Australia: Unregulated ports and airports continue to attract ACCC concerns

The ACCC continues to voice its concerns about the perceived lack of appropriate price constraint mechanisms in the privatisation of monopoly infrastructure such as ports and airports.

On 6 March 2017, the ACCC released its Annual Airport Monitoring Report which examines conditions including prices at each of Australia's airports. In commenting on the high car parking revenues at Melbourne and Sydney airports in particular, Sims said that the ACCC would welcome specific regulatory powers over airports to limit price increases (whether through a negotiate/arbitrate role in respect of aeronautical charges, or a regulatory role over car parking fees).

This fits with the ACCC's push towards an increased role for regulatory oversight of monopoly-type infrastructure.

The ACCC has been increasingly vocal about the importance that price regulation can play in the privatisation of infrastructure which exhibit monopoly characteristics.

We would not be surprised to hear more in this vein where the ACCC considers that consumers are paying the price for infrastructure owners' profit-taking.

The Port of Melbourne's privatisation was not free from this controversy, and the transaction first made news in 2015 when the Port of Melbourne Corporation (owned by the Victorian Government) served a rent review notice on a major lease holder at the port, DP World, proposing a 750% rental increase.

DP World complained to the ACCC, who (despite not having any jurisdiction to regulate rents at ports) made a public submission to the Victorian Legislative Council's Select Committee into the proposed lease of the Port of Melbourne to a private sector entity. In that submission, the ACCC cautioned that privatisation must not create or maintain a market structure that will entrench monopoly power at the port, and that any monopoly pricing would be ultimately paid for by Victorian consumers and exporters.

In response, the port owner reviewed its position and agreed to a rent-review process, including inflation-linked rent increments and market rent reviews. As part of the sale, the Victorian Government proposed an increased price monitoring scheme in addition to a CPI cap on annual price increases, to be overseen by the Essential Services Commission of Victoria once the port was privatised.

Are increased regulatory frameworks needed?

From a competition law perspective, these matters raise fundamental questions. In the absence of effective competition, economic theory tells us that monopolists may seek to "give less and charge more". Given the absence of "port to port" competition at most Australian ports and airports what will constrain the port owner's ability to charge higher or allegedly monopoly rents to its leaseholders?

Increased regulation is rarely an ideal outcome for business but in some circumstances there may be few alternative options. If we accept this, then what is a suitable regulatory framework to adopt when privatising monopoly infrastructure?

In October 2016 in a speech to the Ports Australia Conference, ACCC Chairman Rod Sims was quick to state that nothing but appropriate regulation can act as a constraint on an infrastructure owner's ability to charge monopoly prices. He commented that price monitoring alone ? while useful to increase transparency ? does not on its own amount to regulation nor provide any discipline on pricing.

Price monitoring at the Port of Newcastle

A recent controversial example of privatisation accompanied by unregulated increases in related charges occurred at the Port of Newcastle. The port was privatised by the NSW Government in 2014 for $1.75 billion.

Soon after the sale, and despite a price monitoring framework being in place pursuant to Ports and Maritime Administration Act 1996 (NSW), the new port owners increased the access charges by approximately 40% (and revalued the asset at $2.4 billion).

In May 2015, and in response to the increased charges, Glencore, one of the primary stakeholders in the port, unsuccessfully applied to the National Competition Council (NCC) to seek a declaration of the right to access and use the shipping channels provided by the port operator.

Glencore's particular complaints focussed on what it saw as excessive prices for port access, the unconstrained nature of the port owner's ability to determine such prices into the future, and the uncertainty this creates for access seekers (as well as their financiers and other third parties).

Importantly, a successful declaration of the right of port access under Part IIIA of the Competition and Consumer Act 2010 (Cth) (CCA) would provide Glencore (and other access-seekers) with access to an arbitration mechanism with the port owner in respect of access terms and charges.

However, the NCC, recommended that the services not be declared on the basis the access criteria under Part IIIA of the CCA had not been satisfied.

The Commonwealth Minister agreed with the NCC's recommendation and decided not to declare the shipping channel service.

In January 2016, Glencore successfully sought to review the Minister's decision in the Australian Competition Tribunal, which overturned the Minister's decision not to declare the shipping channel service.

The Tribunal held that the port should be declared on the basis that access (or increased access) to the port "would promote a material increase in competition in a dependent market". In finding that this criterion was satisfied, the Tribunal noted that "...the Service is a necessary input for effective competition in the dependent coal export market as there is no practical and realistically commercial alternative; so access to the Service is essential to compete in the coal export market."

Following the Tribunal's decision, the port owner applied to the Full Federal Court for judicial review in July 2016, and that decision is now pending.

Rod Sims has commented on the Port of Newcastle transaction as being an example of "bad privatisation", on the basis that the price monitoring in place at the port was insufficient to provide a constraint against excessive price increases following privatisation.

We await the Federal Court's Glencore decision with interest.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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