Allens

Competition Law

Focus: Historic High Court decision in Pilbara rail access dispute

21 September 2012

In brief: The High Court has handed down its decision regarding FMG's application to have Rio Tinto's Pilbara rail lines declared subject to open access, referring the matter back to the Tribunal to redecide according to law. In doing so, the court has clarified the meaning of some of the criteria for declaration and, most importantly, decided that infrastructure should not be declared if it is privately profitable for anyone to duplicate it. Partner Ted Hill (view CV) and Lawyer Rosannah Healy report.

How does it affect you?

  • The High Court's decision means:
    • Infrastructure cannot be declared under Part IIIA of the Competition and Consumer Act 2010 (Cth) (and existing declarations could be revoked) if it is privately profitable for anyone to duplicate the infrastructure in question, based on industry evidence. Infrastructure should not be declared solely because a decision maker considers it would be more efficient for infrastructure to be shared rather than duplicated.
    • The National Gas Code coverage criteria are very similar to the declaration criteria in Part IIIA. It is highly likely that, as a result of the High Court decision, a gas pipeline cannot be covered under the National Gas Code (and coverage could be revoked) if it is privately profitable for anyone to duplicate the gas pipeline concerned. The Queensland Competition Authority Act also contains similar criteria.
    • In reviewing a Minister's declaration decision, the Australian Competition Tribunal should be reluctant to interfere with any finding by the Minister in relation to the 'public interest' under Criterion F.
    • If the Minister (or the Tribunal on review) are satisfied of all of the statutory criteria set out in Part IIIA, the service must be declared and there is no residual discretion available to reach a different decision.
    • The Tribunal's role in a review of a Minister's declaration decision is to reconsider what the Minister has decided based only on the material that was before the Minister (and any supplementary material provided at the Tribunal's request by the National Competition Council (the NCC)).

Background

On 14 September 2012, the High Court handed down its decision in relation to FMG's application to have Rio Tinto's Pilbara rail lines declared subject to open access under Part IIIA of the Competition and Consumer Act (please see our earlier Focus). The court decided to refer the matter back to the Tribunal to redecide according to law.

Owners and operators of infrastructure in Australia can be required to allow third parties, including their competitors, to access their infrastructure if use of the infrastructure is 'declared' by the designated Minister under Part IIIA. There are five criteria that must be met before infrastructure can be declared. The High Court has made important findings in relation to two criteria:

  • criterion B (that it must be uneconomical for anyone to develop another facility to provide the service); and
  • criterion F (that access or increased access to the service would not be contrary to the public interest).

The High Court also considered the role of the Australian Competition Tribunal where the access seeker or facility owner applies to the Tribunal for review of the Minister's decision.

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Criterion B – Private profitability test

The correct test

The High Court held (Justice Heydon dissenting) that criterion B ought to be assessed using a 'private profitability' test. Under this test, a service cannot be declared if it would be profitable for any person to establish a second facility to provide the service. In other words, a service must not be declared if it can be shown that an existing or future market participant (including the incumbent infrastructure owner) could reasonably expect to obtain a sufficient return on capital if it duplicated the facility to provide the service.

The High Court rejected the 'social benefit test' adopted by the Tribunal in previous Part IIIA and National Gas Code cases and routinely applied by the NCC and the Minister. That test asks whether, from society's perspective, a single facility could meet demand at less cost than two or more facilities.1 In the High Court's view, the language of Part IIIA pointed to (and the objectives of Part IIIA would best be served by) an evaluation of what would be feasible or practical for an actual or potential participant in the marketplace, rather than evaluation of efficiency from the perspective of society as a whole.

