Australia – National Access Regime Stays Out Of The Port Of Newcastle.

29 January, 2016

 

What does it mean for infrastructure owners, access seekers and future privatisations? 

 

What you need to know

 

• On 8 January 2016, the Commonwealth Acting Treasurer, Mathias Cormann, decided that the use of the shipping channel and berth services at the Port of Newcastle should not be "declared" under the National Access Regime. Critically, he found that access to this service would not promote competition in another market.
• The decision is a blow to Glencore's efforts to use the National Access Regime to introduce ACCC oversight of price and other conditions at Newcastle, and media reports suggest Glencore is considering whether to seek review of the decision by the Australian Competition Tribunal.
• The decision is also an important reminder that declaration under the National Access Regime is available as a means to promote competition, but not otherwise as a means to introduce price or revenue regulation. It confirms that the Regime will not apply unless (among a number of mandatory criteria) access would promote a competition benefit in another market. It suggests this competition benefit is less likely to arise where infrastructure is already accessed on a "multi-user" basis by businesses who operate in competitive markets.
• The decision provides some comfort to those involved in major infrastructure privatisations that the National Access Regime cannot easily be invoked to "rewrite" the regulatory settings determined as part of a privatisation.
• The decision also sheds some light on the Acting Treasurer's views regarding the costs of access regulation, including in relation to investment incentives.
• The Commonwealth government has recently proposed amendments to the National Access Regime, including the declaration criteria. Those amendments would make significant changes to the current law, but it appears unlikely that they would have changed the outcome in this case.

 

What does it mean?

 

• This case reiterates that regulatory settings are critical in infrastructure privatisations, for governments (which design them), bidders (who "price" them), and users (who may seek to invoke alternative regulatory avenues).
• For all infrastructure owners and users, it illustrates the potential for access regulation to be pursued as a regulatory solution to disputes over price and other terms, and the need for access seekers to identify clear competition benefits from declaration/access if seeking declaration under the National Access Regime.

 

What next?

 

• The Acting Treasurer's decision may yet be reviewed by the Australian Competition Tribunal.
• An exposure draft of the Commonwealth government's proposed amendments to the National Access Regime will be released for public comment during 2016. 

 

Introduction

 

On 8 January 2016, the Acting Treasurer decided not to declare the "shipping channel service" at the Port of Newcastle (the Port) under the National Access Regime contained in Part IIIA of the Competition and Consumer Act 2010 (Cth). Although described as a "shipping channel service", the service sought to be declared involved not just the use of the channel itself, but also nearby berths.

 

The Acting Treasurer could only "declare" the service if satisfied of several statutory criteria. Here, he was not satisfied of one of those criteria: that access, or increased access, would promote a material increase in competition in another market. Accordingly, he did not declare the service.

 

Declaration under the National Access Regime

 

Glencore sought "declaration" under the National Access Regime. Under this regime, any party may apply to the National Competition Council (NCC) for "declaration". The NCC undertakes public consultation and then issues a draft, and subsequently a final, non-binding recommendation as to whether the application satisfies the statutory declaration criteria. This recommendation is then provided to the relevant Minister, who decides whether a service should be "declared". The key consequence of declaration is that it creates a binding right for any access seeker – not solely the party that sought declaration – to negotiate the terms and conditions of access to the service with the provider of that service, with recourse to binding arbitration by the Australian Competition and Consumer Commission (ACCC).

 

A service may only be declared if all of the statutory declaration criteria are satisfied – specifically1:

 

• Criterion (a): that access (or increased access) to the service would promote a material increase in competition in at least one market (whether or not in Australia), other than the market for the service;
• Criterion (b): that it would be uneconomical for anyone to develop another facility to provide the service;
• Criterion (c): that the facility is of national significance, having regard to its size, or importance to constitutional trade or commerce, or to the national economy;
• Criterion (e): that access to the service is not already regulated by an alternative access regime (the legislation provides further detail on the types of access regimes that are relevant for this purpose);
• Criterion (f): that access (or increased access) to the service would not be contrary to the public interest. In applying these criteria, the Minister must have regard to the objects of the National Access Regime, which are to:
• promote the economically efficient operation of, use of and investment in the infrastructure by which services are provided, thereby promoting effective competition in upstream and downstream markets; and
• provide a framework and guiding principles to encourage a consistent approach to access regulation in each industry.

