In a watershed 6-1 judgement, the High Court has rejected a decade-long held view that the Australian Competition Tribunal, aided by lawyers and economists, should be able to impose its view of an ‘efficient’ market structure through declaration of access under Part IIIA.  Instead, questions of investment and access to key infrastructure are now left to a political process, based on the real world assessment of bankers and investors. 

What does the decision mean for owners, investors and users of key infrastructure?

On 14 September 2012, the High Court delivered its judgement in The Pilbara Infrastructure Pty Ltd & Anor v Australian Competition Tribunal & Ors (TPI v ACT), bringing to an end the latest chapter in the 8-year dispute between Fortescue Metals Group (FMG), Rio Tinto and BHP Billiton over attempts by FMG to gain access to the dedicated iron ore railways of each of the two major miners in the Pilbara.

The High Court decision in TPI v ACT has important implications for owners, investors and users of key infrastructure:

  1. This decision, which reinforces important amendments made to Part IIIA of the Competition and Consumer Act (CCA) in 2010, will mean that the declaration process is quicker and involves less evidence then has previously been the case.
  2. The political dimension of the declaration process will become more important and decisions of the Minister (usually the Commonwealth Treasurer) whether or not to declare a facility will be far more difficult to overturn on review by the Australian Competition Tribunal (Tribunal).
  3. By settling the question of the economic test to apply as a ‘private profitability’ test for duplication of a facility, the High Court has made it more difficult for parties to successfully seek declaration in marginal cases where there is scope to profitably develop alternative facilities.
  4. Any assessment of a declaration application needs to be grounded in ‘real world’ market evidence, with less scope for the Tribunal to make its own theoretical assessment of what infrastructure outcome it considers to be the most economically efficient from a social perspective.

This decision is also likely to play an important role in shaping policy debate over coming months about Australian access policy, with the Productivity Commission due to commence a review on the operation of Part IIIA before the end of 2012.

The decision in brief

The case involved an appeal by FMG against a decision of the Full Federal Court in 2011 which had itself overturned a decision of the Tribunal made in 2011.  The Tribunal had accepted FMG’s application for declaration of an iron ore railway line operated by Rio Tinto in the Pilbara (the Robe River Line), but had refused to declare another rail line, the Hamersley Line.  On appeal, the Full Federal Court rejected declaration of either rail line.

On appeal to the High Court, a majority found that the original Tribunal decision had miscarried because it had undertaken a task that went beyond the scope of the original decision made by the Commonwealth Treasurer, Wayne Swan, when the railways were first declared in 2008.

The key conclusions reached by the High Court were:

  • FMG’s appeal was upheld on the basis that the Tribunal went beyond the scope of material it was entitled to consider and so the matter was remitted to be reheard, but within tightly defined parameters.  The Tribunal’s role when undertaking a review of a declaration decision is limited to a ‘reconsideration’ of the matter.  It is not entitled to call fresh evidence from the parties or to hold a hearing, but instead must make its decision based on the material provided to the Minister or requested from the National Competition Council (NCC). 
  • The central economic test of whether or not it is ‘uneconomic’ for anyone to develop an alternative facility, under s.44H(4)(b) (“criterion (b)”), should be determined based on whether it is privately profitable, or ‘economically feasible’, for another firm to develop another facility.  This is a real world question which bankers and investors face every day and which is based on whether a party could be expected to make a reasonable rate of return on an investment in a new facility.
  • While the scope of the ‘public interest’ criterion in s.44H(4)(f) (“criterion (f)”) is wide when in the hands of the Minister, the regulation of significant economic infrastructure is not simply an economic or legal issue, but gives rise to significant political and national interest issues.  For that reason, the Tribunal should be very reluctant on review to interfere with any finding which the Minister makes in relation to whether declaration would be contrary to the public interest.
  • If the statutory criteria set out in Part IIIA that govern declaration are all satisfied, there is no residual discretion available to the Tribunal to reach a different outcome.

The High Court's new big idea: declaration as a political decision

Part IIIA is broadly structured in two stages.  The first stage involves access to a facility becoming ‘declared’, which can be achieved either voluntarily or by the Minister declaring the service, on the recommendation of the NCC.  The second stage is that, once declared, parties seeking access to a facility are able to negotiate directly with the owner or operator and, if terms cannot be agreed, disputes may be arbitrated and conditions of access established by the ACCC.

In TPI v ACT, the High Court reinforced the important policy and political dimension of the first ‘declaration’ stage.  Previously, the question of whether or not declaration would be contrary to the public interest had been seen by the Tribunal and Federal Court as inviting a balancing of economic costs and benefits.  The High Court however found that the public interest criterion involved a wider set of policy considerations, rather than being primarily an economic question. 

The Court held (at (112)):

In neither case [declaration or non declaration] is it to be expected that the Tribunal, reconsidering the Minister’s decision, would lightly depart from a ministerial conclusion about whether access or increased access would not be in the public interest.

It seems likely that this new emphasis on the political and policy objective of regulated access will make the decision of a Minister more important and difficult to reverse on review before the Tribunal. 

The central legal question resolved by the Court - "uneconomic to duplicate"

For over a decade there has been keen debate about the principal economic objective of declaration under Part IIIA. This found expression in conflicting views about the meaning of criterion (b), which prevented a facility from being declared unless it was shown to be ‘uneconomic’ for anyone to develop another facility that could provide an equivalent service.

