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Australia – The National Access Regime: Productivity Commission Final Report Released.

18 February, 2014

 

Legal News & Analysis – Asia Pacific – Australia – Energy & Project Finance

 

Overview

 

  • On 11 February 2014, the Federal Government released the Productivity Commission’s (PC) Final Report into the National Access Regime (Regime).
  • In large part, the Final Report adopted the PC’s key recommendations set out in its Draft Report released in May 2013. See related article.
  • While the PC concluded that the current Regime should be retained, it did recommend that amendments be made to four of the five declaration criteria in order to reflect its view that the Regime should only apply in exceptional circumstances.
  • In relation to the often contentious ‘uneconomical for anyone to develop another facility’ criterion, the PC recommended the introduction of a new test, involving an assessment of whether the total foreseeable market demand for the infrastructure service over the declaration period could be met at least cost by the facility in question. This reflects a departure from the “privately profitable” test adopted by the High Court in its 2012 Pilbara access decision, and other previous interpretations of the test. See related article.
  • The Government has indicated that it does not propose to respond to the PC’s report until after the completion of its ‘root and branch’ review of Australian competition law and policy, which is expected to take approximately 12 months.

 

The Regime

 

The Regime1 provides a framework by which applicants can seek to have services that are provided by nationally significant infrastructure facilities, subject to access by third parties.

 

Where an access seeker is unable or unwilling to privately negotiate with an infrastructure owner, and the infrastructure is not already a declared (or otherwise relevantly regulated) asset, the Regime provides a number of ways in which access can be sought.

 

An access seeker may request that the National Competition Council (NCC) recommends to the designated Minister (generally, the Federal Treasurer) that a particular infrastructure facility be declared (i.e. become subject to the Regime). The Minister must be satisfied that each of the declaration criteria have been satisfied.2

 

Declaration is the first stage in a two-step process. Once an infrastructure facility has been declared, any party can seek the right to negotiate access to that service. If there is a dispute and the access seeker and infrastructure owner are unable to agree on access terms, the ACCC will arbitrate.

 

If there is a relevant certified access regime in place (for example, the WA rail access regime) then this regime will determine the terms on which an applicant may seek access.

 

In addition, the Australian Competition and Consumer Commission (ACCC) may accept legally enforceable undertakings from a facility owner, which set out the terms on which an applicant can seek and obtain access.

 

The Regime’s Scope Should Be Limited

 

The PC stressed that the scope of the Regime should be confined to ensure use only in exceptional circumstances.

 

According to the PC, the key focus of access regulation should be to address allocative inefficiencies arising from service providers having the ability and incentive to restrict output and charge monopoly prices. However, the PC also observed that a monopoly position in a particular market will not necessarily be sufficient to warrant access regulation.

 

The PC suggested that access regulation would be unlikely to increase efficiency where the infrastructure service provider has no ability to affect downstream markets, due to the fact that they are a price taker in that market. The PC considered that access should only occur where an incumbent service provider has an incentive to obstruct a competitor from competing downstream, and that this incentive is unlikely to exist where the downstream customers are price setters.

 

Recommendations In Relation To The Declaration Criteria

 

Competition Criterion

 

The ‘competition’ criterion requires the Minister to be satisfied that access (or increased access) to the service would promote a material increase in competition in at least one dependent market.

 

Over time, two approaches have developed when considering this issue:

 

  • a comparison of the status quo against the future state of competition in a dependent market with declaration of the infrastructure service, and
  • a comparison of the state of competition without access (including situations where partial access has already been provided) with the expected state of competition with access.

 

The PC recommended that the relevant test involves a comparison of the state of competition under the status quo against the state of competition where access is granted on reasonable terms and conditions.

 

Uneconomical To Duplicate Criterion

 

The ‘uneconomical to duplicate’ criterion requires the Minister to be satisfied that it would be uneconomical for anyone to develop another facility to provide the service.

 

Over time, three different tests have been proposed by the Courts or the Competition Tribunal for applying this criterion – namely, the net social benefit test, the natural monopoly test and the private profitability test.

 

Most recently, in its Pilbara rail decision3, the High Court adopted a private profitability test. This test asks whether it would be uneconomical to develop another facility if there is no one, including the incumbent operator of the facility to which access is sought, for whom it would be profitable to develop another facility. The High Court described the test as the question that lies at the heart of every decision to invest in infrastructure.

 

In its Final Report, the PC criticised the private profitability test, noting that while a facility may be profitably duplicated, the duplication may not result in effective competition.

 

The PC expressed a preference for a new test which asks whether the total foreseeable market demand for the infrastructure service over the declaration period could be met at least cost by the facility.

