during week days for classification at the existing plant and some or all of the ash during weekends depending on demand.
The new classifier at TNPS has been delayed [because] of a variety of reasons including interconnection timing issues. This means the plant will not be operating fully until mid September and the reject will not be available in the TNPS ash silo until that time.
2940 In order to provide some certainty for third party customers of TEC, Mr White proposed the following matters in the letter: Pozzolanic would have sole access to the Tarong North silo over a 24 hour cycle each day from Monday to Friday each week; on Wednesday of each week Pozzolanic would advise TEC of Pozzolanic’s off-take plans for the weekend; in the 24 hour cycle for Saturday and Sunday, defined periods would be identified during which third parties could take ash “in the likely event that Pozzolanic does not require it all”; Pozzolanic would make reasonable endeavours to ensure that access period scheduled for third parties were not at odd hours and were of a reasonable length; the proposal would endure until the end of the Tarong unit outage (22 September 2006); and once the Tarong North classifier became fully operational, Pozzolanic would not require access to the Tarong North ash silo except as an emergency backup. Mr White observed that as a consequence of the arrangement he had proposed, third party customers of Tarong North would have “a considerable benefit of a Pozzolanic re-design truck loading arrangement providing improved reliability and operability”.
2941 On 26 September 2006, Mr White sent a letter to Mr Tellam at Tarong North. In that letter, Mr White said that since the unit outage at Tarong had finished, Pozzolanic had re-established sufficient ash production, without a requirement for all of the ash from Tarong North. Mr White said that it would be practical for third parties to commence taking ash subject to a number of matters. First, the Tarong classifier was still awaiting electrical connection which could not be completed until the Tarong North outage in October 2006. Second, until the classifier became fully operational, the ash in the Tarong North silo would be ROS ash from Tarong North. Third, once the classifier became operational, the ash in the Tarong North silo would be a mixture of ROS ash and the oversize ash produced by the classifier. Fourth, Pozzolanic owned the equipment used for truck-loading at Tarong North and would continue to maintain it. Mr White said that Pozzolanic had offered to provide the truck-loading equipment to Tarong North at cost and to continue to maintain it on behalf of all users. Mr White expected that a suitable arrangement would be struck to that effect with Tarong North but if not, Pozzolanic might choose to remove its equipment and replace it with the original Tarong North equipment. Fifth, Mr White expected that the quantity of ash available ought to be sufficient for all potential customers under normal Tarong North operational conditions. Mr White said that when the classifier is operating, the average volume of ash remaining, if all ash is classified, would be approximately 360 tonnes per day. Mr White said that the classification of all Tarong North ash was expected to be required about 20%-30% of the time, in any year, “mainly at times of lower generation, unit outages and lower ash production due to coal changes”. Sixth, Mr White expected that third party sales ought to be able to commence immediately, and for “the next 6-8 weeks while the completion and commissioning of the classifier is underway, Pozzolanic asks to be notified if third party customer sales volumes [would] regularly exceed 250 tonnes per day”.
2942 On 31 October 2006, Mr Forbes sent a letter to Mr Anderson at Tarong North in relation to Tarong North’s interim sale of flyash proposal. Mr Forbes said that IFB had become frustrated with its inability to access any flyash from Tarong North under the interim arrangements during the four months prior to Tarong North’s interim supply proposal of 18 July 2006. Mr Forbes said that he believed the prospects for “effective future access” from November forwards, were “severely limited” due to a number of factors. They were that trial burns of coal were planned from late October to late December 2006 which might affect the quality of the ash available; Tarong proposed an outage of Unit 1 from 17 to 27 November 2006 which would likely result in Pozzolanic requiring any available ash from Tarong North to supplement its ash requirements from Tarong with the result that no ash would be available to IFB in that period; Pozzolanic’s classifier at Tarong North would be commissioned in late November 2006 and from that date, the silo from which third parties would draw ash would be contaminated with reject ash from Pozzolanic’s classifier; and, the truck-loading equipment at the Tarong North ash silo would be owned by Pozzolanic, and Tarong North had not reached any agreement with Pozzolanic regarding its future maintenance with the result that it might be removed and replaced with the original loading equipment which had demonstrated “operational issues”.
2943 Mr Forbes summarised his position on these topics in this way:
… the effective denial of access to flyash supply which began with a six month inexplicable delay (after completion of the trial period in January this year) to prepare a simple interim access agreement and supposedly negotiate arrangements with the existing ash customer, which continued with numerous excuses as to why interim access participants could not loadout ash between July and now, and finally made virtually permanent by the developments referred to above, reads as quite a farce and raises many questions. Apologies for this intemperate comment but you can surely imagine how this must look.
2944 On 22 March 2007, Pozzolanic lodged its tender for the sale and removal of flyash and bulk materials from Tarong and Tarong North Power Stations with TEC. Three periods were contemplated. The first concerned the purchase and removal of ash remaining after Pozzolanic’s exercise of its rights up to March 2008, under the Agreement of 26 February 2003. The second period was March 2008 to 2010 for the purchase and removal of ash produced during the period of use at the power stations of Meandu coal. The third period was the post-2010 period from which new coal would be used in the power stations. The schedules to the tender set out much of the commercially relevant information. Pozzolanic bid a lump sum payment subject to CPI adjustment. At p 9 of the tender (Point 6) Pozzolanic set out its position in relation to the facilitation of multiple off-takers on site, and Pozzolanic’s market position. In the document, Pozzolanic said that it completely supported the rights of any party, approved by TEC, to obtain ash from Tarong and Tarong North Power Stations, subject to the limits imposed by the grant of a first right of refusal in Pozzolanic to take ash as it had proposed in the tender document. Pozzolanic acknowledges that if it does not exercise its first right of refusal in respect of any specific quantity of ash, TEC would then be entitled to supply that quantity to a third party. Pozzolanic said in its tender that a third party’s need to install equipment and have access to the ash collection hoppers (and related services) at Tarong and Tarong North would not cause difficulty from a physical point of view. Pozzolanic said that there was sufficient space to accommodate additional extraction equipment at Tarong and Pozzolanic did not, in future, plan to make regular use of the Tarong North ash silo. Pozzolanic’s proposition about third party access to physical equipment was that any third party installations “must not compromise the operation of or restrict access to Pozzolanic equipment including ash transfer pipelines”.
2945 As to the operational daily ROS ash supply, Pozzolanic said in its tender that third parties would need to be told by TEC of Pozzolanic’s “first rights of ash off-take” and “the potential implications during periods of lower ash production for any reason” so those third parties could put in place appropriate contingency measures for supply during such periods. Pozzolanic said that it would facilitate this contingency planning by providing estimates of likely usage and advance notice, where possible, of periods when ash supply might be restricted. Pozzolanic said that it would also consider options of focusing its ash taking activities to maximise off-take from specific sources and hoppers (as set out in Schedule A to the tender) with the objective of providing specific hoppers that would be available to third parties “under normal power station operating conditions” (pp 9 and 10).
2946 In the tender document, Pozzolanic set out the real content of its proposal by reference to Schedules A to D. Schedule A addressed the sources of ash off-take Pozzolanic had nominated. In the period 2 March 2008 to 31 December 2010, Pozzolanic proposed a first right to take from precipitator Zones 2 and 3 at Tarong, 100% of the ash or 300,000 tonnes whichever was the larger volume, at normal ash production rates (Nomination A). In that period, as to Tarong North, Pozzolanic proposed a first right to ROS so as to make classified product up to a maximum of 150,000 tonnes or 100% of feasible classified product (Nomination B). As to precipitator Zone 1 at Tarong, Pozzolanic proposed a first right to take ROS from that zone so as to make up the balance of 300Kt to 550Kt (less the sources procured from Nominations A and B, ie. 100Kt to 200Kt) (Nomination C). In the post-2010 period, Pozzolanic made the same Nominations A and B but as to Nomination C, Pozzolanic nominated a first right to take ROS from Zone 1 to make the balance of 400Kt to 600Kt (less the totals taken under Nominations A and B). Pozzolanic said that the maximum practical volume of concrete grade ash that could be extracted using current technology at Tarong and Tarong North would be 700Kt during normal operations per annum (as for 2006). Pozzolanic described the strength of the commitment it wanted from TEC in response to the tender in these terms: “Pozzolanic require [an] absolute assurance of first right to take for sources A, B and C if the off-take volumes are to be met and as a condition of acceptance of this tender. However, under normal power station operating conditions Pozzolanic will only require 25-50% of the ash from source C”. The volumes indicated in Schedule A were said to be based on current market projections.
2947 In Schedule B, Pozzolanic set out the minimum annual ash off-take commitment for each nominated ash source (B1) and the projected daily, weekly, monthly maximum ash off-take requirements (B2) among other things. As to the projected daily, weekly, monthly maximum ash off-take requirements, Pozzolanic emphasised that ash demand is highly variable and the increasing size and pace of large projects was exacerbating fluctuations in demand. Demand was said to also fluctuate, typically, between the first and second half of the calendar year with the result that there would be periods of very high demand relative to the smoothed out average demand. Those propositions were supported by a graph showing sales in tonnes varying according to the percentage of weeks. As to Pozzolanic’s assessment of its requirements for priority access as described in the nominations in Schedule A, Pozzolanic said this:
The need for priority of access to sources A-C (Schedule A) is to ensure supply during periods of reduced power station operations. During normal operations (eg. 2006) Pozzolanic expect to focus off-take on sources A and B leaving significant volumes of source C for other takers. Pozzolanic will provide projections of use and indications of up coming periods of restricted availability to assist other takers. However, during periods of lowered ash availability Pozzolanic wishes to have the first right of refusal to take as much ash as is required to meet its needs from sources A-C up to the limit of the total amount of ash available.
2948 Pozzolanic was selected at TEC’s preferred tenderer. To that end, TEC proposed that Pozzolanic would have first rights to all ash from precipitators Zones 2, 3 and 4 on all Tarong units; Pozzolanic would have first rights to all ash from Passes 1 and 2 of precipitator Zone 1 on all Tarong units; and another third party tenderer would have first rights to all ash from Passes 3 and 4 of precipitator Zone 1 on all Tarong units. As to Tarong North, Pozzolanic was appointed preferred tenderer for the off-take of ash from the Tarong North hoppers as processed in Pozzolanic’s Tarong North classification “with all Ash not taken by Pozzolanic to be transferred to the TNPS Ash Silo”.
2949 A third party would be the preferred tenderer for ash removed from the Tarong North ash silo. A condition of any contractual arrangement which might be struck with Pozzolanic by TEC arising out of the tender process would be Pozzolanic obtaining “written indicative approval or authorisation from the [ACCC]” in relation to any contract.
2950 On 19 September 2007, Mr Millhouse sent Mr White and others the Minutes of a meeting between TEC and Pozzolanic on 30 August 2007 in relation to the flyash tender. The Minutes note that Pozzolanic would want to access 600,000 tonnes per annum over a 10 year period consistent with its business strategy and that TEC’s proposal “would have approximately 60% less value for Pozzolanic”. Pozzolanic suggested that there might be methods of properly dealing with third parties consistent with obligations arising under the Trade Practices Act. The Minutes suggest that Pozzolanic’s position was that authorisation was unlikely to be granted by the ACCC and that Pozzolanic’s position, in any event, was not to enter into any arrangements which may substantially lessen competition. TEC proposed a 12 month extension to the existing contract to enable identified issues to be addressed and the Minutes note that Pozzolanic agreed to that proposal.
2951 On 22 October 2007, Mr White sent a letter to Mr Millhouse at TEC noting that at the meeting on 30 August 2007 Pozzolanic and TEC had agreed to a 12 month extension of the Agreement. Mr White said that Pozzolanic had considered TEC’s proposals for access to ash and accepted the proposed arrangements concerning Tarong and Tarong North subject to TEC’s acceptance of the matters set out in Part 2 of Mr White’s 22 October 2007 letter. As to Part 2, Mr White said the restrictions on access, to the points of access described by TEC, would require further investment by Pozzolanic at Tarong. Pozzolanic suggested changes which resulted in a request to retain the right to take routinely unused ash from ash collection hoppers allocated to other third party tenderers. Second, Pozzolanic revised its commercial offer to $300,000. Third, Pozzolanic withdrew any proposal to transfer ash, “other than as an [affect] of its normal operations (ie TNPS classifier reject to the TNPS silo)” and withdrew support for any proposal for general access facilities for ash set out in the tender. That followed for Pozzolanic because that activity was otherwise provided for in accepting approaches from other third party tenderers. Fourth, Pozzolanic would cooperate with other bulk off-takers as set out in the tender.
PART 40
The Jones v Dunkel principles
2952 Because the respondents have not called evidence from a range of senior QCL and Cement Australia Executives who were closely engaged in aspects of the events and were influential in the decision-making process, the Commission contends that Jones v Dunkel (1959) 101 CLR 298 inferences are open and ought to be drawn adversely to the respondent companies.
2953 The relevant principles are these.
2954 An unexplained failure by a party to give evidence or call witnesses may (but not necessarily must) in appropriate circumstances lead to an inference that the uncalled evidence or missing material would not have assisted the party’s case. The rule operates against a party bearing the burden of proof but can also operate against a party not bearing that burden. The notion of “appropriate circumstances” contemplates circumstances existing where it is within the power of the relevant party to call the evidence not called. The significance, in deciding the questions of fact in controversy, to be attributed to the failure of a witness to be called to give evidence depends, in the end, upon whether in all the circumstances an inference can be drawn that the reason why the relevant party failed to call the particular witness was a fear of the evidence the witness might give. A party might fail to call a witness because it may not be in a position to do so or because the party may not be sufficiently aware of the evidence the witness might give or because the witness has no relevant relationship with the fact in issue about which one might expect the witness to be called.
2955 In this case, Mr Leon was a Director. He was the Managing Director and Chief Executive Officer. Mr Cadzow was a Director. Ms de Hayes was a Director. Mr Clough was a Director. None of these individuals gave evidence about anything. Mr Chalmers was a man who was regarded highly within the Cement Australia group of companies for his expertise in marketing, sales and forecasts of demand. He was not called to give evidence about any aspect of his engagement in the events between July 2004 and April 2005 (or earlier or later events). Mr Adams was the analyst who was retained to develop the Capex Request submission and produce many variations of the document. He also presented the flyash strategy at ECM meetings with others and at the Board meeting with others. The document that Mr Leon sent to the Directors seeking their support in a decision to approve the capital expenditure at Millmerran was written by Mr Adams. It was sent by Mr Adams to Mr Leon and Mr Leon forwarded it to the Directors with a paragraph by way of comment, which is reflected earlier in these reasons. Mr Adams did not give evidence, either.
2956 The failure of this group of people to be called to give evidence is a genuinely odd circumstance.
2957 Plainly enough, they all in substance fall within the camp of the respondents and although the Commission might have approached some of them about giving evidence, the natural gravitational pull of their alignment is with the respondents. It would have been natural for Cement Australia to call the individual in question. Mr Maycock on behalf of Cement Australia was asked about the reasons adopted by Cement Australia for going on with the Millmerran contract and deciding in March 2005 to invest the capital in the buyer’s facilities, in his evidence-in-chief. If that evidence naturally was to be given by the Chairman of the Board then it follows that evidence of the business reasons of the Directors would naturally be called by the respondents and be given by Mr Leon, Mr Cadzow, Mr Clough and Ms de Hayes. Aspects of the analysis might naturally have come from Mr Adams, called by Cement Australia. The Court, as the tribunal of fact, would naturally expect to hear evidence from these individuals on these questions because the Court is attempting to quell the controversy on all of the relevant evidence which ought properly be dispositive of the controversy.
2958 There is no explanation for the failure to call these witnesses and the fact that these proceeding are proceedings commenced against the respondent companies and two individual respondents by a regulator in which remedies are sought including civil pecuniary penalties is not a satisfactory explanation, of itself, for the failure of the individuals to be called to give evidence of things which presumably lie within their knowledge, comprehension and authority. No doubt the Commission elected not to call some of these individuals because they were perceived to be naturally aligned with Cement Australia.
2959 The consequence of failing to call a witness of the degree of proximity to the respondents as its own directors, its managing director and chief executive, its analyst at the centre of its analytical work on the very subject matter in dispute and other senior executives with clear authority and standing in the corporation on the questions in issue, is that an inference arises that the uncalled evidence from these witnesses would not have helped the party which failed to call evidence from them. Thus, the Court is entitled to take into account, and weigh in the balance according to all the evidence, in deciding whether to accept any particular evidence (either on affidavit from deponents or reflected in the content of documents admitted into evidence which relate to a matter about which the absent witnesses could have spoken), the inference that uncalled evidence about the reasons and purposes for deciding to go on with the Amended Millmerran Contract and deploy the capital on site (and other matters) would not have been helpful to the relevant respondent corporations. The probative point of such an inference is that the trier of fact is more willing to draw an inference which might fairly be drawn from other evidence, because the relevant respondent corporation being in a position, through the witnesses, to prove a proposition contrary to inferences otherwise arising, has chosen not to call that evidence.
2960 However, the inference that is entitled to be drawn, and which the trier of fact might be willing to draw in balancing all of the evidence, does not extend to an inference that the evidence not available to the Court is, in a sense, affirmatively damaging to the party electing not to call the evidence. Moreover, the burden of proof of the case falls upon the Commission and no inference derived from any principles governing the circumstances in which a Jones v Dunkel inference might arise enables any gap or deficiency in the evidence of the affirmative case on purpose or taking advantage of market power or other issues, to be made good by an inference resting upon the absence of evidence from anyone who might have been called no matter how central they may be to the spheres of operation of the relevant corporation. If the evidence and documents in the case properly suggest that a corporation engaged in conduct for a particular business reason or a particular purpose or that a corporation had no particular rationale available to it for a course of conduct in controversy, the failure to call witnesses who can speak to those topics permits the Court, in acting dispositively of a fact in issue, to resolve any doubt or ambiguity on the face of the other evidence adversely to the party who chose not to call witnesses who might have spoken to those matters in clarifying those doubts or ambiguities.
2961 It is important to remember, however, that the inference ought not to be drawn unless evidence is given by documents, affidavits or other oral evidence that, in principle, calls out for an answer from those individuals at or close to the centre of decision-making on the relevant questions within the corporation. If the party bearing the onus has not put on evidence of the contended conduct either directly or of secondary facts from which an inference might arise about the primary fact in issue, the relevant respondent corporation is unlikely to go into evidence on the topic or, more particularly, call evidence from individuals when no probative need arises for those individuals to address the question agitated against the respondent corporation.
2962 Because there is no direct evidence from any “decision-maker” on the reasons for going on with the Millmerran Contract by deploying the capital, this is not a case where the failure to call evidence from these individuals can be disregarded as simply supplementary or unnecessarily cumulative evidence on top of evidence which is otherwise available from the respondents.
2963 The question then is whether the inference properly arises and secondly whether the inference ought to be drawn. With respect, I would depart from the observations of Sackville J in Seven Network Ltd v News Ltd [2007] FCA 1062 at [470] to the extent that his Honour suggests that the inference is truly discretionary. If the reference to discretionary simply means that it falls to the trier of fact to determine whether the inference ought to be drawn, I would agree that drawing the inference is a discretionary matter but it seems to me that the two questions are whether the inference is open and then whether the inference ought, as a matter of evidence, to be drawn or not. I do not agree that the trier of fact in electing to draw or not draw the inference is exercising a true discretion.
2964 The authorities in support of the principles I have just described are these: Jones v Dunkel (1959) 101 CLR 298 at 308 per Kitto J; at 312 per Menzies J; and 320-322 per Windeyer J; Payne v Parker [1976] 1 NSWLR 191 at 200-202 per Glass JA; RPS v R (2000) 199 CLR 620 at 632 at [26], per Gaudron A-CJ, Gummow, Kirby and Hayne JJ; O’Donnell v Reichard [1975] VR 916 at 929 per Newton & Norris JJ; Brandi v Mingot (1976) 12 ALR 551 at 559 and 560 per Gibbs ACJ, Stephen, Mason, Murphy and Aickin JJ; Schellenberg v Tunnel Holdings Pty Limited (2000) 200 CLR 121 at 143 at [53] per Gleeson CJ and McHugh J; Heydon JD, Cross on Evidence, 9th Ed, LexisNexis, Butterworths, (see also the LexisNexis electronic subscription service at [1215] and the authorities discussed in that paragraph.
PART 41
Conclusions in relation to the second election to proceed
The Commission’s contentions as to the second election to proceed at Millmerran
2965 A synopsis of the Commission’s contentions is this.
2966 The Commission says that as the deadline for installing plant and equipment at Millmerran approached, Cement Australia, rather than negotiate a termination of the Amended Millmerran Contract, approved capital expenditure at Millmerran for the purposes of taking Millmerran’s unprocessed flyash, which it did not require and did not believe it could economically sell as concrete grade flyash to concrete producers, and thereby elected to continue in and with the Amended Millmerran Contract. The Commission contends that Cement Australia could have elected to either re-negotiate the Amended Millmerran Contract or terminate it or assign it to another. The Commission contends that Cement Australia, by causing Cement Australia Holdings between March and April 2005 to proceed with the amended contract in the way described, took advantage of its substantial degree of power in the SEQ concrete grade flyash market in contravention of s 46(1)(b) and (c) of the Act.
2967 At the time of engaging in the conduct, Cement Australia and Pozzolanic, it is said, had not taken any commercial quantities of flyash from Millmerran; had made the annual payments; did not need flyash from Millmerran to meet demand; and the supply of unprocessed flyash available to Pozzolanic from power stations in SEQ other than Millmerran, and the volume of concrete grade flyash that could be generated from that supply each year, substantially exceeded the demand for concrete grade flyash from customers in the SEQ concrete grade flyash market at the time, and the forecast demand, at the time.
2968 The Commission contends that the purposes engaging the conduct were to prevent the entry of any competitor into the SEQ unprocessed flyash market; deter and prevent any person from engaging in competitive conduct in that market; preventing entry of a competitor into the SEQ concrete grade flyash market; and deterring and preventing any person from engaging in competitive conduct in the SEQ concrete grade flyash market.
2969 In dealing with these contentions arising out of the events described in this Part, the respondent corporations have not called any evidence from Mr Chalmers, Mr Adams, Mr Leon, Mr Cadzow, Ms de Hayes or Mr Clough on the question of the business reasons for deciding to invest the capital at Millmerran and proceed with the Amended Millmerran Contract, or the purposes for doing so. Nor has any evidence been called from any of the alternate Directors directed to those topics to the extent that they may or may not have been engaged in any aspect of the discussion or decision-making, which is entirely unclear. Evidence has been called from Mr Maycock about those matters but his evidence is no more than speculation as to the steps Mr Leon might have taken in responding, orally, to Mr Clough’s questions about the expenditure or the steps Mr Leon might have taken in talking to the other Directors. Mr Maycock says that he was not engaged in any aspect of the discussion or decision-making with Mr Leon and nor was he engaged in any discussion with the other Directors inter se.
Conclusions
2970 The question to be determined in relation to the second election to proceed, under s 46, is whether Cement Australia in March 2005 enjoyed a substantial degree of power in the relevant market and whether it took advantage of that market power for a prescribed purpose in electing to deploy, or causing to be deployed, the capital at Millmerran to construct the classifier and related facilities, and whether its election not to engage in a negotiation so as to either bring the amended Millmerran Contract to an end, or cause it to be re-negotiated or assigned (to use the language of the Commission’s formulation of the contention), is the expression of the taking advantage of market power.
2971 As to the question of whether at March 2005 Cement Australia enjoyed a substantial degree of power in the SEQ concrete grade flyash market, there can be no doubt that Cement Australia enjoyed that position. The documents I have discussed in Parts 38 and 39 authored by Senior Executives of Cement Australia make it as plain as can be, that the view within Cement Australia was, at this time, that Cement Australia had historically enjoyed virtually a monopoly in a flyash saturated concrete grade flyash market and continued to enjoy that position although the absolutism of that position was beginning to be eroded by a number of factors, including the agitation of the independents, Boral’s actions and actions taken by Tarong North. One of those significant factors was the recognition in the documents that Cement Australia had priced the supply of flyash to the point where it had, in a real sense, enabled Nucon to be able to purchase and supply flyash from Bayswater and truck it approximately 800kms into the SEQ geographic region. Mr Chalmers made his views very plain about Cement Australia’s real market position (and some of the emerging threats to Cement Australia’s market position). Mr Adams expressed similar views in this period (quite apart from his first attempt at an analysis of the flyash market) and Mr White in his formulation of the strategic issues, goals and objectives had reflected the same view. The sophistry inherent in the notion that Cement Australia did not enjoy substantial market power is entirely inconsistent with Cement Australia’s own internal documents and the continuing market circumstances prevailing at March 2005 as already described. Challenges were, however, emerging particularly at Tarong North.
2972 The real question is whether the conduct of deploying the capital at Millmerran and refusing to negotiate a discharge of the amended Millmerran Contract is properly understood as taking advantage of that market power.
2973 There are two problems with that proposition.
2974 The first is that Pozzolanic at March 2005 was a party to an amended contract under which it (Cement Australia) had assumed a contractual obligation to discharge a burden under cl 3.3 of the Contract as amended to construct the buyer’s facilities so that they were completed to the satisfaction of the seller in all respects and ready for operation by 1 May 2005.
2975 Plainly enough, by March 2005, that obligation would not be able to be discharged by 1 May 2005, and in the event that Cement Australia elected to confirm its willingness to invest the capital at Millmerran, the time would need to be extended beyond 1 May 2005. As described earlier, a request to extend the time was made of Millmerran and Millmerran agreed to the extension.
2976 Although the source of a corporation’s market power might be found, or partly found, in a contractual right it enjoys (and which it might elect to waive or enforce) with the result that the exercise of the right might be found to constitute a taking advantage of market power, the discharge of a contractual obligation which forms part of the burden cast upon a corporation as part of a reciprocal benefit enjoyed by another party, is unlikely to be the expression of a taking advantage of market power by the corporation in performing and discharging that burden. In other words, if the Directors of Cement Australia took the view that the contractual obligation assumed by the company ought to be discharged according to the contract (albeit by an extended date), it seems difficult to convert the performance of that obligation, and the discharge of that burden, into a taking advantage of market power. A corporation without market power, in a workably competitive market, could elect to deploy the capital to build the buyer’s facilities at Millmerran in order to discharge a contractual burden cast upon it, and it follows that in constructing the facilities at Millmerran, the conduct is not referable only to any market power Cement Australia enjoyed in the supply of flyash in the SEQ concrete grade flyash market.
2977 It is sometimes thought, wrongly, especially in various strategic analyses of the financial implications of rights, obligations, benefits and burdens arising under a contract, that under our common law, a contract is simply regarded as a financial instrument conferring an option on parties to either perform the contract or pay damages. Contracts contain binding promises to engage in conduct according to the terms of the instrument and whilst the assessment of the financial consequences of failing to perform those promises, according to the terms of the contract, are typically measured by the extent to which a party might be put, in money terms, in the position they would have been in had the contract been performed, that measure of damages is not a substitution mechanism for undermining the significance of the obligation to perform the contractual promise itself.
2978 In this case, Cement Australia had assumed, and had bound itself, to a contractual obligation. The corresponding counterparty was a government owned corporation. Objectively viewed, the directors of a corporation bound by such a contract, in a relationship with such a counterparty, would be reluctant to simply abandon the corporation’s contractual obligations, and refuse to properly discharge the obligation to construct the buyer’s facilities. Certainly, Mr Maycock’s view was that Cement Australia ought not to expose itself to the reputational damage of such behaviour especially given the history of the relationship with Millmerran under that contract. However, of course, Mr Maycock’s position is that he ultimately had nothing to do with the decision-making of Cement Australia on this question. Who knows (other than Cement Australia and its legal advisers) whether other Directors of Cement Australia held that view about it. Either they held such a view and preferred not to be cross-examined about it or perhaps they did not hold that view and did not wish to give evidence about their views at all. On 18 March 2005, Mr Leon gave a brief explanation of the reason for the investment in his email sending on to the Directors the Capex Request document prepared by Mr Adams. Mr Leon told the Directors, which presumably was an expression of his own view, that Cement Australia was “obliged to make this investment under the terms of our agreement with the power station” and because Cement Australia had “delayed the investment as long as we dare”, Cement Australia found itself in a position where it was “now obliged to act”, that is, to make the investment under the terms of the agreement with the power station.
2979 Mr Leon sought the support of the Directors for the submission attached to his email.
2980 Nevertheless, viewed objectively, a corporation whether with or without market power, confronted with a contractual obligation to discharge, could rationally elect to perform the obligation and doing so would not be referable only to any market power a corporation might in those circumstances enjoy. Presumably, the Directors have elected not to give evidence on this question because they take the view that the Commission must affirmatively prove the exercise or use of market power in electing to build the buyer’s facilities in discharge of the contractual promise or in refusing to negotiate changes to the contract, and on the evidence “taking advantage” is not made out and therefore “best not to say anything”.
2981 I am not satisfied that the material fairly establishes that the Directors of Cement Australia did not decide to deploy the capital at Millmerran and build the buyer’s facilities to discharge a contractual obligation. By this observation, I am not seeking to impose an obligation on the Commission to exclude, by evidence, all possibilities inconsistent with any inference the Commission says ought to be drawn from the Directors failing to give evidence. The material must, however, fairly establish a taking advantage or use of market power. If the material did so, I would readily draw the inference that the evidence of the Directors would not be helpful to the position contended for in the litigation on this question by the respondents. It follows that the Commission has not established that the election to construct the facilities is a taking advantage of market power, and that gap cannot be made up by drawing a Jones v Dunkel inference from the failure to call the Directors (or others), to the effect that they must have had in mind a business reason which is only explicable as the expression of market power.
2982 The Board paper that Mr Leon sent to the Directors makes plain the view that a failure to build the facilities would put Cement Australia in breach and Millmerran would likely sue for damages. One possibility, in such circumstances, is that MPP/MOC would accept the breach as a discharge of the contract; strike a fresh relationship with a new entrant; derive whatever royalties might arise out of such a bargain; and, sue Pozzolanic and Cement Australia for the differential lost royalties in an attempt to put itself in the position it would have been in had the contract been performed. Whatever the ultimate measure of the loss might be, the Directors were told (rightly or wrongly), by Management, that the corporation had assumed a contractual obligation and a failure to perform it would put it in breach of its contract. A corporation without market power in those circumstances might choose to perform its obligation and do so within an agreed extended period for performance. That step itself would need a negotiated outcome with the counterparty, Millmerran.
2983 The second step in the argument is that Cement Australia took advantage of its market power in failing to take steps to re-negotiate the contract or negotiate a termination of the contract in circumstances where it realised that the contract was hopelessly uneconomic and the consequence of persevering in the contract would be to preserve to itself (and thus to the exclusion of a rival) the Millmerran volumes of unprocessed flyash (and the consequential processed concrete grade flyash) in circumstances where it did not need and could not use the volume of processed concrete grade flyash able to be produced at Millmerran (with the relevant facilities) and had no sound or informed basis for believing that the Millmerran concrete grade flyash would be required to meet future growth in demand in SEQ or in the contiguous and adjacent northern New South Wales catchment.