On one side, it was argued that declaration should be a “last resort” mechanism, to enable the Minister (and subsequently the ACCC as regulator) to impose access only where it was clearly not feasible for anyone to profitably develop an alternative facility.  On this view, Part IIIA was a exceptional legal tool to be used sparingly and only where there was real world evidence that a facility had become a ‘bottleneck’ to effective competition in other markets. 

On the other side were arguments that Part IIIA was intended primarily as a means of ensuring the structure of Australian markets facilitated efficient use of infrastructure, from a social perspective.  While advocates for this position may disagree about precisely which costs were relevant to the analysis, they agreed that if a single facility could supply all demand in the market at less cost than multiple facilities, and access would promote competition in other markets, then that was a sufficient economic basis to justify regulation.  That is, the threshold for declaration should not be set too high – so that firms have a number of “cards in their hand” when entering the market, which might include building their own (potentially inefficient) facility or, alternatively, seeking regulated access to an existing facility.

Competing answers to criterion (b): the Tribunal and the Full Federal Court

The High Court in TPI v ACT was presented with both perspectives, one which had been adopted by the Tribunal and the other by the Full Federal Court, on appeal.

The Tribunal’s test asked, as matter of economic theory, whether the Rio Tinto railways were ‘natural monopolies’.  It found that criterion (b) would be satisfied where the cost of production of the service (i.e. the capital and operating costs associated with meeting demand for access) using each of the Rio Tinto lines would be lower than the cost of production if the service was supplied over duplicate facilities.  On this test, the Tribunal found that and the Hamersley Line satisfied criterion (b), in that it could hold or be expanded to provide capacity to meet all reasonably foreseeable demand at approximately $2.75 billion less than the capital cost of construction of a second railway line FMG.

On appeal, the Full Federal Court rejected this narrow economic interpretation.  In its place, it adopted a ‘private profitability’ test which was a real world question of whether it was feasible or profitable for anyone to develop an alternative to the existing railways.  Their Honours held (at p98):

In our opinion, the intention of the legislature was that, if it is economically feasible for someone in the market place to develop an alternative to the facility in dispute, then criterion (b) will not be satisfied.  In such a case, there is no problem in the market place that participants in the market place cannot be expected to solve. 

On this basis, the Federal Court rejected FMG’s claim in relation to both the Robe River and Hamersley Lines, on the basis of evidence that FMG had already announced plans if necessary to construct its own alternative rail infrastructure.

The private profitability test adopted

On appeal, the High Court (in a 6-1 majority judgement) accepted the private profitability test for criterion (b).  Their Honours rejected theoretical economic arguments under Part IIIA in favour of a practical ‘real world’ test of the kind that investors and bankers commonly undertake when assessing whether an investment in new infrastructure is commercially feasible.

Their Honours described their test as follows (at (104), (106)):

It would not be economical, in the sense of profitable, for someone to develop another facility to provide the service in respect of which the making of a declaration is being considered 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

... whether it would be economically feasible to develop an alternative facility – is a question that bankers and investors must ask and answer in relation to any investment in infrastructure.  Indeed it may properly be described as the question that lies at the heart of every decision to invest in infrastructure, whether that decision is to be made by the entrepreneur or a financier of the venture.

This decision therefore finally disposes of the most contentious issue under Part IIIA. In doing so, it rejects a decade of previous Tribunal decisions and sets the threshold for declaration higher than it had been prior to the recent Full Court decision.

Other issues

The High Court dealt with several other issues, of less overall importance to the outcome.  In particular, they rejected a number of earlier decisions that had found that the Tribunal retained a ‘residual discretion’, after all of the criteria in s44H had been considered.

The High Court rejected this view and found that if the Minister (and therefore the Tribunal) is satisfied that the six criteria are satisfied, then no additional or free ranging discretion exists to reach an alternative or different decision.

Where to from here?

The High Court’s decision comes at an interesting time in the development of access policy in Australia.  March 2013 will be the 20th anniversary of the Hilmer Review which laid the foundations for Part IIIA and much of the broader competition policy reform of the mid to late 1990s.

At the same time, the effectiveness of Part IIIA is due to be reviewed by the Productivity Commission, with a review of the regime due to commence before the end of the year. The Chairman of the ACCC, Rod Sims, has been vocal in recent months calling for new policy ideas in this area and the ACCC is understood to be gearing up to push for reforms to the process as part of the Productivity Commission process.

While it is too early to say what affect the High Court’s decision may have on the development of policy in this area, we see some key themes emerging:

  • The High Court, like much of industry, was clearly frustrated that the up-front declaration process in the case of the Pilbara had become mired in years of technical legal and economic argument and evidence.  They clearly see declaration as occurring in a different way.  Declaration ought primarily to be a political decision grounded in a range of public interest considerations, and taken with expert economic input, and one which is to be made by the Minister under a compressed timeframe.
  • Where a decision about whether significant infrastructure should be declared is made by a Minister on public interest grounds, the Tribunal (and any court) should be extremely reluctant to intervene.
  • When deciding whether to impose access through declaration, the NCC, Minister and Tribunal should grapple with the ‘real world’ state of the marketplace and, in particular, whether there is scope to let market forces drive investment in new or alternative infrastructure.