Competition policy dilemmas: time for a new direction

As fruitful as it has been, National Competition Policy has hit the policy wall when it comes to network businesses. It can no longer cope with the fact competition, while a great remedy for entrenched poor performance, can not transition infrastructure from better to truly efficient.

Sorting telecommunication, rail access and the perennial difficulties with electricity, requires some real policy bravery - not more lame efforts like government appointments to the Telstra board.

In the 1990s, I worked with an American consultant on the possible vertical separation of Queensland’s coal railway. He couldn’t fathom why one would split track from trains and mandate open access. No one in the US would dare risk the hand-in-glove relationship between infrastructure and operations, even if it did facilitate competition.

What was the Government’s objective - competition or an efficient service? Ten years on, and it’s clear they aren’t necessarily the same thing.

Structural reform and open access to natural monopoly infrastructure has driven out inefficiencies typical of closed shops. What happens, however, when the competitive threat has done its job? Do regulators back off? Does legislation refocus on the higher goal of efficiency? Do politicians start putting the value of competition into perspective?

By and large, no. There are some exceptions, like the Prime Minister’s infrastructure review recommendations last year (note, though, the attempt to quarantine criticism of competition by inferring the problems were unique to “export” infrastructure) and Costello’s sotto voce on Fortescue’s request to access the Pilbara rail system. 

Regardless, such radical standpoints are difficult to sustain while basking in the original gains of competition policy and with the institutional framework still favouring competition. It’s sacrilegious to even contemplate abandoning a hitherto fabulous model, despite NCP being sold to the community as only a means to an efficiency end.

The value of vertical integration is its ability to marry the intimate network-operations relationship within the one company. It gives a single CEO the opportunity to assimilate and judge objective commercial advice on key operational and investment trade-offs.

For example, should the rail track be upgraded for a speedier service or the train set improved? Which train has priority? And what pricing structure maximises total revenue across the network as a whole?

The desire to minimise interface conflict between network and operations is the source of frustration with Telstra. After two decades of industry reform, federal cabinet concluded an internal relationship offered the best prospects of efficient infrastructure management. Unfortunately, this viewpoint is at odds with existing competition legislation and its push for multiple telecommunications providers. 

Unless Telstra is still inefficient, it makes no sense to encourage third parties onto a network, having just accepted the integration model as superior. It’s one or the other.

In electricity, this dilemma has been addressed by vertically separating transmission from generation, though this comes at a price.

Our electricity industry will never be truly efficient with an artificial interface imposed between network and those that rely upon it. Rather than a single point of resolution for vital trade-offs, optimising decisions in electricity involves a gaggle of disparate interests, herded together by a regulator who can never be as well informed as the industry it’s expected to control.

The policy framework attempts to deal with this limitation by establishing public interest criteria. The regulator puts in place pricing and investment arrangements designed to make transparent the relative value of different options from a community-wide perspective. If a new transmission link is more efficient than additional generation capacity, then it should be readily apparent.

It’s not this simple, of course. Complex assessments require expert judgment. At this point, the regulator attempts to become a proxy CEO for a virtual, vertically-integrated industry, but without the corporate support of those in the know and without the same commercial exposures. One suspects this is what fires up Sol Trujillo and his amigos.

For various reasons, the Queensland coal system still has only one vertically-integrated rail operator. There is no head-to-head competition or separate corporate interfaces between track and train operations, as in the Hunter Valley coalfields.

The pressing issue now is will stakeholders in Queensland continue to put their faith in NCP to deliver the much-anticipated next tranche of improvement in the export coal supply chain, or will they break out of the existing policy paradigm?

Such vision is needed if Australia’s infrastructure industries are to capitalise on the success of NCP and move onto a sustainable efficiency-based model.