ACCC & AER annual report 2016-17

Analysis of performance: National infrastructure regulation—rail, wheat exports, airports, stevedoring and post

Deliverable 3.1

Deliver network regulation that promotes competition in the long-term interests of end-users

Deliverable 3.2

Provide industry monitoring reports to government in relation to highly concentrated, newly deregulated or emerging markets

Beyond those covered in the sections above, the ACCC has industry regulation responsibilities in a number of major infrastructure sectors of the economy. These include:

  • rail
  • gas
  • bulk wheat export facilities
  • airports and air services
  • container stevedoring1
  • financial markets
  • postal services.

Our work in these areas contributes to deliverables 3.1 and 3.2, as it encompasses both regulation and monitoring.

In some instances the government has asked us to regulate or monitor these sectors because suppliers of these services are monopolies or only face limited competition. This means that they do not have the same incentives to deliver high-quality services or keep prices down as they would in a more competitive industry. Regulation can produce better outcomes for consumers by requiring suppliers to offer their services in a manner that is more reflective of a competitive industry. For other sectors, monitoring helps to inform government about whether regulation is required and may act as a deterrent to firms taking advantage of market power.

In the rail sector our responsibilities include assessing and administering undertakings given by the Australian Rail Track Corporation (ARTC) which set out terms of access to rail infrastructure.

This year we have been given new functions to monitor and report on gas markets.

In relation to wheat export facilities, our responsibilities include monitoring and assessing compliance with the Port Terminal Access (Bulk Wheat) Code of Conduct (the Wheat Ports Code), and making determinations on whether a port terminal service provider is exempt from requirements under the Code. We also assess and approve capacity allocation systems of terminal operators.

In relation to Australia’s four major airports, we monitor and publish information about prices, costs, profits and quality of aeronautical services and facilities. We also monitor the prices, costs, profits and quality of car parking services at those airports.2

In the container stevedoring industry we monitor the performance, including prices, costs and profits, of container terminal operators at the ports of Adelaide, Brisbane, Fremantle, Melbourne and Sydney. We report to the government and the public on our findings.

We also have a developing role in relation to financial markets. We have participated in working groups of the Council of Financial Regulators to review competition in clearing and settlement of Australian cash equities. We have also been given a role to monitor and report on northern Australian insurance markets.

Our involvement in regulating postal services involves assessing notifications from Australia Post for proposed increases in the price of its reserved monopoly services, including the basic postage rate. Australia Post did not make an application to the ACCC during 2016–17. A further role involves inquiring into disputes about the terms and conditions on which Australia Post provides bulk mail services to users. No disputes were notified during 2016–17.3

This year our priorities relating to these infrastructure sectors were:

  • assessing a replacement access undertaking for the Hunter Valley rail network
  • participating in gas market reform processes, and taking on new functions conferred by government
  • monitoring and enforcing compliance with the Wheat Ports Code.
  • advocating for competitive or effective regulatory outcomes where infrastructure or assets are privatised.

The following section discusses our outcomes in the priority areas and other activities.

Rail

The ACCC assesses and monitors compliance with access undertakings by rail providers regarding rail track infrastructure. To date, only ARTC has rail access undertakings in place with the ACCC. ARTC has one access undertaking for its Hunter Valley rail network in New South Wales and one for its national interstate rail network.

Revised access arrangements for Hunter Valley rail network

On 29 June 2017 the ACCC consented to a variation of the Hunter Valley access undertaking (HVAU). This followed an extensive process of assessment and consultation on proposed replacements of and revisions to the undertaking accepted by the ACCC in 2011.

The HVAU relates to the Hunter Valley rail network operated by ARTC in New South Wales. The network is predominantly used to transport coal from the region’s mines to the Port of Newcastle for export, but is also used to transport coal to a number of domestic customers, as well as providing passenger and non-coal freight services across the Hunter Valley.

