The future of access regimes for non-vertically integrated monopolies

On 24 September 2019, the Treasurer decided to revoke the declaration of the shipping channel service at the Port of Newcastle (Port) in light of recommendations made by the National Competition Council (NCC). This decision marks the first time that the new Part IIIA declaration criteria of the Competition and Consumer Act 2010 (Cth) (CCA) has been tested since the reforms following the Harper Review. 

The Australian Competition and Consumer Commission (ACCC) Chair Rod Sims and some industry stakeholders argue that this decision may have a detrimental impact on the economy as it allows the Port to operate as an unregulated monopoly. 

The decision has sparked debate around the efficacy of the current access regime to regulate non-vertically integrated monopolies. What are the implications that flow from this decision, and what may lie ahead for regulation in this area? 

Background

The NSW Government privatised the Port pursuant to a 98 year lease to Port of Newcastle Operations Pty Ltd (PNO) in 2014. In January 2015, PNO increased the price for coal ships entering the Port by around 40% to $0.69 per gross tonne (GT).

In May 2015, Glencore Coal Assets Australia Pty Ltd (Glencore) (a user of the Port) submitted an application to the NCC for declaration of the shipping channel service under Part IIIA of the Act. Following a public consultation process, the NCC formed the view that the service should not be declared because the NCC was not satisfied that a declaration would promote a material increase in competition in a market other than the market for the shipping channel service. The NCC then recommended this course of action to the Acting Treasurer, the Hon Mathias Cormann. The Acting Treasurer accepted this recommendation and decided not to declare the service.

Glencore then applied to the Australian Competition Tribunal (Tribunal) for review of the Minister’s decision. On 31 May 2016, the Tribunal overturned the decision and decided that the service should be declared. The Tribunal’s declaration meant that the ACCC could arbitrate the terms and conditions of access to the Port, including the price of access where disputes arose.

On 14 July 2016, PNO applied to the Federal Court for judicial review of the Tribunal’s decision. This appeal was dismissed. PNO applied for special leave to appeal the Federal Court’s decision to the High Court. This application was refused in March 2018. 

While the appeal process was being run, Glencore notified the ACCC of a dispute which arose with PNO as a result of a further price increase (to $0.76 per GT). The ACCC decided to arbitrate this pricing dispute and determined that PNO should reduce its current charge by around 20% to $0.61 per GT.

During the course of this dispute, Parliament made amendments to the access regime following the Harper Review under the Competition and Consumer Amendment (Competition Policy Review) Act 2017 (Cth). On 2 July 2018, PNO wrote to the NCC requesting that it make a recommendation about whether or not to revoke the declaration of the shipping channel at the Port under the new regime.

On 24 September 2019, the NCC formed a final view and made a public recommendation that the declaration over the shipping channel service at the Port should be revoked. The Treasurer confirmed in a media release that the statutory decision making period for the Minister to publish a decision on the NCC’s recommendation had expired, and therefore the Treasurer was taken to confirm that the declaration of the Port was revoked.[1] The Treasurer’s decision allows PNO to conduct its operation as a deregulated service, that is free from ACCC intervention with respect to the price it charges users of the Port.

On 30 October 2019, the Tribunal also overturned the previous arbitration which determined that the navigation service charge and wharfage charge for ships entering the Port should be decreased from $0.76 per GT to $0.61 per GT. The Tribunal’s determination, which was confined to an interim pricing dispute over these services, allowed PNO to increase charges for these services to over $1.00 per GT. The Tribunal found fault with the previous arbitration process. This was because the Tribunal took the view that the methodology used to calculate the price, from the regulated asset base, was determined wrongly and did not take into account relevant criteria such as the customer funded component of the Port’s capital works. The Tribunal found that the price and terms of access should permit PNO to charge prices for these services which would provide an incentive for PNO to run efficiently, and to provide these facilities at the Port.[2] Due to the fact that the Treasurer revoked the declaration of the Port in September, the prices determined by the Tribunal are confined solely to 7 July 2031, after which the Port is able to increase wharfage charges and navigation services freely.

Following this decision, PNO is no longer required to negotiate terms and conditions of access with the users of the Port. This also means that the ACCC is no longer able to step in to arbitrate any pricing disputes that may arise between PNO and its users. In relation to the terms of access to the shipping channels, Glencore and PNO failed to reach agreement, taking their dispute to the ACCC. The matter was subject to re-arbitration at the Tribunal, before Glencore appealed to the Full Federal Court over price and access. 

