In a keynote address to the 2013 ACCC/AER Regulatory Conference, ACCC Chairman Rod Sims discusses congestion pricing, consumer involvement and the ACCC's regulatory agenda.
Welcome to the 2013 ACCC/AER Regulatory conference, our key event of the year. Delegates, and the staff and commissioners of ACCC/AER, are all here to catch-up with new ideas about economic regulation.
The themes of this year’s conference – customer involvement and pricing (specifically congestion pricing) have considerable current resonance within the ACCC/AER. I would like to explain our particular interest in these issues, and then give a high level overview about what is before the Commission and the ACCC and AER at the moment.
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.
This, yet another, famous quote from Adam Smith’s Wealth of Nations (1776) encapsulates his concern with the Mercantilist thinking in the late eighteenth century that gave great scope for producers to ignore and collude against consumers. Post Smith this insight is an important underpinning in competitive market economies. However, it appears that this insight might not have been fully understood by regulators. There is now increased realisation of the importance of involving customers in economic regulation.
Customer involvement is needed because, without this input, how can the regulated firms (most importantly), or indeed the regulator, understand the trade-offs that must be made in terms of price and reliability, and price and quality? When these preferences cannot be worked through markets we need other methods of obtaining input from consumers.
This suggests that not only do we need inputs from consumers about their preferences but that consumers must be closely engaged in regulatory processes.
What should be the nature of this engagement? Of course, we and most Australian regulators are committed to transparency, and for our regulatory decisions there are well-ordered processes that allow for submissions to issues papers and draft decisions as well as forums for broader consultation. But this is a relatively passive role requiring a response to what is already there.
In addition, it is not as though there is a homogenous group called consumers. We might expect that large business users for energy, for example, would have a different set of preferences and trade-offs than householders or low income earners. How do we capture and take into account this diversity? How do we – and this is a challenge that has been raised by George Yarrow, a regular speaker at this conference – capture the interests of future consumers? Given the focus of our legislative framework on the long-term interests of end users, this is particularly important.
We are certainly thinking about these challenges and, of course, looking to see what is working elsewhere. Exploration of different models will occur over the next couple of days at the conference. The ACCC’s own long term research project that looks at processes and practices across 17 different countries points to the importance of the different regulatory architecture of individual countries, suggesting that customer involvement cannot be just bolted on to what already occurs but needs to be integrated into the overall design.
How customer involvement can be better integrated into energy market regulation has been the subject of considerable thought and recent activity.
For example, the AER established a purpose specific Consumer Reference Group to facilitate consumer input to the AER’s Better Regulation Program - specifically into the guideline development process.
Most important, there will be a Consumer Engagement Guideline developed under the Better Regulation Program. The guideline sets out the AER’s expectations for consumer engagement by network businesses involving developing consumer engagement strategies and business processes that incorporate meaningful consumer engagement.
On 1 July 2013 the AER announced its inaugural Consumer Challenge Panel (CCP). This was a key component of the COAG’s energy reform agenda.
For each regulatory determination, the AER will draw together a number of the Panel members (from the total pool of thirteen members) to provide advice on that particular determination. This will allow the AER to take into account CCP members’ expertise and availability. Panel members will sit within the AER and, in each determination, will provide advice on whether network businesses’ spending and regulatory proposals are justified in terms of the services to be delivered to customers and whether the proposals are in the long term interests of consumers.
Of critical importance, CCP members will also advise the AER on how energy network businesses have been engaging with their own customers in developing their proposals, so that these reflect the service levels customers are willing to pay for. Members of the CCP may also be requested to provide advice to other bodies.
Finally, as part of COAG’s energy market reform package, the Standing Council on Energy & Resources (SCER) was asked to consider the establishment of a national energy consumer advocacy body. One of the primary aims of the panel is to unify national energy consumer advocacy activities into one peak body. An expert report advising on an effective model for a national energy consumer advocacy body was released by SCER in May this year.
The report suggests that the national energy consumer advocacy body should seek to represent the interests of all energy users, but place particular emphasis on the interests of residential and small business consumers. The report suggests that the advocacy body’s scope of activities should focus on the frameworks for, and operation and performance of, the national energy markets. The report suggests that the Consumer Advocacy Panel be absorbed into the new advocacy body.
These are very major initiatives. Will they be successful? How will they work with the regulatory structures that we have in place? Only time will tell.
Increased consumer consultation is an issue that all our regulatory areas are considering. The frameworks that will be adopted, of course, will not be the same for all industry areas.
Most infrastructure involves networks that are, variously, subject to peak use at some times, and little use at other times. Spreading out that use will have obvious efficiency benefits for society. It has been long argued, for example, that customers should pay different tariffs for electricity at different times. In principle, tariffs set in this way should allow for more efficient network and generation utilisation, thus delaying the need for capacity expansion.
More recently congestion pricing has also been discussed in the context of communications.
Australians are consuming more audiovisual content (films, TV, video an online gaming) than ever before, and providers are diversifying the ways in which they deliver the content depending on the type, scale and reach of the services they are providing.
In particular there is much more content being delivered by Internet Protocol (IP). For example, Foxtel is moving to IP with Foxtel Play and Foxtel Go; the ABC’s iView allows catch up free-to-air TV; and TV manufacturers such as Samsung and Sony are providing internet enabled TVs.
Content delivery methods are increasingly creating opportunities for new market participants and prompting content providers, both traditional broadcasters and the established online players, to develop and diversify their existing services.
These developments have the potential to stimulate pro-competitive outcomes and increase consumer choice and quality of experience.
This additional content, however, requires capacity, and if this is not met by additional investment, network congestion will result.
Network operators are, therefore, increasingly adopting traffic management practices to manage the use of capacity on their networks. For some, this includes giving priority to time critical data such as voice services, and lower priority to content generated by peer-to-peer programs.
