Go to our Contact page for our office details.
Competition Tribunal confirms lower hurdle for declaration of monopoly infrastructure
In an important decision concerning the declaration of monopoly infrastructure under Part IIIA of the Competition and Consumer Act 2010 (CCA), the Australian Competition Tribunal has set aside the decision of the Minister and declared a service provided by Port of Newcastle Operations Pty Ltd (PNO) by means of the shipping channels at the Port of Newcastle.
In doing so, the Tribunal confirmed that the relevant test for applying declaration criterion (a), which requires that access (or increased access) to the service promote a material increase in competition in a dependant market, is the test with a lower threshold laid down by the Full Federal Court in 2006 in Sydney Airport Corporation v Australian Competition Tribunal 1 (Sydney Airport FC), not the higher threshold preferred by the National Competition Council (NCC) and many infrastructure owners.
This decision marks a reversal in the trend of the last decade by some regulators and infrastructure owners to try to limit the application of the test adopted in Sydney Airport FC.
In Sydney Airport FC, the Full Federal Court said that, in considering whether access (or increased access) would promote competition in a dependent market the comparison to be made is between the future state of competition where access seekers have a right or ability to use the service and the future state of competition in the dependent market without any right or ability or with a restricted right or ability.
This is a much easier test to satisfy than the test preferred by both PNO and the NCC, under which the comparison is between the future state of competition in the dependent market under the current access conditions and the future state of competition in the dependent market with declaration (and its associated right to binding arbitration).
In simplistic terms, these tests might be described as a “with and without access” test and a “with and without declaration” test.
With confirmation that the Sydney Airport FC “with and without access” test is the correct approach, the hurdle to satisfy criterion (a) has been substantially lowered. As the Tribunal stated: 2
The consideration of criterion (a) in the present circumstances, in accordance with the approach in Sydney Airport FC at , is quite straightforward.
To paraphrase Sydney Airport FC at  and : the Service providing access to the shipping lanes is a natural monopoly and PNO exerts monopoly power; 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. In the circumstances …, s 44H(4)(a) must have been satisfied.
Under the Sydney Airport FC test for criterion (a), the range of infrastructure which could be the subject of a successful declaration application will increase: rather than having to demonstrate that declaration would necessarily lead to a material promotion in competition in a dependent market (which can be difficult where the applicant already has access to the service), all the applicant has to demonstrate is that the service is a natural monopoly and it is a necessary input for effective competition in a dependent market.
Implications of the Tribunal’s decision:
- for infrastructure owners – the lower threshold clearly increases declaration risk – and means that they will have less ability to mitigate this risk through the commercial terms and conditions of access they offer – it may even encourage some facility owners to consider proactively lodging access undertakings to avoid the risk of declaration; and
- for users – the prospects of successful declaration of a range of facilities will be increased, including ports, airports and railways.
Part IIIA of the CCA provides a regime to facilitate access to services provided by means of nationally significant infrastructure. If a party considers that services meet certain declaration criteria then it may apply to the NCC. The NCC will then make a recommendation to the relevant Minister who in turn makes the decision whether or not to declare the services. The declaration criteria include relevantly:
(a) that access (or increased access) to the service would promote a material increase in competition in at least one market other than the market for the service;
(b) that it would be uneconomical for anyone to develop another facility to provide the service;
(c) that the facility is of national significance; and
(f) that access (or increased access) would not be contrary to the public interest.
Once a service is declared, access seekers are able to resort to arbitration before the Australian Competition and Consumer Commission (ACCC) if they are unable to negotiate acceptable access terms with the service provider.
In May 2015, Glencore Coal Pty Ltd (Glencore), the largest coal producer in the Hunter Valley, applied to the NCC for a recommendation under Part IIIA of the CCA that certain services provided by PNO, including the use of the shipping channels to allow the loading and unloading of cargo at the Port (Port Service), be declared.
It was accepted that the Port of Newcastle is one of the larger coal export ports in the world. The shipping channels are the only means by which vessels can gain entry to and exit from the Port. As the Tribunal noted: 3
It is not contested in submissions that the shipping channels at the Port are the only commercially viable option for the export of coal from the Hunter Valley region in New South Wales. Nor was there any dispute in the course of submissions that the shipping channels are a natural “bottleneck” monopoly. In practical terms, the Service is necessary for the export of coal from the Hunter Valley.
In 2014, the Port was privatised by the NSW Government and PNO became the new operator of the Port. Since PNO has become operator of the Port, the price for coal ships to use the shipping lanes increased by between 40% and 60% for some vessel types, particularly the larger, more efficient vessels.
In response to Glencore’s application, the NCC considered that all of the declaration criteria were met except for criterion (a), the promotion of competition criterion. In reaching this conclusion, the NCC applied its preferred test for criterion (a), being to compare:
(a) the likely future state of competition in the dependent market under the current access arrangements; and
(b) the likely future state of competition in the dependent market with declaration and the associated right to arbitration before the ACCC.
As noted above, this test may be described as a “with and without declaration” test. Under this test the NCC was not satisfied that declaration would lead to a material increase in competition principally because the charges for the Port Service represented a minor component of the FOB cost of coal at the Port, and as such were unlikely to have an effect on production or investment decisions such as to promote a material increase in competition in any dependent market.
Accordingly the NCC recommended to the relevant Minister, in this case the Finance Minister, that the Port Service not be declared. The Minister agreed with the recommendation and decided not to declare the Port Service because he was not satisfied that criterion (a) was met.
