Game changer? Reflections on Glencore's win at the Port of Newcastle

In short

• The Australian Competition Tribunal's (Tribunal) decision at the Port of Newcastle could materially increase the scope of pricing and access regulation of significant infrastructure, creating challenges for infrastructure owners and users, privatisations and other infrastructure-based transactions.
• The Tribunal's decision means the answer to the question "When will infrastructure be subject to access and price regulation?" is now: "More often."

What you need to know

Since May 2015, Glencore Coal Pty Ltd (Glencore) has been seeking a third party access declaration at the Port of Newcastle (the Port). The Port is Australia's biggest coal port, and is already operated on a multi-user basis.

• Glencore's application is a response to the decision by the operators of the newly privatised Port to materially increase Port charges. Glencore is seeking declaration of the use of the Port's shipping channel and berths (the Service) not to obtain use of the Service (as ships servicing Glencore and other producers already regularly use it), but so that negotiations with the Port operator over the price and other terms of use are subject to arbitration by the Australian Competition and Consumer Commission (ACCC).
• Glencore was initially unsuccessful: the National Competition Council (NCC) recommended against declaration, and on 8 January 2016 the Acting Commonwealth Treasurer (Minister) decided not to make the declaration. However Glencore sought review of the Minister's decision by the Tribunal, and on 31 May 2016 the Tribunal decided that the declaration should be made.
• The critical issue was whether access or increased access to the Service would promote a material increase in competition in another market (declaration criterion (a)), and whether that question should be assessed having regard to the fact that Hunter Valley coal producers already use the service. This is in substance a question about whether regulation of major infrastructure should be based on a factual analysis of the incremental benefits of introducing declaration/regulation, or on a more hypothetical analysis that ignores the fact that the service may already be available to and used by those who seek it.
• The Tribunal considered that it was bound by a decision of the Full Federal Court not to consider the prevailing use of the service in applying this test, and so applied the more hypothetical analysis. The Tribunal's decision considerably lowers the bar for declaration of infrastructure, and will have particular significance for multi-user infrastructure. Historically, the orthodox view has been that third party access declaration is critically concerned with promoting competition, not simply with price regulation. However if the fact that infrastructure is already operated on a multi-user basis ceases to be relevant to declaration criterion (a), it is possible that infrastructure may be declared – and regulatory oversight imposed – where declaration would achieve few, if any, incremental competition benefits. This will introduce additional challenges for those operating, selling, buying or seeking to use multi-user infrastructure.

What next?

• It is possible that the Port operator may seek judicial review of the Tribunal's decision.
• The decision may also affect recent proposals to reform the declaration regime and the National Gas Law.

Introduction

On 31 May 2016, the Tribunal published its decision on Glencore's application for review of the Minister's decision not to declare the Service at the Port under Part IIIA of the Competition and Consumer Act 2010 (Cth) (National Access Regime) - (Application by Glencore Coal Pty Ltd [2016] ACompT 6). The Tribunal decided that the Service should be declared.

A service can only be "declared" if it meets five specified declaration criteria. The Minister was not satisfied of declaration criterion (a): that access (or increased access) to the service would promote a material increase in competition in another market.

However the Tribunal reached the opposite conclusion: it considered that the Minister had applied the wrong test in assessing declaration criterion (a), and that on application of the correct test, the criterion would be satisfied. The case turned on the application of a decision of the Full Federal Court in Sydney Airport Corporation v Australian Competition Tribunal (2006) 155 FCR 124 (Sydney Airport).

Background

Glencore's application

Our previous Competition Law News dated 18 January 2016on the "National Access Regime stays our of the Port of Newcastle" sets out the background to Glencore's application.

In brief:

• in May 2014, the Port was privatised, with day-to-day operation of the Port managed by Port of Newcastle Operations Pty Ltd (PNO);
• the State of New South Wales (State) established a light-handed price monitoring regime, but no formal access or regulatory framework; following the privatisation, PNO increased prices for channel usage by 40% - 60% (by vessel size);
• Glencore objected to the price rise, and in May 2015, applied to the NCC for third party access declaration of the Port's "shipping channel service";
• on 8 January 2015, the Minister decided not to declare the service (which was consistent with the NCC's recommendation in November 2016); and
• on 29 January 2016, Glencore filed its application to the Tribunal for review of that decision.

