Third-party access to infrastructure: the case of the Mt Newman rail line in the Pilbara

Economic Papers (Economic Society of Australia), Dec, 2007 by Paul Koshy, Peter Kenyon

1 Introduction

It is often the case that a market is dominated by a single piece of infrastructure and some form of monopolistic power is conferred on the firm owning the infrastructure, both in the existing, as well as related, markets. This can occur to the extent that the firm exhibits quite marked pricing power or where it is uneconomic for other firms to duplicate the infrastructure.

To balance the rights of consumers with the infrastructure owner in such cases, Australia has developed a national system for third party access to key economic infrastructures. This system allows potential competitors to seek access to infrastructure as a means to introduce competition into affected markets. This typically occurs through the National Competition Council (NCC) ('the Council' hereafter), whereby the Council can recommend the 'declaration' of access to infrastructure to be of national significance and, subsequent to approval by the Federal Treasurer, ultimately some form of oversight by the Australian Competition and Consumer Commission (ACCC).

This paper examines the powers and processes of the Council, to preside over the 'declaration' of infrastructure in Australia. It does so with particular reference to a recent application to the Council by the Fortescue Metals Group Limited (FMG) for access to the Mt Newman Rail Line ('the Mt Newman Line')?owned and operated by BHP Billiton Iron Ore (BHPBIO).

2 Third-Party Access, the Trade Practices Act and Competition Policy

Third-party access permits a potential market entrant to use an incumbent's infrastructure under specific, regulated, conditions (including price) in cases where this infrastructure is a 'natural monopoly'. A natural monopoly is characterised by a cost structure where, at all scales of production, it is more efficient to have output supplied by a single firm (or piece of infrastructure), rather than a group of competing firms (or infrastructure facilities).

Typical examples of natural monopoly facilities include telecommunications copper-wire networks, electricity distribution grids, and rail lines. In each of these cases, the firm owning the infrastructure may be in a position to collect monopoly rents on its investment. The extent to which this occurs is often inhibited by the inherent 'contestability' of the market. For instance, the monopolistic exploitation of a copper network in telecommunications will depend to a great extent on alternatives, notably the level of competition provided by mobile phone operators.

A low level of contestability in a market means that competition through access may be the only viable alternative to monopoly. Access is a 'set of rules' determined by government regulators to allow multiple users to use facilities owned by a service provider. It is a mandated alternative to a mutual and voluntary arrangement. Once the access arrangement has been established, potential users negotiate with the infrastructure owner to access infrastructure based on the parameters determined by the access arrangement.

In Australia, Part IIIA of the Trade Practices Act 1974 (TPA) outlines a legislative regime to facilitate third-party access at the national level for all industries, whereby parties seek access to 'essential facilities' of 'national significance'. This process is initiated by an application to the Council (as set out in NCC, 2006a), seeking to have the infrastructure 'declared' as an essential facility. Under the terms of the TPA, the Council can recommend the declaration of a facility if it is satisfied that all of the following criteria (a) through (f) (as set out in s.44G) are met:

a) Access (or increased access) to the service would promote competition in at least one market (whether or not in Australia), other than the market for the service;

b) It would be uneconomical for anyone to develop another facility to provide the service;

c) The facility is of national significance having regard to:

* the size of the facility

* the importance of the facility to constitutional trade or commerce; or

* the importance of the facility to the national economy.

d) Access to the service can be provided without due risk to human health or safety

e) Access to the service is not already the subject of an effective access regime; and

f) Access (or increased access) to the service would not be contrary to the public interest.

The Council assesses requests for declaration against these criteria on an individual case basis and within the four-month period prescribed in s.44GA of the TPA. Following its investigations, it makes a recommendation to the relevant Minister, who can decide whether or not to 'declare' the facility. Ministerial decisions on access are subject to appeal to the Australian Competition Tribunal.

Following the declaration of a service, parties can negotiate the terms and condition of access. This can be done through private arbitration which may involve the ACCC. As an alternative to the declaration process, owners or operators of infrastructure may also finalise with the ACCC an access undertaking to establish the terms and conditions of access to their facility. A facility covered by an agreement with the ACCC cannot be declared by the Council. In addition to the TPA, third party access was an important part of the recommendations of the 'Hilmer Report' (see, Independent Committee of Inquiry into Competition Policy in Australia, 1993) and subsequent COAG agreements. The principles underlying access are delineated by Clause 6 (1) of the Competition Principles Agreement 1995. Under these principles, legislation will be put forward to establish a regime for third-party access to significant infrastructure facilities subject to a set of criteria reflecting those laid out in the TPA.