BHP shouldn't have to share
Inching its way through the court system is a case of immense importance to the future of Australia's major industries. The case concerns the attempt by Fortescue Metals Group and the National Competition Council to force BHP Billiton to share its Pilbara rail lines using Part IIIA of the Trade Practices Act. A decision by judge John Middleton yesterday endorsed this application to obtain a cheap ride courtesy of government regulation.
Part IIIA of the TPA, and Australian regulators' aggressive use of this to pursue open-access regimes, threatens to undermine investment incentives. It's all very well for regulatory bureaucrats to argue that if a firm has spare capacity, it should be obliged to share it with other firms on "fair" terms. But firms, like individuals, have ample incentives to do this. When they refuse to do so, it can be because the price offered is too low, the disruption to its own activities would be so great as to make any such sharing difficult to accommodate, or because it is a monopoly trying to squeeze out a rival.
The regulator in this case also sees another possibility: that businesses are so self-centred that they need "jogging" to be alerted to sensible profitable opportunities.
This is a bureaucrat's fantasy. Those who have never operated in a commercial world would never understand how even rivals like the Murdochs and Packers - Australia's 21st century version of Verona's Montagues and Capulets - will readily combine to pursue particular opportunities while remaining adversaries in other theatres.
BHP and rival Rio Tinto have vigorously opposed the commandeering of their assets sought by the NCC. BHP itself has only 15 per cent of the world's iron ore market even at its most restrictive definition. Fortescue's mine could never achieve 1 per cent of the market and could not apply serious pressure on the existing producers. Protecting some mythical monopoly position is just not a credible reason for BHP's opposition to facility sharing.
What is clearly of concern is the fact that the regulator will inevitably choose a "fair" price that the provider considers inadequate. More importantly, the regulator may well also arbitrate to ensure that applicants get equivalent services to the owner.
This could be very costly in an integrated just-in-time business which schedules shipments of different grades so that the final product arrives at the port precisely as contracted.
In the present case, Middleton rejected the reasoning in an earlier decision by judge Susan Kenny on a similar case. In that case, a competitor was attempting to hitch onto Rio's Pilbara rail lines and Kenny recognised that iron ore rail transport was akin to a manufacturing plant, which even Part IIIA has baulked at regarding as eligible for regulatory seizure.
Middleton also rejected advice given by half a dozen eminent economists.
One of these, New York professor Janusz Ordover, had previously provided advice in the Duke pipeline case. This connected Bass Strait gas to Sydney, bringing competition to the pipeline from Moomba. Ordover argued that the new competition was inadequate to justify deregulation. He concluded that the price should have fallen further than it did.
Ordover therefore comes with clear credentials as an economist more than willing to back his own estimates about where the market should be, rather than observing outcomes generated by actual participants. The fact that he, alongside others, opposes the regulatory seizure of BHP's Pilbara rail assets is clear evidence that something is wrong with the NCC's case and the law as interpreted by Middleton. Important in this respect is that there are two rail lines serving the area and a further one planned by Fortescue itself to service a larger nearby development. Hence BHP's lines could hardly be described as a monopoly.
Australia has an expansive definition of facilities that are eligible for government regulation. Firms facing forced sharing of their facilities will fight against this. They and other firms confronting such dilutions of property rights will be ultra-cautious in embarking on new investments. The latest decision will create greater uncertainty and impede investment in telecoms, ports, pipelines and any other such facilities.