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Access to essential infrastructure

Cover Story

Cite as: (2003) 77(9) LIJ, p.34

The Productivity Commission's recommendations for reform of Part IIIA of the Trade Practices Act and the National Competition Council's guide to its current operation aim to improve the workability of the national access regime.

By Brenda Marshall and Rachael Mulheron

The release of two major reports in the latter part of 2002 concerning Part IIIA of the Trade Practices Act 1974 (Cth) underscores the growing prominence of the national access regime in Australia’s competition reform agenda. In September 2002, the Productivity Commission released its long-awaited Review of the National Access Regime.[1] This was followed in December 2002 by the National Competition Council’s The National Access Regime: A Guide to Part IIIA of the Trade Practices Act 1974.[2] With the former describing how Part IIIA should work, and the latter describing how it does, these reports represent important milestones in the evolution of Australia’s access regime.

Background

This year marks the 10th anniversary of the release of the Hilmer Report by the Independent Committee of Inquiry into National Competition Policy (the Committee). One of the Committee’s key concerns was that owners of core infrastructure facilities might seek to exploit their market power by denying potential competitors in dependent markets access to vital inputs or by charging monopoly prices to would-be competitors seeking such access. Either outcome would be costly to the community. The Committee considered, therefore, that access rules were required to address the issue of market foreclosure by owners of such “essential facilities”. The Committee recommended the implementation of a generic access regime, promoting consistent approaches to access issues across the economy and administered by an economy-wide body, rather than leaving the regulation of access to either existing misuse of market power provisions or to a series of industry-specific regulators.

Introduced on 6 November 1995, the national access regime contained within Part IIIA of the Trade Practices Act enables third parties to seek access, on reasonable terms and conditions, to the services provided by “nationally significant” infrastructure facilities.[3] Under the regime, there are three avenues by which a third party may gain access to such services:

  • requesting that the National Competition Council (NCC) recommend that the designated minister[4] declare access to those services; if this occurs, then the access seeker obtains the right to negotiate terms and conditions of access with the service provider, or failing agreement, to arbitrate that dispute before the Australian Competition and Consumer Commission (ACCC);
  • seeking access through a state or territory access regime, which, on recommendation by the NCC to the federal Treasurer, has been certified as “effective”; or
  • seeking access under terms and conditions specified in a legally binding undertaking from the facility operator, which has been accepted by the ACCC.

Unequal use of these mechanisms has been evident to date. The NCC has dealt with fewer than a dozen declaration applications, and the only undertaking accepted by the ACCC has been for the national electricity code. Instead, most reliance has been placed on the certification of state and territory industry-specific access regimes – in respect of, for example, gas, rail and shipping channels. Industry-specific regimes have also proliferated outside the ambit of Part IIIA, such as those relating to airport services and telecommunications.

Nevertheless, in its 2002 report, the Productivity Commission found that the declaration process has had a pervasive influence on access reform, despite the relatively small amount of declaration activity to date, primarily because the threat of declaration has played a pivotal role in shaping state and territory access regimes.

NCC’s guide

To assist parties interested in access issues, the NCC produced its guide to Part IIIA, published in three parts.[5] Part A examines the rationale for access regulation and provides an overview of the three paths to access identified previously, while Parts B and C provide more detailed information on those routes, namely declaration and certification, that involve the NCC directly.[6] Given the importance attributed to the declaration process by the Productivity Commission, Part B (the Declaration Guide) merits further discussion.

The Declaration Guide reflects the NCC’s current approach to declaration applications, drawing on its own experience since 1996 and relevant decisions of the Australian Competition Tribunal (ACT).[7] The NCC has specifically noted, however, that each application raises unique issues, that its thinking continues to evolve, and that the views expressed in the Declaration Guide are neither definitive nor binding. Although such comments reinforce the need for flexibility in the NCC’s approach, the worth of the Declaration Guide will no doubt be questioned, should an application for declaration be dealt with in a manner contrary to its precepts.

Declaration criteria

Under s44G(2) of the Trade Practices Act, the NCC cannot recommend the declaration of a service unless six criteria, set out in paras (a)-(f), are satisfied. The substance of the Declaration Guide comprises the NCC’s assessment of each of these criteria.

Uneconomical to develop another facility
The NCC begins its deliberations by focusing on criterion (b), which specifies that it must be uneconomical to develop another facility to provide the service. This criterion has been interpreted by the NCC to mean that the facility providing the service must exhibit natural monopoly characteristics.[8] That a facility be a natural monopoly facility, and thus satisfy criterion (b), is a necessary but insufficient condition for the facility to be a “bottleneck”[9] facility, and thus satisfy criterion (a). Thus, the NCC reasons, it is logically preferable to assess criterion (b) first.