2984 It is correct to say that Cement Australia could have, and might have, chosen to embark upon a negotiation with MOC and MPP giving emphasis to the consideration that the Millmerran flyash seemed to exhibit a continuing colour variability question and that in all probability it would not be practically and economically possible to market flyash processed from Millmerran ash to concrete producers in sufficient volumes to justify continuing in the contract to the end of the term at 31 December 2010. Cement Australia might have chosen to simply build processing facilities at Tarong North and avoid the colour variability and marketability issues, and might have sought to negotiate a termination of the Millmerran Contract giving preference in its thinking to the opportunities presented to it in building the Tarong North facilities, and marketing ash produced in those facilities. The parties to the Millmerran Contract could and might have agreed to part company on some consensual terms having regard to either or both of the assumptions about colour variability and marketability.
2985 However, characterising an election not to engage in such a negotiation but rather to perform the contractual obligation to build the buyer’s facilities, as itself the expression of the “taking advantage” of market power, engages the Court in “second-guessing” the commercial analysis of the options confronting the Directors arising out of the Board Paper and determining one option as opposed to another (or an entirely different choice) is a use of market power.
2986 One possibility reflected in the Board paper was that the Directors might choose to discharge the obligation by building the facilities; processing the ash; demonstrating the likelihood that the ash was unmarketable and then terminating the agreement, consistent with the amended agreement, thus bringing the continuing obligations to 31 December 2010 to an end. Such a course would likely secure a recoupment of some of the capital and at least one of the lump sum payments. Some mitigation of the financial risk was also suggested through the mechanism of trying to negotiate, up front, a reduction in the royalty rate. The option ultimately adopted by Cement Australia was one which the Directors were told would reflect an NPV and IRR which was favourable to Cement Australia assuming the ash proved to be unmarketable and the contract was then brought to an end within a reasonable period after the construction of the facilities.
2987 It is equally true that the Board paper made it plain that Cement Australia would be unlikely to sell a sufficient volume of concrete grade flyash processed from Millmerran ash at the required price to make the contract workable in the long term.
2988 By 18 March 2005, Mr Leon had sent the Capex Request Paper written by Mr Adams, although no doubt written under the supervision of Mr Zeitlyn and Mr Leon (recognising that Mr Zeitlyn gave evidence that he had approved the Capex Request), to the Directors. Much of the analysis which had developed through the briefing note to Mr Zeitlyn and many of the earlier presentations to both the ECM and the Board was crystallised in the final version of the Capex Request submission. In the final submission, the paper predicted that the SEQ market would increase by about 40Kt per annum beyond the 2004 level of 380Kt and an additional requirement by 2006 would arise for forecast sales of between 5Kt and 10Kt per annum into the northern New South Wales. The paper recognised that the colour variability and darkness of the Millmerran ash would likely make it unpopular with concrete producers and it would likely be able to be sold only in the area local to the Millmerran site. Mr Adams told the Directors that there was a “high” likelihood that the Millmerran ash would remain uneconomic after the construction of the classifier and associated equipment. The analysis of the options assumes the deployment of $2.52M in capital and sales of 20Kt of Millmerran ash although those sales would likely displace 20Kt of sales from Tarong. In terms of the risk assessment, the paper suggested that the only way of mitigating the risk was to try and re-negotiate a new royalty upfront. Not investing in the classifier, however, would mean Cement Australia breaking its contractual obligation with the power station.
2989 It is perfectly true that Mr Clough urged a different course and took the position that if there was a present high likelihood that the investment would prove in the future, uneconomic, Cement Australia ought to try to presently negotiate so as to “buy [itself] out of the contract” and avoid the “colour and economic issues”. Mr Leon’s position, at least as exposed in the draft email from Sueki Tan, emphasises the contractual obligation to be discharged and that Cement Australia “can’t always solve contractual issues with the stations by simply having a commercial settlement”. Mr Zeitlyn said that he understood the position to be (from Mr Lennon) that should Cement Australia fail to build the facilities it would place itself in breach of the Amended Millmerran Contract and be exposed to a damages claim.
2990 It may well have been prudential, astute, commercially sensible or efficacious for Cement Australia to have embarked upon a negotiation with Millmerran to bring the contract to an end on the footing that the high likelihood at March 2005 was that ash produced from the classifier, when built, would continue to exhibit a variability in colour, and the high likelihood at March 2005, was that such ash would be unmarketable when produced, and thus there was little point deploying the capital as an experiment in quality control. However, on one view of it at least, Cement Australia could deploy the capital, discharge its contractual obligation to Millmerran (by an agreed extended date), produce the processed flyash, test the market and determine the contract should the outcome be as expected, and do so, so far as the Directors were concerned, on the footing that the present investment in March 2005 would reflect a positive net present value and an internal rate of return that made the particular scenario capable of being supported. Whether the analysis in the paper is correct or not, and whether other views might have been taken about the analysis, it remains the position that the Directors were told by management that the particular option involved a financial analysis as described by Mr Adams. The Directors were also told by Mr Adams (and in effect by Mr Zeitlyn and Mr Bailey by approving the Capex Request, and by Mr Leon by Mr Leon’s election to on-forward the paper as framed by Mr Adams to the Directors) that the economics of the proposal could only ultimately be determined by “trying” to sell Millmerran flyash as processed from the facilities.
2991 In considering these questions, I have had regard to the views expressed by both Mr Houston and Professor Hay. In particular, I have had regard to Mr Houston’s views about the possibility that Cement Australia might have sought to negotiate either a lower royalty payment or an exit from the contract altogether. In addition, I have considered Mr Houston’s views that, absent a willingness to negotiate on the part of Millmerran, Pozzolanic and Cement Australia could have unilaterally terminated the Amended Millmerran Contract taking advantage of the benefit that any potential damages, then arising and payable to MOC or MPP, would likely have been less than the full extent of its remaining royalty obligations.
2992 Although I have taken account of the notions put by Mr Houston in undertaking the analysis he has conducted, it seems to me, with respect to Mr Houston, that insufficient emphasis has been given to the contractual obligation to be performed by Pozzolanic (and Cement Australia as the operative and causative entity), or any company without market power hypothetically standing in the shoes of Pozzolanic and Cement Australia, and the considerations directors of such a company ought to give to that matter.
2993 In principle, an industrial company in the position of Pozzolanic ought not lightly embrace the notion that it could unilaterally terminate the Amended Millmerran Contract, in breach of contract, on the financial footing that it has, in effect, made an election to simply pay damages rather than perform obligations it undertook to discharge, especially when the counterparty is a government owned corporation, and the Directors of Pozzolanic and Cement Australia, presumably, would want the companies to be taken seriously by government and government owned corporations in the business of generating electricity and producing raw flyash which Pozzolanic and Cement Australia would want to process and continue to sell in the concrete grade flyash market, in the future, let alone bid for rights in future tendering processes.
2994 I am not satisfied that the refusal of Cement Australia to engage in the negotiation necessarily carries with it the conclusion that only a corporation with a substantial degree of power in the SEQ concrete grade flyash market could have refused to participate in such a negotiation and that only a corporation with substantial market power in that market in the position of Cement Australia could have elected to perform the contractual obligation and go on with the contract to the point of building the facilities to test the marketability of the flyash.
2995 I am not satisfied therefore that the integer of “taking advantage” of market power within s 46 is made out on the evidence and that integer cannot be satisfied by drawing adverse inferences arising out of the failure of the respondents to call evidence from the Directors.
2996 Apart from these considerations, a question arises about whether Cement Australia engaged in the conduct of deciding to deploy the capital and build the buyer’s facilities and extend the term of the amended arrangements to a new date, consistent with the likely completion of the buyer’s facilities, for a substantial purpose, among other purposes, of preventing a rival from securing access to Millmerran unprocessed ash and preventing a rival entering the market for the supply of concrete grade flyash in the SEQ concrete grade flyash market with processed Millmerran ash.
2997 However, although I accept that the decision-makers had a motive to lock-out potential competitors from access to Millmerran ash, motive is not purpose, and having regard to the considerations I have mentioned, I am not satisfied that a substantial subjective purpose informing the minds of the decision-makers in entering into the second election to proceed by deploying the capital was a purpose of preventing a rival from gaining access to unprocessed flyash at Millmerran and preventing entry of a rival into the SEQ concrete grade flyash market. The substantial purpose was to discharge and acquit the contractual obligations on a footing that could enable Pozzolanic to end the contract within 12 months should the Millmerran ash prove to be uneconomic (as many within Pozzolanic and Cement Australia thought it ultimately would be). I am not satisfied that a substantial separate purpose is made out in terms of the s 46(1) purposes. The substantial operative purpose was to discharge the contractual obligation earlier assumed by Pozzolanic; keep at least some degree of faith with Millmerran personnel having regard to the difficulty in the relationship; and perform the contract on a footing that would enable Pozzolanic to terminate the contract quite quickly should the Millmerran ash prove “practically and economically”, unable to be sold.
PART 42
The organising principles in relation to s 45
2998 Section 45(2)(a)(ii) contains three entirely separate notions. First, a corporation shall not make a contract or arrangement if a provision of the proposed contract or arrangement has the purpose of substantially lessening competition in a relevant market. Second, a corporation shall not make a contract or arrangement if a provision would have the effect of substantially lessening competition. Third, a corporation shall not make a contract or arrangement if a provision of it would be likely to have the effect of substantially lessening competition.
2999 Each of these prohibitions are directed to the making of a contract or arrangement containing a provision that has the purpose, effect or likely effect of substantially lessening competition in the relevant market, and thus the assessment of whether a contravention arises under s 45(2)(a)(ii) is to be made at the moment in time of making the contract containing the identified provision that has the purpose, effect or likely effect. Did the decision-makers subjectively hold the proscribed purpose in including the provision in the contract when made? Would the provision have the effect of substantially lessening the competitive process in the relevant market, when made? Would the provision, when made, be likely to substantially lessen the competitive process in the relevant market? The Commission contends that each of these three notions are engaged in respect of various contractual arrangements, giving rise to contraventions of s 45(2)(a)(ii).
3000 Section 45(2)(b)(ii) is concerned with giving effect to a provision of a contract or arrangement where the relevant provision has the purpose, or has or is likely to have effect, of substantially lessening competition in a relevant market. These prohibitions are directed to the conduct of “giving effect” and the assessment of whether a contravention of s 45(2)(b)(ii) arises is made when effect is actually given to the provision.
3001 Section 45(3) explains that competition in relation to a provision of a contract or arrangement means competition in any market in which a corporation that is a party to the contract or any body corporate related to such a corporation, either supplies or acquires, or is likely to supply or acquire, goods or services, or would but for the provision, supply or acquire, or be likely to supply or acquire, goods or services.
3002 Section 45(4) provides, relevantly for present purposes, that in applying s 45 to a particular corporation, a provision of a contract or arrangement shall be deemed to have, or to be likely to have, the effect of substantially lessening competition if that provision, and the other provisions of the contract or arrangement; and the provisions of any other contract or arrangement to which the corporation (or its related bodies corporate) is (or would be) a party; together have or are likely to have that effect.
3003 Section 4F(1)(a)(i) and (ii) provide, relevantly, that an identified provision of a contract or arrangement shall be deemed to have had, or to have, “a particular purpose” if the provision was included in the contract or arrangement for that purpose, or for purposes that included or include that purpose, and that purpose was or is “a substantial purpose”. Section 4F(1)(b)(i) and (ii) provide that a person shall be deemed to have engaged, or to engage, in conduct for “a particular purpose”, or “a particular reason”, if the person engaged or engages in the conduct for purposes that included or include that purpose, or for reasons that included or include that reason, as the case may be, and that purpose or reason was or is a “substantial purpose or reason”.
3004 Section 4G provides that references in s 45 to the “lessening of competition” shall be read as including references to “preventing or hindering” competition. Section 4F is facilitative and is designed to assist in determining the purpose of an identified provision. Section 4F does not create a statutory fiction but rather, defines the circumstances in which the provision of the contract or arrangement will have the particular purpose. The purpose of a provision is to be determined by reference to the subjective purpose of those persons who sought and caused the inclusion of the provision in the contract or arrangement. Doing so, necessitates an examination of the end sought to be achieved by the inclusion of the provision.
3005 In order to establish that QCL or Pozzolanic, or later in time, Cement Australia or Pozzolanic, made a contract containing a provision that had a purpose of substantially lessening competition, it would be necessary to show an actual, subjective purpose on the part of the relevant including individuals who sought and caused the inclusion of the provision in the contract or arrangement. Purpose is not the same thing as the motivation a person might have for making a contract containing the relevant provision. Motive demonstrates the reason why a provision might be included but not the subjective purpose of the including individuals. The purpose will be indentified by examining the end sought to be accomplished by the provision, and because there may be a number of such ends, the person seeking the inclusion of the provision may have a number of purposes. The proscribed purpose need not be the only purpose but it must be “a substantial purpose”.
3006 What needs to be shown is a subjective purpose, in adopting the particular provision, when making the relevant contract or arrangement, at least so far as the first notion of s 45(2)(a)(ii) is concerned. The subjective purpose of the relevant actors (with the relevant decision-making authority) must be made good by the applicant, either by direct evidence on the question or by evidence of facts from which an inference might be drawn of subjective purpose based upon statements, emails, documents and actions, the subject of probative evidence, judged in the light of common human experience.
3007 As to the second notion inherent in s 45(2)(a)(ii), the effect of a provision of a contract is the outworking of the provision having regard to evidence of actual events or conduct that occurred, and as to the third notion, the likely effect of a provision involves making a prediction as to whether particular events or conduct would flow from the operation of the provision.
3008 Section 46 is also concerned with particular proscribed purposes. That section is framed in terms of whether a corporation engaged in conduct which took advantage of its market power for a proscribed purpose. In that sense, s 46 is concerned with the unilateral conduct of a person using substantial market power. Section 45, however, is concerned with contracts and arrangements between parties (and potentially many parties) and focuses upon particular identified provisions. I have found, in relation to Pozzolanic’s entry into the Millmerran Contract, that at least one substantial purpose was the purpose of preventing entry by a rival or potential rival into a relationship with MPP/MOC which would give that party access to unprocessed ash, and a purpose of preventing entry by a rival or potential rival into the market for the supply of concrete grade flyash in the SEQ concrete grade flyash market. Those findings are concerned with purposes in relation to the particular conduct of entry into the contract (notwithstanding that no “taking advantage” of market power is made out).
3009 Section 45 is a more focused enquiry and is directed to the proscribed purpose of particular provisions of a contract or arrangement although, no doubt, findings in relation to Pozzolanic’s purpose in entering into the Millmerran Contract overall, are contextually relevant to a matrix of fact going to the subjective purpose in adopting particular provisions of the Millmerran Contract which might have been thought to facilitate the result that a rival or potential rival would be discouraged or deprived of access to a source of unprocessed ash at Millmerran, and such a rival would be discouraged or deprived of the opportunity to enter the SEQ concrete grade flyash market and engage in contestability in that market, with and against QCL, or Cement Australia. Nevertheless, the inquiry is into the purpose, effect or likely effect of particular identified provisions.
3010 When s 45 talks about a provision of the contract or arrangement having a purpose, it contemplates a proscribed purpose of substantially lessening competition subjectively held by someone or perhaps a number of people within the corporation, and the operative connection between those individuals and the corporation, so as to attribute the views of those persons on the topic of the provision(s) to the corporation, must be such that they were the persons who sought and caused the inclusion of the particular provision(s) in the contract or arrangement. The purpose of substantially lessening competition must be a substantial purpose in the sense that it is a “real” or “considerable” or “large” purpose (and not an imaginary one) among the purposes engaging the subjective purposes of the individuals, assuming the proscribed purpose was not just the only purpose.
3011 It may well be that the parties to a contract or arrangement seek the adoption of a particular provision(s) to achieve different ends or different objectives having regard to their individual assessment of the benefits and burdens of the contract or arrangement and the way in which those benefits and burdens serve the long term interests of the particular party. Thus, parties may have different purposes in mind when seeking the inclusion of the provision. Sometimes parties will be neutral about the ends served by a proposed provision and simply accept the provision, or accept it because it expressly serves their ends, although those ends may be entirely different from the ends sought to be achieved by those parties proposing the inclusion of the provision. As to a multiplicity of purposes for the adoption of a particular provision(s), s 45 is engaged where there may be more than one purpose provided the proscribed purpose is a substantial subjective purpose of the including party. The section is engaged when it can be shown that the particular provision(s) of the contract or arrangement was included by a party whose decision-makers did so for a substantial purpose of substantially lessening competition in a relevant market and it is not necessary to prove that each of the parties contributing to the adoption of the provision(s) shared the proscribed purpose. In determining, in this case, whether Pozzolanic or QCL or Cement Australia contravened s 45 it is enough to show that decision-makers within the relevant corporation subjectively held a substantial purpose of substantially lessening competition in the relevant market in having the particular provision(s) included within the contract or arrangement.
3012 In Seven Network Ltd v News Ltd (2009) 182 FCR 160 at 357 [862]-[864], Dowsett and Lander JJ said this:
Nothing in the text of ss 45 and 4F requires that all including parties must share the impugned purpose. There are indications to the contrary.
First the purpose need not be the only purpose: s 4F(1)(a)(i). It need only be a substantial purpose. The section recognises that there may be a number of purposes for including a particular provision. It is quite likely that in some multi-party contracts, the parties who seek the inclusion of a particular provision do so to achieve different ends or objectives. The section has effect where there are numerous different purposes, provided that the purpose is “a substantial purpose”. The section takes effect when it can be established that the provision was included for a purpose which is a substantial purpose of substantially lessening competition.
Section 4F requires inquiry as to whether the provision “was included” for a (substantial) purpose. The inquiry therefore is as to whether a relevant including party has caused the provision to be inserted into the contract, arrangement or understanding for an anti-competitive purpose, and whether that purpose was a substantial purpose. The fact that the non-including parties did not have that purpose does not mean that the provision was not included for the impugned purpose. The absence of a shared impugned purpose on the part of the non-including parties is irrelevant. So also the fact that other including parties caused the provision to be inserted for purposes other than the impugned purpose does not mean that the provision was not inserted for that purpose. The other including parties’ purposes, which are not anti-competitive, will be relevant, however, to determine whether the impugned purpose was a substantial purpose for the introduction of the provision.
[emphasis added]
3013 In determining whether a provision in the contract or arrangement has or is likely to have the effect of substantially lessening competition in the relevant market, the Court, asks three questions. First, what would the future field of actual and potential rivalry with its substitution possibilities look like with the provision in place (the factual hypothesis), and what would it look like without the provision in place (the counter-factual hypothesis)? Second, to what extent is the future field of rivalry diminished or lessened or the competitive process compromised or impacted upon by the provision? Third, is the measure of that effect substantial, actually or potentially, in the sense of being “meaningful” or “relevant” to the competitive process? The competitive “process”, with its rivalry and field of actual and potential substitution possibilities, protects the interests of consumers by competing away inefficient costs and constraining prices. The effect, and its substantiality or otherwise, is measured as an effect upon the process of competition not individual competitors. To the extent that impacts upon particular competitors are analysed, it is done so only for the purpose of assessing the effect of that impact upon broader rivalrous conduct, potential or actual, within the market.
3014 The effect may be “relevant” to the competitive process in the sense of being “material” to rivalrous conduct even though only small competing volumes of flyash might have been brought into a future SEQ concrete grade flyash market without the relevant provision (if it be the fact or likely fact), and a future SEQ concrete grade flyash market was without that contestable volume with the provision in place and being given effect to.
3015 Whether a provision of a contract or arrangement would be likely to have the effect of substantially lessening competition depends upon whether there is a “real chance” or real possibility of the effect. The method of assessment is to look to the date of inclusion of the provision when making the contract or the date when effect is given to the provision and ask was it likely (a real chance) at that date, based on the circumstances prevailing at that time, that the conduct would bring about a substantial lessening of competition in the relevant market. In Seven Network Ltd v News Ltd (cited below), Dowsett and Lander JJ put it this way in the context of the Master Agreement and the News-Foxtel Licence in issue in those proceedings:
751 It follows that, in the case of the making of the Master Agreement and the News-Foxtel Licence, the question is whether, at the time at which each was made, either of the relevant provisions would, or would be likely to substantially lessen competition in the retail pay television market. It is for the appellants to show that there was (at least) a real chance of such effect. The other question is whether, at the time of giving effect to a relevant provision, the provision had, was having or was likely to have such an effect. We understand the appellants’ case to be that there was a real chance of such an effect. It follows that for the purposes of both s 45(2)(a)(ii) and (b)(ii) the question is whether, at any material time, the likely future effect of either provision was substantially to lessen competition in the identified market.
3016 The authorities in support of these propositions are these: Seven Network Ltd v News Ltd (2009) 182 FCR 160 at 354 to 361 [850] to [887], Dowsett and Lander JJ; News Ltd v South Sydney District Rugby League Football Club Ltd (2003) 215 CLR 563 at 586 [62], Gummow J; ASX Operations Pty Ltd v Pont Data Australia Pty Ltd (No. 1) (1990) 27 FCR 460 at 475, Lockhart, Gummow and von Doussa JJ; ACCC v Baxter Healthcare (No. 2) (2008) 170 FCR 16 at 85 [329], Dowsett J; Rural Press Ltd v ACCC (2003) 216 CLR 53 at [41] to [46], Gummow, Hayne and Heydon JJ; Universal Music Australia Pty Ltd v ACCC (2003) 131 FCR 529 at 585 [242], Wilcox, French and Gyles JJ; Monroe Topple & Associates Pty Ltd v Institute of Chartered Accountants in Australia (2002) 122 FCR 110 at 140 [2] Black CJ, [111] Heerey J; [120] Tamberlin J; ACCC v Baxter Healthcare Pty Ltd [2005] ATPR 42-066 at 43, 056 per Allsop J; Stirling Harbour Services Pty Ltd v Bunbury Port Authority [2000] ATPR 41-783 at 41,276, Burchett and Hely JJ.
PART 43
Section 45 and inclusion of the provisions in the Original Millmerran Contract (see also Part 14 particularly in relation to the definition of terms and Part 32 concerning the valuation of the bids)
3017 As described at [42] to [56] of these reasons, the Commission identifies eight clauses of the Original Millmerran Contract which are said to have been included in the contract for the substantial purpose of, first, preventing any other person from acquiring unprocessed flyash from the Millmerran Power Station, second, hindering or preventing any other person from supplying concrete grade flyash in the SEQ concrete grade flyash market, third, lessening, hindering or preventing competition in the SEQ unprocessed flyash market, and fourth, lessening, hindering or preventing competition in the SEQ concrete grade flyash market.
3018 The point of this Part is to examine the purpose of the identified provisions; determine whether a substantial purpose of the provisions was to substantially lessen competition in the relevant markets in the way contended for by the Commission; identify whose purpose it was if it subsisted; and identify when the relevant provisions reached their final form.
3019 In the course of this chronological analysis, I will highlight in bold provisions as they reach their final form.
3020 For ease of reference, those clauses in their form as at the contract’s execution date of 30 September 2002, relied upon by the Commission, are set out below in the sequence in which they were pleaded by the Commission:
10.1 Term of agreement
(a) This agreement commences on the Commencement Date and ends on the Expiry Date.
(b) The Term includes the Testing Period and the Offtake Period.
…
6.1 Contract Price
(a) The Buyer must pay the Seller the Contract Price for the Ash.
(b) The Contract Price comprises the aggregate of all the Lump Sum Payments for all Operating Years, and the Additional Sum payable for each Operating Year (if any).
6.2 Lump Sum Payment
(a) The Buyer agrees to pay the Seller the Lump Sum Payment for the First Operating Year on or before 1 December 2002 or such other subsequent date nominated by the Seller in writing.
(b) For each subsequent Operating Year, the Buyer agrees to pay the Seller the Lump Sum Payment for the next following Operating Year on or before 1 December in the year prior to that Operating Year.
(c) The Lump Sum Payment is payable to the Seller irrespective of:
(i) how much (or whether any) Ash is actually taken by the Buyer in any Operating Year; or
(ii) whether the Buyer’s Facilities have been completed.
7. Escalation of Purchase Price
On the Price Review Date the amount of the Lump Sum Payment and the Applicable Rate to apply for the next Operating Year for each grade of Ash shall be adjusted in accordance with the following formula:
P = Amount x L1 / L0
where
P = new Lump Sum Payment or Applicable Rate, as the case may be
Amount = the Lump Sum Payment or Applicable Rate applying in the First Operating Year
L1 = means the CPI for the quarter ended 30 June immediately prior to the relevant Price Review Date
L0 = means the CPI for the quarter ended 30 June 2002
For the purposes of this Schedule, “CPI” means the consumer price index published by the Australian Bureau of Statistics in Catalogue 6410.0 – Table 1, Consumer Price Index – All Groups – Brisbane or if that index is suspended or discontinued, the index substituted for it by the Australian Bureau of Statistics.
If the CPI ceases to be published or the basis upon which that index is calculated is changed to such a material extent that it is no longer appropriate to be used, the Parties will meet to endeavour to agree upon another appropriate index or indices with the intention that neither Party will be disadvantaged or benefited by such substitution. If the Parties are unable to agree then the matter will be referred as a Technical Dispute for resolution under clause 29.1.
…
5.1 Minimum Quantity
Subject to the quality of the Fly Ash being within the Acceptable Range for concrete grade fly ash (as determined under clause 2), the Seller must make available to the Buyer and allow the Buyer to take the Minimum Quantity of Concrete Grade Fly Ash each Operating Year.
…
6.3 Calculation of Additional Sum
The Additional Sum payable for each Operating Year (if any) is determined:
(a) in the case of Concrete Grade Fly Ash, by multiplying the number of tonnes of Concrete Grade Fly Ash actually taken in excess of the Minimum Quantity by the Applicable Rate for Concrete Grade Fly Ash; and
(b) in the case of all other grades of Ash, by multiplying the number of tonnes of the relevant grade of Ash actually taken by the Buyer during that Operating Year by the Applicable Rate for the particular grade of Ash.
The Applicable Rates to apply initially are set out in the following table:
| Grade of Ash | Applicable Rate |
| Concrete Grade Fly Ash | $10.10 per tonne |
| Non-Concrete Grade Fly Ash | $0.55 per tonne |
| Conditioned Ash | $0.55 per tonne |
| Bottom Ash | $0.55 per tonne |
…
2.1 Buyer to investigate Ash quality
The Buyer acknowledges that it must undertake the necessary testing and investigations (at the Buyer’s cost and expense) to determine whether the quality of the Fly Ash is within the Acceptable Range for concrete grade fly ash. The Buyer acknowledges that the Seller gives no warranty, and has made no representation as to the quality of the Fly Ash, or in relation to any characteristic of the Fly Ash.
2.2 Notice of Ash Quality
(a) The Buyer must keep the Seller informed as to the progress of the testing and investigations into the quality of the Fly Ash and provide a written report of progress each Month (including the results of ash analysis) to the Seller from the Substantial Completion of Unit 1. Within 3 months from the Substantial Completion of Unit 1, the Buyer must provide the Seller with an initial non-binding report setting out the status of its investigations to that point and such report must give a non-binding indication to the Seller as to the Buyer’s opinion of the likelihood that the quality of Fly Ash will fall within the Acceptable Range for concrete grade fly ash.
(b) The Buyer must complete the necessary investigations, and must notify the Seller not later than 9 months after the Substantial Completion of Unit 1 whether or not the Fly Ash falls within the Acceptable Range for concrete grade fly ash, and can be practically and economically converted into Concrete Grade Fly Ash.
2.3 Independent verification of Fly Ash quality
(a) If the Buyer notifies the Seller that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, the Seller must, within 14 days advise the Buyer whether it accepts the Buyer’s determination or whether it intends to have the Fly Ash quality independently verified under clause 2.3(b);
(b) Upon receipt of the Buyer’s notification under clause 2.3(a), if the Buyer notifies the Seller that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, the Seller may, at the Seller’s cost and expense have the determination independently verified by a procedure to be mutually agreed by the Seller and the Buyer. Any independent verification carried out under this clause 2.3(b) must determine whether the Fly Ash falls within the Acceptable Range for concrete grade fly ash, and whether it can be practically and economically converted into Concrete Grade Fly Ash. The Buyer agrees to cooperate with the Seller and the party engaged to conduct the independent testing, and furnish them with all information regarding the Buyer’s testing and investigations as reasonably required; and
(c) The parties agree that the independent verification of Fly Ash quality conducted under clause 2.3(b) is final and binding on all parties.
…
2.6 Buyer/Seller may terminate
(a) If, following the Buyer giving the Seller a notice under clause 2.2(b) stating that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash:
(1) the Seller notifies the Buyer that it accepts the Buyer’s determination; or
(2) an independent verification carried out under clause 2.3(b) finally determines that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, (or cannot be practically and economically converted into Concrete Grade Fly Ash)
(either of (1) or (2) being a “Termination Event”) then either party may by notice terminate this Ash Purchase Agreement, provided that such notice of termination must be given within 14 days of the Termination Event. Subject to clause 2.6(b) below, and any other rights expressly provided for in this agreement, upon termination the terminating party will have no rights against the other party under or pursuant to this agreement.
(b) If termination under clause 2.6(a) occurs after the Buyer has made the Lump Sum Payment in respect of the First Operating Year, the Seller must repay to the Buyer the amount of the Lump Sum Payment within 30 days of the notice of termination being received.
…
3. Buyer’s Facilities
3.1 Construction of Buyer’s Facilities
The Buyer acknowledges that it is solely responsible for constructing, operating and maintaining the Buyer’s Facilities to enable the Buyer to take delivery of Ash under this agreement.
3.2 Seller approval prior to construction of Buyer’s Facilities
[Clause 3.2 contains a protocol under which the Buyer must submit details of the facilities and the construction time table to the Seller and a time for the Seller’s approval of the proposal. The subclause also contains a protocol for resolving disagreements about those matters. The Buyer may not commence construction until the Seller has given its prior written approval.]
3.3 Failure to Construct
The Buyer agrees to construct the Buyer’s Facilities so that they are completed to the satisfaction of the Seller and in all respects ready for operation by 1 May 2004.
…
3.5 Buyer retains ownership of Buyer’s Facilities
The Seller acknowledges that ownership of Buyer’s Facilities remains with the Buyer and the Buyer’s Facilities will not become fixtures to the Contract Area, notwithstanding that they may be affixed to the land by more than their own weight.
3.6 Use of Buyer Facilities
The Seller would not allow any other person to use the Buyer Facilities.
…
40.12 Transfer
…
(b) The Buyer may not assign any of its rights under this agreement without the prior written consent of the Seller. The Seller agrees not to unreasonably withhold its consent to assignment, provided that:
(1) the Buyer is not in breach of any of its obligations under the agreement;
(2) the Seller is satisfied that the proposed assignee enjoys a reputation and a financial standing acceptable to the Seller and is, in the reasonable opinion of the Seller capable of performing all obligations under this agreement; and
(3) the proposed assignee provides to the Seller an acceptable guarantee in substitution of that provided by the Buyer under this agreement.
…
26.4 Termination or reduction of Minimum Quantity by Buyer
(a) The Buyer may, at any time after 31 December 2006 terminate this agreement upon 60 days notice to the Seller.
(b) If the Buyer terminates the agreement under clause 26.4(a), the Buyer must pay to the Seller (or the Seller must pay to the Buyer as the case may be) on the Termination Date, an amount (“Termination Payment”) calculated in accordance with the following formula:
TP = ($50,000 x M) – (d/365 x L)
where:
TP = the Termination Payment payable under this clause 26.4
M = the number of months (including part of a month) in the period from the Termination Date to 31 December 2009 (and where such number includes part of a month then M will be rounded to two decimal places)
D = the number of days remaining in the then current Operating Year after the Termination Date
L = the amount of the Lump Sump Payment paid by the Buyer for the Operating Year in which the agreement is terminated under this clause 26.4
If the result of this calculation is positive, the amount must be paid by the Buyer to the Seller. If the result is negative, the amount must be paid by the Seller to the Buyer.
