Application for declaration of rail network services - final

Application for declaration ofrail network services provided by

Freight Australia

Final Recommendation

December 2001

National Competition Council

Table of Contents

Recommendation ................................................................................................ 3Declaration process............................................................................................. 4

Council's approach to decision-making ...................................................... 4Declaration criteria ..................................................................................... 4

Facilities that provide the services ................................................................ 5Branch lines and sidings............................................................................. 7

Services ......................................................................................................... 10The meaning of the term ‘market’ ............................................................ 11

Assessment against criteria ............................................................................. 14Sections 44G2(b) and 44F(4)......................................................................... 14

Develop another facility ............................................................................ 14Uneconomical ............................................................................................ 14Development of rail networks................................................................... 16Sidings and branch lines........................................................................... 17Existing rail track not operated by Freight Australia............................. 17

Section 44G(2)(a)........................................................................................... 18Is the market for rail network services separate from transport markets?................................................................................................................... 19Market power in related markets............................................................. 21‘With and without’ declaration ................................................................. 25

Section 44(g)(2)(c).......................................................................................... 26National significance................................................................................. 27Size of the facility...................................................................................... 27Importance to trade................................................................................... 28Importance to the economy....................................................................... 28

Section 44G(2)(d)........................................................................................... 29Section 44G(2)(e)........................................................................................... 30

Victorian rail access regime...................................................................... 30Section 44G(2)(f) ........................................................................................... 33Section 44F(3) ............................................................................................... 33Glossary......................................................................................................... 35References ..................................................................................................... 37Cases.............................................................................................................. 38Submissions .................................................................................................. 39Appendix 1 National access regime............................................................. 40

Freight Australia’s application for declaration

RecommendationOn 1 May 2001 the Council received an application from Freight VictoriaLimited, trading as Freight Australia, for declaration of the services providedby the rail network it leases from the Victorian Government. The networkextends through country Victoria and into southern New South Wales and isused for the purposes of transporting freight and passengers.

The services under application comprise point to point rail line servicesprovided by the use of the facilities under lease to Freight Australia. Theinterconnection of these rail lines provides the potential for access seekers toaggregate complementary rail line services in any viable and technicallyfeasible configuration. This adds the dimension of a network service to thepoint to point rail line services.

The Council is not satisfied of all of the matters set out in section 44G(2) ofthe Trade Practices Act 1974 in respect of the application by Freight VictoriaLimited.

The Council therefore recommends that the Minister not declare the servicesthe subject of this application.


Declaration processPart IIIA of the TPA establishes a national access regime under which accessseekers may gain a legal right to use the services of natural monopolyinfrastructure. Declaration involves:

• the designated Minister or any other person (e.g., a business) making anapplication to the Council for declaration of the infrastructure service;

• the Council assessing the application and making a recommendation tothe designated Minister; and

• the designated Minister either declaring or deciding not to declare theservice.

The Minister’s decision can be reviewed by the Australian CompetitionTribunal (the Tribunal).

Council's approach to decision-making

In coming to its decision, the Council must consider if the services underapplication satisfy the declaration criteria in section 44G(2) of the TPA.

To recommend declaration the Council must be “affirmatively satisfied” of thematters set out in section 44G(2) (Sydney Airport decision, 40755). In sodoing, the Council is required to comply with its duties under the generalprinciples of administrative decision-making. The law does not furtherprescribe the approach to be taken. There is a “range of possible approaches todecision-making” the correctness of any approach depends on thecircumstances of the particular case.1

In coming to its decision, the Council takes account of the AustralianCompetition Tribunal’s (the Tribunal) decisions on declaration applications.The Tribunal considered the declaration criteria in the Australian Union ofStudents case and the Sydney Airport decision. As the TPA’s declarationcriteria raise issues common to the National Gas Code’s coverage criteria, theCouncil also takes account of the Tribunal’s recent Duke Eastern Gas Pipelinedecision.

Declaration criteria

In making its recommendation to the designated Minister, the Council mustconsider the matters set out in 44G(2) of the TPA:

1 See MIEA v Wu Shan Liang (1996) 185 CLR 259 at 282; also John Meadows &

Sornawathy Meadows v Minister for Immigration and Multicultural Affairs(unreported, Einfeld, von Doussa and Merkel JJ, 23 December 1998) especially atp. 12 per Einfeld J.


(a) that access (or increased access) to the service would promotecompetition in at least one market (whether or not inAustralia), other than the market for the service;

(b) that it would be uneconomical for anyone to develop anotherfacility to provide the service;

(c) that the facility is of national significance, having regard to:i) the size of the facility; orii) the importance of the facility to constitutional trade or

commerce; oriii) the importance of the facility to the national economy;

(d) that access to the service can be provided without undue riskto human health or safety;

(e) that access to the service is not already the subject of aneffective access regime;

(f) that access (or increased access) to the service would not becontrary to the public interest.

Further, section 44F(4) requires the Council to consider “whether it would beeconomical for anyone to develop another facility that could provide part of theservice”.

A service cannot be declared if already covered by an undertaking or‘effective’ access regime. To be ‘effective’, a State or Territory access regimemust satisfy all the criteria set out in clauses 6(2)-(4) of the CPA. Thequestion of effectiveness may be pre-determined through a State or TerritoryGovernment applying to the Council for the regime to be certified as‘effective’.

Facilities that provide the services

The facilities that provide the services under the declaration applicationcomprise part of the recently leased Victorian rail network. Table 1 outlinesthe current lease arrangements for the Victorian rail infrastructure. Table 2lists the rail lines that are leased by Freight Australia and are the subject ofthis declaration application.


Table 1 Lessees of Victorian rail infrastructureNetwork segment Leased to

Standard Gauge Interstate Track - between Wolseley (onthe Victorian/South Australian border) and Melbourne andbetween Wodonga (on the Victorian/New South Walesborder) and Melbourne

Australian Rail Track Corporation

*Standard Gauge Intrastate Track - comprising linesconnecting the Standard Gauge Interstate Track with towns inVictoria (notably the Portland to Maroona, Yaapeet toDimboola, Hopetoun to Murtoa and Maryborough toAraratlines)

Dir. of Public Transport whosubleased to Freight Australia

*Broad Gauge Country Track - non electrified broad gaugetrack outside Melbourne (and certain freight only track withinMelbourne known as the “independent freight lines”)

Dir. of Public Transport whosubleased to Freight Australia

Dynon Terminals - various rail freight terminals, notably theterminals at Dynon and South Dynon

Dynon Terminal has been leased toFreight Australia. South DynonTerminal has been leased toNational Rail

Metropolitan Train Network - electrified track and nonelectrified track leased to passenger operators Bayside andConnex (formerly Hillside)

Dir. of Public Transport whosubleased to Bayside and Connex(formerly Hillside Trains)

*Freight Australia NetworkSource: Department of Infrastructure 2000.

Freight Australia leased for a term of 15 years (with two 15-year options) thebroad and standard gauge rail tracks that form the Victorian intra-state railnetwork. The application defines the facilities that provide the relevantservices as:

... the running lines which provide a direct connection between any twoof these nodes and of which Freight Australia is the present lessee. Itexcludes any tracks not specifically connecting or required to connecttwo nodes. The nodes are all specified by their track distance fromMelbourne and these are consistent with the latest Freight AustraliaNetwork Service Plan.Rail track connection between some of the nodes requires traversingtrack that is not leased by Freight Australia and where access isprovided by others, particularly Bayside Trains (metropolitannetwork) and the ARTC (interstate mainline). These segments arethus excluded from this declaration application. (Freight Australia2001a, Attachment A)

and provides the following list of specific point to point services.


Table 2: Rail lines under applicationNode Distance from

Melbourne(km)

Node Distance fromMelbourne(km)

Bairnsdale

BandianaBroadmeadows

Cranbourne

Deniliquin

Dennington

Dimboola

Dunolly

East Ararat

Gheringhap

Hopetoun

Kulwin

Maroona

Mildura

Moulamein

Murtoa

274.172

305.915

16.984(up track)

17.090(down track)

45.507

305.679

271.794

363.138

208.699

273.029(via Cressy)

81.628

470.591

443.108

249.285(via Cressy

571.828

371.823

359.966(via Cressy)

Nyora

Oaklands

Pakenham

Panitya

Portland

Rennick

Robinvale

Sunshine

Swan Hill

Sydenham

Tocumwal

Werribee station

Wodonga

Wodonga coal siding

Yaapeet

90.507

320.882

60.584

599.079

421.080

450.429

472.686

12.428(up track)

12.397(down track)

12.360(terminating

track)

344.417

24.026

250.922

32.272

299.632

301.691

506.155(via Cressy)

Source: Freight Australia 2001a, Attachment A

The application excludes the following facilities:

• buildings (including stations, platforms, sheds and shelters);• carparks;• terminals;• storage, loading and receival facilities;• workshops, depots, yards and fuel points;• sidings;• branch lines not directly connecting the nodes; and• overhead electrical power supply systems.

