Pilbara Infrastructure Pty Ltd & Anor v Australian Competition Tribunal Ors; The National Competition Council v Hamersley Iron Pty Ltd & Ors; The National Competition Council v Robe River Mining Co Pty Ltd & Ors

[2012] HCATrans 52

[2012] HCATrans 052

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M155 of 2011

B e t w e e n -

THE PILBARA INFRASTRUCTURE PTY LTD (ACN 103 096 340)

First Appellant

FORTESCUE METALS GROUP LIMITED (ACN 002 594 827)

Second Appellant

and

AUSTRALIAN COMPETITION TRIBUNAL

First Respondent

HAMERSLEY IRON PTY LTD (ACN 004 558 276)

Second Respondent

HAMERSLEY IRON-YANDI PTY LTD (ACN 009 181 793)

Third Respondent

ROBE RIVER MINING CO PTY LTD (ACN 008 694 246)

Fourth Respondent

NORTH MINING LTD (ACN 000 081 434)

Fifth Respondent

PILBARA IRON PTY LTD (ACN 107 216 535)

Sixth Respondent

RIO TINTO LIMITED (ACN 004 458 404)

Seventh Respondent

MITSUI IRON ORE DEVELOPMENT PTY LTD (ACN 008 734 361)

Eighth Respondent

NIPPON STEEL AUSTRALIA PTY LTD (ACN 001 445 049)

Ninth Respondent

SUMITOMO METAL AUSTRALIA PTY LTD (ACN 001 444 604)

Tenth Respondent

BHP BILLITON IRON ORE PTY LTD (ACN 008 700 981)

Eleventh Respondent

BHP BILLITON MINERALS PTY LTD (ACN 008 694 782)

Twelfth Respondent

Office of the Registry
  Melbourne  No M156 of 2011
  No M157 of 2011

B e t w e e n -

THE PILBARA INFRASTRUCTURE PTY LTD (ACN 103 096 340)

First Appellant

FORTESCUE METALS GROUP LIMITED (ACN 002 594 827)

Second Appellant

and

AUSTRALIAN COMPETITION TRIBUNAL

First Respondent

ROBE RIVER MINING CO PTY LTD (ACN 008 694 246)

Second Respondent

NORTH MINING LTD (ACN 000 081 434)

Third Respondent

PILBARA IRON PTY LTD (ACN 107 216 535)

Fourth Respondent

RIO TINTO LIMITED (ACN 004 458 404)

Fifth Respondent

MITSUI IRON ORE DEVELOPMENT PTY LTD (ACN 008 734 361)

Sixth Respondent

NIPPON STEEL AUSTRALIA PTY LTD (ACN 001 445 049)

Seventh Respondent

SUMITOMO METAL AUSTRALIA PTY LTD (ACN 001 444 604)

Eighth Respondent

BHP BILLITON IRON ORE PTY LTD (ACN 008 700 981)

Ninth Respondent

BHP BILLITON MINERALS PTY LTD (ACN 008 694 782)

Tenth Respondent

Office of the Registry
  Melbourne  No M45 of 2011

B e t w e e n -

THE NATIONAL COMPETITION COUNCIL

Applicant

and

HAMERSLEY IRON PTY LTD (ACN 004 448 276)

First Respondent

HAMERSLEY IRON-YANDI PTY LTD (ACN 009 181 793)

Second Respondent

ROBE RIVER MINING CO PTY LTD (ACN 008 694 246)

Third Respondent

NORTH MINING LTD (ACN 000 081 434)

Fourth Respondent

PILBARA IRON PTY LTD (ACN 107 216 535)

Fifth Respondent

RIO TINTO LIMITED (ACN 004 458 404)

Sixth Respondent

MITSUI IRON ORE DEVELOPMENT PTY LTD (ACN 008 734 361)

Seventh Respondent

NIPPON STEEL AUSTRALIA PTY LTD (ACN 001 445 049)

Eighth Respondent

SUMITOMO METAL AUSTRALIA PTY LTD (ACN 001 444 604)

Ninth Respondent

BHP BILLITON IRON ORE PTY LTD (ACN 008 700 981)

Tenth Respondent

BHP BILLITON MINERALS PTY LTD (ACN 008 694 782)

Eleventh Respondent

FORTESCUE METALS GROUP LIMITED (ACN 002 595 872)

Twelfth Respondent

THE PILBARA INFRASTRUCTURE PTY LTD (ACN 103 096 340)

Thirteenth Respondent

THE AUSTRALIAN COMPETITION TRIBUNAL

Fourteenth Respondent

Office of the Registry
  Melbourne  No M46 of 2011

B e t w e e n -

THE NATIONAL COMPETITION COUNCIL

Applicant

and

ROBE RIVER MINING CO PTY LTD (ACN 008 694 246)

First Respondent

NORTH MINING LTD (ACN 000 081 434)

Second Respondent

PILBARA IRON PTY LTD (ACN 107 216 535)

Third Respondent

RIO TINTO LIMITED (ACN 004 458 404)

Fourth Respondent

MITSUI IRON ORE DEVELOPMENT PTY LTD (ACN 008 734 361)

Fifth Respondent

NIPPON STEEL AUSTRALIA PTY LTD (ACN 001 445 049)

Sixth Respondent

SUMITOMO METAL AUSTRALIA PTY LTD (ACN 001 444 604)

Seventh Respondent

BHP BILLITON IRON ORE PTY LTD (ACN 008 700 981)

Eighth Respondent

BHP BILLITON MINERALS PTY LTD (ACN 008 694 782)

Ninth Respondent

FORTESCUE METALS GROUP LIMITED (ACN 002 595 872)

Tenth Respondent

THE PILBARA INFRASTRUCTURE PTY LTD (ACN 103 096 340)

Eleventh Respondent

THE AUSTRALIAN COMPETITION TRIBUNAL

Twelfth Respondent

FRENCH CJ
GUMMOW J
HAYNE J
HEYDON J
CRENNAN J
KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 6 MARCH 2012, AT 10.16 AM

Copyright in the High Court of Australia

____________________

MR J.T. GLEESON, SC:   May it please the Court, I appear with MR C.A. MOORE, SC and MR M.I. BORSKY for the appellants in M155/2011, M156/2011 and M157/2011 and for the twelfth and thirteenth respondents in M45/2011 and for the tenth and eleventh respondents in M46/2011.  (instructed by DLA Piper Australia)

MR N.J. YOUNG, QC:   May it please the Court, I appear with MR P.W. COLLINSON, SC and MR S.H. PARMENTER for the second to tenth respondents in M155/2011 and for the second to eighth respondents in M156/2011 and M157/2011 and for the first to ninth respondents in M45/2011 and for the first to seventh respondents in M46/2011.  (instructed by Allens Arthur Robinson)

MR A.C. ARCHIBALD, QC:   May it please the Court, I appear with MR M.H. O’BRYAN, SC for the eleventh and twelfth respondents in M155/2011 and for the ninth and tenth respondents in M156/2011 and M157/2011 and for the tenth and eleventh respondents in M45/2011 and for the eighth and ninth respondents in M46/2011.  (instructed by Ashurst Australia)

MR S.J. GAGELER, SC, Solicitor‑General of the Commonwealth of Australia:   If the Court pleases, I appear with MR P.J. HANKS, QC and MR J.P. SLATTERY for the applicant for intervention in M155/2011, M156/2011 and M157/2011 and the applicant for special leave in M45/2011 and M46/2011.  (instructed by Clayton Utz Lawyers)

FRENCH CJ:   Thank you.  Mr Solicitor, the Court is of the view that the National Competition Council should have the leave to interview that it seeks and that it should argue its special leave applications in M45 and M46 as on appeal.

