Competition issues in infrastructure and changes since COVID-19

Speakers: 
Mr Rod Sims, Chair
Conference: 
Australian Financial Review National Infrastructure Summit: Infrastructure beyond the crisis
15 October 2020

ACCC Chair Rod Sims addressed the Australian Financial Review’s National Summit on competition issues in infrastructure since COVID-19. Mr Sims spoke about the importance of efficient infrastructure to keep the economy strong beyond the current pandemic and touched on a range of issues including the competitiveness of the NBN, energy affordability to the disruption and the airline industry.

Transcript: 

Check against delivery.

This terrible COVID-19 pandemic has caused significant personal hardship for many people, along with widespread economic disruption that has led to dramatic, and some permanent, changes to the way many of us go about our daily lives and work.

Now, I think, is a good time to consider infrastructure, and what role it should play in the recovery of our economy.

Let me indulge in some extremely high level history.

Prior to the early 1990s our infrastructure faced numerous efficiency and pricing challenges. It was, in many ways, a drag on our economy.

With the Hilmer Competition Policy and other reforms of the early-to-mid 1990s our infrastructure greatly improved its efficiency and pricing. It provided a boost to our economy.

Since then, however, I believe our infrastructure has again, in many ways, become a drag on our economy. We seem often so focussed on assisting the owners of the infrastructure, that we lose sight of the damaging effect on the users. For example:

  • privatising infrastructure to maximise the proceeds of the sale, rather than the efficient use of the asset or the benefits to consumers
  • inadequate or no regulation of monopoly infrastructure, such as ports, and
  • extremely slow progress on road reform and a focus on toll roads.

I would add to this some concerning mergers that have seen:

  • a highly concentrated electricity generation sector, culminating with AGLs purchase of Macquarie generation
  • high barriers to entry and limited competition in rail freight across the eastern states due to Aurizon’s withdrawal and its associated proposed sale of the Acacia Ridge terminal to Pacific National, and
  • likely a three player mobile market cemented with the merger of Vodaphone and TPG.

The ACCC tried unsuccessfully to prevent these outcomes, noting that we are seeking special leave to appeal to the High Court in respect of the Pacific National Acacia Ridge terminal case.

As we consider infrastructure, and spending money on it, we need to ask whether we are too focussed on the owners at the expense of the users of the infrastructure.

If our economy is to remain strong it needs to be underpinned by efficient infrastructure.

There are many topics I could discuss today, but I think the following are the most immediately relevant to our COVID recovery strategy.

  1. The NBN
  2. Energy Affordability
  3. Disruption of the airline industry

The NBN

The final roll out of the NBN could not have been more timely.

Almost overnight so many of us moved from physical to virtual workplaces. Whole families were caught at home dependent on the NBN for their work, schooling and social gatherings.

Without the NBN largely built, just in time, our broadband would not have performed anywhere near as well as it has.

And it certainly has been tested. Our soon-to-be released Internet Activity Report will show, in the three months to 30 June 2020, there was a 38 per cent increase in the total volume of data downloaded across all fixed and mobile services compared to the same period last year.

And while there was a marked increase in data downloaded through mobile and fixed line services during this period, retail NBN services contributed 76 per cent of the total volume of data downloaded, up from 58 per cent in the June 2019 reporting period.

The most recent Measuring Broadband Australia data shows that average NBN speeds did not miss a beat when so many of us were working or learning remotely during the day. These speeds remained high in the yet-busier evenings as many people turned to the NBN for social engagement and entertainment.

A lot of the credit for this should go to NBN Co for boosting the network capacity that it made available to retailers without additional charge, and to retailers for increasing their plan inclusions. Indeed, before this move, the daily average speed during busy hours on the 100mps speed tier during March 2020 had dropped by 23 per cent from its February level.

This is not to say it was all plain sailing. There were pockets where the network was not quite as capable and, so irritatingly for many, some consumers were unable to get through to their retail provider to seek the help on offer, particularly as call centres and back office functions based overseas were forced to close.

