A funding alternative for monopoly infrastructure replacement

It is difficult for alternative technologies to replace existing technologies in “natural” infrastructure monopolies. We see the problems associated with building alternative sources of energy, alternative ways of increasing the supply of water through recycling and alternative ways of providing transport.

Telstra

A good example is the use of copper wires to bring communications to the home. It is demonstrably better to provide fibre to the home in new developments yet it is not done. The reasons are many and include fitting in with the existing infrastructure. However, the main reason is that the capital, which could be used to fund better alternatives, is made available to Telstra which has a vested interest in keeping existing copper wires as the dominant form of communications, mainly because it has so much copper in the ground.

Telstra, because of legislation, is required to supply communications to every home. If a developer puts ducting in a suburb then it is almost always made available to Telstra to run. If it is not given to Telstra, but to someone else, then Telstra will put in an alternative ducting distribution network anyway rather than use the other ducting. This then makes both sets of ducting uneconomic. We saw the result of this when Optus and Telstra ran cable down the same street. Consequently the ducting a developer is required to include to comply with planning regulations is almost always given for no cost to Telstra. This puts potential competitors to Telstra copper wires at a significant disadvantage.

Of greater significance are the funds raised through a component in the price of existing services, which are for the replacement of existing technology. Telstra receives money to not only cover depreciation (which is essentially to recover capital) but an extra component that is intended to be used for replacement. The size of this component is always debated when monopoly suppliers go to regulators to obtain price increases. The difficulty is not with including replacement capital in the price but with giving these funds at no cost to the monopoly supplier. It makes it difficult for alternative solutions to gain a foothold.

What is needed is some way to provide capital to other competitors on the same terms as the monopoly supplier.

Water and sewerage

The same system operates with water and sewerage. When a developer builds a house, drainage and sewerage connections to fit in with the existing system have to be included. The part of the drainage and sewerage network built by the owner becomes part of the total system and so adds value to the total system. This is given to the existing monopoly supplier. If a developer wants to put in an alternative method of disposing of sewerage or drainwater through some form of local recycling, they have to put in the connections to the existing system as well as building the alternative.

Water authorities all include a large component for replacement and for extending the supply of water in their price of water. A major part of the exercise in setting the price of water is the argument over how much this should be. With water it is always much more than is spent on water supply and it is often returned to the government as a “dividend”, most of which is not spent on water supply or recycling.

With water we need a method of getting some of this capital into the hands of organisations and businesses that will spend it on ways of recycling and on saving water. We need to bring competition into the supply of capital to alternatives.

The next section gives one way of achieving this for water. The final section gives the principles that are used and suggests that we could use the approach in any situation where price competition does not work or is not allowed to work.

Water rewards

Water rewards can provide governments with a politically acceptable pricing approach to reduce consumption, remove the need for water restrictions and provide capital for water conservation and reuse.

Water rewards are vouchers that can only be used to pay for water supply or water reuse projects.

A reasonable allocation of water is determined for every water meter. This allocation is based on long-term sustainability. That is, if everyone used their allocation of water and only their allocation of water, then there would be no need for water restrictions.