Mr Morton
255 While Mr Morton expressed agreement with the other experts in respect of many of the economic principles and conclusions stated in the Joint Report, Mr Morton's opinions with respect to the category (a) effects likely to arise from the proposed collective bargaining conduct that may give rise to public benefits were expressed in far stronger terms than the other experts. In large part, this was due to Mr Morton maintaining opinions expressed in his primary report concerning PNO's market power and its expected behaviour in setting prices and negotiating access, given its economic circumstances and incentives. The report expressed the opinion that the constraints on PNO's pricing discretion are weak, that PNO would be expected to continue to increase Port charges to maximise profits, and that the Pricing Deeds are ineffective in constraining PNO's market power. In expressing those opinions, Mr Morton relied upon and made extensive reference to previous reports that he had prepared (through his firm Synergies) on behalf of Glencore Coal and NSWMC in connection with the Pt IIIA applications that have been made in respect of the Port (both declaration and arbitration).
256 In the Joint Report, Mr Morton expressed the following (summary) opinions:
(a) While agreeing that the demand for PNO's Port services are inelastic over a significant range of prices, Mr Morton nevertheless considered that a change in Port prices can potentially have a greater impact on demand for Port services where required investment in additional coal production is not yet sunk or where investment is required as existing mines reach the end of their mine life.
(b) While agreeing that there are a range of factors that currently constrain PNO's market power, Mr Morton considers that the constraints are not strong.
(c) Mr Morton considers that the offer of the Pricing Deeds, and the execution of the Vessel Agent Pricing Deeds, will provide only a weak constraint on PNO's ability to significantly increase its prices. Mr Morton also considers that the Deeds do not provide pricing certainty and permit PNO to significantly increase prices.
(d) Mr Morton considers that collective bargaining could assist coal producers in effectively negotiating with PNO for three reasons. First, acting collectively, coal producers have a greater opportunity to seek regulatory intervention in relation to PNO's pricing practices. Second, collective bargaining can assist in reducing the asymmetry of information between coal producers and PNO in relation to negotiations. Third, collective bargaining can allow a more effective pursuit of issues, through enhancing the negotiating capacity of the coal producers, including as a result of the sharing of the cost associated with appointing expert advisors.
257 The Tribunal did not find Mr Morton's opinions concerning PNO's market power and its expected behaviour in setting prices and negotiating access, as expressed in his primary report and summarised in the Joint Report, persuasive. In addition to the matters referred to above in the context of Dr Smith's opinions, the principal (but not exhaustive) reasons for the Tribunal's lack of persuasion as to Mr Morton's opinions are as follows.
258 First, and as stated in his primary report, Synergies (under Mr Morton's instruction) has previously prepared a range of reports in relation to access to services at the Port including:
(a) for Glencore Coal, a report prepared in 2015 in relation to its application for the declaration of the shipping channel and berthing services at the Port;
(b) also for Glencore Coal, a series of reports to the ACCC during 2018 in relation to the arbitration between Glencore Coal and PNO of the charges to apply for Glencore Coal's use of the (then) declared shipping channel and berthing services at the Port;
(c) also for Glencore Coal, a series of reports to the NCC over the period 2018-2019 in relation to PNO's application for the revocation of the declaration of the shipping channel and berthing services at the Port; and
(d) for NSWMC, a report to the NCC in 2020 in relation to NSWMC's application to the NCC for declaration of the shipping channel and berthing services at the Port.
259 Mr Morton attached those previous reports to his primary report in this proceeding and referred to those previous reports extensively.
260 The earlier Synergies reports were the subject of detailed consideration and analysis by, relevantly, the NCC and the Tribunal in connection with the earlier Pt IIIA applications to which the reports were directed. Many of the conclusions reached by the NCC and the Tribunal were contrary to the contentions advanced in the earlier Synergies reports. The Tribunal notes in particular:
(a) In the 2018 arbitration between Glencore Coal and PNO, the Tribunal disagreed with the conclusion of the ACCC and approved a navigation service charge of $1.0058 per gross tonne (as at 1 January 2018). Following the recent decision of the High Court in Port of Newcastle Operations, the Tribunal's decision in that regard has been reinstated. In the Tribunal's view, a navigation service charge of that quantum was consistent with the pricing principles in Pt IIIA of the Act, the object of which is to promote the economically efficient operation of, use of and investment in the infrastructure by which services are provided, thereby promoting effective competition in upstream and downstream markets. Subsequently, PNO offered a lower navigation service charge pursuant to the terms of the Pricing Deeds.
