Mandela Fallacy Clouds Sins of the KLA

The return of the Kosovo Albanian refugees to their villages, and the corresponding flight of Kosovo Serb civilians out of theirs, provides occasion to reflect on an illusion held by many people of a leftist persuasion.

This is the notion that those who have been involved in a revolutionary struggle against persecution and injustice are made more benevolent by their experiences, and are therefore likely to create a humane and egalitarian society if only given the chance.  Perhaps we can call it the "Mandela" fallacy;  the belief that liberation movements will contain a far larger number of magnanimous Nelsons than murderous Winnies.

This kind of thinking lies behind the romantic Third Worldism that still retains its hold over many intellectuals.  Radical movements that supposedly act for downtrodden peoples are invariably subject to far less critical scrutiny than they warrant, particularly if they attack capitalism, denounce the West, and include the word "liberation" in their name or objectives.

Many truly nasty organisations and regimes have benefited from this mind-set over the years, and long after their vicious nature has become obvious to everyone else they will still have strong advocates in the universities and other bastions of unreality.  America's Black Panthers, a homicidal bunch of thugs who learnt to speak to the fantasies of radical academics in the late 1960s and early 70s, are a wonderful example, and they are still being celebrated.

At first glance, the Kosovo Liberation Army seems to fit the bill for such a warm embrace from the left.  Its name pushes all the right buttons, a number of its leaders are marxists, and it promotes itself as the representative of people who have unquestionably had appalling experiences at the hands of Serbian forces.

But interestingly, there appears to be a considerable reluctance by the left to crown the KLA as the Viet Cong or Sandinistas of the late 1990s.  University students are not forming KLA solidarity groups and chanting at police while they demonstrate in support of Kosovo's liberation.  And leftist unions are not levying their members to provide financial assistance for the "heroic struggles" of their "brothers and sisters" in the KLA.

Indeed, a number of left-wing groups, such as the Communist Party of Australia (yes, it still exists) and the Socialist Equality Party have flatly refused any backing for the KLA, and have condemned the "demonisation" of Serbia's President Slobodan Milosevic.  Even the leftists who approve of the KLA's goal of independence for Kosovo usually express some reservations about the organisation itself.

Certainly, the KLA is not the kind of group that could be endorsed by anyone who believes in democracy and tolerance.  Writing in the current issue of the respected American journal Foreign Affairs, Chris Hedges, a former head of the The New York Times' Balkan bureau, explains that the KLA is actually split between two totalitarian ideologies.

One faction is made up of old Stalinists.  These are people who were once financed by the former communist dictator of Albania, Enver Hoxha, in the hope of expanding the geographical reach of his own state, and to create trouble for his old enemy Yugoslavia.  Most of these individuals were students at Pristina University in Kosovo during the 1970s and 80s, where they were influenced by a number of militant Albanian professors, and given a solid grounding in revolutionary texts.

The other faction is just as bad, composed of the heirs of the fascist militias and Nazi collaborators who fought the Allies and Tito's partisans in the Second World War.  Though bitterly divided on virtually everything else, the two sides agree on the need for ending Serb rule in Kosovo, after which they are likely to concentrate on tearing each other apart.

Other observers have warned that the KLA has followed a practice favoured by a number of revolutionary and "national liberation" movements, trading in drugs to help finance its operations.  European police say that Albanian criminal groups with strong links to the KLA hold a large share of the heroin market in a number of countries in western and northern Europe.

So it would be satisfying to think that the left's caution about glorifying the KLA represents a new scepticism born out of years of disillusionment, as one radical "national liberation movement" after another has replaced a moderately nasty regime with an even worse collection of gangsters.  Maybe the left is recovering an awareness once common amongst its forebears -- that there can be a very dark side to the politics of ethnic difference and self-determination that have been so carelessly promoted in recent times.

Or even better, perhaps it is coming to realise that being on the negative side of an unequal power relationship is more likely to provoke a desire to lash out at one's tormentors and anyone else who gets in the way, rather than a longing to make the world a nicer place for everyone.

Some on the left may well have arrived as such understandings, but I suspect that the KLA's real misfortune is that it is seen as being too closely linked with the actions of NATO and the Americans.  No doubt this perception will whither in time.  All the indications suggest that NATO peacekeepers will have to remain in place for a few years, and the KLA is likely to become increasingly annoyed with NATO soldiers and European attempts to create a multi-ethnic liberal democracy in Kosovo.

Then, as has happened more than once before, the Western nations will be accused of being colonialists and imperialists by the very people whom they have helped bring close to power.  The idea that there might been any humanitarian considerations behind NATO's intervention will be ridiculed.

In this way, the KLA will be able to redeem itself to the left.  And from this time on, whatever crimes and excesses it commits will be ignored or excused as it is admitted to its rightful place in the radical's pantheon of liberation movements.

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Compensation for Victims of Crime

The call by the Chief Justice of the Supreme Court, Paul de Jersey for a review of victim's of crime compensation is timely.  He regards the scheme as inadequate and asks us "to dip into our own pockets to compensate victims".  Further, he believes the scheme should be "akin to the assessment of civil compensation as in motor car accident compensation schemes".  If this means an unfunded and open-ended scheme it would result in payouts for serious personal injuries of upwards of half a million dollars.

