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The Council's work during 2018-19

Consideration of possible recommendation to revoke the declaration of shipping channel service at the Port of Newcastle

In 2018-19, there were no applications for declaration or certification under the CCA or applications under the NGL considered by the Council.

On 2 July 2018, however, the Council received a request from Port of Newcastle Operations Pty Ltd (PNO) that the Council should recommend under s 44J of the CCA that the designated Minister revoke the declaration of the shipping channel service at the Port of Newcastle.

This is the first matter the Council has considered since the 2017 amendments to the declaration criteria in Part IIIA of the CCA.

In relation to this matter, the Council considers the relevant designated Minister is the Federal Treasurer.

Background – declaration of service and subsequent review proceedings (May 2015-March 2018)

As noted in previous Annual Reports, the relevant service was the subject of a declaration application by Glencore Coal Pty Ltd (Glencore) in May 2015.

In November 2015, the Council provided a recommendation that the service not be declared, on the basis that it considered declaration criterion (a) (as it was then worded1) was not satisfied in relation to the service. The designated Minister (the then Acting Treasurer, Senator the Hon. Mathias Cormann) reached similar conclusions to the Council and made a decision to that effect. Following an application from Glencore for a review of the Minister’s decision, the Tribunal published orders on 16 June 2016 declaring the shipping channel service with effect from 8 July 2016 until 7 July 2031.

In making this decision, the Tribunal considered it was bound by a 2006 decision of the Full Federal Court on the interpretation of criterion (a) (as it was then worded): Sydney Airport Corporation Ltd v Australian Competition Tribunal and Others (2006) 155 FCR 124; [2006] FCAFC 146 (Sydney Airport No.2). That interpretation focussed the criterion on the effect of “access (or increased access)” in the then criterion (a), rather than the effect of “declaration” in prompting competition in a related market.2

In July 2016, PNO applied to the Federal Court of Australia for judicial review of the Tribunal’s decision.

Given its role in applying the declaration criteria, the Council, on behalf of the Commonwealth, successfully applied to be a made a party to the proceeding in order to advance a construction of the declaration criteria (in particular criterion (a)) consistent with the context and legislative purpose of the National Access Regime.

On 16 August 2017, the Full Federal Court dismissed the application for judicial review, and in doing so, affirmed the interpretation of criterion (a) as decided by the Full Federal Court in Sydney Airport No.2.3

In September 2017, PNO made an application to the High Court of Australia for special leave to appeal the Full Court’s decision. The Council, on behalf of the Commonwealth, sought to participate in the application. The application was dismissed by the High Court on 23 March 2018.

The current matter - PNO’s request for a revocation recommendation (from July 2018)

The current matter before the Council followed significant changes to the National Access Regime as a result of the Amending Act passed in October 2017, including material amendments to the declaration criteria in Part IIIA.4 The Amending Act implements the Productivity Commission’s recommendation in 2013 to reform the declaration criteria, including amendments to criterion (a) so as to re-establish its interpretation before the Full Federal Court decision in Sydney Airport No.2.5

Following PNO’s request for a revocation recommendation under s 44J of the CCA, the Council commenced consideration of the matter.

Section 44J has rarely been invoked in the past. The provision does not set out any procedure (including timeframe) for the Council’s assessment of whether it should make a revocation recommendation. Nevertheless, in considering this matter, the Council conducted public consultation, reflecting the process it would undertake in considering a declaration application. The consultation conducted by the Council in this matter is described below.

On 11 July 2018, the Council published notice of PNO’s request in the newspaper and wrote to interested parties to invite submissions, particularly submissions addressing the amended declaration criteria. The Council received nine submissions.

On 4 September 2018, the Council requested PNO to provide it with documents and information by 17 September 2018 to address matters raised in submissions from other interested parties. In response to the request, PNO provided a submission and documents, including documents over which it claimed confidentiality. The Council accepted PNO’s confidentiality request.6 Following PNO’s response, the Council invited other interested parties to make submissions on the non-confidential materials provided by PNO by 5 October 2018. The Council received three submissions.