MR GAGELER:   If the Court pleases.

FRENCH CJ:   Yes, Mr Gleeson.  Mr Gleeson, I understand there has been an agreed order and allocation of time?

MR GLEESON:   Yes, your Honour.  Your Honours will see from our outline that the first topic that we wish to address concerns the structure of Part IIIA and the important division between stages one and two of that process.  That is a topic which this Court addressed, to some extent, in the context of the production process decision and the Full Federal Court addressed it in the Sydney Airport decision.  We do wish to contend that a close look at that structure produces a very different construction outcome to the one which the Full Court has adopted in this case. 

Having done that, I would then seek to advance the substantive argument on criterion (b), which would involve topics two through to five, and then come to criterion (f) and the discretion.  The facts themselves I was proposing to address when we come particularly to topics two and following, if that is convenient. 

If your Honours could go to Part IIIA as in force in 2010 in what was then the Trade Practices Act, stage one involves two or potentially three separate administrative inquiries, critically all directed to the same question and the same criteria.  Your Honours will see that the NCC’s role commences in section 44F and its duty under subsection (2) is, having regard to the objects of the part, to recommend either a declaration or a non‑declaration of the service.  This form of drafting which involves a must/must not decision is then picked up at the further stages of stage one.

In section 44G(2), there is then a constraint upon a positive recommendation which is that the Council must first be satisfied of all of six defined criteria.  One point we note is that the structure of this administrative exercise involves positive satisfaction of six criteria which in turn, if reached, then permits at a minimum a recommendation of declaration to proceed.  It is not an exercise in weighing.  The NCC is not asked to consider six matters and, in the light of them, express an opinion whether it would be in the overall best interests of Australia for a facility to be declared.  So that is one important constraint on its power.

The other constraint is that which I adverted to in section 44F itself, 44F(2)(b), that it must have regard to the objects.  The objects of the part are found in section 44AA.  They were introduced by amendment to strengthen the nature of the exercise and we would submit that the attention in the objects to the economically efficient operation use of an investment in infrastructure by which services are provided indicates we are in the discourse of economics concerned with what is efficient from a perspective of society.  The second aspect of the objects is introduced by the “thereby”:

thereby promoting effective competition in upstream and downstream markets -

Again a notion of competition is central.  Your Honours see the linkage between those two objects.  It is promotion of economically efficient operation, use and investment for a purpose, a purpose of promoting effective competition in separate markets.  If your Honours were to compare those objects with section 44G that I have referred to, we would submit that there is an element of substantiation involved in two particular ‑ ‑ ‑

GUMMOW J:   Substantiation?

MR GLEESON:   Substantiation of the objects into the very statutory language, particularly 44G(2)(a) and (b).

GUMMOW J:   What is the word mean?

MR GLEESON:   A giving of life to in the particular context of the precise statutory language.

FRENCH CJ:   Something like trans‑substantiation, is it?

MR GLEESON:   No.  It is too early for that this morning.  I will put it more directly that the aspect of the object we see first, which is to promote economically efficient matters, including investment, receives particular emphasis in 44G(2)(b) and the “thereby promoting effective competition” receives particular emphasis in 44G(2)(a).

FRENCH CJ:   That concept “effective competition” I do not think is defined.  There is a reference to some economic evidence about it in the decision of the Tribunal, which is replicated in the judgment of the Full Court at 2409 in volume 6.  Is that common ground?  Professor Hausman’s explanation, I think - it is at the top of the page.

MR GLEESON:   Yes, the first part of what Professor Hausman put of a definition of “effective competition” is one that - we would accept it is one that is conventionally used and one that, we would submit, is appropriate.  The other aspect of the constraint on the Council’s process is found in section 44F(4):

the Council must consider whether it would be economical for anyone to develop another facility that could provide part of the service.

That is dealing with something of the same subject matter as the second of the criteria, 44G(2)(b).  The difference seems to be that 44F(4) is a positive duty to:

consider whether it would be economical for anyone to develop another facility that could provide part of the service ‑

but not necessarily the whole, whereas 44G(2)(b) requires positive satisfaction:

that it would be uneconomical for anyone to develop another facility to provide the service ‑

presumably the whole of the service.  We would note that in 44G(2) there is no extra criterion which says, “and you may also consider any other matter thought relevant”.  The criteria are limited to the six in question.  From 44GA we see fairly tight time limits on the Council’s process.  Those limits have, since the date of this decision, been strengthened by amendment and we have given the references in our written submissions.  We would submit that the recommending role of the NCC is not an open‑ended inquiry into every possible aspect of society’s welfare that could in any way bear upon whether it would be better to declare or not declare over, let us say, a 20‑year period.  The exercise is more confined in the manner that I have mentioned. 

The next aspect of stage one is for the matter to be considered by the Minister under section 44H.  Structurally the Minister is constrained in the same manner as the NCC except that the Minister is making the decision rather than recommending.  That is apparent from the “must/must not” nature of the exercise in subsection (1), the duty to “have regard to the objects” in subsection (1A), subsection (2) deals with the “part” question and then subsection (4) contains the very same six criteria.  There are tight time limits on the Minister’s decision, subsection (9), and the default position after 60 days is a negative declaration decision.  Again we would submit it is not an open-ended inquiry into what do I think would be best for Australia over the period of the proposed declaration. 

The third possible aspect of stage one is that if the matter gets to the Competition Tribunal, which would occur under section 44K, it has a power and duty to review by way of reconsideration, subsection (4), with full powers of the Minister, subsection (5), and a power ultimately to affirm, vary, set aside, subsections (7) and (8).  Now, they are the two or possibly three ways in which stage one can arise.  As we put in paragraph 2 of our note and as this Court held in the BHP decision, what declaration does at stage one is open the door to a process under stage two which may or may not lead to requests for access being made. 

The legislative model is called for convenience a negotiate arbitrate model recognising that at stage two, if particular requests are made, one possibility is they will be resolved by contract between the parties.  In section 44ZW there is an ability to register those contracts.  That is done by the Commission and that is one manner in which an access question may be resolved.  The purpose of registration is perhaps illustrated by section 44ZY which is that a registered contract opens up the same court remedies as would apply if the matter were the subject of an arbitration.  Those remedies are in 44ZZD and the court is given particular powers to grant injunctions, damages and the like dependent upon whether the contract has been breached.  So, effectively, if you negotiate and produce a contract, you then have a choice to rest with ordinary remedies of the common law or register the contract and move into the statutory remedies which are structurally similar to section 1324 of the Corporations Act. 

