1132 The third dependent market proposed by FMG is for rail haulage services for iron ore on each line (the product market), the geographic market being the vicinity of each line. The existence of a separate product market for rail haulage services immediately gives rise to the question whether, in a vertically integrated operation of which rail services are but one part, that part can be treated as functionally discrete for market analysis purposes. This also raises the question whether there can be a market when there are no market transactions and, on the supply side, the putative seller is unwilling to enter into any transaction.
1133 It is convenient to deal first with the second issue: Can there be a market for a product or service absent any market-based dealings in that product or service? In QCMA (at 517), the Tribunal accepted that a market was delineated by "the field of both actual and potential transactions between buyers and sellers among whom there can be strong substitution, at least in the long run" (emphasis added). We think that the statement that market participants include both actual and potential buyers and sellers is uncontroversial. The existence of potential buyers and sellers can in many cases affect the price and non-price decisions of actual buyers and sellers. In those cases, it would be wrong to exclude potential buyers and sellers from consideration.
1134 Here, the issue comes about because there is no actual buyer or seller of the particular service. All that exists are potential buyers and sellers. Is that sufficient to conclude there is a market? There are many economists (probably most) who would answer this question in the negative. Professor Hausman put the point quite starkly. He said: "For a market to exist there must be both willing sellers and willing buyers. If no willing sellers exist, a market does not exist." Professor Hausman went on to differentiate between a "market outcome" and a "command economy", where resource allocation and firm conduct is required to follow a state's economic dictate. In that state of affairs, a market does not exist except by appropriation (ie by modifying the rights of an individual by the exercise by the state of its sovereign power). That, he said, will not create an economic market.
1135 The High Court has laid down that in some circumstances, a relevant market will exist even though there is an absence of transactions between a willing seller and a willing buyer. In Queensland Wire Industries Proprietary Limited v The Broken Hill Proprietary Company Limited (1988) 167 CLR 177, the question was whether BHPB's refusal to supply wholesalers with products known as "Y-bars" contravened s 46 of the Trade Practices Act. That section proscribed a firm from taking advantage of its substantial power in a relevant market. The Full Federal Court had held that because there never had been a market for Y-bar, it was not possible to attract the operation of s 46. The High Court disagreed. Deane J said (at 196):
[A] market can exist if there be the potential for close competition even though none in fact exists. A market will continue to exist even though dealings in it be temporarily dormant or suspended. Indeed, for the purposes of the Act, a market may exist for particular existing goods at a particular level if there exists a demand for (and the potential for competition between traders in) such goods at that level, notwithstanding there is no supplier of, nor trade in, those goods at a given time - because, for example, one party is unwilling to enter any transaction at the price or on the conditions set by the other.
Dawson J said (at 200): "But the existence or non-existence of sales of a product cannot conclude whether a market exists or not. It must be sufficient to constitute a market that there is a product for exchange, regardless of whether exchange or negotiation for exchange has actually taken place." Toohey J said (at 211-212): "But even if it was necessary, the absence of existing buyers does not mean that there is no market for Y-bar. It would be a curious consequence if the offering by B.H.P. of a limited supply of Y-bar established a market for that product but the withholding of supply altogether meant that there was no market."
1136 The consequence of Queensland Wire is that Professor Hausman's position, no doubt correct from an economist's standpoint, cannot survive the established legal framework.
1137 There is, in any event, another point to make. Professor Hausman's underlying premise is that the incumbents are properly described as "unwilling sellers". We do not accept that premise. Under the State agreements by which they are each bound and, we would add, to which they and their predecessors voluntarily submitted themselves, BHPB and RTIO agreed to provide haulage services provided that to do so would not unduly prejudice or interfere with their operations. Part IIIA only operates to require access if access will not unduly interfere with the incumbent's operations, although the precise language of s 44W(1)(a) is in somewhat different terms. If it will not cause undue interference, each of BHPB and RTIO cannot properly be described as unwilling sellers.
1138 Turning now to the question whether there is a separate functional market, it is our view that the evidence of a separate haulage market is made out. First, the various examples of below rail and above rail separation in other regions of Australia demonstrate that a functional separation is possible in some circumstances.
1139 Second, although neither BHPB nor RTIO has so far hauled iron ore for a third party or allowed below rail access, at least BHPB has been in negotiation (at least with [c-i-c]) to provide a haulage service. While those negotiations have not led to a concluded agreement, there is no suggestion that the negotiations were an artifice. Not only is there no suggestion that BHPB engaged in sham negotiations, senior BHPB personnel were involved. Assuming that BHPB is rational - that is, profit motivated - it would only have engaged in those negotiations if it believed it could make a profit from providing a haulage service. Likewise, assuming that [c-i-c] is rational, it would only have negotiated with BHPB if outsourcing haulage was regarded as more profitable that building its own line.