On 8 October 2018, the ACCC published a Final Determination on its arbitration of an access dispute7 between Glencore Coal Assets Australia (also referred to as ‘Glencore’) and PNO. The dispute was notified by Glencore to the ACCC on 4 November 2016 (following the Tribunal’s declaration of service on 16 June 2016); and concerned the access charges and other conditions of Glencore’s access to the declared service. Shortly afterwards, in mid-October 2018, the Council requested submissions from interested parties on whether, and if so, how, the Council should have regard to the ACCC Final Determination when considering whether to make a revocation recommendation. The Council received six submissions.

On 19 December 2018, the Council published a Statement of Preliminary Views (SOPV), proposing to recommend that the declaration be revoked on the basis of non-satisfaction of the amended declaration criteria (a) and (d). In response to the SOPV, the Council received 8 submissions by early February 2019.

On 8 April 2019, the Council published on its website a report from NERA Economic Consulting, and invited submissions from interested parties on the report by 28 April 2019. The Council received five submissions. The Council published all public submissions and relevant correspondence in relation to this matter on its website.

As at the end of 2018-19, the Council’s consideration of whether to make a revocation recommendation in respect of the declared service was ongoing.

Participation in policy reviews

Productivity Commission Inquiry into the economic regulation of airports

At the request of the Federal Treasurer, the Productivity Commission commenced an Inquiry into the economic regulation of airports with the release of an Issues Paper in July 2018. In response to the Issues Paper, some stakeholders provided submissions calling for the establishment of an airport-specific, negotiate-arbitrate regime, to be activated by ‘deemed’ declaration of airport services.8 The key argument raised by those stakeholders was they considered the 2017 amendments to criterion (a) had raised the threshold of the criterion to a largely unattainable level, thereby rendering the threat of declaration an ineffective constraint on the airports’ exercise of market power.

In November 2018, the Council provided a submission to the Productivity Commission outlining why it believes such suggested reform would be neither necessary nor appropriate. In this respect, the Council outlined its views and approach to declaration under criterion (a), the history and application of the criterion, and reasons why the Council was unconvinced that the amendments to the criterion would have the effect as claimed by those stakeholders.

The Council also cautioned against the suggested reform to bypass all of the statutory criteria (not just criterion (a)), designed to work together to evaluate the costs and benefits of access regulation and take account of public interest considerations. The Council also considered any such proposed reforms would undermine the current light-handed regulatory approach; and the incentives it provides for parties to negotiate outcomes commercially.

In February 2019, the Productivity Commission released a Draft Report noting that the existing regulatory approach (annual monitoring by the ACCC and the periodic reviews by the Commission) was working well; and that there was no evidence that the four monitored airports9 had systemically exercised their market power. Further, the Commission noted that declaration imposes a credible threat of consequences and constrains the exercise of market power by airports. The Commission considered that bypassing the declaration process would remove the ability of the Minister to consider the need for access regulation on a case-by-case basis; and that introducing a negotiate-arbitrate regime through bypassing declaration would have substantial perverse effects. On this basis, the Commission made a draft recommendation that the existing light-handed regulatory approach be continued, subject to refinements.10

In March 2019, the Council provided a submission in support of the Productivity Commission’s draft recommendation noted above.

The final inquiry report was handed to the Government on 21 June 2019. The Government is required to table the report in each House of the Parliament within 25 sitting days of receipt.

The Council’s submissions are available on the Productivity Commission’s website and on the Council’s website.

Gas pipeline regulation and possible future reforms

The regulation of gas pipelines has attracted considerable policy attention in recent years. Following the ACCC’s East Coast Gas Inquiry in 2015-16 and Dr Michael Vertigan AC’s Examination of the Current Test for the Regulation of Gas Pipelines in 2016, the Council of Australian Governments (COAG) Energy Council endorsed a new gas pipeline information disclosure and commercial arbitration regime.

The new regime took effect upon commencement of Part 23 of the National Gas Rules on 1 August 2017, and applies to ‘non-scheme’ pipelines – mainly, pipelines that are not subject to a ‘coverage’ determination under the NGL.11 In effect, this regime has bypassed the coverage criteria as the ‘gateway’ to access regulation, and has ‘deemed’ all non-scheme pipelines12 as requiring regulation, based on the assumption that they all have market power.