 

Recognising the authority of the High Court’s Pilbara decision on this issue, the PC has recommended that if the private profitability test is retained, then the ability of the incumbent infrastructure service provider to duplicate its own facilities should not be taken into account (i.e. the test would focus on the commercial viability of a third party duplicating the infrastructure).

 

The Effective Access Regime Criterion

 

The ‘effective access regime’ criterion requires the Minister to consider whether the relevant infrastructure is subject to an access regime that has been certified as effective.

 

The PC has recommended that Part IIIA be amended to make this issue a threshold consideration, rather than one of the declaration criteria. This would mean that if there is an effective access regime in place, the Minister would not be required to assess each of the declaration criteria.

 

The Public Interest Criterion

 

The ‘public interest’ criterion requires the Minister to be satisfied that access (or increased access) to the infrastructure service would not be contrary to the public interest.

 

The PC has recommended that this criterion should be amended to be an affirmative test, where the Minister must be satisfied that the public interest will actually be promoted by declaration. In addition, the PC has suggested that the criterion should require decision makers to have regard to relevant factors that are not expressly encapsulated in the other criteria.

 

As a result, the public interest test recommended by the PC appears to be a more difficult test to satisfy than the current test.

 

Power To Direct Infrastructure Extension

 

Once an infrastructure service is declared, access seekers may negotiate with infrastructure owners to determine the terms and conditions of access.

 

Where an access dispute arises, the ACCC is empowered to arbitrate. The ACCC may require an infrastructure service provider to extend the facility or permit interconnection to the facility by a third party.

 

The PC has recommended that Part IIIA should be amended to confirm that the ACCC’s power to direct geographic extensions also encompasses the ability to require capacity expansions. However, the PC has also made clear that a service provider should not be required to pay any of the upfront costs of a directed extension.

 

In addition, the PC has recommended that the ACCC should conduct a public consultation and develop guidelines outlining how it would exercise its power to direct extensions in the future.

 

Institutional Arrangements

 

The Regime has often been criticised for its complex institutional arrangements and the involvement of multiple decision makers at both the state/territory and federal level, which leads to drawn out decision-making processes and disputes. The Pilbara access dispute is a case in point – the first access applications were made in 2004 and the High Court delivered its decision in September 2012.

 

Despite these criticisms, the PC concluded that the current institutional arrangements are a pivotal element of the Regime’s effective operation.

 

Australian Competition Tribunal

 

The PC concluded that the provision for merits review by the Australian Competition Tribunal in Part IIIA should be retained.

 

The PC considered that any concern regarding the increased uncertainty and delay created by a merits review is outweighed by the benefit of having the Tribunal review decisions for factual errors.

 

In addition, the PC noted that the recent amendments to Part IIIA suggest that the Tribunal’s merits review processes will be more confined and timely in the future.

 

The Minister And Deemed Decisions

 

At present, the Minister’s failure to publish a decision on an access matter within the 60 day time limit is deemed to be a decision to not declare the service. The Minister is not required to provide any reasons for their decision, whether or not the NCC recommended declaration.

 

The PC has recommended that where the Minister does not publish a declaration decision within the statutory time limit, the decision should be deemed to follow the NCC’s recommendation.

 

Access Undertakings

 

Under the Regime, an infrastructure service provider may offer a written access undertaking to the ACCC in connection with the provision of access to the service. The ACCC has the power to accept or reject the undertaking.

 

In accepting an access undertaking, the ACCC is only required to consider a limited range of factors, including the legitimate business interests of the provider and the pricing principles of Part IIIA.

 

The PC has recommended that where an access undertaking is submitted pursuant to a statutory obligation to do so, the NCC should first assess the service against the declaration criteria, before the ACCC is able to accept any undertaking. It is implicit in this that the PC appears to have held concerns that existing access undertakings were required by legislation (and submitted) in respect of infrastructure facilities, which might not otherwise have satisfied the declaration criteria.

 

Next Steps?

 

In releasing the Final Report, Minister Billson indicated that the Federal Government would not respond to the PC’s recommendations until the conclusion of the ‘root and branch’ review of Australian competition law and policy.

 

Nevertheless, the PC’s report is important as the ‘root and branch’ review terms of reference specifically direct that review to take into account the PC’s inquiry when considering the adequacy of the Regime.

 

End Notes:

 

  1. Part IIIA, Competition and Consumer Act 2010 (Cth) and clause 6, Competition Principles Agreement.
  2. The declaration criteria are set out in section 44H(4), Competition and Consumer Act 2010 (Cth).
  3. The Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal (2012) 246 CLR 379

 

herbert smith Freehills

 

For further information, please contact:

 

Daniel Preston, Partner, Herbert Smith Freehills

daniel.preston@hsf.com

 

Matthew Bull, Partner, Herbert Smith Freehills

matthew.bull@hsf.com

 

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