This assertion on the taxpayers' resources is but one of several serious deficiencies in the Chief Justice's stand.

In fact, he should not be taking a stand at all.  The question is clearly a matter of public policy, not a legal matter and judges have no particular legitimacy on policy.  The independence of the judiciary is difficult to maintain when opinions are offered on legislation.  A judge should never be a legislator.  Although speaking out is not of itself grounds to disqualify the judge in hearing future cases, he has now clearly cast himself as a "plaintiffs" judge.

Criminal compensation is like other forms of civil compensation, whether motor car accidents or workers' compensation, except in one crucial respect.  The motorist or employer can insure against the liability of a claim, but the citizen cannot insure against the remote possibility of criminal violence.  The criminal will be punished by society as a means of restoring law and order.  The victim has a right to sue the wrongdoer as a means of seeking justice.  However, does the fact that criminals are by and large not wealthy and are uninsured mean that the taxpayer should have to stand as the criminal's insurer?

If there is to be a form of insurance, why compensate this form of harm and not others?  What of those who are suffering because of congenital causes, or disease or natural disaster, or accident where no wrongdoer is apparent.  Is such suffering to be unrewarded, and that at the hands of criminals be rewarded?  If so there needs to be a special rationale for victims of crime.  I doubt the criminal compensation scheme acts as a deterrent to violent crime.  The resources so used may be better devoted to crime prevention, to minimise risk to future potential victims.  The system is really a "top-up" for a certain class of victim, those who have a common law action available but no "deep pockets" to pay compensation.  This is hardly a convincing rationale for the scheme.

If the scheme is a salve to the state's conscience for failing to maintain law and order, so be it.  But what is a fair amount?

How much does a soldier receive for being a victim of the violence of another soldier?  Basically, early access to an aged pension and the right to seek a disability pension of modest amount.  The soldier was hired for the task, and is in a contract with the state, but still there is no suggestion of large lump sum payments.  Those who are prevented from working have access to a disability pension, and Medicare pays medical expenses.  In the crime compensation scheme Medicare and Social Security cannot recover their costs, unlike the workers' compensation scheme.  Why should the state provide compensation, over and above income replacement and medical expenses?  Those who call for an increase in the funds to be devoted to victims of criminal violence should think of those in similar positions who do not have a course of action other than recourse to the medical insurance and social security systems.

The criminal compensation scheme is an act of grace by the government.  The legislation clearly states that the government is not liable for the victims of crime.  Governments do not accept that they are liable for the actions of criminals.  Those who seek justice with taxpayer dollars, must concede that the payments are an act of charity, nothing more.  The question of how much is enough thus becomes highly problematic.  Should it be more than for those born into pain and suffering, more than those suffering from disease, more than those suffering from acts of nature, or plain bad luck, more than the dispossessed or unemployed, more than the soldier?

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Property Rights and Regulatory Takings

Keynote Address to the WA PGA's Property Rights Conference,
Mandurah, 25 June 1999

INTRODUCTION

Australia's founding fathers, like those of the US, and drawing heavily on UK tradition, understood clearly that private property is the foundation not only of prosperity but also of freedom itself.  Through common law and the constitution, they protected property rights -- the rights of people to acquire, use and dispose of property.

With the growth of the modern state, governments at all levels today are eliminating these rights through so-called "regulatory takings" -- that is, by imposing regulatory constraints on people's property which reduce the value and uses of that property while leaving title with the owner.  Moreover, they are doing this without adequate compensation:  the courts have done little to protect such owners.

This process -- which amounts to theft -- is not unique to Australia but is a worldwide phenomenon.  The rise of regulatory takings and the failure by the courts to protect property has led to a vigorous property rights movement in the US.  The focus of reform there has been state governments, primarily because the states have the constitutional power over the resources -- land-use, water, wildlife, etc. -- which are the main subject of regulatory takings and because the states provide less rigorous constitutional protection of property rights.

This movement is starting to have success.  Legislation requiring identification of regulatory takings currently exists in 18 states and legislation requiring compensation for regulatory takings has been passed in 25 states.

It is time that Australia contemplated a similar process.  This will not be easy.  People have long become accustomed to others providing them with free goods, and governments, which face ever-rising welfare bills, will be loath to pay for what they take.  The issue is, however, vital to our individual and collective prosperity and will not be addressed without concerted efforts.

What I would like to do today is:

• outline the importance of private property;
• discuss the importance of our British heritage;
• describe what has gone wrong;
• clarify when compensation is required;  and
• outline the US approach and it usefulness for Australia.

PROPERTY:  THE FOUNDATION OF PROSPERITY AND FREEDOM

Why have some countries prospered and become free and open societies and others remained mired in poverty and despotism?

More specifically, why did England suddenly increases prosperity from the end of the seventeenth century while other countries on the continent and outside Europe remain stagnated?

