Analysis of the Australian National Access Regime

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Presentation to the Tonkin competition conference in March 2013 on the National Access Regime in Australia

Presentation to the Tonkin competition conference in March 2013 on the National Access Regime in Australia

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  • 1. FINANCIAL INSTITUTIONS ENERGY INFRASTRUCTURE, MINING AND COMMODITIES TRANSPORT TECHNOLOGY AND INNOVATIONAnalysis of the National Access Regime: PHARMACEUTICALS AND LIFE SCIENCESWhat can we expect in the future ?Dr Martyn TaylorPartner, Norton RoseMarch 2013
  • 2. Overview 1. The National Access Regime 2. Case study: Pilbara access dispute Dr Martyn Taylor Partner 3. The Productivity Commission review +61 2 9330 8056 martyn.taylor@nortonrose.com 4. What can we expect for the future?2 17752725.ppt
  • 3. 1. The National Access Regime
  • 4. What is the policy mischief ? Essential facility Affected market Airport Aviation Port Shipping Gas pipeline Gas supply Telecom network Communications Railway line Rail carriage • Access to certain infrastructure may be essential to competition (e.g., access to an airport is essential to compete as an airline). • The cost structure of the industry may prevent a competitor duplicating the facility (e.g., a so-called ‘natural monopoly’) • The owner of that infrastructure therefore controls a unique “bottleneck” or an “essential facility” and can use that position of control to the owner’s commercial advantage: – The owner may artificially reduce access and raise prices to increase profits. – If the owner is competing in downstream markets, the owner may discriminate against downstream competitors by giving them less favourable access.4 17752725.ppt
  • 5. How does competition law address this mischief ? • The Competition and Consumer Act 2010 (Cth) contains a generic prohibition against the misuse of market power in section 46: • a firm that has a substantial degree of market power • must not take advantage of that market power • for the purpose of harming competitors or deterring competitive conduct • In theory, a refusal to provide reasonable access to an essential facility may contravene section 46…. …but, in practice, section 46 is notoriously difficult to apply.5 17752725.ppt
  • 6. The problems with relying on section 46 alone… 1. Litigation is costly and may create a barrier to entry. 2. Litigation does not normally enable access to be achieved quickly, even with injunctions. 3. The outcome of litigation can be indeterminate, involving a significant risk. 4. Market definition is inherently imprecise. 5. The law in relation to ‘taking advantage’ is uncertain. The five most recent High Court cases have each been inconsistent in material respects. 6. Establishing ‘purpose’ normally requires inferences to be drawn from circumstantial evidence. 7. Decisions are usually confined to a particular factual pattern existing at a particular point in time in relation to particular players, products and actions.6 17752725.ppt
  • 7. Hilmer’s solution… the National Access Regime Professor Fred HilmerNegotiation remains the preferred means to determine terms of access to infrastructure, but...• If the infrastructure can be economically duplicated, the owner has an incentive to provide reasonable access (or the access seeker will build its own facility), so negotiation should work.• If the infrastructure cannot be economically duplicated, then a ‘bottleneck’ exists and the absence of competition may lead the owner to impose unreasonable terms.• In the latter scenario, rather than relying on section 46, a regime should be created to allow access seekers to obtain access to essential national infrastructure on reasonable terms.7 17752725.ppt
  • 8. National Access Regime is contained in Part IIIA Part IIIA of the Competition and Consumer Act 2010 (Cth): • The regime is intended to enable ‘access seekers’ to obtain access to essential national infrastructure facilities on reasonable terms and prices. • First, the infrastructure is screened to determine whether regulation should be applied. • Second, if regulation is applied, an access seeker may request access to that infrastructure under a negotiate-arbitrate regime. (If reasonable terms of access cannot be negotiated, the ACCC may arbitrate those terms and issue binding determinations).8 17752725.ppt
