Productivity Commission's final report on the National Access Regime

In brief

The Productivity Commission's final report on its review of Australia's National Access Regime has now been released. The report supports the continuation of the National Access Regime subject to reforms, including altering the criteria for the application of access regulation. However, with the Coalition Government's response effectively becoming part of the 'root and branch' review of Australia's competition laws, the current uncertainty for infrastructure providers and users is likely to continue for another 12 months. Partner Ted Hill, Senior Associate John Hedge and Lawyer Rowan Kendall report.

The National Access Regime here to stay

The Productivity Commission's final report, supports the retention of the Regime as enshrined in Part IIIA of the Competition and Consumer Act 2010 (Cth) (the CCA). However, it concluded that access regulation should only be applied to address the problem of enduring lack of effective competition through natural monopoly.

In reiterating its statements from the draft report, the Productivity Commission's final report concludes:

• the negotiate-arbitrate framework should be maintained: with the focus continuing to be on negotiation where possible, subject to a credible threat of arbitration encouraging the parties to reach agreement on reasonable terms. The Productivity Commission did, however, leave open industry-specific processes that justify deviation from the negotiate-arbitrate model;
• the current three-tiered decision process for declaration of services should be maintained: specifically, this involves a recommendation by the National Competition Council (NCC), followed by declaration by the designated Minister and possible review by the Australian Competition Tribunal. The Productivity Commission did address some complaints regarding the timeliness of the process, recommending only limited merits review be available; and
• a deemed decision on declaration arising from a Minister's failure to make a decision should follow the NCC's recommendations: where the Minister fails to reach a decision within the 60-day timeframe, he or she should be deemed to have followed the recommendation of the NCC. This would alter the current approach where the Minister is deemed not to have declared the service.

Reforms to the declaration criteria

Perhaps the most important recommendations are the suggested amendments to the declaration criteria, being the matters about which the relevant decision makers must be satisfied in order for a service to be declared and thereby become subject to the Regime.

Declaration to promote a material increase in competition – criterion (a)

As was foreshadowed in its draft report, the Productivity Commission has recommended raising the threshold for criterion (a).

Currently, when assessing a service under criterion (a), the decision maker considers the state of the market without any form of access and identifies whether there would be a material increase in competition if regulated access was permitted. As the Productivity Commission identifies, the existing approach of assuming access is not being provided can overstate the impact on competition where, in reality, access is actually being provided.

The recommended test would instead compare the status quo (ie, the market without declaration, which may or may not involve access being provided on commercially negotiated terms) to a hypothetical future state of competition if the facility were declared (which is assumed to result in access being provided on reasonable terms and conditions).

The focus on the status quo would, if implemented, tend to promote unregulated access regimes (enshrined by other means such as contract), which could potentially provide access terms that were less favourable to users than likely regulated terms, but sufficiently even-handed from a competition perspective, such that more favourable regulated terms would not promote a material increase in competition.

Re-instigating the 'natural monopoly test' – criterion (b)

The Productivity Commission considered there were shortcomings with each of the three interpretations of criterion (b) which have been previously applied by the courts, the Australian Competition Tribunal, and the National Competition Council.

The Productivity Commission therefore, proposed its own test where decision makers must ask whether the facility can meet total foreseeable market demand for the infrastructure service – including the demand for any substitute services provided by facilities serving that market – at least cost. This is determined by asking whether the cost of one facility meeting total market demand outweighs the costs associated with two or more facilities meeting that demand.

The Productivity Commission recommends a three-step approach:

• Determine the market (using traditional competition law principles including the 'small but significant and non-transitory increase in price' test).
• Estimate total foreseeable demand at a the point in time when market demand is expected to be highest in the declaration period.
• Assess whether the facility in question can meet market demand at a lower cost than two or more facilities competing in the market.

This appears most similar in nature to the 'natural monopoly' test, and would overturn the 'private profitability test' recently applied by the High Court in the Pilbara access dispute, thereby re-lowering the threshold for this criterion.

