In brief

  • The High Court has referred back to the Australian Competition Tribunal (Tribunal) Fortescue Metals Group’s application for access to Rio Tinto’s Hamersley and Robe railway lines in Western Australia.
  • The majority of the High Court endorsed the Full Federal Court’s ‘privately profitable’ test (ie if any person would find it profitable to establish another railway line to provide the relevant service, the access regime would not apply). This is a test that the Tribunal had specifically rejected, preferring a broader ‘natural monopoly’ test, although it did acknowledge that testing for natural monopoly was ‘notoriously difficult’. 
  • The case is another example of the courts’ preference for practical, commercial tests rather than more abstract, economic tests. It means that an analysis of the investment considerations of industry participants is likely to be increasingly important in access matters in the future.

Seeking access

The Competition and Consumer Act provides a mechanism for parties to gain mandatory access to significant infrastructure such as railway lines. The mechanism involves a 2-stage process:

  • Declaration: a party seeking access can apply to the National Competition Council (NCC) for a recommendation that a service provided by a particular facility be ‘declared’. The NCC makes a recommendation to the relevant Minister (generally the Commonwealth Treasurer), who makes the decision. The NCC and Minister must apply the relevant criteria (including the two criteria in issue here – (b) uneconomical to develop another facility and (f) the public interest). If the Minister does not make a decision within the allotted time, he or she is deemed to have decided not to declare the service.
  • Arbitration: a party has the right to negotiate with the provider of a declared service, with arbitration by the Australian Competition and Consumer Commission (ACCC) if a commercial agreement cannot be reached. Importantly, arbitration will not necessarily result in gaining access.

The Pilbara

Fortescue and its subsidiary, The Pilbara Infrastructure Pty Ltd, have made various applications to the NCC since 2004 seeking declaration of services provided by BHP Billiton’s Goldsworthy and Mount Newman railway lines and Rio Tinto’s Hamersley and Robe railway lines. These applications have been reviewed by the Tribunal, the Full Federal Court and, most recently by the High Court, which handed down its decision on 14 September 2012.

The following table summarises the outcome of the reviews.

Click here to view the table.

Privately profitable test

The Minister cannot declare a service unless he or she is satisfied that it would be uneconomical to develop another facility to provide the service.

The Tribunal in the Pilbara cases adopted a natural monopoly test. It assessed whether the relevant railway line could provide society’s reasonably foreseeable demand for the service at a lower total cost than two or more railway lines. In doing so, it rejected a ‘net social benefit test’ and a privately profitable test. The net social benefit test focuses on the costs of producing the service as well as allocative efficiencies (the use of society’s resources to produce the goods or services most highly valued by society) and dynamic efficiencies (the use of society’s resources efficiently over time, investing in new technology). 

The Full Federal Court in the Pilbara cases adopted a privately profitable test. It  assessed whether any person (including the incumbent operator of the facility to which access is being sought) would find it profitable to establish a second facility.

The majority of the High Court preferred the Full Federal Court’s approach. In particular, they noted that the natural monopoly test is notoriously difficult to apply (as the Tribunal itself acknowledged). The privately profitable test does not ask a question to which no answer can be given with any sufficient certainty. The question of whether something is likely to be profitable is a question which bankers and investors answer in relation to any investment and is indeed the question at the heart of every decision to invest in infrastructure.

It will be interesting to see how the Tribunal approaches its task when it reconsiders the matter, especially since the Treasurer’s reasons state that he approached the matter in a ‘social cost benefit sense’ and not a private sense.

The case is another example of the courts’ preference for practical, commercial tests rather than more abstract, economic tests. It emphasises the need to focus on the real world and ask the sort of questions that business people ask themselves every day. It means that an analysis of the investment considerations of industry participants is likely to be increasingly important in access matters in the future. 

Tribunal has a limited role

Limited information

The Tribunal conducted an extensive review process. The parties filed 130 affidavits (more than 70 large lever arch files), the hearing occupied 42 days and the Tribunal’s reasons were 1,351 paragraphs.

The High Court found that this was not the Tribunal’s task. Justice Heydon described it as  a ‘significant error in approach’. The Tribunal’s role is a ‘re-consideration’ of the Minister’s decision. The Tribunal should start by looking at the material that was before the Minister. If the Tribunal needs any additional material, it can require the NCC to give ‘assistance’.

The law has been changed since the Tribunal originally considered the matter. The Tribunal is now, in any event, limited to the kind of approach outlined by the High Court. But the High Court’s decision has potentially interesting implications for this particular case. The Tribunal is now required to largely only consider the material that was before the Minister in 2008. The High Court was not concerned about this, stating that matters will ordinarily proceed quickly and additional material can be obtained from the NCC. It will be interesting to see how the Tribunal balances the High Court’s express statements on its more limited role with its power to obtain assistance and require the NCCC to make reports. 

Public interest finding should not be overturned lightly

The Minister cannot declare a service unless he or she is satisfied that access (or increased access) would not be contrary to the public interest.

The High Court again found that the task was to review the Minister’s decision. The Tribunal would not be expected to depart lightly from the Minister’s conclusion. In particular, if the Minister finds that access would not be contrary to the public interest, the Tribunal should be slow to find otherwise and the High Court doubted that it would make such a finding other than in the ‘clearest of cases’.

An interesting issue arises where the Minister does not make a decision (as happened for the Mount Newman line). The majority of the High Court noted that, because the Tribunal was not going to reconsider the decision for the Mount Newman line, it was ‘neither necessary nor appropriate’ to examine the difficulties that may be presented by not having a statement of the Minister’s reasons. While this is not especially satisfactory, it hopefully emphasises the importance of the Minister’s decision and will encourage the relevant Minister to always make decisions and release proper reasons.

No residual discretion

The Minister cannot declare a service unless he or she is satisfied of all the criteria.

The Tribunal and Full Federal Court assumed that a service does not have to be declared even if all the criteria are satisfied. They considered there was a residual discretion to decide not to declare.

The High Court found that there was no residual discretion. The majority said that no satisfactory criteria could be devised to guide the exercise of some residual discretion. Justice Heydon observed that the breadth of the criteria pointed strongly against the existence of such a discretion.