NSW Rail Summit 2001

NSW Rail Summit 2001
Merchant Court Hotel Sydney
30 April & 1 May 2001
The ACCC’s role in rail industry access and competition arrangements
John Martin Commissioner
Australian Competition and Consumer Commission
INTRODUCTION
Following the 1992 Hilmer review of national competition policy, Commonwealth and state/Territory governments agreed to development of the main elements of a comprehensive national policy, which included:
·  the extension of the Trade Practices Act, 1974 (TPA) to all forms of business virtually without exception;
·  a process for the review and reform of all laws that potentially restrict competition to determine whether these laws are in the Australian public interest;
·  a process for the review and reform of public utility monopoly structures;
·  a generic law regarding access to "essential facilities";
·  a competitive neutrality policy putting government business operations on the same level as competing private sector business operations; and
·  a price surveillance regime.
The Australian Competition and Consumer Commission (ACCC) was established as a new body merging the former Trade Practices Commission and the Prices Surveillance Authority. A new role was added to the ACCC’s existing functions giving it additional powers and responsibilities to regulate rail and other industries such as gas and electricity being opened up to greater competitive pressures.
These sectors were often government owned and in many cases effectively run as part of government. Their revenue was part of government revenue and pricing policies were influenced by government social policy.
A significant reform process was set in train with the separation of those areas of activity that were contestable. Some privatisation occurred but otherwise the monopoly component remained in government ownership, but as separate independent corporations.
The National Competition Council (NCC) was also formed to have policy functions, as well as a legislated role under the access regimes, to take particular account of the interests of the states.
Rail Sector Developments
Over the past five years, there has been significant reform of the rail industry. While the pace of reform has not been as rapid as many would have hoped for, the industry is discernibly different today compared to the mid 1990’s.
There has been structural change in the industry. A wide spectrum of structural arrangements is now in place across jurisdictions. Nationally, the formation of the Australian Rail Track Corporation (ARTC) has provided some impetus to developing a national rail network. The ARTC now owns the interstate track in South Australia (including the track to Kalgoorlie in Western Australia and to Alice Springs in the Northern Territory) and has control over the interstate track in Victoria where it has a lease agreement.
There has also been a number of rail asset privatisations. Rail assets have been sold in Victoria and Western Australia. Other governments are also moving to privatise their rail businesses.
In line with these structural developments, there have also been changes in rail industry regulatory arrangements. Part IIIA of the Trade Practices Act 1974, which establishes a legal regime to facilitate access to the services of certain facilities of national significance such as rail track, has been introduced.
These changes mean that the Commission will play a more significant role in the rail industry in coming years. I will outline the Commission’s role in rail industry access and competition arrangements, focusing on two main areas.
·  First, the Commission’s role in administering rail access arrangements under Part IIIA of TPA. Until recently, the Commission has not exercised access responsibilities as the jurisdictions have implemented access arrangements that have not involved the Commission. However, the ARTC undertaking provides a direct access role for the Commission. I will discuss how the Commission will carry out this role.
·  Second, I will discuss the Commission’s role in assessing competitive effects of rail industry privatisation under the mergers provisions of the TPA. This role has been exercised recently in the National Rail – FreightCorp parallel sale process.
RAIL ACCESS
The purpose of Part IIIA of the TPA is to provide a statutory basis for access on reasonable terms and conditions to services provided by a limited class of facility. Third party access arrangements are being promoted because access to rail services can encourage upstream and downstream competition.
Facilities covered by Part IIIA exhibit the following features:
·  natural monopoly characteristics;
·  strategic position in an industry; and
·  national significance in facilitating interstate or international trade.
The service defined in Part IIIA is a service provided by means of a facility, not the facility itself. Included in the definition is the use of an infrastructure facility such as a railway line.
Part IIIA defines a role for regulatory agencies only after a process of private negotiations between the parties fails to resolve an access dispute. Part IIIA contains three main avenues for dealing with access issues:
·  Declaration, arbitration and enforcement. Applications for a service to be declared, that is to be made available for access, can be lodged with the National Competition Council (NCC) by any person. Once declared, if the facility owner and access seeker can not reach agreement on terms and conditions for access, either directly or through a private arbitrator, then the matter may be referred for arbitration to ACCC or another arbitrator. Arbitration determinations by the ACCC are enforceable through the courts.
·  Undertakings. The owner of a facility can offer an undertaking to the ACCC stipulating the terms and conditions upon which it is willing to provide access to third parties. Once an undertaking is accepted by the ACCC, the service in question cannot be declared and the undertakings are enforceable through the courts. The purpose of the undertakings provisions of Part IIIA is to give the facility owner the opportunity to remove the uncertainty inherent in a declaration/arbitration process as to what access conditions may apply.
·  Recognition of Effective regimes. Part IIIA allows for States and Territories to have their own access regimes recognised as "effective" and thus exempted from the further provisions of Part IIIA. To clarify whether the National regime or a State regime governs access to a particular service, the TPA permits State and Territory governments to ask the NCC to recommend to the Federal Treasurer that their regimes are certified effective. If the Treasurer decides that a particular access regime is effective, the terms of access will be governed by that regime rather than a national access regime.
It is possible that in future the Commission will have to arbitrate on rail access disputes, should any of the sate-based access regimes be declared. However, this presentation focuses on access undertakings and it is noted the Commission currently is considering an access undertaking in rail.
ARTC Undertaking
On 22 February 2001, the ARTC lodged an access undertaking with the Commission. The undertaking sets out the terms and conditions of providing access to the interstate mainline standard gauge track linking Kalgoorlie in Western Australia; Adelaide, Wolseley and Crystal Brook in South Australia; Broken Hill in New South Wales and Melbourne and Wodonga in Victoria.
