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Australia – Reforming The National Access Regime.

2 June, 2013

 

WHAT YOU NEED TO KNOW

 

  • The Productivity Commission today released its Draft Report on its inquiry into the National Access Regime
  • The Draft Report includes draft recommendations that the National Access Regime be amended, including to:

    • adopt a "natural monopoly" test to determine whether it would be uneconomical to develop another facility under declaration criterion (b)
    • strengthen the access declaration criteria, so that declaration can only occur where declaration would promote the public interest
    • confirm that the ACCC has the power to order a service provider to expand the capacity of its facility.
  • The Draft Report also seeks further information on specific matters, including:

    •  whether the safeguards in Part IIIA of the Competition and Consumer Act 2010 (CCA) adequately address the interests of infrastructure service providers and access seekers
    • whether the CCA should be amended to facilitate appropriate funding arrangements for ACCC-directed facility extensions and expansions
    • the impact of the Commission's draft recommendations for existing access arrangements, including services declared under Part IIIA and services covered by access undertakings or certified State or Territory access regimes.


WHAT YOU NEED TO DO

 

 

  • Review the Draft Report (Click here) and consider its consequences for your business
  • Consider whether to respond to the information requests or draft recommendations contained in the Draft Report by making a written submission or attending a public hearing.

 

Draft Report released today


The Productivity Commission (Commission) has today released its Draft Report on its inquiry into the National Access Regime (Regime). The Draft Report identifies the Productivity Commission's view that:

 

 

  • the Regime should address the market failure which occurs where there is "a lack of effective competition in markets for infrastructure services due to natural monopoly", such that regulated access can promote competition and investmentin dependent markets; and
  • infrastructure access should be regulated "only in exceptional cases".


Notably, the Commission has acknowledged that access regulation has the potential to alter investment incentives (both positively and negatively). The Commission has been unable to quantify the economic impacts of the Regime or its effect on economic growth and productivity, due to the limited availability of empirical evidence. However, the Commission considers that the Regime should be retained, and has proposed a renewed emphasis on ensuring that the Regime is targeted to the economic problem that access regulation is intended to address, and that any unintended impacts on investment incentives are minimised.

 

Draft Recommendations: amendments to the access declaration criteria


The Commission has made draft recommendations proposing the following changes to the current declaration criteria.


Replace the High Court's "privately profitable" test with a "natural monopoly" test

 

Currently, a service can only be declared under the access regime in Part IIIA of the Competition and Consumer Act 2010 (Cth) (CCA) if it would be "uneconomical for anyone to develop another facility" (analogous tests apply under other access regimes).

 

In 2012, the High Court's decision in the Pilbara rail access proceedings established that this criterion (known as criterion (b)) would only be satisfied where it is not privately profitable for anyone, including the incumbent service provider, to develop another facility to provide the relevant service.


The Commission has made a draft recommendation that criterion (b) should be amended to depart from the High Court's approach, so that the criterion is satisfied if "total market demand could be met at least cost by the facility" (rather than by more than one facility), where:

 

 

  • "total market demand" includes demand for the specific service sought to be declared, as well as demand for substitute services provided by facilities serving the same market; and
  • the costs to be assessed include costs associated with additional maintenance and reduced operational flexibility which the provider incurs as a result of coordinating multiple users of its facility.


This proposed approach is a variation on the "natural monopoly" test supported by the Australian Competition and Consumer Commission (ACCC). This approach seeks to "better target" the economic problem of market failure which access is designed to address, and "better account for the costs of providing the infrastructure service under shared use." The specific recognition of coordination costs, including costs associated with maintenance and reduced operational flexibility, echoes findings by decision makers under Part IIIA, including in the Pilbara railway access proceedings, about the potentially high coordination costs caused by the imposition of third party access on intensively used infrastructure. 

 

However it may be difficult for infrastructure owners and access seekers to predict whether this criterion will be satisfied in a particular case, since the extent of "market demand" and the costs of accommodating it on a single facility compared to multiple facilities are issues which will require considerable regulatory inquiries, drawing on information which is not readily available to individual market participants. In this sense, the Commission's proposed test may provide less certainty for market participants than the "private profitability" test adopted by the High Court.


The Commission has also made an alternative draft recommendation that if the "private profitability" test is retained, then criterion (b) should be amended to specify that the word "anyone" does not include the service provider (ie so that it is not relevant to consider whether the provider could profitably duplicate the facility when determining whether the criterion is satisfied).


Apply a stronger public interest test: requires that declaration promote the public interest

 

The declaration criteria currently provide that a service can only be declared if access "would not be contrary to the public interest". The Commission has made a draft recommendation that this threshold be increased, to require that access declaration would promote the public interest, having regard to "the effect of declaration on investment in markets for infrastructure services and dependent markets, and compliance and administrative costs".