 

As these objects and the declaration criteria demonstrate, the framework of the National Access Regime is critically concerned with facilitating access where it is necessary to promote competition – it is not designed to facilitate price or service regulation in contexts where access would not promote competition.

 

Why was Glencore's application significant?

 

The Port of Newcastle is the largest bulk shipping port on the east coast of Australia and the world’s leading coal export port. It was privatised by the State of New South Wales in April 2014 under a 98-year lease to Port of Newcastle Investments Pty Ltd (trading as Port of Newcastle). While the State and Newcastle Port Corporation2 (now administered by the Port Authority of New South Wales) retain some oversight of the Port, the Port is operated on a day-to-day basis by Port of Newcastle Operations Pty Ltd (PNO). Prices at the Port are subject to price-monitoring by the Independent Pricing and Regulatory Tribunal under the Ports and Maritimes Administration Act 1995 (NSW), but the Port is not otherwise subject to formal third party access or price regulation.

 

In December 2014, PNO announced price increases at the Port, which varied for different categories of vessel. Glencore was critical of the increases, and its declaration application was clearly made in response to them. Specifically, Glencore expressed concern that, absent declaration, coal miners faced the possibility of future, largely unregulated, increases in port fees that it said the coal and associated industries could ill-afford. It sought declaration as a means of obtaining ACCC oversight (via arbitration) of the price and other terms applied at the Port. In contrast, PNO explained the price increases on the basis that prices at the Port had barely increased over the preceding 20 years (and, in real terms, had declined), that the revised prices remained lower than prices at the nearest comparable port, and that in the absence of capacity constraints on the shipping channel, there was no efficiency or other basis to retain the previous fee structure, which effectively provided discounted or capped fees for larger vessels while relatively disadvantaging smaller vessels.

 

Accordingly, Glencore's application was firmly directed at seeking price regulation of a service to which it already had access. It was not unique in this respect: the National Access Regime has previously been invoked in other contexts as a means of regulating a service to which the applicant already had access. However, the prospect that the National Access Regime might be used to introduce price regulation of recently privatised infrastructure to which access was already being provided, made Glencore's application particularly significant in the current economic environment, and in circumstances where the ACCC has been a vocal supporter of the application of price and access regulation when port and other assets are privatised.3 If successful, Glencore's application would also have resulted in the first access declaration of port infrastructure under the National Access Regime, with significant consequences for the design and implementation of future privatisations.

 

The NCC was keenly aware of this context, and the importance of competition analysis under the National Access Regime. Its Final Recommendation stressed that declaration:

 

… is not a mechanism for imposition of price regulation and was never intended to be such. “Excessive”, “monopolistic” or “gouging” pricing per se is not the focus of Part IIIA. Where such pricing in one market merely transfers income or value from one party in a supply chain to another without materially impacting competition in any other market, Part IIIA does not provide a remedy. The focus of the Regime is on promotion of competition in markets where the lack or restriction of access to infrastructure services provided by facilities that cannot be economically duplicated would otherwise limit competition.4

 

The declaration decision

 

Threshold issue: who was the "provider" of the shipping channel service?

 

An early key issue raised by Glencore's application was the question of who was the "provider" of the service. The provider is "the owner or operator of the facility that is used (or is to be used) to provide the service".5 In this case the State was the owner of the Port seabed, but PNO was the operator of the Port.

 

This issue also arises under various other access regimes, including the National Gas Law. It was material here (and would be in relation to any assets privatised by State governments), because if the provider was the State, the declaration decision would be made by a State Minister; if the provider was not the State, it would be made by a Commonwealth Minister. This issue is especially significant in relation to the "public interest" criterion, because there is limited scope for the Minister's decision on that criterion to be reviewed.

 

Ultimately, the NCC concluded that the provider was PNO, on the basis that PNO is responsible for decisions on key matters such as who will be allowed to have access to the Port, and on what terms.6 Consequently, the declaration decision was made by a Commonwealth, rather than a State, Minister.