On 9 December 2016 ARTC submitted a proposed undertaking—the 2017 HVAU—to replace the 2011 HVAU, which expired on 30 June 2017. In April the ACCC issued a draft decision not to accept the proposed replacement, prompting ARTC to withdraw it from the ACCC’s consideration in May 2017. The ACCC’s draft decision noted that ARTC’s proposed rate of return and approach to calculating weighted average mine life did not reflect the regulatory and commercial risks faced by ARTC. The draft decision also gave detailed feedback to assist ARTC in developing a revised undertaking.

On 6 June 2017, ARTC applied to vary its 2011 HVAU, submitting that its application had ‘the support of the majority of Hunter Valley Coal Producers’. The variation sought to specify a rate of return 0.78 per cent higher than that considered appropriate by the ACCC in its draft decision on the 2017 HVAU. It also specified a remaining mine life of 23 years and a revised expiry date of 31 December 2021. Following further industry consultation, ARTC submitted a revised variation application on 16 June incorporating finalised access charges.

The ACCC consented to ARTC’s revised variation application, accepting that the higher rate of return and other elements of the variation were accepted by stakeholders in order to maintain regulatory certainty and to avoid an unplanned and rushed transition to an alternative regulatory regime.4

In the decision, the ACCC acknowledged and shared stakeholder concerns that the outcome illustrates significant issues with the current regulatory framework for the Hunter Valley rail network. The ACCC understands that ARTC will commence good faith negotiations with stakeholders to develop a further variation application to incorporate certain matters outstanding from the ACCC’s 2017 HVAU draft decision.

ARTC annual compliance assessment 2014

The HVAU requires ARTC to submit documentation to the ACCC for the purposes of assessing whether it has met revenue obligations in the undertaking. On 31 March 2017 the ACCC released its final determination on ARTC’s compliance with its regulated financial model for the 2014 calendar year. The determination concluded that ARTC had complied with the model in almost all respects. It also found that ARTC had over-recovered $23.4 million in revenue during the year, which must be refunded to users pursuant to the regulatory arrangements.

Gas

New role conducting gas inquiry

On 19 April 2017, the Treasurer directed the ACCC to hold an inquiry for improving the transparency of gas supply in Australia. The ACCC is required to monitor:

  • the pricing and availability of offers to supply gas
  • the volumes of gas supplied or available for current or future supply
  • the pricing, volume and availability of gas for domestic supply compared to the pricing, volume and availability of gas for export
  • the pricing, volume and availability of other goods or services, such as goods or services for drilling for, storing or processing gas, that enable, assist or facilitate the supply of gas or gas transportation services in Australia.

The ACCC will submit interim reports no less frequently than every six months and provide information to the market as appropriate, with a final report due by 30 April 2020.

Contributions to gas market reform

At the same time, the ACCC will continue to work with Dr Michael Vertigan to refine longer term transparency measures to address the current opaqueness in the gas market and support longer term market stability in the domestic supply and consumption of gas. The scope of this work will cover the full supply chain, including producers, transporters and retailers. Aspects of this work follow from the ACCC’s inquiry into east coast gas markets, conducted in 2015–16.

In April 2017 the ACCC provided a submission to the Gas Market Reform Group strongly supporting a proposed information disclosure and commercial arbitration framework for gas pipelines. The ACCC also provided submissions to the review of the gas pipeline coverage test in October and November 2016.

Bulk wheat export facilities

Bulk wheat ports monitoring report

The ACCC released its first bulk wheat ports report on 15 December 2016. The report examined the nature and concentration of export activity and capacity allocation at Australia’s bulk wheat port terminals. In particular, the ACCC was seeking to make sure that vertically integrated owners of bulk export port infrastructure did not secure an increasing and disproportionate share of bulk wheat exports as a result of their ownership of bottleneck infrastructure.

The report found that, in general, owners of port terminals did not appear to be obstructing access by competing exporters or receiving a disproportionate share of port terminal capacity. However, due to lower than average export volumes and spare port terminal capacity across Australia, the provisions of the Wheat Ports Code (and the effect of code exemptions) were not fully tested in 2015–16.

The report also noted how access seekers had benefited from new ports across the country, with greater competition on price and service in a number of port zones, and greater flexibility from port operators.