This approach would impose a higher threshold on declaration applicants than the current "doublenegative" public interest declaration criterion, and recognise that in some cases it is at best unclear whether the public interest favours access being granted, (See NCC, Final Decision – Herbert River cane railway – Application for declaration of a service under section 44F of the Trade Practices Act 1974 (Cth), 16 July 2010, 60-69.) while in others access may be contrary to the public interest. (See, for example, In the matter of Fortescue Metals Group Limited [2010] ACompT 2, [1331].) In practice, the application of the public interest criterion involves significant Ministerial discretion, with limited opportunity for review of the Minister's decision. Accordingly, the actual impact of this changed threshold would depend on how this discretion was exercised in practice.


Other amendments to the declaration criteria


The Draft Report also includes draft recommendations on two other declaration criteria.

 

 

  • The declaration criteria currently require that access declaration can only occur where access would "promote a material increase in competition" – the Commission proposes that this criterion be amended to require a comparison of the situation with and without "access on reasonable terms and conditions through declaration". This proposal would usefully require the declaration criteria to be assessed having some regard to likely access terms under Part IIIA, rather than considering access in the abstract.
  • The declaration criteria also currently require that declaration can only occur where the service sought to be declared is not already the subject of a certified State or Territory access regime. The Commission has made a draft recommendation that this issue be tested as a threshold matter, rather than a declaration criterion, so that a declaration application could not be made if the relevant service was already covered by a certified access regime.


Draft Recommendations: ACCC power to order capacity expansions


The Commission has made draft recommendations that:

 

  • the CCA be amended to confirm that when arbitrating an access dispute, the ACCC can require a service provider to expand the capacity of its facility, as well as to extend its facility geographically; and 
  • the ACCC develop and publish guidelines as soon as practicable on how it would exercise this power in practice, using a process involving stakeholder consultation. 


The Commission has also requested information concerning this draft recommendation – specifically, on whether Part IIIA:

 

  • appropriately addresses the interests of service providers and access seekers in the context of mandated extensions and expansions; and
  • should be amended to enable effective funding arrangements for mandated extensions and expansions.


These draft recommendations concerning mandated capacity expansions are clearly controversial. In particular – and as the Commission has recognised – there are substantial practical risks involved in mandating capacity expansions. How is the ACCC practically to manage and supervise a major infrastructure construction project? Further issues include the interference caused to the business of an infrastructure provider who is required to conduct a mandated expansion to accommodate an access seeker on regulated terms, and the financial and associated risks to an infrastructure provider if the access seekers' business fails or the access seeker otherwise does not meet its related financial obligations.


The Commission's requests for additional submissions will provide an opportunity for interested parties to consider and address the risks and complexities associated with such a power.

 

Information request: what rights should the provider have to use its infrastructure?


Submissions to the Commission's inquiry raised concerns that, under the CCA framework, an infrastructure owner can lose priority to use its own infrastructure as a result of an access arbitration. 


The Commission has specifically requested that interested parties provide it with additional information on:

 

  • whether the current safeguards for the service provider and other facility users are appropriate; and
  • the effect that strengthening the safeguards for the service provider's interests would have on access users.


In particular, the Commission is seeking further views on the need for, and implications of, a proposal to give the service provider priority over other infrastructure users.


No proposal to exempt particular infrastructure or services from the Regime


The Commission considered that it would be inappropriate to exclude particular types of infrastructure from the application of the National Access Regime, and has not proposed to adopt any of the submissions which suggested that existing exemptions should be strengthened or supplemented.


Information request: impact of draft recommendations on existing access arrangements


The Commission has specifically requested that interested parties provide it with information on the effect of the draft recommendations on existing access arrangements, including arrangements for access to declared services, as well as services covered by access undertakings and certified State and Territory access regimes.


Draft findings and recommendations about the declaration process


The Commission has not made any specific draft recommendations to limit the time, cost and complexity associated with applications for access declaration.

 

However the Commission has made a draft recommendation that, in cases where the designated Minister does not make a decision within 60 days on whether a service should be declared, the Minister should be deemed to have followed the National Competition Council's recommendation (rather than the current position, where the Minister is deemed not to have declared the service).


Other draft findings and recommendations


The Draft Report makes a range of other draft recommendations including that:

 

  • the Australian government, and State and Territory governments, review their competitive neutrality policies; and
  • a further independent review of the Regime occurs no later than 10 years following the Australian government's response to the Commission's inquiry.


The Draft Report also addresses a range of other matters which are not addressed in this note, including the use of mandatory access undertakings, facilityspecific access arrangements and industry-specific access regimes.


Next steps


The Commission will now consider any further written submissions responding to the information requests in the Draft Report. The deadline for those submissions is 5 July 2013. The Commission will then conduct public hearings in Perth, Brisbane, Melbourne and Sydney during July, and prepare its Final Report for release to the Australian government in October 2013. Hearing details and registration forms (to present a submission or attend as an observer) are available on the Commission's website (Please click here).

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For further information, please contact:

 

Alice Muhlebach, Partner, Ashurst

alice.muhlebach@ashurst.com

 

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