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 investigation safety and investigation economic economic structural (vertical separation and ring-fencing) structural (vertical separation and ring-fencing) pricing (access charges) pricing (access charges) access―mandated, not voluntary access―mandated, not voluntary

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

… and given Australia has little experience with 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 rates fixed rates banned contracts with shippers banned contracts with shippers made line closures difficult made line closures difficult discouraged railway mergers discouraged railway mergers rejected productivity-boosting strategies rejected 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 Act Index Investment $/km of track +28% Track length -37% Mode share up 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 access rejects mandating access

What does this mean for Australia? lower rates lower rates higher track utilisation higher track utilisation facilitating upstream activities (eg mining) that would otherwise not justify new infrastructure facilitating upstream activities (eg mining) that would otherwise not justify new infrastructure National Competition Policy (NCP) regulation aimed at achieving:

…but at what cost? Regulation may discourage and distort timely investment discourage and distort timely investment inhibit long run cost-recovery pricing options inhibit long run cost-recovery pricing options undermine productivity of railway operations undermine 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 1998  June 1999) BHP vs Hancock Mining † (  Nov 2003) BHP vs Fortescue ‡ (June 2004  May 2006) ‡ Application to National Competition Council; † Application to WA Supreme Court

Mandated access aspirationsInvestment downside lower freight rates lower freight rates improves shippers’ ability to access markets eg iron ore exporters improves shippers’ ability to access markets eg iron ore exporters expropriates risk-taker’s assets, undermining investment strategies expropriates risk-taker’s assets, undermining investment strategies can compromise productivity of operations can compromise productivity of operations In summary

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

Thank you