There are many contributing factors, such as the Protestant Work Ethic, climatic conditions, the overthrow of feudalism, the commitment to free trade and technological advancement.  But as Tom Bethell has painstakingly documented it, ⁽¹⁾ the overwhelming factor was the commitment to the security of private property rights.

As Mr Bethell points out, the institution of property is intricately tied to traditional conceptions of freedom, justice and peace and he argues that prosperity and civilisation can only arise where people hold private property securely.

FREEDOM

As Milton Friedman has said, "you cannot have a free society without private property". ⁽²⁾

Private property rights give people the freedom to participate, to make choices, to advance, to take risks, to feel secure.  Importantly, they give people the capacity and a reason to take care of themselves.

Private property also provides an important bulwark against the state and against the powerful.  In a society that protects and respects property, property ownership will tend to be unequal.  Nonetheless, and contrary to received wisdom, property rights give protection to the poor against the rich.  The poor might not have much, but what they do have cannot be taken from them under a secure property rights regime.

Private property also assists in limiting freedom.  It is a compromise between our desire for unrestricted liberty and the recognition that others have similar rights and similar constraints on their aspirations.  It is, I believe, a necessary institution for people who wish to be free and secure and one that acknowledges the right to freedom of others.

JUSTICE

A society that enshrines private property goes a long way towards institutionalising justice.  A private property regime makes people responsible -- in a negative and positive sense -- for their own actions.  As Mr Bethell says:  "Property puts up fences, but also surrounds one with mirrors, reflecting back upon us the consequences of our own actions". ⁽³⁾

As James Q. Wilson said, "property is a powerful antidote to unfettered selfishness".

PEACE

Property both disperses power and shields us from the coercion of others.  It gives us the capacity and a reason to work within the system.  Among other things, it gives us strong reasons not to cheat and to respect (even protect) the rights of others.  The obligations are mutual and therefore self-reinforcing.

PROSPERITY

As was well recognised by the early economists, property and prosperity are intimately connected.

Jean-Baptiste Say, writing in 1803, said that only with secure property rights "can the sources of production ... attain their utmost degree of fecundity", a truth he regarded as "so completely self-evident that demonstration is quite superfluous". ⁽⁴⁾

Exchange is basic to market activity.  When goods are not individually owned they cannot be effectively traded.  Free markets, therefore, can only be built on a private property base.  By allowing people to enjoy the benefits without having to share them with other people, property rights provide people with an incentive to plan, save, and work.  Private property permits people to evaluate what they own, to use it, sell it, or alter it to maximise its value.  It enables people to decide how much to ask, or bid, for the goods or services flowing from their property.

Many economists blinded by the false promises of socialism -- particularly from 1930 to 1989 -- lost sight of the importance of property rights.  Even they, however, have been mugged by reality with the fall of the Berlin Wall and the economic, environmental, and social mess that it exposed.  The socialist experiment was an "all points failure" and the main reason for that was the absence of private property rights.

As for the ancient philosophers -- Aristotle noted that "What is common to the greatest number gets the least amount of care.  Men pay most attention to what is their own:  they care less for what is common". ⁽⁵⁾

AUSTRALIA'S INHERITANCE:
COMMITMENT TO SECURE PROPERTY RIGHTS

Why did the Industrial Revolution take place in Britain rather than on the continent of Europe?  There are two reasons:

• the commitment of the law to supporting property rights;  and
• the commitment to laissez-faire philosophy.

British common law, developed by judges piece by piece since the Middle Ages, evolved a sophisticated system of property rights.  Property became defined in many ways but every definition was based on the principle of equality of rights for all.

Significantly, under the common law, the rights of all people were equal whether they were tenants or proprietors, lords or peasants.  Each had rights and each right was protected by law.

Common law recognised that property entails numerous rights -- the right to acquire, dispose and use property.  It also developed a sophisticated system of adjudicating disputes about conflicting rights and the limits of rights.  It was also significant that common law held that the Crown was also subject to, and not above, the law -- the rights of the government or the Crown were upheld but these did not override the property rights of ordinary men and women.

In short, the industrial revolution came to England first because the rule of law was established there first, and the "democratisation" of property laws in England stimulated the creation of wealth.

It also came first to Britain because a political philosophy of laissez-faire replaced a philosophy in which it was thought that the duty of the State was to watch over individual citizens.

As William Pitt the Elder argued in the House of Commons in 1766:  "there are many things a parliament cannot do.  It cannot make itself executive, nor dispose of offices which belong to the crown.  It cannot take any man's property, even that of the meanest cottager ... without him being heard". ⁽⁶⁾

It is believed that during his time of more than 20 years as Prime Minister, Pitt did not carry out a single legislative measure in the Parliament.  Moreover, during this period, most counterproductive regulations were either repealed or allowed to wither away. ⁽⁷⁾

CONSTITUTIONAL PROTECTION OF PROPERTY RIGHTS

The Founding Fathers of the US and Australia grasped this lesson of history.

At the formation of their nations, they enshrined commitments to the protection of property rights and to equality of rights before the law.  They did so first by the adoption of common law -- Britain's greatest legacy.  Second, they enshrined the protection of property rights in their Constitutions.

