Is the access regime worth keeping? The Productivity Commission says 'yes’ - Trade Regulation & Practices

On 11 February 2014, the Productivity Commission (PC) released its report ("Final Report")¹ into the effectiveness of the national access regime in Part IIIA of the Competition and Consumer Act 2010 (Regime). The Final Report was the outcome of an inquiry ordered by the Federal Government in October 2012.

By way of background, the Regime allows third parties to seek regulated access to certain services provided by nationally significant infrastructure and has been subject to extensive criticism as a result of the cost and delay associated with a number of third party attempts to gain access to services. One striking example is Fortescue's unsuccessful attempt, over the course of nine years, to gain access to iron-ore railways owned by BHP Billiton and Rio Tinto in the Pilbara.

As expected, the PC has not departed significantly from the approach it took in the draft report, released on 28 May 2013, and continues to be supportive of the Regime overall. However, the PC concluded that the scope of the Regime should be confined to ensure its use is limited to exceptional cases where the benefits arising from increased competition in dependent markets are likely to outweigh the costs of regulated third party access to infrastructure services.

DECLARATION CRITERIA

Many of the substantive recommendations relate to the statutory criteria that must be satisfied before a service may be declared (section 44H(4)). In particular the PC has recommended that:

The operation of the 'promotion of competition' criterion (criterion (a)) be confined to situations where regulated access to an infrastructure service on reasonable terms and conditions would promote a material increase in competition in a dependent market. Two additional recommendations the PC made logically follow from this principle, namely, the criterion will not be satisfied if there is already effective competition in dependent markets or if access is already being granted to all third parties on reasonable terms and conditions.
The 'uneconomical for anyone to duplicate' criterion (criterion (b)) be amended to expressly incorporate a natural monopoly test i.e. whether the total foreseeable market demand (including demand for the service itself and any substitutes) could be met at least cost by the relevant facility. The PC also recommended that the assessment of costs should include an estimate of any production costs incurred by the infrastructure service provider from coordinating multiple users of its facility. In so doing, the PC recognised that the production costs of coordinating infrastructure use with third parties can be significant, particularly in highly integrated supply chains and that, in some cases, these coordination costs will outweigh the benefits of access.
If, contrary to the PC's recommendation, criterion (b) continues to be applied as a private profitability test, the term 'anyone' should exclude the incumbent infrastructure service provider as they could otherwise avoid declaration by arguing that they could profitably duplicate their own facility.
The 'public interest criterion' (criterion (f)) be amended so that it positively requires the public interest to be promoted. Unlike the other criteria, criterion (f) is currently drafted in the negative. When considering the public interest, the PC has recommended that the NCC and decision makers have regard to factors not expressly covered by the other criteria, including the effects on investment (both positive and negative) as well as administrative and compliance costs.

DIRECTED EXTENSIONS TO INFRASTRUCTURE

The PC has recommended that Part IIIA be amended to clarify that the ACCC's power to direct extensions under section 44V(2)(d) also encompasses capacity expansions. This, it says, would ensure that the safeguards set out in section 44W regarding the costs associated with directed extensions would equally apply to expansions of capacity.

The PC also recommended that the ACCC develop guidelines on how the power to direct extensions will be used. The Final Report observes that the power to direct an extension is yet to be relied upon, but is nevertheless essential to prevent infrastructure owners from frustrating the intent of Part IIIA. The Final Report goes on to acknowledge that any exercise of this power in the future would involve complex operational, commercial and legal considerations. In this context preparing guidelines on the exercise of the power would arguably present substantial difficulties.

Finally in relation to directed extensions, the PC recommends that a service provider should never be required to pay any of the upfront costs of an extension.

OTHER RECOMMENDATIONS

Two further recommendations are also worth mentioning. Firstly, the PC has recommended that merits review of decisions be retained on the basis that the effects of the High Court's 2012 decision in the Fortescue Pilbara rail case² and the 2010 amendments to Part IIIA have not yet been tested and it is therefore unknown whether the two events will have the effect of confining the scope of merits review under Part IIIA.

Secondly, the PC has proposed that if the Minister does not publish a decision on an access matter within the 60-day time limit, then the Minister is deemed to have followed the NCC's recommendation. Currently, if the Minister does not publish a declaration decision within the 60-day limit, he or she is deemed not to have declared the relevant service (even where the NCC has recommended declaration).

NEXT STEPS

The Minister's media release³ on the Final Report makes it clear that the Government will not formally respond to the PC's report until the conclusion of the root and branch review of competition law more generally. The final report for the root and branch review is not due until at least the end of this year.

Footnotes

¹The Final Report can be found here.

²The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal [2012] HCA 36.

³The Hon Bruce Billson MP, "Productivity Commission's final report on National Access Regime released", dated 11 February 2014, available here.

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