Australian companies may have to rethink their call centre arrangements. Poor responses from calls centres send strong messages to customers about how little they are valued by the retailer.

Recently the ACCC started a public inquiry into wholesale service standards at a time when consumer complaints about their NBN connections had risen dramatically.

Similarly, we commenced a further inquiry into NBN wholesale pricing in response to many retailers withdrawing their less expensive plans, heightening affordability concerns.

It is important to note that the ACCC regulates the NBN within a given legal framework and principles.

We do have powers to impose access determinations in relation to certain matters but they must meet particular tests and they rank below agreements entered into between NBN and retailers, so their effect can be delayed and in certain ways reduced.

Many, including sometimes the AFR, call on the ACCC to regulate the NBN in ways that do not recognise this framework and the principles that underline it.

If or when the NBN is privatised we will need to rethink NBN’s regulatory framework.

We have identified particular initiatives that we believe will facilitate more competitive and efficient broadband markets. For example:

  • A rebate framework that will provide stronger incentives for NBN Co to meet its connection, fault repair and technician appointment commitments, as well as a new commitment for underperforming services.
  • Fair and affordable prices for basic speed NBN services of 12 megabits per second, to allow more consumers to connect and anchor prices of higher speed plans at competitive levels.

We are closely watching the new wholesale broadband agreement between NBN and the retailers as it develops. At present we are confident the initiatives I have outlined, and many others, can be realised under that agreement.

To date NBN Co has only faced limited competition in new developments, or in those precincts where fibre to the basement networks can be economically feasible. The arrival of 5G networks will bring a new and very welcome source of competition with both mobile and fixed-location broadband connections.

This competition between fixed and wireless networks should certainly be encouraged. Rather than be guided by any sense of protecting the asset value of the NBN we need to promote efficient investment and product innovation, and require NBN Co to be responsive to its various customer’s needs.

This is why the NBN was built.

Electricity

The electricity industry is characterised by high levels of concentration across the supply chain. Australia’s electricity prices are high and affordability continues to be a key concern for Australian households and businesses.

It is imperative we do not let the effects of the COVID-19 pandemic result in a further concentration in the market and that the substantial reductions we are seeing in wholesale market prices are passed on to consumers.

We found as part of our inquiry into the National Electricity Market (NEM) that residential customers experienced a 45 per cent real increase in the effective c/kWh cost of electricity in the 11 years from 2007-08 to 2018-19. Business customers saw a real increase of 61 per cent in the effective c/kWh over the same period.

Australia went from having relatively low electricity costs by world standards to having relatively high costs. A key source of comparative advantage was lost.

But dramatic falls in wholesale electricity prices, largely due to lower fuel costs for generators and increased renewable generation, represent an opportunity to bring down the cost of electricity to more affordable rates for consumers and increase the competitiveness of Australian businesses.

Wholesale prices across the NEM have been in decline over the last 18 months and contracts for future periods indicate that prices will remain low for some time. This year’s average winter prices in the NEM ranged from $36 per MWh in Queensland to $59 per MWh in Victoria, with reductions of 38 per cent to 51 per cent compared to the same time last year. These are the lowest levels we have seen for a number of years. They represent great news for electricity users.

And due to new electricity market ‘big stick’ prohibitions, any retailers not passing on these wholesale price reductions will need to explain why consumers haven’t benefited from these cost reductions. The ACCC is actively monitoring compliance with these provisions.

While wholesale costs are important, and are the largest component of prices for C&I customers, network costs are the most significant component of residential and SME bills, at 43 per cent in 2018-19.

Past significant overinvestment in state-owned networks across New South Wales, Queensland and Tasmania were driven by an increase in network reliability standards and inadequate regulatory rules. The excess costs that resulted are estimated to be in the tens of billions of dollars and customers in those states continue to pay for over-investment in networks.