Branch lines and sidings

The application excludes services provided by rail sidings, branch lines notdirectly connecting nodes and overhead electrical power supply systems.

Interested parties consider this exclusion to be significant. The AustralianRail Track Corporation (ARTC) does not support the exclusion of sidingsfrom any declaration:


ARTC does not support the exclusion of services provided by railsidings from declaration. There are many sidings on the Victorianbranch line network required for access to grain silos (and other grainreceival points) as well as other freight and passenger loading andunloading facilities. Access to these services would be essential, andintegral, to any third party user in order to conduct a rail transportservice to many of these markets. Access to these services must be onfair and reasonable terms to third parties so as to instill sufficientconfidence in the certainty and equity of access terms and conditions,so as to sufficiently promote market entry. ARTC notes that sidingshave been covered by the Victorian declaration order. (ARTC 2001,p.2)

The Australian Wheat Board (AWB) agrees that sidings are an integralpart of Freight Australia’s network:

Sidings at country silos are a critical component of infrastructure forfreighting grain from growers to export or domestic markets, asexisting grain loading infrastructure at these country silos ispositioned to load wagons located on these sidings. ...In addition, AWB believes that Freight Australia controls the sidingsat port terminals at Geelong Port and the Port of Portland. Access tothese rail sidings is required to unload grain transported by freight tothese ports. (AWB 2001, p.11-12)

FreightCorp considers sidings and branch lines an integral part of theFreight Australia network:

To operate a commercial service on the network in Victoria leased toFreight Australia a TPO such as FreightCorp will require access tomuch more than the mainline track between nodes. Obviously to movefreight, such as grain, access is required to any branch lines wheresidings holding grain are located, sidings in which silos are located,and sidings at the ports where the unloading occurs. Furthermorethere may be the need to access branch lines or sidings for the purposeof short-term stowage of rolling stock. Omission of the above sidingswould make provision of rail services impossible. (FreightCorp 2001,p.6)

Freight Australia argues that these concerns are due only to aninterpretation of the terms ‘branch lines’ and ‘sidings’ rather than to theactual infrastructure placed under application. Freight Australia considersthat its application covers the ‘branch lines’ and ‘sidings’ referred to by theabove interested parties and necessary to provide a full point to point networkservice for the transport of grain from collection to delivery points for grainhandling services to take place.

The term “siding” is often loosely applied to facilities that are, inreality, terminals (ie the primary purpose is for loading or unloadingfreight.) Freight Australia believes that such “sidings” are also not


covered by the Victorian regime on the basis that they are, in reality,terminals – and “terminals” are excluded. If Freight Australia were tooperate under the Victorian regime it would administer that regimeaccordingly.Thus it is Freight Australia’s contention that there is no differencehere between its application and the Victorian regime. ...The other exclusions are there, either because a line is closed orbecause alternative tracks are available.Freight Australia’s reference to branch lines that are excluded are tolines that are closed and on a care and maintenance basis only. Itdoes not seem sensible to include them in the Part IIIA declaration.(Freight Australia 2001c, pp. 5-6)

Council’s considerationIn the Sydney Airport decision, the Tribunal considered an application fordeclaration of:

• the service provided by the use of the freight and passenger aprons andhard stands at Sydney International Airport for the purpose of enablingramp handlers to load freight into and unload freight from internationalaircraft; and

• the service provided by the use of an area at the Airport to enable ramphandlers to store equipment and transfer freight to and from trucks.

The Tribunal noted that a key issue in determining the relevant facility is“the minimum bundle of assets required to provide the relevant services subjectto declaration”. This is important because:

The more comprehensive the definition of the set of physical assets …the less likely it is that anyone would find it economical to developanother facility within a meaningful time scale. Conversely, thenarrower the definition of facility, the lower the investment hurdle andinhibition on development … (Sydney Airport decision, 40791).

The Tribunal found that most, if not all of the airport, including all the basicairside infrastructure (runways, taxiways and terminals) and related landside facilities, were clearly essential to the services to which access wassought and therefore constituted the relevant facility within the meaning ofPart IIIA (Sydney Airport decision, 40792).

The Council notes that Freight Australia intends that the application coverall facilities necessary to deliver the nominated point to point services,including those for the transport of grain from collection points and todelivery points, for grain handling services to take place. Freight Australiaindicates that it will amend its application to more clearly reflect thisintention if this is considered necessary.


ConclusionThe Council concludes that any declaration should incorporate allinfrastructure, including the rail network, sidings and branch lines, necessaryto provide point to point network services nominated by the application.

Services

Part IIIA provides for access to the services of a facility (or part of a facility),rather than the facility itself. A service is something separate and distinctfrom a facility. It may consist merely of the use of a facility. Thus, forexample, it is the use of a rail track, rather than the rail track itself thatcould be the subject of a declaration recommendation.

Service is defined in s44B of the TPA:

‘service’ means a service provided by means of a facility and includes:(a) the use of an infrastructure facility such as a road or railway

line;(b) handling or transporting things such as goods or people;(c) a communications service or similar service;but does not include:(d) the supply of goods; or(e) the use of intellectual property; or(f) the use of a production process;except to the extent that it is an integral but subsidiary part of theservice.

The purpose of identifying the services is to consider whether:

• in terms of criterion (a), coverage would promote competition in a marketother than the market for the services the subject of the application;

• in terms of criterion (b), it would be uneconomical for anyone to developanother facility to provide the services subject to the application;

• in terms of criterion (d), access to the services provided by means of thefacility can be provided without undue risk to human health and safety;

• in terms of criterion (e), the services are not already subject to an effectiveaccess regime; and

• in terms of criterion (f), access to the services would not be contrary to thepublic interest.

In the Duke Eastern Gas Pipeline case, the Tribunal in deciding that theservice provided by means of the Eastern Gas Pipeline was a haulage servicefor the transport of gas between one point on the pipeline and another said:


The question of what constitutes the services provided by the pipelineis fundamentally a mixed question of fact and the proper constructionof criterion (b), rather than a matter of economic analysis. Everyhaulage service will of necessity be from one point to another. That isthe commercial service actually provided by the pipeline operator to itscustomers. That service may be of different use to the producers in theorigin market or to the customers in the destination market, but it isthe same service. (Duke Eastern Gas Pipeline case, paragraph 69)

Section 44F(4) is a related but distinct consideration to s44G(2)(b). TheCouncil’s view is that this consideration forms part of its residual discretion.That is, where the Council is satisfied of all declaration criteria, it may stillrecommend that the service not be declared should it consider it economical todevelop another facility that provides part of the service.

ConclusionThe Council concludes that the services under application comprise point topoint rail line services provided by the use of the facilities under lease toFreight Australia. The interconnection of these rail lines provides thepotential for access seekers to aggregate complementary rail line services inany viable and technically feasible configuration. This adds the dimension ofa network service to the point to point rail line services.

The Council concludes that these services satisfy the definition set out ins44B of the TPA.

The meaning of the term ‘market’

In considering the questions of market definition, the Council is guided by thework of the Federal Court, the Tribunal, and the High Court in theirconsideration of the market for the purposes of Part IV, as well as theTribunal’s and the Court’s consideration of Part IIIA.

The Tribunal has defined the ‘market’ in the following way:

A market is the area of close competition between firms, or putting it alittle differently, the field of rivalry between them (if there is no closecompetition there is of course a monopolistic market). Within thebounds of a market there is substitution – substitution between oneproduct and another, and between one source of supply and another,in response to changing prices. So a market is the field of actual andpotential transactions between buyers and sellers amongst whom therecan be strong substitution, at least in the long run, if given a sufficientprice incentive. (Re Queensland Co-operative Milling Association Ltd(1976) 25 FLR 169 at 190)


This view of the market has been accepted by the High Court in theQueensland Wire case2 and was adopted by the Tribunal in the context of PartIIIA in the Sydney Airport decision (40772 - 40773).