The decision of the Tribunal
Glencore sought a review of the Minister’s decision not to declare the Port Service. Before the Tribunal, the key issue was the application of criterion (a). There was no dispute in relation to criteria (b) and (c), ie it was accepted that it was uneconomical to build another facility to provide the Port Service and that the Port was nationally significant infrastructure.
Glencore submitted that the “with and without declaration” approach adopted by the NCC and the Minister to criterion (a) was incorrect, and that the correct approach was that outlined by the Full Federal Court (French, Finn and Allsop JJ) in Sydney Airport FC. As noted above, under this test, in considering whether access (or increased access) would promote competition in a dependent market, the comparison to be made is between the future state of competition where access seekers have a right or ability to use the service and the future state of competition in the dependent market without any right or ability or with a restricted right or ability.
PNO submitted that there had been important developments since the Sydney Airport FC decision that rendered it inapplicable to Glencore’s current application, being:
(a) amendments to Part IIIA of the CCA, introducing an objects clause and adding the words “a material increase in” after the word “promote” in criterion (a); and
(b) the decision of the High Court in Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal 4 (Pilbara) which decided that decision makers have no residual discretion under Part IIIA and that services should therefore be declared if they meet the declaration criteria.
The Tribunal rejected these arguments. It found that the Sydney Airport FC test was consistent with the new objects clause, that the new words in criterion (a) did not affect its proper construction and that there had been no need to address the proper construction or application of criterion (a) in the High Court’s decision in Pilbara (that case principally concerned declaration criteria (b) and (f)).
The Tribunal concluded that the test from Sydney Airport FC, the “with and without access” test, was the carefully considered view of the Full Court and was therefore the test that the Tribunal should apply.
As noted above, the application of the Sydney Airport FC test to the Port Service was straightforward. The Tribunal stated criterion (a) was met because:
(a) the Port Service (providing access to the shipping lanes) is a natural monopoly;
(b) PNO exerts monopoly power; and
(c) the Port Service is a necessary input for effective competition in the dependent coal export market as there is no practical and realistically commercial alternative.
Therefore, since access to the Port Service is essential to compete in the coal export market, criterion (a) is satisfied.
Interestingly, the Tribunal went on to consider whether criterion (a) would be satisfied in the event that it was incorrect about the application of the Sydney Airport FC test. The Tribunal found that if the test was instead the “with and without declaration” test then it would agree with the reasons given by the Minister, that increased access (through declaration) would not promote a material increase in competition in the coal export market, and criterion (a) would not be satisfied. A key argument of Glencore was that declaration would promote a material increase in competition by providing certainty:5
Glencore said that if the [Port Service] were declared, there will be greater certainty for investment in existing mines, expansion of those mines or the development of new mines, as there will be a regulated price path subject to reasonable and legitimate price increases, which would make those dependent markets materially more competitive than if access to those markets was subject to unfettered pricing power by an unconstrained monopoly infrastructure provider; that the continued or increased participation of smaller coal producers would result in an increased demand for mining authorities and result in a material increase in competition in the bidding for the award of mining authorities; that the continued or increased participation of major and smaller coal producers would result in an improvement in the opportunities and environment for competition in the provision of the infrastructure (including a new coal terminal) required for the development of coal projects, including in particular in relation to the development and output from smaller more marginal projects; and that the continued or increased participation of major and smaller coal producers would also result in further demand in the markets for specialist services in the Hunter Valley region.
However, the Tribunal noted in relation to uncertainty that, compared to the uncertainty that coal producers faced from the fluctuating coal price (stated to have varied from US$20/t to US$180/t over the last several years), costs and regulation (including environmental regulation), any such uncertainty over PNO’s charges is likely to be very small.
Finally, the Tribunal considered, and rejected, an argument from PNO that the Port Service did not meet criterion (f), that access (or increased access) would not be contrary to the public interest. The Tribunal noted that the Minister had considered that criterion (f) had been satisfied and that the High Court in the Pilbara case had stated that “if the Minister has not found that access would not be in the public interest, the Tribunal should ordinarily be slow to find to the contrary.” The Tribunal concluded that, having regard to matters raised by PNO, no detriment to the public interest by declaring the Port Service had been identified.
Consequences for infrastructure owners and access seekers
We note that the decision of the Tribunal may yet be appealed to the Full Federal Court. Indeed, the history of access disputes under Part IIIA of the CCA shows that it is not unusual for decisions to be fought all the way to the High Court. Given that the Tribunal has found that the Port Service only satisfied criterion (a) on the basis of the lower threshold of the Sydney Airport FC test, an appeal would appear likely.
Nonetheless, under the test for criterion (a) laid down in Sydney Airport FC and applied by the Tribunal in the Glencore decision, a far greater range of infrastructure will potentially meet the declaration criteria than would be the case under the“with and without declaration” test.
In essence, any infrastructure of national significance which exhibits natural monopoly characteristics and is a necessary input is now at risk of declaration, regardless of the current terms on which access is provided and the impact that declaration may (or may not) have on competition in the dependent market(s).
It will be interesting to see if this decision results in any legislative response. In reviewing criterion (a) the Productivity Commission (PC) favoured the “with and without declaration” test, not the Sydney Airport FC test, and the Commonwealth Government (in its response to the Harper Review) subsequently stated that it would adopt the recommendation of the PC in relation to criterion (a).
Finally, the ACCC has recently called for the equivalent of criterion (a) in the National Gas Law to be removed entirely and replaced with a different test, based on the existence of “sustained market power”’. It will be interesting to see if the Tribunal’s approach (if it survives) will be seen as undermining the justification for this change.
1(2006) 155 FCR 124
2at , .
4(2012) 246 CLR 379
5 at