The undertaking covers issues such as –
·  The scope and administration of the undertaking;
·  access negotiations;
·  pricing principles sets out the principles used by ARTC to derive access charges;
·  management of capacity;
·  network connections and additions to capacity; and
·  network transit management.
In deciding whether to accept or reject the proposed undertaking the Commission is required to take into account, amongst other things, the legitimate business interests of the service provider and also the interests of potential third party users.
These criteria are quite broad, focusing on the interests of the various parties as well as the public interest. The Commission must give appropriate weighting to the various concerns raised by interested parties and achieve a workable balance between the diverse interests represented by the criteria. In balancing these criteria the Commission will consider its overriding objective that an access undertaking should promote competition and economic efficiency.
Assessing Access Undertakings
The ACCC’s approach to the assessment of access undertakings is set out in its publication ‘Access Undertakings’.
This publication sets out the matters that an undertaking should cover in order to provide an effective third party right of access. In particular, the Access Guide notes that:
The ACCC needs to be satisfied that the undertaking is sufficiently detailed to be court enforceable. Thus the boundaries to negotiations specified in an undertaking must be clearly defined.
As a starting point for negotiations undertakings should:
o  clearly specify what services are subject to the undertaking;
o  specify what terms and conditions are open to negotiation;
o  provide a framework for negotiations including clearly defined boundaries for the negotiations;
o  provide relevant information necessary for meaningful negotiations;
o  include effective provisions for dispute resolution;
o  provide for potential third party users to be fully informed about non-negotiable terms and conditions; and
o  specify an expiry date for the undertaking.
Negotiations could cover a range of issues, which might include:
o  access prices;
o  service standards;
o  connection and disconnection arrangements;
o  capacity constraints and extension of capacity;
o  trading and queuing policies; and
o  review and expiry.
Access Pricing Issues
If the Commission’s experience regulating other industries is replicated in rail, a great deal of interest will focus on access pricing issues. The requirements governing access pricing are a central part of any access undertaking.
The Commission believes that access pricing proposals should be designed to:
·  prevent monopoly rent-taking by facility owners; and
·  provide efficient market signals for the use of existing facilities and for future investments
To achieve these objectives, the Commission will have to be satisfied that the proposed access pricing arrangements are consistent with the legitimate business interests of the access provider. While access providers should not be protected from normal commercial risks, the access regime should not require them to undertake investments which are uneconomic and should not discourage commercially sound investment opportunities.
The Commission will also have to be satisfied that the proposed access pricing arrangements are consistent with the interests of third party access seekers. In this context, access pricing arrangements:
·  should reflect efficient costs and not monopoly profits nor cost padding including ‘gold plating’ of investments and excessive remuneration of staff;
·  should reflect an access seeker’s use of the facility; and
·  should not be used to hinder access.
Other desirable features of the access pricing regime is that it should be flexible for individual circumstances and include incentives for the access provider to improve efficiency over time and to share the benefits of any such efficiency improvements with facility users.
In terms of the public interest, the Commission will have to consider whether the access pricing regime is capable of promoting community welfare and that any benefits of reform and efficiency improvements are not wholly captured by industry participants.
The Commission released an Issues Paper on the undertaking and called for submissions from interested parties. Submissions were to have closed on Friday, 27 April. However, a number of interested parties have suggested that they require more time to lodge submissions. The Commission will write to interested parties this week to inform them of the new closing date for submissions. Following consideration of the submissions, the commission will release a draft decision on the ARTC’s undertaking. At that time, interested parties will have an opportunity to comment on the Commission’s draft decision. Once these further submissions are considered, the final decision will then be released.
PRIVATISATION AND MERGERS ISSUES
The Commission also plays a role in the rail industry in assessing privatisation proposals under section 50 of the TPA.
Section 50 of the TPA prohibits mergers or acquisitions which result, or are likely to result, in a substantial lessening of competition in a market. The Commission assesses merger proposals to determine whether such proposals are likely to breach this test. Section 50 sets out a number of criteria that the Commission must take into account in assessing the potential competitive impact of a proposed merger.
Factors to be taken into account include:
·  The level of market concentration;
·  Barriers to entry;
·  Countervailing power;
·  Dynamic characteristics of the market;
·  Availability of substitutes; and
·  The level of vertical integration.
The Commission’s Merger Guidelines outline the approach adopted in assessing each of these factors.
To date the Commission’s assessment of acquisitions involving Australian railways has largely been limited to the sales of a number of state-based railways to parties that, in general, have been new entrants to the Australian transport industry.
For example, in late 1998 – early 1999 the Commission considered the privatisation of V/Line Freight. The Commission did not oppose any of the shortlisted bidders, including Rail America which was ultimately successful in acquiring the business.
Sale of FreightCorp and National Rail
Recently, however, the Commission has considered the proposed parallel sale of FreightCorp and National Rail.
The sale of both businesses to a single party, and particularly to any party currently operating in the Australian transport industry, clearly raises issues that need to be investigated fully. The sale of National Rail and FreightCorp to the one bidder raises two main questions:
i.  Does the joint acquisition of both businesses by any party give rise to competition concerns pursuant to section 50 of the TPA because of any lessening of competition caused by the amalgamation of National Rail and FreightCorp?
ii.  Does the joint acquisition of both businesses by particular parties already operating in the Australian transport industry, or a consortium of such parties, give rise to competition concerns?
The Commission’s investigations and data raised a number of areas of potential concern with the joint sale. These concerns relate to:
·  The nature of current and likely future competition between National Rail and FreightCorp in respect of particular transport services provided. These services include the freighting of coal and other bulk products, as well as intrastate and interstate general freight.