Declaration under the National Access Regime

Under the National Access Regime, any party may apply to the NCC for the declaration of a service. Declaration provides a binding right for any third party seeking access to the service to:

• negotiate access terms with the service provider (eg the infrastructure owner or operator); and
• refer disputes to binding arbitration by the ACCC.

The NCC undertakes a public process and makes a non-binding recommendation to the relevant Minister, who then decides whether to make the declaration.

A service cannot be declared unless all of the following statutory declaration criteria are satisfied:

• criterion (a) – that access (or increased access) to the service would promote a material increase in competition in at least one market (whether or not in Australia), other than the market for the service;
• criterion (b) – that it would be uneconomical for anyone to develop another facility to provide the service;
• criterion (c) – that the facility is of national significance, having regard to its size, or importance to constitutional trade or commerce, or importance to the national economy;
• (criterion (d) - repealed);
• criterion (e) - that access is not regulated by an "effective" alternative access regime; and
• criterion (f) – that access (or increased access) to the service would not be contrary to the public interest.

The initial analysis

Both the NCC and the Minister had reached the view that all of the declaration criteria were satisfied except for declaration criterion (a).

The critical issue was how declaration criterion (a) should be applied, given that Glencore already had the use of the service sought to be declared.

Both the NCC and the Minister approached declaration criterion (a) on the basis that, since ships servicing Glencore and others already had use of the service, it was appropriate to take this into account. Accordingly, they didn't ask whether "access" would promote a material increase in competition, since access, or use, was already readily available to those who wanted it. Therefore, they asked whether increased access would promote a material increase in competition. In other words, they considered whether the imposition of declaration and access on reasonable terms and conditions through the National Access Regime would incrementally promote competition above the levels that would otherwise exist, having regard to the extent to which the service was already available for use. This approach was considered to be consistent with the Sydney Airport decision, but it was also acknowledged that the implications of legislative reform and subsequent cases decided under the National Access Regime needed to be taken into account in considering the Sydney Airport decision.

This approach led to an analysis of the impact of access through declaration on the following markets Glencore identified:

• a coal export market;
• markets for the acquisition and disposal of exploration and/or mining authorities;
• markets for infrastructure connected with mining operations, including rail, road, power and water;
• markets for specialist services such as geological and drilling services, construction, operation and maintenance;
• a market for the provision of shipping services involving shipping agents and vessel operators; and
• a market for the financing of coal projects in the Hunter Valley.

The NCC and Minister were not persuaded that the coal financing market existed. In relation to the other markets, they concluded that increased access would not promote competition. Glencore had argued that access through declaration would promote competition by introducing important certainty, through regulation, in relation to prices and other terms of use. However the NCC and Minister did not accept this view. Critically, they considered that the coal export market was already effectively competitive, such that increased access would not promote competition in that market, or in the other identified markets, each of which depended on it. The Minister and NCC also placed significance on their views that:

• port fees only represented a small fraction of the overall costs faced by coal producers (such that they considered that changes in those fees were not likely to affect competition in related markets);
• uncertainty about future port fees was limited, compared to other risks in the coal industry; and
• it was more likely that PNO would have an incentive to maximise the flow of coal through the port, than that it might raise prices to such an extent that some coal producers would respond by ceasing operations in the Hunter Valley.

The NCC and Minister both also concluded that there was no basis to reject the declaration application on public interest grounds; in particular, they did not accept arguments by the Port that it would be contrary to the public interest to disturb, by declaration, the light-handed price monitoring regime that the State had established for the Port as part of the privatisation.

Tribunal's decision

The two key issues on review were the proper assessment of declaration criteria (a) (promotion of competition) and (f) (public interest).

Would access promote competition?

