What you need to know

In February 2014, the Productivity Commission's (PC) final report to the Government on the National Access Regime under Part IIIA of the Competition and Consumer Act 2010 was released.

The PC has made the following recommendations:

• keep Part IIIA because it provides a sound basis for resolving access disputes, effective pricing principles to ensure investment incentives are addressed, certainty via the option to provide undertakings and alignment between national, state and territory access regimes.
• amend declaration criterion (a) so that it is fulfilled where access to an infrastructure service on reasonable terms and conditions through declaration (rather than access per se) would promote a material increase in competition in a dependent market.
• specify a new test akin to the natural monopoly test under declaration criterion (b) to overturn the High Court's decision in the Pilbara iron ore railways case that a private profitability test applies.
• remove and replace declaration criterion (e) with a threshold test that a service cannot be declared if it is subject to a certified access regime.
• change declaration criterion (f) into an affirmative test that requires an applicant to show that declaration would promote the public interest and include a non-exhaustive list of relevant factors not expressly covered by the other declaration criteria such as effects on investment and compliance costs.
• assess access undertakings against the declaration criteria to ensure they properly address economic problems and deliver net benefits.
• require the ACCC to publish guidelines on how its power to direct facility extensions (including capacity expansions) would be exercised in practice in access arbitrations.
• change the deeming provision for the Minister's declaration decision so that where no decision is made, the Minister is deemed to follow the NCC's recommendation.

What happens next?

Minister Bruce Billson has indicated that the Government will not respond to the PC's recommendations until the 'root and branch' review of competition law has been finalised later this year.

Watch this space…

Key issues & recommendations

The PC's final report largely adopted the key recommendations set out in its draft report of May 2013.

Retaining Part IIIA

Following an assessment of the costs and benefits of Part IIIA, including the above issues and recommendations, the PC concluded that on balance, Part IIIA should be retained because it is likely to generate net benefits to the community.

In the PC's assessment:

• the framework for negotiating and arbitrating under Part IIIA provides a sound basis for resolving access disputes;
• the pricing principles provide sufficient scope for the ACCC to consider investment incentives in its determinations;
• amendments to the CCA made in 2010 and the High Court's decision in the Pilbara rail case in 2012 would result in merits review of Part IIIA decisions by the Tribunal being more confined, taking less time and therefore being less costly, than in the past;
• Part IIIA is likely to improve the quality of state and territory access regimes through a demonstration role and the formal certification process;
• undertakings can be used to provide certainty to both service providers and potential access seekers over the terms and conditions of access to the service; and
• in Part IIIA's absence, governments may adopt ad-hoc approaches to access regulation that would result in less efficient outcomes than under Part IIIA.

Declaration

Criterion (a) - that access promote a material increase in competition in at least one market other than the market for the service being considered

The PC considered that the current competition test under the declaration criteria overstates the potential effect of access regulation on competition to the extent that any existing access arrangements promote competition in a dependent market. In light of the Federal Court's decisions in Sydney Airport Corporation Limited v Australian Competition Tribunal [2006] FCAFC 146and the Pilbara rail case, the PC believes that the hurdle for satisfying the competition criterion needs to be re-raised.

Consequently, the PC has recommended that the competition test be amended so that it is only satisfied where access to an infrastructure service on reasonable terms and conditions through declaration(rather than access per se) would promote a material increase in competition in a dependent market.

The amended criterion:

• would require a comparison of the status quo state of competition against the state of competition where access is granted on reasonable terms and conditions if the service was declared;
• would not be satisfied where there is already competition in dependent markets; and
• would not be satisfied where access is already granted to all third parties on reasonable terms and conditions.

Criterion (b) - that it would be uneconomical for anyone to develop another facility to provide the service

The PC noted that the interpretation of criterion (b) is controversial due to the three different tests which have been used by courts in the past to assess the criterion ('net social benefit test', 'natural monopoly test' and 'private profitability test').

The PC believes that criterion (b) should be used by decision makers to identify facilities that give rise to an enduring lack of effective competition in markets for infrastructure services and in its view, none of the tests previously used are suited to perform this purpose.

The PC has recommended that criterion (b) be amended and applied in a different manner than in the past, such that it is satisfied where total foreseeable market demand for the infrastructure service over the declaration period could be met at least cost by the facility.