The same technical capability that allows network operators to prioritise different categories of traffic, however, could potentially be used to disadvantage competing third party services, such as over-the-top (OTT) voice and messaging services, as has been observed overseas in Korea and the Netherlands.
Telstra has called for an industry debate around the potential for network operators to manage traffic by modifying their pricing practices, suggesting that charging consumers could be based on the quality and time of service they wish to receive rather than a download cap or data rate.
Finally, I have long argued that there are strong arguments for road congestion pricing. We can either use price or traffic queues to rationalise demand.
Looking to theory, the advantages of congestion pricing for infrastructure services are clear and even uncontentious. Why then is there such gap between theory and practice?
One explanation is consumer caution. The challenge for us is to understand this caution and see what types of safeguards might need to be put in place. I specifically note some of the questions raised in the Friday Communications session:
• Is there a role for consumers in determining how congestion is managed?
• What is the regulator’s role, and does its role differ when the network operator is wholesale only or vertically integrated?
We recognise that congestion pricing is a challenge that regulators have to confront. Given the questions posed across the conference program on this issue I hope that we will be able to make progress in our thinking on this challenge.
THE CURRENT AGENDA FOR THE ACCC
The ACCC is a multi-sector regulator and in practical terms this means an important role in water, a very broad role in communications, some in-depth work on wheat ports, a continuous but focussed stream of activity on rail, a constant focus on fuel monitoring, a weather eye on airports, and an openness to whatever else might come-up through the National Access Regime (and for this year this has included submissions to the Productivity Commission as part of their review of Part IIIA of the Competition and Consumer Act).
The breadth of our regulatory task means that we have to work hard to maintain industry specific expertise. But there are economic principles common to regulation, and using the experience of regulation in one sector and applying and adapting it to another sector is an advantage that was anticipated in the Hilmer report, and which is being realised in the day-to-day regulatory work of the ACCC.
For the rest of 2013 these are some of the main regulatory tasks that we have to work through:
- Regulating the NBN. The NBN will be a wholesale only network, so regulation is less complicated than the previous experience with the vertically integrated Telstra. But it will still be a monopoly, with the usual incentives of all monopolies to raise price or offer inadequate service quality. Also, as the NBN will be a new build, the standard approaches to regulation are not readily applicable. So we have been grappling with the details of how to balance, on the one hand, the interests of consumers in reasonably priced services, and on the other, NBN Co’s legitimate interests in recovering its costs. All the while, of course, aiming to maintain incentives for NBN Co to undertake its major construction task in the most efficient way possible within its policy mandate. These are the types of issues that the Commission has been working through with NBN Co so it can further refine and respond to proposed amendments to their Special Access Undertaking (SAU).
- Fixed Services Review will involve the review of access regulation for fixed line telecommunication services. It includes a declaration inquiry (which services should be declared?) as well as an inquiry regarding the appropriate price and non-price terms and conditions to be included in final access determinations. There have been significant changes in the telecommunications industry, including those relating to the NBN, since the last review in 2009. The review will consider what these changes are likely to mean for the future of competition, and the role of fixed line service regulation. Also, a separate but related inquiry reviewing regulation of transmission services is to occur, and we are reviewing our (albeit more limited) role in regulating mobile markets. The breadth of this work program provides an ideal opportunity to consider the evolving nature of competition and the appropriateness of our broad regulatory settings.
- NSW State Water Corporation pricing determination. The price review relates to water charges for the 2014 – 2017 period for eight valleys and one water supply scheme serviced by State Water within the Murray Darling Basin (MDB). State Water’s bulk water supply charges in the MDB were previously regulated by the NSW Independent Pricing and Regulatory Tribunal (IPART) and this is the first water price review undertaken by the ACCC. State Water is proposing to change its tariff structure and price control mechanism with the proposed aim of reducing the risk of revenue volatility whilst minimising price shocks on customers where possible. The ACCC will test the proposed tariff structure under the Water Charge (Infrastructure) Rules and having regard to the water charging principles and objectives in the Water Act 2007, and we will also closely test the proposals with customers.
- Development of a mandatory code for Wheat ports. After Australia’s wheat export markets were liberalised in 2008, Australian policy makers decided that vertically–integrated wheat port operators should be required to provide access to competing exporters. Access undertakings to the ACCC were considered to be the best mechanism to use to achieve this goal, and they have worked well. The Commonwealth Government decided, however, that regulation in this area should undergo significant change. From October 2014, access to port terminal services for bulk wheat export is expected to be governed by a mandatory code of conduct, to be enforced by the ACCC. The ACCC is currently involved in the development of this code of conduct, with Department of Agriculture, Fisheries and Forestry and Treasury, using input from the industry representatives from port operators, exporters and producer groups on the Code Development Advisory Committee. The current debate over the acquisition of Graincorp by Archer Daniel Midland illustrates the importance of an effective code.
- Rail access undertakings. The ACCC assesses proposed third party access undertakings, monitors compliance with accepted undertakings and may arbitrate access disputes in relation to rail infrastructure. Currently this involves assessing Australian Rail Track Corporation’s (ARTC’s) compliance with access undertakings for the Hunter Valley rail network in NSW and for the national interstate rail network. The ACCC is currently assessing a variation to incorporate track used by coal producers in the Gunnedah Basin into the Hunter Valley access undertaking. The ACCC is also involved in discussions regarding access to proposed new rail infrastructure projects in places such as the Pilbara region of Western Australia.
It is time now for the conference to commence. I would like to thank all the speakers. For those coming from abroad, thank you for enduring the long journey to Australia. We are extremely grateful that you are able to be part of the 2013 ACCC/AER Regulatory Conference.