Dimensions of markets

The relevant dimensions of markets include the following:

• The product market, that is the types of goods and services in a market.Product markets can be considered separate if their respective productsare not substitutable in demand or supply. Products are substitutable indemand (and therefore in the same product market) if consumers willsubstitute one product for the other following a small but significantchange in their relative prices. Substitution in supply occurs when aproducer can readily switch its assets from producing one product toanother.

• The functional market. Functional market definition focuses on thedifferent steps in a production process. In defining functional markets, theCouncil has had regard to the Tribunal's approach to functional marketdelineation in the Sydney Airport decision (40772 - 40773).) which isconsistent with the approach used by the High Court in Queensland Wireand developed by Mr Henry Ergas (Ergas 1997, pp. 1-3). The Councilconsiders that the two following conditions must be satisfied beforemarkets can be regarded as functionally separate.− The layers at issue must be separable from an economic point of view

(economically separable). This involves an assessment as to whetherthe transaction costs in the separate provision of the good or service atthe two layers are so large as to prevent such separate provision frombeing feasible. In effect, to be in different markets, vertical integrationmust not be inevitable.

− Each layer must use assets sufficiently specific and distinct to thatlayer such that the assets cannot readily produce the output of theother layer (economically distinct). In effect, supply side substitutionmust not be so readily achievable as to unify the field of rivalrybetween the two layers.

Markets may be functionally separate even though there is a one for onerelationship, that is to say, perfect supply and demand sidecomplementarity. A good example of this is rail track and train operations.However, where complementarity is associated with economies of jointproduction or consumption such that separate provision or consumptionwas not economically feasible, the services will not be in functionallyseparate markets (Sydney Airport decision, 40772 - 40773).

• The geographic dimension of the market. This refers to the area coveredby the market such as national, intra-state or regional markets. The

2 Queensland Wire Industries Pty Ltd v The Broken Hill Proprietary Ltd and Another

(1989) 167 CLR 177.


reference to ‘other markets’ in criterion (a) includes markets outsideAustralia.

• The temporal dimension of the market. This refers to whether the size andscope of the market is likely to change over time. The temporal dimensionis particularly relevant where production technologies are continuallychanging. In order to determine the temporal parameters of markets, theCouncil generally has regard to long-run rather than short-runsubstitution possibilities.


Assessment against criteria

Sections 44G2(b) and 44F(4)

s44G2(b) - it would be uneconomical for anyone to develop another facility to provide theservice; or Criterion

s44F(4)... it would be economical for anyone to develop another facility that could providepart of the service. ...

These criteria are designed to identify facilities where the development ofother facilities to provide substitute services would be inefficient. It is notnecessary that the additional facility identically duplicate the first but ratherthat it be capable of providing substitute services. (Sydney Airport decision,40793).

Develop another facility

The Tribunal in the Duke Eastern Gas Pipeline case stated that a “literalconstruction of criterion (b) might require the decision-maker, in theapplication of the criterion, to ignore the existence of pipelines which havealready been developed” (Duke Eastern Gas Pipeline case, paragraph 55)because the words of the criterion ask whether it is economic to developanother pipeline. The Tribunal considered there was:

…no logic in excluding … existing pipelines from consideration in thedetermination of whether criterion (b) is satisfied. The policyunderlying the Code would not be advanced if the Tribunal were toproceed in that blinkered way. (Duke Eastern Gas Pipeline case,paragraph 57)

The Council considers this reasoning is also relevant to the interpretation ofcriteria (b) under section 44G(2) of the TPA. This means that in the presentcase, the Council must have regard to whether it would be economic todevelop a new or existing rail network to provide the services alreadyprovided by the Freight Australia rail network.

The Council considers that the term ‘develop’ is sufficiently broad toencompass minor modifications or enhancements to an existing rail network.This means that criterion (b) is not met if an existing rail network can beeconomically expanded to provide the services under application.

Uneconomical

To satisfy criterion (b) it is necessary to show that the provision of substituteservices by another facility is ‘uneconomical’. The Tribunal affirmed in the


Sydney Airport decision that ‘uneconomical’ is construed in a social context(focussing on economic efficiency considerations) rather than in terms ofprivate (commercial) interest:

... the uneconomical to develop test should be construed in terms of theassociated costs and benefits of development for society as a whole.Such an interpretation is consistent with the underlying intent of thelegislation, as expressed in the second reading speech of theCompetition Policy Reform Bill, which is directed to securing access to"certain essential facilities of national significance". This languageand these concepts are repeated in the statute. This language does notsuggest that the intention is only to consider a narrow accounting viewof "uneconomic" or simply issues of profitability (Sydney Airportdecision, 40793).

The Tribunal endorsed this approach in the Duke EGP decision, acceptingthat it would be ‘uneconomic’ to develop another gas pipeline if a singlepipeline could meet market demand at less cost (after taking into accountproductive, allocative and dynamic effects) than two or more pipelines. Inreaching this view the Tribunal relied on the definition of natural monopolyoutlined by the Council in its 1996 Draft Guide to Part IIIA and by Posner inhis book Natural Monopoly and its Regulation (30th Edition, 1999):

If the entire demand within a relevant market can be satisfied atlowest cost by one firm rather than two or more, the market is anatural monopoly, whatever the actual number of firms in it. If such amarket contains more than one firm, either the firms will quicklyshake down to one through mergers or failures, or production willcontinue to consume more resources than necessary. In the first casecompetition is short lived and in the second it produces inefficientresults. Competition is thus not a viable regulatory mechanism underconditions of natural monopoly.

The Tribunal’s decision recognises the barriers to entry posed by a naturalmonopoly. In the absence of non-market controls (such as access regulation),these barriers confer on the provider substantial market power that isunencumbered by the threat of entry by a competitor (Sydney Airportdecision, 40771). In these circumstances, regulated access can be animportant means of promoting efficient use of infrastructure and competitiveoutcomes in dependent markets.

The Council also takes account of imminent changes that could underminethe natural monopoly status of the infrastructure. These include significantincreases in demand and changes in technology that allow smaller parcels ofinfrastructure to economically deliver the same services. The need to takethese issues into account turns on the importance of ensuring regulation doesnot discourage economic expansions and adoptions of new technologies, soimportant in promoting dynamic efficiency.


Development of rail networks

Considerations relating to criteria 44G2(b) and 44F(4) focus on the economicdevelopment of infrastructure that provides rail network services for thepurposes of transporting passengers and freight over Victoria and southernNew South Wales. The application argues that it would be uneconomical foranyone to develop another facility to provide these services:

The development of another facility to provide the service would entailthe construction of a totally new railway track linking all the nodes onFreight Australia’s network. As there is ample capacity at reasonableoperating levels on the existing railways, it would be manifestlyuneconomic to develop a totally new railway track. (Freight Australia2001a, p.4)

Freight Australia estimates that developing a substitute facility would costsome $4 billion and would be hindered by environmental and land acquisitionissues. The AWB also notes that the cost of development could be $4 billion3

and points to the network’s current low utilisation (AWB 2001, p.30).Victoria argues that the infrastructure covered by the regime satisfies thiscriterion:

As a result of the high fixed costs it is less costly, in the absence ofcongestion, for rail services to be provided using one facility ratherthan more than one facility.

Currently and for the foreseeable future Freight Australia’s networkcan provide the level and quality of services demanded by users. Thatis, the rail lines are not congested and there is sufficient availablecapacity to meet the demands of users for the foreseeable future.Duplicating the rail lines would significantly increase the fixed costswith no increase in the services provided. This would be wasteful.(Victorian Government 2001a, p.36)

The Council considers that the network displays features associated withnatural monopoly infrastructure. These include significant fixed capitalinvestment with relatively small ongoing expenditures to maintainoperations. Evidence indicates that the rail network has considerable sparecapacity and that additional usage would further reduce average unit costs.

The question arises as to whether some, but not all the rail lines in FreightAustralia’s network, could be developed to provide the same services as thoseunder application. The Council considers that the combination of rail linesthat form the Freight Australia network allows access seekers to combine andconfigure discrete and complementary services as can only be offered by a

3 This estimate of the replacement cost of the Victorian network is based on track

length of approximately 4,000 km and a replacement cost, extrapolated from theARTC rail network audit, of $1 million/km.


network and that these same services could not be provided by single raillines.