(c) The Buyer may, at any time after 31 December 2006 reduce the Minimum Quantity under the agreement on 60 days notice by nominating its new Minimum Quantity.
(d) If the Buyer reduces its Minimum Quantity under clause 26.4(c) then:
(1) the Buyer must pay to the Seller (or the Seller must pay to the Buyer, as the case may be) on the date the reduction takes effect an amount (“Reduction Payment”) calculated in accordance with the following formula:
RP = TP1 x P
where:
RP is the Reduction Payment payable in respect of a reduction in the Minimum Quantity under clause 26.4(c)
TP1 is the result of the calculation which would have been carried out under clause 26.4(b) if the notified reduction under clause 26.4(c) were a notification of termination under clause 26.4(a)
P is the amount by which the Minimum Quantity is reduced, divided by the Minimum Quantity which applied on the Commencement Date
If the result of this calculation is positive, the amount must be paid by the Buyer to the Seller. If the result is negative, the amount must be paid by the Seller to the Buyer; and
(2) the amount of the Lump Sum Payment payable for all future Operating Years will reduce in direct proportion to the reduction in Minimum Quantity.
…
35.1 Guarantee
The Guarantor unconditionally and irrevocably guarantees to Seller the due performance, observance and fulfilment by the Buyer of all Buyer obligations.
3021 Pozzolanic lodged its non-conforming tender with MOC in September 2001. The document was signed by Mr Maycock as Director and Mr Schodel as Secretary. As noted earlier, Mr Michael Wilson was nominated as the Manager for Pozzolanic and as the tenderer’s contact person and the Area Project Manager. He was also described as the contractor’s representative. Clause 3.2 of the non-conforming tender sets out Pozzolanic’s offer and a number of “Notes” about the offer. One note says this: “To justify our investment, we would need an exclusive agreement for sale of ash in the cementitious market”. Another note says: “We would seek the development of a true partnership between our organisations for the marketing of fly ash. A truly flexible approach from both parties will be needed to fully realise many of the opportunities”.
3022 On 29 January 2002, a meeting took place between Mr Hunt and Ms Knox from Millmerran and Mr Wilson and Mr Ridoutt for Pozzolanic, and Mr Cameron for MPA Energy. In that meeting, Mr Cameron gave a general introduction. Mr Wilson gave an overview of options and previous presentations. Mr Wilson’s notes of the meeting note a discussion of approximately 22 topics. Mr Wilson notes that Mr Hunt and Ms Knox were interested in the non-conforming tender. Under the topic of “purchase of fly ash” there is a reference to disposal tied to exclusivity. The agreement would be with MPP rather than MOC.
3023 On 28 February 2002, a further meeting took place between Ms Knox and Mr Hunt for MPP and MOC, Mr Wilson for Pozzolanic, Mr Cameron, and representatives of each side’s lawyers, Clayton Utz and Freehills. Mr Wilson’s notes reveal that there were four areas of “consideration” for the meeting. They were exclusivity, operational risk, commercial terms and market risk. As to exclusivity, the note suggests that there were practical issues about not letting other parties set up. The note suggests that Millmerran wanted to “keep doors open to other users”. The meeting notes record “looking at tonnages (as a way to lock out exclusivity)”. The note observes that Transpacific was being more aggressive and there seemed to be more “upside with their bid”. Transpacific had offered Millmerran “more in guarantee + possible”. The note records that Transpacific had “addressed realistic market potential” and had “pushed non-concrete grade marketing”. These notes about Transpacific’s position are obviously remarks made by the Millmerran representatives in the course of the meeting. Mr Wilson also notes that Millmerran wants to “leave door open to other opportunities in future”. The note then records “no problem, need to have good working relationship”.
3024 On 8 March 2002, Mr Cameron sent an email to Ms Knox attaching a letter dated 6 March 2002 from Pozzolanic addressed to Mr Cameron setting out Pozzolanic’s revised offer of $10.10 per tonne for a guaranteed minimum quantity of 135,000 tonnes. Pozzolanic’s letter signed by Mr Wilson observes that the revised offer arose out of “our meeting with D Hunt and B Knox last week”. On 13 March 2002, Ms Knox responded to Mr Cameron advising that MPP had selected MPA Energy Services as first place bidder for the tender with the final award of the tender subject to “ongoing negotiations on the transaction and the final execution of the Ash Purchase Agreement”. Ms Knox said that she looked forward to working with Mr Cameron and his team to further discuss the tender documents and details of the transaction including, among other things, the payment terms, ash testing parameters, time periods for ash testing, trucking of furnace ash and other commercial terms and conditions in order to finalise the Ash Purchase Agreement in a timely manner.
3025 A draft contract was received by Pozzolanic on or about 20 March 2002 (RCTB 535) drawn by Freehills on behalf of MOC. The terms relevant to this Part, in their form as at 20 March 2002, are set out below:
11.1 Term of agreement
(a) This agreement commences on the Commencement Date and ends on the Expiry Date.
(b) The Term includes the Testing Period and the Offtake Period.
…
7.1 Contract Price
The Buyer must pay the Seller the Contract Price for the Ash. The Contract Price comprises the Lump Sum Payment and, in each Operating Year the Additional Sum (if any).
7.2 Lump Sum Payment
The Seller agrees to pay to the Buyer the Lump Sum Payment on or before the day which is 15 days prior to the First Ash Delivery Date.
[Parties to discuss Lump Sum Payment]
…
8 Escalation of Purchase Price
On the Price Review Date the Applicable Rate for each grade of Ash shall be adjusted in accordance with the following formula:
P = Amount x L1 / L0
where
P = new Applicable Rate
Amount = the Original Applicable Rate as set out in clause 7.3
L1 = means the CPI for the quarter ended 30 June immediately prior to the relevant Price Review Date
L0 = means the CPI for the quarter ended 30 June 2002
For the purposes of this Schedule, “CPI” means the consumer price index published by the Australian Bureau of Statistics in Catalogue 6410.0 – Table 1, Consumer Price Index – All Groups – Brisbane or if that index is suspended or discontinued, the index substituted for it by the Australian Bureau of Statistics.
If the CPI ceases to be published or the basis upon which that index is calculated is changed to such a material extent that it is no longer appropriate to be used, the Parties will meet to endeavour to agree upon another appropriate index or indices with the intention that neither Party will be disadvantaged or benefited by such substitution. [If the Parties are unable to agree then the matter will be referred as a Technical Dispute for resolution under clause 31.1]
…
6.1 Minimum Quantity
The Seller must make available to the Buyer the Minimum Quantity of Concrete Grade Fly Ash each Operating Year.
…
7.3 Calculation of Additional Sum
The Additional Sum payable for each Operating Year (if any) is determined by multiplying the number of tonnes of the relevant grade of Ash actually taken by the Buyer during that Operating Year by the Applicable Rate for the particular grade of Ash. The Applicable Rates to apply initially are set out in the following table:
| Grade of Ash | Applicable Rate |
| Concrete Grade Fly Ash | $10.10 per tonne |
| Non-Concrete Grade Fly Ash | $0.55 per tonne |
| Conditioned Ash | $0.55 per tonne |
| Bottom Ash | $0.55 per tonne |
…
3.1 Buyer to investigate Ash quality
The Buyer acknowledges that it must undertake the necessary testing and investigations (at the Buyer’s cost and expense) to determine whether the quality of the Fly Ash is within the Acceptable Range for concrete grade fly ash. The Buyer acknowledges that the Seller gives no warranty, and has made no representation as to the quality of the Fly Ash, or in relation to any characteristic of the Fly Ash.
[Parties to discuss Acceptable Range]
3.2 Notice of Ash Quality
The Buyer must keep the Seller informed as to the progress of the testing and investigations into the quality of the Fly Ash and provide a written report of progress each Month (including the results of ash analysis) to the Seller from the First Ash Production Date. After completing the necessary investigations the Buyer must notify the Seller (not later than [4] months after the First Ash Production Date) whether or not the Fly Ash falls within the Acceptable Range for concrete grade fly ash.
3.3 Independent verification of Fly Ash quality
(a) If the Buyer notifies the Seller that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, the Seller must, within 14 days advise the Buyer whether it accepts the Buyer’s determination or whether it intends to have the Fly Ash quality independently verified under clause 3.3(b);
(b) Upon receipt of the Buyer’s notification under clause 3.3(a), if the Buyer notifies the Seller that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, the Seller may, at the Seller’s cost and expense have the determination independently verified by a procedure to be mutually agreed by the Seller and the Buyer. The Buyer agrees to cooperate with the Seller and the party engaged to conduct the independent testing, and furnish them with all information regarding the Buyer’s testing and investigations as reasonably required; and
(c) The parties agree that the independent verification of Fly Ash quality conducted under clause 3.3(b) is final and binding on all parties.
…
3.5 Buyer may terminate
If, following the Buyer giving the Seller a notice under clause 3.2 stating that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash:
(a) the Seller notifies the Buyer that it accepts the Buyer’s determination; or
(b) an independent verification carried out under clause 3.3(b) finally determines that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash,
then either party may by notice terminate this Ash Purchase Agreement, provided that such notice of termination must be given within [#] months of the Commencement Date. Upon termination, the terminating party will have no rights against the other party under or pursuant to this agreement.
…
4 Buyer’s Facilities
4.1 Construction of Buyer’s Facilities
The Buyer acknowledges that it is solely responsible for constructing, operating and maintaining the Buyer’s Facilities to enable the Buyer to take delivery of Ash under this agreement.
4.2 Buyer’s Facilities to include weighing equipment
The Buyer’s Facilities must include equipment for the weighing of Ash which complies with all Applicable Laws relating to weighing equipment. If requested by the Seller, the Buyer must produce evidence of compliance with such Applicable Laws.
4.3 Failure to Construct
The Buyer agrees to construct the [Buyer’s] Facilities so that they are completed to the satisfaction of the Seller and in all respects ready for operation within [9] months of [the
4.4 Consents
The Buyer will obtain all consents necessary for the construction, operation and maintenance of the [Buyer’s] Facilities.
…
41.12 Transfer
…
(b) The Buyer may not assign any of its rights under this agreement. The rights created by this agreement are personal to the Buyer and must not be dealt with by the Buyer at law or in equity.
…
37.1 Guarantee
The Guarantor unconditionally and irrevocably guarantees to Seller the due performance, observance and fulfilment by the Buyer of all Buyer Obligations.
3026 Although the position and formulation of each of the relevant clauses is different to that of the executed contract of 30 September 2002, all provisions did exist in at least a preliminary form as at 30 March 2002, with the exception of cl 26.4 “Termination or reduction of Minimum Quantity by Buyer”. The importance of the late addition of this clause will be discussed later in this Part.
3027 Mr Hunt says that Pozzolanic met with the MOC to discuss the draft contract on 22 March 2002. As a result of this meeting, Pozzolanic sent its comments regarding the draft to MOC on 9 April 2002 (Ex-24, DJH-18). Mr Hunt does not recall receiving this document. The document bears the letterhead of Pozzolanic’s legal representatives, Clayton Utz. In relation to cls 7.2 and 7.3 “Payment”, Pozzolanic flagged the issues of “Lump sum payment” and “Additional Sum calculation” for further discussion. With regard to cl 8 “Escalation of Purchase Price”, Pozzolanic stated that its understanding of the escalation of purchase price was indexed to the sale price of concrete grade flyash and “does not apply to any lump sum payment”.
3028 Pozzolanic also observed that there should be a change to cl 6.1 “Minimum Quantity”, namely, that it should capture the position “that the Seller will be required to make available more than the 135,000 tonnes of total ash per annum to meet the Minimum Quantity of 135,000 tonnes of Concrete Grade Fly Ash per annum, as there will be an amount of ash that will not meet the requirements for Concrete Grade Fly Ash”.
3029 Pozzolanic observed that cl 3 “Ash quality” also needed revision. Specifically, Pozzolanic would require more “than 4 months in which to test the Ash Quality”. A period of “12 months is desired to ensure consistency of the quality of the product being purchased”. The 12 month period would be required “to commence from the first delivery of Fly Ash to Pozzolanic”. Pozzolanic also observed that, in the event of variations in quality of the flyash, Pozzolanic would require an ability to “terminate the contract or suspend the contract until ash quality returns” [emphasis added]. Mr Hunt in his comment on the document on this clause observed: “This is a change from indications given by [Michael Wilson] in March”. Mr Hunt added this comment: “This is a departure from the tender documents. Suspension implies reduced payment. If seller makes available minimum quantity (clause 6) then its obligation is met”.
3030 Pozzolanic proposed changes to cl 4 of the contract. Pozzolanic put its position in the 9 April 2002 letter in this way:
Pozzolanic needs assurances that there will be no other consumers of ash from the power station site who are able to take ash for processing before Pozzolanic is able to process the ash. That is, any other users of ash will only be able to use the ash which Pozzolanic rejects. Furthermore, should a third-party wish to purchase the ash from MPP, the ash is to be sold to the third party on no lesser terms than what the ash is being sold to Pozzolanic.
3031 Mr Hunt incorporated some track change comments into the document in relation to cl 4 in which he observes: “Need to think some more on this one. Interested in Freehills view of this. This is slightly different to discussions previously”. Pozzolanic had originally suggested in its tender document that it should be given exclusive rights. The suggestion to amend cl 4 would mean giving Pozzolanic an assurance that no other consumer of ash from the Millmerran power station site would be able to take ash, for processing, before Pozzolanic was able to process ash and that other users would only be able to use the ash from Millmerran which Pozzolanic rejected. The “Minimum Quantity” under cl 6.1, according to the note of 9 April 2002 (Point 5), would be 135,000 tonnes of concrete grade flyash and MPP/MOC would need to recognise that it would need to make available more total ash than that to enable the minimum quantity of concrete grade flyash per annum to be met.
3032 Pozzolanic also commented in relation to cl 37 “Guarantee” that “the guarantee … goes well beyond the liability of the Seller pursuant to this contract” and “[t]he liability of any guarantor should be no wider than the liability of the Seller pursuant to the contract”. Finally, in relation to cl 42.12 “Transfer”, Pozzolanic accepted “a provision where it can assign [its rights and obligations] only with MPP’s consent which shall not be unreasonably withheld”.
3033 On 30 April 2002, MOC sent an updated version of the draft contract to Pozzolanic (RCTB 536). The terms of that version of the document relevant to the provisions addressed in this Part of the Commission’s case are reproduced below. In these reasons, the changes to a provision are underlined.
10.1 Term of agreement
(a) This agreement commences on the Commencement Date and ends on the Expiry Date.
(b) The Term includes the Testing Period and the Offtake Period.
…
6.1 Contract Price
(a) The Buyer must pay the Seller the Contract Price for the Ash.
(b) The Contract Price comprises the aggregate of all the Lump Sum Payments for all Operating Years, and the Additional Sum payable for each Operating Year (if any).
6.2 Lump Sum Payment
(a) The Buyer agrees to pay the Seller the Lump Sum Payment for the First Operating Year on or before 15 November 2002 or such other subsequent date nominated by the Seller in writing.
(b) For each subsequent Operating Year, the Buyer agrees to pay the Seller the Lump Sum Payment for the next following Operating Year on or before 1 December in the year prior to that Operating Year.
(c) The Lump Sum Payment is payable to the Seller irrespective of:
(i) how much (or whether any) Ash is actually taken by the Buyer in any Operating Year; or
(ii) whether the Buyer’s Facilities have been completed.
…
7 Escalation of Purchase Price
On the Price Review Date the amount of the Lump Sum Payment and the Applicable Rate to apply for the next Operating Year for each grade of Ash shall be adjusted in accordance with the following formula:
P = Amount x L1 / L0
where
P = new Lump Sum Payment or Applicable Rate, as the case may be
Amount = the Lump Sum Payment or Applicable Rate applying in the First Operating Year
L1 = means the CPI for the quarter ended 30 June immediately prior to the relevant Price Review Date
L0 = means the CPI for the quarter ended 30 June 2002
For the purposes of this Schedule, “CPI” means the consumer price index published by the Australian Bureau of Statistics in Catalogue 6410.0 – Table 1, Consumer Price Index – All Groups – Brisbane or if that index is suspended or discontinued, the index substituted for it by the Australian Bureau of Statistics.
If the CPI ceases to be published or the basis upon which that index is calculated is changed to such a material extent that it is no longer appropriate to be used, the Parties will meet to endeavour to agree upon another appropriate index or indices with the intention that neither Party will be disadvantaged or benefited by such substitution. If the Parties are unable to agree then the matter will be referred as a Technical Dispute for resolution under clause 29.1.
…
5.1 Minimum Quantity
Subject to the quality of the Fly Ash being within the Acceptable Range for concrete grade fly ash (as determined under clause 2) the Seller must make available to the Buyer the Minimum Quantity of Concrete Grade Fly Ash each Operating Year.
…
6.3 Calculation of Additional Sum
The Additional Sum payable for each Operating Year (if any) is determined:
(a) in the case of Concrete Grade Fly Ash, by multiplying the number of tonnes of Concrete Grade Fly Ash actually taken in excess of the Minimum Quantity by the Applicable Rate for Concrete Grade Fly Ash; and
(b) in the case of all other grades of Ash, by multiplying the number of tonnes of the relevant grade of Ash actually taken by the Buyer during that Operating Year by the Applicable Rate for the particular grade of Ash.
The Applicable Rates to apply initially are set out in the following table:
| Grade of Ash | Applicable Rate |
| Concrete Grade Fly Ash | $10.10 per tonne |
| Non-Concrete Grade Fly Ash | $0.55 per tonne |
| Conditioned Ash | $0.55 per tonne |
| Bottom Ash | $0.55 per tonne |
…
2.1 Buyer to investigate Ash quality
The Buyer acknowledges that it must undertake the necessary testing and investigations (at the Buyer’s cost and expense) to determine whether the quality of the Fly Ash is within the Acceptable Range for concrete grade fly ash. The Buyer acknowledges that the Seller gives no warranty, and has made no representation as to the quality of the Fly Ash, or in relation to any characteristic of the Fly Ash.
2.2 Notice of Ash Quality
(a) The buyer must keep the Seller informed as to the progress of the testing and investigations into the quality of the Fly Ash and provide a written report of progress each Month (including the results of ash analysis) to the Seller from the Substantial Completion of Unit 1. Within 3 months from the Substantial Completion of Unit 1, the Buyer must provide the Seller with an initial non-binding report setting out the status of its investigations to that point and such report must give a non-binding indication to the Seller as to the Buyer’s opinion of the likelihood that the quality of Fly Ash will fall within the Acceptable Range for concrete grade fly ash.
(b) The Buyer must complete the necessary investigations, and must notify the Seller (not later than 9 months after the Substantial Completion of Unit 1) whether or not the Fly Ash falls within the Acceptable Range for concrete grade fly ash.
2.3 Independent verification of Fly Ash quality
(a) If the Buyer notifies the Seller that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, the Seller must, within 14 days advise the Buyer whether it accepts the Buyer’s determination or whether it intends to have the Fly Ash quality independently verified under clause 2.3(b);
(b) Upon receipt of the Buyer’s notification under clause 2.3(a), if the Buyer notifies the Seller that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, the Seller may, at the Seller’s cost and expense have the determination independently verified by a procedure to be mutually agreed by the Seller and the Buyer. Any independent verification carried out under this clause 2.3(b) must determine whether the Fly Ash falls within the Acceptable Range for concrete grade fly ash, and whether it can be practically and economically converted into Concrete Grade Fly Ash. The Buyer agrees to cooperate with the Seller and the party engaged to conduct the independent testing, and furnish them with all information regarding the Buyer’s testing and investigations as reasonably required; and
(c) The parties agree that the independent verification of Fly Ash quality conducted under clause 2.3(b) is final and binding on all parties.
…
2.6 Buyer/Seller may terminate
(a) If, following the Buyer giving the Seller a notice under clause 3.2 stating that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash:
(1) the Seller notifies the Buyer that it accepts the Buyer’s determination; or
(2) an independent verification carried out under clause 2.3(b) finally determines that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash,
(either of (a) or (b) being a “Termination Event”) then either party may by notice terminate this Ash Purchase Agreement, provided that such notice of termination must be given within 14 days of the Termination Event. Subject to clause 2.6(b) below, upon termination the terminating party will have no rights against the other party under or pursuant to this agreement.
(b) If termination under clause 2.6(a) occurs after the Buyer has made the Lump Sum Payment in respect of the First Operating Year, the Seller must repay to the Buyer the amount of the Lump Sum Payment within 30 days of the notice of termination being received.
…
3 Buyer’s Facilities
3.1 Construction of Buyer’s Facilities
The Buyer acknowledges that it is solely responsible for constructing, operating and maintaining the Buyer’s Facilities to enable the Buyer to take delivery of Ash under this agreement.
3.2 Seller approval prior to construction of Buyer’s Facilities
(a) At least one month prior to the anticipated commencement of construction of the Buyer’s Facilities, the Buyer must submit to the Seller details of the Buyer’s Facilities including full details of the proposed methods and timetable for construction. The Seller must advise the Buyer within 14 days whether or not the Seller approves the Buyer’s Facilities and the details of their construction.
(b) If the Seller does not approve the Buyer’s Facilities or the details of construction of the Buyer’s Facilities, the parties agree to meet and discuss in good faith the Seller’s concerns. If the parties are unable to resolve the matters in dispute within 7 days, the dispute will be referred as a Technical Dispute under clause 29.1.
(c) The Buyer may not commence construction of the Buyer’s Facilities until the Seller has given its prior written approval to commencement of construction.
(d) [Subject to the proceeding provisions of this clause 3.2:
(1) the continuing ability of the Seller and its subcontractors and agents to remove Ash and to operate the Materials Handling Equipment without interference from the Buyer or the Buyer’s Facilities; and
to any potential effect of construction of the Buyer’s Facilities upon the enforceability of any applicable warranties under the EPC Contract,
the Seller agrees to allow the Buyer to construct the Buyer’s Facilities so that they interface with the Ash Equipment at a location of the Buyer’s choosing.]
3.3 Failure to Construct
The Buyer agrees to construct the Buyer’s Facilities so that they are completed to the satisfaction of the Seller and in all respects ready for operation by 1 January 2004.
3.4 Consents
The Buyer will obtain all consents necessary for the construction, operation and maintenance of the Buyer’s Facilities.
3.5 Buyer retains ownership of Buyer’s Facilities
The Seller acknowledges that ownership of Buyer’s Facilities remains with the Buyer and the Buyer’s Facilities will not become fixtures to the Contract Area, notwithstanding that they may be affixed to the land by more than their own weight.
3.6 Use of Buyer Facilities
The Seller would not allow any other person to use the Buyer Facilities.
…
40.12 Transfer
…
(b) The Buyer may not assign any of its rights under this agreement without the prior written consent of the Seller. The Seller agrees not to unreasonably withhold its consent to assignment, provided that:
(1) the Buyer is not in breach of any of its obligations under the agreement;
(2) the Seller is satisfied that the proposed assignee enjoys a reputation and a financial standing acceptable to the Seller and is, in the reasonable opinion of the Seller capable of performing all obligations under this agreement; and
(3) the proposed assignee provides to the Seller an acceptable guarantee in substitution of that provided by the Buyer under this agreement.
…
35.1 Guarantee
The Guarantor unconditionally and irrevocably guarantees to Seller the due performance, observance and fulfilment by the Buyer of all Buyer Obligations.
3034 As can be seen above, cls 10.1, 6.1, 7, 6.3, 2.1, 2.3, 40.12 and 35.1 achieved their final form in this draft, no later than 30 April 2002.
3035 On 9 May 2002, Mr Ridoutt, on behalf of Pozzolanic, telephoned Mr Gamble of MOC to discuss the draft contract. Mr Gamble’s file note of the conversation that day records, among other things, that “his [Mr Ridoutt’s] legal advisors are concerned about the lack of an exclusive arrangement”. This observation reflects Mr Ridoutt’s apparent continuing desire, consistent with the notion reflected in the non conforming tender, for Pozzolanic to secure “an exclusive arrangement”, otherwise presumably he would not have mentioned the concern to Mr Gamble. Mr Gamble also made this note, however, of his conversation with Mr Ridoutt: “I [Gamble] suggested that we should include an escape clause in case we decide to sell ash to a third party (for the cementitious fly-ash market). We agreed that this might be a good idea and that we should arrange a meeting next week to discuss this” (Ex-11, MJG-2).
3036 The proposed meeting appears to have taken place at some time prior to 15 May 2002. Mr Wilson sent a letter dated 15 May 2002 to Ms Knox referring to previous discussions. The letter provides new comments on the draft contract (Ex-24, DJH-19). Reinforcing his position of 22 March 2002, Mr Wilson states, “As per the original draft, escalation only applies to the Applicable Rate”. In relation to cl 2.6(a) (dealing with the circumstances in which the buyer/seller may terminate), Mr Wilson says that the reference to cl 3.2 on the first line of cl 2.6(a) should be replaced by cl 2.2 (which deals with notice of ash quality), and at the end of cl 2.6(a), after the word “agreement”, the words “except for rights that have already accrued” be inserted. Mr Wilson comments that the words “which approval must not be unreasonably withheld” should be inserted at the end of the second sentence of cl 3.2(a) (which deals with the seller’s prior approval of the buyer’s facilities). Mr Wilson also observes that cl 3.2(d) “doesn’t currently make sense” and he goes on to provide a new draft clause. Mr Wilson observes that the words “and allow the Buyer to take” should be inserted after the word “Buyer” as it appears in cl 5.1. The word “reasonably” should also be inserted before the word “satisfied” in the first line of cl 40.12(b)(2) (as to transfer and assignment). Mr Wilson also amends some of the terms defined within cl 42.1, notably, the definitions of “Acceptable Range for Concrete Grade Fly Ash”, “Critical Limits”, “Fly Ash” and “Lump Sum Payment”.. Assuming those changes were taken up, the earlier mentioned clauses would appear as:
7 Escalation of Purchase Price
On the Price Review Date the Applicable Rate for each grade of Ash shall be adjusted in accordance with the following formula:
P = Amount x L1 / L0
where
P = new Applicable Rate
Amount = the Applicable Rate applying in the First Operating Year
L1 = means the CPI for the quarter ended 30 June immediately prior to the relevant Price Review Date
L0 = means the CPI for the quarter ended 30 June 2002
For the purposes of this Schedule, “CPI” means the consumer price index published by the Australian Bureau of Statistics in Catalogue 6410.0 – Table 1, Consumer Price Index – All Groups – Brisbane or if that index is suspended or discontinued, the index substituted for it by the Australian Bureau of Statistics.
If the CPI ceases to be published or the basis upon which that index is calculated is changed to such a material extent that it is no longer appropriate to be used, the Parties will meet to endeavour to agree upon another appropriate index or indices with the intention that neither Party will be disadvantaged or benefited by such substitution. [If the Parties are unable to agree then the matter will be referred as a Technical Dispute for resolution under clause 29.1]
…
5.1 Minimum Quantity
Subject to the quality of the Fly Ash being within the Acceptable Range for concrete grade fly ash (as determined under clause 2) the Seller must make available to the Buyer and allow the Buyer to take the Minimum Quantity of Concrete Grade Fly Ash each Operating Year.
…
2.6 Buyer/Seller may terminate
(a) If, following the Buyer giving the Seller a notice under clause 2.2 stating that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash:
(1) the Seller notifies the Buyer that it accepts the Buyer’s determination; or
(2) an independent verification carried out under clause 2.3(b) finally determines that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash,
(either of (a) or (b) being a “Termination Event”) then either party may by notice terminate this Ash Purchase Agreement, provided that such notice of termination must be given within 14 days of the Termination Event. Subject to clause 2.6(b) below, upon termination the terminating party will have no rights against the other party under or pursuant to this agreement except for rights that have already been accrued.
…
3.2 Seller approval prior to construction of Buyer’s Facilities
(a) At least one month prior to the anticipated commencement of construction of the Buyer’s Facilities, the Buyer must submit to the Seller details of the Buyer’s Facilities including full details of the proposed methods and timetable for construction. The Seller must advise the Buyer within 14 days whether or not the Seller approves the Buyer’s Facilities and the details of their construction which approval must not be unreasonably withheld.
…
(d) The Seller agrees to allow the Buyer to construct the Buyer’s Facilities so that they interface with the Ash Equipment at a location of the Buyer’s choosing. Subject to the proceeding provisions of this clause 3.2;
(1) the continuing ability of the Seller and its subcontractors and agents to remove Ash and to operate the Materials Handling Equipment without interference from the Buyer or the Buyer’s Facilities; and
(2) to any potential effect of construction of the Buyer’s Facilities upon the enforceability of any applicable warranties under the EPC Contract,
the Seller agrees to allow the Buyer to construct the Buyer’s Facilities so that they interface with the Ash Equipment at a location of the Buyer’s choosing.
…
40.12 Transfer
…
(b) The Buyer may not assign any of its rights under this agreement without the prior written consent of the Seller. The Seller agrees not to unreasonably withhold its consent to assignment, provided that:
…
(2) the Seller is reasonably satisfied that the proposed assignee enjoys a reputation and a financial standing acceptable to the Seller and is, in the reasonable opinion of the Seller capable of performing all obligations under this agreement; and
3037 In the letter of 15 May 2002, Mr Wilson set out some further comments. First, he said that Pozzolanic’s major concern centred upon managing Pozzolanic’s risk profile in signing a seven year agreement that would be worth close to $10M. That observation led to Mr Wilson’s proposal for a price re-negotiation proposition. Mr Wilson put it this way:
Pozzolanic … be able to seek a price re-negotiation in the event that Millmerran sells concrete grade fly ash to any third party at a price and on terms more favourable than those agreed between Pozzolanic and Millmerran. In this event, the parties would be required to meet and negotiate for a set period (say one month). If the parties did not agree on price adjustment within that time then Pozzolanic would have the ability to elect to terminate the agreement without penalty and at its sole discretion.
3038 On 17 May 2002, Mr Wilson received a memorandum from Pozzolanic’s solicitors, Clayton Utz, containing at least one clause Mr Wilson had requested be drawn for incorporation into the draft contract (ATB 5.4), and a second “savings” clause. The first of these was to be cl 39, entitled “Buyer’s Rights”, which, as framed, seems to take up the proposition put by Mr Wilson to Millmerran in his letter of 15 May 2002. Mr Howard and Mr Sheehy of Clayton Utz described the operation of the proposed clause in this way:
The first clause provides that if Millmerran proposes to sell Concrete Grade Fly Ash to a third party at terms more favourable than those that had been agreed with Pozzolanic then Millmerran will provide to Pozzolanic the details of that proposed contract At Pozzolanic’s request, a meeting will be convened to discuss any amendments that Pozzolanic may require. In the event that no agreement is reached, Pozzolanic has the sole discretion to terminate the contract without penalty and be refunded any balance of the upfront payment for the operating year (if any exists). In similar terms as already proposed, Pozzolanic would be required to remove its facilities from the Contract Area upon termination.
3039 Clayton Utz also proposed a “Partial Invalidity” clause which would require the parties to meet and discuss amendments to the contract arising from any invalidity in any clause in the agreement, including amendments as to price.
