Pilbara Rail access dispute: Federal Court derails Fortescue’s application for declaration

Criterion B must be decided on the basis of whether it is “privately profitable” to duplicate the service

Tribunal previously applied a “social benefit” test

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[2]

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:

• compared the construction and operational costs (i.e. excluding social or consequential costs) of an alternative infrastructure facility with those of a shared infrastructure facility (i.e. one open for third party for access) across a period of foreseeable demand for the services; and
• assessed whether a single infrastructure facility would provide for the desired (forecast) output at a lower construction and operational costs than two or more infrastructure facilities.

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.

Full Court adopted a narrower test for Criterion B

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…”[3] 

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. 

Benefits of the Full Court’s approach

This approach is likely to result in:

• targeted economic evidence on whether development of alternative infrastructure will be privately profitable;
• greater predictability by using a clearer economic-based assessment of Criterion B, rather than the more complex “social benefit” issues; and
• narrower circumstances in which Criterion B will be satisfied.

Criterion F must continue to take into account a full range of public interest issues

Fortescue argued that Criterion F must be narrowly applied when making the initial declaration decision

The Full Court rejected Fortescue’s argument that:

• Criterion F limits the types of costs that can be taken into account when assessing the whether granting access would be contrary to the public interest; and
• a number of costs of access should not be taken into account in the initial declaration decision, but must be determined by the Australian Competition and Consumer Commission (ACCC) in relation to any access arbitration decision it makes.

Full Court upheld a wider approach to Criterion F

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:

• costs of the infrastructure owner in providing access (i.e. the infrastructure owner’s legitimate interests, as distinguished from any potentially anti-competitive interests in not providing access);
• costs involved with negotiating access to the infrastructure, including any costs associated with a potential ACCC determination of any future access dispute; and
• general social costs and benefits in the Australian public interest, including factors such as potential delays to expansions or the retardation of technological development if access is granted. 

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” [4].  

Benefits of the Full Court’s approach

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.

Conclusion: narrower application of Criterion B should provide greater certainty to declaration decisions

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.

Footnotes

• [1]     Fortescue Metals Group ASX Release, 4 May 2011.
• [2]     See Tribunal decision first applying this test in Re Sydney Airports Corporation Ltd (2000), ACompT 1. 
• [3]     Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal [2011] FCAFC 58, paragraph 86. 
• [4]     Paragraph 111.