The second way in which an access question might ultimately be resolved is through arbitration.  The arbitral process commences with section 44S where, if the parties cannot agree, an access dispute can be notified to the Commission.  An access dispute will thus arise in a particular context where we have a particular request for access which has been refused and a particular issue for the Commission to resolve as an arbitrator.  It does that under section 44V by determination process.  Your Honours would see from 44V(2) the breadth of matters that the arbitration can resolve.  It can resolve the very question of access, price, terms and conditions, importantly under (d) it can require the provider to extend the facility.  That is relevant in this case because some of the demand which access seekers might seek to place on Rio’s lines may involve extensions of the railway lines over the 20‑year period. 

There were then two important constraints on the arbitration which operate in different ways.  Section 44W is an absolute bar to making determinations which might have particular effects.  This is part of the legislative scheme whereby certain interests are regarded as so critical that they cannot be overridden ever in an arbitration.  Specifically under subsection (a), a determination cannot be made that prevents:

an existing user obtaining a sufficient amount of the service to be able to meet the user’s reasonably anticipated requirements –

An existing user would include the incumbent, in this case Rio.  So that in that sense it has a protection that at the point any access dispute is notified it can never be subjected to a result which deprives it of use of its own line which it would need for those reasonable future purposes, a very powerful protection for the incumbent.  Your Honours would also note under subsection (d), the incumbent cannot be ordered to surrender ownership of any part of its facility except with consent and, of course, within an arbitration, it may be that a win‑win solution is produced in a particular case where the incumbent might be willing to surrender ownership of part of its facility as part of a larger bargain, but it cannot be forced to do it against its will. 

Under paragraph (e), the next protection for the incumbent is that it cannot be required, against its will “to bear some or all of the costs of” extensions.  So, unless it is willing to bear the cost of an extension which might be necessary to meet some of the third party demand, the whole of that must be borne by the access seekers.  So that is the first group of protections within the arbitration designed importantly but not solely to protect legitimate interests of the incumbent. 

The second constraint comes from section 44X and this is now the mandatory duty on the Commission to take into account some 10 or 11 matters in the arbitration in making the final determination.  We would draw attention to the difference in structure between 44X and the stage one provisions I took the Court to such as 44F and 44H.  This is now an administrative structure which says, must take into account a list of matters.  Indeed, under subsection (2) you can also take into account anything else you think is relevant.  Each of those matters will be taken into account in the particular context of the dispute that has arisen.  The matters may point in different directions. 

The Commission will have to engage in a weighing process and the intention is that it comes up with the best decision available to its mind which will be a compromise and a balance between a range of interests.  For example, your Honours might note under 44X(1)(e), one of the things to take into account is the value to the provider of extensions whose cost is borne by someone else.  So that if the incumbent has insisted upon its earlier right not to pay for any extensions that, in turn, might be reflected in the access price that would be charged.  Accordingly, your Honours, as we put in near the end of paragraph 2, the nature of this process involving the Commission and the arbitration is fundamentally different to the nature of the stage one decision.

FRENCH CJ:   There is a public interest dimension at both the contract registration level and the arbitration level, is there not?

MR GLEESON:   Yes, there is, your Honour. 

FRENCH CJ:   Presumably, for example, the Commission could not or would not register a contract which had the air of an anticompetitive arrangement between two users.

MR GLEESON:   Yes.  At each of those levels, it is an open‑ended factor, as it were.  You may have regard to the public interest in all of its possible dimensions together with other factors to come up with the best possible administrative decision.  The difference in language, which we will come to, under criterion (f) is that in 44H it is a rather different exercise that the public interest role plays there and I will come back to that, if I can, under (f). 

FRENCH CJ:   But any private contractual arrangement between the owner and the user of a service would be constrained only by other general provisions of the Act relating to anticompetitive arrangements?

MR GLEESON:   Yes. 

FRENCH CJ:   That is an unregistered contract?

MR GLEESON:   Unregistered contract, yes.  Of course, while I have been buried in the detail of this, the conceptual step taken in Part IIIA was to say, rightly or wrongly, that the sort of protections found in Part IV, particularly section 46, were inadequate to deal with the particular problem in question because it was thought, at least, that the purpose requirement of section 46 was a difficult one to satisfy on the facts.  It was also thought that what you would get, even if you could prove a section 46 case, is a remedy after the event whereas this is designed to set up a process where, if certain services meet the stage one criterion, what is being generated is a new right, a right to negotiate and that right to negotiate is regarded as a valuable step in achieving the objects that I have referred to.

Your Honours, to conclude this structural point in paragraph 3 we make what may appear to be some general propositions, which I will be then fleshing out during the course of the argument.  But it is what we submit is not the role of stage one.  The first is it is not the role of stage one for any of the bodies involved to form an assessment of what sort of access will be sought in stage two.  It is simply not the role to make an assumption.  For example, if I declare this facility over the 20‑year period, a person such as Fortescue, and all the other miners, will seek to place the entirety of their demand on the Rio line. 

That is not part of my exercise in deciding declaration.  That is a question which will arise after declaration.  The second irrelevant matter, which follows from the first, is the results which may be achieved in stage two, whether at the contract or the arbitrate phase, are no part of the exercise of the administrative bodies at stage one.  We would contend that at least those two conclusions arise from the text and the structure, and they are consistent with what this Court said in the BHP decision. 

The third one, which may be of some importance to this case is, we submit that stage one is not the occasion for any of the bodies to make predictions on how future infrastructure decisions may vary, depending upon whether we ever get to stage two.  It is not the occasion for that because of the text and the structure I have been to.  It is not the occasion for that because that would introduce a critical circularity into the process. 

If the criteria are met at stage one, all that is obtained is a right to negotiate.  The person who obtains that right then decides what to do with it.  If the person is a small player where it is out of their reach to ever consider duplicating the facility, they simply ask for access if they wish and they proceed down that path. 

If the person is a bigger player, such as Fortescue, who may be in the favourable position that we see in much of the mining industry in Australia of operating in downstream markets with valuable ore deposits which currently are in demand on the global market, it is possible that such a person could duplicate the existing facility, even if that were a very wasteful exercise.

We submit that the role of stage one is not to anticipate whether Fortescue will or will not duplicate contingent upon the very decision about declaration.  Instead, if a case for declaration has been made out Fortescue still makes the decision at stage two whether to duplicate or not.  The decision is left to the market player but it has one extra card in the pack which is the right to negotiate.  

Your Honours, to complete topic one, the other way in which access can be obtained of course is under an access undertaking.  Just for completeness, I will note that that can be done under section 44ZZA.  The Commission again has a role under subsection (3).  Structurally it operates like section 44X in that it has regard to a series of matters including the public interest and, in effect, if an incumbent has conceded that there is a likely case for declaration you may simply cut to the chase and proffer your own access undertaking which, if approved by the Commission, will then regulate access that may be granted thereafter. 

Your Honours, I did need to explain where the pricing principles come in.  The pricing principles themselves are in 44ZZCA and one of those principles under (b)(ii) is:

not allow a vertically integrated access provider to set terms and conditions that discriminate in favour of its downstream operations, except –

if there is a cost justification.  Now, that would come into an arbitration because of section 44X(1)(h).  That is an indication that part of the exercise which can be considered at stage two, assuming the Rio line has been declared, is when we come to set a fair price, is Rio charging a price which discriminates in favour of its downstream operations and the arbitration can modify or control such behaviour. 

