Competition policy workshop - infrastructure access

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Gilbert + Tobin Lawyers
18 April 2013

Australian Competition and Consumer Commission Chairman Rod Sims outlined the Australian approach to infrastructure access regulation to a Competition Policy workshop in Sydney today.

Mr Sims said that in general, Australia’s National Access Regime provides the ‘right’ policy settings for addressing the infrastructure requirements of the contemporary Australian economy.But the issue of the appropriate test for coverage under the regime will require further examination.

Transcript: 

Check Against Delivery

Thank you for the invitation to speak at today’s workshop.

The topic and question provided to us today, of course, recognises that the Productivity Commission (PC) is part-way through its review of Australia’s National Access Regime. I have had a number of discussions on these issues with my colleagues at the PC.

Those discussions, and reading a range of material for today, reminds me yet again that these are indeed fascinating and fun issues.

Today I want to make the following points.

  • First, we need a common view on what is the Australian approach to access regulation if we are to address the broad question posed for us today.
  • Second, on the whole, the Australian approach to access regulation has worked well.
  • Third, there are important issues to address, and these are likely the specific subject of the Productivity Commission’s review.
  • Fourth, Australia faces more important issues concerning appropriate infrastructure investment levels than those associated with Part IIIA.

1. Understanding the Australian approach to access regulation

To understand the Australian approach we need, of course, to go back to the Inquiry into National Competition Policy chaired by Professor Fred Hilmer in the early 1990s.

As part of the recommended national competition policy, the Hilmer Committee recommended the establishment of a general access regime potentially applicable to any sector of the economy.

In 1995 agreement was reached between the Commonwealth and States on a National Competition Policy based on the recommendations of the Hilmer Committee.

Importantly, industry specific microeconomic reforms were also initiated under the National Competition Policy; for example, in telecommunications, electricity and gas, and road and rail.

I believe these reforms together form the basis of “the Australian approach” to access regulation.
Indeed, the general access regime gained important impetus from considering a specific access regime for telecommunications; it was not the other way round.  I shall explain this a little later.

Further, the fundamental point that Fred and his team accepted was that Australia needed to deal with access issues via a market structure solution; that is, structural separation where appropriate and a legislated general access regime, rather by regulating conduct under Section 46.

The key objectives of such an approach were and remain efficiency and promoting competition in upstream or downstream markets. 

When I travel overseas I hear some of my counterpart heads of competition agencies dealing with issues including access to infrastructure under provisions broadly equivalent to our section 46.  We largely do not have such cases because of the Australian approach to access regulation. For today’s purposes the Australian approach, to access regulation, in my view, covers the industry specific as well as the general Part IIIA regime.

2. On the whole the Australian approach to access regulation has worked well

Let me illustrate by giving some sector examples.

Telecommunications

As I said in a speech last week, the communications industry could have looked so different from what we have today.

In the late 1980s there was only one domestic telecommunications provider, and it was government-owned. Telecom provided voice services over its copper network. The Overseas Telecommunications Commission (OTC) was the sole international player.

In telecommunications those of us involved in micro reform in the late 1980s and early 1990s lost some big debates. The most important debate was trying to separate Telecom’s copper network from its retail activities. We succeeded with structural separation in electricity, but failed in telecommunications.

Just imagine how different the communications industry would look today had we won that debate. Telstra would never have been vertically integrated and, I believe, our industry would be more competitive than it is today.

The second battle was over whether to fold OTC into Telecom, or whether it could form the basis of a new competitor. In a pivotal meeting in the Prime Minister’s office in around 1990, it was decided to fold OTC into Telecom.

Even though two crucial debates were lost, an important concession was gained: a new licence was to be issued, which was won by Optus in 1991, and the new competitor was to have the benefit of favourable access terms to Telstra’s network.

In the Department of Prime Minister and Cabinet we leveraged this concession by feeding the general idea into the Hilmer Review. Peter Harris, now Chairman of the Productivity Commission, played a key role in this.

Despite many refinements and frustrations, the telecommunications access regime has seen significant competition introduced and large consumer benefit. For example, real prices for fixed-line and mobile services have approximately halved since 1997-8.

