Submission to the National Competition Council on Specialized Container Transport's Declaration Application

Industry Commission Submission

The Submission to the National Competition Council on Specialized Container Transport's Declaration Application was released in May 1997. It discusses a number of issues relevant to the National Competition Council's (NCC) consideration of Specialized Container Transport's (SCT) application for declaration of the Sydney-Broken Hill railway track service.

The Sydney-Broken Hill railway track service is provided by the recently formed government owned Rail Access Corporation (RAC) of New South Wales (NSW). Third party access to this service is covered by the NSW Rail Access Regime (hereafter the NSW Code). SCT - which seeks access to provide an inter-state rail service between Sydney and Perth - claims that the NSW Code is not effective.

The NCC is required to assess SCT's application and make a recommendation to the NSW Premier. Before making a recommendation, the NCC must be satisfied that declaration would satisfy criteria set down in Part IIIA of the Trade Practices Act (TPA).

This submission does not canvas all issues relevant to the NCC's considerations. Hence, it does not conclude whether or not the services which are the subject of SCT's application should be declared. It does, however, seek to provide some insights to assist the NCC's declaration assessment - mainly in relation to:

• natural monopoly considerations;
• the affect of access on competition in related markets; and
• pricing structures.

The Commission believes that many of these issues will also be relevant to other applications for access to railway infrastructure.

Natural monopoly

In practice, it is difficult to establish empirically the existence of a natural monopoly. However, the Sydney-Broken Hill rail track, along with NSW railway track network as a whole, has a number of characteristics which can be associated with a natural monopoly, including:

• substantial fixed costs and low variable costs;
• the capacity to carry significantly more rail traffic (ie much of the track network has excess capacity); and
• synergies (ie economies of scope) in providing rail services to different rail operators (eg passenger and freight).

These characteristics suggest there is some prima facie evidence to support a claim that, in the provision of Sydney-Broken Hill railway track services, the rail infrastructure covered by SCT's application is a natural monopoly.

Access to railway tracks and competition

The Commission has explored how access to the Sydney-Broken Hill railway track service might affect competition for the transport of bulk and non-bulk (inter-state and intra-state) freight.

There are currently only two operators providing rail freight transportation services in NSW - the government owned National Rail Corporation (NRC) (inter-state) and the NSW government owned FreightCorp (intra-state). Access to the Sydney-Broken Hill railway track service could expose the NRC and FreightCorp to competition from new rail operators - such as SCT.

The benefits of this additional competition depend significantly on the strength of the competition from other freight transport modes (eg air, sea and road). At present, competitive pressures vary considerably between and within the bulk freight (ie high volume 'unpackaged' commodities and minerals) and non-bulk freight (ie all other freight) markets (section 2.2).

The available data, although limited, indicate that, currently, the volume of bulk freight moved between Sydney and Perth is very low, with virtually all carried by sea. In contrast, there appear to be few viable alternatives to rail for the transportation of bulk freight in the Sydney-Broken Hill transport corridor. In these circumstances, mandating access is more likely to promote competition in the transport of bulk freight in the Sydney-Broken Hill transport corridor than between Sydney and Perth. The Commission has not been able to gauge the potential significance of this because of a lack of data on the level of intra-state bulk freight transported in this corridor.

In contrast to bulk freight, there is a considerable volume of non-bulk freight transported between Sydney and Perth. However, there is already vigorous competition between transport modes for much of the non-bulk freight task (inter-state and intra-state). This suggests that access to the Sydney-Broken Hill railway track may not substantially increase competition for most non-bulk freight. This is not to deny that access may promote a substantial increase in competition for some specialised non-bulk freight which is well suited to transport by rail. Reliable estimates of the current size of this specialised market are not available.

Price discrimination and access negotiations

Price discrimination allows a utility with natural monopoly characteristics to efficiently recover costs (operating and capital) without significantly discouraging the use of the infrastructure. This can result in different access prices for individual users (section 3.2).

Under the NSW Code, the RAC has the flexibility to discriminate between users and negotiate different access prices. However, SCT claims that this flexibility has undermined its efforts to negotiate access on a basis that would enable it to compete in the freight transport market.

While flexibility can facilitate the implementation of efficient pricing structures, there is the danger that it will support monopoly behaviour. In this context, the Commission has some concerns that the pricing flexibility available to the RAC under the Code may not be conducive to "efficient" negotiation outcomes (section 3.4):

• the financial caps established in the Code are very broad and the RAC has considerable pricing flexibility to set prices within those caps without the "oversight" of an independent regulator;
• the Code does not appear to explicitly incorporate a mechanism designed to ensure that the RAC pursues practices to minimise costs and negotiate prices based on efficient costs; and
• as the RAC appears to be operating well below the financial caps imposed by the Code, there may be few constraints on the RAC's ability to pursue monopoly strategies on many lines.

In examining these issues, other factors need to be considered, including the role of:

• inter-modal competition in reducing the scope for the RAC to pursue monopoly strategies;
• administrative mechanisms, such as the Statement of Corporate Intent process required under the NSW State Owned Corporations Act, in creating pressures for the RAC to perform efficiently; and
• arbitration to effectively address the potential monopoly issues identified.

Implications of wider industry reform

The Commission understands that many of the government related costs and revenues (eg CSO arrangements, capital structure) associated with the wider NSW rail industry reform program are not fully resolved. The resolution of th ese matters is a transitional issue.Nevertheless, while these issues remain unresolved, the RAC does not have full information about its costs and revenues and, as a result, cannot have an appropriate basis for negotiating access. The sound resolution of these issues is necessary in order to improve the prospect of successful access negotiations - irrespective of whether the NSW rail network is subject to the NSW Code or the National Access Regime (section 3.4).

These outstanding reform issues, coupled with many of the unavoidable uncertainties associated with the introduction and operation of access arrangements, point to a need for the incorporation of monitoring and review processes for any new access regimes.