(b) In the 2019 application to revoke declaration of the shipping channel and berthing services, the NCC concluded that access (or increased access) to the services, on reasonable terms and conditions, as a result of a declaration of the services would not promote a material increase in competition in any market. In that connection, and contrary to opinions expressed in earlier Synergies reports, the NCC concluded that PNO did face material constraints on its pricing discretion (see, by way of summary, para 1.9 of the NCC's recommendation dated 22 July 2019 titled "Revocation of the declaration of the shipping channel service at the Port of Newcastle").
(c) In the 2020 application to declare the shipping channel and berthing services, both the NCC and the Tribunal again concluded that access (or increased access) to the services, on reasonable terms and conditions, as a result of a declaration of the services would not promote a material increase in competition in any market. In that connection, and contrary to opinions expressed in earlier Synergies reports, the Tribunal concluded that there are a range of factors that are likely to constrain PNO's market power across the medium term in setting prices for the services and that PNO would be expected to set prices so as to recover long run costs, but not to further increase prices in a manner that would lessen future investment in the coal tenements market or coal production more generally: see NSWMC No 3 at [199].
261 In his primary report prepared in this proceeding, Mr Morton ignores the consideration given to his earlier reports by the NCC and the Tribunal in the context of the applications to which those reports were addressed, and fails to explain why his opinions should be preferred to the contrary conclusions reached by the NCC and the Tribunal. An expert cannot be criticised for maintaining a particular opinion despite contrary views. However, the approach adopted by Mr Morton, involving repetition of earlier opinions directed to particular regulatory decisions without engagement with contrary conclusions reached by the relevant decision-maker, has the appearance of advocacy. The approach is of no assistance to the Tribunal.
262 Second, Mr Morton's opinions concerning PNO's expected pricing behaviour, as expressed in his reports, bear little relationship to PNO's actual pricing behaviour to date. Mr Morton's primary report states that Synergies' previous reports demonstrated that PNO's profit maximising incentive will be most effectively met by raising access prices (and accepting any likely consequential impact on volume) rather than by maintaining lower prices in order to attract additional volume. Synergies' modelling in earlier reports purported to show that, by increasing the navigation service charge to $3 per tonne, PNO would increase revenues which would have a strongly positive impact on PNO profits. Further modelling purported to show that PNO's profit would only start to decline at a charge of $12.50 per tonne. Nowhere does the report attempt to explain why PNO has set the navigation service charge at approximately $1.00 per tonne (on an open access basis) and at a lower rate under the Pricing Deeds when the profit maximising price, according to Synergies' modelling, is $12.50 per tonne. If Mr Morton were correct as to PNO's pricing power and the profit maximising price, PNO is voluntarily foregoing vast profits. The Tribunal considers that Mr Morton's opinions in that respect are not credible.
263 Third, Mr Morton's opinions in his primary report concerning PNO's price increases since privatisation are based on a simplistic analysis which fails to engage with relevant economic costs. Mr Morton's report calculated the percentage increase in the navigation service charge since the privatisation of the Port in respect of vessels of a certain capacity and concluded that the increase for Panamax vessels was up to 120%. Mr Morton's report also calculated that the percentage price increase at the Port since 2014 far exceeded the percentage increase at other Australian coal ports in that period. While citing percentage price increases over a limited time span may have an emotional appeal, the calculations have little relevance to an informed assessment of whether the current level of the navigation service charge is at an inefficiently high level. In respect of the first percentage calculation, Mr Morton's unstated assumption appears to be that the navigation service charge at the Port at the time of privatisation was set at a level that enabled recovery of efficient costs. Mr Morton provided no evidence to support that assumption. Further, and as noted above, the conclusion reached by the Tribunal in the context of the Glencore Coal arbitration was that the current level of the navigation service charge (incorporating price increases) enables a reasonable return to be earned on the DORC value of the Port assets. In respect of the second percentage calculation, any comparison between coal ports is economically meaningless without knowing the actual amounts of the charges at each port and the costs incurred by each port in providing the relevant services.