The Council concludes that substitute facilities could not be economicallydeveloped, in part or in whole, to provide the same services as those underapplication.

Sidings and branch lines

FreightCorp considers that sidings and branch lines are an integral part ofFreight Australia’s network (FreightCorp 2001a, p.6). The AWB agrees (AWB2001, pp.11-12). The AWB costs development of Freight Australia’s networkof country silo sidings at $451.2 million ($3.2 million x 141 up-country silos inthe area serviced by Freight Australia’s network that have sidings) excludingrail sidings at Portland and Geelong Ports (AWB 2001, p.13).

Victoria states that substitute sidings are uneconomic or infeasible todevelop (Victorian Government 2001a, p.27) Australian TransportNetwork (ATN) agrees:

It is not physically possible to duplicate the sidings under the grainloading and receival bins because of space constraints and the natureof the bins. Without access to these key facilities we cannot service ourcustomers. (ATN 2001, p.4)

Existing rail track not operated by FreightAustralia

ARTC and Bayside (National Express Group) provide rail network services inVictoria. However, Freight Australia advises that these networks do notprovide any substitute services for any point to point services underapplication (Freight Australia 2001b, p.9).

ARTC track is standard gauge. Freight Australia states that the ARTC trackis complementary to that of Freight Australia, allowing Freight Australia tocombine its services with those of ARTC to allow trains a continuous pathfrom origin to destination (Freight Australia, 2001b, p.9). Where ARTC andFreight Australia tracks run side by side and service the same origins anddestinations, the gauges differ and trains are unable to readily switchbetween these tracks.

The Bayside network is limited to metropolitan Melbourne where FreightAustralia has minimal track. Its services too are complementary as FreightAustralia must use the Bayside lines to pass through metropolitanMelbourne.


ConclusionThe Council considers that existing Bayside and ARTC rail track providescomplementary rather than substitute services to those provided by FreightAustralia’s rail network. Further, it is not economic to develop these tracks toprovide substitute services.

The Council concludes that the nominated facilities could not be economicallydeveloped, in part or in whole, to provide the same services as those underapplication and that the nominated facilities satisfy the requirements ofSections 44G2(b) and 44F(4).

Section 44G(2)(a)

access (or increased access) to the service would promote competition in at least onemarket (whether or not in Australia), other than the market for the service;

The purpose of criterion (a) is to determine whether declaration wouldenhance the environment for competition in an upstream or downstreammarket when compared with the environment without declaration.

The Tribunal made it clear that the ‘promotion of competition’ assessmentshould be made by comparing the situation ‘with and without declaration’. Asthe Tribunal held in the Sydney Airport decision:

The Tribunal does not consider that the notion of "promoting"competition in s 44H(4)(a) requires it to be satisfied that there wouldbe an advance in competition in the sense that competition would beincreased. Rather, the Tribunal considers that the notion of"promoting" competition... involves the idea of creating the conditionsor environment for improving competition from what it would beotherwise. That is to say, the opportunities and environment forcompetition given declaration, will be better than they would bewithout declaration (Sydney Airport decision, 40775).

The Tribunal went on to say that if barriers to competition were reduced,competition would be promoted (Sydney Airport decision, 40790). TheTribunal said it would expect the removal of barriers to entry in a dependentmarket to have a non-trivial effect on the competitive environment and a non-trivial effect on the level of competition in the related market.

In the Duke EGP case, the Tribunal held that access would promotecompetition if the access provider has market power that could be used tohinder competition in dependent markets (Duke Eastern Gas Pipeline case,paragraph 124).

To test this criterion the Council:


• verifies that the market in which competition is said to be promoted isseparate from the market for the service to which access is sought; and, ifso,

• assesses if declaration would promote competition in this separate market.It is not necessary for the Council to define precisely the boundaries of allpossible markets, only to determine whether there are distinct markets.

Is the market for rail network servicesseparate from transport markets?

In order to determine whether the services provided by the Freight Australianetwork are in different markets to those in which competition is likely to bepromoted, the Council applies the test outlined earlier under the discussion ofmarket definition.

Functional levels within the rail transport industry

The markets of rail network services and rail transport services areeconomically separable. In particular, large transaction costs do not makejoint provision essential. While there are a number of vertically integratedproviders of rail network and rail transport services, this may relate as muchto the historical development of the rail industry as to economic factors. Morerecently rail transport operators have extended their activities outside theirstate of origin, where affiliated businesses provide no network services.

New entrants to rail transport operations are few. However, this may alsorelate to historical factors and continuing Government subsidies for selectedservices. The markets appear to be economically distinct. The assets used forsupplying each service are specific and are unable to produce services for theother market.

ConclusionThe Council concludes that rail network services and rail transport servicesoperate in separate though related markets.

Rail transport service markets

The markets for passenger, general freight and bulk freight transportservices are separate if substitution in supply (between the assets thatprovide these services) and demand (between the products available toconsumers) is not significant.

Consumers of transport services are largely unable to switch between theseservices. For instance, consumers of bulk transport services are, for the most


part, unable to substitute these services for passenger or general freighttransport services.

Suppliers of transport services have some ability to switch assets from thesupply of one transport service to another. For instance in the case of rail,advice4 indicates that wagons that can transport bulk freight products, suchas coal and wheat, are reasonably interchangeable after limited conversionwork. Similarly container wagons and log wagons are reasonablyinterchangeable after some conversion work5. However, this substitution doesnot extend to passenger wagons. The Council notes that log transport formsonly a minor part of the bulk transport market which is dominated by thecarriage of wheat and coal. Therefore the substitution of container for logwagons is not considered a significant source of increased supply in the bulkfreight transport market.

Locomotives may be used to pull wagons that transport a range of products.However, locomotives that transport bulk products ideally need more powerthan is necessary to pull other freight, making investment in new locomotivesfor bulk freight operations specific. It is understood that the availability oflow cost second hand locomotives and limitations on track speed has resultedin a less than ideal utilisation of available locomotives in the past. However,efficient investment in new locomotives would be specific and more strictlymatch capability with requirements.

Further, the size of the bulk freight task and its domination by rail meansthat any supplier of bulk freight transport services must make large-scaleinvestment in rail assets to meet the requirements of producers and handlers.

Given these factors, the Council considers that substitution possibilities andeconomies of scope are not so great as to integrate the passenger, generalfreight and bulk freight transport markets into one single transport market.

ConclusionThe Council concludes that the passenger transport services, general freighttransport services and bulk freight transport services are provided inseparate markets.

4 Advice given by Martin Baggott, Consultant.5 There are two basic types of wagons. One has a flat platform base, the other a

shaped body. Within these two types there is considerable scope for alteration to takean alternative cargo.


Box 1: FreightCorp’s view of transport market competitivenessThe particular characteristics of freight largely determine the appropriate means of transport, and theextent to which inter-modal substitution is viable. The most significant characteristics are the size ofthe consignment; the value of the freight relative to its volume and weight; the time-sensitivity of thefreight; and the particular points of origin and destination. Other factors can also be significant, suchas a product’s susceptibility to damage and logistics such as double-handling. FreightCorp’s view isthat there are two broad markets in the freight industry – a national bulk market and a nationalgeneral freight market.

Bulk freight is generally defined to include commodities tipped loose into wagons. It includes coal,wheat, minerals, ores, fertiliser and petroleum, which fill and fit any container they are placed in andare generally homogeneous in nature. Bulk freight is generally high in density, with low relative value;speed of delivery is not a significant issue, although reliability and on-time delivery are; it is pouredinto the wagon, rather than being lifted as a discrete item; and it has no differentiation within thewagon. The principal bulk shipped products in Australia by order of volume are iron and other ores,coal, sugar cane, grain, minerals, stone, sand and gravel. Because of the volume and value of thefreight task, and the significance of the freight component to the overall price, customers are activelyinvolved in the freight solution. For example, the freight of iron and other ores is undertaken by themining companies and is integrated into the overall mine logistics in the Pilbara and elsewhere. Inother industries, the terminal and storage networks are owned by the customers or customercontrolled groups. Further, customers may own their own wagons and locomotives and may operatethem themselves or use outside freight operators to manage the freight task, for example by hookand pull operations.

Non-bulk (or general) freight comprises a diverse range of commodities including steel products,vehicles, manufactured products, plastic, resins, paints, fertiliser, wool, livestock, meat and fish andagricultural products including milk, fruit and vegetables, rice and cotton, and "fast-moving consumergoods" (FMCGs) such as processed food products and beverages. It can also include heavy loads suchas the steel feedstock carried by National Rail for BHP. While each of these commodities can have itsown special pattern of freight movements (reflecting customer requirements, the nature of the freightand origin and destination points), most general freight involves either the movement of primaryproducts from rural areas to the cities and ports; or the movement of finished and semi-finishedproducts and feedstock either within major cities or between major cities and into rural areas. Steel isan exception, with the movement of steel around Australia reflecting the location of the processingand manufacturing plants. General freight is shipped on pallets, typically loaded onto trucks; inspecialised shipping containers which can then be loaded onto trucks, wagons or ships for transport(this form of freight is referred to as inter-modal freight); in special purpose containers, such assealed containers for gases and liquids (such as petroleum or milk) or for other products (such ascement); or in other specially designed freight wagons or trays, such as the special purpose steelwagons used by National Rail for BHP.

Source: FreightCorp 2001, pp.9–12

Market power in related markets

Consumers’ ability to readily substitute products in related markets will limitthe network service provider’s ability to exercise market power in the relatedmarket. Declaration would be unlikely to promote competition in a marketwhere there is already effective competition. The Council looked at the levelof substitution between transport modes in the nominated related markets.

General freight transport

Freight Australia, among others, considered road was highly substitutablefor rail in the market for transporting general freight and particularlycontainer freight:

Here, road transport is generally more competitive. This occursprincipally for two reasons. Firstly, there is generally a road-haulrequired to feed the containers to the train service with relatively-high


transhipment costs. (This is different to grain where the transhipmentcosts are relatively-small and where the transhipment cost issubsequently offset to some extent by lower rehandling costs furtherdown the chain). This improves the competitiveness of road relative torail. Secondly, all full container movements must be matched by aback-haul. Thus, for container traffic there is two-way loading whichtends to favour road.(As a generalisation where road and rail compete over intermediatedistances, the market shares of each tend to be determined by thebackhaul volume with road capturing the majority of the backhaul.The relative road and rail economics then set the different forwardand backhaul rates.)Rail generally is then economically-viable only on a marginal costbasis. Provided that the additional (container) traffic contributes atleast something to fixed costs then it is a rational decision for rail tocompete in the intermodal business. (Freight Australia 2001b,p.27)

In other declaration processes, the Council has noted the importance ofdistance in providing rail an advantage over road in this market. This wasparticularly the case in the declarations of Specialised Container Transportthat related to services with origins in Sydney and Melbourne anddestinations as distant as Perth (NCC 1997a, pp.13-18, NCC 1997b, pp.16-17). In these cases the Council considered the advantage rail had over roadincreased with the distance of the relevant trip, giving market power toproviders of rail network services over these distances. However, marketpower would tend to diminish as trip distances reduced. Distances in Victoriaare relatively short, giving road a strong basis for competition with FreightAustralia’s network services.

ConclusionFreight Australia’s ability to exercise market power in the general freighttransport market is constrained by the competition provided by roadtransport. The general freight transport market does not contain significantbarriers to entry. Given the evidence before it, the Council concludes that thegeneral transport market within Victoria is an effectively competitive market.

Passenger transport services

Passenger rail transport services are easily substitutable by road (either caror bus) for trips of consistent or better quality. The Council notes that mostVictorian rail passenger services are only viable after Government subsidypayments to operators. The passenger transport market is therefore unlikelyto significantly benefit from constraints on Freight Australia’s networkpricing and greater access for rail transport operators.

ConclusionFreight Australia’s ability to exercise its market power in the passengertransport market is constrained by the competition provided by roadtransport. The passenger transport market does not have significant barriers


to entry. Given the evidence before it, the Council concludes that there isalready effective competition in the passenger transport market.

Bulk freight transport

Freight Australia, among others, considers road was not generallysubstitutable for rail in the market for transporting bulk freight, particularlygrain:

Grain is produced over a relatively-short stripping season. It is thengenerally stored at off-port sites – in part because of the scarcity of at-the-port land for such storage and partly because land is cheaper awayfrom the ports, thus allowing for more economical storage. With thetrend to “horizontal silos” as the most economical form of grain storagethe gap between storage at the port and storage away from the port hasincreased substantially.The grain is then required to be transported to the ports to meet theshipping requirements. There is thus a need for large volumes to beshipped over a short period of time. Road haulage can obviouslytransport part of the tonnage but it is not capable of transporting thelot. Such an attempt would clog the port infrastructure long before theshipping impulse requirement were met. (Impulse here meaning thatthe volume to fill the ship needs to be delivered in a short period oftime to avoid demurrage and to utilise the ships and wharveseconomically).Truck transport is typically 20 tonne to 30 tonne per truck. Thus some1,600 truck movements would be required to match a 40,000 tonneshipment. The same tonnage, though, could be moved in some 12 to 13train movements, each carrying a load of some 3,000 tonnes grain.Obviously the unloading requirements and port queuing becomemanageable with rail but would be unmanageable with a total roadoperation. (Freight Australia 2001b,p.25)

The AWB noted the considerations behind the choice between road and railand the linkage to the domestic and export markets:

There are two separate geographic markets for grain, the domesticmarket and the export market. AWB determines whether to transportgrain to the domestic and export markets on the basis of relative totalsupply chain cost from farm to domestic and export market,respectively. Relative average road and rail costs are the primaryfactor affecting relative total supply chain costs of using road and rail.... while road is a substitute for rail in the transportation of domesticgrain and export grain, certain factors, which also impact totalrelative supply chain cost of road and rail, limit the effectiveness ofsubstitution between road and rail transportation. …The key factors that determine whether road or rail is used totransport commodities, including grain, are:


Distance Road is generally more competitive over short hauldistances, between 100 to 200 kilometres.Volume Rail tends to be more competitive than road with larger orderquantities, 1,000 tonnes plus per order.Road Regulations Vehicle mass rules and the number of roadkilometres open for use by heavier road vehicles effects whether roadcan be used for freight purposes. In Western Australia, for example,trucks with 3 trailers can carry up to 70 tonnes of grain. By contrast,in Victoria B-Doubles can carry approximately 41 tonnes of grain.However, the use of B-Doubles in Victoria is limited by roadconditions, in particular bridge weight limits. The most common roadhaulage vehicle in Victoria for grain haulage is, therefore, a semitrailer with a capacity of 28 tonnes.Farm Storage Victoria now has over 2 million tonnes of storagecapacity based on farms. The majority of grain held in on-farmstorage is used for domestic purposes. Transportation of this grain byrail would require transportation of the grain by road from farm torail loading point, resulting in additional double handling costs.Capacity for direct rail deliveries The majority of domestic users’facilities do not have the capacity to accept direct rail deliveries.Additional double handling costs are involved in the transportation ofgrain from a central rail delivery point to the domestic users’ facilitiesthat do not have rail direct receival. By contrast, the capacity fordirect rail delivery is not an issue for the transportation of grain to theexport market.Storage Capacity at Ports Where grain export facilities located atports have limited storage capacity, grain will be accumulated in arelatively short period of time shortly before the vessel to be loadedberths. As rail is able to move larger volumes of grain faster thanroad and does not pose the same difficulties with respect to co-ordination of deliveries as road, rail may be a more efficient way toaccumulate cargo for ship loading. ...In Victoria, the average distance over which export wheat istransported is 360 kilometres. This is well above the viable thresholdfor road transportation ...Based on quotations provided to AWB by the road industry, AWB’sbest estimate of the average road cost of delivering grain to Victorianports, assuming the same export shipping program, is approximately50% higher than the average rail cost for the same transport task.(AWB 2001, p.19-22)

The AWB divided the grain market into export (approximately 80 per cent)and domestic consumption (approximately 20 per cent). The AWB noted thatgiven the small quantities and the dispersion of domestic consumers, grainfor domestic consumption was more likely to go by road (AWB 2001, p.20).However, where either domestic of export customers require large quantities,rail was more economic that road (AWB 2001, p.21). The AWB noted that portcongestion also favours rail (AWB 2001, p.21).


Freight Australia considers that while the economics of rail grain transportcould withstand long periods of idleness, road could not, giving rail amonopoly position in the grain transport market (Freight Australia 2001b,p.26).

