The Chairman of the Australian Competition and Consumer Commission, Professor Allan Fels, said today that he was puzzled by statements made by Mr David Ryan, Managing Director, Adsteam Marine Ltd (Adsteam), in conjunction with price increases for harbour towage being implemented today.
"This will be of deep concern to customers but Adsteam is a monopoly", he said.
"The ACCC undertook a thorough financial analysis of Adsteam’s proposed prices for harbour towage services and, on 19 February, announced that no increase could be justified in the ports of Melbourne, Brisbane, Port Jackson, Port Botany and Port Adelaide", Professor Fels said.
"The details of the ACCC's reasoning are set out fully in the Statement of Reasons.
"Quite simply, on its own figures, Adsteam is already making high returns and the increases will give it an extremely high profit. Using Adsteam’s own numbers, the ACCC has estimated that Adsteam would achieve returns on equity at a rate approximately double that observed for Australian shares over recent years and in some cases even significantly higher.
"Comments made today by Mr Ryan misrepresent the ACCC's reason for its decision. The ACCC's decision was supported by analysis from Professor Kevin Davis, Commonwealth Bank Group Chair of Finance, the University of Melbourne.
"Under the Prices Surveillance Act the ACCC has a responsibility to assess, among other things, whether a 'declared' company requires price increases to maintain a reasonable rate of return. Indeed, the Government has continued to apply prices surveillance to the harbour towage industry in recognition that, if left to itself, Adsteam could introduce monopoly prices. The price increases introduced today by Adsteam will allow the company extraordinary rates of return.
"In the majority of the ports where Adsteam is increasing its prices there has been an increasing volume of business over the past ten years which has meant that revenues have increased despite prices remaining stable.
"However, in two of the five ports, prices have increased in recent years. With the ACCC's approval prices were increased by 10 per cent at the port of Melbourne in 1999. At Port Jackson in 1997 Adsteam increased its prices by 15 per cent in spite of an earlier decision by the ACCC that the price increases were not justified.
"The ACCC examined the 'economic costs' of providing towage services, that is, all costs that Adsteam incurs and the returns required by Adsteam's shareholders on their investment. Therefore 'profits' are included in economic costs. Adding a 'margin' on top of such costs is, put simply, a double counting of profit.
"The ACCC has seen the report by Professors Gans and King. Importantly, the report only goes 'half way' to explaining the Adsteam approach and does not comment on how to measure an appropriate 'margin' that should be applied to these leasing costs.
"The report is also a theoretical work that relies on the assumption that there is an efficient market for the leasing of tug boats. The ACCC understands from Adsteam's claims of confidentiality that prices for tugboat leases cannot readily be observed.
"The ACCC is currently limited to the comments it is able to make on the Gans-King report as Adsteam regards the document as 'confidential'. The ACCC invites Adsteam to make the Gans-King report publicly available so that these issues may be more fully explained.
"A fundamental, unanswered question in this matter is - if Adsteam assumes for the purposes of setting prices - that it leases rather than owns its tugs, then what is an appropriate margin? Under the theoretical Adsteam model there is no investment in assets. As there is no readily identifiable benchmark to asses returns in these circumstances, the ACCC resorted to the cost based approach commonly used to assess returns in regulated industries.
"Further, if it would cost Adsteam significantly more to lease tugs than to use some other method to finance those assets, then the ACCC cannot see that prices should increase for what would amount to an inefficient financing decision.
"The ACCC conducted the price review in an unusually fast time. At all times Adsteam had control of this time frame.
"While the process from start to finish lasted about two months, this included the Christmas-New Year holiday period and included Adsteam stopping and re-starting the process on 19 January".