 

This experience highlights that the identity of the provider warrants attention in the design of privatisations of State infrastructure where declaration may be sought.

 

Application of the declaration criteria

 

The Acting Treasurer found that all except one of the statutory declaration criteria were satisfied: he found that declaration criterion (a), regarding the promotion of competition, was not satisfied. The Acting Treasurer's decision on each criterion substantially reflected the NCC's reasoning. 

 

 

Criterion (a) – whether access/increased access would promote competition in another market

 

Criterion (a) tests whether access would "solve" a competition problem, by promoting competition in another market.

A threshold issue raised in this case was whether criterion (a) should be applied to assess whether "access" would promote competition, or whether only "access through declaration" should be considered. This is an important issue where, as at the Port, access is already being provided: should criterion (a) only assess the incremental effect of access as a result of declaration, or should it test competition by comparing a world "without" access (even though that is not the status quo) to a world in which access is provided?

 

There is previous case law that adopts both interpretations. Ultimately, the NCC and the Acting Treasurer considered that this criterion should be applied having regard to whether the making of a declaration – ie "access through declaration" – would promote competition.

 

This approach usefully focuses the analysis on the incremental competition benefits available through declaration. It is also consistent with amendments to criterion (a) which were recently proposed by the Commonwealth government (discussed below).

 

On the question whether access would promote competition, Glencore submitted that, absent declaration, PNO's pricing freedom would create uncertainty that could have a "profound" impact on marginal coal mining operations, and hence competition in related markets. It submitted that in contrast, declaration would impose a form of (indirect) price regulation on PNO, thereby increasing

 

"certainty" about pricing outcomes, and potentially reducing prices for shipping channel services in future. Compared to a situation without declaration, Glencore argued that this increased certainty would promote competition in a number of markets, including the markets for:

 

• coal exports;
• the provision of shipping services, involving shipping agents and vessel operators;
• the acquisition and disposal of exploration and/or mining authorities;
• the provision of infrastructure connected with mining operations, including rail, road, power and water;
• specialist services such as geological and drilling services, construction, operation and maintenance; and
• financing coal projects in the Hunter Valley.

 

The Acting Treasurer found that access would not promote competition in any of those markets. It was particularly important to the analysis that PNO's prices were a small component of coal production costs in the Hunter Valley (less than 1% of the total cost of coal delivered to the Port) – as a result, he considered that any increased pricing certainty brought about by declaration and access was unlikely to have any meaningful effect on competition. It was also important to this analysis that coal markets and related shipping markets were already workably competitive, so that any "increased" access through declaration was unlikely to promote competition in those markets. It followed that declaration would be unlikely to materially affect the competitive dynamics in smaller, localised markets for exploration licences, drilling services or infrastructure services. The Acting Treasurer did not accept that there was a separate market for financing coal projects in the Hunter Valley (as distinct from broader financing markets), and did not consider that access would promote competition in relation to financing activities. 

 

 

Criterion (b) – uneconomical to develop another facility

 

Following a decision of the High Court in 20127, the NCC and the Acting Treasurer applied criterion (b) by considering whether it would be privately profitable for anyone to develop another facility (ie a facility other than the Port) to provide the service.

 

The NCC has previously argued that criterion (b) should be amended, to replace the High Court's "private profitability" interpretation with a natural monopoly test, in effect to assess whether a single facility could provide the service at lower cost than two or more facilities. The Commonwealth government has recently announced its intention to amend criterion (b) to adopt a natural monopoly test.

 

However, the High Court's "private profitability" interpretation will prevail unless and until those amendments are introduced by legislation; accordingly, it was not open to the Acting Treasurer or the NCC to depart from the private profitability test in this instance.

 

Their decision that criterion (b) was satisfied – ie that it would not be profitable to develop another facility to provide the service – was unsurprising, and uncontroversial.

 

Criterion (c) and (e) – national significance / alternative regime

 

These criteria were not controversial. The Acting Treasurer found they were both satisfied, on the basis that:

 

• the Port is of national significance having regard to the scale and economic significance of the Hunter Valley coal industry, and hence the Port's importance to constitutional trade and commerce and the national economy; and
• no relevant alternative access regime applied to the service sought to be declared (the price monitoring regime identified above was not found to be such a regime).