3040 The two clauses as suggested, were these:
Clause 39 Buyer’s Rights
(a) If the Seller has sold or proposes to sell Concrete Grade Fly Ash produced by the Power Station to a third party on terms more favourable to that third party than those contained in this agreement, including but not limited to price, term, quantity or discounts, then the Seller will immediately give notice to the Buyer of such contract or proposed contract and will with that notice provide to the Buyer full disclosure of such contract.
(b) At the Buyer’s discretion and within 14 days of the Buyer receiving notice under clause 39(a), the Buyer and Seller will meet with the aim of negotiating amendment to the terms of this agreement, including, but not limited to, price, term, tonnage or discounts as the case may dictate to ensure that the Buyer receives competitive terms. The Buyer and Seller may agree to have the provisions of this agreement amended to reflect the corresponding terms of the third party contract.
(c) If the Buyer and the Seller are unable to agree on the amendment of this agreement within 30 days of the notice provided under clause 39(a), the Buyer may at its sole discretion, by notice allowing a further 45 days, terminate this agreement without penalty. Any balance of the Unused Portion of the Lump Sum Payment for the current Operating Year will be refunded by the Seller to the Buyer within 14 days of the Buyer notifying the Seller of termination of the Contract. The Unused Portion is to be calculated as follows:
Unused Portion = Lump Sum Payment for current Operating Year x Tonnage of Concrete Grade Fly Ash taken by Buyer up to termination for relevant Operating Year / Minimum Quantity of Concrete Grade Fly Ash
(d) Following termination notice under clause 39(c), the Buyer must remove the Buyers Facilities (including foundations) within 45 days from the Contract Area at the Buyer’s cost and make good any damage to the Contract Area caused by the installation or removal of any of the Buyers Facilities. If the Buyer fails to so remove the Buyers Facilities the Seller may do so at the Buyer’s expense. The Seller agrees to provide access to the Contract Area to allow the Buyer to remove its Buyer’s Facilities.
Clause 40.9 Partial Invalidity
(a) The invalidity, illegality or unenforceability of any provision of this agreement shall not affect or impair the continuation in force of the remainder of this agreement.
(b) If any provision is determined to be invalid, illegal or unenforceable under Clause 40.9(a) then the Buyer and Seller must within 7 days of such determination, meet to discuss in good faith any necessary amendments to this agreement that have arisen as a result of the determination, including, but without limitation any amendment to price or other materially affected terms.
3041 The content of the Clayton Utz memorandum was put into an email by Mr Wilson and sent to Ms Knox on 17 May 2002 (ATB SB 3.28).
3042 On 20 May 2002, Mr Wilson sent an email to Mr Ridoutt copied to Clayton Utz, setting out Ms Knox’s concerns, expressed to Mr Wilson, about the outstanding number of issues in relation to the proposed contract (ATB 5.5). These concerns included the overall wording of cl 3.2(d) (concerning the seller’s agreement to allow the buyer to interface its equipment at a location of the buyer’s choosing); the insertion of the word “reasonably” before the word “satisfied” in the first line of cl 40.12(b)(2) (dealing with transfer and assignment), and the definitions of “Acceptable Range for Concrete Grade Fly Ash” and “Lump Sum Payment” in cl 42.1. Mr Wilson notes that these matters, among others, would be discussed with Ms Knox at a meeting on the following Wednesday. That meeting occurred on 22 May 2002. The handwritten note of the meeting records that Mr Wilson, Mr Ridoutt and Mr Howard (Clayton Utz) met with Mr Hunt, Ms Knox and Mr Ryan (Freehills) (ATB 5.7).
3043 The notes of the meeting identify “3 key issues” to be discussed: “Proposal, Liability, Arbitration”. The meeting note records that “Millmerran has US partners who are subject to tough examination of competition issues”. The second separate point noted is: “Considerable discussion regarding terms, etc – no resolution – discussion about particular issues”. The note records discussion of “12 months to ‘construct some’ facilities – May 04” and as to “Escalation” – “problem with the draft”. That same day Mr Gamble had a telephone discussion with Mr Hunt. Mr Gamble’s note says this: “Discussed proposal for resolving issues with Pozzolanic on fly-ash sales – my preference is to release them from their obligations if we contract with anybody else to sell fly-ash (for cementitious market)” [emphasis added] (Ex-23 MJG-3).
3044 On 30 May 2002, Ms Knox sent an email to Mr Wilson and Mr Ridoutt, copied to Mr Hunt and Mr Jardine (a Freehills’ lawyer) in which Ms Knox said this:
One week has now passed since our last meeting and considering we are close to producing first ash at the project we are keen to finalise direction of tender process as soon as possible. As I understand Clayton Utz was going to prepare an opinion on the concept of restriction of further sale of concrete-grade fly ash in terms of it having no Trade Practices issues and you were going to discuss all with your Directors to see if Pozzolanic was in the position to proceed in negotiations.
Appreciate update on status of Pozzolanic’s position and on timing of Clayton Utz’s opinion as soon as possible.
3045 Mr Ridoutt resent an email to Ms Knox that day copied to Mr Wilson (RCTB 537), saying:
Sorry for the delay, I attach the advice. My discussion with our Directors was not very productive and managing risk to an acceptable level may still be an issue. I expect that this advice should help with our negotiations.
3046 The letter of advice from Clayton Utz is dated 29 May 2002 and is addressed to Mr Wilson. The letter refers to “our recent discussions regarding a price renegotiation arrangement in respect of the proposed contract between [Pozzolanic] and [MPP] for the acquisition of fly ash”. The letter recites the elements of the price renegotiation clause as drawn by Clayton Utz previously and records this observation:
It is our understanding that the reason for such a clause is that:
1. the term of the proposed contract is for a period of seven years;
2. Pozzolanic wishes to avoid the risk of the market value of fly ash falling during that period;
3. Pozzolanic does not wish to pay above the market price for fly ash.
3047 The letter notes that Freehills had suggested that the proposed price re-negotiation clause “may breach the provisions of the Trade Practices Act” because in their view “such a clause would result in a substantial lessening of competition in the market”. Clayton Utz said that in their view, it was not possible to conclude on the material then available that such a clause “would result in a substantial lessening of competition in the market”. Other things would need to be known, in their view, such as how the market might be defined; the volume of ash Millmerran would produce; the volume of ash produced by Millmerran over and above the contract minimum Pozzolanic would be likely to take; the market demand for flyash; and, possible fluctuations in the price. Clayton Utz regarded the price renegotiation clause as arguably pro-competitive based on their perception of the end Pozzolanic was seeking to achieve, which was put in this way in the letter:
… Pozzolanic is endeavouring to ensure that the price at which it purchases fly ash today, next year and in seven years’ time is a fair market value for fly ash. This will enable it to remain competitive in the relevant market in which it operates.
3048 Clayton Utz concludes that if Pozzolanic is locked into a long-term contract to purchase flyash at an above market price, then, subject to the make-up of the relevant market, Pozzolanic might not be able to compete with another buyer acquiring Millmerran flyash “at a substantially lower price than Pozzolanic”. The essence of the price renegotiation clause was said to allow Millmerran to sell concrete grade flyash to any third party on terms more favourable than the Pozzolanic terms, although doing so would enable Pozzolanic, at its discretion, to request a price renegotiation of the contract. The Clayton Utz author of the letter, took the following view on the question of whether the right to call for a price renegotiation in light of more favourable sales to a third party, would operate as a behavioural disincentive on Millmerran:
We do not see that [a price renegotiation] necessarily creates any disincentive to sell further concrete-grade fly ash. It may be that Millmerran, at some future time, wishes to sell additional volumes of concrete-grade fly ash at a lower price in order to move more concrete-grade flyash with a view to increased revenue and profits.
3049 Clayton Utz also suggested another option of adopting an initial term for the contract of three years and two options of two years each which “would go some way towards avoiding the risk of Pozzolanic paying above-market price for fly ash for a lengthy period”.
3050 On 31 May 2002, Ms Knox circulated an email within the MOC Management Group (Ex-24, DJH-20) in which she said this:
Have received something from Clayton Utz on the ash purchase. We have discussed with [Mr Jardine at Freehills] and in general are very disappointed with the synopsis and do not consider [it] a legal opinion. Clayton Utz has not gone into the issues and has given no comfort on the substance of the problem and hasn’t concentrated on the effect that their proposed clause could have. Therefore I will respond to Pozzolanic accordingly. Will advise that they need to confirm by [close of business] Monday if our proposed clause is acceptable. If they do not positively respond by COB Monday will exclude them for tender process. We do expect Fly Ash Australia to approach us on this business.
[emphasis added]
3051 That day, Mr Gamble responded to Ms Knox’s email, copied to Mr Jardine and Mr Hunt in which he said this:
I generally agree with your proposed course of action. We should make the point to Pozzolanic that they were given preferred tenderer status on the understanding that they had agreed to a non-exclusive arrangement. It is disappointing that they have since backed away from this position (although, it was surprising that they were originally prepared to make this offer). We should keep in mind, however, that we are running out of options. With Transpacific out of the picture, we are left with Fly Ash Australia as the only remaining viable tenderer. If they have done a deal with Tarong in the meantime, they will not be very interested in offering us a good price. Perhaps we should leave the door slightly open for Pozzolanic if they are prepared to accept suitable terms.
[emphasis added]
3052 On 1 June 2002, Mr Wilson and Mr Hunt had a telephone discussion. Mr Wilson’s handwritten notes (ATB 5.6) record Mr Hunt’s view in this way:
Concerned about how it has gone from site’s point of view. Doesn’t look like we will get an agreement. Clayton Utz info not helpful .. didn’t address the issue of Pozzolanic’s position in the market. [seeking out] legal opinion – [Millmerran] are digging in - US based – very nervous about risk.
3053 On 20 June 2002, Ms Knox sent an email to Mr Nelson, Mr Hunt, Mr Jardine and Ms Connell updating the position with Pozzolanic (Ex-24, DJH-22). In the memorandum, Ms Knox expresses very frank views about her assessment of the position, in these terms:
From discussions held with Pozzolanic over the past few months I believe it is unlikely that we will be able to reach agreement on the restriction on sale of fly ash, otherwise known as ‘clause 40’. Think that Pozzolanic does not have the appetite for our clause as it is not meeting their aim of protecting their commercial investment in this deal. We are clearly not in any position to accept their clause and therefore we are at an impasse in negotiations and not sure if we are able to close the 7 year deal.
Pozzolanic is again angling at reducing the term to one year in order to alleviate TPA issues and of course this gives them a lot more commercial benefit however we lose 6 years of value from this and is against what we tendered for and what Pozzolanic put in a bid for. Essentially we feel that Pozzolanic has negotiated in extremely bad faith and in hindsight we should have asked for a bid bond at the start of the tender process to cover our costs in legal fees with them wasting our time in negotiations.
Although Pozzolanic have now offered a bid bond, I will respond to them today and say that we think its is too late for a bid bond as we do not want to be seen to be locking in only negotiating with them and we are currently considering opening up discussions with other bidders. By getting a bid bond from QCL and negotiating with someone else it would be seen as being cute.
I recommend that you phone the CEO of QCL to give a similar message. Can say that we are extremely disappointed with the way that they have put a bid in and we accepted in good faith and yet they have tried to negotiate around one of the most crucial issues in the contract – being exclusivity. We specifically addressed the issue of exclusivity during the tender evaluation process and Pozzolanic said they would not need an exclusive deal. Think we should make a last attempt at trying to get as much value out of Pozzolanic as we can by saying that we will re-open discussions with others particularly given that they want to go to a one year contract.
Important to note that Tarong has now awarded their fly ash contract to Pozzolanic and this on an exclusive basis for 8 years”. Given that information Fly Ash Australia may be more hungry for our ash and we may want to begin discussions with them given that Pozzolanic negotiations are not going anywhere.
[emphasis added]
3054 On 8 July 2002, Mr Wilson received a memorandum (Ex-24, DJH-24) from Clayton Utz, copied to Mr Ridoutt. In that memorandum, the authors, Mr Powell and Mr Howard say that they have prepared a list of possible options for dealing with the current issue in respect of the proposed Millmerran ash purchase contract. The list is said to include the option proposed by Millmerran noting however that, in its current form, that option is not acceptable to Pozzolanic. The memorandum says it includes options previously discussed but which the parties might wish to re-visit.
3055 The “Millmerran option” is described in this way:
4. Further sale of concrete-grade fly ash as proposed by Millmerran
Millmerran have proposed a clause (cl 40) whereby it will not enter into any other agreement to sell or supply concrete-grade fly ash to any person without first undertaking a competitive tender process with the invitation to tender to contain substantially the same terms as the terms of the Ash Purchase Agreement with the variables of price and quantity to be tendered by each tenderer.
The minimum term of the “Tendered Contract is to be the balance of the term of the Ash Purchase Agreement”. The draft contract to be included in the invitation to tender must include a requirement that the successful tenderer provide its own facilities to enable it to take fly ash from the power station.
[emphasis added]
3056 The first option set out in the memorandum is the price renegotiation proposition as framed by the proposed cl 39 earlier formulated by Clayton Utz. The second option comprised a number of alternatives that might be explored in relation to term, options and price. The “aim” of these alternatives was said to be “to reduce the commercial exposure of Pozzolanic associated with the yearly lump-sum payments for 7 years”. The first of those options involved converting the agreement from a seven year term to an initial term of three years with two extension options of two years each. The ability to extend a term would be at Pozzolanic’s sole discretion. This proposition was thought to “go some way to avoiding the risk of Pozzolanic paying above-market price for fly ash for the full seven years”.
3057 The second of these possible approaches suggested converting the term of seven years into seven annual Pozzolanic options to terminate the contract exercisable only in limited circumstances including Millmerran selling ash at a price and on terms more favourable than those under the agreement with Pozzolanic, and Pozzolanic being unable to economically sell the concrete grade fly ash purchased from Millmerran.
3058 The third of these possibilities involved converting the seven year term into a number of option periods (three two year periods plus one year period) exercisable at Pozzolanic’s option. The total amount payable over the period would remain the same although the payments would be re-structured so that Pozzolanic would pay more in the first few terms and less in the later period thus creating an incentive for Pozzolanic to continue to exercise the option to take the allowable tonnage of concrete grade flyash in later years while giving Pozzolanic some ability to terminate the agreement should it find itself unable to compete in the market.
3059 Another entirely separate approach involved adopting a provision whereby annually, following the first three years of the seven year term, Millmerran would have the right to call for tenders on the same terms and conditions as the Ash Purchase Agreement (except as to price), for the balance of the term. If Millmerran found itself able to obtain a greater price than that contained in the agreement with Pozzolanic, the contract would come to an end. Millmerran would then enter into a contract for the balance of the seven year term at the greater price with the successful third party tenderer, although “Millmerran would not otherwise sell concrete-grade fly ash”.
3060 Another possibility was that Pozzolanic would “seek exclusivity of concrete-grade fly ash only”. Clayton Utz observed that it understood that Pozzolanic had asked to be the sole purchaser of concrete grade flyash from Millmerran which would leave Millmerran free to sell flyash (other than concrete grade flyash) in the market at any price. Millmerran had rejected this proposal, so far as the authors understood the position.
3061 A further option involved Millmerran granting a first right of refusal to Pozzolanic to purchase concrete grade flyash. Should Pozzolanic not wish to purchase additional concrete grade flyash on the terms proposed by Millmerran, then Millmerran would be free to sell that concrete grade flyash on terms no more favourable than those offered to Pozzolanic. The authors note that Millmerran had previously rejected this proposal on the basis of the trade practices implications. This proposal is described as “not a preferred option for Pozzolanic”.
3062 On 8 July 2002, Mr Wilson sent an email to Ms Knox (ATB 5.25) copied to Mr Ridoutt attaching the options described by Clayton Utz which would be discussed the next day. Ms Knox sent the document to the MOC internal management group. Many of the options set out in the Clayton Utz letter are marked by Mr Hunt with the words TPA or TPA?
3063 On 12 July 2002, Mr Hunt had a telephone conversation with Mr Gamble about the state of the Millmerran negotiations. Mr Gamble’s file note records Mr Hunt as hoping “to arrange a meeting with Pozzolanic next week to finalise the ash sales agreement; compromise is for a 4 year agreement with 3 yr option; penalties for Pozzolanic if option not taken up” (Ex-23, MJG-4).
3064 On 25 July 2002, Freehills sent an email to Ms Knox copied to Mr Hunt attaching a further draft of the Ash Purchase Agreement. Ms Knox forwarded that email and the draft agreement to Mr Wilson and Mr Ridoutt, copied to Mr Hunt on 26 July 2002 (RCTB 538). The terms relevant to this Part appear below.
6.2 Lump Sum Payment
(a) The Buyer agrees to pay the Seller the Lump Sum Payment for the First Operating Year on or before 1 December 2002 or such other subsequent date nominated by the Seller in writing.
(b) For each subsequent Operating Year, the Buyer agrees to pay the Seller the Lump Sum Payment for the next following Operating Year on or before 1 December in the year prior to that Operating Year.
(c) The Lump Sum Payment is payable to the Seller irrespective of:
(i) how much (or whether any) Ash is actually taken by the Buyer in any Operating Year; or
(ii) whether the Buyer’s Facilities have been completed.
…
5.1 Minimum Quantity
Subject to the quality of the Fly Ash being within the Acceptable Range for concrete grade fly ash (as determined under clause 2), the Seller must make available to the Buyer and allow the Buyer to take the Minimum Quantity of Concrete Grade Fly Ash each Operating Year.
…
2.2 Notice of Ash Quality
(a) The Buyer must keep the Seller informed as to the progress of the testing and investigations into the quality of the Fly Ash and provide a written report of progress each Month (including the results of ash analysis) to the Seller from the Substantial Completion of Unit 1. Within 3 months from the Substantial Completion of Unit 1, the Buyer must provide the Seller with an initial non-binding report setting out the status of its investigations to that point and such report must give a non-binding indication to the Seller as to the Buyer’s opinion of the likelihood that the quality of Fly Ash will fall within the Acceptable Range for concrete grade fly ash.
(b) The Buyer must complete the necessary investigations, and must notify the Seller not later than 9 months after the Substantial Completion of Unit 1 whether or not the Fly Ash falls within the Acceptable Range for concrete grade fly ash, and can be practically and economically converted into Concrete Grade Fly Ash.
…
2.6 Buyer/Seller may terminate
(a) If, following the Buyer giving the Seller a notice under clause 2.2(b) stating that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash:
(1) the Seller notifies the Buyer that it accepts the Buyer’s determination; or
(2) an independent verification carried out under clause 2.3(b) finally determines that the Fly Ash does not fall within the Acceptable Range for concrete grade fly ash, (or cannot be practically and economically converted into Concrete Grade Fly Ash)
(either of (1) or (2) being a “Termination Event”) then either party may by notice terminate this Ash Purchase Agreement, provided that such notice of termination must be given within 14 days of the Termination Event. Subject to clause 2.6(b) below, and any other rights expressly provided for in this agreement, upon termination the terminating party will have no rights against the other party under or pursuant to this agreement.
(b) If termination under clause 2.6(a) occurs after the Buyer has made the Lump Sum Payment in respect of the First Operating Year, the Seller must repay to the Buyer the amount of the Lump Sum Payment within 30 days of the notice of termination being received.
…
3. Buyer’s Facilities
3.1 Construction of Buyer’s Facilities
The Buyer acknowledges that it is solely responsible for constructing, operating and maintaining the Buyer’s Facilities to enable the Buyer to take delivery of Ash under this agreement.
3.2 Seller approval prior to construction of Buyer’s Facilities
(a) At least one month prior to the anticipated commencement of construction of the Buyer’s Facilities, the Buyer must submit to the Seller details of the Buyer’s Facilities including full details of the proposed methods and timetable for construction. The Seller must advise the Buyer within 14 days whether or not the Seller approves the Buyer’s Facilities and the details of their construction.
(b) If the Seller does not approve the Buyer’s Facilities or the details of construction of the Buyer’s Facilities, the parties agree to meet and discuss in good faith the Seller’s concerns. If the parties are unable to resolve the matters in dispute within 7 days, the dispute will be referred as a Technical Dispute under clause 29.1.
(c) The Buyer may not commence construction of the Buyer’s Facilities until the Seller has given its prior written approval to commencement of construction.
3.3 Failure to Construct
The Buyer agrees to construct the Buyer’s Facilities so that they are completed to the satisfaction of the Seller and in all respects ready for operation by 1 May 2004.
3.4 Consents
The Buyer will obtain all consents necessary for the construction, operation and maintenance of the Buyer’s Facilities.
3.5 Buyer retains ownership of Buyer’s Facilities
The Seller acknowledges that ownership of Buyer’s Facilities remains with the Buyer and the Buyer’s Facilities will not become fixtures to the Contract Area, notwithstanding that they may be affixed to the land by more than their own weight.
3.6 Use of Buyer Facilities
The Seller would not allow any other person to use the Buyer Facilities.
…
26.4 Termination or reduction of Minimum Quantity by Buyer
(a) The Buyer may, at any time after 31 December 2006 terminate this agreement upon 60 days notice to the Seller.
(b) If the Buyer terminates the agreement under clause 26.4(a), the Buyer must pay to the on the Termination Date, an amount (“Termination Payment”) calculated in accordance with the following formula:
TP = ($50,000 x M) – (d/365 x L)
where:
TP = the Termination Payment payable under this clause 26.4
M = the number of months (including part of a month) in the period from the Termination Date to 31 December 2009 (and where such number includes part of a month then M will be rounded to two decimal places)
D = the number of days remaining in the then current Operating Year after the Termination Date
L = the amount of the Lump Sump Payment paid by the Buyer for the Operating Year in which the agreement is terminated under this clause 26.4
If the result of this calculation is positive, the amount must be paid by the Buyer to the Seller. If the result is negative, the amount must be paid by the Seller to the Buyer.
(c) The Buyer may, at any time after 31 December 2006 reduce the Minimum Quantity under the agreement on 60 days notice by nominating its new Minimum Quantity.
(d) If the Buyer reduces its Minimum Quantity under clause 26.4(c) then:
(1) the Buyer must pay to the Seller on the date the reduction takes effect an amount (“Reduction Payment”) calculated in accordance with the following formula:
RP = TP1 x P
where:
RP is the Reduction Payment payable in respect of a reduction in the Minimum Quantity under clause 26.4(c)
TP1 is the result of the calculation which would have been carried out under clause 26.4(b) if the notified reduction under clause 26.4(c) were a notification of termination under clause 26.4(a)
P is the amount by which the Minimum Quantity is reduced, divided by the Minimum Quantity which applied on the Commencement Date
(2) the amount of the Lump Sum Payment payable for all future Operating Years will reduce in direct proportion to the reduction in Minimum Quantity.
3065 Clauses 6.2, 5.1, 2.2, 2.6 and 3 achieved their final form no later than 25 July 2002. This draft contains the first appearance of the new cl 26.4 “Termination or reduction of Minimum Quantity by Buyer”.
3066 Mr Wilson and Mr Ridoutt had a teleconference with Ms Knox and Mr Hunt regarding the status of the draft contract on 7 August 2002. Following that conference, Ms Knox sent an email to Mr Wilson and Mr Ridoutt, copied to Mr Hunt, attaching MOC’s proposed changes to cl 26.4 (RCTB 18). In the email, Ms Knox said this:
FYI, Freehills on the approval review believe that clause 26.4 ‘Termination’ needed to be clarified to give more comfort to the Buyer. I agree with the change as proposed in the attached. Basically, the change covers Pozzolanic in the event, that you have already paid upfront for the year and then terminate a couple of months later. In some cases, we may need to actually pay you money back instead of the other way round. I think this change is in the spirit of the negotiations and really is clarification”.
3067 Although the content of that attachment is not in evidence directly, it is clear, based on the final form of cl 26.4 in the Millmerran Ash Purchase Agreement signed on 30 September 2002, what those alterations were. They are set out below:
26.4 Termination or reduction of Minimum Quantity by Buyer
(a) The Buyer may, at any time after 31 December 2006 terminate this agreement upon 60 days notice to the Seller.
(b) If the Buyer terminates the agreement under clause 26.4(a), the Buyer must pay to the Seller (or the Seller must pay to the Buyer as the case may be) on the Termination Date, an amount (“Termination Payment”) calculated in accordance with the following formula:
TP = ($50,000 x M) – (d/365 x L)
where:
TP = the Termination Payment payable under this clause 26.4
M = the number of months (including part of a month) in the period from the Termination Date to 31 December 2009 (and where such number includes part of a month then M will be rounded to two decimal places)
D = the number of days remaining in the then current Operating Year after the Termination Date
L = the amount of the Lump Sump Payment paid by the Buyer for the Operating Year in which the agreement is terminated under this clause 26.4
If the result of this calculation is positive, the amount must be paid by the Buyer to the Seller. If the result is negative, the amount must be paid by the Seller to the Buyer.
(c) The Buyer may, at any time after 31 December 2006 reduce the Minimum Quantity under the agreement on 60 days notice by nominating its new Minimum Quantity.
(d) If the Buyer reduces its Minimum Quantity under clause 26.4(c) then:
(1) the Buyer must pay to the Seller (or the Seller must pay to the Buyer, as the case may be) on the date the reduction takes effect an amount (“Reduction Payment”) calculated in accordance with the following formula:
RP = TP1 x P
where:
RP is the Reduction Payment payable in respect of a reduction in the Minimum Quantity under clause 26.4(c)
TP1 is the result of the calculation which would have been carried out under clause 26.4(b) if the notified reduction under clause 26.4(c) were a notification of termination under clause 26.4(a)
P is the amount by which the Minimum Quantity is reduced, divided by the Minimum Quantity which applied on the Commencement Date
If the result of this calculation is positive, the amount must be paid by the Buyer to the Seller. If the result is negative, the amount must be paid by the Seller to the Buyer; and
(2) the amount of the Lump Sum Payment payable for all future Operating Years will reduce in direct proportion to the reduction in Minimum Quantity.
3068 On 3 September 2002, Clayton Utz (Mr Howard) sent a letter to Mr Wilson commenting upon aspects of the negotiations with MOC. Mr Howard said this:
The proposed Ash Purchase Agreement effectively provides for a 7 year agreement with take or pay payments (of approximately $1.3M each) to be made annually in advance over the term. In return, Millmerran must make available to Pozzolanic and allow it to take a minimum quantity of 135,000 tonnes per Operating Year of Concrete Grade Fly Ash.
Security of Supply
There has been significant discussions with Millmerran in relation to securing the supply of ash (particularly concrete grade flay ash) in favour of Pozzolanic but still enabling Pozzolanic to compete with lower priced ash should that occur in the future. Pozzolanic was assisted in these negotiations by Clayton Utz.
Millmerran stated during these negotiations that it was extremely sensitive to any provisions that may be seen to have any trade practices implications. As a result, Millmerran would not contemplate an exclusive arrangement over the 7 year term in relation to concrete grade fly ash.
A number of options were considered and canvassed with Millmerran including:
• the inclusion of a price renegotiation clause in the event that Millmerran sold concrete grade fly ash to any third party at a price on terms more favourable than those agreed between Pozzolanic and Millmerran;
• A right of first refusal to purchase additional concrete grade fly ash; and
• Market confirmation and termination (which would involve Millmerran calling tenders for the balance of the term in the market place at set intervals) and Pozzolanic having the ability to exit the contract if it was unsuccessful or the outcome of those tenders were not acceptable to it.
The parties were unable to reach a consensus in respect of any of these possible options, primarily due to Millmerran rejecting them.
… As a result of a one day intensive negotiation [between Millmerran and Pozzolanic involving Clayton Utz], the parties renegotiated the following position:
• Pozzolanic could terminate the ash agreement at any time after 31 December 2006 and upon 60 days’ notice to Millmerran, or Pozzolanic could reduce its minimum quantity of concrete grade fly ash that it is required to take, also on 60 days’ notice; and
• If Pozzolanic were to terminate in this matter, it would be required to pay $50,000 per month for the balance of the term less a pro rata of any lump sum payment made for the relevant operating year. If Pozzolanic reduces its minimum quantity, then it is to make a payment to Millmerran that is pro rated in accordance with the amount by which the minimum quantity is reduced.
3069 Clayton Utz described the arrangement as effectively providing “Pozzolanic with a fixed contract for 4 years with the ability to exit the contract at any time during the remaining three years, provided it makes the requisite payment which is an amount less than the take or pay payments that would have applied for the balance term”.
PART 44
Conclusions as to s 45 in relation to the purpose of the Millmerran provisions
3070 The objective or end QCL sought to achieve in its bid, through Pozzolanic, for the Millmerran Ash Purchase Contract at the outset of the non-conforming tender in September 2001 was to secure an exclusive supply agreement for the “sale of ash into the cementitious market” in SEQ. The commercial strategy of QCL and Pozzolanic’s approach to both the Millmerran and Tarong contracts (and Tarong North) was framed and executed by Mr Ridoutt and Mr Wilson, and put to the Directors. The strategy was discussed with Mr Arto as Director and CEO of QCL. Mr Ridoutt presented the strategy to the QCL Board Meetings. Mr Arto spoke of his dependency upon Mr Ridoutt and Mr Wilson.
3071 A substantial purpose of the framing of the final commercial bid to Millmerran was to prevent a rival from securing access to Millmerran unprocessed ash and to prevent threatened entry into the SEQ concrete grade flyash market for the supply of concrete grade flyash. These purposes, serving the end sought to be achieved by QCL and Pozzolanic through Mr Ridoutt, Mr Wilson and Mr Arto, were each a substantial subjective purpose of these individuals. These purposes were not the only purposes for the reasons already mentioned but they were each a substantial purpose. Mr Ridoutt and Mr Wilson persevered in their attempts to try and secure an exclusive arrangement in the lengthy negotiations with Millmerran over the contract terms, ultimately leading to cl 26.4 (not before giving rise to Ms Knox’s frustrations set out in her note of 20 June 2002). Pozzolanic and QCL were including entities and their authorised negotiators, Mr Ridoutt and Mr Wilson (with the authority and thus approval of Mr Arto) subjectively held each of the substantial purposes of preventing entry of a person into a supply relationship with MPP and thus entry into the unprocessed flyash market, and preventing entry of a person into the SEQ concrete grade flyash market, using processed Millmerran flyash.
3072 These specific purposes are the expression of a substantial subjective purpose of substantially lessening competition in each market as Mr Ridoutt, Mr Wilson and Mr Arto plainly believed that the face of future competition in each market, and particularly the SEQ concrete grade flyash market in which QCL was the seller supplier, would show contestability and rivalry in volume and price (and other aspects of the service offerings) should a competitor enter at Millmerran and enter the SEQ concrete grade flyash ash market through processed Millmerran ash. This entry would exhibit rivalrous responses and counter-responses that would likely see a volume, revenue and EBIT loss for Pozzolanic and QCL in the flyash business. The future face of competition in each market without entry of a rival at Millmerran would show diminished future (nascent) rivalry and thus impact upon the competitive process. Mr Maycock accepted that whatever shape rivalry might take, Pozzolanic and QCL would be unlikely to maintain their EBIT earnings in the flyash business once a rival entered the market for the sale of concrete grade flyash in the SEQ concrete grade flyash market having secured access to Millmerran ash for processing and supply.
