Chapter 27 – Microeconomic Reform and Implementation of National Competition Policy
MICROECONOMIC REFORM AND IMPLEMENTATION OF nATIONAL COMPETITION POLICY
This chapter:
· provides an overview of the Microeconomic reforms undertaken by the ACT during the last 10 years and details the impact of these reforms on public sector provision of services;
· details the ACT’s position and recommended course of action which the Territory believes the Commission should take in relation to the assessment of microeconomic reform issues; and
· provides an outline of the issues presented in the Commission’s Discussion Paper and supports the Commission’s position that the issues be addressed on a case by case basis.
This chapter is being driven by the developments in relation to national competition which have had a significant impact upon many of the key service obligations of States. The ACT considers that microeconomic reform has been implemented and progressed to such an extent that State PTE’s in the ACT operate in an environment which reflects the competitive nature of the private sector as much as possible. The recent developments and key drivers with respect to microeconomic reform and their impacts upon states has also been explained in this chapter.
Importantly, implementation of the principles of microeconomic reform does impact on the Commission’s assessment framework. This chapter draws out these implications for the Commission to consider as part of the 2004 Review.
The phase of microeconomic reforms, which the Commission is examining in relation to the current assessment process, which essentially began in the early 1990’s, with the Council of Australian Governments (CoAG) Agreements on transport, electricity, water and gas. These were subsequently subsumed into the National Competition Policy (NCP) reforms with the signing of the National Competition Policy Agreements in April 1995.
One of the most difficult issues facing those who have been responsible for the administration and implementation of microeconomic reform has been the quantification of the costs and benefits of those reforms.
A number of factors have acted to make such assessments an inexact science, including:
· the ‘smearing’ of costs and benefits across the whole community (particularly benefits);
· that NCP Agreements in recognition of State sovereignty, allowed for differing implementation strategies for the policy;
· the significant reform tasks which have, and are still, taking considerable time to complete; and
· the physical resource and infrastructure barriers, impacting upon the speed and levels of reform in some industries.
Those microeconomic reforms which have most impact on the Commission’s assessments relate to the structural and regulatory reform of government business enterprises (GBEs), infrastructure and services because they have resulted in changed revenue sources, administrative and regulatory costs. This reform process is still under way and different approaches have been adopted in every State, making it difficult, in the ACT’s opinion, to compare the impacts of various measures between the States. Different policy decisions, for example, decisions to privatise rather than corporatise, have resulted in varying impacts on the revenue raising capacity and debt retirement capacity of each State. The Commission recognised this issue in its 1999 assessment methodology.
A number of separate reform ‘strands’ have impacted on GBEs, in particular, the utilities sector. These include:
· review and reform of all legislation and regulation with a view to eliminating anti-competitive aspects;
· structural reform of government monopolies;
· introduction of the principles of Competitive Neutrality for government business enterprises;
· development of the national access regime set out in Part IIIA of the Trade Practices Act to underpin the principles of Competitive Neutrality and allow competitive access to significant infrastructure facilities; and
· specific industry reform packages for the electricity, gas, water and transport industries.[1]
In the ACT, the legislative review process is almost complete. The initial structural reform of significant ACT government enterprises is also largely complete. This is, however, an ongoing process.
The introduction of competitive tendering, taxation equivalents and other mechanisms to ensure the competitive neutrality of ACT GBEs and units is also well integrated into the current administrative processes of business units. The introduction of a national Commonwealth income taxation equivalent scheme is under way, complemented by State taxation equivalent schemes.
Access regimes for significant infrastructure (gas and electricity distribution) have been set in place and are administered by the Territory’s Independent Competition and Regulatory Commission.
The most significant change has resulted from the formation of the wholesale National Electricity Market (NEM) and the establishment of contestable utility markets for gas and electricity and the formation in the ACT of a public/private partnership to supply utility services. The development and refinement of the NEM is still under way, as is the introduction of contestable utility markets. To date, only New South Wales and Victoria have introduced full retail contestability for electricity. More detail is provided on this issue, later in this chapter. A brief description of the NEM can be found at Input Costs.
Despite the Commission’s earlier belief that most reform would be complete by 1998, the process has proven far more complex and taken longer to achieve. At the CoAG Meeting of 3 November 2000, Heads of Government agreed to extend the deadline for completion of the legislative review and reform program under the Competition Principles Agreement until 30 June 2002. Water reforms are proceeding and a new assessment framework has recently been agreed (February 2002) by the States and the National Competition Council (NCC), for assessment of reforms up to 2005.
Attachment A provides a brief description of the microeconomic reforms which have, and are still, taking place in the ACT.
The main issues which formed the basis of the 1999 Review were:
· the impact of microeconomic reform on State Budgets;
· treatment of lump sums from the sale of government assets;
· assessment of State capacities to raise revenue from trading enterprises operating in reformed markets; and
· assessment of disabilities which may have changed because of the reforms, including those relating to community service obligations (CSOs) and outsourcing.
It was originally expected that the movement toward microeconic reforms would progress more than it actually has. Much of the early change related to privatisations and corporatisations of GBEs and the introduction of measures to ensure competitive neutrality of those GBEs and business units that were retained.
These reforms had impacts on State budgets, which related to the Commission’s treatment of:
· lump sums and stamp duty from privatisations; and
· changed capacities to raise revenue from trading enterprises operating in reformed markets.
