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Infrastructure - Rein in the regulators

By Alan Moran - posted Tuesday, 10 May 2005


We can’t seem to get it right on infrastructure, the ports, pipelines, roads, rail and telecom lines, over which all of us  travel and transact each day. Yet, while there are many voices calling for vigorous action to resolve a crisis in the provision of new infrastructure, the lack of data on existing levels of infrastructure or recent additions is cause for some caution.

What we do want to avoid is the pork barrelling and politically motivated decisions on the construction of new facilities that has characterised much of our history. National Competition Policy offered us a way forward. It sought first to have infrastructure provided without conferring monopoly rights. Where monopoly is inevitable it established apolitical referees, under the umbrella of the Australian Competition and Consumer Commission (ACCC), to set the prices and access conditions.

Unfortunately these competition referees tend to want to price access too low, which causes all the delays in new provision that we are seeing in cases like Dalrymple Bay and the augmentation of the Dampier to Bunbury gas pipeline. These are inevitable outcomes of a bureaucratic price setting process. Regulatory bodies like the ACCC and its sister organisation, the National Competition Council (NCC), created to combat the waste of politically determined infrastructure decisions, have developed their own agendas and vested interests.

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The best approach to efficient pricing and investment is to have no referees setting prices. Once meaningful competition is in place, it is generally agreed that regulation should be removed to allow commercial rivalry to set the supply prices and conditions. Determining the nature of meaningful competition has been a contentious issue. In the gas supply industry however we are seeing some remarkable revision of what was once thought of as an inevitable “natural” monopoly.

Although cited by the Hilmer Report as epitomising natural monopoly, in less than a decade, during which statutory protection from competition was removed from gas transmission pipelines, most of the important ones are now in rivalrous supply situations. There are now two sets of pipelines serving Sydney and Adelaide, and Brisbane is also likely to see competitive provision once a go-ahead is received for the PNG pipeline.

Regrettably, however the regulatory agencies have been keen to cling on to their powers. They have refused to recognise when competition is with us. Happily, their perspectives have been over-ruled or challenged by reviews of their decisions and a policy framework for regulation of these facilities set out by the Productivity Commission’s (PC) Review of the Gas Access Regime. The key outcomes of the reviews of the regulators’ decisions is that regulatory controls are no longer appropriate when there are two pipelines of comparable capacity serving the same market.

Applying these principles, the Commonwealth Minister and the Australian Competition Tribunal have largely eliminated regulatory coverage of the two pipelines serving Sydney. The latest tussle is over supply to Adelaide. There are now two main pipelines linking the city with Moomba and Bass Strait. The latter pipeline is new, fully contracted and not subject to regulatory coverage. Notwithstanding the precedence set by review bodies regarding supply to Sydney and the analysis of the PC, the NCC is opposing removal of regulatory coverage over the Moomba to Adelaide pipeline.

The NCC wants coverage so that it can set lower prices than it considers are likely to emerge through the competition that now prevails. Such regulatory aspirations are born from a mesmerising wish to see prices fall to marginal costs. They never do so, except in highly distressed market conditions or as a part of a marketing strategy. If they did newspapers would be free, Foxtel would be $5, airline seats between Sydney and Melbourne would be $50 return and motor cars would be half their present price. After all in most of these cases there is surplus capacity and there are high fixed costs.

If markets followed some naive theoretical economics approach and firms adopted marginal costing as soon as a surplus supply was in evidence, nobody would invest in the first place. The danger is that regulators will be dazzled by the prospect of free gains to consumers and will require prices and access that undermine the on-going viability of a supply by strangling its incentive to invest anew.

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Market imperfection is the norm in Australia. The airline duopoly - of first Qantas-Ansett then Qantas-Virgin - has delivered vast price and efficiency gains once the parties were freed to compete openly and obligated not to collude. Other markets with monopolistic features like telecoms, steel and cement also work efficiently.

In overturning the NCC’s attempts to maintain control over a pipeline from Bass Strait to Sydney, the appeal body, the Australian Competition Tribunal, carefully examined and rejected the NCC’s contentions that it should be regulated because it and the existing Moomba pipelines may otherwise collude in increasing price and because in any event, competition required parallel pipelines. It found that reasoning deficient in the light of the new competition from Bass Strait gas. It accepted, as is commonplace, that rivalrous markets were better determinants of price and market supplies than regulatory decisions that try to shadow a genuine market. It also recognised a disincentive to entrepreneurship if pipelines were to be regulated and their prices kept down to a level that is not commensurate with their costs and risks.

The Minister adopted a similar set of reasonings in overturning the ACCC’s aspirations to maintain regulatory coverage over the long established Moomba to Sydney pipeline.

It is time for the key regulatory bodies in Australia to accept the well reasoned decisions as to the best means of ensuring efficiency and pare their regulatory ambitions.

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About the Author

Alan Moran is the principle of Regulatory Economics.

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