Coming back to your Honour the Chief Justice’s question about effective competition, we would submit that effective competition carries with it the notion that the parties in the downstream market be able to provide this workable constraint upon others in the market and part of the way of achieving that is to make sure that your cost base is not artificially loaded up by someone in a market higher up.  That concern with what a vertically integrated access provider might do is properly recognised within the Part IIIA and it can be addressed in Part II.

If it is convenient, your Honours, I will move to the second topic and come very directly as I can to criterion (b).  Just to lay the groundwork for that, in point 4 we note that the service is the service provided by means of the facility which is the use of the railway line between certain points.  Your Honours will have in volume 5 at page 2269 a map of the Pilbara.  The Hamersley line runs from the south up to a port near Dampier.  Below the Solomon deposits, which are marked in green which are Fortescue deposits, there is a junction which is not marked here.  That junction is called the Rosella Siding.  From that point the Hamersley line heads out towards Brockman to the west, Paraburdoo to the south and Yandicoogina to the east.  The whole of that system is the Hamersley line. The road line reaches the port at Cape Lambert and it starts down near Mesa.  It intersects with Hamersley at something called Emu Springs.

Now, the service is the use of the facility, the facility is the railway line and at paragraph 806 of the Tribunal it identified – and there is no dispute about this – the nature of the service.  That is at page 2135.  In functional terms, it is convenient to think of four different markets that may be involved in this case.  The first market is what is called the below rail service which involves the use of the railway line.  The second market is the above rail service market which involves the provision of haulage services along that line.  The third market is the tenements market which would involve the purchase and sale of the rights to mine the ore, and a fourth market is the iron ore sale market which is essentially global.

FRENCH CJ:   Was that divided into a sea market otherwise?

MR GLEESON:   It is a seaborne global iron ore market.  The relevance of those four markets I will develop as I go through the criteria.  At the moment, we have a service which is the ability to use the line.

FRENCH CJ:   Now, geographical extent of the rail services both below line and the – sorry, the below rail and above rail, are we defining that solely in terms of the rail line itself or a zone around the rail line where another such service could be conceivably provided?

MR GLEESON:   The service as defined and as declared by Minister Swan ‑ ‑ ‑

FRENCH CJ:   I am asking you in terms of your market definition.

MR GLEESON:   I trust this is an answer.  The service is the former, namely it is point to point and all points in between.  As to who that service can be usefully made available to, it will be people in the surrounding zone because they may be able to either truck or build a small railway line to get to the main line in question.  I hope that has answered your Honour’s question.

FRENCH CJ:   I am not sure but I do not think it is worth exploring it further at the moment because it is not really the definitive market here, is it?

MR GLEESON:   No.

CRENNAN J:   Fortescue is the access seeker – wants access to the below rail service for haulage purposes?

MR GLEESON:   Yes, and so looking at those four markets and if we simply look at the state of the competition today, for one moment, the position today is that in the first market, the below rail market, there is one supplier, Rio, and at the moment there is only one user or purchaser, Rio, because it only supplies to itself.  The finding of the Tribunal is that in the 50 years that we have seen these railway lines in the Pilbara, no access has ever been granted by either of the incumbents, Rio or BHP, to any other party. 

But to take up your Honour’s question then, Fortescue wishes to enter that below rail market and acquire the ability to use the Rio railway line for the purpose of it then becoming a supplier in the second market, which is the haulage market.  It will become a supplier to itself, clearly enough, that is important, but also it wishes to be an open access supplier.  It wishes to provide haulage services to other miners who are in the region.  Could I just show your Honours those findings.  In the Tribunal at 2121 ‑ ‑ ‑

BELL J:   Could you give the paragraph number?

MR GLEESON:   Yes, I am sorry.  Paragraph 737.  The findings in the first sentence that:

Attempts to date by junior miners and FMG to have BHPB and RTIO haul iron ore have been futile.

There is some discussion about why that is.  At 742 there is a finding to the same effect:

in the 50 years or so since the railway lines were constructed, the owners have not carried a single good on behalf of a third party . . . This is despite efforts by several junior mining companies to negotiate haulage arrangements. 

Then coming to 744, Fortescue is willing to offer haulage services to junior miners.  It has entered certain arrangements on the Chichester line.  That is a line which Fortescue currently operates.  It has taken some other steps and it is interested in doing so.  Then the discussion goes on to whether, in any event, under the Western Australian access regime, Fortescue can be compelled to offer haulage that it wishes to do so.  I have gone to those matters only to really open up criterion (a) to show why that was satisfied in the present case.  Your Honours have section 44H(4)(a).  The Minister was satisfied:

that access (or increased access) to the service –

being the use of Rio’s line –

would promote a material increase in competition in at least one market (whether or not in Australia), other than the market for the –

use of the line and the market the Minister was satisfied about was market number two, the haulage market, because, fairly clearly, once Fortescue gets access to the Rio line, it will now be the first person in fact offering haulage services to persons other than BHP and Rio in the Pilbara and because it will be offering haulage services, not only would that be a benefit to itself, but it would be a benefit to any persons with ore in the vicinity of the Rio line.  Could I just show your Honours where the finding is in relation to paragraph (a).  There is no dispute in this case that (a) was satisfied.  However, when we come to the public interest and the discretion, I will be seeking to show the Court that the exercise done at that point in relation to (a) was infected by legal error. 

In the Tribunal’s decision at paragraph 1146 there is a finding, which is unchallenged, which summarises what I just sought to put.  The question your Honour the Chief Justice asked me is addressed at paragraph 1144 on that page.  So 1146 is the general and correct finding about an increase in competition once Fortescue was able to offer this haulage service to anyone who seeks it.  Could your Honours then go to paragraph 1149.  What happened in relation to criterion (a) was that one might have thought from 1146 that it is a simple proposition.  Anyone who has ore anywhere near the Hamersley or the Robe line will now have for the first time the chance of a haulage service which will enable them to get ore to market and that is a promotion of competition of some material degree in the haulage market. 

What the Tribunal, in fact, did is modify that conclusion by a counterfactual exercise in paragraph 1149.  It is the counterfactual exercise I will be coming back to on (f) and discretion.  What the Tribunal said was, if there is no access, the new facility will be only a partial substitute for the Hamersley line.  That is because the new Dixon line from the Solomon area would not enable haulage services to be provided to significant parts of the Hamersley haulage market, particularly to tenements in areas to the south and east of the Solomon area. 

If your Honours go back to the map at the back of this decision, what the Tribunal did really can be put in two steps.  The first is, for all of the deposits below Solomon there is no question of Fortescue building any railway line below Solomon.  So anyone who has got a deposit below there, if they get access to the Rio line, they get haulage services for the first time and that is a material increase in competition.  What the Tribunal was saying in this paragraph, however, was that for anyone who had a deposit at Solomon or above, including Fortescue, if we do not declare this line, we believe that will impel Fortescue to go and build a Dixon line which will broadly head from Solomon up to the coast and if Fortescue builds a Dixon line for the next 20 years, that would allow the people with deposits at or north of Solomon to get to port through Fortescue and because of that counterfactual exercise the benefit under (a) or the satisfaction of (a) is not as great as it might appear from the simple way I will put it.  I will come back to that finding under paragraph (f). 