In 2017-18, the Australian Energy Market Commission (AEMC) completed a review into the economic regulation of covered pipelines, in which it also examined the new Part 23 regime and its interaction with the other pre-existing forms of regulation determined by the Council under the NGL.13 The AEMC canvassed potential options to re-design the overarching regulatory framework, including changing the processes and criteria by which the Council makes recommendations regarding the coverage of pipelines and decisions regarding the forms of regulation for covered pipelines.

In April 2018, the Council provided a submission to the AEMC expressing its concerns regarding the proposed re-design of the regulatory framework and putting forward an alternative re-design option for consideration.14

The AEMC released its final report In July 2018. Following this, in December 2018, the COAG Energy Council15 requested its Senior Committee of Officials to prepare a Regulatory Impact Statement (RIS) to review the issues highlighted in the AEMC’s proposed re-design of the regulatory framework and to consider possible options for further reform. The RIS will examine all new and pre-existing forms of regulation, the tests used to determine the form of regulation and exemptions. The RIS process will be closely integrated with a review of the Part 23 regime, which is scheduled to commence in August 2019.

As these issues relate to the Council’s functions and responsibilities under the NGL, the Council intends to follow the RIS process and engage with the proposed review of the Part 23 regime in due course. If these processes result in any policy decisions to change the coverage criteria16 or any other mechanisms administered by the Council under the NGL, the Council will update its guidelines accordingly.

Footnotes

  1. Prior to the amendments to criterion (a), the criterion was set out in paragraph 44G(2)(a) of the CCA.
  2. To that point, the latter interpretation was applied by the Council, the relevant Ministers and the Tribunal in previous matters.
  3. Port of Newcastle Operations Pty Ltd v Australian Competition Tribunal [2017] FCAFC 124 (PNO v Tribunal).
  4. The amendments were introduced as a result of the Competition and Consumer Amendment (Competition Policy Review) Act 2017. The amended declaration criteria are set out in s 44CA of the CCA.
  5. The Australian Government response to the Productivity Commission and Competition Policy Review Recommendations on the National Access Regime, released on 24 November 2015.
  6. The PNO’s reason for confidentiality, which the Council accepted, is that the documents contain highly confidential and commercially sensitive information about PNO’s business and strategy. As noted in the Council’s Statement of Preliminary Views (19 December 2018), the Council considered the confidential information provided by PNO to have no bearing on the matter, and hence gave it no weight.
  7. The access dispute was notified by Glencore to the ACCC on 4 November 2016.
  8. The call for such an approach was similarly made by various parties to previous Productivity Commission Inquiries, and were rejected by the Productivity Commission on the basis that such approach would undermine the light-handed regulatory regime.
  9. Sydney, Melbourne, Brisbane and Perth airports.
  10. Of relevance to the Council, the Productivity Commission also considered options to improve competition in the markets for the supply of jet fuel. These options were: a recommendation to the Treasurer or the Minister for Infrastructure to apply to the Council for a recommendation to declare the relevant service(s), or recommending that an industry-specific access regime for jet fuel supply infrastructure be established.
  11. The exception is pipelines that do not currently provide third party access.
  12. The exception is pipelines that do not currently provide third party access.
  13. Due to accelerated timeframe in which the Part 23 regime was introduced in 2017, these issues were not able to be considered in much detail by the policy makers at the time.
  14. The Council’s submission also considered issues relating to light regulation (the possibility of removing light regulation in light of the introduction of Part 23) and the 15-year no-coverage exemption for greenfields pipelines. These issues will be considered in the RIS process undertaken by the COAG Energy Council’s Senior Committee of Officials.
  15. The COAG Energy Council also endorsed the AEMC’s recommendations relating to the regulation of covered pipelines by the Australian Energy Regulator and the Economic Regulation Authority (which the Council supported). Most of these recommendations have become law by March 2019.
  16. See also the ‘Coverage criteria under the NGL’ section on page 22 of this Annual Report.