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Focus: Full Federal Court decision on access

16 May 2011

In brief: Recently, the Full Federal Court handed down its decision in the Pilbara rail access dispute. The Full Court was reviewing determinations made by the Australian Competition Tribunal last year which considered whether or not Rio's two Pilbara railways should be declared under Part IIIA of the Competition and Consumer Act 2010. (Railways owned by BHP were also considered by the Tribunal, but were not the subject of review by the Full Court). The outcome of the Full Court's decision is that neither of Rio's railways in the Pilbara is declared open for third party access. The Full Court's approach provides a clearer, more certain framework for assessing the application of the Part IIIA access regime to infrastructure. It is also more consistent with the philosophy underpinning Part IIIA and competition regulation in Australia generally. Partner David Brewster (view CV) and Senior Associate Verity Quinn report.*

How does it affect you?

The decision means (for both future and existing declarations and coverage determinations):

  • Infrastructure will not be declared under Part IIIA if it is privately profitable to duplicate the infrastructure, based on industry evidence.
  • Regulators do not have a broad power to declare privately owned infrastructure on the basis that the regulator considers it would be more efficient for infrastructure to be shared rather than duplicated.
  • Decision-makers should take a broad approach to assessing whether access is contrary to the public interest.
  • The National Gas Law uses the same criteria as Pt IIIA, and the Full Court's interpretation of the criteria should apply equally in coverage determinations under the National Gas Law.
  • It is now easier to assess whether particular infrastructure will become subject to Part IIIA.

Key findings

Owners and operators of infrastructure in Australia can be required to let third parties, including their competitors, access their infrastructure if use of the infrastructure is 'declared' under the Part IIIA regime.
There are five criteria that must be met before infrastructure can be declared for third-party access. In its decision, the Full Court made important findings in relation to two of them:

  • 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 Full Court's decision regarding criterion B, in particular, will significantly change the way decision-makers assess whether infrastructure should be declared under the Part IIIA regime.

Services will not be declared if it is privately profitalble to duplicate

Since the introduction of Part IIIA in 1995, there has been debate over how criterion B should be interpreted. Then, in 1999, the National Competition Council expressed a preference for a social benefit test, and the following year the Australian Competition Tribunal (the Tribunal) adopted a social benefit test in Re Sydney Airports Corporation Ltd (2000). That test was applied for the following decade. The social benefit test looks at whether, from society's perspective, a single facility can meet demand at less cost than two or more facilities. Under the social benefit test, all costs, including consequential costs such as impacts on dynamic and allocative efficiency (consequential costs), were to be assessed under Criterion B. 

However, in its determinations regarding the Pilbara railways last year, the Tribunal adopted a new test of natural monopoly. The natural monopoly test compares the costs of a new facility with those of a shared facility over the range of foreseeable demand, looking at whether a single facility can produce the desired output at lower cost than any combination of two or more facilities, and looking only at production costs, not consequential costs. The Tribunal determined that consequential costs are to be addressed under Criterion F.

In its recent decision, the Full Court has departed from both the social benefit test and the new natural monopoly test, instead accepting Rio's argument that the statutory purpose, language and context of Part IIIA support a 'privately profitable' test for criterion B'.

The private test looks at whether it is economically feasible for someone in the marketplace to develop an alternative to the relevant facility. It assesses whether it is, in fact, profitable for another person to duplicate the relevant infrastructure.

The key practical benefits of the private test having now been adopted are:

  • It is clear that services will not be declared if it is privately economical to duplicate the infrastructure.
  • Criterion B will now be based on industry evidence. As the Full Court observed, the private test is 'concerned with the facts of the market place, rather than a regulator's evaluation of efficiency' ([59]). Accordingly, there will be more certainty about whether criterion B will be met for given infrastructure; hence, infrastructure owners/operators and access seekers can more reliably assess whether a Part IIIA application is likely to succeed. There should also be more consistent decision-making by regulators and courts in declaration decisions in the future.
  • Assessing whether criterion B is met will now be more straightforward than it was under the social benefit test or the natural monopoly test. As the Full Court acknowledged, the 'narrow test propounded by Rio Tinto has the attraction of being easier to apply than the alternative' ([86]). The private test simply requires an assessment of the facts of the marketplace. For example, industry evidence demonstrating the viability of duplicating infrastructure will now be decisive, with no further inquiries as to the relative productive efficiencies required.
  • Criterion B will not permit regulatory intervention where 'there is no problem in the market place that participants in the market place cannot be expected to solve' (see [100]).

Part IIIA framework does not limit public interest costs which can be taken into account

The Full Court rejected Fortescue's arguments that the structure of Part IIIA significantly limited the types of costs that can be taken into account under criterion F. Instead, it upheld the Tribunal's approach to the factors to be considered when assessing the public interest under criterion F. Notably, the Full Court accepted that:

  • The legitimate interests of the infrastructure owner are relevant to the public interest.
  • The costs of negotiating access following a declaration, including the costs of any arbitration by the Australian Competition and Consumer Commission (the ACCC), can be taken into account.
  • The fact that the ACCC might consider certain costs in the event of an arbitration dispute following declaration does not mean those costs cannot be taken into account in deciding whether or not to declare infrastructure.
  • Estimates of the likely impact of access (eg delayed or suboptimal expansion of the facility or changes to operating practices) should be addressed under Criterion F at the declaration phase, even though these may be revisited by the ACCC if the service is declared and there is an access dispute for a specific access application.

Underpinning the Full Court's decision was its view that limitations on the costs that can be considered under criterion F would radically reduce the power and responsibility of Ministers and the Tribunal to reject declaration applications that they considered to be plainly contrary to the public interest ([111]). The Full Court could not find anything in the statutory language or purpose that warranted such a restriction on the decision-maker's role.

The key practical benefits of the Full Court upholding the Tribunal's approach to relevant considerations under criterion F are:

  • The costs to the owner/operator of providing access can be taken into account.
  • The threshold for including particular costs is whether they are relevant to the public interest or not, with the public interest being broadly construed.
  • There are no complex carve-outs for costs that might arise if the infrastructure is declared, or that could be viewed as an inherent part of the Part IIIA process.

Conclusion

The most important aspect of the Full Court's decision is its discussion of the philosophy of Part IIIA, and the criteria that must be met in order to declare infrastructure. It held that this philosophy 'makes the granting of access to override the otherwise legitimate interests of incumbent owners a distinctly exceptional occurrence which is simply not justified by an evaluation by a regulator that economic efficiency from the point of view of society as a whole would be served by a declaration of access' ([87]).

The Full Court has effectively clarified that regulators 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. Declaration of infrastructure under Part IIIA is only permitted where regulatory intervention is necessary to resolve problems of market failure, something that will not exist if a facility can feasibly be duplicated.

* Allens Arthur Robinson acted for Rio in relation to the rail access dispute.

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