 

Criterion (f) – whether access/increased access would "not be contrary to" the public interest

 

Glencore submitted that the cost certainty and competition benefits from access that it addressed in its submissions on criterion (a) meant that declaration would not be contrary to the public interest.

 

The PNO, and the Victorian and NSW governments, submitted that access through declaration could be contrary to the public interest, as it had the potential to:

 

• impose regulatory costs and uncertainty, and deter efficient investment in and expansion of infrastructure;
• disrupt the existing Capacity Framework Arrangements, which are the ACCC-authorised arrangements designed to address capacity constraints by establishing a system to allocate capacity to Hunter Valley coal producers); and
• interfere with the "light handed" regulatory models implemented by State governments for State assets.

 

The Acting Treasurer did not accept these three arguments: he considered that access through regulation does not impose costs that are material to the public interest, did not accept that access would disrupt the Capacity Framework Arrangements, and did not accept that the potential for the National Access Regime to interfere with State governments' access regime was relevant to the public interest analysis.

 

The approach to this criterion is significant in two respects:

 

• first, it pays little regard to previous experience in relation to Part IIIA declaration proceedings, which suggests that declaration can impose very material costs;8 this experience was also the subject of submissions to the recent Harper Review of competition law and policy;
• secondly, it suggests that the public interest analysis under criterion (f) will not necessarily operate to prevent the National Access Regime "disrupting" a State government's approach to regulating a particular privatised asset.

 

Would the outcome have been different if the Commonwealth's proposed amendments to the National Access Regime had already been introduced?

 

On 24 November 2015, the Commonwealth government released its response to previous recommendations made by the Productivity Commission and the Harper Review regarding the National Access Regime. That response recommended a number of changes, including the following amendments to the declaration criteria. 

 

 

We expect that some of the analysis, but not the outcome of the Acting Treasurer's declaration decision would have been different if the Commonwealth's proposals had already been introduced. Specifically:

 

• The reforms would adopt the interpretation of criterion (a) (promotion of competition) used in this case, so would not have changedthe analysis or the decision on this criterion.
• The criterion (b) reforms would replace the "private profitability" test used here with a "natural monopoly" test; the new test would be likely to require a complex cost-based analysis, but we expect the Acting Treasurer would still have been satisfied that it would be uneconomical to develop another facility had this alternative test applied here.
• The Commonwealth does not propose changing criterion (c), so there would be no change to its application here.
• Criterion (e) was not relevant in this case.
• The Commonwealth's proposed higher public interest threshold ("would promote" the public interest) would have required a different analysis by the Acting Treasurer, who in this case only needed to consider whether access would "not be contrary to" the public interest. If the Acting Treasurer had had to apply this revised test, it is quite possible that he may have found that access would not promote the public interest (particularly in the absence of any competition benefits from access), such that criterion (f) was not satisfied. However, even if the Acting Treasurer had decided this criterion was not satisfied, this would not have changed the outcome in this case, since his finding that another criterion (criterion (a) – promotion of competition) was not satisfied meant he was required to decide not to declare the service.

 

Looking ahead

 

It is now open to Glencore to seek review of the Acting Treasurer's decision.

 

However, if the decision not to declare the Port stands, it will be a strong endorsement of the fact that declaration under the National Access Regime is available to address competition problems, and not otherwise to resolve what are, in substance, pricing disputes.

 

Infrastructure owners and users, and those involved in privatisation processes, should closely follow developments in this area, including the release of the Commonwealth government's draft legislation to amend the National Access Regime later in 2016. 

 

1. Note that criterion (d) was repealed.
2. A statutory body corporate, continued in existence under the Ports and Maritime Administration Act 1995 (NSW). 
3. ACCC submission to the inquiry into the proposed lease of the Port of Melbourne (10 September 2015) at p 2. Final Recommendation, 3.15.
4. Competition and Consumer Act 2010 (Cth), section 44B.
5. Final Recommendation, 2.20 and 2.36. 
6. The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal [2012] HCA 36
7. Re Fortescue Metals Group Limited [2010] ACompT 2. 

 

For further information, please contact:

Alice Muhlebach, Partner, Ashurst

alice.muhlebach@ashurst.com