In its recommendation, the PC outlined that 'total market demand' should include the demand for the service under application as well as the demand for any substitute services provided by facilities serving that market. The recommendation is to also broaden the assessment of costs under criterion (b) by including an estimate of any production costs incurred by the infrastructure service provider from coordinating multiple users of its facility.

Alternatively, the PC recommended that if criterion (b) continues to be applied as a private profitability test, the term 'anyone' should be amended to expressly exclude the incumbent service provider (contrary to the High Court's decision in Pilbara rail case).

Criterion (e) - that access to the service is not already subject to a certified access regime

The PC considered that the administrative costs incurred by infrastructure service providers, access seekers and the NCC in assessing a declaration application against all declaration criteria, even if a certified regime is in place, are burdensome and inefficient.

Consequently, the PC recommended that criterion (e) be removed and replaced with a threshold test which states that a service cannot be declared if it is subject to a certified access regime.This would remove the unnecessary administrative costs which are currently imposed.

Criterion (f) - that access would not be contrary to the public interest

The PC outlined that the public interest test in criterion (f) was intended to and should only be used to deny a declaration application and not to get an application 'over the line' if other declaration criteria cannot be satisfied.

The PC recommended that the public interest test be amended to an affirmative test that requires the public interest to be promoted as opposed to access being granted on the basis that it is 'not contrary' to the public interest. This will impose a positive obligation on access seekers to demonstrate how declaration would promote the public interest.

The PC further recommended that the public interest test be amended to require decision makers to have regard to a non-exhaustive list of relevant factors not expressly covered by the other declaration criteria. The PC specifically recommended the inclusion of effects on investment in infrastructure services and dependant markets, and administrative and compliance costs.

Certification

The PC considered that the assessment of whether there have been substantial modifications to a certified state or territory regime once a declaration application is submitted undermines one of the purposes of certification, which is to enhance regulatory certainty that a service cannot be declared.

In order to improve regulatory certainty, the PC recommended introducing a formal mechanism to revoke certification following a recommendation from the NCC if there have been substantial modifications to the certified regime or the competition principles.

The PC has also recommended that Part IIIA be amended to enable infrastructure service providers covered by the certified regime, access seekers, or the relevant state or territory government to apply to the NCC to make a recommendation to revoke certification.

Mandatory undertakings

The PC in its report recognised that there are costs associated with mandatory undertakings and noted that mandating an undertaking may result in some of the safeguards included in the declaration process being bypassed.

The PC recommended that if mandatory undertakings are to be used, the NCC should assess the relevant service against the declaration criteria before, and at appropriate levels after, the mandatory undertaking is place. This will ensure that future mandatory undertakings are used to target the economic problem and deliver net benefits.

Protection of legitimate business interests of service providers

The PC noted that the applicability and practicality of the safeguard provisions set out in section 44W of Part IIIA which impose restrictions on access determinations, was of particular concern.

The PC has recommended that the ACCC develop and publish guidelines on how its power to direct facility extensions would be exercised in practice, such that it is expected to generate net benefits to the community. The PC recommended that the guidelines be developed by the ACCC using a process that includes the public release of draft guidelines, and is informed by stakeholder consultation.

The PC also recommended that Part IIIA be amended to confirm that the ACCC's power to direct extensions, in the context of access dispute arbitrations, also encompasses capacity expansions to ensure that the safeguards set out in section 44W also apply to directed expansions.

Deemed ministerial decisions

In order to increase transparency and improve opportunities for review, the PC has recommended that if the designated Minister does not publish a decision on an access matter within the 60 day time limit, then the decision should be deemed to follow the NCC's recommendation. This is expected to ensure that written reasons are provided for all declaration decisions, providing a basis for judicial review. In cases where the designated Minister decides not to follow NCC's recommendation to declare, the proposed change would impose a requirement on the Minister to make an active decision not to declare the service and to provide reasons for that decision.

Terms of reference

The PC was asked to:

• examine the rationale, role and objectives of Part IIIA within the context of Australia's overall framework of access regulation;
• assess the performance of Part IIIA in meeting its rationale and objectives;
• report on whether Part IIIA adequately meets its economic efficiency objectives when implemented;
• provide recommendations which can improve processes and decisions for facilitating third party access to essential infrastructure;
• review the effectiveness of the reforms outlined in the Competition and Infrastructure Reform Act (CIRA) and the reforms that have been undertaken by governments to give effect to the CIRA; and
• comment on other policy measures which can ensure effective and responsive delivery of infrastructure services both in the short and long term.

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