So, your Honours, in terms of the criteria, paragraph (a) is met, paragraph (c) is uncontroversial, national significance.  The Tribunal found that at paragraph 795.  Let us them come to criterion (b).  In point 6 of our note we seek to put, just as a matter of language, without regard to any broader considerations, what this criterion means.  I have to be satisfied that something would be uneconomical.  I am using that word in the sense of contrary to the principles of good economics, in particular wasteful of society’s resources. 

This hearkens back to the first part of the object in section 44AA that I have referred to and we emphasise that that choice of language is not impossible, impracticable, and it is certainly not unprofitable.  That is that first step in our construction argument.  The second step is it must be uneconomical for anyone to do something.  We submit that the “anyone” has been chosen to anonymise the inquiry.  The answer to this inquiry must be true for any market participant.  It does not depend upon the particular circumstances of particular people.

So what we draw from that is that it is not an inquiry into whether it would be uneconomical for Fortescue, having regard to its vertically integrated operations, to do this exercise.  It is not an inquiry whether it would be uneconomical for Rio to do it.  The answers to those individual questions, if one was tending down the private profitability route, may well differ.

FRENCH CJ:   The question is, I suppose, whether you look at “uneconomical for anyone” as a collocation in which the words “for anyone” inform the meaning of “uneconomical”.

MR GLEESON:   Yes.  Ultimately we are urging the collocation as the whole and it is uneconomical for anyone to engage in an activity, the development of a facility to provide the service.  At the stage of development which is the third element of it, we submit that is pointing one to the cost or the production profile of a firm.  What capital – to a lesser extent operational costs but primarily capital – would be incurred by a hypothetical rational firm in the construction and operation of a second railway line providing the same service.  In that sense, the inquiry has so far taken three elements where in the discourse of economics the “anyone” anonymises the inquiry and the development is concerned with the cost or production profile of developing another facility to provide the service. 

CRENNAN J:   I suppose the anonymising has the effect that you do not run the risk of having two facilities because it is privately economically feasible for a second facility to be built.  You do not run the risk that you have two facilities under that scenario, but you still have a deficit in relation to access.  Is that the point of the anonymising?

MR GLEESON:   Yes.  The very point of it is it is to identify that the focus of (b) – and (b) does not do the work of all criteria and one of them is if this same service were to be provided by two facilities rather than one, would that involve the wastage of resources contrary to the principles of good economics.  So it does not matter that it might be that a particular person, because of downstream highly profitable operations, can manage to find a way to make it profitable.  What you do not wish to see, under this criterion at least, is the duplication involved of two when one will do.

KIEFEL J:   Does your notion then take up ideas of two services then providing some capacity for use which is not utilised?

MR GLEESON:   Yes.  On the facts, what our construction converts to is this.  In relation to Hamersley, the Tribunal found if Fortescue were to build – or if anyone indeed were to build a fully duplicative line, that would produce a wastage of $2.5 billion or so of resources for not only that player but for society.  In the course of it, one would have far greater capacity than is needed either at present or in the foreseeable future than if you dealt with it the efficient way which would be to say we use one line and to the extent we need to expand that line over the life of the declaration period that can be dealt with through the stage two process.

KIEFEL J:   If you are talking about capacity and uses then, it might be more correct perhaps to talk about the market for the uses rather than wider societal questions.  But it is a wider question than one operator and the cost or financial efficiency to one operator of developing the line. 

MR GLEESON:   We are strongly opposing the view it is about the private profitability profile of a person ‑ ‑ ‑

KIEFEL J:   I understand that.  It is just a question of how wide you take it.

MR GLEESON:   What I want to come to in a moment, if I can, is when Judge Posner in his classic article on natural monopoly in 1969 identified the essence of natural monopoly, he really was grappling with not this statutory question but this underlying question of what is natural monopoly and what is the wastage of society’s resources that is involved in it and both the Tribunal in this case and in an earlier Duke decision found assistance from Judge Posner’s understanding of natural monopoly.  Perhaps I should go directly to it ‑ ‑ ‑

HAYNE J:   Before you do, can I take you back to this anonymity and anonymising idea.  The anonymity you seek to impose is one which would cause the inquirer to disregard the circumstances of any present market participant, is that right?

MR GLEESON:   In the particular circumstances, yes.

HAYNE J:   The circumstances generally?  I understood you to say that anonymising the inquiry had the effect that you disregarded the circumstances of any individual, is that so?  Or is there a middle ground?

MR GLEESON:   I am only pausing, your Honour, to the extent that in an evidentiary sense if the primary question is the one I have identified in paragraph 6(c), what is the cost or production profile of a firm, it may be that real world material will provide you with evidentiary assistance, but in terms of the concept, one is not looking at the particular circumstances.  It is really about the cost production profile.  Your Honours, in Judge Posner’s 1969 article, on the first page 548 he identified the concept of natural monopoly and said it:

does not refer to the actual number of sellers in a market but to the relationship between demand and the technology of supply.  If the entire demand within a relevant market can be satisfied at lowest cost by one firm rather than by two or more, the market is a natural monopoly –

So in that sense it is a term providing indication about industry structure and that is so whatever the actual number of firms in it.  He then identifies two situations which may play out.  The first is –

If such a market contains more than one firm, either the firms will quickly shake down to one through mergers or failures, or production will continue to consume more resources than necessary.  In the first case competition is short‑lived and in the second it produces inefficient results.  Competition is thus not a viable regulatory mechanism under conditions of natural monopoly.

Now, we submit that the idea that underlies criterion (b) is, essentially whether or not someone persuades themselves that it is a good idea to enter a market which has these features of natural monopoly, competition is not a viable regulatory mechanism.  Plenty of people persuade themselves a business case can be made to enter a natural monopoly.  One only needs to think of the telecommunication companies in the last decade or so.  Whether they fail or whether they remain in the market and consume more resources than necessary, the result is not one favoured by competition or by efficiency.

We would submit that paragraph (b) has identified this fairly simple exercise that, is it uneconomical for anyone to develop another facility to provide the service means can the entire demand within the relevant market be satisfied at a lower cost by one firm than by two or more.  If that is so, whether a second firm enters will involve inefficient results and/or a failure of competition. 

FRENCH CJ:   This requires an analysis at a fairly high level of abstraction though, does it not, as it would detach it from particular circumstances of the market which are, in a sense, defined by the actors?

MR GLEESON:   That may be so, your Honour.

FRENCH CJ:   I am talking about a theoretical market rather than a real market.

MR GLEESON:   Well, one of the criticisms of the Full Court is that the Tribunal’s approach took us into imaginary worlds, not real worlds.  Can I try and address that?  It is an analysis being conducted on the real world characteristics but through a particular competition and economic prism.  One integer is I have to work out what is the foreseeable demand in the market over the period I am looking at.  Then I have to look at cost or production profiles and that is, ultimately, a real world exercise. 

On the one hand, if the demand moves to the incumbent’s facility, what cost consequences will flow from that?  The Tribunal did the exercise.  They worked out there would be some expansions.  They put a figure on that.  Then, on the other hand, they said what would be the cost of building a duplicative facility.  They did that and the difference was $2.5 billion for Hamersley.  So that having done that exercise, what has been identified is, there would be a wastage of society’s resources if duplication were to occur.

CRENNAN J:   Is not the common assumption, in relation to the natural monopoly, that economies of scale will lead to surplus capacity?

MR GLEESON:   Yes.