The US Bill of Rights explicitly enshrines the right of all men to freely acquire and use property.  Importantly, it also prohibits the taking of property without just compensation, stating that "... nor shall property be taken for public use without just compensation".

The Australian Constitution, like the American, incorporates the view that individual freedom should prevail alongside a limited role for government.  Section 51(xxxi) requires that if the government acquires property from any State or person, it does so on just terms.  Just terms have been defined by the High Court as "full and adequate compensation" where the acquisition is a compulsory taking.

We should note, however, that section 51 (xxxi) only applies to the Commonwealth.  It does not bind the States nor do the States have "just compensation" clauses in their own constitutions.

DECLINING SUPPORT FOR PROPERTY RIGHTS

There has been a substantial decline in support for upholding the security of private property rights by the courts and by governments of all levels over the last 50 years.

This decline has not led to ignoring these property rights altogether.  Rather, it has led to the narrowing of the definition of property rights, a widening of the definition of "public use" and the limiting of the grounds for compensation.

When governments expropriate property outright, taking title from the owner, courts relying on Section 51(xxxi) generally require governments, at least the Commonwealth government, to compensate owners for their losses.

The modern problem does not lie there.  The problem lies with governments taking part of the use of the property while leaving title with the owner.  Courts have been reluctant to award compensation in such cases because they have failed to grasp the principle of the matter -- due, in part, to an unwarranted deference to the regulatory state.

The central principle is that property is not a singular concept.  It is not just a matter of the title.  Property is a bundle of rights:  take away any of these rights and you take something that belongs to the owner.

Property rights included the right to acquire property, the right to dispose of property;  the right to exclude others, the right against trespass, the right to quiet enjoyment and, importantly, the right of active use -- with the general proviso, of course, that one may do so only as long as these rights do not hinder the rights of others to enjoy or use their property.

In fact, property law recognises that property is a "bundle of sticks" any one of which could be bought, sold, rented or bequeathed in every area except takings.  Takings law has clung to the idea that only if the entire bundle is taken does the government have to pay compensation.

This all-or-nothing view enables government to extinguish nearly all uses through regulation -- and hence to regulate nearly all value out of the property -- yet escape the compensation requirement because the all-but-empty title remains with owner.

This is clearly wrong.  Compensation should be required when government takes any right -- whether partial or full title.

WHEN IS COMPENSATION REQUIRED?

When is compensation required?  Or rather, when is compensation not required?

First, when government acts to secure rights -- when, for example, it stops someone from polluting his neighbour's land -- it is acting under its police powers and no compensation is due to the owner, whatever his financial loss, because the use -- pollution -- was wrong in the first place.  Since there is no right to pollute, we do not have to pay polluters not to pollute.  The relevant question is not whether value has been taken by regulation but whether a right has been taken.

Second, if governments act to provide the public with some good and that act does not take a right, then even if it results in a financial loss, no compensation is due.  For example, if a government builds a public housing estate and neighbouring property values decline, no compensation is due because the action took nothing that they owned.  The neighbours own their property and its uses.  They do not own the value in their property.

Compensation is required when governments act not to secure rights but to provide the public with some good -- for example, a wildlife habitat or the preservation of historic buildings -- and in doing so take away some otherwise legitimate use.

The principle is quite simple:  the public has to pay for the goods it wants and takes, just like any private person would have to.

THE APPROACH OF THE US PROPERTY RIGHTS MOVEMENT

The first lesson to learn from the US is that the problem of takings begins with regulation.

The Founding Fathers could not have foreseen the modern regulatory state.  They could not have envisaged our obsession with regulating every conceivable human activity.

One hundred years ago, when governments took property, they generally took it all.  Hence the constitutional focus on seizure.

In recent years -- while governments have been busy privatising over $70 billion in assets and supposedly deregulating the economy -- governments have produced massive quantities of regulation.  Indeed there have been more regulations put in place in the last 15 years than in the first 80 years of the history of our nation.

Some of these regulations are legitimate;  especially those aimed at securing genuine rights.  Many more are aimed at providing some citizens with benefits at the expense of others.  But even if these benefits are justified, they should not be provided at the expense of other individuals but at the shared expense of the whole community.

To take a prominent example, some endangered species may indeed be worth saving, but we should not expect a few farmers to bear all the cost of preservation.

In the face of this mushrooming regulation, the task is to convince governments to review their many regulations, to determine which impose regulatory takings, to estimate the cost of these takings and to cut back on these regulations.  In the US, 18 states have passed laws requiring such a review.

The second lesson is to put in place legislation that specifies the need to compensate property owners for regulatory takings.

The last 50 years and more have shown that we cannot rely on the courts to protect the rights of property owners.  There is a need for legislation, drawing on common law principles, which clearly enshrines the rights of property owners.  Twenty-five states in the US have enacted such legislation.  Although many of the laws are new, they seem to be effective -- not just in generating compensation but in stopping governments from putting new takings in place.

The third lesson is that the legislation will need to define "just compensation".  In the US, courts have tended to put in place large compensation thresholds and fail to take into consideration the full cost of the loss in rights The legislation will need to make it clear that "just" compensation means compensation for all losses that arise from the takings.

