Addressing the University of Wollongong’s SMART international infrastructure symposium, ACCC Chairman Rod Sims discusses the role that appropriate infrastructure regulation can play in the wider productivity debate. Mr Sims explains the key factors underpinning efficient infrastructure in the areas of land transport, shipping, electricity, communications and water.
Thank you for the opportunity to speak today at this important and timely event.
There are increasing calls for Australia to improve its productivity performance. Indeed, I am heartened that this increasing focus will see the sort of change we saw following the Hilmer Review into National Competition Policy.
Indeed, it is the policy of the new Commonwealth Government to begin a comprehensive competition review that will be broad in scope.
Infrastructure is, of course, a key enabler of productivity growth.
For infrastructure to play its full role in driving productivity growth, however, we must get at least three things right.
First, we need to make the right investment decisions, with the highest cost benefit ratios. In Australia, we do not always do this, to our cost.
Second, we need efficient investment, made according to appropriate regulatory rules and standards. We have seen recently that poor electricity regulation rules, and reliability standards that do not properly reflect what customers wish to pay for, have cost us dearly.
Consumers are paying too much for electricity and our competitiveness has suffered.
Third, we need the right price signals and incentives to make the best use of existing and new infrastructure. As everyone involved in infrastructure knows, pricing and incentives are fundamental.
For example, infrastructure networks are built for the peaks, which are infrequent; it is often best to try to dampen peak demand and spread usage to non peak times so that more services are provided for a given expenditure
Today I will outline some changes to drive productivity. Some items are likely or coming, others are more speculative.
I will roam across all sectors, including those that may stretch a bit the definition of infrastructure.
As our population grows so does both our freight task and traffic congestion. More investment is clearly needed, but we also need reform in a number of areas.
At the most basic level this involves choosing the right projects. In Australia we can have a bias to large land transport projects over the more targeted, smaller ones with higher cost benefit ratios.
In addition to having better, more transparent cost benefit analysis there are, however, some regulatory changes that can improve our choice and use of land transport infrastructure. I will suggest a few of these.
First, a Productivity Commission report in 2006 found that road user charges, comprising a fixed registration charge and varying fuel excise, did not convey signals to road users about the cost of using certain roads. They also criticised the disconnect between road user charges and future road spending.
The National Transport Council, which calculates and recommends the road user charges, has no to ability consider future investment needs either generally or in the case of specific roads.
The problems can be simply illustrated.
We have a number of important freight transport link roads where there can be limits on their use by heavy vehicles. This can reflect the fact that the trucks that use the road are not charged sufficiently to cover the damage they do to the road and, if they were, the funds raised would not go to those responsible for maintaining or upgrading the road.
Making this problem worse, the charges trucks pay reflect past road spending. There is no mechanism to approach users to suggest they pay for road usage in return for particular roads being built or upgraded.
Standard regulatory practice could address this. In rail and energy, for example, user charges are set on the basis of a future build and spend program; what you pay is linked to what you get.
These issues are being examined by the Heavy Vehicle Charging and Investment Reform group, which is a Commonwealth and State initiative that importantly involves local government too.
A second regulatory change could be the introduction of congestion charging which is, of course, controversial. The community largely now accepts that it needs to directly pay for certain toll roads. It does not seem a large stretch to move from paying for which road you use to paying according to when you use it.
We can solve congestion via traffic queues or congestion charges. Trying only to build more roads to reduce congestion is not likely to work.
Congestion charging would also be a more equitable way to fund new or upgraded roads.
A third potential regulatory change goes to improving signals for modal choice, or whether to use rail or road freight.
The 2006 Productivity Commission inquiry into road and rail freight infrastructure pricing found that the prices paid by heavy road vehicles did not reflect distance travelled, the differing weights of vehicles or the maintenance costs imposed on the different types of roads travelled on.
While we have seen some reform of heavy vehicle road pricing since then, the Australian Rail Track Corporation’s, the ARTC’s, interstate rail network competes against a strong interstate road network, meaning there is the potential for non cost reflective heavy vehicle user charges to distort the choice between road and rail freight.
My fourth and final potential regulatory change is the need for incentives in the regulation of rail freight where there is no intermodal competition.
In the Hunter Valley coal chain, for example, the ARTC owns the track and there are several above rail operators carrying coal. While this vertical separation does encourage above rail competition, which is extremely important, it also brings some economic disconnects.
For example, the ARTC does not necessarily have the incentive to do its maintenance so as to optimise train speeds and so use of the network. The ACCC is encouraging the ARTC and the above rail operators to devise and agree appropriate incentive mechanisms.
While some may not see shipping under an infrastructure heading, it is equally an enabler, and there are steps that could enhance productivity. Today I will only highlight two.
First, we continue to have an unusual arrangement in place in relation to the shipping of our exports that raises freight costs. As a country well distant from our export markets this is strange.
Part X of the Competition and Consumer Act 2010 (CCA) provides a partial exemption from the CCA for shipping “conferences”. In effect it can allow price fixing and capacity allocation which, without this exemption, would be per se illegal as cartel conduct.
Such provisions were once common around the world but the tide has turned; with many countries, including the European Union and, of late, New Zealand, removing them.
A better approach for Australia would be to remove Part X and allow such conference arrangements to seek authorisation under the CCA on the basis of net benefits. Lower freight costs to and from Australia would, as a matter of logic, result from such a move.
A second issue involves coastal shipping. Current arrangements seek to protect local providers against foreign ships, particularly those from overseas that would call at a number of Australian ports anyway.
We need to ask whether the existing protections, involving the need for permits and licenses to carry domestic goods between Australian cities and the requirement to pay their crew Australian wages, are worth the cost.