1140 Third, there are willing buyers and hence there is demand for the service. Demand comes from FMG (which would be a more-than-willing provider of haulage services on some lines) and, at least, the various juniors (including Atlas and BC Iron) with whom FMG has agreed that it would provide, or has entered into a memorandum of understanding by which it has undertaken to enter into negotiations to provide, haulage services.
1141 Fourth, once again assuming that it is appropriate to treat a haulage market as functionally separate from the incumbent's other activities, the only element of an economist's definition of a market that is missing, actual transactions, is missing because the potential supplier, a monopolist, has power to withhold supply.
1142 Fifth, we do not believe that transaction costs are so large that no actual transactions will ever take place. BHPB and RTIO point to large transaction costs that include the costs to compensate the incumbents for any lost production, administration costs, costs of negotiating and enforcing contracts and the cost of arbitrating decisions. [c-i-c] and BHPB's negotiations have demonstrated that neither party believed this to be the case. Dr Williams points to "hold up" costs: that BHPB and RTIO would be held up from making an efficient investment in track infrastructure if it expects that once it has made the investment, the access seeker will refuse to pay more for access. But the hold up costs need not be so significant. Assume that access is sought for purposes of transporting only a relatively low volume of iron ore (eg 5mtpa). The evidence is that this volume could be accommodated on all lines with little disruption to the incumbent's activities and little, or no, displacement of the incumbent's throughput. Thus, we disagree with the factual premise upon which Dr Williams expresses his opinion. It may be accepted that much higher volumes of third party demand could result in hold up costs. Dr Williams' conclusion would, in our opinion, only be valid if in all circumstances the transaction costs were so high as to prevent access being taken up.
1143 So far as the product dimension of the haulage market is concerned, we have explained that trucking is not generally an effective substitute for rail haulage: see Chapter 7.3.3. Whether the product market extends to haulage on other lines will depend on the nature of the other line. Clearly, another haulage service that ends at a different port is unlikely to be a substitute for many miners. On the other hand, haulage services on the Mt Newman line and Chichester lines (including the proposed Marillana spur) are effective substitutes because both would originate and terminate within close proximity to one another.
1144 The geographic market for haulage is best described as a corridor around each line which is the subject of an all-points application, and a circumference around the access point of the line the subject of a point-to-point application. How wide the corridor is (and what length the radius should be) depends on the distance a miner can viably build a spur or truck ore to the line. It is impossible to give an exact distance or radius for any line.
1145 The next question is: Will access to a line promote a material increase in competition? Clearly enough the market is presently not effectively competitive as the only potential provider of haulage services, the incumbent, is able to exert market power by refusing to provide haulage. In Services Sydney (at [135]), the Tribunal said that criterion (a) applied to a market in which there was no competition because of the vertically integrated monopolist. The Tribunal also said that "the facilitation of any competition in any such market is of significance." In other words, the facilitation of any competition closer to effective competition will satisfy criterion (a), provided the movement is not trivial.
1146 Here access to the lines will enable FMG, and possibly other firms if they choose, to provide a haulage service. At least mining companies will have the choice of paying the provider's asking price. Under the status quo, they have no such choice. We regard the choice as significant. It constitutes an increase in competition even if the supplier of haulage (eg FMG) is a monopolist. Though it may be a monopolist, it may not be able to exercise monopoly power. Once haulage is provided by a third party, the incumbent may be encouraged also to provide haulage services to junior miners. Even if the incumbent does not provide a service to junior miners, it would constrain the third party haulier because of its potential to provide haulage services.
1147 Is this any different from the position that would obtain if there were no access to the lines? The answer is "yes" in respect of three lines, the Goldsworthy, Hamersley and Robe lines, and "no" in respect of one line, the Mt Newman line.
1148 It is necessary to explain why we have reached these answers. Once again they are dictated by the effect on the rail haulage market if the likelihood is that a substitute facility will be constructed if there is no access to the service. In the case of the Mt Newman service, the Chichester line, extended by the Marillana spur, will offer a very similar service to the Mt Newman service. The Marillana spur will likely not be built if the Mt Newman service is declared. Thus, the situation in the access factual and no access counterfactual is the same: in either event there will be a single line which provides the service. In the case of the Goldsworthy line there will be no substitute facility. It follows that the future with access will promote competition whereas the future without access will not.