Glencore argued that declaration criterion (a) required a comparison between the future state of competition in a dependent market "with" access, and "without" access. This was not the basis on which Glencore made its initial application, but it was subsequently raised following the NCC's draft determination.

Glencore argued that "access" meant a legal entitlement to use the service (which it said no users currently have), and that the question whether access would promote competition should be considered without regard to whether use of the service was already available. On this view, declaration criterion (a) was said to be readily satisfied: ignoring the fact that Hunter Valley coal is already shipped from the Port, it was sufficient to identify that use of the Port is essential in order to export coal from the Hunter Valley; without access to that essential facility, there would be limited or no coal exported from the Hunter Valley, such that "access" would promote competition in the coal export market (and those markets that depend on it) relative to a situation with "no access".

Glencore submitted that if it was incorrect on this primary argument, and it was relevant to consider whether "increased access" above the existing multi-user arrangements would promote competition, then the increased certainty said to be facilitated by the prospect of ACCC arbitration (as described above) constituted "increased access", and would promote competition.

The Tribunal ultimately agreed with Glencore's primary argument, based on its application of the Full Court of the Federal Court in a previous decision: Sydney Airport Corporation v Australian Competition Tribunal (2006) 155 FCR 124 (Sydney Airport).

• In Sydney Airport, the Full Court overturned a decision of the Tribunal under the National Access Regime, to declare a service relating to the use of airside facilities at Sydney Airport (including movement of departure gates, maintenance, and equipping of aircraft). An airline had sought declaration of the services after the operator imposed significant changes to its fees. Like Glencore's case, the airline already had the use (in the practical sense) of the services. The issue before the court was whether criterion (a) was satisfied, given that the operator was not denying or restricting access to the services. The Full Court held that it was not necessary to identify a denial or restriction of access in order for declaration criterion (a) to be satisfied.
• The Full Court also observed in Sydney Airport that declaration criterion (a) requires a comparison of the future state of competition in the dependent market with a right or ability to use the service (or an increased right or ability), and the future state of competition in the dependent market without any right or ability (or with a restricted right or ability) to use the service. It considered that this analysis should be undertaken without regard to the extent to which, or terms on which, usage of the relevant service was currently being provided. However the Full Court also observed that prevailing terms of use may be otherwise relevant to the decision of whether to declare a service.

The Port and the NCC made submissions to the Tribunal to the effect that the approach adopted in the Sydney Airport decision did not preclude any consideration of the fact that use of the relevant services was already being provided. They also submitted that subsequent legislative amendments and decisions (including in relation to the Pilbara iron ore railways) were relevant to the interpretation of Sydney Airport. They submitted that those developments meant it was appropriate for the Minister to consider the effect of access (or increased access) on such reasonable terms and conditions as may be determined via the arbitration stage of Part IIIA. They considered that, as a result of those amendments, criterion (a) did not preclude consideration of prevailing use of the Service.

However, the Tribunal determined that it was bound to apply declaration criterion (a) in accordance with the decision in Sydney Airport, substantially unaltered by these later developments. Accordingly, the Tribunal concluded that declaration criterion (a) must have been satisfied:

"the service providing access to the shipping lanes is a natural monopoly and PNO (the port lessee/operator) 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".
( See paragraph 113 of the Glencore decision.)

Given the essentiality of the service, on this reasoning, to the existence of competition in the export market, the Tribunal was satisfied that access to the service would promote a material increase in competition in that market.

The alternative argument – increased access

However the Tribunal did also specifically address the alternative argument put by Glencore – ie that "increased access" would, by enabling negotiation with recourse to ACCC arbitration, provide increased certainty to coal producers which would increase the level of competition in the coal export and other markets.

In particular, the Tribunal noted that if it was incorrect in considering itself bound by Sydney Airport, and in its application of that decision, then it would reject this alternative argument for substantially the same reasons that it was rejected by the NCC and the Minister (as outlined above). The effect of this observation by the Tribunal is that, if criterion (a) does in fact require consideration of the incremental competition benefits from access on reasonable terms and conditions through declaration, then the Tribunal would not be satisfied of criterion (a) and would not declare the service.