Finally, as in the US, our focus should be on the states.  Under the Constitution they have responsibility for most of the powers that give rise to takings -- including land-use and the environment.  They impose most of the regulatory takings.  And their constitutions provide no protection for takings and for compensation.

SUMMARY

Property rights are essential to freedom, justice, peace and prosperity.  They are basic rights.  Despite common law and constitutional protections, property rights are increasingly being taken by the modern regulatory state.  The time has come to restore respect for property rights.  It is unjust for governments to take rights without compensation.  The provision of free goods for the many, but paid for by the few, leads to excessive demand for such goods, to excessive regulation and to bigger government.  Unless governments are forced to pay for the goods they take, they will undervalue the costs and as a result take far too many.

---

ENDNOTES

1. Bethell, Tom, The Noblest Triumph, St Martin's Press, New York, 1998.

2. Friedman, Milton and Rose, Free to Choose, Macmillian, Sydney, 1980, page 61.

3. Bethell, op. cit., page 11.

4. Ibid., page 98.

5. Aristotle, Politics, Book II, Chapter 3.

6. Bethell, op. cit., page 90.

7. Ibid., page 90.

Red Radicals Find Fertile Ground in Green Causes

It is time re-civilise civil society.  Non-government organisations have been developing pretensions to represent civil society, the broader community -- even to the extent of claiming equivalent standing to sovereign governments in international forums.

But who are these people?  Who elected them?  How are they accountable?

With the fall of the Berlin Wall and the relegation of the socialist project to the dust-bin of history, a lot of activists were left homeless.

Many parachuted into environmental, religious and consumer organisations.  These new homes proved comfortable.

They did good social things, had a high standing in the community -- indeed some were on a "mission from God".  They also often had large, docile support bases and were owned by all but controlled by none.

Not surprisingly, intrigue, infighting and takeovers followed, with the usual outcome being a victory to the politically focused paratroopers.  The end result was that organisations such as the Australian Conservation Foundation became "watermelons" -- green on the outside, red in the middle.

Similar processes occurred with bodies like the Australian Consumers' Association and the Brotherhood of St Lawrence.  They became institutions more interested in overthrowing capitalism than improving adding to consumer choice or seeking everlasting salvation.

Some of the former paratroopers became gentrified with age and power and rejoined the mainstream.  Many, however, remained true to the cause.  Joined in recent years by a new generation of true believers and organisations, they continue to dress up the failed socialist project with new green, consumerist and religious garnishes.

Such institutions are too important to be left to a radical fringe.  Socialism, as history as repeatedly shown, is not a route to a cleaner environment, greater consumer choice or a moral society.  Capitalism has it problems, but it leaves socialism for dead in all three areas -- 70 years of Soviet socialism produced appalling environmental mismanagement and the only industrialised society with a declining average life expectancy.

The antics of many of these radical groups do not foster a civil society or sense of community.  In recent months, we have seen radical groups physically barring people for their work places, shouting down people at shareholder meetings, and despoiling property.  These groups are taking-up Karl Marx's recommendation of using the system against itself.

Many organisations have begun buying shares in companies to disrupt shareholders meetings.  Unlike normal shareholders, their goal is to destroy wealth by stopping profitable projects.

Well, two can play at this game.  It time for the wider community to fight back.  The paratroopers and old Uncle Karl have shown the way.

We should join these institutions as a paid-up members, demand a modern and democratic system of governance, turf out the ideologues and refocus the operations of the organisations on their original purposes.  If people do not have the time or energy to do the hard work themselves they can always delegate it to others.

This must be done carefully and selectively or else the tactic will backfire.  Some organisations are impervious to the wishes of members.  Greenpeace, for example, is controlled by tightly held, off-shore interests and is takeover-proof.  Other groups are simply fronts established to do the aggressive work of larger, more mainstream organisations.  It is better to ignore fronts and go directly to their leader like the Australian Conservation Foundation and the Wilderness Society.

If we did this en-mass we would start to see a genuine civilising of so-called "civil society".

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Forget the ideology, look at the facts

When humanities academics -- historians, political scientists, sociologists -- comment on markets, they almost never mention their positive side.

Instead, they tell us markets are so dreadful, volatile, unfair, inequitable, overrun with greed and destruction.  Only more controls, they insist, can solve problems involving markets.

Not that such analysts sully themselves with anything resembling careful analysis of the evidence.  For example, discussions of the alleged importance of industry policy and protection in the (now somewhat tarnished) East Asian miracle regularly failed to note that the two most successful East Asian economies -- Singapore and Hong Kong -- are free-trade states.

Similarly, claims about the "need" for capital controls fail to grapple with the fact that the most regulated of the major OECD capital markets -- the Japanese -- is also the most corrupt and problem-ridden.

The current problems of Russia -- where 70 years of communism left a society without a properly functioning legal system, judiciary, defined property rights or any real experience of the institutions, practices and conventions of commercial society we take for granted (except for the distorted mirror of the black market) -- are blamed on "capitalism", when the problem is the lack of capitalism.

