under Part IIIA of the Competition and Consumer Act 2010 (CCA) (see Mallesons Alert of 1 July 2010).
The Full Court’s decision means that Rio Tinto will not be required to provide third party access to either of its two rail lines in the Pilbara. This means that, of the main rail lines in the Pilbara used to haul iron ore from mines to ports, only BHP Billiton’s Goldsworthy rail line is open to third party access.
Additionally, the Full Court clarified the principal criteria required for private infrastructure to be declared for third party access under Part IIIA of the CCA. The Court did this by holding that infrastructure cannot be declared to be open for third party access unless there is clear evidence that it would not be privately profitable for any market participant to construct alternative infrastructure.
Despite the setback, Fortescue has reaffirmed its plans to expand its iron ore production from 55 million tonnes per anum to 155 million tonnes per anum.
Part IIIA of the CCA enables third parties to obtain access to “essential facilities”. Essential facilities are those which are of national significance which are (i) uneconomic to duplicate; and (ii) used to provide services which, if supplied to third parties, would promote competition.
To be declared, the National Competition Council must recommend, and the Treasurer must accept, that the declaration would satisfy each of the criteria in section 44H of the CCA.
The following two criteria were in issue in the Full Court’s decision:
The Full Court decision elucidates the relevant test to be applied when examining these criteria, significantly narrowing the previous approach to Criterion B. The Court’s decision should be good news for infrastructure owners and their financiers.
Since its inception in 1995, until the Court’s decision in this case, Criterion B has been applied on the basis of a social benefit test.
The social benefit test mean that the Australian Competition Tribunal examined whether the infrastructure was capable of meeting demand for the relevant service (including third party demand) at less cost than two or more facilities. All costs (including production, social and consequential costs) were used in the assessment
Tribunal moved to a “natural monopoly” test in this case
Despite previous practice, the Tribunal applied an alternative “natural monopoly” approach to assessing Criterion B when reviewing the Pilbara case. In contrast to the “social benefit” approach, this test distinguished between production and consequential (including social) costs, with the latter assessed under Criterion F.
Accordingly, in applying the “natural monopoly” test, the Tribunal:
If the assessment indicated that the single infrastructure facility would provide for the desired (forecast) output at a lower construction and operational costs than two or more infrastructure facilities, then the single infrastructure facility would satisfy Criterion B and could be declared open to third party access if it also satisfied other criteria.
In its decision, the Full Court approved a “privately profitable” test which is narrower than either the “social benefit” or “natural monopoly” approaches previously used by the Tribunal.
The Full Court assessed whether it is, in fact, profitable for any third party in the relevant market to develop alternative infrastructure:
“…whether “anyone” can be identified for whom the development of an alternative facility is economically feasible is a matter of looking at the facts of the market place. If an examination of the facts shows that there is such a person, whoever that might be, and whatever that person’s circumstances, then regulatory interference in the interplay of market forces is not warranted…”
The Full Court considered that an approach which derived from, and was reliant on, tangible industry facts and economic data was easier to apply than the alternative “social benefit” or “natural monopoly” tests.
This approach is likely to result in:
The Full Court rejected Fortescue’s argument that:
The Full Court accepted the Tribunal’s view that Criterion F required it to consider a wide range of factors, including those consequences of access which Fortescue argued fell within the responsibility of the ACCC under sections 44V and 44X of the CCA during an arbitration of the price of access to the infrastructure facility.
Further, the Full Court confirmed that the Tribunal’s discretion to decide on declaration is both wide and connected closely with Criterion F.
Accordingly, the Full Court reiterated that the following matters may be taken into account when determining whether or not to declare infrastructure:
In reaching this conclusion, the Full Court highlighted that, had Fortescue’s arguments prevailed, it would “radically reduce the power and responsibility of the Minster and Tribunal to reject applications which appear to them plainly to be contrary to the public interest” .
The Full Court has confirmed the breadth of factors that may reasonably be considered by the National Competition Council or Tribunal.
In addition to confirming that Criterion F includes a requirement to take into account the legitimate interests of the infrastructure owner, the Full Court’s decision ensures that consequential costs associated with access, including public costs, may be taken into account.
The decision is important in clarifying the scope of the declaration provisions under Part IIIA of the CCA. By limiting the regulators’ ability to declare infrastructure to circumstances where it is not “privately profitable” for any other market participant to create an alternative facility, the Full Court has stated that it is “simply not justified by an evaluation by a regulator that economic efficiency from the point of view of society as a whole would be served”.
While this decision clarifies that declaration will be the clear exception, it will be interesting to see how this interpretation may evolve in the mining sector if carbon output is priced, and the environmentally and economically efficient use of infrastructure is further promoted.