The cost of capital and access arrangements

The recently introduced Part IIIA of the Trade Practices Act 1974 establishes a legal regime under which third parties can in certain circumstances obtain a right of access to services provided by certain essential facilities on fair and reasonable grounds. The policy underlying the regime is set out in the report by the Independent Committee of Inquiry on National Competition Policy (the ‘Hilmer Report’) which sees access arrangements as being critical to the promotion of competition in some markets. Essential facilities exhibit natural monopoly characteristics, in the sense that they cannot be duplicated economically and may occupy strategic positions in an industry such that access by the third party to the facility is required if it is to be able to compete effectively in a particular upstream or downstream market. Examples of essential facilities include infrastructure assets such as road and railway lines, electricity transmission grids and communication services. Access may be obtained by either ministerial declaration or by the owner or operator of the facility giving a written undertaking to the Australian Competition and Consumer Commission (ACCC) to provide access to a third party. The ACCC may be required to determine access prices in relation to the arbitration of an access dispute or to assess the terms and conditions of an access undertaking from an access provider. To do so, it is necessary to determine the rate of return necessary to compensate supplies of capital (debt, equity or hybrids) to an access provider for the provision of those funds and reflecting the risk involved. The paper thus analyses certain issues associated with cost of capital methodologies in the context of these access arrangements, including: