4 September 2002

Mining Company Given Go-Ahead to Negotiate Rail Access

Miner AuIron Energy Ltd has been given Federal Government go-ahead to negotiate access to the Wirrida-Tarcoola rail service in South Australia.

The company plans to use the rail track to haul coal and iron ore from its mine sites in the Lake Philipson region to Port Augusta, Stirling North and Whyalla.

The Parliamentary Secretrary to the Treasurer, Senator Ian Campbell, said today he had accepted a recommendation from the National Competition Council that AuIron Energy's application for declaration be endorsed.

He said the decision gave access seekers such as AuIron Energy a legal right to negotiate access with the provider, Asia Pacific Transport Pty Ltd, and, if necessary, have requests for access determined through arbitration by the Australian Competition and Consumer Commission.

The National Competition Council found that AuIron's application satisfied all six matters required under the Trade Practices Act.

The decision is effective from 27 September.

The statement of reasons for the decision and the council's recommendations are attached and are also available on www.ncc.gov.au.

PERTH

4 September 2002

Contact: Wayne Grant (08) 9421 1755 or 0407 845280

STATEMENT OF DECISION AND REASONS CONCERNING THE APPLICATION FOR DECLARATION OF RAIL NETWORK SERVICES PROVIDED BY AUIRON ENERGY LIMITED

I, Senator the Hon Ian Campbell,

Parliamentary Secretary to the Treasurer, and

the designated Minister for the purposes of Part IIIA of the Trade Practices Act 1974,

make the following Decision in relation to the

application for declaration of rail network services provided

by Asia Pacific Transport Pty Ltd (APT)

DECISION

On 12 September 2001 the National Competition Council (NCC) received an application from AuIron Energy Limited (AuIron), for declaration of the service provided by the Wirrida to Tarcoola rail track. AuIron plans to use the rail track to operate trains to haul coal and iron ore from its mine sites in the Lake Philipson region to Port Augusta, Stirling North and Whyalla in South Australia.

The NCC's Final Recommendation concerning the above mentioned application was received by the Ministerial Office on 12 July 2002.

The Trade Practices Act 1974 (section 44H) provides that, on receiving a declaration recommendation from the NCC, I (as the designated Minister) must either declare the service or decide not to declare it.

In deciding whether to declare a service or not, I must consider all six matters specified under subsection 44H(4).

The service under application comprises a point to point rail track service provided by the use of the facilities under lease to Asia Pacific Transport Pty Ltd (APT).

Following consideration of the recommendation by the NCC, I am satisfied that all of the matters set out in s. 44H of the Trade Practices Act 1974 in respect of the application by AuIron have been met and the Wirrida to Tarcoola railway will be declared for five years under Part IIIA of the Trade Practices Act 1974 .

The decision has effect from 27 September 2002 (being not earlier than 21 days after publication).

RELEVANT PRINCIPLES

I cannot declare a service unless I am satisfied of all the following six matters as set out in s. 44H(4) of the Trade Practices Act 1974:

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

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

      (c) that 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;

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

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

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

Further, s. 44H(2) requires me to consider `whether it would be uneconomical for anyone to develop another facility that could provide part of the service'. Also s. 44H(8) requires me to specify the expiry date of the declaration.

REASONS

Subsection 44H(4)(a) specifies that access (or increased access) to the service would promote competition in at least one market (whether or not in Australia), other than the market for the service.

I agree with the NCC that the markets for rail bulk-freight transport and rail track services are economically separable. Access to the rail track would enable AuIron to seek competitive bids from third parties to provide bulk rail transport, or would allow AuIron to acquire a bulk rail transport capability.

The issue of whether competition would be promoted in the rail bulk-freight market depends, in this case, largely on the extent of potential competition from the alternative transport mode of road transport. However, as the NCC notes alternative transport of iron ore and coal by road would mean 50 000 large truck trips per year, which equates to one truck passing a given point every 2.5 minutes on the two lane sealed Stuart Highway. The NCC also considered the 1991 Industry Commission inquiry into rail transport which noted that rail transport had such cost advantages for many bulk commodities that road transport was not a viable competitor.

  • I agree with the NCC that, on the grounds of cost, rail is the only viable transport option for the types of bulk freight proposed to be carried by AuIron and that, as a result, access to the Wirrida-Tarcoola rail track is required for competition in the bulk-freight transport market.

The Australasia Railway Access Regime does not apply to the Wirrida-Tarcoola rail track and is not expected to until approximately 2004. The absence of declaration will mean that APT has the ability to refuse access to the rail track service; set prices for access for rail track services that substantially exceed its forward-looking, long-run costs; or provide access on terms that favoured its own above rail operation.

  • I consider that APT, as the provider of the Wirrida-Tarcoola rail track service, has the ability and commercial incentive to use its significant market power in the bulk freight transport market. I agree with the NCC's conclusion that declaration of the rail track would promote competition in the bulk freight transport market.
    • Therefore, I am satisfied that the application complies with subsection 44H(4)(a).

Subsection 44H(4)(b) specifies that I cannot declare a service unless I am satisfied that it would be uneconomical for anyone to develop another facility to provide the service.

  • I agree with the NCC that the Wirrida-Tarcoola track displays features of natural monopoly infrastructure and I am satisfied that it would be uneconomic (from the perspective of society as a whole) to develop a new track to provide the service under application by AuIron Energy Ltd. Important considerations are the extent of spare capacity of the existing track (with the prospect of further increased capacity with minor incremental expenditure) and the high cost of estimated network replacement relative to the cost of accessing the services of existing network.
    • Therefore, I am satisfied that the application complies with subsection 44H(4)(b).