The knowledge elite equates economic problems with "market failures" even when the problems are actually -- as in Thailand, Indonesia and Korea -- the result of bad public policy.  Where economic success occurs, the education elite thanks government intervention.

Government failure is not accepted as evidence for problems in political processes.  North Korea constantly teeters on the edge of starvation;  Castro took the second richest nation in Latin America and turned it into the third poorest;  70 years of Soviet socialism created the only industrial society ever with a declining life expectancy.  All such failures are glossed over or ignored.

It is the poor intellectual quality and selective attention which is most revealing:  particularly when it comes to explaining the failure of the command economies.  After all, the "Third Way" only exists because the "Second Way" of collectivism has so conspicuously and universally disappointed.

The language of politics is an abbreviated language.  It deals in intentions and resources allocated, not in effects;  because intentions and resource levels are easy to grasp and most of us have neither the time, the incentives nor the information to examine effects seriously.  And since the intentions are so "noble" those who complain about the effects are easily categorised as heartless, simple-minded, blaming the victim, prejudiced, unconcerned with social justice, or (worst of all) economists.

The ongoing chorus of denunciation of "economic rationalism" encapsulates these anti-market sentiments.  The economic reform program is about removal of regulatory privilege and forcing people to justify their claims on resources.  As people like their privileges, and resent having to justify their use of resources, naturally economic reform is denounced;  though not in those terms, of course.

Those who sneer about "worship" of the market and economics as a pseudo-religion hide their own their own extraordinary faith in state action, public ownership (such as of Telstra) and politics generally.

Ironically, the anti-market knowledge elite is actually winning its war on the market.  Taxes are at record peacetime levels as a share of GDP.  More people are dependent on the (coercive) transfers of the state -- rather than the consensual exchanges of markets and families -- for their income than ever before in our history.  Each year, the Commonwealth Parliament passes eight to nine times the number of pages of legislation it did in the 1950s.

The fundamental appeal of anti-market sentiment to the knowledge elite is that the claim that markets should be controlled translates as "people should be told what to do".

And who is going to do the telling?  Whose schemes are to be implemented?  The people who know so much more than anyone else, of course!  One can also detect envy for the power over human affairs the vulgarians of the market place are taken to have and envy of the public policy influence (and consultancy fees) of economists.  In such circumstances, belief in politics uber alles can be a great boost to their self-image as wise moral legislators who just know how we should be told to behave by the state.

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Salary Caps and the AFL

The Melbourne based consultancy, Affairs of State has recently published the football club affiliation of all Victorian MPs.  The most popular club, Collingwood, also has the biggest supporter base but was at the bottom of the ladder as at the end of April.  Neither Collingwood or the other giant Carlton has topped the ladder for eight seasons.

There is no other sports competition in which the two best supported clubs are performing so dismally.  And the reason for this?  The regulations of player salaries implicit in the policy of equalisation which the AFL Commission adopted in 1986.  This was borrowed from American Football.  It is designed to prevent, wealthy clubs from using "chequebook power to recruit the best players" and keep "player costs within the reach of most clubs".

The issue of salary caps in AFL has recently assumed great topicality.  AFL Commissioner David Shaw is under extreme pressure to resign after breeches of the salary cap during his tenure as President of Essendon.  All clubs go to the limit in seeking to offer adequate remuneration to their best players but the AFL thoroughly scrutinises packages to ensure that supplements for training, representation etc. are within bounds it considers acceptable.

As far as the players are concerned, the salary caps mean a reduction in income and a corresponding reduction in the attraction of a sporting career that is inevitably short compared with other sports or vocations.  In this respect it is akin to a wage ceiling.  Imagine the reaction if a Paul Anderson, a Pavarotti or a Mick Jagger were to be limited in earnings by some sort of salary cap.  How would their talents be allocated among the many seekers of their services?  Supposing a Paul Anderson were to be told that he could not go to work for BHP for more money than Duke energy were prepared to pay him, even though he was more valuable at BHP?  Supposing a middle ranking executive at NAB could not be recruited by Westpac because it would break some form of wage cap that the banking industry itself had set?

Salary caps have adverse effects on the ability of AFL to compete and provide the services supporters wish to see in a number of ways.  Importantly, these include denying supporters the capacity to have their support reflected in the calibre of players their club can attract.  That apart, they may even be illegally anti-competitive, if the AFL Commissioner Graeme Samuel were to be wearing his National Competition Council hat.  Although nobody has mounted a restraint of trade assault on the AFL regulation, the policy must surely be an impediment to competition.

Other mass spectator team sports reward their main employees according to the market demand for their skills.  Soccer, baseball, ice hockey and even cricket are among the sports that have flourished as a result of open access and no effective restraint on player payment.  The different levels of club wealth, while facilitating on-going success of clubs like Manchester United, Real Madrid or the San Francisco 49ers, has not prevented the rise and fall of other clubs, (and it was less than 25 years ago that even the might Manchester United was relegated to the English Second Division).

A footnote on the Affairs of State data.  The team with the largest politician support is Collingwood, the team which for so long was the favourite of the True Believers and which co-opted Paul Keating as its Number 1 supporter.  Times change.  Collingwood now has fewer Labor Party than Liberal/ National party MPs as supporters.