To the extent that the private profitability test was maintained, the Productivity Commission recommended that the 'uneconomic for anyone to duplicate' criterion should not be satisfied by it being privately profitable for the incumbent infrastructure service provider to duplicate the facility (as the High Court had interpreted it).

Positive benefit to the public – criterion (f)

The Productivity Commission also recommended amendment to the public interest test in criterion (f).

When currently applying criterion (f), the decision maker must be satisfied that access 'would not be contrary to the public interest'. However, largely based on the perceived costs of, and operational disruption caused by, regulation, the Productivity Commission has recommended that the threshold should be raised to require that access (on reasonable terms following declaration) positively promotes the public interest. This raising of the threshold was proposed to be supplemented with a requirement to have regard to the effect of declaration on investment in infrastructure services and dependent markets and the administrative and compliance costs that are incurred once a service is declared (with such factors not being intended as an exhaustive list as to what can be considered in assessing the public interest).

Powers to compel capacity expansions

The Productivity Commission has recommended that the power to compel 'extensions' to a regulated facility be clarified to also cover requirements for capacity expansions (albeit subject to application of the existing safeguards for infrastructure providers¹). In relation to the safeguard about the infrastructure provider not being required to pay the costs of the expansion, the Productivity Commission indicated that should not be interpreted as enabling the ACCC to compel the infrastructure provider to pay upfront costs of an expansion (even if those costs were subsequently able to be recouped via take or pay contracts).

The ACCC has never exercised a power to direct an extension under the Regime, but the Productivity Commission considered the ability to do so remained necessary to prevent service providers undermining the Regime by deliberately delaying infrastructure investment or constructing facilities with suboptimal capacity to limit competition and extract monopoly rents.

However, it was noted that there would be numerous practical and operational difficulties involved in ordering mandatory extensions, such that the benefits of using the mandatory extension power would rarely outweigh the costs involved. The current process, under which the Queensland Competition Authority is considering standard user funding arrangements for capacity expansions of Aurizon Network's central Queensland coal region rail network was referred to as an example of the complexities involved.

Other points of note

The Productivity Commission also noted:

• while many submitters suggested that electricity and gas regimes required certification to ensure consistency and certainty, the overall costs of certifying these regimes may in fact outweigh the benefits. As such, the Productivity Commission recommended that state and territory governments should be released from having to submit electricity and gas regulation for certification;
• industry-specific regimes should only be pursued where the specific circumstances make it efficient and cost-effective to do so. In particular, the Productivity Commission noted that differences in some industry-specific regimes (for example rail regulation) may increase costs for service providers who are required to comply with multiple jurisdictionally-specific access regimes. As such, industry-specific regulation is only supported on a case-by-case basis; and
• review of the Regime should occur within 10 years from the Federal Government's response to the current inquiry as the Regime requires constant review to ensure its effectiveness.

Government's response to form part of the 'root and branch' review

As part of its election promises, the Coalition Government pledged to implement a 'root and branch' review of Australian competition law.

The Draft Terms of Reference for the review are extensive, and include 'considering whether the National Access Regime contained in Part IIIA of the CAA (taking into account the Productivity Commission's recent inquiry) is adequate' and examining 'the structure and behaviour of markets with natural monopoly characteristics' to determine whether the existing regulatory frameworks are leading to efficient outcomes and whether there are opportunities to increase competition².

Accordingly, it appears that the Coalition Government's response to the report's call for reform will be subsumed within the broader 'root and branch' review and stay 'on ice' until then.

Conclusion

The Productivity Commission's recommendations are likely to be an ongoing issue of debate, with parties having further opportunities to make submissions on the more controversial aspects of the report as part of the 'root and branch' review.

Given the timing for that review, parties considering investment in, or seeking access to, natural monopoly infrastructure will need to be conscious of the future uncertainty as to the exact scope of the Regime, which is not likely to be resolved for at least another 12 months.