  • 9. Stage 1 - DeclarationScreening process for determining whetherinfrastructure should be regulated:• Any person may apply to the National Competition Council (NCC) and request the ‘declaration’ of a service provided via a facility.• The NCC will engage in a public consultation process to determine whether or not certain statutory criteria are met.• If the statutory criteria are met, the NCC must recommend to the relevant Minister in favour of regulation via ‘declaration’.• The NCC must prepare a report to the relevant Minister which sets out that recommendation.• The Minister has limited discretion and must declare the service if the criteria are met.• The Minister’s decision is subject to appeal,9 17752725.ppt
  • 10. Facility Service Declared? What can be declared ? Jet fuel line at Airport fuel No airport supply Various Rail carriage Yes railway lines services A service provided by means of a facility… Dam and Water storage No pipelines and carriage What is a “facility”? Sewage Sewage Yes reticulation carriage • Case law: “a physical asset (or set of Runways at Use if airport Yes assets) essential for service provision” airport runways Electricity Electricity Withdrawn network carriage Airport freight Airport cargo Yes aprons services Gas network Gas carriage Withdrawn services Computer Payroll No system service Cane tram Carriage via No network tram Space at Space for No airport cargo terminal Rail cargo Rail No facilities marshalling10 17752725.ppt
  • 11. The five criteria for declaration NCC must consider whether: • Access will promote competition in at least one other market • Uneconomical to replicate the facility • Facility is of national significance • Access is not already subject to an effective access regime • Access is not contrary to the public interest National Access Regime only applies in limited circumstances, including that the infrastructure must be nationally significant and access must promote competition11 17752725.ppt
  • 12. Example – access to a natural gas pipeline Upstream markets Downstream markets Gas exploration Gas supplyExploration Reticulationtenements network Non-gas markets Gas production supplied by users of gas Inputs into gas Inputs into gas production 12 17752725.ppt supply
  • 13. Ministerial decision• The National Competition Council makes a recommendation to the relevant Minister.• The Minister must decide whether or not to declare the service.• The High Court has held that the Minister has no residual discretion not to declare the service if the declaration criteria are met (i.e., the Minister must declare the service if the declaration criteria are met).13 17752725.ppt
  • 14. What has been declared to date ? Railway services: • Use of rail tracks and associated infrastructure on certain segments of the Tasmanian rail network. • Goldsworthy Railway track access service in Pilbara region. Airport services: • The use of runways, taxiways, parking aprons and other associated facilities (airside services) at Sydney Airport. • Use of freight aprons and hard stands to load and unload international aircraft at Sydney International Airport and Melbourne International Airport. Wastewater services: • Transportation of sewage and connection of new sewers in various locations in Sydney.14 17752725.ppt
  • 15. Voluntary access undertakings prevent declaration• Access providers may voluntarily submit an “access undertaking” to the ACCC, before a service is declared.• An access undertaking sets out the terms (including price) on which access will be provided (i.e., an offer to supply the service on pre-determined terms).• If the undertaking is accepted by the ACCC, the service cannot be declared.• Access undertakings do provide a means to obtain regulatory certainty.• For example, NBN Co has submitted a 30 year access undertaking to provide investment certainty for its deployment of the $35 billion National Broadband Network (albeit under the analogous telecoms access regime in Part XIC of the Competition and Consumer Act).15 17752725.ppt
  • 16. Effective access regimes also prevent declaration• State and Territory governments may create bespoke access regimes for infrastructure services provided in their regions.• The relevant Government can then apply to National Competition Council (NCC) to have the regime certified as “effective”.• The NCC recommends to the Federal Treasurer.• If the access regime is certified as “effective” by the Treasurer, the services cannot be declared under the National Access Regime. Ports access Electricity networks (SA) (WA) Water Access Dalrymple Bay (NSW) Rail access Queensland Rail Coal Terminal Rail access (SA) Network16 17752725.ppt (WA)
  • 17. Stage 2 - Arbitration • [ ] • [ ]17 17752725.ppt
  • 18. Stage 2 - Arbitration • [ ] • [ ]18 17752725.ppt
  • 19. Stage 2 - Arbitration • [ ] • [ ]19 17752725.ppt