Promoting competition in another market
Criterion (a) stipulates that access to the service promotes competition in at least one market, other than the market for the service. As mentioned above, this criterion addresses whether the facility is a “bottleneck” facility. In making this assessment, the NCC considers whether declaration will enhance the opportunities and environment for competition in a separate market or markets. This involves a comparison of the future conditions for competition “with and without declaration” in those other markets.

National significance
According to the NCC, relevant indicators that the facility is of “national significance”, as mandated by criterion (c), include the facility’s physical dimensions, capacity, and throughput of goods and services, the monetary value of trade dependent on the facility and the importance of the facility to trade and commerce in related markets.

Human health and safety
Criterion (d) requires that access to the service be provided without undue risk to human health or safety. Here, the NCC maintains that access must be possible without compromising the operational integrity of the facility, and safe scheduling or timetabling of services must be feasible. The NCC acknowledges that relevant safety regulations may suffice to satisfy this criterion.

Effective existing access regime
Under criterion (e), the service must not already be the subject of an “effective” access regime. In assessing whether an existing state or territory regime is “effective”, the NCC has regard to relevant principles set out in the Competition Principles Agreement (CPA), according those principles the status of guidelines rather than binding rules.[10]

Not against the public interest
Criterion (f) provides that access to the service not be contrary to the public interest. The NCC takes the view that where criteria (a)-(e) are met, a presumption arises that declaration is in the public interest. In determining under criterion (f) whether any argument displaces that presumption, the NCC’s approach is to assess whether the costs of declaration outweigh the benefits. The effect that declaration would have on economic efficiency is pertinent to this assessment, but the NCC also cites the “public interest” matters listed in the CPA (including ecologically sustainable development, industrial relations and the interests of consumers) as potentially relevant.

Certainly, the NCC has been thorough in documenting its interpretation of the declaration criteria and valuable information is contained in the Declaration Guide. In the end, however, a recommendation by the NCC to declare a service or not is not final – that prerogative lies with the designated minister (subject to appellate overrule by the ACT). The minister is not bound by the NCC’s recommendation, but must decide whether or not to accept it, basing his or her decision on criteria mirroring those considered by the NCC. Contrary recommendations and decisions by the NCC and minister are a feature of the current declaration landscape – one of many concerns investigated by the Productivity Commission in its recent review.

Productivity Commission’s report

The task of the Productivity Commission was to review the current arrangements under Part IIIA for regulation of access. In so doing, the Productivity Commission was directed to be cognisant of the fact that legislation or regulation that restricts competition or that may be costly to business should be retained only if the benefits to the community as a whole outweighed the costs.

After taking into account the many submissions to the inquiry, the Commission concluded that, given the limited experience of the access regime to date and ongoing structural change in a number of infrastructure sectors, it would be inappropriate to abandon access regulation at this stage. The “essential facility” characteristics of certain core infrastructure meant that an explicit mechanism for facilitating efficient third-party access was desirable. Like the Committee before it, the Productivity Commission did not believe that such regulation should be left to general anti-competitive provisions elsewhere in the Trade Practices Act. Retention of the Part IIIA regime was therefore warranted.

However, the Productivity Commission recognised that the regime has some significant deficiencies. Paramount concerns were the potential for access regulation to deter investment in essential infrastructure (as a widespread perception among service providers that regulatory decisions would be biased in favour of access seekers appeared to be compounding assessments of “regulatory risk”), and the somewhat cumbersome institutional arrangements and administrative processes applying under Part IIIA. The Productivity Commission thus proposed certain measures intended to make the access regime better targeted and more workable.

Important recommendations

Including an objects clause in Part IIIA
In the Productivity Commission’s view, the purpose of such a clause would be to provide greater certainty to the parties about the circumstances in which regulatory intervention may be warranted, to promote consistency in the application of the regime by the various decision-makers (as each would be required to have regard to the objects clause) and to emphasise, as a threshold matter, the need for proper regard to be given to investment issues. It was also expected that an objects clause would help to condition the objectives and application of industry-specific access regimes.

Inserting pricing principles in Part IIIA
The Productivity Commission proposed that pricing principles be expressly embodied within the access regime in order to increase the likelihood of negotiated outcomes, inform regulatory determinations and discourage divergence across industry-specific regimes. Pricing determinations under Part IIIA had to allow service providers sufficient return to justify continued investment in the relevant infrastructure, and give them incentives to improve their efficiency.