Public interest test

PNO argued that criterion (f) was not satisfied because the Minister failed to weigh up all of the costs and benefits to the public interest of providing access (or increased access). In particular, PNO pointed to the public interest in facilitating a light-handed regulatory approach to the Port and not interfering in the price monitoring arrangements adopted between PNO and the State. PNO also submitted that the public interest analysis should have had more significant regard to the competition benefits from imposing access through declaration. It submitted that, in circumstances where there were few competition benefits because PNO was already allowing use of the Service, it would be contrary to the public interest to declare the Service.

The Tribunal rejected PNO's arguments, emphasising that it should not lightly depart from the Minister's decision on the public interest. It expressly supported the submission of the NCC that criterion (f) requires the Tribunal to address anything that has not been considered under the other criteria that would make access contrary to the public interest, and should not be used to call into question the results of the application of the earlier criteria (eg whether access would promote competition).

Ultimately, the Tribunal was not persuaded that access through declaration would be contrary to the public interest. In particular, it considered that the existing price constraints on PNO were not an effective substitute for access regulation, and did not consider that access through declaration would cause costs, or lead to adverse effects on investment, that would render access or increased access contrary to the public interest.

What does it mean in practice?

This decision increases the challenges associated with designing, pricing and executing infrastructure transactions involving multi-user infrastructure – not only port infrastructure, but any infrastructure that has monopoly or "essential" features.

• To date, the fact that infrastructure was already operated on an open access basis, or was readily used by all customers, was often considered relevant to the assessment of that risk, on the basis that there could be little incremental competition benefit from declaring a service that was already available to those who wanted to use it.
• However, following the Tribunal's decision, the fact that use of the relevant infrastructure is readily available on fair and reasonable terms will do little to reduce the risk of a successful declaration application.

This means that governments and businesses:

• can expect to face greater risk of a declaration application (since the "degree of difficulty" of succeeding with those applications has been reduced); and
• may need to look to more complex options if they seek upfront regulatory certainty about their transaction – for example, by pursuing access holidays/no coverage determinations, State or Territory "effective" access regimes, or voluntary Part IIIA undertakings.

The alternative is to bear the risk of declaration – and hence regulation – occurring after a deal is done; this will raise real challenges in terms of pricing that risk.

Law reform

We have previously outlined two recent law reform proposals which now appear likely to be affected by the Tribunal's decision.

First, in November 2015, the Commonwealth government released its response to recommendations by the Productivity Commission and the Harper Review regarding the National Access Regime. One of the reforms supported by the Commonwealth was a statutory amendment to declaration criterion (a), so that it would test whether access on reasonable terms and conditions through declaration would promote a substantial increase in competition – ie, so that it would test the incremental competition benefits from regulation. (See our Competition Law News dated 18 January 2016on the "National Access Regime stays out of the Port of Newcastle".)

This reform has not yet been implemented; if it had been, it may well have reversed the outcome of the Tribunal's decision. It remains to be seen whether this amendment will still occur, following the Tribunal's decision and the upcoming federal election.

Secondly, the ACCC's Report on its East Coast Gas Inquiry also recently recommended changes to the law regarding "coverage" of natural gas pipelines for access and price regulation under the National Gas Law. The National Gas Law contains "coverage criteria" that are based on the "declaration criteria". As explained in our previous Competition Law News dated 4 May 2016 on "ACCC East Coast Gas Report: now that the dust has settled, what does it all mean?"), the ACCC has recommended that the equivalent to "declaration criterion (a)" in the National Gas Law – which is in relevantly identical terms – should be replaced with a "market power" test in order to facilitate increased pipeline coverage. While the Tribunal's decision remains in place, the need for that reform is arguably reduced, as the Tribunal's decision may mean that the threshold for coverage under the National Gas Law is considerably lower than it has been in the past.

Looking ahead

It is possible that PNO may seek judicial review of the Tribunal's decision to the Full Court of the Federal Court. Any such appeal would be limited to a question of law – for example, whether the Tribunal was correct in its application of the approach in Sydney Airport.