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The inside (success) story of free markets

The great economic and political debate of the 20th century has been between central planners and free marketeers.  The apparent victors have been the free marketeers.  But their victory constitutes only the first item on the free marketeers agenda.  The next and perhaps more substantial item is the application of market principles to the internal operations of firms.

In the prevailing model of market economies, competition operates between firms but not inside them.  Firms are seen as islands of command-and-control socialism operating in oceans of free-market activity.  Business-style socialism within firms has pretended to offer employees protection from competition with talk of "permanency" and "loyalty".

What is now being observed is the penetration of the internal operations of firms by markets.  This paradigm shift is most apparent in the US.  It is a prime creative driver within the information technology area, but the trend is not confined to the emerging glamour industries.  Market-based management has a solid history in some more traditional industries as well.

Consider Koch Industries, which is ranked as the 18th-largest business in the US.  It is valued at more than $US35 billion ($52.5 billion), is a debt-free and has a top-quality credit rating.  Privately owned, Koch Industries operates in oil, gas, animal feed, cattle and petrochemicals.  Charles Koch, the media-shy 63-year-old owner and a devotee of libertarian scholar F.A. Hayek, has practised what he preaches.  He has applied market principles to the internal management of his businesses.

The management structure of Koch Industries relies on internal markets to allocate internal resources.  So-called "support groups" or "profit centres" are expected to survive in the internal Koch market by offering services competitively to other such centres.

With internal markets, for example, a machinery maintenance depot will seek to service manufacturing sectors in the firm.

The manufacturing sectors are not obliged to use the internal maintenance group, which has to win its business in competition with other service providers from outside industries.  Applying the market principles even further, the pay of individual workers in the maintenance group will be linked to their commercial success.

Similar internal competitive markets can be applied to other activities within the firm, such as accounts, debt control, marketing, training, recruitment, design and planning.  For internal markets to work, no profit centre must be allowed any exclusive right to deal with any other profit centre.

Internal markets can have a profound effect on productivity.  According to Koch Industries, introducing the price mechanism to the internal workings of the organisation encourages staff to think and act like smart purchasers.  The market-based management of personnel in firms produces two results.

By exposing everyone to competitive pressures, it prevents the destructive and negative game-playing that can poison a company.  More importantly, it allows human economic creativity to flourish.

Koch-style, market-based management practices have penetrated deep into US businesses thanks to the minimal labour-market regulations.  What was once thought to be a technology-led growth surge in the US is proving to be based on the productive behaviour of people in firms.

Alan Greenspan has wondered why the US is experiencing sustained long-term growth and low unemployment without the expected emergence of wage-induced inflation.  An answer can be found in the application of markets in firms.

When internal markets operate inside firms, the monopolistic and destructive behaviour of internal collectives cannot force the price of wages up beyond the capacity of the firm to pay.  The price constraints of the external markets are directly and rapidly transmitted throughout each firm by internal markets that constantly send thousands of small price signals that impose reality tests on attempted income increases.

As this highly price-sensitive management process becomes commonplace throughout business, it challenges and changes conventional ideas about a "natural" rate of unemployment.

When the market is allowed to operate inside firms, national unemployment rates can fall way below the levels previously thought of as the natural minimum as market honesty relating to incomes directly affects every person in the firm.  Individuals can benefit themselves only when the firm or firms for which they work benefit.

The true quest for nations is the release of human economic creativity.  Each society and individual has two choices.  As George Bernard Shaw explained:  "This is the true joy in life -- being a force of nature, instead of a feverish, selfish little cod of ailments and grievances complaining that the world will not devote itself to making you happy".

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Two can play the protest game

Accountability is something which cuts both ways -- if you are going to demand it, then you had better practice it yourself.

And, as every child in a schoolyard knows, if you invade somebody else's turf, then you had better be prepared for them to invade yours.

Environmentalist and other single interest groups have been developing a new tactic -- buying shares in targeted companies and disrupting meetings of shareholders to raise the profile of their particular cause.

Major companies, like Rio Tinto and Norths, have found their annual general meetings turned into politicised meetings.

People who buy shares are normally aiming to increase their wealth.  (And, if you have privately-funded superannuation, then you are a shareholder).

Shareholder-protesters, however, are about destroying wealth by stopping otherwise profitable projects.

If they are using their personal funds to do that, that is their business -- and they will, no doubt, be voted down by the other shareholders.

But if environmentalist organisations and other bodies are using the funds of the organisation, that is entirely different matter.

Directors and public officers of organisations have fiduciary duties to look after the funds of their members.  Which is fine so long as the membership have approved expenditure of their funds in that way -- but very much not fine if they haven't.

Non-government organisations have been developing pretensions to represent "civil society", the broad community -- even to the extent of claiming equivalent standing to sovereign governments in international forums.

But who are these people?  Who elected them?  How are they accountable?

Environmental concern should not be owned by any particular ideology.

Broad-based environmental organisations should favour of whatever works to improve the environment, not dressing up failed socialist projects with a new "green" garnish.

