The evolution of Part IIIA

Linda Evans

27 July 2007

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Overview

• What should we expect from Part IIIA?

• How has it delivered on those expectations?

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What should we expect from Part IIIA?

• Importance of a sensible and consistent approach to when a service will be liable to declaration under Part IIIA

• The test for the grant of access should not be able to be manipulated by either the access seeker or the access provider

• The grant of access must preserve the incentives for innovation and investment

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Has it delivered on those expectations?

• There are real problems with the interpretation of criterion (a)

• The way in which the exceptions operate is highly dependent on the outcome of the Fortescue Full Court decision

• There is anxiety on the part of access providers and access seekers on the ACCC's approach to arbitration decisions on pricing and other terms and conditions

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The structure of the statute

• The service not the facility is the subject of the declaration

• The designated Minister cannot declare a service unless he or she is satisfied of all of the conditions set out in s.44H

• What are the consequences of that structure of the Ministerial decision making power?

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Tribunal v Full Court - Round 1

• Sydney Airport 2000 case - The Tribunal is prepared to accept that the statutory scheme is such that it does have a residual discretion. However, when one has regard to the nature and content of the specific matters in respect of which the Tribunal must be satisfied the Tribunal considers there is little room left for an exercise of discretion if it be satisfied of all the matters set out in s 44H(4).

• Virgin Blue 2006 case - s 44H(4) is a statutory statement of necessary matters, it is not expressed to be a list of the only considerations that may be relevant to be considered...After the considerations in s 44H(2) and (4) are dealt with, the decision to be made whether or not to declare a service may be affected by a wide range of considerations of a commercial, economic or other character not squarely raised by, nor falling within, the necessary preconditions in s 44H(4).

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The Full Court's approach

• Full Court approach in Virgin Blue has a ring of familiarity to it. In the context of authorisations the ACCC shall not make a determination granting an authorisation "unless it is satisfied" that certain conditions are met. The Tribunal said:

But they are necessary conditions only. Their satisfaction does not require that the ACCC grant authorisation. There is a discretion to refuse authorisation even where the relevant public benefit test is satisfied. That follows, not only from the discretionary language of s88, but also from the way in which s90 is framed beginning, as it does, with the words "The Commission shall not make a determination granting an authorisation...unless it is satisfied..."

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Scope of the discretion

• Two very different approaches to the nature and scope of the discretion residing in the designated Minister.

• How does a negative public interest test sit with a discretion as that proposed by the Full Court?

• How did the Full Court's approach to the construction of s44H(4) affect its interpretation of (a)?

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Promotion of competition

• Statutory language requires that "access (or increased access) would promote competition"

• The initial decisions approached this in the same way as authorisation issues are approached - namely the future with or without access

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What the Tribunal thinks access means?

• Sydney Airport 2000 took access (or increased access) to mean declaration:

• In reaching a view as to whether increased access 'would promote competition', the Tribunal must look to the future on a similar basis to the way it looks at the authorisation provisions, namely the future with and without declaration.

• The Tribunal then separately examined the threshold for a promotion of competition

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The Tribunal stays consistent

• The Tribunal took the same approach in Duke as it did in Sydney Airport and did not accept an argument by Duke that paragraph (a) in the Gas Code proceeded on the premise that access to the service must be either limited or unavailable.

• The Tribunal looked to the objects of the Code and found the enquiry to be "as to the future with and without coverage"

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Yet more consistency from the Tribunal

• Virgin Blue 2005 - The notions of access and increased access include the terms and conditions upon which such access or increased access is made available at the facility. Draws on Duke, structure of Part IIIA and the Competition Principles Agreement.

• Increased access is where the terms and conditions of access will change and the right of access will be enhanced.

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The threshold

• In this environment it was the threshold required to establish a promotion of competition that was contentious. The Tribunal's decision in Sydney Airport 2000 focused on the idea of creating the conditions or environment for improving competition from what it would be otherwise.

• That lead to the amendment to require that there be a "material increase" in competition.

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What did the Full Court have to say?

• The relevant inquiry is the comparison between access and no access and limited access and increased access. That is what the words say.

• In reaching this view the Full Court relied on the structure of s44H(4) as discussed earlier, the background and context of Part IIIA, the Hilmer Report, the COAG explanatory material and cl 6 of the CPA

• Special leave refused

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The consequences

• It does lead to a significant lowering of the threshold

• Would seem to involve the same approach for (d)-(f). Does not sit well with a negative public interest test

• Government to amend s 44H(4)(a) to "reinstate its interpretation to that which prevailed prior to the decision of the Full Court"

• What was the position where declaration was sought even though a State regime existed?

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The one and only arbitration decision

• Dispute concerns access pricing methodology to be applied to services for the transport of sewage provided on 3 of 25 separate systems which form part of the Sydney Water sewage network

• ACCC has delivered an arbitration decision published its report

• Access seeker has sought review of the decision in the Tribunal

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The ACCC decision

• Price to be determined as a charge per customer supplied by the access seeker using a retail minus methodology plus costs directly attributable to the declared sewage transportation services.

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Determining the retail minus• Used Sydney Water's retail price for sewerage/wastewater

services relevant to each customer as determined (from time to time) by IPART minus the avoidable costs for Sydney Water as a result of supplying the declared sewage transportation services to Services Sydney.

• Building blocks approach that includes the operating and capital costs associated with the provision of the contestable components used to calculate avoidable costs.

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The controversial aspects of the decision

• Use of retail minus but how controversial really given retail prices are regulated?

• Methodology to calculate avoidable cost - specifically, in using a MEERA approach how are EPA licence conditions to be addressed?

• Inclusion of contribution to postage stamp pricing in the access price

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MEERA - Replacement cost technology

• ACCC found that level of technology should be based on Sydney Water's actual licence conditions as at the time of entry by the access seeker.

• Issue as to whether EPA licence conditions for access seeker could be used as a proxy for the conditions that would apply to Sydney Water. But access seeker proposing a higher level of treatment therefore not an appropriate proxy.

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Postage stamp pricing

• Sydney Water's retail prices for sewerage services do not vary with the location of the customers served

• Access prices that did not include a contribution to postage stamp pricing would facilitate cherry picking and cream skimming.

• Any distortion to the efficient use of and investment in the sewerage reticulation network would be small because of the law of the price elasticity of demand for the services.

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What about the pricing principles?

• Limited guidance particularly on s44ZZCA(a)(ii) which requires access prices to include a return on investment commensurate with the regulatory and commercial risks involved

• Not appropriate to deal with regulatory risk simply by systematically increasing the allowed rate of return

• How it should be addressed remains unanswered