Five judges have ruled on two disputes about access to the Pilbara iron ore railways. These judgements have resulted in four conflicting decisions. None of these adequately provides investors confidence to develop new infrastructure without fear of it being controlled by regulators.
The circumstances under which firms must give access to essential facilities they own are strictly limited. This acknowledges forced sharing can lead to adverse investment incentives and is contrary to property rights. Australia's access conditions were refined by provisions, primarily targeting government-owned facilities, after the mid-1990s Hilmer report into competition policy. This sharpening of the definitions also placed production processes as largely immune from requirements to provide access.
Access was first sought to the Pilbara railways with North's application to use Rio Tinto's tracks in 1999. The judge concluded that Rio's integrated mining and transportation system was, in reality, a production process and was therefore protected from access requirements.
Last year Fortescue Metals applied to make use of BHP Billiton's rail system for a small mine. The judge, John Middleton, said the decision in the Rio case was plainly wrong and the BHP rail line was fundamentally a transport facility and did not transform the product even if it was part of a production process. He granted access to Fortescue.
On appeal, that decision was upheld -- but not the reasoning behind it. The court was split with both the minority and majority affirming that any production process should be immune from the provisions whether or not it transformed the product. The minority appeal judged said, in accord with the Rio decision, that the system was a series of productive processes and access should not be required. The two majority appeal judges scolded Middleton for incorrectly depicting the Rio decision as plainly wrong on the grounds that the rail lines were not an integrated production process.
But by focusing on the production process caveat of the essential facility provisions, all these decisions are failing to address key considerations. One of these is the actual essentiality of the facilities concerned.
There are already two rail systems in the Pilbara region and Fortescue is building a third to service its major ore deposits. There are, therefore, alternative services. This undercuts the case of regarding a facility as a natural monopoly and, in effect, placing it under a regulator's control. In analogous situations regulatory coverage over gas pipelines has been removed, once new facilities serving the same market have been built.
Fundamentally, the distinction between a production process and other forms of productive activity was always arbitrary and technological change made it increasingly meaningless. For example, installing software on computers is now undertaken by the owner.
This aside, it is illogical to single out production processes for immunity from measures to address market power. There is greater market power over local producers with a large scale manufacturing plant like BP's oil refinery in Perth, which is thousands of kilometres away from any rival facility, than is the case with a rail line. And yet the former is automatically excluded from regulatory reach.
Behind all this contention is the issue of how to ensure timely and adequate new infrastructure supply. While forcing firms to share their facilities offers a piggyback to rivals, this also deters new investment. It encourages firms to become second movers and the vital first-mover entrepreneurs become rarer.
No firm wants regulatory control over its business strategy. Well documented examples illustrate where regulators' insistence on such control has deterred investment. The best known is Telstra's proposed fibre network, whereby the Australian Competition and Consumer Commission's insistence on pricing control has denied the nation a $4 billion investment and fast internet speeds.
The BHP/Fortescue case will proceed through the courts but changes in the law are necessary if economically efficient infrastructure provision is not to be deterred.
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