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.

Water rewards are given to those who consume less than their allocation. The money associated with these rewards comes from higher prices of water for those who consume more than their allocation and it comes from the money in the price currently allocated to the water authority for replacement and extension of the water system. Water rewards vouchers are transferable and can be sold.

The system reduces water consumption through price signals to high users of water, by transferable rewards to low consumers to reduce their consumption even more and by giving consumers the funds to choose the most capital efficient water-saving approach available in the market.

The system is revenue neutral and fits on top of existing pricing and allocation systems, with no change to existing regulations, billing and metering systems. Water reduction is established by adjusting the amount of money transferred through increasing the price for excess consumption and by adjusting the “reasonable consumption” level. In drought the reasonable consumption level is low.

Any water saving scheme can qualify under the scheme. The particular ones selected by individuals are determined by the market. Low consumers of water can “cash” their vouchers with companies or systems that can use the capital - such as desalination plants or pumping schemes from other sources or purchasing water from other downstream users. Community-based recycling systems could be financed from these systems with the ongoing costs and profits coming from the sale of water from the recycling efforts.

The system and approach can be introduced incrementally within a few areas. There can be many organisations that compete for the right to run water rewards systems and there can be many water reward systems in operation.

The principles

The following principles are used in the water rewards example and the same principles can be applied for any situation where, for one reason or other, price competition is not appropriate or does not operate.

The principles are:

1. Set up competitive structures where there is competition for the capital that is used to provide the service or resource;
2. Give the decision on allocating this capital to the consumers of the service or resource. That is the capital is given to consumers not to the monopoly suppliers;
3. Make the allocation of the capital to the consumers on the basis of some desirable behavioural change, such as conservation of the resource; and
4. The system sets up competition for capital to provide services rather than competition on price of the provision of services.

Using these principles, we set up positive feedback systems where the outcomes are ones that go beyond the simple creation of profits.

It is not too hard to see how systems could be created that will bring competition to areas such as water, energy, transport and communications.

However, the principles can also be used in other not so obvious areas, such as bank interchange fees, education, health, welfare, drug consumption and gambling. The idea is to bring competition to situations where price competition does not work or is not allowed to work for a variety of legitimate social reasons.

If such systems are introduced, the losers are those who now control monopolies or who take commercial advantage of regulations and restrictive legislation. By allowing such systems to operate we remove the need for many regulations and we break the heavy hand of monopolies on innovation.

The winner is the community because competition allows innovation to flourish and gives capital to a wide section of the community and is a socially equitable way of distributing wealth throughout the community.