  • 20. How does the ACCC arbitrate a dispute?• ACCC expects parties to attempt to resolve the dispute before seeking arbitration.• ACCC will seek to identify the fundamental issues in dispute (i.e., not just price, may be particular issues in the pricing methodology).• ACCC may sequence issues in the dispute to encourage commercial settlement (e.g., resolve pricing methodology, before price).• ACCC may seek to facilitate commercial negotiation and settlement where practicable.• Otherwise, the ACCC applies the statutory criteria…20 17752725.ppt
  • 21. What has been arbitrated by the ACCC to date? • Only one arbitration under Part IIIA has been conducted to conclusion. • Services Sydney sought access to Sydney Water’s sewage reticulation network. • 8 month arbitration process, preceded by some 8 years of negotiations for access. • Once pricing methodology was determined, parties commercially agreed prices. • The only other arbitration under Part IIIA was commercially settled. • Virgin Blue disputed the price of access to Sydney Airport, alleging a ‘per passenger’ pricing methodology was discriminatory vis a vis ‘maximum take off weight’. • Qantas joined the dispute as a party. • Sydney Airport settled the dispute by agreeing to continue with a ‘maximum take off weight’ pricing methodology. • But 182 arbitrations under the telecoms access regime in Part XIC !!21 17752725.ppt
  • 22. 2. Case study: Rail access in the Pilbara
  • 23. The protagonists… • Fortescue Mining Group (FMG) has the largest holding of mining tenements in the Pilbara region, rich in iron ore. • FMG wished to develop a substantial iron ore deposit, known as ‘Cloud Break’, via several open pit mines. • The iron ore to be extracted had a value of some $20 billion, assuming the iron ore could be transported to Port Hedland (or another port) for export to China. • Rather than spending $2.5 billion constructing its own railway, FMG sought access to parts of the existing private railways of BHP Billiton (BHP) and Rio Tinto (Rio). • Once it was clear that neither BHP nor Rio would provide access, FMG applied to the NCC for parts of four private railways in the Pilbara region to be declared: • Hammersley & Robe, as used by Rio Tinto to connect to Port Dampier • Goldsworthy & Mt Newman, as used by BHP to connect to Port Hedland23 17752725.ppt
  • 24. The importance of rail access to Fortescue PORT HEDLAND • [ ] PORT DAMPIER • [ ] CLOUD BREAK MINE24 17752725.ppt
  • 25. The resulting litigation….25 17752725.ppt
  • 26. Round 1… the initial jurisdictional skirmish• In Part IIIA, a ‘service’ is defined to exclude the use of a production process.• BHP claimed that its railways were part of a fully integrated ‘mine-to-port’ production process in the Pilbara.• BHP claimed that the NCC did not have jurisdiction to make a recommendation as the ‘service’ would involve the use of BHP’s production process.• The NCC determined it had jurisdiction, leading to a series of appeals through the courts to the High Court level.• The High Court held that FMG was seeking to use a facility that was used by BHP for its production process (i.e., the rail track). FMG was not seeking to use BHP’s production process itself (i.e., the rolling stock on that rail track).26 17752725.ppt
  • 27. Round 2… challenging the Minister’s declaration • The NCC recommended to the Commonwealth Treasurer that the Goldsworthy, Hamersley, Robe and Mt Newman lines should all be declared. • The Treasurer declared rail access to each of the Goldsworthy, Hamersley and Robe railway lines for 20 years. He did not make a decision for the Mt Newman line within the prescribed period, so that railway was deemed not declared. • All three parties appealed the Minister’s decision to the Australian Competition Tribunal, which conducted a de novo hearing and replaced the Minister’s decision with its own: Railway Minister’s decision Appellant Tribunal decision Goldsworthy 20 year declaration BHP 20 year declaration Hammersley 20 year declaration Rio Not declared Robe 20 year declaration Rio 10 year declaration Mt Newman Deemed not declared Fortescue Not declared27 17752725.ppt
  • 28. Round 3… back to the Full Federal Court • Fortescue and Rio both appealed to the Full Federal Court. Railway Minister’s Appellant Tribunal Appellant FFC Appellant decision decision decision Goldsworthy 20 year BHP 20 year declaration declaration Hammersley 20 year Rio Not declared Fortescue Not declared Fortescue declaration Robe 20 year Rio 10 year Rio Not declared Fortescue declaration declaration Mt Newman Deemed not Fortescue Not declared declared • The Full Federal Court determined that the two Rio railways subject to appeal (i.e., Hammersley and Robe) should not be declared. • Fortescue then further appealed to the High Court…28 17752725.ppt