Victoria states that transport of bulk freight is best suited to transport byrail and, given the few rail operators currently providing services, thesemarkets would experience the greatest competitive effect from increasedentry to rail track (Victorian Government 2001a, p.44).

ConclusionCriterion (a) requires consideration of whether an access provider has theability to profitably hinder competition in the relevant related market.

Freight Australia’s ability to exercise market power in the passenger andgeneral transport markets is constrained by the competition provided by roadtransport. Therefore, application of an access regime to network services willnot necessarily promote competition in these related markets.

Freight Australia’s ability to exercise market power in the bulk freighttransport market is not effectively constrained by competition from roadtransport. Entry into this market is dependent on access to rail networkservices. Freight Australia has the ability to hinder entry into the bulktransport market. Application of an access regime to rail network serviceswill reduce barriers to entry to rail network services and so promotecompetition in the bulk transport market.

‘With and without’ declaration

In assessing whether declaration of the service would promote competition ina dependent market, the Council compares the current competitiveenvironment (assuming the current environment is a reliable indicator offuture conditions) in that market with the environment anticipated afterdeclaration.

The market ‘with declaration’ would have market power constrained by thenational regime. The market ‘without declaration’ would have market powerconstrained by the Victorian regime.

As discussed below at criterion (e), the Council considers that the Victorianregime does not satisfy all the clause 6 principles and could not berecommended for certification as ‘effective’ at this stage. Notwithstanding, theVictorian regime still must be considered part of the ‘without declaration’environment.

Comparison is made difficult by the lack of experience with both the nationaland Victorian regimes. While the omissions of the Victorian regime(competitive neutrality issues, information provision and interface with


related services not covered by the regime) are significant, the nationalregime contains no provisions that deal specifically with these issues.

The Victorian regime contains provisions to assist negotiations notspecifically included in the national regime. These include:

• the development of guidelines by the Office of the Regulator General (theORG) to determine the package and content of information available toaccess seekers on application;

• the development of guidelines by the ORG on the business and financialinformation to be kept and the manner in which it should be maintainedto allow the ORG to make its determinations; and

• short negotiation timeframes after which disputes can be formallyresolved.

The Australian Competition and Consumer Commission (ACCC) is thenational regime’s appointed arbitrator while the ORG fulfils the same role inthe Victorian regime. In addition, the ORG undertakes limited regulatoryactivities. The Council has recognised through previous certificationapplications, that both the ACCC and the ORG are independentregulator/arbitrators with considerable experience and can be seen as havingsimilar broad discretionary arbitration and independent regulatory records.

The undertaking covering the ARTC network (parts of which arecomplementary to the Freight Australia network), allocates dispute resolutiontasks to the ACCC. Declaration would allow Freight Australia’s customersthe option of appointing the ACCC to resolve disputes across regimes.However, given the ORG’s arbitration role in access disputes for the Baysidenetwork (complementary to the Freight Australia network) application of theVictorian regime would assist with interface issues across the Bayside andFreight Australia networks.

ConclusionThe Council concludes that the national regime is unlikely to constrainFreight Australia’s market power more effectively than the Victorian regime.Therefore, the Council is not satisfied that declaration of the network servicesunder application will improve the environment for competition in a relatedmarket, specifically the bulk freight transport market.

Section 44(g)(2)(c)

the facility is of national significance having regard to:

(i) the size of the facility; or

(ii) the importance of the facility to constitutional trade or commerce; or

(iii) the importance of the facility to the national economy;


Criterion (c) relates national significance to the facility providing the services,placing less important facilities outside the scope of Part IIIA. A facility needonly satisfy one of these three benchmarks.

Relevant indicators of size include physical capacity and the throughput ofgoods and services using the facility. The importance of the facility toconstitutional trade or commerce may be indicated by the monetary value oftrade dependent on the facility or the importance of the facility to trade orcommerce in related markets. In assessing the importance of a facility to thenational economy, the Council focuses on the market in which access wouldpromote competition. The Council would generally consider nationalsignificance to be established if the related market provides substantialannual sales revenue to participating businesses.

National significance

The application argues that the network is a facility of national significancedue to its size and the values of freight transport businesses that use it andthe freight they carry:

Thus, the combined value of the transport activity presently carriedout on the line is well in excess of $200 million pa. ...Inclusion of thevalue of the products (excluding people) carried would increase thisvalue to well in excess of $1 billion pa. ...Product for export constitutes some 60% of Freight Australia’s freighttask and of the product carried. In particular, the network serves asthe natural freight “highway” to the ports for grain grown in thesouthern regions of NSW for export from Australia.The next most significant freight by weight is “intermodal” – thecarriage of goods in containers. Again, this is primarily an export-orientated activity ... Finally, the transport of logs to the port, also forexport from Australia, is a growing segment of the present rail task.(Freight Australia 2001a, p. 5-6).

The AWB notes that Freight Australia’s network provides grain transportservices to approximately 6,000 farmers located in southern New South Walesand Victoria (AWB 2001, p.2). Victoria argues that the infrastructure issignificant because of its role in the export grain market:

In 1997, rail [in Victoria] delivered grain for export with a value ofabout $50 million. (Victorian Government 2001a, p.38)

Size of the facility

The network covers Victoria and reaches into southern New South Wales. Itrepresents approximately 3,600 km of track over some 3,300 route km. Thenetwork allows the provision of rail transport services to centres of population


and production, significant to the Australian economy. The size of thenetwork is likely to define a facility of national significance.

Importance to trade

Grain is the highest volume product transported on Freight Australia’snetwork. The proportion of Australian grain crops produced in Victoria withthe option of using this network is significant.

Table 3: Proportion of Australian grain crops produced in VictoriaCrop Percentage

Wheat 2.1

Oats 6.0

Barley 2.8

Lupins 10.0

Canola 4.5

Cereals for hay production 9.5

Grain sorghum 49.2

Source: ABS 7110.0 1999-2000

Crops, particularly wheat, from NSW and SA use this network to get productto ports. Freight Australia estimates that it carries approximately 10 per centof the grain export crop and that some 50 per cent of this volume is producedoutside Victoria (Freight Australia 2001a).

Other products transported on this network are fertilisers, fruit andvegetables, lumber, petroleum products, cement, paper, milk, processed foodand an array of inputs for industrial production. A number of products, suchas lumber, barley and wheat, are exported to a broad range of destinations.

The importance of Victorian production, both agricultural and industrial, tothe Australian economy and the central role the network plays intransporting the products of Victoria and other states indicates that thefacility is of national significance to constitutional trade and commerce.

Importance to the economy

Freight Australia notes that value of the rail freight transport activityconducted on the rail lines is approximately $150 million per annum. Inaddition, the rail passenger transport activities represent some $80 millionper annum.

ConclusionThe Council concludes the facilities under application satisfy therequirements of Section 44(g)(2)(c).


Section 44G(2)(d)

access to the service can be provided without undue risk to human health or safety;

Some facilities require a degree of spare capacity to provide appropriatesafety margins. In addition, access to facilities may need to be governed byconduct codes and operational guidelines. For a service to be declared, accessmust be possible without compromising system and operational safety.

This criterion does not specifically refer to ‘increased’ access. However, ifaccess is currently being provided, this should not automatically be construedas evidence that criterion 44G(2)(d) is satisfied. It is still necessary for theCouncil to conclude that an increase in access can be accommodated withoutundue risk to human health or safety (Sydney Airport decision, 40794).

Council’s considerationThe Victorian Transport (Rail Safety) Act 1996, governing accreditation of railoperators, rail infrastructure managers and rolling stock providers, came intoforce on 1 January 1998. The Office of the Director of Public Transport, Safetyand Technical Services Branch (in Department of Infrastructure) managesrail, bus and tramway safety through an accreditation model provided by theAct, the Rail Safety Regulations 1998 and the Public Transport Regulations1999.

On 1 July 1996, the Commonwealth and State Governments signed an inter-governmental agreement providing for mutual recognition of state safetyaccreditation regimes. Each state passed complementary legislation givingrecognition to an accreditation obtained in another state.

Freight Australia argues that access to the service can be provided withoutundue risk to human health and safety because:

There are established and documented safe working procedures andaccreditation requirements for the operation of trains on the network.There are already several different operators running trains on thenetwork and the procedures allow for this. (Freight Australia 2001a,p.6)

Victoria argues that with low utilisation, safety is not an issue (VictorianGovernment 2001b, p.40). Submissions generally agree that the safetyregulation is adequate and that the network currently operates substantiallyunder capacity. Submissions generally agree that it was unlikely that anincrease in access would place pressure on capacity nor undermine the levelof safety established by current regulations.


