The pipeline poisoners

The surest way to kill innovation is to have a government body set pipeline prices, writes Richard Wood.

The finest and hopefully most enduring of the policies introduced under the Keating Government were those in competition reform.

With "New Labor" having backflipped on tariffs, the present Government has already gone to water on further action in this area.  Fortunately, much tariff reform is already in the bag.

The other main improvement was undertaken while the previous Government was operating on auto-pilot.  It involved dismantling monopoly powers across gas and electricity utilities, transport, the legal professions, and forcing government agencies to examine options other than in-house provision of services.

These measures are bearing fruit.  Economic growth is above the levels that would be justified by new capital investment.  Micro-economic reforms have brought greater efficiency of capital.  This is exemplified by the Victorian experience, where 50,000 public service jobs have disappeared without service reduction and electricity generation manpower has been reduced to a quarter of previous levels while efficiency improved.

The one area where the reform process has been mishandle has been gas.  This week's latest draft of the national third party access code maintains this tradition.

The gas code seeks to have all new pipelines report to a central price-fixing agency.  It displays a total lack of understanding about the way enterprise discovers new needs, reaches to serve them profitably and in the process improves the well-being of those it serves.

Gas pipelines in Australia have long been monopolies.  New pipelines were constructed and managed under the patronage of governments, if not by governments themselves.  With the Keating Government's Competition Policy Reform Act, monopolies ended.  At issue is what replaces the government oversight aimed, without great success, at preventing monopolies extracting too high a price.

Government and business representatives formulating the gas code have laboured for two years.  The code's focus is on existing pipelines, which must have regulatory oversight, at least until alternatives are introduced.  The code demands a plethora of information to construct a galaxy of different service charges which will, for example, require the same piece of equipment to be depreciated at different rates to establish "correct" costs for different services.  The deputy chairman of the Australian Competition and Consumer Council, Mr Alan Asher, has declared it unworkable.

Over-ambitious though these requirements are, the main deficiency of the code stems from its authors' fundamental ignorance of commercial rivalry.  They fail to understand that if an entrepreneur spots an opportunity and builds a pipeline, customers can only gain.

An entrepreneur spending capital and taking risks performs a valued service.  He sometimes does so reasonably certain of the gains to be made.  Often though, he is punting on the market accepting his product, on a rival power source or pipeline not undermining profit projections, and on bridging his plan in on time and on budget.  He is often hoping for high profits known in the jargon as "economic rent".

Those who see this as somehow immoral had ascendancy in the development of the gas code.  But to defend their position they would have to attack the massive profits created by near monopolies like Microsoft or Intel, firms whose success has transformed the modern economy.  The truth is that pursuit of such high profits is the hurricane driving innovation.  The surest way to kill innovation is to require its owners to report to a government body which will solemnly consider its costs and set prices.  Entrepreneurs will be diverted into avenues that satisfy regulators, not the customers.  Some will consider the process too complex and seek more promising venues.

If no pipeline exists and there is no impediment to constructing a pipeline, these should be no control over it once it is built.  By definition, those using its services cannot be made worse off.  If others locate to make use of its services, they will do so only after receiving assurances the price won't suddenly escalate once they are locked in.

The code's authors also offer no provision for rescinding control once a pipeline ceases to be a monopoly.  They fail to realise that if two pipelines are in direct competition, commercial rivalry regulates price.  Instead, they wish to maintain a labyrinthine umbrella of controls normally associated with hostility to market forces and bureaucratic empire building.

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