3073 These ends or objectives were achieved through the vehicle of the purposes earlier described in respect of the provisions for which Pozzolanic and QCL were “including” parties. MOC accepted the provisions, no doubt because those provisions met the objectives and ends Millmerran sought to achieve of removing certain thresholds of waste ash from the site and securing an acceptable minimum revenue stream from the sale of ash. Whatever the ends, objectives or purposes of MOC may have been, the ends and objectives of Mr Ridoutt, Mr Wilson and Mr Arto were to secure the contract by adopting the final commercial minimum quantity take or pay term for at least a substantial subjective purpose (among the other purposes and reasons) of substantially lessening the competition QCL would face in the SEQ concrete grade flyash market and, in aid of that purpose, a purpose of preventing a potential rival from securing access to a source of likely contestable ash processed from Millmerran ash.
3074 Section 45 asks whether the identified particular provisions had the substantial purpose of substantially lessening competition and therefore the question is whether those substantial purposes were substantial purposes of the identified particular provisions upon which the Commission relies.
3075 Central to the contract are the commercial provisions concerning the minimum quantity of concrete grade flyash the seller must make available and allow Pozzolanic to take each Operating Year for seven years at 135,000 tonnes extracted, retrieved or processed from the volume of raw ash produced by the power station operations, at a price of $10.10 per tonne, according to the lump sum calculations and escalation provisions, of cls 5.1, 6.1, 6.2, 6.3, 7 and 10. These provisions were incorporated into the contract, at the adoption of Millmerran, by accepting the terms as put by Pozzolanic, but they were provisions initiated by Pozzolanic as the foundation commercial terms of the contract. Pozzolanic and QCL were including parties for these terms as was MOC for reasons entirely different to those actuating Pozzolanic and QCL. By these terms, Pozzolanic would have access to the necessary volume of raw ash at Millmerran to enable it to take either consistently each day, or each week, over each operating year, 135,000 tonnes of concrete grade flyash processed out of whatever volume of raw feedstock ash was required to obtain that volume, or take concrete grade flyash from the raw ash episodically throughout each operating year. In either case, the concrete grade flyash would be extracted from the required volume of raw ash through the buyer’s installed facilities.
3076 I am satisfied that a substantial purpose of the inclusion of these commercial terms as framed, in substance, by Pozzolanic and QCL was to substantially lessen competition in the markets as earlier described for the reasons earlier described, by seeking to exercise a substantial degree of control over a sufficient volume of raw unprocessed Millmerran flyash necessary to extract, over time, 135,000 tonnes of concrete grade flyash and foreclose or discourage sustainable new entrant participation at Millmerran.
3077 Plainly enough, however, Mr Ridoutt and Mr Wilson thought that it would also be necessary to secure an exclusive supply arrangement with MPP so as to prevent MOC and MPP from supplying any ash to anyone else for sale into the cementitious market. This conduct brought the integrity of the Pozzolanic negotiators into serious question according to the views expressed by Ms Knox. Pozzolanic’s position on this question led to all of the steps earlier described culminating in cl 26.4 in the way explained by Clayton Utz. Having regard to those exchanges, I am satisfied that at least a substantial purpose of the termination provision on 60 days notice to Millmerran after 31 December 2006 with the reduction in the annual minimum payment was to discourage Millmerran from entering into another supply contract for concrete grade flyash extracted or processed out of raw Millmerran ash during the currency of the Ash Purchase Agreement with Pozzolanic so as to constrain rivalry in the sale and supply of concrete grade flyash in the SEQ concrete grade flyash market. Clause 26.4 was included in the contract either by Mr Ridoutt and Mr Wilson, or as a consensual inclusion as a result of a mediation between both parties to the contract of what was then an impasse. Nevertheless, Mr Ridoutt and Mr Wilson were including decision-makers for Pozzolanic and their subjective purposes for the provision was at least a substantial purpose as described and thus a substantial purpose of substantially lessening competition in the way earlier described.
3078 Neither Mr Ridoutt nor Mr Wilson were called by Pozzolanic or QCL to give evidence, and to the extent that there is any ambiguity about their subjective purposes, I am willing a draw a Jones v Dunkel inference, in light of the exchanges I have described, that their evidence on purpose would not have been helpful to Pozzolanic or QCL.
3079 As to the effect or likely effect of the provisions substantially lessening competition at the date of making the contract containing the provisions, a question arises about the role in such an assessment of the factor that the Millmerran ash had not been produced at that date and was unknown as to its future quality. Would inclusion of the provisions have the effect of substantially lessening competition in a product when the market participants could not know the characteristics, features and qualities of the new ash until it entered the market, contested for supply and acceptance, and its substitutability became apparent? Would, viewed at the date of inclusion, the provisions be likely to substantially lessen competition in either market in a forward looking way by diminishing the future shape of the competitive process by constraining competitor entry of Millmerran ash when the future contestability of the ash could not be known until entry, contestability and substitutability were later determined?
3080 These questions were answered, in substance, for the assistance of the Court by the expert evidence of Professor Hay.
3081 Professor Hay accepted, as a matter of economics, that if a competitor won the contract at Millmerran, and Pozzolanic thought that at some time in the future the competitor would start supplying Millmerran concrete grade flyash into the concrete grade flyash market, that circumstance, “might produce a quite prompt price response on the part of Pozzolanic” (T, p 2559, lns 21-25) and that would particularly be “likely to be the case” if Pozzolanic’s prices, at the time the competitor wins the Millmerran contract, were “supra-competitive prices” (prices above prices which would prevail in a workably competitive market) (T, p 2559, lns 27, 28). Professor Hay also unsurprisingly accepted that if the source of a price constraint upon QCL or Pozzolanic was loss of the Millmerran contract to a competitor, that source of constraint would not operate if Pozzolanic won both the Tarong and Millmerran contracts (T, p 2559, lns 39-41). Professor Hay also observed that if a competitor won the contract at Millmerran, that circumstance would reduce the degree of Pozzolanic’s market share and therefore tend to reduce its degree of market power and would “likely” lead to the quite prompt price responses on the part of Pozzolanic earlier mentioned in Professor Hay’s evidence (T, p 2559, lns 43-47; p 2560, lns 1-7).
3082 This exchange then occurred in cross-examination with Professor Hay at T, p 2561:
Q I had understood you to say that if a competitor won the Millmerran contract, that would have an effect on competition as soon as the contract was won. Is that right or not?
A It might, yes, and that also depends upon the assumption that there was substantial market power at the time.
Q I understand what you say. And it is not only a question of “might”, is it? … It is better put that it would be likely that as soon as a competitor won the Millmerran contract, there would have been an effect on competition, correct?
A It is possible. It may depend upon the assumption about the quality of the ash, but yes, it is certainly possible.
Q Well, if we leave hindsight to one side for a moment, when the Millmerran contract is won, nobody knows that there is going to be a problem with the colour of the ash, correct?
A Well, I don’t know for sure, but I will assume that to be the case.
Q Assume that to be the case. Then what Pozzolanic knows is that there is a competitor who now has a source of supply of fly ash which can be used to sell fly ash into the south-east Queensland concrete-grade fly ash market, correct?
A Correct.
Q And that knowledge is what is likely to cause Pozzolanic to regard its prices as being constrained, correct?
A It could have that effect, yes.
Q And it would have that effect if Pozzolanic had been charging supra-competitive prices prior to the competitor winning the Millmerran contract?
A It could have had that effect, yes.
Q You say it could have that effect. It is likely to have had that effect, isn’t it?
A I will say it could have had that effect. I’m not sure how likely it is, but it may be likely. It is certainly possible.
Q Well there was at least a real chance it would have had that effect, correct?
A I think there was a chance, yes.
Q A real chance?
A Well, I take a chance to be a real chance.
Q You agree, then, that the effect on competition is not dependent on taking a hindsight view of how long it might have taken a competitor to bring that fly ash to market?
A Well, I think that’s right. … if someone else had achieved the contract, then there could have been an effect and the question then is how long – would that effect last long, what would happen with the colour and how quickly would it dissipate. That’s right.
[emphasis added]
3083 Professor Hay’s observations on this topic and the related comments in his report are made in the context of the colour variability problem which ultimately emerged throughout 2003 and resulted in the scientific investigations in the latter part of 2003 and 2004, and beyond. Professor Hay in these quoted passages accepted that there was a real chance of a likelihood of an effect upon competition once a competitor won the Millmerran contract but the constraining effect might dissipate over time as a quality, colour problem, emerged.
3084 The relativity in the degree of dissipation of the immediate constraining effect was examined in these passages (T, p 2562, lns 26-45):
Q Someone else wins the Millmerran contract. At that stage, no-one knows there is a colour variability problem and we have discussed what the consequences might be. Do you accept the proposition that unless it is found that the Millmerran ash can never be sold as concrete-grade fly ash in the south-east Queensland market, there will remain a degree of constraint on Pozzolanic’s prices from the existence of that competitor’s alternative source of [concrete-grade fly ash]?
A I think that may overstate it. It seems to me the question would be the extent to which it is anticipated that the Millmerran ash would be an alternative source of ash, or people would otherwise buy Pozzolanic ash. Whether it can be sold, the concrete-grade ash may not be the same – saying it can or cannot be sold as concrete-grade fly ash may not be the same assumption.
Q So what one is looking at is whether it turns out to be a substitute for those who would otherwise have bought Pozzolanic’s ash?
A If it’s clear that it’s not a substitute, then I would expect it to have no significant constraining effect upon Pozzolanic.
Q And if it remains a substitute to some extent, then it has a constraining effect. Is that right?
A I would expect there to be some degree of proportion between the degree of substitution and the degree of constraint.
[emphasis added]
3085 In concluding this discussion, Professor Hay accepted that if there is an assumption that the Millmerran ash is an alternative source of supply, then there is a possibility, looking forward, that a competitor winning the Millmerran contract is going to bring about “some impact” on competition in the SEQ concrete grade flyash market (T, p 2563, lns 1-6).
3086 Professor Hay accepts that the event of entry itself into the Millmerran contract by a competitor would “likely” produce “a quite prompt price response” from Pozzolanic in the SEQ concrete grade flyash market assuming, in a forward looking way, that the ash would be usable in the concrete grade flyash market. Professor Hay also accepts that Pozzolanic’s “knowledge” of a competitor at Millmerran with a source of flyash that Pozzolanic would assume could be sold into the SEQ concrete grade flyash market (since no hindsight view of an emergent colour problem would be relevant at that moment in time) would give rise to at least a “real chance” of causing Pozzolanic to regard its prices as being constrained and there would be at least “some impact” on competition in the SEQ concrete grade flyash market.
3087 It follows that, at the date of entry into the contract, with the clauses I have mentioned (cls 5.1, 6.1, 6.2, 6.3, 7, 10 and 26.4), those clauses would have the immediate effect and would be likely to have, in a forward looking way, a real chance of substantially lessening competition in the SEQ concrete grade flyash market because the future field of rivalry or the future state of the competitive process with the provisions is substantially diminished, on all of the evidence as nascent competition in a Pozzolanic/QCL dominated market was hindered and prevented. However, the constraining effect would have begun to dissipate once it became clear to the market that a problem was emerging in the quality of the Millmerran flyash and that problem was unlikely to be resolved either at all, or within a period of time which would make Millmerran ash a real substitute for Pozzolanic ash, assuming a rival in Millmerran. The extent of the constraint and its potential to dissipate is ultimately a question of degree. However, I am satisfied that upon entry into the Millmerran contract by a rival, participants would have proceeded on the assumption that the Millmerran ash was, in all probability, likely usable in the SEQ concrete grade flyash market and that once a competitor had access to a source of ash at Millmerran (notwithstanding that the concrete grade flyash would not be available for some little time), there would likely be quite prompt price responses from Pozzolanic in a market which had been characterised, otherwise, by a virtual monopoly with delivered pricing, and pricing above a competitive level characterising a workably competitive market.
3088 In a market exhibiting the characteristics of the SEQ concrete grade flyash market throughout 2001 and 2002, competitive entry by a rival at Millmerran was very important to the future competitive process, in a forward-looking way, and thus the likely effect upon what would have been emerging competition based on Millmerran ash was large or significant and truly meaningful. Had the frustrations exhibited by Ms Knox in her memorandum of 20 June 2002 resulted in no further negotiations with Pozzolanic, with Millmerran contracting with FAA as the next best option, the likely price responses and counter-responses would likely have been very vigorous. Mr Maycock said that confronted with some of the scenarios postulated by Management arising out of the loss of one or more of the contracts, QCL and Pozzolanic would have found a way to compete and would have responded to the challenges presented to it. Had FAA won the contract at Millmerran, with its tied shareholder concrete producers, Pozzolanic would very likely have vigorously responded in its supply and service offerings to those major shareholders to try and hold some proportion of QCL’s sales to those particular buyers, apart from contesting for all marginal sales as Mr Clarke said of FAA. The provisions described at [1347] were the expressions of these substantial purposes.
PART 45
Section 45 and entry into the Tarong Contract of 26 February 2003 in respect of the provisions in issue
3089 Much of the background evidence concerning the chronological bidding for the Tarong contract; the views of management and directors of QCL and Pozzolanic (and others) about Pozzolanic’s position in the market; the evidence of QCL and Pozzolanic’s market position leading up to February 2003; the content of Board papers, submissions and other documents; the desire and need expressed in those documents for Pozzolanic to win both contracts at Millmerran and Tarong (including Tarong North); and QCL’s pricing policies and the total ash management policy, has been set out at length.
3090 Although Pozzolanic and QCL also wanted to secure exclusivity for concrete grade flyash in its propositions put to TEC, they sought to win the contract with TEC because Pozzolanic had been operating exclusively at Tarong since 1984 or so; Pozzolanic had the benefit of incumbency on its side (a notion Mr Maycock regarded as particularly important in securing future contracts); it had proven the Tarong ash over a considerable period of time in the SEQ concrete grade flyash market; Tarong was the major source of supply of concrete grade flyash for Pozzolanic for the SEQ concrete grade flyash market; Tarong ash was essentially consistent in its quality and volume, subject to the orthodoxy of operational contingencies in the functioning of a large baseload coal-fired power station like Tarong; Tarong represented or accounted for the bulk of Pozzolanic’s supply of concrete grade flyash to Pozzolanic’s three major customers; Tarong was the ash source which accounted for the majority of the earnings of QCL’s flyash business and particularly its EBIT in the flyash business. Pozzolanic and QCL required the volume of concrete grade flyash produced from Tarong raw flyash to supply its existing customers. The Millmerran ash, although assumed to be a likely source of concrete grade flyash, was then unknown and untested. The Pozzolanic and Tarong operational teams knew each other well in a day-to-day sense. The two companies had become very familiar with each other and in many respects saw themselves in a joint activity although governed by a contractual arrangement.
3091 For all of these reasons, QCL and Pozzolanic wanted to renew their contractual relationship with TEC and, for the purposes of the new contract, establish a supply arrangement under that contract with the operators of Tarong North. Mr Maycock gave evidence, in effect, that he would never have seriously considered not bidding for the contract with TEC, and securing the Millmerran Contract was not something, in Mr Maycock’s view, that rendered winning the Tarong Contract less relevant or less important to the future conduct of the flyash business particularly for the SEQ concrete grade flyash market.
3092 All of these considerations, leaving aside the initial objective of securing an express exclusion of others from access to concrete grade flyash at all from Tarong, during the period of the proposed contract, represent entirely unsurprising business reasons why it is that QCL and Pozzolanic decision-makers would rationally regard winning the contract with TEC (which carried with it Tarong North) as natural and important to business continuity in the capacity of QCL and Pozzolanic to supply flyash to its concrete producer customers, and in particular, the major three concrete producers which accounted for 72% of QCL’s sales at the moment in time of entry into the Tarong Contract.
3093 By the September 2002 Board paper, the essential commercial terms of the current draft of the Tarong Contract were said to be: eight years from 1 December 2003 with possible three year extensions by agreement; a fixed payment of $2.8M per annum (indexed); a volume guarantee of 200Kt per annum; and plant installed within 12 months of normal operating conditions (of Tarong North).
3094 On 1 October 2002, Mr Ridoutt sent an email to Mr Chalmers, Mr Wilson, Mr White and others advising that a revised contract had been received from TEC. Mr Wilson expressed the hope that the negotiations would conclude in October 2002 and approval would go to the TEC Board in November 2002. Mr Wilson also observed: “no longer have exclusivity so we will have to be more creative with the contract to cover our risk”. Had Mr Wilson been successful in achieving exclusivity in the proposed arrangements with TEC, as it had sought in its tender, Pozzolanic would not have been exposed to the risk of supply of ash by TEC to third parties, and Pozzolanic and QCL would not have needed to have mitigated the risk of third party access to Tarong ash, in creative ways under Pozzolanic’s contract with TEC.
3095 The relevant terms of the Fly Ash Agreement of 26 February 2003 are set out at Pt 14 in detail.
3096 The Commission identifies these provisions as having the purpose, effect or likely effect of substantially lessening competition in the relevant market. First, cl 2 creates a term of five years from 1 March 2003. Clause 2 also provides that either party may terminate the agreement by giving the other party 12 months written notice “at this time” which suggests that notice might be given up to 1 March 2008 of 12 months notice of termination. Mr Collingwood in his submission to the Board for approval of the contract regarded the term as a six year term. Clause 15 provides that the agreement may be extended in increments of three years “upon the agreement of both parties” and any such agreement to extend must be reached no later than 12 months prior to the date on which the contract (or any extension) would otherwise expire. Second, during the term TEC agrees to sell and Pozzolanic agrees to buy “any and all Concrete Grade Fly Ash” [Pozzolanic] obtains from the Ash Transfer Points and processes in [Pozzolanic’s] plant [emphasis added]: cl 3.1. The term Concrete Grade Fly Ash is defined to mean Fly Ash extracted by Pozzolanic from the TEC Ash Transfer Points and capable of being processed in Pozzolanic’s plant for use as cementitious materials, for use with Portland and blended cement and as shown in AS 3582.1 (1998): cl 1.1. The term Fly Ash, adopted within the definition of Concrete Grade Fly Ash in cl 1.1, is defined to mean solid fly ash material extracted from the flue gases produced from the coal fired boilers at the Tarong power station and the Tarong North power station. The TEC Ash Transfer Points are defined to mean the points of connection of Pozzolanic’s plant to the precipitator hoppers on Units 1 to 4 at the Tarong power station and any other points of connection approved by TEC at which Pozzolanic takes possession of Fly Ash from the Ash Disposal System. The Ash Disposal System is defined as the infrastructure adopted at Tarong and Tarong North for the disposal of ash from either station.
3097 It follows that, under these provisions, Pozzolanic was entitled to any and all solid fly ash material, extracted from the flue gases at either power station, taken by Pozzolanic at the points of inter-connection between Pozzolanic’s plant and the precipitator hoppers on Units 1 to 4 at the Tarong power station (and any other points of inter-connection approved by TEC at which Pozzolanic would take possession of all or any of Tarong’s solid fly ash material extracted from the flue gases) and capable of being processed in Pozzolanic’s plant for use as cementitious materials conforming to AS 3582.1 (1998). All Reject Ash would remain the property of TEC and TEC would be entitled to supply or sell it to any other person for any use or application.
3098 These are the defining features of the rights granted under cl 3.1 having regard to the definition of the terms contained in cl 1.1.
3099 Third, by cl 12.2 Pozzolanic is to pay TEC, for the right to take Fly Ash, a base amount each quarter in each year of $600,000 (escalated by CPI) subject to the adjustment mechanism in cl 12.3 so that the total amount payable under cl 12.2 would not exceed the following payments.
| Column 1 Total volume of Fly Ash removed per annum | Column 2 Payment per annum |
| Less than 50,000 tonnes | $2.6 Million |
| 50,000 to less than 150,000 tonnes | $2.5 Million |
| 150,000 to less than 350,000 tonnes | $2.4 Million |
| 350,000 to less than 450,000 tonnes | $2.2 Million |
| 450,000 tonnes or more | $2.1 Million |
3100 Fourth, as to Tarong North, cl 4.4 provides that as soon as possible after (either 26 February 2003 or 1 March 2003) Pozzolanic must reasonably determine whether Tarong North Fly Ash is suitable for use with Portland cement (that is, confirms to AS 3582.1–1998), and if so suitable, TEC must “request” Pozzolanic to, “establish” a plant to extract Concrete Grade Fly Ash from the Tarong North Fly Ash, to a capacity of equal to, or greater than, the volume of Fly Ash removed from Precipitator Zone 1 hoppers of a fully operational unit at Tarong; and to, “construct” the plant according to TEC approved drawings and connect that plant to the Ash Disposal System at a TEC approved point of inter-connection.
3101 Fifth, by cl 8.3, if the quality of the six monthly average of Fly Ash available from the Tarong North Ash Transfer Points (under normal commercial operating load conditions), after processing, does not conform to AS 3582.1, or if the quantity of Concrete Grade Fly Ash is not sufficient to support “commercially viable operations”, the parties agree to undertake good faith negotiations to “achieve an adjustment to the contract conditions”. However, if the Tarong North Fly Ash is not suitable for use in Portland cement (and presumably the clause is intended to say “after processing”), or if Pozzolanic does not establish a plant, Pozzolanic is not entitled to any reduction in any of the amounts payable under the agreement. By cl 8.7, Pozzolanic must remove flyash from each of the “Ash Transfer Points” prior to flyash accumulating in the hoppers to the maximum design storage level and Pozzolanic when extracting flyash from the Ash Transfer Points, must ensure that all flyash is completely extracted from the ash storage hoppers every 24 hours.
3102 Sixth, by cl 17.1, Pozzolanic may at any time after 1 September 2004 terminate the agreement by giving TEC 12 months’ written notice of termination with termination effected at the end of the notice period.`
3103 Apart from these provisions, cl 7 deals with the topic of “Run of Station Non Concrete Grade Fly Ash”. Clause 7 provides that at the request of TEC, Pozzolanic will use its best endeavours to provide ROS non-concrete grade flyash (“rosncgfa”) from Pozzolanic’s plant to either TEC or a third party nominated by TEC, and the clause sets out seven functions included within that obligation. They include processing and handling rosncgfa through Pozzolanic’s plant to the full limit of the capacity of Pozzolanic’s plant (cl 7.1(a)); grading rosncgfa into grades requested by TEC (to the extent possible); scheduling arrival, loading and departure of vehicles of TEC and third parties; providing suitable transport if required and available at an agreed price; supplying rosncgfa at temperatures requested by TEC (to the extent possible); loading TEC and third party vehicles presented at Pozzolanic’s plant; and otherwise cooperating with TEC and third parties and using its best endeavours to minimise disruption to the operation of Pozzolanic’s plant, with the intention that Pozzolanic will coordinate, manage and provide all services directly or indirectly required to be provided to facilitate the removal of rosncgfa from the Tarong site. By cl 1.1, the term Run of Station Non-Concrete Grade Fly Ash is defined to mean Fly Ash removed from the Ash Transfer Points by Pozzolanic and identified for supply to TEC or third parties in an unprocessed form or in a form for use in applications other than as Concrete Grade Fly Ash.
3104 It is now necessary to examine how these provisions came to be incorporated within the Tarong Fly Ash Agreement in order to address the Commission’s contentions about the purpose of the identified provisions.
3105 In Part 32, the detail of the early exchanges between Mr Collingwood for TEC and Mr Wilson for Pozzolanic is set out especially for the period from 30 January 2002 to 15 May 2002. Mr Wilson’s letter of 15 May 2002 sets out for Mr Collingwood virtually all of the points about the draft agreement to that point, discussed between Mr Ridoutt and Mr Wilson. At that point, Mr Ridoutt and Mr Wilson thought that the agreement with TEC should cover “all Fly ashes”; the TEC proposed cl 4.5 dealing with Pozzolanic’s proposed obligation to supply and sell concrete grade flyash to TEC or TEC appointed third parties, was regarded as “very difficult” and the pricing which would apply to such supply was regarded as inadequate as a 5% margin over the cost of supply was seen simply as the imposition of variable cost pricing upon Pozzolanic by TEC; the guaranteed volume obligation at 200Kt was sought to be reduced to an obligation to make “all efforts” to remove that volume but the ultimate amount taken would depend upon the concrete market and Pozzolanic’s contracts with its concrete customers; TEC’s proposed fixed term of seven years with an option, in TEC only, to extend by three years rather than Pozzolanic’s proposal for a 10 year contract, was seen as a proposal against Pozzolanic’s expectations but that, in any event, any option to extend should be exercisable by either side.
3106 On 6 June 2002, TEC and Pozzolanic met to discuss aspects of Pozzolanic’s response of 15 May 2002. The particular provisions of the draft agreement sent to Mr Wilson by Mr Collingwood on 18 April 2002 (MSA 1) were discussed. TEC expressed “concern about ACCC issues”. The meeting note also records that there would be “no exclusive agreement”. The minimum tonnages were “not negotiable”. As to the term, the note records that Pozzolanic had tendered on the basis of an initial 10 year term and contended that there should be a review period after seven years. TEC seemed to be concerned about the notion of “rolling” three year periods. Mr Collingwood would write to Pozzolanic about that matter.
3107 On 7 June 2002, Mr Wilson sent an email to Mr Ridoutt reporting on the meeting. He said that the meeting went well and that TEC wanted to put the contract to its Board meeting in July. Mr Wilson reported that the minimum tonnage was not negotiable “given that it was in our tender and FAA offered large volumes as well”. Mr Wilson reported that there was some discussion about the term of the agreement. Mr Collingwood had proposed a new clause. Mr Wilson reported that “we have removed their ability to purchase concrete grade fly ash from us [and] they will not be allowed to sell it either”.
3108 Mr Collingwood’s proposed clause for the term of the agreement was this:
The Contract shall be for a fixed period of (8) years.
The Contract may be extended in increments of 3 years upon agreement by both parties.
A review of the Contract will be carried out with any negotiated amendments being agreed to by both parties. The results of this review will take effect from the commencement of the extension and remain in force for the period of the extension or until other mutually agreed changes are made.
Agreement to extend must be reached no later than 18 months prior to the date on which the Contract or an extension would otherwise expire. In the event mutual agreement is not reached by this date the extension will not proceed.
The fixed period will commence on 1 September 2002 and be completed on 31 August 2010.
3109 On 11 June 2002, Mr Collingwood sent Mr Wilson proposed changes to the draft Agreement.
3110 On 19 June 2002, Mr Wilson sent a letter to Mr Collingwood arising out of the 6 June 2002 meeting and the receipt of the revised draft agreement. In that letter, Mr Wilson set out Pozzolanic’s comments on the draft. As to the definition of “Concrete Grade Fly Ash”, Mr Wilson said that the definition should refer to “fly ash extracted and processed to then use as a cementitious material”. Pozzolanic would need 12 months to establish plant. Suggestions were made about the formulation of the cost base for the marginal pricing under Annexure 2, Clause 1.
3111 On 25 June 2002, a further version of the draft agreement was produced (Draft 3). This version is attached to an email from Mr Collingwood to Mr Wilson dated 10 September 2002. In this version, the definition of “Concrete Grade Fly Ash” incorporates a reference to “Fly Ash” extracted by the contractor from TEC’s Ash Transfer Points processed and used as a cementitious material according to AS 3582.1 for fine grade flyash. The definition of “Fly Ash” means “solid material” extracted from the flue gases produced from the boilers and included all ash extracted from TEC’s Ash Transfer Points and the ash stored in the ash dam. Pozzolanic would be entitled to “any and all Concrete Grade Fly Ash [Pozzolanic] extracts from [TEC’s] Ash Transfer Points”. Pozzolanic would agree to supply “Run of Station Fly Ash” to TEC in accordance with cl 7. All “Reject Ash” or “Run of Station Fly Ash” would remain the property of TEC and Pozzolanic would agree to supply “Run of Station Fly Ash” to TEC in accordance with cl 7.1. The old formulation of cl 4.5 requiring Pozzolanic to supply and sell concrete grade flyash to TEC or TEC nominated third parties (compliant with AS 3582.1) under the pricing schedule set out in Annexure 2, clause (c) (or at all) is no longer part of the new version of the draft agreement. Clause 4.3 of Annexure 1 of the earlier version provided that TEC would be entitled to use or sell “Reject Ash”, “Bulk Fill Ash” or “Run of Station Fly Ash” in any application that TEC considered suitable “other than for sale onto the Fly Ash Market”. In the 25 June 2002 version, those words were deleted and the definition “Fly Ash Market” was also deleted.
3112 A new modification was introduced into this version of the agreement by TEC under cl 6 of Annexure 1 under the heading “Incentive Payments”. Incentive payments were designed to encourage the highest level of removal of concrete grade flyash. The proposed incentive payments were these:
Incentive Payments Table
| Total volume of ash removed per annum | Incentive Payment per annum |
| Less than 100,000 tonnes | $3.0 Million |
| 100,000 to 200,000 tonnes | $2.8 Million |
| 200,000 to 350,000 tonnes | $2.6 Million |
| 350,000 to 400,000 tonnes | $2.55 Million |
| 400,000 to 450,000 tonnes | $2.45 Million |
| 450,000 to 500,000 tonnes | $2.4 Million |
| Greater than 500,000 tonnes | $2.35 Million |
3113 The first version of this incentive clause seems to appear in the 25 June 2002 version of the document and is described by Mr Collingwood in his note of 30 August 2002.
3114 On 30 September 2002, Mr Wilson sent a letter to Mr Collingwood copied to Mr Rice and Mr Taylor setting out Pozzolanic’s comments in relation to the 25 June 2002 document. Mr Wilson suggested some changes to the defined terms.
3115 As to the supply of ROS flyash to TEC, or TEC nominated third parties, Pozzolanic would agree to supply “where possible”. Mr Wilson suggested that there would be no need to incorporate at cl 4.6 the notion that Pozzolanic’s plant at Tarong North would be of sufficient capacity to equal the volume of flyash removed from a fully operational unit, precipitator Zone 1, at Tarong.
3116 As to the incentive payments, Mr Wilson suggested that the payments ought to apply in relation to the total volume of ash removed “or processed” by Pozzolanic each year. As to the amounts, Mr Wilson proposed the following incentive payments for the following volume of ash processed or removed:
| Total volume of ash removed or processed per annum | Incentive Payment per annum |
| Less than 50,000 tonnes | $2.8 Million |
| 50,000 to 149,999 tonnes | $2.7 Million |
| 150,000 to 249,999 tonnes | $2.6 Million |
| 250,000 to 349,999 tonnes | $2.5 Million |
| 350,000 to 449,999 tonnes | $2.4 Million |
| 450,000 tonnes or greater | $2.3 Million |
3117 As to Pozzolanic’s facilitation of the supply of ROS flyash to TEC or third parties nominated by TEC, under cl 7.1, Mr Wilson suggested that Pozzolanic’s obligations would be to “use best endeavours to” facilitate supply.
3118 As to the term of the agreement, Mr Wilson said that Pozzolanic would like to see an initial four year term with a four year extension at Pozzolanic’s option with notice to extend being given no later than 18 months prior to expiration. Moreover, Mr Wilson suggested that after the second four year term, the contract could be extended in increments of three years upon agreement by both parties.
3119 Apart from this, Mr Wilson said that Pozzolanic would like to see a “Price Renegotiation clause” that would enable Pozzolanic to seek renegotiation “in the event that Tarong sells Power Station Ash which is used as a cementitious material in concrete or mortar to any third party for an amount on terms more favourable than those agreed between Pozzolanic and Tarong”. Mr Wilson suggested that if the parties could not agree new terms, then Pozzolanic would have the right to elect to terminate the agreement without penalty, at its sole discretion. Also, the starting date of the agreement was proposed for 1 December 2002. Pozzolanic also suggested changes to the costing model to be applied to the calculation under Annexure 2, Clause 1, for ROS flyash supplied to TEC or a third party nominated by TEC.