ConclusionThe Council considers that the application satisfies the requirements ofSection 44G(2)(d).

Section 44G(2)(e)

access to the service is not already the subject of an effective access regime;

Infrastructure services already covered by an effective access regime cannotbe declared under Part IIIA. For State and Territory access regimes6, thecriteria for judging effectiveness are set out in clauses 6(2)_(4) of theCompetition Principles Agreement. The clause 6 principles are called up intoPart IIIA under s44M(4) and s44N(2) of the TPA.

The Council assesses whether a State or Territory regime is ‘effective’ at thetime it considers an application for declaration. However, a State or TerritoryGovernment can pre-determine the issue of effectiveness by applying to theCouncil for certification of the regime.

Victorian rail access regime

The Victorian rail access regime (Victorian regime) only covers access termsand conditions to the freight services under application. It does not cover thepassenger services under application.

In its consideration of criterion 44G(2)(a), the Council concluded that FreightAustralia only had the ability to transfer market power to the bulk freighttransport market. It concluded that Freight Australia was unlikely to havethe ability to transfer market power to the passenger transport market, giventhe level of substitution between road and rail in that market.

The Victorian regime comprises Rail Corporations Act 1996, Transport Act1983 and Office of the Regulator General Act 1994. The general provisions forthe Victorian regime are contained in Part 2A of the Rail Corporations Act.The Victorian regime applies only to services ‘declared’ by the VictorianGovernor-in-Council. To date the services of the following rail infrastructureare ‘declared’ for the purpose of transporting freight:

• the intra-state rail network leased to Freight Australia;• the Dynon and South Dynon freight terminals leased to Freight Australia

and National Rail respectively; and• the Metropolitan Train Network leased to Bayside Trains.Rail infrastructure specifically excluded from ‘declaration’ under theVictorian legislation are:

6 Where the relevant jurisdiction is a party to the Competition Principles Agreement.


• the standard gauge interstate track leased to the Australian Rail TrackCorporation (ARTC);

• the freight rail network – for passenger purposes;• country stations;• Bayside train network – for passenger purposes; and• Hillside train network.Directions to the arbitrator on prices are covered by orders gazetted theVictorian Government Gazette in May 2001. The Rail Corporations Actnominates the Office of the Regulator-General (the ORG) to perform someregulatory tasks and act as arbitrator.

ConclusionThe Council considers that the Victorian regime fails to satisfy all therelevant criteria in clauses 6(2)_(4) of the CPA and is therefore not an‘effective’ regime for the purposes of Part IIIA of the TPA. Given that thismeans there is no effective regime covering the services under application,the Council concludes that criterion 44G(e) is satisfied.

The Council is currently considering Victoria’s application to certify theVictorian regime under a separate process. Victoria proposes some changes inresponse to the Council’s concern and may no doubt consider further changesshould issues arise from the public process. However, the Council must makeits assessment on the current regime, established under the Rail CorporationAct and gazetted Orders.

Some areas that the Council considers the Victorian regime currently fail tosatisfy the clause 6 criteria are outlined below.

Competitive neutrality

Where a service provider also operates services that compete with accessseekers, competitive neutrality provisions are necessary to ensure that theaccess provider does not favour its operator over other access seekers.Provisions that address these issues appropriately are necessary to ensure aregime satisfies clause 6(4)(a) and (b) of the CPA.

Freight Australia conducts rail network and rail transport businesses.Freight Australia also manages network control functions and timepathmatters. The potential to favour its own operator could deter competitorsfrom seeking access.

More favourable terms and conditions

Section 38E of the Rail Corporations Act 1996 states that access terms andconditions may vary according to costs, but are not permitted to vary because


of the identity of the access seeker. The regime’s average cost pricingapproach does not allow price variations according to demand factors.

The Council notes that s38M(3) allows negotiation of prices outside theorders’ pricing approach. It also notes that the orders can only be imposed ifthe ORG is called on to make a determination.

The Victorian regime does not empower the ORG to establish an informationbase sufficient to verify access seeker terms and conditions and ensurecompliance with competitive neutrality principles.

Misuse of access seeker’s information

FreightCorp outlines its concerns relating the misuse of its commerciallysensitive information after it was provided to the access provider:

The ability and even willingness of a third party access seeker toengage in competition with an integrated railway will be highlydependent on the safeguarding of her/his commercial interests. IfFreightCorp intends to operate on the track leased to FreightAustralia’s we essentially have to inform our direct competitor of allour plans for running trains, even though those plans might be for thespecific purpose of competing for business currently hauled by them.This will lessen or stifle competition in several ways. As soon asFreightCorp informs Freight Australia of where it would like tooperate and what commodity it wishes to haul it will take theunderstandable competitive response of identifying which customersFreightCorp is seeking to service and disrupt our attempts to win theirbusiness. Freight Australia will not be informing FreightCorp whichcustomers it is negotiating with for above-rail services.Furthermore customers that FreightCorp has already talked to haveexpressed concerns that there may be a backlash from FreightAustralia for attempting to transfer their business to another operator.(FreightCorp 2000, p.8)

When access providers compete with access seekers, there is an incentive toexploit commercially sensitive access seeker information. Measures tosafeguard such information include the separation of access provideractivities and constraints backed by penalties. The Victorian regime does notinclude such provisions.

Dispute resolution outside the Victorian regime

Clause 6(2) raises issues relating to the influence of services covered by an‘effective’ regime on services provided in another jurisdiction. Clause 6(4)(p)deals with the consistency of access arrangements, where more than one setof arrangements applies to a service.


Section 38R of the Rail Corporations Act 1966 ensures that the regime coversthat part of the Freight Australia network in southern New South Wales:

It is the intention of the Parliament that the operation of this Partshould, so far as possible, include operation in relation to –(a) railways and rail infrastructure situated outside Victoria;(b) a rail transport service operating outside Victoria.

Although consumers of Freight Australia’s network services may also travelon the complementary ARTC track, the regime does not provide for mattersthat could arise when transport services incorporate the services of bothnetworks. The Victorian regime needs to include provisions that allow suchmatters to be handled efficiently to satisfy the relevant criteria.

Section 44G(2)(f)

access (or increased access) to the service would not be contrary to the public interest.

In considering criterion (d) of the National Gas Code (the equivalent provisionto the public interest criterion in section 44G(2)(f)) the Tribunal in the DukeEGP decision stated that:

NCC submitted, and we agree, that criterion (d) does not constitute anadditional positive requirement which can be used to call into questionthe result obtained by the application of pars (a), (b) and (c) of thecriteria. Criterion (d) accepts the results derived from the applicationof pars (a), (b) and (c), but enquires whether there are any othermatters which lead to the conclusion that coverage would be contraryto the public interest (Duke EGP decision, para145).

Council’s considerationAs the Council concluded that the application does not satisfy criterion (a), itis not necessary for the Council to independently consider criterion (f).

Section 44F(3)

... the Council may recommend that the service not be declared if the Council thinks thatthe application was not made in good faith. ...

The Council has a residual discretion not to recommend declaration ofservices even if it is satisfied of all the matters specified in s44G(2) of the Act.That discretion focuses on the consideration of good faith.


Council’s considerationThe Council considers that there are no substantive good faith issues withregard to this application.