CRENNAN J:   Almost inevitably.

MR GLEESON:   Yes.  So if you built the duplicative facility, you will almost inevitably have that excess capacity immediately on the one hand.  On the other hand with the existing facility, because of the economies of scale, you are very likely to have surplus capacity and it is far more efficient to use that surplus capacity by charging someone an access fee than to have someone build a second line.  That is the essence of the underlying concept.  The only wrinkle in this case is the Tribunal said, well, there is some surplus capacity on the Rio lines, but a fairly moderate amount; it is 10, 20, 30 mega tonnes per annum. 

We think the foreseeable demand in the market is greater than that, so for it to go down the Rio line we are looking at expansion and so it is really the cost of expansions plus a fairly minor operating cost against the cost of building a brand new one which has much surplus capacity in it, that produces a big difference.  It is that difference that criterion (b) focuses on and to the extent that the incumbent might say, why do I have to expand?  I would rather just use my own line, the scheme has recognised that expansions are something which are properly to be dealt with because they can be a highly efficient way of dealing with this problem.

CRENNAN J:   For the purposes of this case, is it fair to say the Tribunal adopted Judge Posner’s conception of a natural monopoly and we do not have to be concerned about any contestations of his idea about a natural monopoly?

MR GLEESON:   None at all.  They accepted that as the meaning of that term and then both as a matter of the language of the statute and by reference to material such as the Hilmer Report, that I will come to, they were comfortably satisfied that a natural monopoly would be a situation where it would be uneconomic for anyone to develop another facility.  That is where it fits in.  The reference to Judge Posner is found from paragraphs 508 and following of the Tribunal.  First there was a reference to Alfred Kahn’s work, which is consistent with what your Honour Justice Crennan put to me. 

Paragraph 509 is a plain English way of putting it, high fixed costs, low operating costs meaning that long‑run average cost and marginal cost decline as output expands.  That is the essence of it.  Then 510 is an adoption of what was put by Judge Posner.  There is a discussion of a few issues and then at 515, again that view is adopted.  There is then a discussion on some of the problems that occur with natural monopolies and at 522 to 523, coming back to one of the questions one of your Honours put to me, the particular situation where the natural monopoly can cause an economic vice is where there is vertical integration.  Paragraph 523, which is:

An extreme case of market dominance exists where the vertically integrated firm is a network industry or a natural monopoly –

This can lead to behaviour including withholding supply of services, and that is the very issue that Part IIIA is then designed to address.  Your Honours, the next place I wish to go if it is convenient is to the background material which led to Part IIIA.  Could I do it through this framework?  The Tribunal found this material to be helpful in understanding that criterion (b) embodied natural monopoly concerns.  The Federal Court read this material very differently.  They read it as firstly embracing private profitability and secondly as evidencing a philosophy that declaration was intended to be distinctly exceptional, and each of those two readings of this material, we would submit, are incorrect.

Your Honours should have a bundle of extrinsic materials.  Could I go first to the Hilmer Report which should be at tab 1.  In the executive overview at page xxxi, under the heading “Access to Essential Facilities” there was a broadly expressed proposition that:

Introducing competitions in some markets requires that competitors be assured of access to certain facilities that cannot be duplicated economically – referred to as “essential facilities”.  Effective competition in electricity generation and rail services, for example, will require firms to have access to the electricity transmission grid and rail tracks.

Now, in that very broad summary we already see some of the origins of what emerged in the ultimate Part IIIA.  The essential facility is identified as one that cannot be duplicated economically.  Then over on page xxxii, the recommendation is for:

a new legal regime be established under which firms could in certain circumstances be given a right of access to specified “essential facilities” on fair and reasonable terms.

There will be “safeguards”.  Then your Honours also see the last paragraph on that page.  It might be shortest while I do this if I could ask your Honours to also have open the Full Court’s decision so I can deal with how the Full Court addressed this material. 

At paragraph 62 of the Full Court decision this passage has been cited and your Honours will see from the emphasis which the Full Court has placed on a concluding part of the passage this was thought to be important.  It is one of the parts the Full Court perhaps relied upon to get the distinctly exceptional proposition. 

Now, the Full Court has then gone to Chapter 11 and page 240 of Hilmer.  I need to go to some intervening material.  At page 73 of Hilmer in Chapter 4 dealing with misuse of market power there was some discussion of the US approach.  There was a reference in the middle to the essential facilities doctrine being developed in the interpretation of the Sherman Act.

Rio placed some reliance, perhaps modest, on the proposition that if this Court were to not adopt private profitability Australia would somehow be out of step with the US, Europe and New Zealand.  That proposition is wrong for a number of reasons.  One is that the US simply does not have any regime like Part IIIA.  What it did was to eke out from the Sherman Act as an example of abuse of power situations of refusals to provide access to certain assets.  It is a court‑made remedy after the event, structurally like our section 46.  As your Honours see here Hilmer thought the US doctrine was unclear.  It had not been:

developed with clarity, coherence or consistency, let alone with strong economic foundations.”  The Committee is not satisfied that the doctrine has sufficiently developed to provide a suitable model for Australian law.

Nevertheless, the national importance of some industries may require that a positive duty to deal be created, albeit in carefully circumscribed circumstances.

So it is a deliberate decision not to attempt to mirror US doctrine in Australian law.  Next, if your Honours go to page 215, which is Chapter 10.  This chapter was concerned with the structural reform of public monopolies.  As the first paragraph indicates, it was dealing with a situation:

Where the incumbent firm has developed into an integrated monopoly during its period of protection from competition –

Leading to a need for “structural reforms” to –

dismantle excessive market power and increase the contestability of the market.

Throughout this chapter “natural monopoly” is a term referred to.  We see it in the third paragraph on this page and this is the origin in Hilmer of much of the legislation, of course, of the last 15 to 20 years, engaged with the structural separation of formerly government natural monopoly enterprises.

The idea to structurally separate, let us say, the copper wire of Telstra which is a natural monopoly and regulate it in some way and then the competitive parts of the business would be put into separate hands.  So that the nature monopoly was a central issue Hilmer was trying to do deal with in two ways.  Chapter 10 is structural separation, Chapter 11, which is our relevant chapter, is access.  On page 217 under paragraph (1) that point is made and it is developed further on the following pages.  For instance, on page 219, the middle paragraph is directed to this problem where natural monopolies are:

essential for effective competition in the downstream or upstream market.

The matter discussed in this chapter is separation.  Then if your Honours could go directly to 239, which is the relevant Chapter 11, we have the direct origin of Part IIIA.  Now, the first sentence is one not quoted by the Full Court.  We would wish to place considerable reliance upon it:

In some markets the introduction of effective competition requires competitors to have access to facilities which exhibit natural monopoly characteristics, and hence cannot be duplicated economically.

There we have, in our submission, the origins of criterion (b) and, the clear bridge or link is drawn between a facility which exhibits natural monopoly characteristics and the proposition, hence it cannot be duplicated economically.  Coming back to one of your Honour the Chief Justice’s questions about reality, as it were, we would submit that the reality involved here is, it is a fairly concrete exercise about a facility looked at admittedly through a prism of an economic framework, does it have natural monopoly characteristics?  If so, it cannot be duplicated economically.  Now, that sentence is repeated variously in Hilmer.  The Tribunal placed some weight on it, not overall weight, but some weight.  The Full Court, we would submit, has not given it any weight and it did deserve some weight in the exercise.  So the next paragraph says a bit more about what an essential facility is and there is a specific reference to rail at the end of that paragraph. 