  • 29. Round 4… and back to the High Court • The High Court surprised everyone by holding that the Tribunal had exceeded its statutory powers by conducting a de novo hearing. Accordingly, the High Court remitted the matter back to the Tribunal for a re-hearing… Other key conclusions: • ‘Uneconomical to duplicate’ is construed to mean that ‘there is not anyone for whom it would be profitable to develop another facility’ (i.e., a ‘private profitability test’). • The Tribunal should not lightly depart from the Minister’s conclusion as to whether access would be in the public interest. • If the declaration criteria are satisfied, the Minister has no residual discretion and must declare the service.29 17752725.ppt
  • 30. The Tribunal’s reconsideration • FMG and Rio’s applications were remitted to the Tribunal. Railway Final result Goldsworthy (BHP) 20 year declaration • The Tribunal re-decided these applications in December 2012 and published its Hammersley (Rio) Not declared decision in February 2013. Robe (Rio) Not declared • The Tribunal indicated it had no power to Mt Newman (BHP) Not declared seek further information in order to apply the ‘private profitability’ test, given it was limited to the material before the Minister. • Accordingly, the Tribunal determined that Private profitability test: there was not sufficient material before it to establish that it would be uneconomical for Applicant for declaration must establish anyone to develop an alternative facility to that it is not privately profitable for provide the relevant services. anyone to develop an alternative facility to provide the service. • On these grounds, it set aside the Minister’s declarations in respect of the Robe and Hamersley lines on the basis that criterion (b) had not been satisfied.30 17752725.ppt
  • 31. A huge waste of time and money? • It has taken some 9 years to resolve the declaration stage of access, including two High Court decisions. • Fortescue ultimately decided to spend $2.5 billion and constructed its own private railway line. • The Tribunal’s de novo re-hearing of the Minister’s decision was, in effect, disregarded, notwithstanding… • The hearing occupied 42 sitting days. • The parties filed 130 affidavits from 73 witnesses. Expert witnesses included bankers, computer simulation experts, economists, engineers, environmental scientists, geologists, metallurgists, quantity surveyors, rail modellers and train schedulers, among others. • This material took up approximately 70 large lever arch files. • The transcript of the hearing runs for over 3300 pages.31 17752725.ppt
  • 32. Implications of the High Court’s decision 1. Private profitability test – the decision raises the threshold for declaration. There must be no-one who can profitably duplicate the facility. 2. Practical, commercial test – the courts prefer a more practical and commercial approach. An analysis of investment considerations will be important in future access matters. 3. No residual discretion – the Minister is required to declare the service if the declaration criteria are met. 4. The role of the Tribunal – when reviewing the Minister’s decision, the Tribunal is not permitted to receive additional evidence. 5. Public interest – the Tribunal should be slow to depart from the Minister’s decision in relation to public interest factors.32 17752725.ppt
  • 33. 3. The Productivity Commission review
  • 34. Terms of reference David Bradbury, MP Assistant Treasurer 1. Examine the rationale, role and objectives of the Regime, and Australias overall framework of access regulation. 2. Assess the performance of the Regime in meeting its rationale and objectives. Part of the motivation 3. Report on whether the implementation of the Regime for the review was the adequately ensures that its economic efficiency objectives significant time and are met. expense involved in the application of the 4. Provide advice on ways to improve processes and National Access decisions for facilitating third party access to essential Regime, as infrastructure. evidenced by the Pilbara proceedings. 5. Review the effectiveness of the reforms outlined in CIRA, and the actions and reforms undertaken by governments in giving effect to CIRA. 6. Comment on other relevant policy measures which would help ensure effective and responsive delivery of infrastructure services.34 17752725.ppt