Glossary

ACCC Australian Competition and ConsumerCommission

Access provider Freight Australia, as the provider of networkservices

Access seeker Provider of rail transport services

ARTC Australian Rail Track Corporation

ASR Australian Southern Railroad

ATN Australian Transport Network

AWB Australian Wheat Board

Bayside trains National Express Group (Australia) Pty. Ltd.Trading as Bayside trains is a passenger serviceoperator and access provider of Melbournemetropolitan network services

Clause 6 criteria Criteria listed under clause 6 of the CompetitionPrinciples Agreement to test for an effectiveregime for the purposes of Part IIIA of the TradePractices Act

CPA Competition Principles Agreement

DOI Department of Infrastructure, VictorianGovernment

Freight Australia Freight Victoria Pty. Ltd. Trading as FreightAustralia is a freight service operator and accessprovider of Victorian intra-state network services

National regime The access regime established by Part IIIA of theTrade Practices Act 1974

ORG The Office of the Regulator-General

PC Productivity Commission

Rail track/networkservices

The use of the track (below rail services) totransport products

Rail transportservices

The transport of products by rail (above railservices)

Road transportservices

Transport of products by road

SCT Specialized Container Service

TPA Trade Practices Act 1974


Tribunal Australian Competition Tribunal

Victorian regime Victorian Rail Access Regime under Part 2A of theRail Corporations Act 1996

Section 44G(2)criteria

Criteria listed under section 44G(2) of the TradePractices Act to test for a services that can berecommended for declaration


References

Australian Rail Track Corporation (ARTC) 2001, submission to FreightAustralia Declaration

Australian Southern Railroad (ASR) 2001, submission to FreightAustralia Declaration

Australian Transport Network (ATN) 2001, submission to FreightAustralia Declaration

Australian Wheat Board (AWB) 2001, submission to Freight AustraliaDeclaration

Brunt, Maureen 1990, “Market Definition – Issues in Australian andNew Zealand Trade Practices Litigation,” ABLR 86.

Ergas, Henry 1997, Submission to National Competition Council onCarpentaria Declaration Application.

Freight Australia 2001a, Application for declaration of FreightAustralia’s rail network.

..........2001b, first submission to Freight Australia Declaration

2001c, second submission to Freight Australia Declaration

FreightCorp 2001, Submission to Freight Australia Declaration.

- 2000, Submission to the Department of Infrastructure’s reviewof the Victorian Rail Access Regime.

National Competition Council 2001, Legislation Review of Clause 6 ofthe Competition Principles Agreement and Part IIIA of the TradePractices Act 1974: Submission to the Productivity Commission.

2000, Final Recommendation, Application for revocation ofSouth East Pipeline System.

..........1997a, Final Recommendation, Specialized Container TransportApplication for declaration of services provided by RAC.

..........1997b, Final Recommendations, Specialized ContainerTransport Application for declaration of services provided by Westrail.

National Express Group 2001, submission to Freight AustraliaDeclaration

Productivity Commission 1999, Progress in Rail Reform, Inquiry Report,Report No. 6.

Specialized Container Transport (SCT) 2001, submission to FreightAustralia Declaration

Victorian Government, Department of Infrastructure, 2001a, firstsubmission to Freight Australia Declaration


2001b, second submission to Freight Australia Declaration

..........2000, Discussion Paper Proposals for the Implementation of theVictorian Rail Access Regime.

Western Improved Passenger Service 2001, submission to FreightAustralia Declaration

Cases

Australian Union of Students (1997) ACompT 1.

Duke Eastern Gas Pipelines Pty Ltd (2001) ACompT 2.

Hamersley Iron Pty Ltd v National Competition Council and others(1999) ATPR 41-705.

Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (1989) 167CLR 177.

RAC v NSW Minerals Council (1998) 158 ALR 323.

Re Queensland Co-operative Milling Association Ltd; Re DefianceHoldings Ltd (1976) 25 FLR 169.

Sydney International Airport; Re Review of Declaration of FreightHandling Facilities (2000) ATPR 41-754.


Submissions

Australian Rail Track Corporation (ARTC)

Australian Southern Railroad Pty. Ltd.

Australian Transport Network Limited (ATN)

Australian Wheat Board (AWB)

Freight Australia (1st submission)

Freight Australia (2nd submission)

FreightCorp

National Express Group (Australia) Pty. Ltd. (Bayside trains)

Specialized Container Transport (SCT)

Victorian Government, Department of Infrastructure (DOI) (1st

submission

Victorian Government, Department of Infrastructure (DOI), (2ndsubmission)

Western Improved Passenger Service (WIPS)


Appendix 1 National access regime

In April 1995, the Council of Australian Governments (CoAG) adopted theNational Competition Policy reform package. Part IIIA of the TPA formedpart of this package. It establishes a national access regime under whichaccess seekers may gain a legal right to use the services of natural monopolyinfrastructure. The rationale for providing access to such services is topromote competition in upstream and downstream markets.Part IIIA sets out three pathways for access:

• Declaration (and arbitration): any person, including the designatedMinister, can apply to have a service ‘declared’. If declared, access seekersand the access provider are required to negotiate terms and conditions.The Australian Competition and Consumer Commission (ACCC) willarbitrate disputes against Part IIIA criteria. Declaration is made for aspecified period and does not give an access seeker exclusive rights to thedeclared service.

• Certified (effective) regimes: where an ‘effective’ access regime alreadyexists, declaration is not available and an access seeker must use theeffective regime. An access regime can be certified as effective by thedesignated Commonwealth Minister following the Council’srecommendation that the regime satisfies the clause 6 criteria containedin the Competition Principles Agreement (CPA).

• Undertakings: access providers can give an undertaking to the ACCCsetting out access terms and conditions to their services. If accepted, theundertakings are legally binding and available to all access seekers.

Declaration process

Declaration provides a two-stage process for access to a service:• the decision by the designated Minister7 to declare or not declare a service;

and• negotiation and, where necessary, arbitration of the access terms and

conditions.Declaration involves:

• the designated Minister or any other person (e.g., a business) making anapplication to the Council for declaration of the infrastructure service;8

7 The State Premier or the Chief Minister of the Territory are the designated

Ministers where the provider in question is a State or Territory body and the Stateor Territory concerned is a party to the Competition Principles Agreement. If it isnot a party (and all States and Territories currently are), the designated Minister isthe Commonwealth Minister (see s 44D(2)(b)). The Commonwealth Minister is alsodesignated for access to private or Commonwealth infrastructure services.


• the Council assessing the application and making a recommendation tothe designated Minister;9 and

• the designated Minister either declaring or deciding not to declare theservice.

The Minister’s decision is reviewable by the Australian Competition Tribunal(the Tribunal).

Criteria for declaring access

In making its recommendation to the designated Minister, the Council mustconsider the matters set out in s44G(2) of the TPA:

(a) that access (or increased access) to the service would promotecompetition in at least one market (whether or not inAustralia), other than the market for the service;

(b) that it would be uneconomical for anyone to develop anotherfacility to provide the service;

(c) that the facility is of national significance, having regard to:i) the size of the facility; orii) the importance of the facility to constitutional trade or

commerce; oriii) the importance of the facility to the national economy;

(d) that access to the service can be provided without undue riskto human health or safety;

(e) that access to the service is not already the subject of aneffective access regime;

(f) that access (or increased access) to the service would not becontrary to the public interest.

Section 44F(4) requires the Council to consider “whether it would beeconomical for anyone to develop another facility that could provide part of theservice”10.

The same criteria bind the Minister when declaring the service.

The Council can recommend that a service not be declared if it thinks that anapplication is not made in good faith.

A service cannot be declared if already covered by an undertaking11 or an‘effective’ access regime. To be ‘effective’, an access regime must satisfy all

8 s44F of the TPA9 ss44F and 44G of the TPA.10 ss44F and 44G of the TPA.11 s44G(1) of the TPA.


the criteria set out in clauses 6(2)-(4) of the CPA12. The question ofeffectiveness may be pre-determined through the Premier applying to theCouncil for the regime to be certified as ‘effective’13.

Arbitration under the national regime

If a service is declared, s44S of the TPA allows a third party or a serviceprovider to notify the ACCC of the existence of a dispute on any access matter(s44V). Section 44X sets out matters the ACCC must take into account inarbitrations:

(a) the legitimate business interests of the provider, and theprovider’s investment in the facility;

(b) the public interest, including the public interest in havingcompetition in markets (whether or not in Australia);

(c) the interests of all persons who have rights to use the service;(d) the direct costs of providing access to the service;(e) the value to the provider of extensions whose cost is borne by

someone else;(f) the operational and technical requirements necessary for the

safe and reliable operation of the facility;(g) the economically efficient operation of the facility.

Section 44X(2) allows the ACCC to take into account any other matter it maythink relevant.

Section 44ZP allows for a review of an ACCC determination by the AustralianCompetition Tribunal. The Tribunal’s review is a ‘re-arbitration’ (s44ZP(3)).The Tribunal has the same powers as the ACCC when undertaking thisreview (s44ZP(4)). Appeals on questions of law regarding Tribunaldeterminations can be made to the Federal Court (s44ZR).

12 s44G(3) of the TPA.13 s44M of the TPA.

Application for declaration of rail network services - final

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