If your Honours go to page 240, under the heading “The ‘Essential Facilities’ Problem”, that material is where the Full Court picks up at paragraph 63.  So there is no doubt the Full Court has quoted the whole of the paragraph, including the first sentence that we place considerable reliance upon.  What the Full Court has emphasised, though, is not that first sentence but the second sentence and so has drawn emphasis on the notion of it being an essential facility in the sense that access is required if there is to be effective competition upstream or downstream. 

Without mapping Hilmer precisely onto Part IIIA the first sentence is the origin of criterion (b) and the second sentence is the origin of criterion (a).  One of the errors that we submit the Full Court has made is effectively read criterion (b) as if it has to do the work of criterion (a) and, indeed, of the whole of Hilmer and by doing so has deprived it of any real effect.  Your Honours will then see that the paragraph commencing at the bottom of 240 of Hilmer is picked up by the Full Court, and that is a paragraph about:

Where the owner of the “essential facility” is not competing in upstream or downstream markets –

That is not our case; that is not Rio.  The Full Court has not picked up the next paragraph of Hilmer on page 241, which is our case.  Where there is a specific reference to “rail” in the fourth line and there is a potential to not only “charge monopoly prices” but “an incentive to inhibit competitors’ access to the facility”.

Coming back to this concept of effective competition, what is being dealt with there is either there will be a refusal of access or even the possibility of refusal may be enough to deter entry into the downstream market and then the next paragraph draws the bridge back to natural monopoly and to Chapter 10, that there needs to be structural separation of the natural monopoly elements, and that does half the job.  Then one needs access to the structurally separated natural monopoly business.  Then over on page 242, in the first paragraph ‑ ‑ ‑

GUMMOW J:   What are they talking about in the last sentence of 241?  What is the problem with the UK that they are pinpointing?

MR GLEESON:   It is not enough to have a Telstra, but say, it must account as if it had two separate divisions in it, one owning the copper and the second providing the retail service.  You must structurally separate so that the business which has the natural monopoly element cannot in any way control decisions affecting the downstream market.  So the material that is on 241, we would submit, is of great significance in identifying, again, the natural monopoly problem and the need to deal with it in two ways; separation and access.

The access topic is then picked up on page 242 and the first paragraph under the heading section 2 has been picked up in paragraph 90 of the Full Court.  Paragraph 90 in the Full Court appears in a context starting with paragraph 87 which is there is a philosophy informing the enactment of Part IIIA, in turn reflected in the provisions:

which makes the granting of access to override the otherwise legitimate interests of incumbent owners a distinctly exceptional –

circumstance and so on.  So the “distinctly exceptional” is then found in a number of places.  Paragraph 89 says

As to the “enacting history” [there should be] some further reference to the Hilmer Report –

as well as other material and the proposition is that Hilmer shows:

Pt IIIA was intended to minimise regulatory intervention –

Then 90 sets out the first paragraph in this section on page 242 which no one could possibly beg to disagree with.  The second and third paragraphs on 242 are the essential qualification to the first paragraph.  Indeed, the second paragraph expressly refers to:

the natural monopoly character of certain transport functions gave rise to the common law notion of “common carriers” –

There is a reference to a text from Gorton in footnote 6 that we provided a copy of to the Court.  The conceptual origin of Part IIIA in a distant sense is the common carrier notion at common law.  It is not a Sherman Act notion.  It is not a section 46 expansion.  It is a common carrier type notion provided certain special characteristics are met and it is particularly linked with natural monopoly conditions.  Hilmer then goes on to say there are two broad ways of dealing with it.  First, you can rely upon the general competitive conduct rules, secondly, special legislative regimes. 

The next section which goes from page 242 through to the top of 244 is a statement which may or may not be borne out by law since on section 46, but it is essentially section 46 is not a good enough tool to deal with this problem and the perceived problems with section 46 included on page 243 it was difficult to prove purpose and perhaps more importantly, in the last paragraph at 243, and this is where Hilmer has departed significantly from the US, even if you were in a section 46 context:

there may be difficulties in courts determining the terms and conditions, particularly the price, at which such access should occur. 

The courts have certain powers under the Act and they might be wide enough to permit the fixing or prices –

However . . . Australian Courts are “slow to impose upon the parties a regime which could not represent a bargain they would have struck between them”.

Injunctions are possible but the court –

may decline to order supply because of the difficulties in calculating a reasonable price.

So the deliberate decision was even if you could get over the purpose hurdle, at the remedy stage the notion of the court settling the fair terms and condition of the bargain was problematic and, accordingly, it was very important to create Part IIIA where, provided you get to stage two, you have the ACCC to do that exercise. 

There is then a further discussion that the US approach has proved unclear and at the top of 245 that New Zealand, under the Commerce Act, uses the section 46 approach.  That is unlikely to be fully effective.  So the result of that section is, section 46 plus a court remedy is not the way to go.  Then the next section discusses some specific access regimes which were already in Australia. 

At the foot of 247, the body of submissions was to the effect that section 46 would not do, there needed to be a new regime.  Then, when one comes to 248, the Full Court at paragraph 91 has quoted the first paragraph under the heading “Conclusions”.  However, it is really the next two paragraphs which are the essence of the recommendation.  The suggestion, if it is to be distinctly exceptional, is simply not borne out by a reading of Hilmer.  On 250 and 251, the actual recommendations of Hilmer do not mirror precisely what appeared in Part IIIA.  That must be recognised.  The first proposition of Hilmer on 251 was:

Access to the facility in question is essential to permit effective competition in a downstream or upstream activity ‑ ‑ ‑

FRENCH CJ:   Do you accept that concept of a natural monopoly does not equate to a monopoly.  In other words, you can have a natural monopoly which is contestable?

MR GLEESON:   Yes, successfully or otherwise but yes, contestable.  The first criterion is there.  The second criterion has undergone quite a bit of surgery before it gets to section 44H.  It, in fact, would have provided a much more open‑ended inquiry for the decision making, open ended in the sense that the primary question would be do I think it is in the public interest having regard to two matters.  Section 44H is a deliberate decision not to frame the inquiry in that open‑ended sense.  One of our points about the Tribunal’s approach to (f) and the discretion is it has turned the inquiry certainly into that but probably into something far broader than that.

BELL J:   Mr Young, I did not understand the Council to be contending that the test that the Tribunal had earlier applied in cases such as Duke extended to all the matters that were brought in to consideration by the Tribunal under (f).  I thought that the Solicitor specifically disavowed that.

MR YOUNG:   He did and he was wrong about that, your Honour, and I will need to demonstrate why.  Can I turn to criterion (b).  In our submission, the natural reading of the language at paragraph (b) is that it refers to the economic feasibility of an investment by a firm, that is to say, any firm, in the development of another facility to provide the service.  It is necessary to read the phrase as a whole.  It is a collocation that is intended to have a clear and single meaning.  The first observation we would make is that paragraph (b) does not refer at all to the characteristics of the existing facility.  Its focus is solely on the potential for new entry.  It directs itself solely to the question whether it is “uneconomical for anyone to develop another facility”.

