The decision is significant because the Tribunal’s interpretation of criterion (a) – that access would promote a material increase in competition – lowers the threshold faced by access seekers in satisfying that criterion. Although this approach may ultimately change as a result of proposed legislative reform to Part IIIA, access seekers are currently in a better position to bring access applications where access to the relevant facility is essential to compete in an upstream or downstream market.
The decision also reinforces that an access application under Part IIIA remains a strategic option for access seekers faced with high access charges from the infrastructure owner to leverage the threat or regulator-imposed charges to obtain agreement on lower access charges.
The background to the application for access
Port of Newcastle Operations Pty Ltd (PNO) controls the Service which provides access to ships to the Port of Newcastle. The Port of Newcastle has been described as a natural “bottleneck” monopoly and PNO unilaterally determines the charges for access and may prohibit access if charges are not paid. Since May 2014, PNO has increased access charges by approximately 40-60% for some vessels without changing the nature or quality of the Service.
In May 2015, in an attempt to restrict further increases to the usage charges, Glencore Coal Pty Ltd (Glencore) made an application to the National Competition Council (NCC) for a recommendation that the Service be “declared” as open access under Part IIIA. A declaration would require PNO to negotiate the terms and conditions of access (including price) with users of the Service and failing agreement, those terms and conditions could be arbitrated by the Australian Competition and Consumer Commission.
The relevant criteria for declaring a service as open access
In order for the NCC to recommend a declaration of a service (and the relevant Minister and Tribunal to declare a service), an access seeker must demonstrate that certain criteria are satisfied.
The criteria are that access would promote a material increase in competition (criterion (a)); that it would be uneconomical to develop another (criterion (b)); that the facility is of national significance (criterion (c)); that the service is not already subject to an access regime (criterion (e)); and that access would not be contrary to the public interest (criterion (f)).
The NCC’s recommendation and the Minister’s decision
On 2 November 2015, the NCC recommended that the Service not be declared because, although it considered all other criteria to be met, it was not satisfied that criterion (a) was met.
On 8 January 2016, the designated Minister followed this recommendation and decided not to make the declaration. In determining whether criterion (a) was satisfied, the Minister considered that the appropriate approach was to compare:
- the future state of competition in the dependent markets under the current access arrangements (which took into account that Glencore and other users already had access to the Service); with
- the future state of competition in the dependent markets with a declaration.
In undertaking this analysis, the Minister concluded that access to the Service would not promote a material increase in competition in a dependent market because those markets would remain workably competitive and the terms of access offered by PNO would not materially alter this. The Minister reasoned that:
- PNO was heavily reliant on coal exports for revenue and was under contractual obligations to improve productivity and efficiency;
- PNO had no incentive to diminish the long-term output of the Hunter Valley coal industry which relied on the Port of Newcastle; and
- there were no material concerns of vertical integration that would lead PNO to favour any participants in the dependent markets.
The Tribunal’s interpretation of criterion (a)
The Tribunal agreed with Glencore’s submission that the Minister did not take the correct approach to criterion (a). It held the correct approach was that taken by the Full Federal Court in Sydney Airport FC1and which required a comparison of:
- the future state of competition in the dependent market without any right or ability to access the Service; and
- the future state of competition in the dependent market where users have a right or ability to access the Service pursuant to a declaration.
It was determined that criterion (a) did not require an assessment of the usage or access that the service provider did or could provide voluntarily or the terms on which such usage or access was provided. That is, it was not necessary to take into account the current situation of access being provided to users by PNO.
The Tribunal stated that criterion (a) would be satisfied where:
- the Service providing access to the shipping lanes was a natural monopoly and PNO exerted monopoly power;
- the Service was a necessary input for effective competition in the dependent coal export market as there was not a practical and realistically commercial alternative; and
- access to the Service was essential to compete in the coal export market.
The Tribunal agreed that if the Minister’s interpretation of criterion (a) were to be used then a material increase in competition would not be promoted.
Access seekers have a lower threshold to satisfy criterion (a) thus making the prospects of a successful access application more likely.
Infrastructure owners of natural monopoly facilities that exert market power may be subject to increased access applications if access to the facility is necessary to compete in another market (regardless of whether that market is workably competitive already).
Access users with existing rights that are faced with increased charges from the infrastructure owner may use the Part IIIA declaration process as leverage to obtain lower prices via the threat of regulated prices.
But is the current status of play only temporary?
The Tribunal’s decision may only provide a small window of opportunity for access seekers because the Productivity Commission has recommended that criterion (a) be amended to make clear that it requires a comparison of competition with and without access on reasonable terms and conditions through declaration.
This interpretation of criterion (a) is contrary to the Tribunal’s decision but consistent with the approach taken by the Minister.
The Commonwealth Government has announced its support for this recommendation but it remains to be seen whether and when the amendment would come into operation and in what form.