Competition has also seen the introduction of new infrastructure and services.  As but one example, back in 2006 it was companies like iinet and Internode that first developed ADSL2+, as Telstra was focused elsewhere. Telstra, of course, then quickly followed, and consumers have reaped the benefits with faster connection speeds and more data allowances.

Electricity

I will not say much on electricity at this point, but will return to it later.

Suffice to say, however, that access to the poles and wires has not constrained competition in this sector.

Wheat ports

After Australia’s wheat export market was liberalised around 5 years ago, there was concern that wheat port operators who also exported wheat would foreclose their ports to competitors.

In this sense there was a concern that the Australian Wheat Board would simply be replaced by three “regional monopolies”, undermining the policy intent of liberalising the Australian wheat export market.

Given this, Australian policy-makers decided that the vertically-integrated wheat port operators would be required to provide access to third parties to their wheat ports.

And the mechanism via which this would be done was to be an access undertaking provided to the ACCC.

The access undertakings accepted by us establish the processes by which access seekers and providers can negotiate terms and conditions of access and provide for ACCC oversight of capacity allocation systems. The obligations in the undertakings are backed up by the availability of arbitration by the ACCC if commercial negotiations are unsuccessful.

We now, as a result, have multiple wheat exporters in each market to the benefit of Australian farmers.

3. Some issues that need to be addressed

I will mention three such issues.

Using the general Part IIIA provisions

When we were putting all this in place 20 years ago we accepted there would be industry specific regimes and a general access regime.

Many regulated firms, who did not like their industry specific regimes, particularly given how effective they were, argued that they should be temporary, and that their industry should simply be regulated by the general Part IIIA regime.

This argument makes no sense.

The industry specific communications regime has been steadily improved to the point where it now works well.

And why would we want the electricity poles and wires businesses to seek declaration under Part IIIA?

This issue raised its head, for example, when the wheat access regime I mentioned earlier came up for review.  Some felt the industry specific regime should be replaced by the general Part IIIA regime.

Our view, however, is that where there a clear bottleneck to competition in upstream and downstream markets, as exists in wheat, it may be simpler and more cost-effective to continue industry-specific regulation.

Complexity & Delay

One of the key processes in the National Access Regime is “declaration”, whereby a service provided by a facility becomes “covered” by the National Access Regime. The ability of a bottleneck infrastructure owner to seek declaration remains an important part of the incentive framework for access regulation.

Unfortunately, our view is that declaration has recently been a more costly, complex and time-consuming path to access than it needs to be. The length of time that the Pilbara railways matter has been unresolved is testament to this.

The declaration and arbitration processes potentially include 13 steps for an access seeker. It can take a long time, and often can only be successfully pursued by an applicant with substantial financial resources.

This lengthy declaration process has costs to the community, and can affect the perception and credibility of the National Access Regime to address market failure problems.

However, in recent years the Government has legislated for some streamlining of the declaration process.

These amendments limit a Competition Tribunal review of a declaration decision to material that was before the relevant Minister when making the decision, with provision to supplement that material as provided for in the legislation.

Furthermore, the High Court recently held that the Competition Tribunal’s role is narrower than previously thought.

Given all this, it is to be hoped that future declaration decisions will be resolved in a more timely fashion.

Criterion (b) issue

One issue that we think clearly needs to be addressed in the National Access Regime is that of the interpretation of criterion (b) of the criteria for declaration in Part IIIA. This is:

That it would be uneconomical for anyone to develop another facility to provide the service.

As you would be aware, the High Court in its recent Pilbara decision found that a “privately profitable” test should apply against this criterion.

We consider that the “privately profitable” test has the potential to lead to adverse impacts on economy-wide efficiency and competition. For example, the restriction or foreclosure of competition in markets reliant on access to bottleneck infrastructure, or on the other hand, socially wasteful duplication of infrastructure facilities.

The ACCC’s position is that the interpretation of criterion (b) should revert to a more appropriate test based on the economics of natural monopoly. Interpreting criterion (b) in this way would promote economic efficiency and the welfare of the whole Australian community.

It is sometimes argued that prior to the High Court Fortescue decision there were two slightly different natural monopoly tests for criterion (b). One such test is a narrow natural monopoly test examining only the costs of production with and without duplication.

The other test, which was enunciated by the Competition Tribunal in the gas coverage case Re Duke Eastern Gas Pipeline Pty Ltd [2001] takes into account the costs and benefits to the community as a whole rather than just production costs.