  • 35. Key issues under consideration Patricia Scott Commissioner • Do we still need a National Access Regime and, if so, what should be its future role ? • Is the scope of the Regime commensurate with the policy mischief ? • Should the declaration criteria be amended or refined ? • Should the private profitability test remain, or should it be replaced by a net social benefit or a natural monopoly test ? • How can the certification process for State-based access regimes be improved ? • How should the arbitration regime be improved to enable the timely resolution of disputes ? • How should the National Access Regime be amended or refined to assist its effective application ? • Are the current institutions, such as the NCC and Tribunal, appropriate ?35 17752725.ppt
  • 36. Submissions to date (36) ACCC’s view: NCC’s view: • Retain Part IIIA. The High Court’s guidance • Retain Part IIIA. Net social benefit test, on the Tribunal’s role corrects many issues. not private profitability. • Net social benefit test, not private profitability. • Tribunal’s role is superfluous. Law Council’s view: Treasury’s view • Retain Part IIIA. Clarify the declaration • Retail Part IIIA. Net social benefit test, criteria. The public interest test should be not private profitability more objective and less political. • The High Court’s guidance assists, but there are too many institutional decision-makers. Business Council’s view: • Retain Part IIIA, but reduce the investment risks and high transaction costs.36 17752725.ppt
  • 37. Timeframe for recommendations to Government Time frame Deliverable October 2012 Terms of Reference released by Government November 2012 Issues Paper released by Productivity Commission February 2013 Public submissions due to Productivity Commission May 2013 Draft report released by Productivity Commission July 2013 Public hearings before Productivity Commission October 2013 Report to Government by Productivity Commission37 17752725.ppt
  • 38. Most likely outcomes and recommendations • Part IIIA will be retained. It serves an important role. • The Part IIIA process may be streamlined, possibly by consolidating institutions – such as the NCC and Tribunal. • The private profitability test may be replaced by a net social benefit test or similar. • The objectives of the National Access Regime may be tweaked. • The public benefit test may contain more objective criteria. • Refinements may be made to the arbitration regime to reflect the experience from telecoms access disputes.38 17752725.ppt
  • 39. 4. What can we expect in the future?
  • 40. What is likely to occur within 5 years ? • Likely to see further development of State-based access regimes, particularly in relation to critical infrastructure such as ports and rail. • National Access Regime may be applied more frequently, once it has been refined and streamlined. However, this will only occur if the private profitability test is replaced with a net social benefit test. • Extensive litigation in the nature of the Pilbara proceedings is unlikely to be repeated. However, Part IIIA issues are likely to continue to be litigated given the significant sums of money at stake. • Key infrastructure to watch: airports water supply ports sewage railways electronic systems40 17752725.ppt
  • 41. Hilmer revisited – national competition policy Interesting thought: August 2013 will be the 20th anniversary of the Hilmer Report. Perhaps we should have another Inquiry into National Competition Policy in Australia, essentially to update the Hilmer recommendations ? • Refining the competition policy settings for Australia in the 21st century and continuing the current momentum. • Progressing the competition reform agenda of the Council of Australian Governments (COAG). • Building on current Government policy initiatives towards less regulation and more effective ‘best practice’ regulation. • Harmonising state-based sectoral access regimes. • Identifying specific sectors deserving of access regimes. • Undertaking a general stock take on competition law – and perhaps pruning some anachronistic aspects.41 17752725.ppt
  • 42. Questions?42 17752725.ppt
  • 43. Our international practice Disclaimer The purpose of this presentation is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Norton Rose Australia on the points of law discussed. No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any constituent part of Norton Rose Group (whether or not such individual is described as a “partner”) accepts or assumes responsibility, or has any liability, to any person in respect of this presentation. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of, as the case may be, Norton Rose LLP or Norton Rose Australia or Norton Rose Canada LLP or Norton Rose South Africa (incorporated as Deneys Reitz Inc) or of one of their respective affiliates.43 17752725.ppt