ACCC believes price monitoring for monopoly infrastructure will damage Australia’s economy

29 October 2015

Price monitoring for monopoly infrastructure is ill-conceived in theory and not working in practice, Australian Competition and Consumer Commission Chairman Rod Sims said today.

At the Gilbert + Tobin infrastructure workshop in Melbourne, Mr Sims called for a return to the approach to regulation of monopoly infrastructure envisaged by the Hilmer Committee.

“Hilmer recognised that the regulation of monopoly infrastructure would require, at a minimum, the implementation of a negotiate/arbitrate framework.”

“I would like to suggest that the current interpretation of light-handed regulation of monopoly infrastructure, which in essence has come to mean price monitoring, is not only ill-conceived in economic theory, it has failed in practice,” Mr Sims said.

“Experience has shown that, in circumstances of natural or legislated monopoly, price monitoring will have little or no longer term impact on the conduct of the monopoly infrastructure owner.”

“Why are we surprised? Price monitoring is not price regulation. What would you or any commercial owner of monopoly infrastructure do when there is no constraint on monopoly pricing? If you did not exploit this situation your board or shareholders would likely sack you, and deservedly so.”

Mr Sims said price monitoring ignores the need to give the parties negotiating with the monopolist some strength to their arm.

“They cannot threaten not to use the facility, so at least give them the threat of referring a dispute over prices or terms to binding arbitration.”

“Indeed, I believe a negotiate/arbitrate framework is true light handed regulation. It actually allows a commercial negotiation, where both parties have some negotiating leverage; without this there is no ability to negotiate commercially.”

Mr Sims said there may soon be an opportunity to remedy misconceptions.

“One of the important recommendations of the Harper Review was that all Australian governments commit to a revitalised set of competition principles.”

“I would like to suggest that the relative merits of price monitoring versus some form of price regulation (including negotiate/arbitrate) are taken into account in any revised agreement.”

“Indeed, it is important to address this issue as only using price monitoring for monopoly infrastructure, rather than stronger regulation such as a negotiate/arbitrate regime, can damage Australia’s competitiveness and productivity through higher than necessary infrastructure prices and/or reduced service levels,” Mr Sims said.

Mr Sims also spoke about the ACCC’s work with Australian governments to highlight the importance of privatising assets to promote competition, rather than just the sale price.

“Unless government ownership is critical to meeting a clearly stated public policy goal, private ownership will always provide a better outcome than public ownership.”

“However, with most governments facing fiscal challenges, there is a temptation to privatise to maximise proceeds. This is fine if there is a competitive market, or there are sound regulatory arrangements in place.”

“With many infrastructure assets these requirements are not in place.”

Mr Sims said the Victorian Government has proposed significant improvements to the current regime applying to the Port of Melbourne.

“I consider the proposed amendments move the dial towards a more robust regulatory regime to apply post-privatisation, and are more rigorous than measures in place at other major Australian container ports,” Mr Sims said.

Read the Chairman's speech

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MR 208/15
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