Earlier this year, BHP Billiton (BHPB) and Rio Tinto (RIO) each preserved their right to the exclusive use of key heavy haulage railway lines and associated infrastructure for the transporting of iron ore in the Pilbara region in Western Australia following the Australian Competition Tribunal's (ACT) 30 June 2010 decision to declare only two of the four railways owned by the two mining companies.

Future direction for access to key rail infrastructure in the Pilbara region is likely to remain highly topical, particularly in respect to the investment ambitions of potential or existing local and overseas investors.

Key points for consideration

The four railways the subject of the ACT's decision were:

  • the BHPB operated Mt Newman line (running from the south-east Pilbara to Port Hedland)
  • the BHPB operated Goldsworthy line (running from the north-east Pilbara to Port Hedland)
  • the Rio operated Hamersley line (running from the south-east and central Pilbara to the port at Dampier)
  • the Rio operated Robe line which runs from the western Pilbara to the port at Cape Lambert.

Outcome

As a result of the ACT's decision:

  • BHPB maintained the right of exclusive access to its Mt Newman line
  • Rio maintained the right of exclusive access to its Hamersley line
  • BHPB shares access with third parties to its Goldsworthy line
  • Rio shares access with third parties to its Robe line.

Legislative background

The question whether to "declare" the subject railway lines arose for decision pursuant to the terms of Part IIIA of the Trade Practices Act 1974 (Cth) (TPA). Part IIIA was incorporated into the TPA in 1995 for the purposes of establishing a legal regime to facilitate third parties obtaining access to the services of certain essential facilities considered to be of national significance. The policy rationale for the establishment of such a regime was that access to certain facilities which have natural monopoly characteristics is required in order to promote competition and efficiency.

The procedure prescribed by Part IIIA for obtaining access to essential facilities comprises two principal steps:

  • the making of an application to the National Competition Council (NCC) for a declaration of the relevant service as "essential". The NCC may then recommend to the designated Commonwealth Minister (Minister) that the service be "declared" subject to its satisfaction of the requirements in Part IIIA governing the NCC's decision to recommend the declaration of a service as “essential” (see a) - f) below)
  • the private negotiation between the affected parties (or, failing that, arbitration by the ACCC or determination by the ACT) of the access arrangements including the price of access.

In recommending a service be declared, the NCC must be satisfied of all of the following six elements (see subsection 44G(2) of the TPA):

  • that access (or increased access) to the service would promote a material increase in competition in at least one market (in Australia or elsewhere) other than the market for the service
  • that it would be uneconomical for anyone to develop another facility to provide the service
  • that the facility is of national significance having regard to -
    • its size
    • its importance to constitutional trade or commerce, or
    • its importance to the national economy
  • that access to the service:
    • is not already the subject of a regime in relation to which a decision that the regime is an effective access regime is in force, or
    • is the subject of a regime in relation to which a decision that the regime is an effective access regime is in force, but the NCC believes that, since that decision by the Minister was published, there have been substantial modifications of the access regime or of the relevant principles set out in the Competition Principles Agreement
  • that access (or increased access) to the service would not be contrary to the public interest.

The ACT decision on access to the BHPB and Rio Pilbara rail lines

The ACT's recent decision regarding access to the Pilbara rail lines arose out of separate appeals by BHPB, Rio and Fortescue Metals Group Limited (FMG) to the ACT in respect of the earlier decision by the designated minister (on the recommendation of the NCC) to declare all of the rail lines save for BHPB's Mt Newman line. Prior to the commencement of these appeals, appeals by BHPB of decisions of the Federal Court and Full Federal Court testing the jurisdiction of the NCC to declare the services associated with the Mt Newman and Goldsworthy lines, respectively, were heard by the High Court. The High Court's decision on those appeals confirmed that those services fell within the scope of Part IIIA and therefore the jurisdiction of the NCC to make declarations in respect of access to them was enlivened.

FMG's case before the ACT was essentially that rail is the only viable option for most junior minors in the Pilbara for the transport of iron ore and many cannot afford to make the significant capital investment required to build their own rail lines. FMG's case was challenged by Rio and BHPB which argued that their rail lines are part of an integrated mine-rail-port production system which requires absolute flexibility and that any interference with their exclusive and intensive use of the lines by third parties could cause billions of dollars of lost export revenue.

The determination of the ACT ultimately turned on three of the six criteria (set out above) which were disputed amongst the parties, namely:

  • whether access would promote a material increase in competition in at least one market
  • whether any of the rail lines had "natural monopoly characteristics" such that it would be "uneconomical" for competitors to develop new rail infrastructure
  • the balance between the public interest and costs of allowing access.

In its assessment of the third criterion, the ACT found that while there was a public interest in the grant of access insofar as it would generate savings through the sharing of the existing rail infrastructure and make rail services available for additional mining projects, significant costs would accrue from the severe logistical and commercial constraints on third party access that would be required to ensure that there was no interference with BHPB and Rio's highly flexible iron ore logistics business models.

The results of the ACT's costs/benefits analysis were that the costs likely to be suffered by permitting access to BHPB's Mt Newman line and Rio's Hamersley line were so great as to outweigh any countervailing benefits to the public. On the other hand, the ACT found that the public interest in enabling third party access to the BHPB Goldsworthy and Rio Robe lines outweighed the likely associated costs. The ACT indicated that the key determinant in the public interest vs. costs balancing exercise in this case was the difference in intensity of use (including in the sense of the volume of iron ore transported) as between the four lines

Future direction for rail access

Relief for existing local and foreign investors in rail infrastructure from concerns about access to their investments by third parties under the essential infrastructure access regime in Australia may be provided by recent amendments to Part IIIA of the TPA. These were ushered in under the Trade Practices Amendment (Infrastructure Access) Act 2010 (Cth) and enacted in July this year.

The amendments have introduced into the regime what have been referred to as “access holidays”. Under the new provisions, a person with a material interest in a particular service proposed to be provided by way of a proposed facility may apply in writing to the NCC requesting that it recommend that the Minister decide that the service is “ineligible” to be a declared service. On receipt of such an application, the NCC must recommend to the Minister that:

  • he or she decide the service is ineligible and, if so, the period for which the decision should remain in force (the minimum period being 20 years), or
  • he or she decide that the service is not ineligible.

In recommending that the Minister decide that the service is ineligible to be a declared service, the NCC must be satisfied that:

  • the service will be provided by means of the proposed facility when constructed, and
  • at least one of the criteria in subsection 44G(2) has not been met in respect of the service to be provided by means of the proposed facility.

It remains to be seen whether the prospect of owners of key rail infrastructure in the Pilbara region seeking to protect that infrastructure from use by junior iron ore producers for at least twenty years courtesy of “access holidays” will thwart or encourage the investment ambitions of potential or existing local and overseas investors. However, the new amendments do seek to facilitate some certainty to assist in the making of such investment decisions. Recent forays into the region by Chinese miners since the introduction of the amendments to the access regime, however, suggest that investment interest in Pilbara iron ore has not been dampened by changes to the regulatory landscape.