3120 On 8 October 2002, Mr Collingwood sent an email to Mr Wilson advising him that TEC would be extending the existing Pozzolanic Contract for three months to 28 February 2003. This extension was given to enable issues with the new draft contract to be addressed. Mr Collingwood said in the email that the main issue was a Licence for Pozzolanic to occupy and operate on site rather than the grant of a lease. The other issue was said to be the legal implications of one contract dealing with Tarong and Tarong North.
3121 The next version of the document was produced by TEC in early October 2002. On 8 October 2002, Mr Collingwood sent an email to Mr Morrison, Mr Burton and Mr Taylor attaching the October version of the agreement. Pozzolanic was to provide wording for a clause dealing with the price renegotiation point in the event that Tarong allowed a third party to remove ash on terms more favourable than the incentive scheme offered to Pozzolanic.
3122 On 8 October 2002, Mr Morrison sent a note to Mr Collingwood concerning the draft agreement. Mr Morrison regarded the issues under contention as:
Pozzo seeking to lock in itself as having the most favourable commercial deal for the purchase of flyash (I fail to see how this can happen as commercial arrangements between us and another party should not be up for review by Pozzo)
The amount that pozzo can charge for harvesting ash for a third party.
3123 In the October version of the agreement, the reference to the plant capacity at Tarong North was deleted. The incentive payment cross-proposal from Mr Wilson was slightly amended by TEC to take this form:
| Total volume of ash removed or processed per annum | Incentive Payment per annum |
| Less than 50,000 tonnes | $2.8 Million |
| 50,000 to 149,999 tonnes | $2.7 Million |
| 150,000 to 349,999 tonnes | $2.6 Million |
| 350,000 to 449,999 tonnes | $2.4 Million |
| Greater than 450,000 tonnes | $2.3 Million |
3124 In cl 7.1, TEC took up Mr Wilson’s proposed “best endeavours” obligation. The contract term would be a period of four years with Pozzolanic having an option to extend for a further four years with further three year terms to be agreed by both parties. By the remuneration clause, Annexure 2, Clause 1, Pozzolanic would pay TEC quarterly in arrears $650,000 with adjustments to be made according to the “Incentive Payment Table” (as indexed).
3125 On 13 November 2002, Mr Wilson sent a memorandum to Mr Ridoutt setting out a list of the issues in relation to the draft agreement which he said he had discussed with Mr Collingwood to keep the matter proceeding. Clause 7.2 contemplated that where TEC requested Pozzolanic to supply a specific grade of ROS flyash at a specific temperature and moisture content, the parties would co-operate so as to provide that grade of ash. Mr Wilson suggested that cl 7.2 be removed. The term would be eight years. Mr Wilson said that cl 15.1 should be replaced with a clause recognising that the agreement could be extended in increments of three years upon agreement by both parties with agreement to be reached no later than 18 months prior to the date on which the agreement (or any extension) would otherwise expire. Mr Wilson suggested a cl 17.2 directed to “Ending the Agreement early”, in these terms: “The Contractor [Pozzolanic] may terminate the Agreement at any time after 1 June 2004 by giving 18 months notice to TEC. This right does not apply to any extension of the Agreement”.
3126 Mr Wilson also commented upon the “Schedule 3, Clause 1 Grant of Licence” in these terms: “We are concerned that TEC can grant access to our Licensed Area to other people, which means others to get access to our plant”. Mr Wilson suggested: “Amend clause so that the only rights that TEC can grant in respect of the Licensed Area are those which are not inconsistent with the rights of the Contractor and do not prejudice the Contractor’s rights generally under the Agreement”.
3127 On 13 November 2002, Mr Wilson sent a letter to Mr Collingwood setting out a commentary of all of the matters he had raised with Mr Ridoutt. There are, in effect, 36 comments to be addressed by Mr Collingwood and the TEC negotiating team, in all. On 21 November 2002, TEC and Pozzolanic met including Mr Collingwood and Mr Wilson. Concerns were expressed about how long the negotiation of the contract had taken. The existing contract had been extended to the end of February and the new agreement would start on 1 March 2003. On 13 December 2002, Mr Collingwood sent an email to Mr Wilson attaching a further version of the agreement dated 12 December 2002.
3128 At this point, the agreement substantially takes the form of the final version. The term is expressed to commence on 1 March 2003 and remain in force for eight years unless ended earlier under the agreement. Clause 7.1 reflects the best endeavours obligation to provide ROS ncgfa to TEC or any TEC nominated third parties. Clause 12.3 adopts the TEC amended version of Mr Wilson’s counter-proposal although the volumes are rounded out from, for example, 149,999 tonnes to 150,000 tonnes and so on. Mr Wilson’s proposed clause is adopted by TEC (although with an important difference) as part of cl 17.1 in these terms: “At any time after 1 September 2004, a party [any party] may give written notice to the other terminating this agreement, and this agreement will terminate on the date that is 18 months after the notice is given” [emphasis added].
3129 On 13 December 2002, Mr Wilson emailed a letter to Mr Collingwood observing that in the latest draft of the agreement, the termination clause 17.1 had been changed to give TEC the right to terminate the agreement after 1 September 2004 which, in Mr Wilson’s view, effectively made “the term of the Agreement only 3 years”. Mr Wilson said that Pozzolanic’s offer had always been tied to at least a seven year term and changing the term to three years fundamentally altered the value of Pozzolanic’s offer with the result that Pozzolanic would need some time to re-value the contract for a three year term. Mr Wilson thought that the monetary value of Pozzolanic’s proposal would decrease by 25%-50%. Mr Wilson also said: “There is no exclusivity in the contract and therefore there should be no concern about an 8 year agreement. This is obviously a major issue for us and we would like to discuss it further”.
3130 Also on 13 December 2002, Mr Collingwood sent an email to Mr Wilson asking whether Pozzolanic would support a submission to the Commission for approval of the version of the flyash agreement “mooted in your letter dated 13 December (ie 8 year term with limited termination by TEC)”.
3131 On 18 December 2002, Mr Wilson sent Mr Collingwood a copy of a letter Pozzolanic had received from Clayton Utz dated 17 December 2002 dealing with the trade practices implications of the proposed agreement with Tarong. The letter is addressed to Mr Wilson and sets out the author’s understanding of the position as instructed by Pozzolanic. The understanding conveyed was this:
As we understand it, broadly speaking, the agreement provides as follows:
1. [TEC] agrees to sell to [Pozzolanic] all concrete grade fly ash that Pozzolanic obtains from certain ash transfer points and processes in a plant provided by Pozzolanic.
2. Subject to the adjustment referred to in clause 12 of the Agreement, Pozzolanic is to pay TEC for the right to take fly ash (whether or not Pozzolanic takes any fly ash) a base amount of $650,000 per quarter escalated at CPI.
3. Under clause 12 of the Agreement, the amount payable in the fourth quarter of each year of the Agreement is to be adjusted depending on the quantity of power station ash taken by Pozzolanic.
4. There is no exclusivity clause in the Agreement.
5. The term of the Agreement is 8 years.
We understand that Pozzolanic wishes to protect itself against being tied to an 8 year contract in the event the market value of fly ash falls. Therefore, Pozzolanic wishes to include in the Agreement a term whereby it can at any time after the date which is 18 months from the commencement of the Agreement, terminate the Agreement on giving 18 months notice.
TEC has stated that if Pozzolanic has a right of termination, it should have a similar right.
3132 The author of the letter then makes some observations about that contention and says that it seems to Clayton Utz that there is a strong argument against TEC having such a right, as Pozzolanic would be investing substantial capital in plant and equipment and would need the opportunity to amortise the capital costs over an eight year horizon. Any earlier termination of the agreement by TEC “could result in losses to Pozzolanic”, in the author’s view. The author also notes Pozzolanic’s instructions that TEC believed an eight year agreement reflecting the understanding at Points 1 to 5 in the letter, could breach the provisions of the Trade Practices Act because “it could result in a substantial lessening of competition in the market”. The author observes that such a conclusion would depend upon how the market was defined; the demand for flyash; the amount of flyash likely to be produced by TEC, the amount taken by Pozzolanic and the residual volume of ash available for others; and whether other parties who wished to produce ash from TEC would be able to physically access flyash by adequate off-take points.
3133 Ultimately, the author concluded that it was not possible to say whether an agreement, in the terms reflecting the elements of Points 1 to 5 in the letter would breach the Trade Practices Act although the fact that TEC would produce 1.3 million tonnes of flyash each year of which Pozzolanic would take about 250Kt per annum, coupled with no clause in the agreement restricting TEC from selling flyash to anyone else, weighed heavily against the possibility of the agreement resulting in a substantial lessening of competition.
3134 On 30 January 2003, Mr Wilson sent a letter to Mr Burton copied to Mr Collingwood and Mr Ridoutt arising out of a flyash meeting between the parties. In that letter, Mr Wilson refers to his meeting with Mr Burton, Mr Collingwood and Mr Ridoutt from QCL. Mr Wilson says, in the letter, that Pozzolanic and QCL agreed with TEC about the three outstanding issues. First, the agreement would commence on 1 March 2003 and would remain in force for five years unless ended earlier under the agreement. Either party would be entitled to terminate the agreement by giving the other party 12 months notice at that time (the expiration time).
3135 Second, the table for the purposes of cl 12 would be this:
| Column 1 Total volume of Fly Ash removed per annum | Column 2 Payment per annum |
| Less than 50,000 tonnes | $2.6 million |
| 50,000 tonnes to less than 150,000 tonnes | $2.5 million |
| 150,000 to less than 350,000 tonnes | $2.4 million |
| 350,000 to less than 450,000 tonnes | $2.2 million |
| 450,000 tonnes or more | $2.1 million |
3136 Third, cl 17 would be changed to provide that Pozzolanic could at any time after 1 September 2004 give written notice to TEC terminating the agreement, and the agreement would terminate on the expiration of the 12 months. On about 7 February 2003, Mr Collingwood, Mr Morrison and Mr du Mee put a proposal to the TEC Board that Pozzolanic’s bid be accepted in a total flyash bid of $14.4M with electricity charges of $2.3M resulting in a base amount payable by Pozzolanic of $16.7M for the removal of flyash at Tarong and Tarong North for six years (being five years plus a 12 month notice year). On 4 February 2003, Mr Collingwood sent Mr Wilson a final version of the agreement. On 13 February 2003, TEC accepted Pozzolanic’s tender in writing, by letter, which was received by Pozzolanic on 21 February 2003. On 25 February 2003, Mr Wilson, however, sought some further changes to the agreement and on 26 February 2003, Mr Collingwood took up those changes and provided Mr Wilson with another version of the document, and a further modified version was sent later on the same day. The contract was signed, in February 2003, by Mr Burton for TEC and by Mr Arto for Pozzolanic.
PART 46
Conclusions in relation to s 45 on purpose, concerning the Fly Ash Agreement of 26 February 2003 between Pozzolanic and TEC
3137 Having regard to the history of these negotiations and the evolution of the provisions relied upon by the Commission, I am satisfied that Mr Collingwood for TEC and Mr Ridoutt and Mr Wilson for Pozzolanic were each including parties for the provisions in issue, each for their own perceptions of how those provisions served the objects or ends sought by each organisation. The term of five years (together with a 12 month notice period), the final form of the cl 12 volume and payment thresholds, and the notice provision after 1 September 2004 were finally agreed on 30 January 2003. Were the provisions included by Mr Ridoutt and Mr Wilson with the authority of Mr Arto, for the purpose of substantially lessening competition in either the upstream or downstream markets?
3138 There is, no doubt, that the Board papers prepared by Mr Wilson and Mr Ridoutt identified in dramatic terms the overarching likely consequences for Pozzolanic and QCL should the Tarong Contract be lost. In those Board papers and in other material leading up to entry into the Tarong Contract there is a significant body of agitation about entry at Millmerran or Tarong by a putative rival and, significantly, a serious well resourced, aggressive and determined rival anxious to secure a position as a supplier in the SEQ concrete grade flyash market, and in aid of that outcome, secure a position of access under appropriate contractual arrangements for a source of supply of raw flyash at either Millmerran or Tarong.
3139 The acceptance of Pozzolanic and QCL’s bid would necessarily lead to the rejection of a rival’s bid and in that sense a rival would be excluded from principal access to Tarong ash and the immediate opportunity to enter the downstream market with processed flyash from Tarong. At February 2003 and in the 12 months leading up to it, Pozzolanic and QCL had formed the view that it simply had to win the Tarong Contract in order to continue to supply concrete grade flyash to its concrete customers in SEQ. Winning the Millmerran Contract would not serve that end, in any immediate sense, because the ash was unknown, the power station was not built, the generating units were not commissioned and the ash was neither available nor tested.
3140 Therefore, in very real and practical sense, how would Pozzolanic and QCL supply concrete grade flyash to its concrete customers in SEQ in the first week, or the second week, or the third week, in March 2003 or every week immediately thereafter, without the Tarong flyash and before Millmerran ash was available, tested and proven as a substitute for Tarong ash in the SEQ concrete grade flyash market (assuming it would prove to be a substitute ash?)
3141 In order to maintain the business and continue to supply its customers, Pozzolanic and QCL had to win the contract, and in order to win the contract, they had to propose terms on the one hand, and respond to terms put to them on the other hand, by TEC and reach a concluded arrangement for the supply of flyash. All of the other evidence in this case, relating to the logistics of transport and delivery, demonstrates that it was not practical or feasible on any sustained basis (other than for the purposes of interim holding over supply of flyash in urgent circumstances) to transport Gladstone ash or Central Queensland ash into SEQ for sale to Pozzolanic’s SEQ concrete customers should it have lost the Tarong Contract.
3142 I am satisfied that a substantial purpose which actuated Mr Wilson and Mr Ridoutt in framing the terms of the bid for the Tarong Contract was the purpose of having continuity in the product it knew in order to continue to supply that product to QCL’s concrete customers, and preferably exclusive access to that ash either expressly or in the terms of exclusivity as Mr Maycock understood that notion. I am satisfied that this was a substantial purpose of Mr Wilson and Mr Ridoutt and ultimately Mr Arto in the way in which he relied upon Mr Wilson and Mr Ridoutt, and also a purpose of Mr Maycock.
3143 The immediacy of Pozzolanic and QCL having no concrete grade flyash to sell in the SEQ market (apart from Swanbank flyash) should it have lost the Tarong Contract was, no doubt, the problem Mr Maycock was addressing in his thinking when he said that winning the Millmerran Contract did not cause him to alter his view that it was important to win the Tarong Contract. It is entirely unsurprising, in the context of all of the evidence of Pozzolanic and QCL’s history in the flyash business, that QCL would wish to “secure” Tarong ash as a flyash source for its continuing operations through its subsidiary Pozzolanic, over time, and that it would not abandon any business or commercial interest in Tarong flyash simply because it had won the contract at Millmerran.
3144 The question, however, is not simply whether there were good business reasons for Pozzolanic wanting to secure a contractual relationship with TEC. I am satisfied that the business objective of Pozzolanic in entering into the contract was to have concrete grade flyash to sell in SEQ. However, the real question is whether the adoption of the identified particular provisions in the contract were included for a substantial purpose of preventing others from entering the SEQ concrete grade flyash market, and in aid of that purpose, a purpose of preventing others from obtaining access to unprocessed Tarong flyash for processing, for entry into the SEQ concrete grade flyash market, and thus a substantial purpose of substantially lessening competition in those markets.
3145 The term of the contract was five years (and on TEC’s view probably six years by operation of the notice provision). Pozzolanic and QCL certainly wanted an exclusive agreement that would deny Tarong concrete grade flyash to others. That proposition was pressed with TEC but not accommodated by TEC. There was no provision for express “exclusivity” although the measure of Pozzolanic’s rights granted under the contract, was a right to “any and all” solid material extracted from Tarong and Tarong North flue gases, capable of being processed through Pozzolanic’s plant for use as supplementary cementitious materials as shown in AS 3582.1, that is, concrete grade flyash recovered through Pozzolanic’s plant from the raw flyash. All of the solid material extracted from the flue gases of each power station, collected in the hoppers, could be processed in Pozzolanic’s plant. Some of it would then be of use as concrete grade flyash falling within AS 3582.1, and some of it would not and would thus be reject ash. Nevertheless, Pozzolanic enjoyed the right to any and all of the Tarong and Tarong North “Fly Ash” extracted from the hoppers for processing in Pozzolanic’s plant for use in conformity with AS 3582.1, from the raw Tarong and Tarong North flyash. Pozzolanic would pay $2.6M (indexed) if it actually took less than 50Kt per annum but that was never going to be the case on any orthodox going concern basis. The likely band would be either 150Kt to less than 350Kt or 350Kt to less than 450Kt attracting payments of $2.5M or $2.4M respectively.
3146 The rights granted under the contract (and related definitions) were framed by TEC and accepted by Pozzolanic during the negotiation process described earlier. TEC formulated the incentive payment schedule to encourage Pozzolanic to extract and sell the highest volume of concrete grade flyash, from Tarong ash, as possible. Although TEC would not grant exclusivity to Pozzolanic, it wanted to see, and agitated for, provisions in the contract that created clear commercial incentives for Pozzolanic to remove as much concrete grade flyash as it possibly could from the Tarong raw ash to meet the perceived demand for concrete grade flyash in South East Queensland, rather than flyash from any other source (and presumably the anticipated entry of Millmerran flyash). These incentives, in turn, encouraged Pozzolanic to assert as much control over the raw unprocessed flyash from each station, as necessary, in order to process out of it “any and all” concrete grade flyash capable of use in conformity with AS 3582.1. Although a substantial volume of unprocessed flyash would continue to be produced each year at Tarong, and a substantial additional volume would begin to be produced from Tarong North, the rights clause, and the incentive schedule, encouraged Pozzolanic to try and extract concrete grade flyash in the aggregate of 450Kt or more to attract the lowest level of payment at $2.1M. Under the rights clause of the contract with Pozzolanic, if any third party was capable of installing plant at Tarong (or later Tarong North), and extracting concrete grade flyash by processing Tarong ROS ash, each tonne of concrete grade flyash so obtained would be a tonne of product that Pozzolanic had the right to extract from the raw ash by processing through its own facilities.
3147 Pozzolanic and QCL perceived at this time that it would require about 330Kt of concrete grade flyash in 2003 for the SEQ market. About 40Kt of that would come from Swanbank. Subject to determining the utility of the Millmerran ash, the balance of flyash supplied by QCL would come from Tarong as would any incremental growth in demand, over time, due to the sorts of factors Mr Arto and Mr Maycock spoke about. Also, Pozzolanic and QCL took into account the extent to which some reserve capacity might be needed although the supplemental 20% buffer did not properly emerge, at least in those terms, until 2004. The Tarong Power Station would produce approximately 1.4 million tonnes of unprocessed flyash each year. Pozzolanic by cl 7.1 had assumed a best endeavours obligation of providing ROS ncgfa from its plant to TEC or TEC nominated third parties including the services of processing and handling that ash through its plant to “the full limit of the capacity” of Pozzolanic’s plant. The limits of the “best endeavours” obligation would, no doubt, be determined by the extent to which that ash would be required by Pozzolanic for processing for the production of concrete grade flyash for its own use in supplying its customers.
3148 Pozzolanic’s entitlement to first accommodate its own requirements, at any and all times, would no doubt make it difficult for a third party to secure consistent regular access to run-of-station ash for processing into concrete grade flyash in circumstances where an existing contractor had rights of the kind enjoyed by Pozzolanic. “As available” transactional sales would not enable a supplier to confidently enter the SEQ concrete grade flyash market as concrete producers would want regular supplies of flyash to their batching plants to meet the requirements of servicing concrete pours on projects with great regularity if not each day, every other day.
3149 Clause 17.1 created the mechanism under which Pozzolanic could give written notice to TEC terminating the contract at any time after 1 September 2004 with the contract expiring 12 months later.
3150 If the Tarong Power Station was capable of producing about 1.4 million tonnes of raw flyash and Tarong North was expected to produce about 500Kt of raw flyash when commissioned and operational, it is difficult to see why Mr Ridoutt and Mr Wilson found it necessary, as an aspect of securing the objective of having ash to sell at all, from the beginning of March 2003, to include a rights provision framed on the basis that Pozzolanic would have the right to buy “any and all” flyash meeting AS 3582.1 recovered by Pozzolanic through its processing plant, extracted from the 1.9 million tonnes of raw flyash produced at both power stations over the life of the contract.
3151 Part of the answer may be that Pozzolanic’s plant was perceived to have some capacity constraints along the lines described by Mr Druitt; Tarong North ash was not known and it might not produce ash useable in conformity with AS 3582.1; contracts like this only come along when they come along, as Mr Clarke put it, and although the full extent of the concrete grade flyash capable of extraction from all of the Tarong and Tarong North raw ash could not be used, and was not needed immediately, it would be needed, it was said, in the later years out to years five and six and beyond; and, some reserve capacity to meet fluctuations and volatility was required.
3152 Nevertheless, I am satisfied that not only did Mr Ridoutt and Mr Wilson pursue the quite natural and rational objective (and thus have the purpose) of winning the Tarong Contract to secure a continuing source of Tarong concrete grade flyash to enable the flyash business to continue to function and supply the company’s customers, but a further substantial subjective purpose in including the terms earlier described was to “creatively” or otherwise (in light of the loss of exclusivity) secure a position where “provisions” would be adopted that gave Pozzolanic (and in effect, QCL) contractual control over access to the total volume of raw flyash produced from both power stations for the life of the contract for priority processing through its own plant for the priority extraction, as it chose, of all concrete grade flyash capable of being extracted from the raw flyash at both stations. That provision was subject only to the “best endeavours” obligation under cl 7.1 concerning non-concrete grade flyash.
3153 Pozzolanic was the incumbent producer and it had its plant and equipment connected to all of the transfer points on all hoppers in Zones 1, 2 and 3 at Tarong and enjoyed the right to connect to all the hoppers at Tarong North. Although the imperative of securing a contract at Tarong, first, to have ash to sell in the immediacy of the post-Tarong tender period (and before Millmerran might come on stream, if useable) and, second, to secure access to the familiar and reliable Tarong ash as the source of proven market ash, was a fundamental objective for entry into the Tarong Contract, I am satisfied that the ubiquity in the scope of the rights provision was included for a substantial purpose of preventing or discouraging a rival from obtaining access to Tarong and Tarong North raw flyash for processing (behind Pozzolanic and QCL), and to prevent a rival entering the SEQ concrete grade flyash market with processed Tarong or Tarong North flyash. Thus, a substantial purpose of the formulation and inclusion of cls 2, 3.1, 12.2, 12.3, 4.4, 8.3 and 17.1, was a substantial purpose of substantially lessening competition in each market. These purposes were the subjective substantial purposes of Mr Ridoutt and Mr Wilson (among other purposes). The material does not reveal the decision-making process about the particular provisions as between Mr Ridoutt and Mr Wilson on the one hand and Mr Arto and Mr Maycock on the other. However, Mr Arto has made plain the degree of inter-dependency between him and Mr Ridoutt and Mr Wilson on these questions, and Mr Maycock fundamentally regarded these questions such as the precise formulation of the particular provisions as very much “matters for management”.
3154 Neither Mr Ridoutt nor Mr Wilson was called to give evidence about the business purposes for including the identified provisions or, more generally, the considerations, objectives or purposes in Pozzolanic entering into the contract with TEC. I draw the inference that the failure to call Mr Ridoutt and Mr Wilson on these topics suggests that their evidence would not have been helpful to the respondents.
PART 47
Conclusions in relation to s 45, as to effects and likely effects, and the Fly Ash Agreement of 26 February 2003 between Pozzolanic and TEC
Other aspects of the s 45 contentions involving Tarong and Tarong North
3155 The Commission contends that the identified provisions, so far as they relate to Tarong, had the effect or likely effect, at the date of making the contract with TEC, of substantially lessening competition and thus Pozzolanic contravened s 45(2)(a)(ii). The Tarong provisions are said to have had those effects because entry into the contract with those identified provisions had the effect of hindering or preventing a rival from gaining access to a source of unprocessed flyash from Tarong for processing, so as to be able to enter, and supply concrete grade flyash, into the SEQ concrete grade flyash market. Had the Tarong provisions of the TEC contract not conferred a right in Pozzolanic to any and all concrete grade flyash capable of being processed in Pozzolanic’s plant from the solid material extracted from the flue gases at the power station (taken together with the other identified provisions), rivals would likely have sought to enter into a supply agreement with TEC for access to at least some of the 1.4 million tonnes of raw flyash produced at Tarong (and the 500Kt of raw ash produced at Tarong North), and enter the SEQ concrete grade flyash market with processed flyash, even if in a relatively small but meaningful and real way, it is said.
3156 The Commission says that up to June 2003, QCL funded Pozzolanic’s entry into the TEC contract, with the provisions, and thereby gave effect to the identified provisions having the purpose when made, and having at the date of giving effect to the provisions, the effect or likely effect of substantially lessening competition.
3157 After June 2003, Cement Australia is said to have given effect to the provisions.
3158 As to the Tarong North provisions, the Commission contends that cl 4.4 gave Pozzolanic the right to establish classification plant at the station and extract raw flyash from all of the Tarong North hoppers for classification so as to isolate concrete grade flyash. The Commission contends that once Pozzolanic exercised the right to build classification plant at Tarong North, and process and take concrete grade flyash from the raw flyash, it would not be “commercially feasible” for any third party to become a second off-taker at Tarong North to classify raw Tarong North ash to produce concrete grade flyash.
3159 Pozzolanic, by that conduct, it is said, gave effect to those provisions of the contract. The Commission contends that on 29 May 2006, TEC approved Pozzolanic and Cement Australia’s proposal for the installation of a classifier at Tarong North and by 26 September 2006, construction was substantially completed with the project simply awaiting connection to the electricity supply. By this time, the quality of the Swanbank ash had deteriorated which “reduced its attractiveness as a potential substitute for Tarong or Tarong North flyash”.
3160 The Commission contends that from no later than 29 May 2006, the non-transitory effect of the conduct was to “shut out competitors from a source of classified ash” which was a substantial or meaningful effect of substantially lessening competition in the two relevant markets. The Commission also contends that a substantial purpose of cl 4.4 taken in conjunction with cls 8.3, 3.1 and 1.1 was to prevent any other person from acquiring unprocessed flyash from Tarong North; to prevent any other person from supplying concrete grade flyash in the SEQ concrete grade flyash market; to substantially lessen, hinder or prevent competition in the SEQ unprocessed flyash market; and to substantially lessen, hinder or prevent competition in the SEQ concrete grade flyash market. The Commission contends that Pozzolanic, by the conduct just described (of exercising the Tarong North rights), gave effect to the provisions included in the contract for these substantial purposes, apart from giving effect to those provisions which, when giving effect to them, had the effect or likely effect of substantially lessening competition.
3161 In Part 38, I examined many of the relevant events.
Conclusions
3162 I am satisfied that cls 2, 3.1, 12.2, 12.3 and 17.1 (together with the cl 1.1 definitions) of the contract as they relate to the Tarong Power Station had the effect when the contract was made, and would be likely to have the effect of discouraging, hindering or preventing a third party from seeking to establish processing facilities (extraction and collection equipment, pumps, a classifier and related plant and equipment) at the Tarong site (or off-site) so as to collect and take raw unprocessed flyash from Zones 1, 2 or 3 into a processing facility for processing and extracting or winning concrete grade flyash for supply into the SEQ concrete grade flyash market.
3163 The essential elements of that conclusion are these.
3164 First, the provisions conferred a right to any and all “Fly Ash” as defined in the way explained earlier both in relation to Tarong (and Tarong North) for the extraction of concrete grade flyash out of raw ROS flyash using Pozzolanic’s extractive plant and equipment. Pozzolanic enjoyed, by force of the provisions, the right to take all of the raw flyash into its processing facility to extract whatever volume of concrete grade flyash it wanted. It is no answer to a contention that identified provisions of a contract have an effect at the date of making the contract (or a likely future effect), that a good business reason subsisted in Pozzolanic (in making the contract with those provisions) of wanting or securing access to any or all of the concrete grade flyash that might be able to be extracted from any or all of the raw flyash containing particles meeting the description as concrete grade flyash in its own processing facility, and thus the provisions came to be included in the contract in order to serve that business end. Every contracting party that includes provisions in a contract designed to fully satisfy its own perceived need to be able to supply 95% of the relevant market for a product, produced using a particular input, no doubt fully believes that those business objectives are best served by such an arrangement.
3165 The only question (as to this limb, s 45(2)(a)(ii)) is whether the identified provisions had the effect or would be likely to have the effect, viewed at the date of making the contract, of substantially lessening competition in a relevant market.
3166 Second, the provisions had that effect and would, as to the future, be likely to have that effect because the immediate scope, and the likely future scope, of rivalry characterising the competitive process in the SEQ concrete grade flyash market, was and would continue to be diminished by the operation and effect of the provisions because any third party seeking access to Tarong Power Station raw flyash, as a feedstock for processing, for entry into the SEQ concrete grade flyash market, could have no confidence of real, genuine or effective access to any particular volume of that ash; at any particular time; with any degree of certainty; with any real degree of orthodoxy in planning the conduct of a business of processing raw ash to extract concrete grade flyash for supply each day to batching plants operated by concrete producers undertaking concrete pours each day or every other day.
3167 Concrete grade flyash is material extracted from the relevant power station ash for regular supply to buyers who are engaged in the “ready-mix” daily supply of a concrete mix. The evidence in this case makes plain that suppliers of concrete grade flyash as an input feedstock for the production of concrete must be able to obtain access to a regular and consistent (in terms of quality) source of raw flyash for the production or extraction of concrete grade flyash, rather than on an “as available” or “spot purchases” basis if such a person wants to conduct a business (comprising a sequence of regular transactions) of supplying concrete grade flyash to concrete producers. Mr White was of that view. He recognised that continuity, consistency and regularity were critical matters in the conduct of such a business.
3168 Pozzolanic’s contractual command and control position over any and all volumes of raw Tarong ash, by force of the provisions, for first taking any and all Tarong ash into its own processing facilities for the extraction of any or all concrete grade flyash capable of extraction in those facilities from that ash, in priority to any other third party off-taker, either regularly or episodically, meant that the systemic arrangements a third party would need to see in place to “enter” at Tarong could not be put in place because a new third party entrant at Tarong would always be susceptible of being placed second behind Pozzolanic at all times or at any time. Also, the command and control position Pozzolanic enjoyed over any and all of the Tarong “Fly Ash” for first processing in its own facility (to the extent capable of extracting concrete grade flyash from raw Tarong ash through that facility) made it possible for discretionary decision-making by Pozzolanic that would, at all times or at any time, enable Pozzolanic, as it chose, to displace a third party in favour of Pozzolanic’s prior rights.
3169 Pozzolanic’s enjoyment and exercise of its priority rights during all of the period of the contract would become the daily measure of the commercial uncertainty in any third party’s position.
3170 None of the incentives conducive to third party entry were present in the arrangements between Pozzolanic and TEC. The best test of this notion that Pozzolanic’s first rights had, and were likely to have, the effect of discouraging third party entry at Tarong is that Mr White would not have wanted to enter, standing behind Pozzolanic’s prior rights, as a theoretical third party off-taker at the Tarong Power Station in trying to conduct a new concrete grade flyash supply undertaking.