On appeal, Glencore argued that the Tribunal erred in concluding that access to the shipping channels was, in effect, only provided to those parties in control of a ship and, on that basis, confining the scope of its determination to instances where Glencore was in control of a ship being used to load and export coal. Glencore argued that the determination should cover all coal that it exports through PNO.  

In an unanimous decision, the Full Court allowed the appeal and found that the Tribunal, in confining the scope of determination to ships controlled by Glencore, misconstrued the shipping channel service, which is not governed by physical access.[3] Further, the Full Court found that the Tribunal erred in failing to consider the user contributions previously received by the Port of Newcastle when determining the appropriate access costs. Both matters were remitted to the Tribunal for determination. 

Tension around the access regime

This dispute brings to the forefront the tension surrounding the current access regime. The debate centres on whether the declaration criteria under Part IIIA are able to effectively address competition and monopolistic pricing issues created by non-vertically integrated infrastructure (i.e. owners of infrastructure that do not compete in a related market to the service it provides).

Under the current Part IIIA framework, access-seekers are required to prove that a declaration to the service would promote a material increase in competition in a market other than the market for the service. 

ACCC position

The ACCC argues that the CCA is not well framed to capture vertically separated monopolies. 

ACCC Chair Rod Sims believes that the current framework leaves owners of vertically separated monopoly infrastructure virtually unconstrained, and creates an incentive for them to maximise profits by substantially increasing the price of access. Mr Sims stated that the primary issue with non-vertically integrated monopolies is their use of power, rather than the denial of access, which is why he believes there should be a ‘misuse of market power’ test for vertically integrated separated infrastructure.[4] Mr Sims emphasised the importance of having considered regulatory frameworks in place to serve the interests of the community and has flagged possible reforms in this space.[5]

The ACCC believes that the lack of regulatory oversight for vertically separated monopolies will cause harm to the economy, and that the inability to regulate this infrastructure will detrimentally affect access-seekers, consumers and the community as a whole.[6] The ACCC stated the Treasurer’s decision could also have negative impacts on the economy more broadly, as the lack of regulation will raise concerns for companies that operate in the related markets of these services and this could lead to reduced investments in the short and long term.[7]  Mr Sims also voiced his concern that currently regulated monopolies such as rail tracks will seek to have their regulation removed following this decision.[8]

NCC position

In its recommendation, the NCC considered that PNO is unlikely to have an incentive to deny access or reduce competition for users in related markets. Rather, they consider that it is in their interest to promote competition in these markets. When considering the access criteria in this matter, the NCC found that section 44CA(1)(a) of the CCA was not satisfied because it did not believe that a declaration of the service would promote a material increase in competition in a market other than the market for the shipping channel service e.g. the coal export market or the container port market.[9] 

The NCC highlighted that the consideration of whether to declare a service requires an assessment of the impact that a declaration would have on dependent markets, and the fact that a monopoly service operates a bottleneck facility or has market power will not be sufficient to satisfy criterion (a).[10] The NCC took the view that because PNO is not vertically integrated in any relevant markets related to the export of coal activity, this creates a disincentive for them to deny access to the service or inhibit competition in these related markets.[11] Going further, the NCC concluded that imposing regulations on the service would undermine the viability of efficient investment decisions and could risk deterring future investment in important infrastructure projects.[12]

The NCC did not comment on the effectiveness of the regime, stating that whether the Part IIIA criteria are working is a matter for Parliament to decide.[13] However, the view outlined in their recommendation suggests that the regime is operating in accordance with its intention. 

Where to next?

The decision places a spotlight on the effectiveness of the amended Part IIIA access regime to regulate non-vertically integrated monopolies. 

The ACCC considers that reducing the risk of non-vertically integrated infrastructure damaging the economy may involve changing the regulatory framework to allow non-vertically integrated monopolies to be captured by this regime through the implementation of a misuse of ‘market power’ test.[14] Another option the ACCC has posed is the creation of a ‘Part IIIB’ provision for these monopolies or alternative industry specific regulations such as those in place for electricity networks and gas pipelines.[15]

It remains to be seen whether changes will be made to Part IIIA to give the regulator more extensive powers to declare vertically separated monopolies. What has been made clear is that obtaining a declaration under the amended Part IIIA access regime has become more complicated for access-seekers of monopoly infrastructure services.