14 & 15 June 2006

Peter Kain

BTRE Transport Colloquium

…with illustrations from railway regulation

REGULATING TRANSPORT INFRASTRUCTURE―HOW LIGHT A

TOUCH?

Railways have become more heavily regulated:

• safety and investigationsafety and investigation

• economiceconomic

• structural (vertical separation and ring-fencing)structural (vertical separation and ring-fencing)

• pricing (access charges)pricing (access charges)

• access―mandated, not voluntaryaccess―mandated, not voluntary

Trade-off between utilisation (mandated access regulations) and production

ConsumptionConsumption(utilisation) (utilisation)

ProductionProduction(investment)(investment)

… … and given Australia has little experience with and given Australia has little experience with railway regulation?railway regulation?

How do we know when we are over-regulating?

Perhaps lessons from the USA can guide us…

US rail regulations focused on protecting shippers:

• fixed ratesfixed rates

• banned contracts with shippersbanned contracts with shippers

• made line closures difficultmade line closures difficult

• discouraged railway mergersdiscouraged railway mergers

• rejected productivity-boosting strategiesrejected productivity-boosting strategies

…but the eye was taken off the need for the railways to be viable

…so, in the early 1970s, more than 20% of the railways went into administration

Brought on USA’s largest corporate bankruptcy (PennCentral)

So what was the policy response?

Following these bankruptcies, government recognised that the existing regulations were:

“… a hodgepodge of inconsistent and often anachronistic regulations”.

(US Department of Transportation)

Impact of 1980 Staggers Act deregulation was dramatic

Passing of Staggers Act0

50

100

150

200

250

300

Inde

x

Investment$/km of track +28%

Track length-37%

Mode shareup from 38% to 42%

USA freight railway performance

Productivity+183%

Price-60%

Volume+60%

Since Staggers, policy has focused on production rather than consumption/usage:

• emphasises “revenue adequacy”emphasises “revenue adequacy”

• rejects mandating accessrejects mandating access

What does this mean for Australia?What does this mean for Australia?

• lower rateslower rates

• higher track utilisationhigher track utilisation

• facilitating upstream activities (eg mining) that facilitating upstream activities (eg mining) that would otherwise not justify new infrastructurewould otherwise not justify new infrastructure

National Competition Policy (NCP) regulation National Competition Policy (NCP) regulation aimed aimed at achieving:at achieving:

……but at what cost?but at what cost?

Regulation mayRegulation may

• discourage and distort discourage and distort timelytimely investment investment

• inhibit long run cost-recovery pricing optionsinhibit long run cost-recovery pricing options

• undermine productivity of railway operationsundermine productivity of railway operations

Mandated access can threaten railway and shipper productivity―particularly mining railways

Notable access cases are:

• Hamersley Iron vs Robe River‡ (Sept 1998June 1999)

• BHP vs Hancock Mining† ( Nov 2003)

• BHP vs Fortescue‡ (June 2004May 2006)

‡ Application to National Competition Council; † Application to WA Supreme Court

Mandated access aspirations Investment downside

• lower freight rateslower freight rates

• improves shippers’ ability to improves shippers’ ability to access markets eg iron ore access markets eg iron ore exportersexporters

• expropriates risk-taker’s assets, expropriates risk-taker’s assets, undermining investment strategiesundermining investment strategies

• can compromise productivity of can compromise productivity of operationsoperations

In summary

To conclude… we need to ensure that regulation does not pull railway owners into the abyss

Thank you

www.btre.gov.au