3171 A proposition was put to Mr White in evidence about the operation of the Tarong Contract to the effect that if a second off-taker had examined the question of what non-concrete grade ash such a person might expect to get for processing, day-to-day, at and from Tarong, standing behind Pozzolanic’s rights, the answer would have been “no available ash”. Mr White did not accept that proposition because the volume of ash taken from Zone 1 at Tarong by Pozzolanic might, for example, have been 1,000 tonnes which would have left another 2,500 tonnes of ash available for a second off-taker. Mr White took the view that a second off-taker would have been able to connect its own pumping and transfer equipment into Zone 1, connected to its own classifier. Mr White was asked this question: “Are you suggesting that a second off-taker would have regarded that [connecting its own pumping and transfer equipment into Zone 1] as being economically feasible?” Mr White said: “Well, I think … obviously, there would have to be some form of amended arrangement to provide them some guarantee of volume and probably the best arrangement would have been to [allocate] hoppers within each unit to one party or another in the way that’s now proposed [in terms of the new tender]” [emphasis added]. Mr White said that other than those sorts of arrangements, there was no reason why it would not have been feasible for a second off-taker to participate at Tarong. That notion of the feasibility of a second off-taker participating at Tarong was further examined with Mr White in this way (T, p 2467, lns 12-19):
Q So just let me understand. Do you agree that unless Pozzolanic’s existing contract was amended so that a third party could be guaranteed volumes of ash, it was not economically feasible for a third party to be a second off-taker at Tarong Power Station?
A I would say that there would have to – if I was a third party off-taker, I would want some arrangement, but I would also, at July 2006, be reflecting that the agreement only had 18 months to run, and I would probably be negotiating around the renewal or retendering of that agreement in terms of any arrangement that I would make.
[emphasis added]
3172 Mr White was asked whether he had formed a view during the life of the Pozzolanic Contract about whether a third party would be interested in being a second off-taker at the Tarong Power Station. Mr White said that the Pozzolanic/Cement Australia “internal ash team” had considered that question. Mr White was asked (T, p 2468, lns 40-46):
Q Are you saying you [Mr White and the internal ash team] formed the view that it was likely the second off-taker might want to build a classifier and wait behind Pozzolanic at Tarong Power Station?
A I don’t think we ever viewed or expressed it in those terms because clearly, that wouldn’t be attractive. I think our view was that if someone was to obtain a right of access – and it seemed to be feasible at Tarong North, so I’m not sure why not at Tarong – then we would prefer that right of access to be at Tarong and, therefore, obviously, we viewed it as a feasible option.
[emphasis added]
3173 Even though Mr White (and the Cement Australia ash team) viewed it as a “feasible option” for a third party to build a classifier and obtain access to Tarong ash for processing, with Pozzolanic’s contractual rights derived from the provisions in place as described, it seems to me significant that Mr White, as an experienced operator and manager of an undertaking functioning in the concrete grade flyash market, standing hypothetically in the shoes of a third party, would have wanted “some form of amended arrangement” to the terms of the existing Pozzolanic TEC contract to provide such a third party with either a “guaranteed volume” of ash or, as the “best arrangement”, the “allocation” of some hoppers in each unit at Tarong to the incumbent, and others hoppers to a third party. For Mr White, that view of it might not have prevailed by July 2006 because by then the Pozzolanic TEC Agreement would have only had 18 months to run and the focus for Mr White, as a hypothetical third party at that point, would probably have been upon negotiating an access arrangement to Tarong ash as part of TEC’s renewal or re-tendering of the principal agreement. Nevertheless, leaving aside the focus that might have emerged in a third party’s attempts to secure access towards the end of the term of the Pozzolanic TEC Agreement, the desirability of access to a guaranteed volume of ash or access to particular hoppers for a third party, from the outset of the term, remains a step that Mr White thought desirable, from a third party’s perspective.
3174 As to Tarong North, Mr White accepted that once Pozzolanic installed the classifier at Tarong North, it had first right of access to the ash from Tarong North for processing for the extraction of concrete grade flyash, and the result of Pozzolanic installing a classifier at Tarong North, would be that no one else would install a classifier at Tarong North. Mr White put it this way: “I think our view was that if any party, regardless of their rights, installed a classifier first at Tarong North no other party would, including ourselves, and given that we had bought and paid for first rights and an obligation to put a facility in, we felt that was what we should do” [emphasis added].
3175 Mr White gave evidence that having installed a classifier at Tarong North, it was Pozzolanic’s “hope” that no other party would install a classifier. Mr White also accepted that it was more than a hope and that it was “certainly [Pozzolanic’s] expectation it [a third party installation] wouldn’t happen” (T, p 2469, lns 14-23).
3176 Had the provisions of the Tarong Contract included, for example, a power in TEC (and a clear corresponding obligation in Pozzolanic to act in conformity with the exercise of the power by TEC) to allocate or regulate, for the benefit of one or more third parties seeking access to Tarong ROS ash, either access to a guaranteed volume (a sum certain in the mind of a possible new entrant) of raw unprocessed flyash, or access to particular off-take points or “Ash Transfer Points” on particular hoppers, in particular zones, at particular times, perhaps cycled as between Pozzolanic and a third party (or third parties), or permanently allocated hopper points, at which a third party could readily connect its collection equipment and lines (with a corresponding direction to Pozzolanic to temporarily disconnect its collection plant and equipment) to remove raw Tarong ash into third party processing facilities (and then removal of concrete flyash into a temporary storage silo), the contract might well have facilitated new entrant behaviour productive of rivalry, contestability and a new dimension to the competitive process in the SEQ concrete grade flyash market. Alternatively, such provisions would have at least mitigated the collective disincentives in the grant of the rights by the identified provisions, having the effect of discouraging a new entrant from obtaining ash at Tarong for processing it in its third party facilities so as to supply concrete grade flyash into the SEQ concrete grade flyash market in competition with the incumbent supplier of 95% of all concrete grade flyash sold and supplied into the SEQ concrete grade flyash market.
3177 Confronted with the commercial disincentives contained in the provisions I have mentioned, where might a putative new entrant to the SEQ concrete grade flyash market have turned in 2003 for five years, from the date of the making of the TEC Pozzolanic Contract, for feedstock ash for processing, for entry into the SEQ concrete grade flyash market? There would be little point turning to Millmerran as Pozzolanic had a contract giving it the right to take 135,000 tonnes of concrete grade flyash out of Millmerran ROS ash (coupled with a corresponding supply obligation in MPP) and the quality of the ash had to be determined. Swanbank ash was under contract to Pozzolanic. Any new ash out of Tarong North was under contract to Pozzolanic with the same bundle of rights conferred upon Pozzolanic as those in relation to the Tarong Power Station. Buying ash from NSW power stations required a new entrant to confront the significant disincentives in the transport costs of bringing the product into SEQ.
3178 It follows that the provisions of the Tarong Contract of 26 February 2003 as they applied to access to unprocessed flyash from the Tarong Power Station, had the effect, and the continuing likely future effect, of substantially lessening competition in the market for the supply and acquisition of unprocessed flyash and the effect, and continuing likely future effect, of substantially lessening competition in the SEQ concrete grade flyash market because, first, the provisions operated to discourage and thus hinder and prevent third party entry into a supply arrangement at Tarong Power Station with TEC for raw flyash for processing for entry into the SEQ concrete grade flyash market, and discouraged and hindered and prevented third party entry into the SEQ concrete grade flyash market with processed Tarong concrete grade flyash. In addition, other SEQ raw flyash sources were not available to a third party.
3179 Second, an assessment of the future scope of rivalry and the competitive process in each market with the identified Tarong Power Station provisions in place, reveals an immediately diminished future competitive process in each market upon the making of the contract, by operating to discourage, hinder and prevent third party entry at Tarong thus removing any immediate future potential constraint upon Pozzolanic’s discretionary conduct (arising out of effective third party access to Tarong Power Station ash, and the potential entry of third party Tarong concrete grade flyash into the SEQ concrete grade flyash market), as compared with the future scope of the competitive process without the identified provisions and third party entry and contestability.
3180 Third, an assessment of the likely scope of future rivalry and the competitive process in each market over the life of the Agreement with the identified Tarong Power Station provisions in place reveals a real and meaningful likelihood of a diminished future competitive process in each market upon the making of the contract. In the absence of the provisions as framed, the real likelihood was that third parties would have sought access to Tarong ROS flyash (as they attempted to do) and secured an agreement for access to Tarong ROS flyash for processing for the extraction of concrete grade flyash for supply into the SEQ concrete grade flyash market. Had a third party obtained access, processed Tarong ROS flyash and entered the SEQ concrete grade flyash market with Tarong concrete grade flyash, the strong probability is that rivalry and contestability would have operated to constrain the prices of Pozzolanic and QCL (and challenged their market share of volume) and later Pozzolanic and Cement Australia. The likely future effect of the identified provisions was to discourage, hinder and prevent such entry (and the consequential expansion in contestability and rivalry in each market that entry would have brought). The identified provisions operated to make it likely, over the life of the Agreement, that the future scope of rivalry would be meaningfully reduced or diminished as compared with the likely scope of rivalry without the provisions. The measure of the difference is the increased participation in the competitive process by a new entrant and the constraining effect which would likely have arisen, upon Pozzolanic’s volume of sales and the prices for concrete grade flyash in the SEQ concrete grade flyash market.
3181 I am satisfied that having regard to the strong interest which was shown by third parties in seeking to strike a relationship with TEC for access to Tarong Power Station ash, during the tender process leading up to the Pozzolanic/TEC Agreement of 26 February 2003, and the interest which was shown by third parties in seeking to obtain Tarong ROS ash after the commencement of the Agreement (and throughout periods of the term of the Agreement and later Tarong North ROS ash), that third party access to Tarong ROS flyash under supply agreements with TEC, and the processing of that flyash into concrete grade flyash would very likely have occurred, had the identified provisions not been included in the Agreement.
3182 Because Pozzolanic and QCL and later Pozzolanic and Cement Australia enjoyed such a substantial market share and exercised such a substantial degree of influence upon pricing in the SEQ concrete grade flyash market for the product, any new entrant activity at the Tarong Power Station of obtaining access to raw flyash for processing so as to enable new entrant competition in the SEQ concrete grade flyash market, would have been significant, real and meaningful new competition. The expansion in the scope and field of rivalry would very likely have operated to constrain Pozzolanic and QCL and later Pozzolanic and Cement Australia in the way described.
3183 Fourth, the evidence demonstrates that approaches made by third parties to TEC both in relation to access to Tarong Power Station ash and, later, Tarong North Power Station ash, resulted in responses which rendered any arrangement for access subject to the prior rights of Pozzolanic. The notion that TEC would have adopted that position is entirely unsurprising because the power station operator was giving voice to its understanding of the operation of the provisions. Any new entrant could only obtain ash for processing in circumstances where its potential right to ash necessarily stood behind the prior rights of Pozzolanic to any and all “Fly Ash” as defined so as to enable Pozzolanic to extract any and all concrete grade flyash capable of being extracted from the power station “Fly Ash” as defined, in Pozzolanic’s facilities. The letters generated by TEC make it plain that TEC’s view was that any third party would stand, in effect, sublimated to the prior rights of Pozzolanic. Mr White had taken the view that Pozzolanic (as funded by its parent) had paid for and obtained these prior rights. However, that view, and the view reflected in the approach by TEC to its dealings with third parties demonstrates the effect of the provisions upon new entrant behaviour at the power station. As Mr White explained in his evidence, what was actually needed from the perspective of a third party was a change to the Pozzolanic/TEC Agreement to reflect provisions which entitled a third party either to a guaranteed volume of ash (rather than episodic or transactional access to ash as and when not needed by Pozzolanic) or access to dedicated and allocated hoppers. Mr White was entirely correct about this matter. Neither of those mechanisms were incorporated into the contract. Its provisions worked an effect of substantially lessening competition in the upstream and downstream markets as earlier described.
PART 48
Further Millmerran events
3184 The events from 26 September 2005 were these.
3185 On 26 September 2005, Mr White sent an email to Mr Zeitlyn. Mr White noted, in the email, that the data on colour strongly suggested that consistent supply at a uniform colour would not be possible with the proposed installation. A more detailed study would be undertaken over one month to determine colour variability day-to-day and within a day from all hoppers. Mr White’s plan was to present the “testing proposal” to Mr Hunt along with a proposed one month postponement of further capital expenditure on the footing that the worsening colour situation had significantly increased the risk of the project and Pozzolanic needed to confirm it could secure a saleable flyash product before continuing further. Mr White said Pozzolanic should assume the result would be negative.
3186 The plan was Mr White’s plan. Mr Zeitlyn probably agreed with it, according to Mr White. In Mr White’s mind, he could not see any alternative other than “exiting Millmerran on some terms or other”. Mr White thought building a classifier was the wrong decision and wanted to terminate the agreement on some appropriate legal basis (T, p 2481, lns 7-16).
3187 On 30 September 2005, Mr Bailey sent an email to Cement Australia’s Project Manager saying that the classifier project was “on hold”. Mr White gave evidence that some time in October 2005 he was given instructions by Mr Zeitlyn to terminate the Millmerran Agreement and termination of the contract was “very firmly on foot” at this time (T, p 2482, lns 20-26). On 11 October 2005, Mr White sent a letter to Mr Gamble at MOC explaining Pozzolanic’s current position concerning Millmerran ash, following upon earlier project review meetings. Mr White makes reference to test data over the preceding six to eight weeks (although the data may have actually been gathered in June, July or August of 2005: T, p 2490, lns 20-27) which had given rise to concern. Mr White put it this way:
The ash from Millmerran has always been quite variable in colour. However, in previous studies the colour range of 1 lightest to 5 darkest was considered manageable and had some consistency in its average colour value. In the most recent sampling periods we have had to add an additional 2 colour bands at the darker end of the range (6 and 7) and we have different time periods for which the colour ranges hardly overlap let alone the average colour.
This type of variation has very significant implications for the future ability to sell ash into the concrete markets. Colour variations in fly ash of the degree observed recently would have a significant effect on concrete colour.
3188 Mr White then sets out in the letter the series of investigations being undertaken by Pozzolanic and the questions Pozzolanic hoped to answer as a result of those investigations. Mr White then put the proposal in these terms:
While these investigations are underway we would like to suspend further work on the plant installation. Our concern is that we do not want to continue with a plant that may be unsuitable for the job or incapable [of] producing a saleable product. The current stage of the project is the ordering of silos and foundation construction and these are not easily modified once committed.
3189 Mr White gave evidence that notwithstanding a perceived risk recited in a document called “Risk Re-evaluation” of an “escalation of competition in the SEQ fly ash market causes fall in ash prices to shareholder customers”, the thinking leading up to the decision to exit Millmerran was that competition was “coming” and Cement Australia was not going to stay at Millmerran just because of possible competition from Millmerran ash. Mr White gave evidence that so far as his engagement in the exit decision was concerned, escalating competition in the SEQ flyash market was not a consideration (T, p 2485, lns 41-47).
3190 Mr White gave evidence that he, Mr Druitt and Mr Blackburn thought it unlikely that anyone else would want to invest (“a couple of million dollars to get that ash”) in Millmerran and because it was an unattractive source of ash for Cement Australia, it would also be an unattractive source for anyone else. Mr White could not recall discussing that view with Mr Zeitlyn although the conclusion that Millmerran ash was an unattractive ash source for Cement Australia was clearly discussed with him (T, p 2486, lns 1-3; lns 9-10; lns 19-21; lns 31-34; lns 39-41).
3191 Mr White also accepted, however, that if Cement Australia left Millmerran, that circumstance would open up a source of flyash for a potential competitor (T, p 2485, lns 38-39).
3192 Mr White gave evidence that the decision to exit Millmerran was made on the basis of the information Cement Australia had concerning the ash and not on the basis of whether someone else would want to come and get the Millmerran ash (T, p 2487, lns 6-11). Mr White’s view was that once someone else had the same facts before them as Cement Australia, they would probably make the same decision, and in consequence, Cement Australia perceived the risk of competition in the SEQ concrete grade flyash market based on supplies of Millmerran processed ash, as “limited” (T, p 2487, lns 13-15). Notwithstanding these considerations, Mr White generally accepted Mr McGurgan’s (a member of Cement Australia’s technical team based at Darra) assessment that based on the 2005 flyash benchmark test results of Millmerran ash in concrete batch performance tests, the Millmerran ash “would be seen as an acceptable product in the market” that performs “comparably” with Tarong ash (T, p 2487, lns 38-41). The problem was, as Mr McGurgan noted, colour consistency remained a concern and a problem (T, p 2487, ln 43).
3193 Mr White gave evidence that Millmerran ash was “concrete grade ash and it could be sold as such, and meet all the necessary standards and, taking the colour [problem] away, people would use it” (T, p 2488, lns 10-12). The content of the problem was this. Cement Australia’s main flyash product in SEQ was Tarong ash which was a consistent light grey coloured ash. Cement Australia did not see any way that it could use, as a supplementary supply of ash, a product that was “occasionally black or commonly black” as a supplement to Tarong ash. In addition, the ash performed in a way that was “somewhat lower” than Tarong ash (T, p 2488, lns 15-26). For Mr White, Tarong North was the obvious supplement for Tarong ash. In addition, the Cement Australia formulas for determining the relative value of ash from different sources suggested that Millmerran ash was very unattractive as a “business proposition” as the apparent delivered price of that ash into SEQ might not have been much above cost, and whether a better price might have been achieved, Cement Australia was not encouraged to proceed further with the ash (T, p 2488, lns 35-41).
3194 On 25 October 2005, Mr Blackburn sent an email to Mr White advising that the Millmerran ash colour had improved since June 2005. Mr Blackburn set out quite extensive test data results. Mr White understood that the ash colour had become lighter. Mr White gave evidence that his concern was that in June the colour was black and in October it was light. The October test results found that the ash colour was lighter with not many dark samples of ash. However, Mr White was not prepared to assume, having experienced two years of colour variability, that the colour variability problem was “fixed” and would “never occur again” simply on the strength of the most recent test results (T, p 2491, lns 34-36).
3195 Mr White did not accept that the sole purpose of his proposed continuing test program for the Millmerran ash was to provide a basis to say to Millmerran management that Pozzolanic was justified in not building a classification plant, and terminating the contract. Mr White accepted that, of course, there was an element of undertaking the program to provide a factual foundation for such a view but Pozzolanic’s intention in undertaking the test program and collecting the data was to “determine what the colour variability patterns were” (T, p 2492, ln 4). Mr White accepted that the instruction given to him by Mr Zeitlyn by October 2005 was to negotiate a termination of the contract based on the ongoing colour variability. By October 2005, Pozzolanic’s experience “over a considerable period was that the colour variability problem was here to stay” and on that basis Pozzolanic had determined to bring the contract to an end. Mr White accepted that by this time Pozzolanic probably did not want the Millmerran ash “colour variable or not” (T, p 2492, ln 44). Mr White’s view was that Pozzolanic should be investing its capital at Tarong North. Mr White’s view was that the Millmerran ash was not comparable (favourably) with the Tarong ash and, for that reason, Pozzolanic did not wish to use it (T, p 2493, lns 16-17). By October 2005, Pozzolanic had made its decision because the extant fact was that the ash was not comparable with the Tarong ash (T, p 2493, ln 22). Mr White, in effect, rejected the proposition implicit in the questions put to him that the issue of the colour variability of the Millmerran ash was something simply “made up” by Pozzolanic and represented a “false proposition” put to Millmerran when the truth was that the ash was not colour variable at all (T, p 2492, lns 27-32). By the beginning of 2006, the termination dye was cast and Mr White’s job, on instructions from Mr Zeitlyn, was to terminate the contract (T, p 2493, lns 39-40).
3196 On 8 December 2005, Mr White wrote to Mr Gamble at MOC setting out Pozzolanic’s view about the flyash quality of Millmerran ash, Pozzolanic’s future intentions, matters in relation to the agreement and Mr White’s perception of the next steps. Mr White described this letter as “a softening up prior to terminating the agreement” (T, p 2497, lns 38-39). Mr White rejected the proposition that this letter represented an attempt to maintain a contractual relationship with Millmerran which gave Pozzolanic rights to the Millmerran ash at minimal cost. This letter, in Mr White’s view, represented the initial stages of Pozzolanic’s lead-up to a formal termination notice.
3197 At Point 1, Pozzolanic gave MOC notice under cl 2.5 of the Agreement that the Millmerran flyash had worsened in the range of ash colour, and degree of variability, resulting in a material reduction in ash quality. The ash colour variability was said to be unacceptable and the overall darkening of the ash was prejudicing its value. Pozzolanic said that it was in neither party’s interest to establish plant that would not produce ash that could be sold due to colour variability questions. Mr White said that Pozzolanic wished to continue a relationship with MPP/MOC, however, it had become clear that the ash plant could not be completed by 31 December 2005 due to the suspension of construction for reasons understood by the parties and that, by cl 4, Pozzolanic was entitled to terminate the agreement after completion of the Buyer’s Facilities and before 1 January 2007, if the ash did not meet the relevant tests.
3198 Mr White said that Pozzolanic had received an invoice for the fourth operating year lump sum payment under the Agreement. The payment would be made on the footing that if Pozzolanic could not produce flyash meeting the criteria set out in the Agreement during early 2006, Pozzolanic’s only option would be to terminate the Agreement prior to December 2006 without any further payment. Mr White invited discussion with MOC on any alternative arrangement.
3199 Mr White said that his instructions from his superiors were that Pozzolanic wished to no longer be obliged to build plant at Millmerran and wished not to pay any further royalty (T, p 2498, lns 44-46; T, p 2499, lns 4-5).
3200 In December 2005, a number of Cement Australia personnel developed a document called “Millmerran Ash Summary” (ATB 23.27). Mr White accepted that the document was created after 12 December 2005 and the first two pages of it were, most likely, his work (T, p 2500, lns 27-33; T, p 2499, lns 24-25). One of the actions proposed in the document was to “negotiate around issue of plant completion as a termination trigger”. Another action point was to seek an agreement, suspension or replacement agreement to give a further 12 months minimum at Millmerran to enable Pozzolanic to work with MOC on ash colour issues with no further payments being made other than Pozzolanic meeting ash investigation costs. By the end of December 2005, Pozzolanic had already paid the lump sum payment for the following year ending 31 December 2006.
3201 Mr White gave evidence that Pozzolanic wanted to suspend or replace the Agreement and Pozzolanic’s position was that, by then, it was not going to be bound by the Agreement and MPP/MOC were not going to be bound by it either. Moreover, Pozzolanic was not going to build the plant at Millmerran although Mr White understood that should it do so, all the royalties to the end of the term would have to be paid to Millmerran. Mr White recognised, at this time, that whatever steps were implemented by Pozzolanic along these lines, those steps would mean that Millmerran would have the right to seek and “was quite likely to seek other people to come in and take the ash” (T, p 2501, lns 8-15), and Millmerran would be free to invite other people to come and take ash (T, p 2501, lns 29-31). Mr White gave evidence that at this stage he and the ash team had a clear understanding that Millmerran ash was not likely to be an alternative ash source to Tarong and Tarong North ash (T, p 2502, lns 11-13). Mr White rejected the proposition put to him that he had sought to maintain the Millmerran Contract for a further 12 months so as to maintain Millmerran ash as a credible alternative to Tarong ash for the purposes of his discussions with TEC (as reflected in the 14 November 2005 letter to TEC) (T, p 2502, lns 15-21).
3202 On 30 December 2005, Mr Gamble responded to Mr White’s letter of 8 December 2005. Mr Gamble noted Pozzolanic’s view about the material change in ash quality and awaited supply of Pozzolanic’s comprehensive data analysis. Mr Gamble said that MOC would work with Pozzolanic to improve the understanding of any ash colour changes and, in particular, “the effect combustion control may have on ash colour”. This observation goes to the various matters which Millmerran and Pozzolanic were investigating concerning the influence on ash colour of combustion factors including pockets of oxygen within the burners, as discussed earlier in these reasons. Mr Gamble also said that MPP was willing to discuss options available to Pozzolanic in relation to the Agreement and suggested a conference consequent upon the provision of the test data. Moreover, Mr Gamble said that pending assessment of the outcome of the discussions, MPP did not propose to take any action relating to Pozzolanic’s failure to complete the facilities by 31 December 2005.
3203 On 1 March 2006, Mr White wrote to MPP referring to his earlier letter of 8 December 2005. The letter advised that Pozzolanic had conducted a detailed review of all data available on Millmerran flyash (which had been discussed with Millmerran staff including Mr Hunt on 30 January 2006). The detailed review was attached to the letter. Pozzolanic had continued to monitor flyash quality since 30 January 2006. Mr White said that the technical review revealed that the Millmerran ash performance (relative strength) and (water demand) had worsened since the initial studies. Both of these factors were said to be critical determinants of ash quality. Mr White said the concern about colour related to Pozzolanic’s ability to sell the ash regardless of its performance. Mr White said that the ash performance determines the price and at current performance levels, even if it were uniform in colour, the price able to be secured for the ash would make the installation and operation of a flyash processing facility at Millmerran uneconomic. Pozzolanic gave notice under cl 4 of the Agreement that the Millmerran ash did not fall within the Acceptable Range and could not practically and economically be converted into Concrete Grade Fly Ash. Accordingly, Pozzolanic sought termination of the Agreement and requested that the provisions of cl 2.3 of the Agreement apply.
3204 At Point 4 of the letter, Mr White makes the point that the Agreement (as amended) provides that Pozzolanic must build the Buyer’s Facilities prior to giving notice of termination. Mr White says that in the current circumstances building the facilities did not appear to benefit MOC but would give rise to considerable injury to Pozzolanic and, conversely, not building the plant would not appear to injure MOC while, at the same time, relieving Pozzolanic of a considerable and unnecessary burden. Mr White says in the letter that the constraints of the Agreement left Pozzolanic with few options other than to terminate the Agreement.
3205 By this point, Mr White had no intention of trying to establish a profitable business of selling Millmerran flyash for non-concrete grade purposes (T, p 2505, lns 24-26) although Pozzolanic was investigating agricultural applications for the ash and having commenced that activity, Mr White felt it ought to continue until completed. Mr White wanted to sustain a relationship with Millmerran because “we didn’t want Millmerran to be in the power station market, for want of a better word, telling people what a bunch of ratbags Pozzolanic were, terminating their contract and behaving badly”.
3206 Mr White wanted to leave Millmerran “on as good terms as possible” (T, p 2505, lns 44-47).
3207 Mr White gave evidence that Pozzolanic wanted to sustain a relationship with Millmerran but not on any basis that “would be any obstacle to anyone else who wanted to do anything with ash on the site” (T, p 2506, lns 1-3; lns 32-34). The relationship would be an informal one, with no royalty being paid, not based on any contract and one in which Pozzolanic continued to carry out the assessments it then had in hand (T, p 2506, lns 37-39).
3208 On 11 May 2006, MPP (Mr Gamble, Mr Hunt and Mr Winter) met with Pozzolanic (Mr White and Mr Blackburn). MPP presented data on Unit 1 trials demonstrating the effect of boiler conditions on baghouse and flyash colour. Pozzolanic presented data on relative strength issues, at less than 90% from samples under different conditions from Unit 1 in March 2006. Pozzolanic confirmed it wanted to terminate the Agreement as the relative strength of Millmerran ash was too low for it to be commercially usable. Pozzolanic did not want to make any further payments but was keen to pursue other market opportunities. Pozzolanic advised MPP that it needed to have plant constructed at Tarong North by July 2006 otherwise it would suffer a shortfall of ash for the concrete grade flyash market. MPP told Pozzolanic that under the current Agreement, Pozzolanic did not have a right to terminate the contract. Pozzolanic suggested that it wanted to resolve this issue and terminate the contract. MPP said it would respond.
3209 On 21 June 2006, Mr Gamble wrote to Mr White saying that MPP did not accept that Pozzolanic had given a valid termination notice as a notice could only be given after construction of the Buyer’s Facilities. MPP elected to treat the Agreement as still on foot. As to ash quality, MPP expressed surprise as to Pozzolanic’s reliance on the relative strength position for Millmerran flyash having regard to the results Pozzolanic had provided which demonstrated no great variation from Pozzolanic’s results notified to MPP at the commencement of the Agreement. MPP noted that Pozzolanic had previously said that the relative strength issue could be dealt with, and that colour was the issue of major concern.
3210 Moreover, the issue of colour variation was the matter that led to the variation of the Agreement and the extensions of time for the construction of the facilities. MPP noted that it was the colour variation issue that caused MPP to concentrate on finding a solution to the question of colour consistency, and a solution had now been identified. Also, Mr Gamble observed that it had been Millmerran’s goal that any sales of flyash should not impact upon the generation operations of the power station, and it had been Millmerran’s preference that there be only one ash receiving facility and one purchaser with which the Millmerran operating team would be required to interact. Mr Gamble said that MPP had intended to reassess that position following operational experience with the Pozzolanic facilities, to be constructed. Mr Gamble observes that Pozzolanic’s reliance upon the relative strength of the Millmerran flyash “at this late point” meant that Millmerran may have well lost the market opportunity of securing other purchasers for its flyash or the opportunity of obtaining a supply arrangement with another party on more favourable terms.
3211 Mr Gamble further observed that the Agreement contained a provision for early termination (cl 26.4) with a formula for the calculation of a termination payment. Mr Gamble said that MPP was prepared to negotiate the early implementation of that termination protocol. Alternatively, MPP was also prepared to discuss the “restructure” of the Agreement. Mr Gamble invited Mr White to take up these matters with Mr Hunt.
3212 On 20 July 2006, Mr Hunt received a proposal from IFB to purchase flyash from the Millmerran Power Station in accordance with MPP’s request for a proposal dated 30 June 2006. The four members of the IFB Group were Wagners Pty Ltd, Neilsen’s Concrete Pty Ltd, Cordwell’s Concrete and Sunmix Concrete Pty Ltd.
3213 On 20 October 2006, Pozzolanic and MPP entered into an agreement providing for the terms of termination of the Ash Purchase Agreement. MPP and Pozzolanic agreed that the Agreement would terminate on 31 December 2007 fully releasing both parties from all further obligations under the Agreement from that date.
3214 On 15 February 2007, MPP entered into an Ash Purchase Agreement with IFB.
PART 49
Swanbank considerations
3215 The position in relation to Pozzolanic’s arrangements with Swanbank can be stated in fairly short terms. As discussed in Part 6, Pozzolanic had enjoyed a longstanding contractual arrangement with Swanbank which conferred, in substance, exclusive access to Swanbank ash subject to certain protocols apparently designed to facilitate third party access but always subject to the prior rights of Pozzolanic. The early contractual arrangements had subsisted since 1993 by force of Contract H0315/93. That contract was amended by the letter of 9 September 1998 (with the amending agreement signed on 30 September 1998) to extend the term for four years commencing 1 January 1999 and ending on 31 December 2002 subject to the option in Pozzolanic to extend the term to 31 December 2004. The event upon which the option was conditioned occurred, and in July 2002 Pozzolanic effected an extension of the amended contract until 31 December 2004. For all practical purposes, the contract was an exclusive supply agreement until 31 December 2004.
3216 I have considered all of the correspondence relied upon by the Commission and the matters discussed by Mr White in his principal affidavit concerning Pozzolanic’s engagement with CS Energy at Swanbank. I have also considered Mr White’s oral evidence on these topics and particularly the matters at pp 2413 to 2429 and other references in the transcript of oral evidence. I have also considered Mr White’s strategic references to the role Swanbank flyash might play in the broader Pozzolanic assessment of its future, in describing the chronological evolution of events in earlier Parts in these reasons.