The majority of the court concluded that:

The better view of criterion (b) is that it uses the word 'uneconomical' to mean 'unprofitable'. It does not use that word in some specialist sense that would be used by an economist. Further, criterion (b) is to be read as requiring the decision maker to be satisfied that there is not anyone for whom it would be profitable to develop another facility. ... When used in criterion (b) 'anyone' should be read as a wholly general reference that requires the decision maker to be satisfied that there is no one, whether in a market or able to enter the market for supplying the relevant service, who would find it uneconomical (in the sense of profitable) to develop another facility to provide that service.
Applying the private profitability test in practice

In assessing whether a facility can be profitably duplicated, the High Court explained that:

It would not be economical, in the sense of profitable, for someone to develop another facility ... unless that person could reasonably expect to obtain a sufficient return on the capital that would be employed in developing that facility. Deciding the level of that expected return will require close consideration of the market under examination. What is a sufficient rate of return will necessarily vary according to the nature of the facility and the industry concerned. And if there is a person who could develop the alternative facility as part of a larger project, it would be necessary to consider the whole project in deciding whether the development of the alternative facility, as part of that larger project, would provide a sufficient rate of return.

The High Court made clear this is a question of the type bankers and investors must ask, rather than being a theoretical economic question.

Implications

The decision means that infrastructure will not be declared under Part IIIA (and existing declarations could be revoked) if it is privately profitable for anyone to duplicate the infrastructure concerned, based on industry evidence.

Because the National Gas Code contains a criterion for coverage very similar to criterion B, it seems highly likely that the High Court's decision will also apply to the National Gas Code. This would mean that gas pipelines should not be covered under the National Gas Code (and coverage could be revoked) if it is privately profitable for anyone to duplicate the gas pipeline in question, again based on industry evidence. The Queensland Competition Authority Act also contains an equivalent to criterion B.

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Criterion F and residual discretion

Like the Full Federal Court, the majority of the High Court considered that the range of public interest matters that may be considered under criterion F was very wide. The court also considered, however, that the public interest assessment by the Tribunal must be informed by the public interest findings of the Minister before it. In the High Court's view, it is not expected that the Tribunal would 'lightly depart from a ministerial conclusion about whether access or increased access would not be in the public interest. In particular, if the Minister has not found that access would not be in the public interest, the Tribunal should ordinarily be slow to find to the contrary'.

The High Court rejected the Full Federal Court's view that there is a residual discretion, finding instead that where the decision maker is satisfied of all statutory criteria under Part IIIA, the service must be declared and there is no residual discretion to reach a different view.

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Nature of Tribunal review

Since the introduction of Part IIIA, the Tribunal has generally approached a review of the Minister's decision as a full merits review, holding a hearing and receiving new expert and lay evidence from all parties to determine whether the service ought to be declared. The Tribunal did so in reviewing the Minister's decision to declare the Rio Tinto rail lines.

The High Court decided that the Tribunal had acted outside of its statutory task by approaching the review in this manner, including by receiving fresh evidence from all parties that was not before the Minister. Instead, the court considered that the Tribunal's task was to review the Minister's decision based on the material that was before the Minister, supplemented only by any additional information provided by the NCC at the request of the Tribunal. As a result, the High Court has referred the matter back to the Tribunal to redecide according to law.

It is interesting to note that Part IIIA was amended, in any event in 2010, in essence to limit expressly the Tribunal to material before the Minister in the manner the High Court has now decided was the case even before the amendment, although by that amendment the Tribunal has the power to request further evidence from all parties involved, not just the NCC. Ironically, this means the amendment increased the Tribunal's powers (as restricted by the High Court) rather than limited them.

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Conclusion

The High Court's decision on criterion B affirms the Full Federal Court's findings that decision makers do not have a wide-ranging power to override private property rights wherever they consider sharing of infrastructure would produce a more efficient use of resources for society. Rather, declaration of infrastructure under Part IIIA is permitted only where regulatory intervention is necessary to resolve problems of market failure, something that will not exist if a facility can be profitably duplicated. As a result, the finding may narrow the circumstances in which infrastructure can be declared under Part IIIA and gas pipelines can be covered under the National Gas Code.

The High Court's decision in relation to criterion F may, as a practical matter, discourage the Tribunal from 'lightly' overturning Ministers' decisions on the public interest criterion under Part IIIA and, potentially, the National Gas Code.

Allens acted for the Rio Tinto parties in relation to the rail access dispute

Footnotes
  1. The High Court also rejected the 'natural monopoly' test adopted by the Tribunal in this case. That test asked whether the facility in question could provide reasonably foreseeable demand for the relevant service at a lower total production cost than if demand were to be met by two or more facilities.reference

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