Wheat code exemptions

The ACCC issued draft determinations proposing to exempt Riordan Grain Services and Semaphore Container Services Pty Ltd from certain requirements of the Port Terminal Access (Bulk Wheat) Code of Conduct. These determinations were issued on 22 June 2017.

The draft decision on Riordan Grain Services states that Riordan’s operations at the Port of Geelong compete with the dominant providers of bulk wheat port terminal services in Victoria, Emerald and GrainCorp. As such, in the absence of full regulation under the code, Riordan will continue to face strong competition for bulk wheat volumes from Emerald’s and GrainCorp’s terminals.

In relation to Semaphore, the ACCC noted that it will continue to face strong competition for bulk wheat volumes from Viterra, the dominant provider of bulk wheat port terminal services in South Australia, and competition from LINX Cargo Care’s Port Adelaide facility.

The ACCC released its final determinations in July 2017.

Airports and air services

Airport monitoring report

The ACCC released its airport monitoring report for 2015–16 on 6 March 2017. All four airports monitored—Sydney, Melbourne, Perth and Brisbane—received an overall weighted rating of ‘good’ for their quality of service for the year.

The report noted that the airports are collecting substantially more aeronautical revenue per passenger than a decade ago. The ACCC estimated that, over the past decade, these airports have collected $1.57 billion more in revenue from airlines than they would have collected if average prices were held constant in real terms. The higher aeronautical charges have been used both to cover increasing costs per passenger and to grow airports’ profit margins.

The report also noted that profit margins for both car parking and aeronautical services remain very high. Notably, Sydney Airport reported profit (EBITDA) margins of 73.1 per cent for car parking and 46.7 per cent for aeronautical services.

The report also commented on developments in relation to the proposed new airport in Western Sydney. It noted that a second international airport competing with Sydney Airport would yield significant benefits to both consumers and airlines.

Container stevedoring

Container stevedoring monitoring report

The ACCC has monitored the container stevedoring industry since 1998–99 under a direction from the Australian Government. We currently monitor the prices, costs and profits of container stevedores at five Australian container ports. In 2015–16 four container stevedores were covered by the ACCC’s monitoring program. Patrick Terminals and DP World Australia operate at the four largest ports—Melbourne, Sydney, Brisbane and Fremantle. Hutchison Ports Australia operates in Brisbane and Sydney. We also monitor Flinders Adelaide Container Terminal as the sole operator at the Port of Adelaide.

The ACCC’s 2016 container stevedoring monitoring report, released in November 2016, found that increased competition in container stevedoring has pushed prices to their lowest level in 17 years. Industry margins and rates of return on assets were also at the lowest level recorded by the monitoring program, while productivity on the wharves remained at close to record levels.

The report observed that, as a result of substantial investments by new entrants, there is now infrastructure in place to support a third stevedore in each of the three largest container ports in Australia. This will provide additional choice to shipping lines.

Financial markets

Cash equities

The ACCC continued its work with the Council of Financial Regulators (CFR) on the reviews of competition in clearing and settlement of Australian cash equities.

In October 2016 the CFR released policy statements for the finalised review of competition in clearing. These policy statements include provisions concerning access to monopoly clearing and settlement services, which are proposed to be supported by a rule-making power for ASIC and the RBA and an arbitration power for the ACCC. The Treasury is anticipated to introduce the relevant legislation to enact the proposed changes in 2017–18.

The ACCC also worked with the CFR to develop a plan and a consultation paper for the CFR’s review of competition in settlement. The consultation paper was released by the CFR in March 2017 and submissions closed on 20 April 2017. The aim is to have this review completed ahead of the proposed legislative amendments being introduced into parliament, thereby allowing any additional amendments to be included with the proposed changes to clearing.

Insurance in northern Australia

In May 2017, the Australian Government directed the ACCC to hold an inquiry into the supply of residential building, contents and strata insurance products to consumers in Northern Australia. Official notice of the inquiry, including the terms of reference, was gazetted on 14 June 2017.

The ACCC’s inquiry will explore in detail consumer, regulatory and competition issues identified in previous inquiries. It will focus in particular on cost drivers of insurance premiums, and transaction costs and information issues experienced by consumers. The inquiry will also monitor the activities of the insurance industry in Northern Australia over three financial years to 30 November 2020, which will help inform its findings.