This is an even more pressing question when it does not seem economic for Australian shipping even with the current protections in place.
As I said earlier, in the electricity sector we have seen that poor regulation rules have cost us dearly. Consumers are now paying too much for electricity, our competitiveness has suffered, and reforms such as deregulating retail electricity prices have been made much more difficult.
The National Electricity Rules that limited the Australian Energy Regulators (AER’s) ability to reject excessive expenditure were developed in 2006. Then there was a perception that we needed to guard against inadequate investment to “keep the lights on”. As a result the rules promoted investment per se, rather than efficient investment.
The result was unprecedented network investment of $42 billion from 2006 to 2011, some of which was unnecessary.
The AER submitted a Rule Change proposal to the Australian Energy Market Commission (AEMC) to address the problem. The new rules provide a more balanced framework that sees more focus on efficient investment, and a better balance between a reliable supply and cost.
There are a range of other reforms that would ensure a more cost effective electricity supply that are either underway or much discussed. I will mention four of them.
First, there is tremendous scope for benchmarking, which is a way of determining how well a network company is performing against its peers. The Rule changes just mentioned now give the AER the wider discretion it needs to form views on the total forecast expenditure.
Over time, the AER will be able to settle forecast expenditure taking account of whether a network business is materially inefficient compared to its peers.
Second, there are compelling grounds for privatisation of all electricity network businesses in the National Electricity Market. It is important to get the governance arrangements right to align the objectives of the network businesses with those of the incentive based regulatory regime. As any introductory textbook in economics will explain, profit-maximising incentives act as an impetus for cost reductions and quality improvements. Network businesses that have conflicting objectives will not be as responsive to incentive regulation.
Victoria is a good example of the potential gains from privatisation. The efficiency of the Victorian network businesses has improved significantly over the last ten years since they were privatised.
A third desired reform is to improve the way network reliability standards are set.
The higher the standard, the more redundancy and maintenance is required on the network, and the higher the costs. Consumers should only pay for network reliability standards that they value by being prepared to pay for them.
Past approaches to setting standards, particularly under previous governments in both NSW and Queensland in particular, have not reflected this.
The AEMC is undertaking a review of the national frameworks for network reliability with the objective of improving consumer engagement and setting standards that are based on the value that consumers place on reliability.
The fourth reform I will mention is the need to deal more effectively with peak demand. Ultimately we must build both electricity generation and networks to meet this peak. Measures to smooth the peak in demand can avoid a considerable level of investment.
The AEMC’s 2012 Power of Choice Review considered pricing, demand side management and metering issues.
Ultimately consumers need to be able to respond to price signals to shift their demand to reduce pressure at peak times. A closely related issue is the role of network businesses, and their current lack of incentives to address this issue or drive innovation in demand side management.
The most significant feature of the communications sector at present is the NBN. There is bi-partisan support for the need to upgrade Australia’s communications infrastructure to deliver high speed broadband services, albeit with important differences.
The key issue for the ACCC is settling the Special Access Undertaking (SAU) that will regulate the NBN. The ACCC will soon issue its Notice to Vary to NBN which will describe in detail the changes we see that are needed to their SAU.
The SAU needs to provide for, among other things, price caps on all products so that the NBN cannot build safe in the knowledge that it will earn a commercial return on whatever it invests; service standards need to be negotiated between NBN and access seekers, but with recourse to the ACCC if agreement cannot be reached; and we need to allow for regular price rebalancing if the usage charges (the CVC charges) in particular became inappropriate over time.
Settling the SAU will provide access seekers the certainty they seek, even if the new Government’s policies require consequential changes at a later stage.
There are both rural and urban water issues. Australia’s rural water trading system in the Murray Darling Basin (MDB) is world leading, but it is only part complete. While water markets have been limited by barriers to trade imposed by irrigation infrastructure operators and state governments, these have been or are being addressed in the MDB at least.
There is still considerable scope to develop rural water markets in Australia. I will give four examples.
First, we can do more to separate the rights to water from the water delivery rights. The current bundling of those rights can see water infrastructure being paid for that is not required.
Second, we can do more to separate the right to water and the right to store water, including between seasons. Currently the ability to carryover water from one season to the next is tied to the volume of water an irrigator holds and further limited by the need for a “one size fits all” approach to carryover across the system. Separating the right to storage and enabling its trade would enable irrigators to adjust their holdings to better match their reliability preferences.
Third, currently water trading is not generally permitted between areas with only moderate or intermittent connectivity. Opportunities for trade could be expanded significantly through the development by governments of water “shepherding” arrangements. In effect such arrangements would protect water as it travelled through unregulated systems.
Fourth, the water rules applying in the MDB could be extended beyond the MDB so that other areas can benefit from more effective water trading.
There are also important challenges in relation to urban water.
First, regulators could seek to benchmark the various water authorities so that, like in electricity, they can be compared against their peers in determining efficient costs. This is done very effectively in the UK to the benefit of water consumers.
Second, there remains the highly contentious issue of considering the barriers to rural – urban water trade. This could provide lower cost bulk water alternatives, especially in drought.
In general, the creation of bulk water supply markets has the potential to meet growing demand more cost effectively in the future.
Investigating such options now, rather than when facing the next drought, could help us avoid much more costly solutions.
It is an exciting time for those of us interested in infrastructure in Australia. A look at the agenda for this Symposium illustrates this.
My purpose today has been to discuss the role that appropriate infrastructure regulation can play in our wider productivity debate.
My examples have been selective. I have not, for example, even discussed issues such as the need for effective landside access to our ports, or the need to ensure effective regulated access undertakings to Australia’s wheat ports.
There is an important array of productivity enhancing infrastructure issues ahead of us all.
Thank you for your time today.