264 Fourth, the Tribunal does not accept Mr Morton's opinion in his primary report, and as summarised in the Joint Report, with respect to the operation of the Pricing Deeds. In that respect, Mr Morton expressed the opinion that the Deeds offer only limited certainty as to ongoing Port charges and provide considerable opportunity for PNO to continue to exercise market power in the setting of Port charges. The Tribunal does not accept that opinion for the reasons explained in NSWMC No 3 at [218]-[239]. Mr Morton's report failed to explain why, if PNO has unconstrained market power as he contends, it should choose to fetter its future pricing freedom by entering into the Pricing Deeds. A firm with unconstrained market power would be free to announce price increases from time to time without submitting its prices to any form of scrutiny or control by a third party. In contrast, the Pricing Deeds, voluntarily offered and entered into by PNO, require PNO to notify Port users of price increases, provide supporting material for the increase and, in the event the increase is disputed, submit the increase to binding arbitration. The Tribunal adopts the earlier conclusion expressed in NSWMC No 3 at [240], that:
…the Pro Forma Pricing Deeds provide a reasonable degree of pricing certainty to coal producers. While the Deeds allow PNO to propose adjustments to the rate of the navigation service charge, any such adjustment is subject to arbitration applying pricing principles which are similar to those governing arbitrations under Division 3 of Part IIIA.
265 Fifth, Mr Morton's primary report is critical of the "most favoured nation" (or non-discrimination) clause in the Pricing Deeds, arguing that the clause is likely to inhibit the ability of coal producers to negotiate changes in the pricing related provisions of the Deeds via bilateral negotiations. In advancing that argument, Mr Morton appears to consider that bilateral negotiations between individual coal producers and PNO are preferable, enabling differentiated prices to be agreed with each coal producer. The evidence before the Tribunal, of which Mr Morton is apparently unaware, is that the non-discrimination clause was inserted in the Deeds at the request of coal producers. Further, Mr Morton fails to explain how collective bargaining by the coal producers is consistent with his apparent preference for differential prices through bilateral negotiations.
266 Sixth, Mr Morton's primary report expresses a very tentative conclusion on the question whether collective bargaining is likely to produce category (a) effects that may give rise to public benefits (at para 79):
While I am unable to predict the extent to which collective bargaining by mining companies will actually achieve more efficient outcomes, I consider that collective bargaining will significantly reduce the transaction costs associated with negotiating the Deed and, more importantly, present the best opportunities for the parties to negotiate a balanced contract that will prevent the emergence of future disputes by better articulating the circumstances triggering future price adjustments, and in that event, quantifying the impact on future prices.
267 Mr Morton does not explain why, in light of his opinion concerning the strength of PNO's market power, collective bargaining will have any effect on the terms of the Producer Pricing Deed. As noted above, Mr Morton sought to address that question in the Joint Report, but the Tribunal again finds his opinions unpersuasive.
268 The first reason given by Mr Morton is that acting collectively, coal producers will have a greater opportunity to seek regulatory intervention in relation to PNO's pricing practices. The Tribunal does not accept that the coal producers require an authorisation in order to act collectively in seeking regulatory intervention. The history of regulatory intervention since the privatisation of the Port amply demonstrates that such intervention does not require coal producers to act in a collective manner. Further, collective action by coal producers advocating regulatory intervention would not involve any contravention of Pt IV of the Act and therefore would not require authorisation.
269 The second reason given by Mr Morton is that collective bargaining can assist in reducing the asymmetry of information between coal producers and PNO in relation to negotiations. Mr Morton did not explain the content of the asymmetry he was referring to. In any event, for the reasons given earlier, the Tribunal is not persuaded that the proposed collective bargaining conduct in respect of the navigation service and wharfage charges would be likely to result in bargaining behaviour or outcomes that differ from bilateral negotiations.
270 The third reason given by Mr Morton is that collective bargaining can allow a more effective pursuit of issues, through enhancing the negotiating capacity of the coal producers, including as a result of the sharing of the cost associated with appointing expert advisors. Transaction costs savings are considered below as a separate head of claimed public benefit. In relation to negotiating capacity, the evidence shows that the coal producers are large sophisticated companies, many of which are far larger than PNO. The evidence does not suggest that any of the coal producers lack negotiating capacity. Again, and for the reasons discussed earlier, the Tribunal is not persuaded that the proposed collective bargaining conduct in respect of the navigation service and wharfage charges will result in different outcomes.
271 In relation to category (a) effects that may give rise to public detriments, Mr Morton considered that there was a low risk of such detriments arising for three reasons:
(a) First, the different circumstances applying to each coal producer are unlikely to result in significant differences in the commonality of the coal producers' interests in relation to the Producer Pricing Deed.
(b) Second, a range of measures can be adopted to accommodate individual interests in a collective bargaining framework, including negotiating a menu of options that could be chosen by individual coal producers or negotiating an agreed pro-forma contract with finalisation of individual contracts managed through bilateral discussions.
(c) Third, if any coal producer considered that its interests were not being effectively addressed through the collective negotiation, the coal producer would be free to negotiate bilaterally.
272 The Tribunal largely agrees with Mr Morton's opinion in respect of the risk of public detriments for the reasons expressed above in relation to Dr Smith's opinion.