The ACCC prefers this broader test for criterion (b), although I note that there would be unlikely to be a significant practical difference between the two tests in the majority of cases.

4. Australia faces more important issues concerning appropriate infrastructure investment levels than those associated with Part IIIA

Perhaps the best way to make this point is to provide some examples from the airports, road, rail and energy sectors. 

Airports

Responsive high performing airports are a critical element of a robust Australian economy. In the period since their privatisation we have seen one airport declared twice and those declarations subsequently cease. The ACCC has been given a monitoring role, and the airports have been subject to the general access provisions under Part IIIA.

The ACCC has raised questions about the performance of some Australian airports.

We see increasing prices for airports, while in some instances quality of service has fallen over a sustained period of time.

There are also increasing concerns over congestion.  The long running debates about capacity at Sydney and Brisbane airports are just two examples of this.

These observations raise concerns about whether or not certain airports are investing enough.

Monitoring, of course, does not restrict airports from exercising their market power. What the Virgin Blue and Sydney Airport dispute demonstrated is that a successful commercially negotiated settlement could be reached, when undertaken against the backdrop of possible arbitration under Part IIIA.

It cannot be said that the Part IIIA provisions are inhibiting investment.  Indeed, it could at least be argued that an industry specific access regime could well facilitate higher levels of investment.

Rail and road

I do not see how Part IIIA can be to blame for concerns over a lack of investment in road and rail.

The Australian Government is, for example, currently investigating the feasibility of pricing options for heavy vehicles such that charges better reflect cost drivers, and in which the revenues from these charges are better linked to road expenditure.

The outcomes of these road pricing reforms are intended to unlock more productivity from the road network and deliver more efficient pricing and investment.  

There are definitely also challenges ahead in urban transport.  While some urban traffic congestion is economically justifiable, the Bureau of Infrastructure Transport and Regional

Economics has estimated that the economically unjustifiable costs of congestion in Sydney alone were around $5.4 billion in 2012

The issue of congestion pricing and other demand management measures is contentious but, I would argue, so is the issue of increasing traffic gridlock. 

Closely related to this is the issue of how we pay for the urban transport infrastructure of the future. For example, the losses incurred on public infrastructure are now so large that some state treasuries are understandably resistant to expanding the public transport network. Ever more money cannot be the answer. Some combination of congestion pricing, appropriate relative pricing between urban transport modes and significantly increased efficiency should be part of the mix.

Energy

The AER is responsible for regulating electricity network businesses, major gas distribution networks and five gas transmission pipelines.

In electricity, the regulatory framework to date has delivered significant network investment in the national energy market. Over the current five year cycle, investment of $7 billion in transmission networks and $36 billion in distribution networks is forecast.

Much of this investment was necessary, driven by factors such as the need to replace ageing assets and meet peak demand. There has, however, been significant concern raised in the past couple of years that there has been overinvestment with the result that consumers are paying more than necessary for a safe and reliable supply.

One of the drivers of these unnecessary price increases was weaknesses in the regulatory framework; the rules which govern how revenues for network businesses are determined. If anything, the industry specific access regime has seen excessive investment rather than a lack of it.

Changes to the regulatory framework were finalised by the rule making body, the AEMC, in November last year. The new rules give the AER the tools to rein in unnecessary investment in energy networks and shift the focus to efficient investment in the long term interest of consumers.

In gas, there has also been significant network investment. In transmission, construction is underway on major pipelines in Queensland to transport gas to Gladstone, and on a capacity expansion of the Moomba to Sydney pipeline. Expansions to the South West Queensland pipeline and Roma to Brisbane pipeline have also recently been completed. Investment to augment and expand distribution networks is forecast at around $2.6 billion in the current access arrangement periods.

5. Conclusion

In conclusion, I look forward to a robust debate today, and like many of you here I look forward to the draft findings from the PC on the National Access Regime. This evaluation will play a key role in ensuring that the regime continues to promote Australia’s economic performance, and improve productivity and competition for the benefit of all Australians.

Endnote

Report prepared for Infrastructure NSW by ACIL Tasman and SMART Infrastructure Facility, University of Wollongong, Pricing Congestion in Sydney; Discussion Paper, April 2012, p. vi.

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