PC News - August 2014

The Australian Government asked the Productivity Commission to undertake an inquiry into the role and efficacy of the National Access Regime. The Commission was asked to propose ways of improving the operation of the Regime to ensure the efficient operation of and investment in essential infrastructure to promote competition and investment in dependent markets. The Commission's final report was released in February 2014.

Why is access to infrastructure services important?

Infrastructure services are delivered through electricity, gas and water systems; telecommunications, rail and road networks; and port and airport terminals. The cost and quality of infrastructure services is an important driver of a business's competitiveness and productivity. For example, improvements in transport infrastructure can lower distribution costs, increase access to overseas markets, and improve access to inputs. And poor delivery of infrastructure services can stifle business productivity.

What is the National Access Regime?

The National Access Regime is a regulatory framework through which third parties may seek access to infrastructure services owned and operated by others, when commercial negotiations on access are unsuccessful. The Regime aims to promote the economically efficient operation of, use of, and investment in essential infrastructure services, thereby promoting effective competition in upstream and downstream markets. The Regime was introduced in 1995 as a key part of the National Competition Policy. The regulatory provisions of the Regime are contained in Part IIIA of the Competition and Consumer ACT 2010 (CCA) and clause 6 of the Competition Principles Agreement signed by the Commonwealth and States and Territories in 1995.

How does the Regime work?

Parties can use the Regime to seek access to a service provided by an infrastructure facility through one of four pathways:

• Declaration — a party can request that the National Competition Council (NCC) recommend that the designated Minister declare a particular infrastructure service. If the service is declared by the Minister, parties can then negotiate the terms of access to the service. If they are unable to agree on access terms, the Australian Competition and Consumer Commission (ACCC) can act as an arbitrator and may determine the terms and conditions of access to the declared service.
• Certified access regime — a party can seek access to a service through a state or territory access regime that is certified as effective by the Commonwealth Minister.
• Undertaking — a party can seek access to a service under terms and conditions set out in an undertaking that has been accepted by the ACCC.
• Competitive tender — a party can access a service provided by a government-owned facility under terms that have been established through a competitive tender process approved by the ACCC.

When should access to infrastructure services be regulated?

In the Commission's view, access regulation should only be used to address an enduring lack of effective competition, due to natural monopoly, in markets for infrastructure services where access is required for third parties to compete effectively in upstream or downstream markets.

The existence of a natural monopoly per se does not warrant access regulation, as the ability of an infrastructure service provider to exercise market power may be constrained by a range of factors including the existence of substitutes, countervailing market power, or the threat of market entry by a competitor.

However, where a service provider is not constrained from using its market power, denial of access or monopoly pricing can lead to allocative inefficiencies that impose costs on the community. Access regulation can address these allocative inefficiencies, and facilitate lower prices for consumers. Applied appropriately, access regulation can also increase incentives for innovation — a fundamental driver of productivity improvements and economic growth — through the promotion of competition in markets reliant on infrastructure services.

Access regulation is not the most effective means to address market power arising from government legislation, patents and copyrights, or strategic behaviour — there are more direct means for addressing these problems. Nor should access regulation be used to avoid the duplication of infrastructure per se, or to address wider social and economic issues such as income distribution or environmental concerns.

Government intervention can be costly — in particular where it adversely affects investment incentives. If prices are set too low, investment could be delayed or not occur at all. And mandating third party access imposes costs on infrastructure service providers, including from coordinating multiple users of their facilities. The Commission report argues that access regulation is only warranted when it generates net benefits to the community.

The benefits of access regulation are more likely to outweigh the costs where there is a monopoly provider of infrastructure services. Competition between service providers will generally be preferable to access regulation in markets where two or more infrastructure service providers are able to provide the same service (or an effective substitute service).

The Commission's recommendations

The Commission supported the continuation of the National Access Regime, but recommended that its scope be confined to ensure its use is limited to cases where the benefits arising from increased competition in dependent markets are likely to outweigh the costs of regulated third party access to infrastructure services.

The Commission's proposed reforms focus on the criteria for declaration, as these determine when access regulation will and will not apply. The Commission's reforms, if implemented, would reduce avoidable administrative costs of access cases by improving certainty for access seekers and infrastructure service providers, and reduce the likelihood of unsubstantiated and speculative declaration applications, reviews and appeals.

When considering whether to regulate access to infrastructure services in the future, governments should seek to demonstrate that there is a lack of effective competition in the market for the service that is best addressed by access regulation. An assessment of the net benefits should determine whether access regulation is most appropriately applied at the facility or industry level.

Access regulation and the potential use of market power: an example

Natural gas transmission pipelines may exhibit significant economies of scale in their construction and operation and, in some circumstances, adding compressors can be a lower cost way to increase their capacity than duplicating the pipeline. As such, it can be efficient for a single pipeline to transport gas from a production facility to an industrial or urban centre.

Access regulation may be warranted where the provider of pipeline services has an ability and incentive to charge monopoly prices or deny access to a pipeline in order to generate monopoly rents. This may occur where the provider of pipeline services is not constrained from exercising its market power by:

• the availability of substitute facilities — for example, where there are no other pipelines taking gas from the production facility or delivering gas to the final market
• the availability of substitute goods — for example, where there are no other fuel and energy sources that are suitable substitutes for natural gas
• users with countervailing market power — for example, if users are small and do not have the capacity to build their own pipeline
• the threat of entry — for example, where sunk costs and economies of scale act as an impediment to a competitor building another pipeline.

Conversely, access regulation is unlikely to be warranted where the market power of a provider of a pipeline service is constrained by these factors.

National Access Regime

• Read the Inquiry Report released February 2014