Competition advocacy

In March 2017 the ACCC received an international award from the World Bank and the International Competition Network (ICN) for its role in elevating competition policy to the national economic agenda.

The ACCC won the award for its advocacy work in promoting pro-competition measures when governments are privatising public assets. We have been advocating that, when privatising infrastructure assets, governments should not restrict future competition to these assets, and that infrastructure monopolies need appropriate up-front regulation.

The ACCC was awarded the top prize in the category ‘Levelling the playing field through competitive neutrality or by elevating competition policy to the economic policy agenda’. The Chairman of the ACCC accepted the prize at an ICN meeting in Portugal in May 2017.

Access dispute over charges at the Port of Newcastle

The ACCC has a role under Part IIIA of the Act to arbitrate access disputes where a service has been ‘declared’. When an access seeker and the provider cannot agree on the terms and conditions of access to the declared service, either party may request the ACCC to arbitrate the dispute.

The ACCC was notified of a third-party access dispute between Glencore Coal Assets Australia Pty Ltd (Glencore) and Port of Newcastle Operations Pty Ltd (PNO) in relation to the shipping channel service at the Port of Newcastle. Glencore notified the ACCC of the access dispute on 4 November 2016 and requested that we arbitrate.

The notification relates to the level of access charges and access terms set by PNO for users of the shipping channel service at the port, which was declared under Part IIIA of the Act by the Australian Competition Tribunal in June 2016.

Regulatory guidance

Guidelines on Part IIIA access undertakings

On 11 August 2016 the ACCC released Part IIIA access undertaking guidelines. The guidelines provide information about our processes for assessing access undertaking applications. The guidelines also discuss how to draft an access undertaking and the types of provisions that applicants may consider including in their proposed undertakings. The material in the guidelines is based on the provisions in Part IIIA and the ACCC’s experience to date of assessing Part IIIA access undertakings.

Deferral of arbitration and backdating of determinations guidelines

On 26 May 2017 the ACCC released for public comment draft revised guidelines on the deferral of arbitrations and the backdating of determinations under Part IIIA of the CCA. The guidelines were originally made to satisfy a requirement of the Trade Practices Amendment (National Access Regime) Act 2006, and are due to sunset on 1 October 2017. The ACCC is reviewing the existing arrangements ahead of remaking the instrument.

Regulatory approach to price notifications

The ACCC released a revised statement of regulatory approach to assessing price notifications under Part VIIA of the Act on 27 March 2017. The statement replaces the 2009 version.

1 We have a role under Part X of the Act in relation to international liner cargo shipping. There are limited exemptions from certain provisions of the Act for “registered international liner cargo shipping conferences”, and the ACCC is responsible for investigating complaints about conference agreements. The ACCC has rarely been called upon to perform this role.

2 We also have a role in assessing notifications by Airservices Australia of proposed increases in prices for terminal navigation, en route navigation, and aviation rescue and fire-fighting services. Under the Act, we can decide whether to object to proposed price increases. No application was made to the ACCC in 2016–17 in respect of these services. Similarly, we have a role to assess proposed price increases by Sydney Airport for regular public transport air services operating wholly within New South Wales. After assessing the proposed increases we can decide whether to object or not object. No such application was made to the ACCC in 2016–17.

3 In past years the ACCC issued an annual report of its analysis of Australia Post’s regulatory accounts, to determine whether Australia Post may have used revenue from its reserved services to cross-subsidise its non-reserved services. Reserved services are services for which Australia Post has a statutory monopoly; non-reserved services are services it provides in competition with other businesses. Australia Post is required, under a formal record keeping rule, to keep certain records and provide these to the ACCC if requested, to enable a cross-subsidy assessment to be undertaken. However, following several reports concluding that no cross-subsidy had occurred between reserved and non-reserved services, in 2015 we reviewed the need for continued reporting. This report has accordingly not been prepared since 2015–16.

4 That is, if the ACCC had not consented to the application, regulation of the Hunter Valley rail network would have transferred to the Independent Pricing and Regulatory Tribunal of New South Wales.