As efforts are focussed now on redesigning the transmission system to address reliability and sustainability concerns, we cannot lose sight of affordability. Building new transmission must factor in the increased costs that are then passed to consumers.

There are real concerns that again affordability is being given inadequate weight in our electricity market policy discussions.

Gas

The contraction in economic activity resulting from COVID-19 has been keenly felt in oil and gas markets.

A dramatic drop off in global demand saw Brent Crude oil prices fall to a record low of US$9/bbl on 21 April 2020. Similarly, LNG spot prices in Asia fell by around 66 per cent between January and April.

A sudden fall in international prices should, in a well-functioning market, be reflected in the prices offered in the domestic market. That is not, however, what has occurred.

The impact of record low oil and gas prices on the East Coast Gas Market has been most obvious in the domestic spot markets. Average prices in Queensland and southern states fell from more than $9/GJ in October to less than $4/GJ in April.

However, east coast gas users are being offered prices significantly above export parity prices for contracts. The prices offered over late 2019 to early 2020 were $8 – 11/GJ, down only slightly from the $9–11/GJ range we saw offered over the first eight months of 2019 (for 2020 supply).

Prices offered in the domestic market were quick to follow LNG netback prices when they went up in 2018, and C&I users have told us that some suppliers referenced LNG netback prices as a justification for the prices offered. It is convenient how those arguments seem to have changed now that LNG netback prices are so low.

Increasing competition and affordability in domestic gas markets is more critical now than ever to ensure that Australian gas customers benefit from low international prices.

We have made a series of recommendations that provide a roadmap to ensuring this is the case. These have included, for example, measures such as active tenement management to ensure producers bring gas to market in a timely manner.

We are pleased the Government intends to accept our recommendation to extend the Heads of Agreement with the LNG exporters, and to strengthen commitments around the pricing of offers to domestic gas users. We see some urgency in this.

Airlines

You would be hard pressed to find an industry that has been more impacted by the pandemic than airlines.

International travel essentially disappeared, and even domestic passenger numbers collapsed by 95 per cent.

This has led to major upheavals. We have witnessed:

  • the major airlines downsize and restructure their fleets and workforces
  • Virgin Australia enter into administration, and then be acquired by Bain Capital
  • the formal discontinuation of the Tigerair brand, and
  • the rollout of government support.

We expect the domestic airline industry has a longer and more challenging road to recovery than other industries, complicated by the risk of infection spikes and travel restrictions.

Not all of the news has been negative. There has been activity from the smaller players who have seen opportunity amongst the upheaval. For example, Rex announced its intention to enter the Golden Triangle of Sydney, Melbourne and Brisbane; and Alliance Airlines has purchased additional aircraft for new services including between Queensland and Canberra.

A competitive airline industry is vital to meet the needs of consumers and the economy more broadly, especially for a large country as geographically dispersed as Australia.

It was with this in mind that back in June, the Australian Government directed the ACCC to monitor prices, costs and profits in the domestic airline industry.

Our first report went out in September and briefly outlines the types of activities that could damage competition and which the ACCC will be looking out for. These include predatory pricing, capacity dumping, airlines entering into agreements with suppliers to prevent competitors from offering services, or altering schedules or infrastructure to prevent a competitor’s expansion or entry into market.

As the industry returns, if we identify any behaviour leading to diminishing levels of competition, we will be ready to act. This could involve taking enforcement action if there is an apparent breach of competition law, and/or working with government on possible policy options.

It is also worth noting the effects of the pandemic on airports. Keep in mind that there is no regulation of price or service from this monopoly infrastructure. It will be interesting to see how airports price their services and otherwise react as the aviation sector recovers.

Conclusion

The ACCC’s focus will continue to be on ensuring the infrastructure sector is competitive and delivered in a way that is in the long term interests of consumers.

There is so much to do to achieve this.

A key issue will be our approach as a country.

Are we too focussed on the needs of the infrastructure owners, at the expense of the users and so the economy?

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