3217 I generally accept Mr White’s evidence on these topics, subject to what follows.
3218 This is especially so in relation to two matters.
3219 The first is that the evidence demonstrates that from about the second quarter of 2005 the Swanbank ash became particularly problematic in terms of its quality. I have identified the evidence about that matter earlier and I will not repeat it here. It is reflected in the observations of Mr White, the strategic planning assessments of Mr White and the evidence of Mr Zeitlyn and others. It is reflected in Mr Blackburn’s evidence and his quality assessment reports. I accept Mr Blackburn’s evidence on these matters.
3220 The second consideration is that Mr White understood the position to be, from about the middle of 2005 (and perhaps earlier), that CS Energy was operating on the footing that it saw itself as unconstrained in its dealings with third parties. That view was entirely consistent with the evidence of Mr Christy. The content of that evidence is set out at [693] of these reasons and I will not repeat it here except to say that in Mr Christy’s view, Pozzolanic did not exhibit any desire to prevent third party access to unprocessed ash at Swanbank and exhibited no obstructive approach to CS Energy giving third party access at Swanbank, if it felt inclined to do so.
3221 Of course, Mr White had put in place by his letter of 11 March 2005 a request for an extension of the terms of the contract from 31 December 2004 to 30 June 2005 and Mr Christy had agreed to that extension on 15 March 2005. There can be little doubt that the point of the request was to preserve Pozzolanic’s exclusive access to the Swanbank ash at least until 30 June 2005. In Mr White’s earlier strategic analysis reflected in the documents I have extensively described earlier in these reasons, Mr White saw that one of the solutions to competitor threats at Swanbank was to take all the Swanbank ash. Mr White, Mr Leon, Mr Zeitlyn and others, in December 2004, prior to the expiry of the Swanbank Contract, made a visit to Senior Management at Swanbank to talk about the strategy of Pozzolanic taking all of the Swanbank ash.
3222 Nevertheless, in the period from 1 January 2005 to 31 December 2006 Mr Christy did not regard himself as constrained in any dealing with any potential off-taker by reason of the contractual arrangements with Pozzolanic [693]. Whilst that view was inconsistent with the terms of the extended contract up to 30 June 2005, I accept that Mr White proceeded on the same footing about this question as Mr Christy.
3223 To the extent that the contract as varied by the 1998 letter and as extended to 31 December 2004, and then as extended to 30 June 2005, conferred exclusivity of access, in substance and in form, upon Pozzolanic, I accept that that position came to an end by 30 June 2005 but in terms of the dealings, CS Energy was conducting itself as if it was free of that constraint from the early part of 2005, without serious objection from Pozzolanic. Mr White gave oral evidence that it was plain to him that CS Energy did not see itself as constrained or prohibited from seeking to supply flyash to third parties. It may well have been the case that even though Mr Christy saw himself as free to negotiate supply arrangements with third parties, he would not have sought to put a supply contract in place until the expiration of the extended Pozzolanic Contract of 30 June 2005.
3224 Mr White had formed the view, in strategic terms, that the future for the Pozzolanic ash from about 2005 would be in terms of non-concrete grade applications, although, of course, sales of concrete grade ash continued. There is also, no doubt, that Mr White was seeking to engage with CS Energy on the basis of putting in place continuing arrangements which would give Pozzolanic some considerable control over access to Swanbank unprocessed ash for deployment into the perceived non-concrete grade applications to be developed over time. CS Energy was seeking to extract minimum guarantees in the volume taken by Pozzolanic and Mr White was seeking to deal with that expectation. Mr White explained his responses and efforts in this regard as attempts to prevent Pozzolanic and Cement Australia losing the value of its otherwise sunk investment and seeking to maintain some sort of relationship with CS Energy. Nevertheless, I am satisfied that having regard to Mr Christy’s view of it taken in conjunction with Mr White’s evidence, that the provisions of the Swanbank Contract effecting a present or future substantial lessening of competition had dissipated by 30 June 2005.
3225 I accept, however, that in the period, in particular for the purposes of this case, from the beginning of 2001 and throughout 2002 and up to and including the end of February 2003 when the Tarong Contract was signed, the contractual arrangements between Pozzolanic and CS Energy at Swanbank, conferred exclusivity of access to Swanbank ash upon Pozzolanic and QCL. That position continued until 31 May 2003 and to 31 December 2004 during the period of the Pozzolanic and Cement Australia arrangements. That position also continued, in substance, until 30 June 2005, although Mr Christy saw himself free to conduct negotiations with third parties from about January 2005.
3226 The volume of ash taken by Pozzolanic from Swanbank was, as compared with the Tarong volumes, small but yet very significant. It was flyash substitutable for, or treated by Pozzolanic as substitutable for, Tarong ash. Third party access to Swanbank ash and sales of processed Swanbank ash by a third party into the SEQ concrete grade flyash market would have had significant competition effects as it would very likely have triggered MFN consequences in Pozzolanic’s supply price to its major customers. In the Pozzolanic and Cement Australia correspondence I have reviewed and described in these reasons, Pozzolanic put buyers of concrete grade flyash on notice that Tarong ash, if not available for any reason, might well be substituted with Swanbank ash.
3227 I am satisfied that the pleaded provisions of the Swanbank Contract had the effect and the continuing likely effect from the beginning of 2001, relevantly, of substantially lessening competition in the SEQ concrete grade flyash market because any new entrant to that market seeking to use Swanbank flyash, could not secure consistent or regular supply of ash for processing from Swanbank due to the provisions of the Swanbank Contract. The provisions had the effect and the continuing likely effect of substantially lessening competition by preventing access by a rival to a source of ash in the upstream unprocessed flyash market at Swanbank. The future state of competition in the SEQ concrete grade flyash market without the pleaded exclusive terms reflected in the Swanbank Contract would likely have seen third parties securing a source of supply of ash at Swanbank, processing that ash and entering the SEQ market for the supply of concrete grade flyash. Having regard to Pozzolanic and Cement Australia’s substantial position in the market, any nascent competition of that kind would have been very significant for the process of competition. Apart from that likely transactional rivalry, rivalrous supply of Swanbank concrete grade flyash would likely have triggered the MFN consequences which would in turn have been productive of price competition on a broader scale.
3228 In that sense, the stand alone provisions of the Swanbank Contract with the provisions had this effect upon future competition.
3229 However, the additional significant matter in relation to the Swanbank arrangements is the combined effect of those arrangements in circumstances where not only could a third party not practically obtain a regular and consistent supply of ash for processing from Swanbank until about 30 June 2005, but such a party could not turn to the other source of supply in SEQ, namely, the Tarong Power Station.
3230 The simple fact is that Pozzolanic was standing at the gate at both places.
3231 By March 2003, Pozzolanic found itself in the position where it had the extension of the Swanbank Contract in place; it had secured the contract for Tarong and Tarong North in the terms already discussed; and it had secured the contract at Millmerran for priority access to a minimum of 135,000 tonnes of concrete grade flyash. From March 2003 to 30 June 2005, the provisions of the Swanbank Contract continued to have the effect or likely effect, in conjunction with the Tarong provisions, of substantially lessening competition in the sense that the future scope of rivalry would be diminished by reason of the provisions as compared with the likely field of rivalry which would have emerged had the provisions not had the effect of hindering and preventing third party access to Swanbank ash either at all or on any regular and consistent basis enabling new entrant competition.
PART 50
The ultimate conclusions
3232 I am satisfied that a substantial purpose of entry into the Original Millmerran Contract on 30 September 2002 was to prevent a rival entering into a contract with MPP for access to unprocessed flyash and to prevent a rival from entering the SEQ concrete grade flyash market with the supply and sale of Millmerran processed ash. I am satisfied that although Pozzolanic sought to risk manage its exposure to a loss of a contract with TEC in the tender process, and thus a loss of its historical source of supply of flyash, nevertheless a substantial purpose of entry into the Millmerran Contract was each of the two purposes I have described. More importantly, however, those purposes were purposes of the identified provisions of the Millmerran Contract as discussed in these reasons and particularly the provisions by which Pozzolanic was entitled to a substantial volume of concrete grade flyash from the Millmerran Power Station processed out of raw ash produced at that station, each year.
3233 I am satisfied that upon entry into the Original Millmerran Contract containing the identified provisions, the effect and likely future effect of the provisions would be to substantially lessen competition in the SEQ concrete grade flyash market as that contract, with those provisions, would have the immediate effect of discouraging third party regular and consistent access to Millmerran unprocessed ash for processing.
3234 However, the effect and likely effect of the provisions would, like the effect of entry itself into a contract per se, dissipate as information flows emerged in the market which made it plain to market participants that a problem had emerged in the quality of the Millmerran ash of the kind extensively discussed in these reasons. At that point, the provisions, prima facie, did not operate to have the effect or likely effect of substantially lessening competition, in the with and without sense already discussed. The effect or likely effect upon competition in connection with the utility and possible use of the Millmerran flyash was an effect or likely effect of the compromised quality of the Millmerran ash itself. As I have found, the quality problems with the ash in terms of its colour and variability were not a confected or manufactured problem. They were real and enduring problems. They were the subject of extensive work and analysis by both MOC and Pozzolanic and professional third party analysts. The Millmerran ash was not substitutable for the Tarong ash, in the sense that it could not be applied as a substitute for the diversity of applications to which the Tarong ash could be applied. Mr White thought that the Millmerran ash was capable of being used in “niche” applications, in the context of his strategy paper. Others within Cement Australia thought that the Millmerran ash would be capable of use in applications which were not sensitive to colour. Others thought that the question was not so much simply one of use in non-colour prominent applications but a concern more generally that concrete producers would simply not want to be supplied with (and would not accept) dark ash one week, and light ash the next, as a general supply proposition. Consistency in the quality of the ash was seen as a critical matter.
3235 It is true that ultimately the Millmerran flyash was able to be used and a supply arrangement was ultimately struck which provided for substantial volumes of Millmerran ash to be supplied and used. However, I am satisfied that viewed in the period 2003 to 2005, that once the colour problem emerged by the end of 2003 with the problem reflecting the features described in the various reports, the effect or likely effect of a substantial lessening of competition by reason of the provisions of the Millmerran Contract had dissipated and had become displaced by an effect or likely effect upon potential contestability through the use of Millmerran ash, by reason of the colour variability of the ash itself.
3236 I am satisfied that Pozzolanic entered into the Original Millmerran Contract and adopted the identified provisions for at least a substantial purpose of preventing rival entry as earlier described, and I am satisfied that the provisions had the effect or likely effect of substantially lessening competition from 30 September 2002 until about the end of 2003.
3237 As to the Amended Millmerran Contract, I am satisfied that a substantial purpose of entry into the variation provisions of 28 July 2004 carrying with it the affirmation of the earlier provisions of that contract was to prevent a rival from obtaining access to unprocessed Millmerran ash for processing and to prevent a rival from entering the SEQ concrete grade flyash market with Millmerran processed flyash. I am satisfied that at the moment in time when the amendment was made Cement Australia’s relevant Senior Managers as earlier described were proceeding on the assumption that the ash problem would ultimately be solved and that the ash would be contestable ash. A substantial purpose, in those circumstances, of the amendment was to preserve a continuing relationship with MPP on the footing of the established provisions of the contract but as varied by the amended terms, and a substantial purpose of doing so was to prevent rival entry at Millmerran having regard to the likely impact upon Pozzolanic’s price, revenue and margins should a rival secure access to Millmerran unprocessed ash and then enter the SEQ concrete grade flyash market with Millmerran cgfa. Another purpose, plainly enough, was to put in place arrangements to enable the parties to the contract to come to grips with solutions to the colour problem. Nevertheless, in the context of the particular provisions, I am satisfied that a substantial purpose of the inclusion of those varied provisions of the new arrangement was each of the purposes just described.
3238 However, I am not satisfied that the provisions of the Amended Millmerran Contract otherwise carrying forward the identified provisions of the Original Millmerran Contract had the effect or likely effect of substantially lessening competition because, at that point, the effect upon competition was a function of the uncertainty surrounding the quality of the ash itself.
3239 As to the second election to proceed, I am not satisfied that a substantial purpose of deploying the capital at Millmerran was a purpose of preventing rival entry for the reasons earlier described. The operative purpose in relation to those events was the purpose of performing and acquitting the contract. I do not accept that those arrangements had the effect or likely effect of substantially lessening competition as those arrangements were a part of the resolution of the question of whether the Millmerran ash could be made practically and economically marketable to concrete producers and thus, from the market’s perspective, the question of the quality of the Millmerran ash and its general utility was an unresolved question.
3240 As to the Tarong Contract, I am satisfied that although Pozzolanic was rationally determined to risk manage its exposure to the possibility of a loss of access to its historical source of flyash for its flyash business undertaking, a substantial purpose of entry into the contract was to prevent the entry of a rival at the Tarong Power Station and prevent entry of a rival into the SEQ concrete grade flyash market with processed Tarong flyash. More importantly, and relevantly, a substantial purpose of the particular identified provisions was to prevent a rival from securing regular and consistent access to Tarong Power Station flyash for processing for entry into the SEQ concrete grade flyash market. The provisions conferring rights to any and all flyash framed in the particular way I have earlier described made it very unlikely indeed, in any practical sense, for a third party to embark upon deploying the capital to build facilities to access the Tarong ash standing behind Pozzolanic’s prior rights to any and all concrete grade flyash processed by it in its facilities out of the Tarong unprocessed ash. Mr White has made it perfectly plain that any third party would have rationally wanted to see, in place, specific arrangements giving access to particular hopper outlets or access to a guaranteed volume which would have meant changes to the TEC Contract with Pozzolanic. The same position prevailed in relation to Tarong North in a forward-looking way as once unprocessed ash began to be produced at that power station, Pozzolanic had the same rights at that station.
3241 For the reasons earlier identified, I am satisfied that the future process of competition in terms of the future field of rivalry would have been more vigorous, more dynamic and more contestable without the identified provisions as compared with the future face of rivalry with the provisions in place.
3242 As to the Tarong North Power Station, Pozzolanic enjoyed the rights to concrete grade flyash as described earlier in these reasons by force of the contract. Any third party seeking to secure access to Tarong North unprocessed ash, once the station was commissioned, and obtain consistent and regular access to that ash for processing through any facilities that might be deployed, to enable that party to enter the SEQ concrete grade flyash market, would necessary have had to stand behind Pozzolanic’s prior rights. At Tarong North, once Pozzolanic installed its facility, no third party would consider seeking to install another classifier on that site (and other processing equipment at Tarong North), as Mr White made plain in his evidence.
3243 From early January 2005 until the early part of 2006, Tarong North made unprocessed flyash available to third parties from the Tarong North ROS flyash silo. The history of the exchanges I have described in these reasons between independent participants and Tarong North and between Pozzolanic and TEC reveal the arrangements under which Pozzolanic asserted rights over access to the Tarong North flyash. Pozzolanic’s weekday requirements for ash and its proposals for notification of its need for the ash on weekends had the effect of denying third parties access to the Tarong North ROS flyash from the Tarong North silo. Pozzolanic contended that it required access to ash across these periods to meet the demands of its customers for cgfa.
3244 Mr White was instrumental in developing a series of documents, described in these reasons, which set out the strategic focus for Cement Australia’s flyash business and Pozzolanic’s engagement with each of the power stations. I have described those strategic plans extensively and I will not repeat the content of them here. One feature of them, so far as Tarong North is concerned, is that the solution to a perceived problem of third parties obtaining access to ash at Tarong North was to install a classifier at Tarong North. Pozzolanic made it plain to TEC that there was no additional capacity in the installed Pozzolanic facilities to make cgfa available to third parties. In the documents, Mr White reported that all taking of Tarong North ash by third parties had been stopped by Tarong North and the trials which were being carried out would no longer continue. On 27 February 2006, Cement Australia put its proposal to TEC for the installation of a classifier at Tarong North. TEC expressed concern about aspects of that proposal especially in terms of the apparent effect upon ash quality for third parties taking ash from the Tarong North ROS flyash silo as reject ash from the classifier would be pumped into the silo.
3245 The Pozzolanic installation provided for the removal of reject ash into that silo from the classifier. Mr Forbes, in particular, had expressed strong objection to that course on the footing that it would, in effect, contaminate the silo by introducing great variability into the quality of the ash in that silo. That was a particular concern because many tests had been undertaken during the trials to determine the average quality of the ash available to third parties assuming the available ash in the silo was simply Tarong North ROS flyash.
3246 I am satisfied that a substantial purpose of electing to establish a classifier at Tarong North was to confer control in Pozzolanic over Tarong North flyash and enable it to extract concrete grade flyash through its processing facility in priority to anybody else. Mr White made it plain in his evidence that once a classifier was installed at Tarong North no other party would seek to install any other facility. There are three considerations that seem to me to be important in connection with the Tarong North classifier question.
3247 The first is that the nature of the facility, its size, layout and the volume of ash produced was such that its scope meant that only one operator would be likely to establish facilities on site.
3248 The second is that TEC and Tarong North had extensively examined options for the handling and removal of reject ash from the classifier to various disposition places whether in terms of the ROS flyash silo, another silo, ash disposal or other options. The result of the analysis as discussed in these reasons was that Pozzolanic’s proposal for the removal of reject ash into the Tarong North ROS flyash silo, at least as an interim measure pending the new tendering process, was accepted by TEC and Tarong North as the only interim practical way of dealing with the reject ash.
3249 The third is that in the correspondence in response to TEC’s concern, Pozzolanic put a series of propositions or alternatives about how third parties might be able to obtain access to Tarong North ROS flyash unaffected by reject ash from the classifier. Those options have been identified earlier in these reasons.
3250 Although Pozzolanic, by installing the classifier in the way configured in the drawings, gave effect to the relevant provisions of the contract, I am not satisfied that in giving effect to these provisions, the provisions had the effect or likely effect of substantially lessening competition. That follows because the plan for the installation of the classifier was approved on 29 May 2006. In a forward-looking way, the balance term of the contract was by then relatively short.
3251 Secondly, the facility was configured in a way which was operationally a way of dealing with the reject ash which TEC considered to be an appropriate option and the preferred option when measured against all the alternatives.
3252 Thirdly, Pozzolanic had proposed a series of methods of enabling third party access which would not have the effect of depositing reject ash, universally, into the Tarong North ROS flyash silo.
3253 Fourthly, although no third party would contemplate seeking to install a classifier or other processing equipment at Tarong North once Pozzolanic had installed its classifier on site, the installation of the classifier by itself did not necessarily result in flyash being unavailable to third parties from Tarong North. In this context, the options put by Pozzolanic to TEC which would have enabled third parties to access Tarong North ROS flyash, at least for a time, unaffected by reject ash from the classifier (such as eight hour periods) needs to be taken into account. Moreover, although the potential for third parties taking ash had been suspended for a time, Pozzolanic ultimately gave notice to TEC that third parties could resume taking ash.
3254 Accordingly, I am not satisfied that Pozzolanic and Cement Australia giving effect to the provisions of the contract for the installation of a classifier had the effect or likely effect of substantially lessening competition in either the upstream or downstream market.
3255 Having regard to the manner in which QCL and Pozzolanic Board decisions were made as described by Mr Arto and Mr Maycock in their oral evidence and also the method of decision-making at Board level within Cement Australia as described by Mr Maycock in his oral evidence, I am satisfied about these matters.
3256 As to entry into the Original Millmerran Contract, Pozzolanic contravened s 45(2)(a)(ii) of the Act by entering into the contract in circumstances where the contract included the identified provisions which had as a substantial purpose each of the purposes earlier described and in circumstances where those provisions had the effect or likely effect of substantially lessening competition. Pozzolanic contravened s 45(2)(b)(ii) by giving effect to those provisions of the contract and particularly by making the relevant take or pay payment. Although Pozzolanic continued to give effect to the provisions of the contract, those provisions did not have the effect or likely effect of substantially lessening competition in the period after those effects had dissipated by reason of the intervention of the colour variability problem, that is, by the end of 2003. No question of a contravention of s 47 of the Act arises. QCL was knowingly concerned in Pozzolanic’s contravention of s 45(2)(a)(ii) in entering into the contract including the relevant provisions for the purpose and having the effect and likely effect described, as decisions were made by QCL in full knowledge of the relevant matters and QCL funded Pozzolanic’s entry into and performance of the contract as the “treasury company” for the group according to the evidence described earlier.
3257 As to entry into the Tarong Contract on 26 February 2003, Pozzolanic contravened s 45(2)(a)(ii) of the Act by entering into the contract in circumstances where the contract included the identified provisions which had, as a substantial purpose, each of the purposes earlier described and in circumstances where those provisions had the effect or likely effect of substantially lessening competition. Pozzolanic contravened s 45(2)(b)(ii) by giving effect to the provisions by acquiring flyash from March 2003 upon terms including cls 2, 3.1, 12, 17, 4.4, 8.3 and 1.1. QCL was knowingly concerned in Pozzolanic’s contravention of s 45(2)(a)(ii) and contravened s 45(2)(b)(ii) by giving effect to the identified provisions by funding Pozzolanic’s entry and subsequent performance of the contract up to 1 June 2003 in acting as the group treasury company under the Holcim/QCL arrangements prior to the merger. QCL was knowingly concerned in Pozzolanic’s contravention of s 45(2)(b)(ii) of continuing to give effect to the contract. Cement Australia contravened s 45(2)(b)(ii) by giving effect to the provisions of the Tarong Contract and was knowingly concerned in Pozzolanic’s continuing contravention of s 45(2)(b)(ii) as it continued to give effect to the contract. No question of a contravention of s 47 arises.
3258 A substantial purpose of the pleaded provisions of the Tarong Contract relating to the Tarong North Power Station was also each of the purposes of the pleaded provisions of the contract relating to the Tarong Power Station. The ash produced or to be produced upon commissioning of the Tarong North Power Station was new ash and it was very likely to be of like quality and standard to the Tarong Power Station ash as each station was burning coal from the same coal source. Entry into the Tarong Contract containing those provisions involved a contravention by Pozzolanic of s 45(2)(a)(ii). Pozzolanic contravened s 45(2)(b)(ii) by giving effect to the pleaded provisions in relation to Tarong North by acquiring flyash on the terms of the contract once the power station was commissioned. Cement Australia was knowingly concerned in Pozzolanic’s contravention of s 45(2)(b)(ii) by giving effect to the identified provisions by funding Pozzolanic’s performance of the contract by the taking of ash by truck to Tarong for processing.
3259 As to the Amended Millmerran Contract of 28 July 2004, Pozzolanic contravened s 45(2)(a)(ii) by entering into the amended terms and affirming the terms of the Original Millmerran Contract, as amended, and contravened s 45(2)(b)(ii) by giving effect to the amended provisions having, as a substantial purpose, each of the purposes earlier described. Cement Australia contravened s 45(2)(b)(ii) by causing Pozzolanic to give effect to the amended terms included in the contract for the purpose earlier described. No question of a contravention of s 47 arises.
3260 As to the second election to proceed by electing to install a classifier at Millmerran, no contravention of s 45 arises. No contravention of s 47 arises.
3261 As to the Swanbank Contract, Pozzolanic contravened s 45(2)(b)(ii) by giving effect to the identified provisions of the contract conferring exclusivity from 2001 until 30 June 2005. QCL contravened s 45(2)(b)(ii) by causing Pozzolanic to give effect to the identified provisions of the contract from 2001 to 31 May 2003. Cement Australia contravened s 45(2)(b)(ii) by causing Pozzolanic to give effect to the identified provisions of the contract from 1 June 2003 to 30 June 2005. Pozzolanic contravened s 45(2)(a)(ii) by entering into the extension of the contract containing the identified provisions of the contract to 31 December 2004 and from that date to 30 June 2005.
3262 As to the election to construct and install a classifier at Tarong North, no contravention of s 45 arises.
3263 As to the entry into the Original Millmerran Contract, entry into the Amended Millmerran Contract and entry into the second election to proceed at Millmerran, no contravention of s 46 of the Act arises.
3264 The remaining question is the Commission’s claim against Mr Leon and Mr White individually as persons knowingly concerned in particular contraventions and persons who aided and abetted those contraventions. The principles to be applied in determining these questions are well understood. They have a long history and the orthodoxy of the approach has been established in Yorke v Lucas (1985) 158 CLR 661. The principles have recently been considered in Google Inc v Australian Competition and Consumer Commission (2013) 294 ALR 404; (2013) 87 ALJR 235. I apply those principles to these questions.
3265 Mr Leon is said to be knowingly concerned in Cement Australia’s contraventions of s 46 and s 45(2)(a)(ii) in relation to the Amended Millmerran Contract. He is said to be knowingly concerned in Cement Australia’s contraventions of s 46 and s 45(2)(b)(ii) in relation to the second election to proceed, and Pozzolanic and Cement Australia’s contraventions of s 45(2)(b)(ii) in respect of Tarong North. He is also said to be accessorily liable in respect of the Swanbank conduct.
3266 As to the Amended Millmerran Contract, I have found that there is no contravention of s 46 of the Act.
3267 As to s 45(2)(a)(ii), I have found that Pozzolanic and Cement Australia entered into those amended arrangements at least for a substantial purpose of foreclosing entry by a rival as earlier described. The difficulty I have with the claims of accessorial liability made against Mr Leon are that I cannot be satisfied of Mr Leon’s purpose and the state of his knowledge of the relevant matters. I am not willing to infer against him a state of knowledge simply on the footing of his important and senior position in the Cement Australia Group of Companies and in particular in Cement Australia.
3268 If documents were in evidence clearly demonstrating the state of Mr Leon’s knowledge and his purposes in relation to the relevant matters, or direct oral or affidavit evidence had been put on which identified the state of his knowledge and his purposes which called for an answer, that would be a different matter. Mr Leon did not give evidence in these proceedings. No doubt, he formed the view that the material did not establish the matters contended against him. Inferences might be drawn against him about particular matters having regard to his position, but the quite specific question of whether he actually knew and fully understood the central factual integers of the relevant contended matters, is not at all clear to me on the present material. I am not willing to draw a Jones v Dunkel inference against him as to these matters.
3269 I am not satisfied that there is a contravention in relation to Tarong North concerning the installation of the classifier at Tarong North.
3270 As to the extension of the Swanbank Contract having regard to Mr White’s letter raising the proposition and TEC’s response, I am not satisfied that there is any evidence which establishes any specific state of knowledge in Mr Leon about that matter.
3271 As to Mr White, the matter is a little different.
3272 Mr White is said to have been knowingly concerned in or a party to and to have aided and abetted contraventions on the part of Cement Australia and Pozzolanic in relation to the Tarong North installation of the classifier and the extension of the Swanbank Contract, and the performance of that contract. I have found no contravention in respect of Tarong North so far as the conduct of installing a classifier is concerned.
3273 As to the Swanbank extension, the steps taken by Mr White to extend the Swanbank Contract to 30 June 2005 need to be understood in the context of the extensive documented analysis by Mr White of the strategic position of Cement Australia and Pozzolanic; the imperatives in the market confronting those companies and the circumstances confronting Cement Australia specifically in relation to third parties attempting to secure access to Swanbank ash. Although by 2005 the Swanbank ash had become variable and of doubtful quality, it still had some utility.
3274 I am satisfied on all the material that Mr White was entirely astute to the exclusive character of the arrangements between Pozzolanic and CS Energy and sought to enable Pozzolanic and Cement Australia to secure a continuation of the contract from 31 December 2004 to 30 June 2005. I am also satisfied that Mr White was astute to all of the elements of the pre-existing contractual arrangements operating up to 31 December 2004, the events which would be necessary by June 2002 to enable the option to extend to 31 December 2004 to be exercised, and was knowingly concerned in Pozzolanic having given effect to those exclusive provisions of the Swanbank Contract.
3275 A remaining question concerns submissions by the parties in relation to objections to evidence. I do not propose to address individually in these reasons each of the objections. In relation to some of the material, I have admitted documents into evidence provisionally under s 57(1) of the Evidence Act 1995 (Cth). As to each of the documents admitted on that footing, I find that the evidence is relevant on the basis that I am satisfied and find that the evidence in each case is evidence that the party claims it to be, for the purposes of s 57(1). To the extent that other reservations have been made of the question of whether particular evidence is admissible, I am satisfied that the material is relevant and admissible, and ultimately the question is only one of weight.
3276 The final matter is this. In these reasons I have attempted to deal with the vast body of material relied upon by parties in support of their various propositions as footnoted in the submissions and made the subject of emphasis in the case. Virtually every aspect of every factual question has been in controversy.
3277 To the extent that I have not expressly mentioned or discussed particular evidence, it ought not be assumed that the evidence has not been addressed. All of the evidence in this case has been addressed in very great detail both within and outside the written reasons.
| I certify that the preceding three thousand, two hundred and seventy seven (3277) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood. |
Associate:
Dated: 10 September 2013
ANNEXURE A
Relevant Queensland Power Stations
| Reference | Site | Distance from Brisbane (km) | Major Road |
| 1 | Stanwell | 652 | Pacific Highway (A1) |
| 2 | Gladstone | 544 | Pacific Highway (A1) |
| 3 | Callide | 590 | Burnett Highway (A3) |
| 4 | Tarong and Tarong North | 189 | D’Aguilar Highway (National 17) |
| 5 | Swanbank | 42 | Ipswich Motorway (A5) |
| 6 | Millmerran | 206 | Warrego Highway (A2) |
ANNEXURE B
Relevant New South Wales Power Stations
| Reference | Site | Distance from Brisbane (km) | Major Road |
| 1 | Bayswater | 746 | New England Highway (National 15) |
| 2 | Eraring | 812 | Pacific Highway (National 1) |
| 3 | Mount Piper | 961 | New England Highway (National 15) |
Distances from the New South Wales Power Stations to the Gold Coast and Tweed Heads:
| Site | Distance from Gold Coast (km) |
| Bayswater | 750 |
| Eraring | 738 |
| Mount Piper | 962 |
| Site | Distance from Tweed Heads (km) |
| Bayswater | 727 |
| Eraring | 715 |
| Mount Piper | 939 |
ANNEXURE C
Nucon concrete batching plants
| Reference | Site |
| 1 | Logan |
| 2 | Yatala |
| 3 | Oxenford |
| 4 | Southport |
| 5 | Carrara |
| 6 | Currumbin |
| 7 | Chinderah |
| 8 | Ballina |
ANNEXURE D
Ash Market in SE Qld - 2001
ANNEXURE E
Power Stations in SE Qld
ANNEXURE F
Location of Intermediate Storage Facilities in relation to Tarong Power Station and Relevant Distances
| Reference | Site | Distance from Tarong (km) | Major Road |
| * | Tarong | ------ | ------ |
| 1 | Darra | 197 | D’Aguilar Highway (National 17) |
| 2 | Wacol | 192 | D’Aguilar Highway (National 17) |
| 3 | Yatala | 227 | D’Aguilar Highway (National 17) |
ANNEXURE G
Location of Intermediate Storage Facilities in relation to Swanbank Power Station and Relevant Distances
| Reference | Site | Distance from Swanbank (km) | Major Road |
| * | Swanbank | ------ | ------ |
| 1 | Darra | 27 | Cunningham Highway (National Highway 15) |
| 2 | Wacol | 22 | Ipswich Motorway (M7) |
| 3 | Yatala | 57 | Logan Motorway (M6) |