KIEFEL J:   Well, it is said that that reflects the characteristics of the natural monopoly facility.

MR YOUNG:   Well, it is said somehow that the focus of (b) is solely on the characteristics of the existing facility, but the natural monopoly test as it marches on effectively sets up a comparison.  Looking at production costs alone, static production costs, is it going to be more efficient for a new facility to be developed than to share the existing facility as a result of access?

Now, that comparison is not articulated anywhere in paragraph (b) and there is no reference to the characteristics of the existing facility, whether by way of natural monopoly or otherwise.  The focus is on the real world potential for there to be new entry.  That is a real world question to which paragraph (b) is directed.  The natural reading I have just articulated is supported by dictionary meanings of “economical”.  It means, amongst other things - and I will not go to the dictionaries - on a business footing, maintained for profit, paying at least the expenses of its operation and as well, we accept, careful of resources and not wasteful.  But the focus is on an investment by any firm which may contemplate the development of another facility. 

All of those dictionary meanings embrace the concept that the investment is one which, if made, will earn an economic return on the investment and if it earns an economic return on the investment it will not be wasteful and it will not be inefficient.  It will, moreover, promote competition, which conduces to the benefits of efficiency in new infrastructure across the economy.

KIEFEL J:   On your approach is “anyone” a particular entity, or is it anyone in the relevant market?

MR YOUNG:   It is any firm applying a real world analysis to the facts and possibilities of new entry.  It is not right, as Mr Gleeson repeatedly said, that we argue that anyone is an integrated miner that operates a mine, a rail, a port and exports iron ore.  That has never been our argument.  Our argument is the reference to “anyone” is to any firm or any person contemplating an investment in infrastructure desiring to achieve an economic return.

KIEFEL J:   Well, perhaps I could extend it – in the market or wishing to enter the market for the relevant services.

MR YOUNG:   We accept that “anyone” includes both people already in the market, or new entrants, or potential entrants, as the Chief Justice observed.  May I say that the Full Court did not intend to exclude that?  They were using participant in the market in contradistinction to the kind of abstract theoretical arguments that were being advanced about natural monopoly.  An example is at the paragraph that Mr Gleeson directed attention to – paragraph 76 of the Full Court’s judgment – 2428 of volume 6.  The Full Court is drawing a contrast in paragraph 76.  It is not directed to whether someone would judge the investment to be:

“economically efficient” from the perspective of society as a whole –

but, rather whether:

“it would be uneconomical for anyone” to do so.  The perspective of this phrase is that of a participant in the market place –

That is not using market place in the strict sense of a market whose boundaries have been defined.  We are simply here talking about people who may have an interest in the development of a rail line.  So it is not apt to exclude potential entrants and there was no intention, in our submission, for the Full Court to do that. 

GUMMOW J:   What is the force of the word “for”?  What is the sense of it?

MR YOUNG:   That is asking, in our submission, your Honour, about the ability of anyone developing another facility to obtain an economic return from that investment.  So it is focusing on the returns to the firm or person contemplating the development of another facility.  The context, of course, for the application of this kind of provision will be an argument that there is unsatisfied demand for the use of the services of the facility. The facility will often be a large one with hefty costs.  The question directed by (b) concerns the possibility of new entry.  Will anyone, that is to say will a firm proceed with a development of that kind of facility at large cost, having regard to the risks and returns associated with such an investment.  So “for anyone” refers to the undertaking by a person of investing in developing another facility.

FRENCH CJ:   Now, in paragraph (b) the question is whether it is “uneconomical for anyone to develop another facility to provide the service”.  Now, that is not the service which is the subject of the declaration because that is related to a particular piece of infrastructure, is it not?

MR YOUNG:   Yes, that does relate to a particular piece of ‑ ‑ ‑

FRENCH CJ:   Having regard to the definition of “service”.

MR YOUNG:   It does, your Honour.  Your Honour is right.

FRENCH CJ:   Yes.  So the it would be the like service or something?

MR YOUNG:   It has to be.  It has be an alternative but functionally equivalent service, not necessarily identical in every respect, but commercially equivalent because this, as I will go on and say, is a provision that is designed to address a competition problem.  We are not speaking in a vacuum.  If the converse of what I have put satisfies what are urged to be the textual meanings by our opponents, if the investment is incapable of earning an economic return for the developer, then it would be one that is wasteful.  The substitution of “wasteful or inefficient” only assists the opposing arguments if you add the words “from the perspective of the society”, but that is not the perspective of paragraph (4)(b). 

The next point I wanted to make is that the meaning we urge is an economic meaning.  We are concerned with the economic concept of a return on investment, an economic return having regard to the risks and rewards associated with an investment of the class in question.  We are not concerned with matters of accounting or accounting profitability.  The Tribunal recognised that in several places – I do not need to go to it, I will give the references – in the Tribunal’s determination at paragraphs 954 and 959, the passages commence at 2171 of volume 5.  The next point I wish to address is the contrast between criterion (b) and some of the other criteria.  If we focus attention on (a) for a moment, it postulates access or increased access to the service.  Paragraph (a) is clearly directed at an examination of the consequences of assumed access.  The question, the preliminary threshold condition prerequisite that it states is that access must be such as to:

promote a material increase in competition –

in a dependent market –

other than the market for the service -

So we are looking into other markets.  So the focus of the criterion (a) inquiry is whether assumed access would result in a benefit.  It is not necessarily the whole of the benefits that may be associated with access because it is only requiring satisfaction that there be a material increase in competition – not a substantial increase in competition as the Productivity Commission had recommended but it was pared back to a material increase in competition. 

That means as the Full Court said, that there are aspects of the impact of access that are left untouched by paragraph (a).  If the only dependent market where there is a beneficial effect is a very minor market and the most that could be said is that it promotes a very small, perhaps trivial, increase in competition which the explanatory memorandum says – or I should have said non‑trivial increase in competition which according to the explanatory memorandum would be enough, there would be a large question left unanswered for later consideration by the Minister.  It would be this.  Given that the only benefit identified in (a) is a very small benefit in a very small market, how do we weigh that against the very large inefficiencies, diseconomies and costs cast upon Australia’s market for the export of iron ore?  That is a large consideration associated with competitive effects that is left outside the scope of paragraph (a). 

The Full Court makes the point I have just made more succinctly.  In paragraph 111 of the Full Court’s judgment at page 2441, last paragraph.  Now, that same approach in (a) is reflected in other criteria, including (f) but not (b).  Paragraph (f) also starts with a postulate of actual access or increased access.  Again it is expressed in the future conditional tense.  Would such access not be contrary to the public interest?

FRENCH CJ:   Now, the term “access” itself I do not think is defined, is it?

MR YOUNG:   It is not defined.

FRENCH CJ:   One understands it in the context of the statutory scheme and its access to looking at the definition of service, the use of a facility.

MR YOUNG:   Yes, but in our submission, because of the nature of the inquiries it must be referring to actual access being exercised. 

FRENCH CJ:   That might be a convenient moment, Mr Young.

MR YOUNG:   If your Honour pleases.

FRENCH CJ:   The Court will adjourn until 10.15 tomorrow morning.

AT 4.15 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 7 MARCH 2012