Port of Darwin privatisation triggers new regulatory regime

A new ports regulatory regime in NT

In contrast to recent port privatisations in NSW and Queensland, in order to address concerns that a privately-owned port may price excessively and therefore undermine NT economic growth, the NT Government has established an economic regulatory regime that commences upon privatisation of the port. This provides a statutory price and access regulation framework that applies to a range of ‘prescribed services’, including providing access for vessels using the port, the pilotage service, berths and facilities for loading and unloading vessels. This regulatory framework will be overseen by the NT Utilities Commission (UC), whose prior regulatory experience has been in water and electricity.

Price regulation framework

The Ports Management Act (NT) (PMA) provides for a price determination by the UC to establish the manner in which port charges will be regulated. It provides a broad suite of options in terms of how price regulation may be applied, ranging from light handed price monitoring to heavy handed regulation of individual prices. However, there is a statutory requirement that in the first instance the UC adopt a light handed price monitoring regime.

The effectiveness of this regulatory framework will be reviewed after three years (and thereafter at five yearly intervals). If, at this time, the UC concludes that there is evidence of the port misusing its market power, it may recommend a move to a more heavy handed approach to price regulation. In this event, the form of price regulation may be changed provided that the Minister considers that the benefits of more intrusive regulation will outweigh the costs.

Once the Port of Darwin transaction is finalised and the commencement of regulation is triggered, the UC will provide further guidance as to how price monitoring will be applied. The UC is required to consult on and issue a price determination within three months. We expect that this will be accompanied by a more detailed statement by the UC as to the approach that it will take in fulfilling its price monitoring role. We believe that this is likely to provide for a regime similar in nature to that applied in South Australia, which involves monitoring the extent to which price increases are in accordance with CPI and uses benchmarking to analyse increases above CPI.

Access Regulation

The PMA also establishes an access regime, to ensure that potential users have a clear path for securing access to the prescribed services. Within four months, the port will be required to submit an access policy to the UC.

The Port Management Regulation (PMR) specifies a range of matters that the access policy must address, central to which is the requirement that it provide a commitment to negotiate with access seekers on a non-discriminatory basis, and access to binding arbitration in the event that negotiations fail. Provided that the access policy adequately addresses each of the requirements as specified in the regulations, the policy must be accepted by the UC.

While the regulatory framework has been established by the PMA and PMR, a range of actions are now required in order to clearly set out the way in which this framework will apply. Critical next steps are:

• for the UC to issue its Price Determination, which is required within 3 months of privatisation.  This is likely to be supported by a more detailed statement that sets out how the UC will approach the price monitoring task; and
• for the Port of Darwin to develop and submit its Access Policy to the UC, required within 4 months.

And in other jurisdictions…

Victoria

Echoing the NT Government’s concerns about the extent of market power held by private port operators and their incentive to misuse this, the Victorian Government has established a range of economic safeguards to accompany the privatisation of Port of Melbourne. Earlier this year, a range of measures were introduced, including:

• precluding stevedores from bidding for the lease and not including any rights to develop a second port;
• enhanced economic regulation by the Essential Services Commission , together with a 15 year CPI based price cap and the introduction of non-discriminatory pricing rules for the shared channel to the Port of Geelong.

On 30 September, further controls were announced, which focused on the treatment of land rentals – an area that has to now been considered to a matter for commercial negotiation and outside any regulatory controls. The Port will now be required to offer standard market rental review clauses to all new and renewing leaseholders, together with access to a binding dispute resolution mechanism. The ESC will also periodically assess whether the port has misused its market power in relation to the setting of rents at the port.

As acknowledged by the Australian and Competition Consumer Commission, this means that the Port of Melbourne will now be subject to the strongest economic oversight of any privately owned port in Australia.

New South Wales

In sharp contrast to the Victorian and NT approaches, recent port privatisations in NSW were accompanied by only limited economic safeguards. Following large price increases by Port of Newcastle, Glencore applied to the National Competition Council (NCC) for declaration of the port’s channel services under the National Access Regime. Demonstrating the difficulty of addressing these concerns after a port is sold, the NCC’s July 2015 draft recommendation was to not declare the service, on the basis that the navigation services charge was not significant enough to materially impact competition in an upstream or downstream market. Following further submissions in late August, the NCC sought additional information from Port of Newcastle on a range of stakeholder claims. We are now awaiting the NCC’s final decision.

Future economic regulation for Australian Ports

Australian Governments are increasingly concerned about the ability and incentive for privatised ports to misuse their market power, potentially leading to excessive prices or anti-competitive conduct. As a result, we are seeing a greater appetite by Governments to specify upfront a rigorous economic regulatory framework, prior to privatisation occurring. Importantly though, consistent with the 2006 Competition and Infrastructure Reform Agreement (CIRA), we see that Governments are maintaining their preference for a light handed approach in the first instance, while retaining the threat of more heavy handed regulation being applied in future if legitimate competition concerns arise.