Also, subsection 44H (2) requires me to consider whether it would be economical for anyone to develop another facility that could provide part of the service.

  • I have considered this matter and agree with the NCC's view that it would be uneconomical to replicate any part of the Wirrida-Tarcoola rail service that form the Wirrida-Tarcoola track under application.
    • Essentially, given that it is uneconomical to develop a new rail track, and as a rail track is necessary to provide even part of a rail track service, then it is also uneconomical to develop a facility to provide part of the service under application. Spare capacity on the whole will also extend to the segments and facilities of the track that might be replicated and the costs of new investment would therefore be high relative to the cost of accessing the services provided by such existing infrastructure.
    • Therefore, I consider that the application complies with subsection 44H(2).

Subsection 44H(4)(c) requires that the facility be of national significance.

National significance can be determined by size, importance of the facility to constitutional trade or commerce, or the importance of the facility to the national economy.

  • I agree with the NCC that the Wirrida-Tarcoola rail track is a significant section of the Tarcoola-Darwin rail track. Estimates of the replacement cost of the infrastructure on this section range from $96m to $150m-$200m.

The AuIron smelter plans to produce 2.5 million tonnes of pig iron using 10 Mt/year of coal and iron ore from its deposits in the Lake Phillipson region, South Australia. AuIron has submitted that the Wirrida-Tarcoola rail service is essential to transport coal and iron ore for processing at its smelter in Whyalla.

  • I also agree with the NCC's conclusion that the rail track service is important for the export of AuIron's coal and iron ore and so is nationally significant with regard to its importance to constitutional trade or commerce and, considering also Aurion's smelting plans, that this rail facility is important to the national economy.
    • Accordingly, I am satisfied that the application complies with subsection 44H(4)(c).

Subsection 44H(4)(d) requires that access to the service can be provided without undue risk to human health or safety.

  • I agree with the NCC's view that access would not undermine the level of safety established by current regulations applying to the services of this track.
    • Therefore, I am satisfied that the application complies with subsection 44H(4)(d).

Subsection 44H(4)(e) requires that access to the service is not already the subject of an effective access regime.

The Wirrida-Tarcoola rail track forms part of the Tarcoola to Darwin rail track, which, north from Alice Springs, is under construction. Third party access to the Tarcoola to Darwin rail track service will be regulated under the Australasia Railway Third Party Access Regime (the Australasia Railway Access Regime), which is contained in the AustralAsia Railway (Third Party Access) Code (the Code), a schedule to the AustralAsia Railway (Third Party Access) Act 1999 of South Australia and the Northern Territory. The Commonwealth Treasurer certified the regime as effective under s. 44N of the Trade Practices Act 1974 (TPA) in March 2000.

Section 2 of the Code states that

This Code applies to so much of the railway as has been constructed between Tarcoola and Darwin to the extent prescribed from time to time.

  • I note that the South Australian and Northern Territory governments have undertaken to ensure the Code takes effect on the later date of completion of the Alice-Springs-Darwin section of the rail track and 1 July 2003, and that the new track is expected to be completed by 31 March 2004.
  • I agree with the NCC view that, given that the Wirrida-Tarcoola rail track has not been prescribed under the Code, the Australasia Railway Access Regime is not effective for the service that is subject of this declaration application.
  • I note also that, while the Australian Rail Track Corporation (ARTC) has an approved access undertaking, the NCC does not consider that the ARTC has sufficient control over this part of the network to be considered the `service provider".
    • For these reasons, I consider that there is no effective regime covering the services under application and I am satisfied that the application complies with subsection 44H(4)(e).

Subsection 44H(4)(f) requires that "access (or increased access) to the service would not be contrary to the public interest."

APT in its submission argued that it would be contrary to the public interest for the services of the Wirrida-Tarcoola rail track to be declared if it is to become subject to the Australasia Railway Access Regime in approximately two years.

However, AuIron claims that it requires declaration as it needs to engage in commercial arrangements, before trains commence operating on the rail track (and therefore, before the Australasia Railway Access Regime is effective) to facilitate the transportation of its product by the required starting date.

  • I agree with the NCC that, although the Australasia Railway Access Regime demonstrates the commitment of the Northern Territory and South Australian governments to introducing an effective access regime `the priority is to implement effective access arrangements as soon as possible in those areas where such arrangements are appropriate.' As there is no guarantee of when the Australasia Railway Access Regime will commence and, therefore, when it would be effective for the Wirrida-Tarcoola rail track service, it would not be inappropriate to declare the rail track service to provide immediate effective access arrangements.
  • I note that the facility providing the service has already been built and that, when it comes into play with the completed Tarcoola-Darwin track, the Australasia Railway Access Regime is expected to apply. Accordingly, I do not consider that declaration will act as a deterrent to investment.
  • As I can revoke a declaration of a particular service after an effective regime is introduced, declaring this service now would not compromise the implementation of access arrangements under the Australasia Railway Access Regime for the Tarcoola-Darwin rail track.
    • For the above reasons, I am satisfied that the facilities under application satisfy the requirements of subsection 44H(4)(f).

Also, subsection 44H(8) requires that every declaration include an expiry date.

  • A long duration would be inappropriate given current expectations concerning the Australasia Railway Access Regime.
    • I agree with the NCC that the duration of declaration of the Wirrida-Tarcoola rail track should be five years.

Subsection 44F(3) allows the NCC to recommend to me that the service not be declared if it thinks that the application was not made in good faith. However, the NCC considered that there were no substantive good faith issues with regard to the application.

IAN CAMPBELL