Amending the declaration criteria
The Productivity Commission observed that more case history would be required before a definitive judgment could be made about the adequacy of the six declaration criteria contained in Part IIIA. Despite that reservation, the Productivity Commission recommended that criterion (a) be strengthened, to provide that access would promote a “substantial” increase in competition in another market, rather than simply promoting competition in that other market. The purpose of the amendment would be to guard against the possibility of declaration in circumstances where a trivial increase in competition, offset against costly intervention, gave little prospect of a gain in efficiency.

Encouraging investment in essential facilities
In order to ensure that infrastructure investment is not deterred by exposure to access regulation, the Productivity Commission proposed the introduction of two new measures into Part IIIA. The first measure would allow investors in a proposed essential facility to seek a binding ruling from the minister (on the recommendation of the NCC) that the Part IIIA declaration criteria are not met, so that the facility’s services would not become the subject of an access declaration. Under the second, where the right to construct and operate an essential facility was determined on the basis of the most favourable access terms and conditions offered in a competitive tender, the facility’s services would be granted immunity from declaration as the intent of the legislation would have been achieved in any event. The Productivity Commission was of the view that both mechanisms would encourage investment and minimise regulatory risk.

Improving administrative efficiency and transparency
Despite many contentions to the contrary, the Productivity Commission favoured the retention of the designated minister as the final decision-maker in applications for declaration of services and certifications of “effective” access regimes (with appeals still lying to the ACT), on the basis that the intrusion of legislation on property rights was a matter truly for elected, rather than unelected, regulatory officials. It also favoured the continued separation of responsibility between the NCC (in determining whether access should be allowed at all) and the ACCC (in setting the terms and conditions on which such access should be granted). However, in order to streamline the time-consuming procedures under Part IIIA and enhance their transparency, the Productivity Commission advocated and stipulated time limits for various steps in the Part IIIA process, as well as a requirement (which legislatively implements the status quo to date) that all Part IIIA decision-makers publish reasons for their recommendations and determinations.

Conclusion

The NCC’s guide, with its detailed elucidation of the provisions of Part IIIA directly confronts the difficulties inherent in this area of competition law. In seeking to improve the operation of the access regime via certain recommendations for legislative change, the Productivity Commission’s report manifests the same purpose, albeit with more interventionist intentions.

Of course, the complexity of the access regime, and the relative newness of it, mean that ongoing monitoring and periodic review will remain a fixture. Indeed, the Productivity Commission has recommended that the NCC be charged with reporting annually on the operation of Part IIIA, and that a further independent review of the regime be undertaken five years hence. In the interim, however, it will be interesting to observe whether any or all of the Productivity Commission’s 33 specific recommendations are implemented by the federal government and to track the impact that these changes, together with the incremental advances occurring case-by-case, will have on the NCC’s guide.


BRENDA MARSHALL, lecturer in law at the University of Queensland, has published on a variety of trade practices topics, including misuse of market power, market definition, and misleading and deceptive conduct, but remains particularly interested in tracking the development of the national access regime.

RACHAEL MULHERON, lecturer at University of Warwick Law School, developed an interest in restrictive trade practices issues while a practising solicitor, and maintains a continuing interest in the disparate means by which “essential facilities” disputes are managed and resolved in Australia and elsewhere.


[1] The report is available from the Productivity Commission’s website at http://www.pc.gov.au.

[2] The guide is available from the NCC’s website at http://www.ncc.gov.au.

[3] The regime applies whether these facilities are owned privately, or by the federal or state/territory governments or their instrumentalities.

[4] The designated minister for infrastructure owned by a state or territory is the Premier or Chief Minister; and for all other infrastructure, the federal Treasurer.

[5] The current guide supersedes the NCC’s Draft Guide to Part IIIA, released in 1996.

[6] Further information in respect of access undertakings is available from Australian Competition and Consumer Commission, Access Undertakings – A Guide to Part IIIA of the Trade Practices Act, 1999, ACCC Publishing Unit.

[7] For example, Re Australian Union of Students [1997] ATPR 41-573 and Review of Declaration of Freight Handling Services at Sydney International Airport [2000] ATPR 41-754.

[8] The term “natural monopoly” indicates that the size of the market is such that it is only efficient for one facility to operate in the market.

[9] The word “bottleneck” signifies that access to the facility is essential for competition in a dependent market.

[10] Part C of the NCC’s guide, released in February 2003, details its approach to certification matters.

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