1149 The same is true as regards the Hamersley line. If there is no access the new facility will be only a partial substitute for the Hamersley line. We say that it will be only a partial substitute 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 the tenements in areas to the south and east of the Solomon area.
1150 The most difficult haulage market to assess, from a competition perspective, is the Robe market. It is worth restating some of our earlier observations about this line.
1151 The first observation is that some tenements in the vicinity of the Robe may have alternative rail options. Some of these options will exist regardless of whether the Robe service is accessed. For example, Aquila will build a line from its projects in the West Pilbara to at least near Mesa J (in order to at least connect with the Robe line). Likewise, some tenements in the vicinity of the Robe line might also be able to access the Hamersley line or the Dixon line (as the case may be). The only alternative rail option the existence of which might depend on whether there is access to the Robe service, is the section of the Aquila line continuing beyond the Mesa J area to Anketell Point (the Anketell section). If there is no access to the Robe service, that section is likely to be built. Indeed, the Anketell section might well be built even if there is access to the Robe service.
1152 The second observation is that the proposed course of the Anketell section diverges considerably from the course of the Robe line. Much of the section is 50km or more to the north of the Robe line. This means that for tenements close to the Robe line, it may not be viable to truck longer distances to connect with the Anketell section, and vice versa.
1153 How, then, does this somewhat complicated factual situation translate into the language of criterion (a)?
1154 Let us begin with the definition of the market. It is clear that some (but certainly not all) potential consumers of the Robe service may have alternative rail options (eg the Aquila line or the Hamersley/Dixon line). The question is whether those services are within the same market. The way to test for this is to apply the hypothetical monopolist test: Would a hypothetical monopolist be able to profitably implement a price increase on the Robe service? Whether this is possible will depend on the extent to which consumers can substitute to other lines. We do not have enough data to determine whether the product market includes the alternative lines. Nonetheless, we think that, regardless of whether the market definition incorporates several rail alternatives or is confined to the Robe service, it is possible to conclude that access to the Robe service would promote a material increase in competition in the market.
1155 It is convenient to consider first the position if the product market includes both the Robe service and alternatives. It is, we think, clear that access would promote competition in this market for various reasons. First, the only identified source of demand for the Robe service, at this stage, is Aquila. Access to the Robe line creates choice for Aquila. It may choose haulage on the Robe line, or it may choose to have its ore hauled on its own line, if it elects to build the Anketell section of the Aquila line. It can be no worse off if it has access to the Robe line, but it may be better off.
1156 Second, if there are other, as yet unidentified, consumers they may also benefit from access. Some, who could access haulage on both the Robe line and other lines, would benefit from the choice between two or more suppliers. Others who could not access rail would clearly benefit from having a rail option available.
1157 The only consumers who might be worse off if there were access to the Robe service are those close to the Anketell section of the Aquila line. If there is access, the Anketell section may not be built. However, we think that those consumers are likely to be limited in number. They are relatively close to the coast, so trucking direct to port may be the preferable option in any event. Many would also be close to Cape Preston and therefore not interested in the Robe service. Further, a significant number of tenements in the vicinity of the proposed Anketell section are large magnetite projects, which have already been ruled out as potential sources of demand for the Robe service: see Chapter 15.6.2.2. And ultimately, the Anketell section may be built even if the Robe service is declared, in which case no consumers would be worse off.
1158 All in all, we are satisfied that access to the Robe service would promote a material increase in competition in the market for haulage broadly defined on the Robe service. We think the majority of potential consumers of the service would benefit from access, thereby increasing the likelihood of a vibrant, competitive haulage market emerging in the Robe area.
1159 An alternative scenario is that the market is defined narrowly to only include the Robe service (and not encompass alternative rail facilities). Here too, it is clear that access to the Robe service would promote a material increase in competition. By definition, in this scenario the vast majority of consumers would not have an effective substitute to the Robe service (because otherwise, they could defeat a price increase). In the access scenario, there would be a competitive market for the service; in the no access scenario, there would be no market transactions. In saying this, we recognise that a small proportion of consumers (ie too small to defeat a price increase) would have alternative rail options in different markets. They might or might not take up access on the Robe line. But for most consumers of the Robe service, their only transport option would be the Robe service. We are satisfied that creating a market for at least those miners (and, indeed, potentially for other miners who elect to use the Robe service rather than some alternative) would promote a material increase in competition.