catallaxy files

catallaxy in technical exile

Access regulation and property rights

with 2 comments

A publicly discussed case that is currently being trashed out in the courts and the specific merits of which I will not comment on because it’s one I am involved in at work involves an iron ore developer, FMG which is applying to have a BHP-affiliate railway declared for access regulation under Part IIIA of the Trade Practices Act. I will, however, offer the case to our libertarian and economics junkies readers as an interesting example of natural monopoly regulation in action and cite a publicly available news source, a wiki entry and a source which takes the opposite line from that of my employer as a summary of the case, and the issues involved.

The purpose of Part IIIA is to facilitate regulation of what economists would call natural monopolies or ‘essential facilities’ for competition. This is in order to facilitate the sharing by the owner of such facilities with a competitor on some mutually agreed terms and conditions and failing that, some access price set by the regulator where it is efficient to do so.o

One of the criteria under Part IIIA is that access must ‘promote competition in at least one market’, another is that ‘it would be uneconomical for anyone to develop another facility to provide that service’. The National Competition Council’s take on this case is here (PDF). For the record, the NCC decided in favour of declaration.

What is interesting about the BHP v FMG case as it is being played out in the courts between the two private parties (the NCC is acting as amicus curiae and has a slightly different take) is that things haven’t come down to debate about the specific criteria for declaration yet because there is an exemption under Part IIIA if the facility in question is a ‘production process’.

 This in turn raises the interesting question of what constitutes a production process, which though all agree is not a term of art in economics can be related back to theories of  vertical integration. It is therefore on this theoretical point and how it can be applied to the facts of the case that most of the debate between the experts representing the two private parties (including my boss who is acting for the BHP side) has bogged down.

This short news item provides a precis of the facts of the case:

Iron ore developer Fortescue Metals Group Ltd has told the Federal Court that BHP Billiton is neither the owner nor the operator of two railways in West Australia’s Pilbara region.

Fortescue is seeking access to the railways, used solely by BHP Billiton, to allow development of the Mindy Mindy iron ore deposit …

Fortescue contends the railways are owned by a number of joint ventures which have access agreements with BHP Billiton.

BHP Billiton is the major partner in these joint ventures with other partners including Korean, Japanese and Chinese companies.

“BHP (Billiton) is an access seeker … it has access arrangements with the joint ventures,” Mr O’Bryan said.

“The only material difference is … that its name commences with the three magic letters BHP.”

BHP Billiton argues the railway lines are part of its production process and cannot be opened up to third party access.

The National Competition Council (NCC) disagrees with BHP Billiton and says the railway lines are not a part of the production process …

Since the beginning of the railway dispute, BHP Billiton has maintained that allowing other users onto its railways could jeopardise its ability to expand its iron ore production.

On the broader issue of natural monopoly regulation, a good perspective on the Chicago school side is provided by this book by Richard Posner:

Natural monopolies exist in those markets in which demand can be satisfied at lowest cost by the output of only one rather than several competing firms. Under such conditions, conventional wisdom suggests that government regulation must substitute for competition to discipline the behavior of firms.

Thirty years ago a young professor named Richard Posner asked the provocative question of whether the existence of natural monopoly provides adequate justification for government intervention. His even more provocative answer was no. The evils of natural monopoly are exaggerated, the effectiveness of regulation in controlling them is highly questionable, and regulation costs a great deal. “The resources and energies of government should be directed to problems we know are substantial, that we think are traceable to government action, and that cannot be left to the private sector to work out. There are plenty of those problems, and it is doubtful that natural monopoly is among them.”



Written by Admin

October 18, 2006 at 4:13 pm

Posted in Uncategorized

2 Responses

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  1. c8to – do you know why all these funny wiggles are appearing in my posts??


    October 18, 2006 at 4:29 pm

  2. Jason, I found the same problem in OE, but it’s OK in Firefox.

    But I seem to have lost my “whyisitso” id and can’t get it back. I changed the password from the emailed one but it won’t accept my new one and keeps sending me round in circles. Clicking the link in the recovery email just gives a message like incorrect key. And I was getting attached to my whyisitso moniker!


    October 18, 2006 at 5:41 pm

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