The establishment of the National Electricity Market (NEM) is a significant element in the microeconomic reform of the electricity industry. The NEM embodies the generation and wholesale supply side of the electricity market. Full Retail Contestability (FRC) for gas and electricity is essentially about the retail supply side of the energy market. [2] The ACT is a member of the NEM, along with New South Wales, Victoria, Queensland, and South Australia. Tasmania will join once it is interconnected with Victoria via the undersea Basslink.
The impact of reforms associated with the NEM and retail contestability for gas and electricity is yet to be fully realised. The NEM is still in its infancy and being refined by the National Electricity Market Management Company and the member States. Various factors are at play here. There are some physical constraints to the interconnected system (being addressed) which are restraining the operation of the NEM market. Also the rules and administration processes underpinning the NEM are still being refined.
Further, the contestability of the market has led to:
· new entrants from the private sector;
· amalgamation of entities to gain market share; and
· convergence in the prices of electricity in each participating jurisdiction.
Progress towards FRC in each of the NEM jurisdictions has been varied and is being achieved through a series of tranches by which groups of customers, based on their level of electricity consumption, have been allowed to choose between competing electricity retailers. To date, only NSW and Victoria have introduced full retail contestability for electricity and gas.
While the retail supply of gas in the ACT has been fully contestable since 2001, electricity supply is only contestable above 100 Megawatt hours (MWh) per annum usage. The largest customers such as the Universities, using more than 20 Gigawatt hours (GWh) of electricity per annum have been free to choose their electricity retailer since December 1997. The next group of customers using between 4 GWh and 20 GWh per annum were given this choice in March 1998. This group included premises such as multi-story office blocks. By June 1998, ACT customers with consumption above 160MWh per annum were free to choose their electricity retailer.
The opening up of a further tranche of contestability (above 100 MWh) in the ACT in July 2001 meant that a further 450 customers now have retailer choice. The total number of customers who now enjoy their choice of retailer is around 1600. Just under half of all ACT electricity supply is contestable following these reforms. [3]
Queensland has announced that it will not proceed with the extension of FRC to small business and residential consumers. This is based on a report that found customers in rural and regional areas would be required to pay more for their power needs than they do currently. SA is not expected to move to full retail contestability until 2003.
A study of the costs and benefits of the introduction of contestability to the remaining tranche of customers in the ACT is currently being undertaken by the Independent Competition and Regulatory Commission. This study, which will be completed by mid 2002, will inform the ACT Government’s decisions in relation to the introduction of full retail contestability.
Overall, the ACT considers that until this and other microeconomic reform processes are complete, the Commission cannot readily assess relative disabilities and/or impacts. Further, many of the so-called disabilities that States might claim are due to differing State policies in relation to implementation.
The Commission has raised as an issue the treatment of excluded capital transactions of lump sum payments (including stamp duty) resulting from privatisations.
Although the number and frequency of corporate governance changes made to enable GBEs to both comply with the new Competitive Neutrality Principles and take advantage of changing markets has somewhat settled, this is an ongoing process which recognises the dynamic nature of business. Further, decisions to privatise or corporatise government businesses are made on policy grounds which differ from State to State.
As a result of the ACTEW and AGL joint venture (JV) which commenced in October 2000, AGL paid ACTEW an equalisation payment to the ACT Government in 2000-01.
The underlying reason for this payment was that at the time of the joint venture agreement, ACTEW's assets to be invested in the joint venture were valued at higher than those contributed by AGL.
Any stamp duty revenue arising from public assets sales should be excluded from a State's revenue base so as not to influence a State's decision to provide a stamp duty waiver or concessional stamp duty in favour of a higher sales price.
The ACT has identified few objective data sources upon which the Commission could base judgements about the treatment of changed capacities to raise revenue from trading enterprises operating in reformed markets.
This is an important issue for the ACT and goes to our earlier points about the nature of microeconomic reform, particularly that some measures of the impacts from microeconomic reform reflect State policy decisions and that reform is incomplete.
The ACT requests that the assessment continue to treat lump sums derived from privatisations as excluded capital transactions.
Similar to the treatment of funds realised from privatisations, the ACT also requests the retention of the treatment of stamp duty as excluded capital transactions, to ensure consistency.
The ACT considers it is not possible to discount policy decisions from the States’ differential capacities to raise revenue from asset sales.
The ACT recognises that there are differing capacities between the States to raise revenue from asset sales, and presumably, a corresponding lesser capacity to reduce debt. However, it would be difficult for the Commission to arrive at a soundly based disability factor given the range of policy decisions undertaken by State Governments which dictate the size and structure of each public sector.
Similarly, the ACT considers that the Commission would be hard pressed to assess a disability factor based on the relative size of private and public sectors and that, in concert with the above, the body of evidence does not support a disability assessment based on sectoral differences.
Clearly these differences could arise from differences in policy. Inclusion of States’ differential capacities to privatise or to outsource at lower costs because of the different size and composition of their public and private sectors would be in contradiction of Clause 1 (5) of the Competition Principles Agreement, which states:
“This Agreement is neutral with respect to the nature and form of ownership of business enterprises. It is not intended to promote public or private ownership”.
The ACT agrees with the Commission’s view that improvements in efficiency may have occurred due to changes in the resources allocated to particular population groups because of the privatisation of a service, but the ‘mode’ of delivery of service does not guarantee efficiency. Greater efficiency results from improved use of resources and factors of production – something which can occur both within the private and public sectors.
There is no evidence to suggest given recent reforms of Government business units under new Public Sector Management and microeconomic reforms, that the cost of the provision of service by the public sector would be greater than by private enterprise. The public-private mix is the result of Government policy decisions based on effectiveness and equity, as well as efficiency.