Indeed, bodies like the Australian Conservation Foundation and the Australian Consumer Association used to be much more mainstream in their make-up and outlook before they were taken over by zealots looking for new homes.

What if people affected by "green socialism" struck back?  What if shareholders, farmers, workers in industries targeted by green protesters, members of mainstream political parties and so on started joining organisations like the Australian Conservation Foundation and the Wilderness Society and demanding the levels of accountability for those organisations they have been so quick to demand of others?

(Greenpeace is not worth bothering with, ordinary members have no effective power in that centrally-controlled multinational).

What if such organisations returned to how they were?

Then we would start to see a genuine civilising of so-called civil society.

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Mainstream lost in the slipstream of reconciliation

If the draft Declaration for Reconciliation is accepted in its present form, Australia will be a diminished nation.  Quite literally.  For the document released for public consultation last week is completely lopsided, celebrating only one of the broad traditions that have contributed to contemporary Australia.

The draft Declaration makes no acknowledgement that there might be anything worthwhile in the mainstream culture which derives from the nation's British and Irish founders, and which developed its own distinctive characteristics as later immigrants and common historical experiences made their mark.  The institutions, the values, the knowledge and the arts that have made Australia one of the world's more successful and enviable nations are simply passed over.

But most of the members of the Council for Aboriginal Reconciliation have been appointed because of their accomplishments in activities that are overwhelmingly dependent on this mainstream culture -- science, education, business, parliamentary politics.  This applies to the indigenous members of the Council almost to the same extent as it does to the non-indigenous members.

Do they really regard their own fields of endeavour as being of such little account?  Their approval of the draft Declaration certainly suggests that they have insufficient respect for the culture that has played an essential part in sustaining their own achievements.

When I criticised this glaring omission during a talk back program on Radio National earlier this week, Jackie Huggins, one of the authors of the reconciliation document, responded that the mainstream non-indigenous culture had been acknowledged "implicitly".  She said the draft Declaration's statements that we should recognise "the gift of one another's presence" and "learn our shared history, walk together and grow together to enrich our understanding" showed an awareness of the social and cultural benefits that had come from non-Aboriginal migrants to Australia.

But even if we were to go along with this less-than-obvious interpretation, it merely raises another question.  Why does the draft Declaration only give "implicit" recognition to the cultural traditions of the Australian mainstream, while urging us to "taste" the "spirituality" and "rejoice" in the "grandeur" of indigenous "customary laws, beliefs and traditions"?

(I must add that "taste" is not the word I would have chosen in this context.  It conveys the unfortunate implications that indigenous spirituality is either something people can dabble in, or that it is rather akin to Chardonnay and café latte.)

I suspect that the people who have prepared and approved the draft Declaration are more preoccupied with hammering home notions of white guilt than with offering a document that would engage the nation as a whole and allow nearly everyone to embrace reconciliation.  This makes it impossible for them to praise the culture of those that they blame for Aboriginal dispossession and misery.

But there is nothing wrong with the cultural values and moral principles that underpin Australia's nationhood.  Rather, in the past these principles were not consistently applied to indigenous people, a point that was clearly understood by the early leaders of Aboriginal protest movements.  And there were always whites who treated Aborigines with humanity, who realised the injustices that had been inflicted on them, and who worked for a more equal and inclusive Australia by invoking mainstream cultural ideals against the actual practices of governments and others.

Of course, some of these whites are now being accused of "genocide", but that is because a number of the people who presently dominate the agenda on Aboriginal issues are suffering from a deep moral confusion.  That it is these people who are most insistent on a national apology to the "stolen generations" is good enough reason to view these demands with grave suspicion, and to resist attempts to include such an apology in any reconciliation document.

The process of reconciliation itself, together with the other moves to redress past wrongs such as the recognition of native title and Aboriginal sites of significance, were not forced on Australia by the political or military strength of indigenous people.  These attempts to make amends came about because large sections of the Australian public became increasingly troubled by the inconsistency between our cultural values of fairness and tolerance and the lot of many Aborigines.

We do not have to look far in today's world to realise that it could easily have been otherwise, for in many other cultural traditions the idea that people of different race or ethnicity deserve to be treated with decency and justice is not firmly held.  So any reconciliation document should explicitly acknowledge and praise the mainstream Australian culture that has largely given rise to the reconciliation process in the first place.

It is also likely that success in overcoming the economic, social and health problems experienced by many Aborigines will depend more on practices and values deriving from mainstream culture than from traditional cultures, although it is difficult to make this point without being condemned as an "assimilationist".  The Aboriginal and Torres Strait Islander heritage is certainly worthy of admiration, but we should also accept the possibility that aspects of this heritage may compromise our ability to create "a united Australia", providing "justice and equity for all" -- the ultimate supposed goals of the reconciliation process.

The Council for Aboriginal Reconciliation likes to portray itself as having initiated a "people's movement", pointing to the million-odd people who have signed "sorry books" and the existence of over 300 local reconciliation groups around Australia.  While these people may not actually represent majority views, they are likely to have the greatest input during the coming nation-wide consultations over the final form of the reconciliation document.

I fear that too many other people have been turned off by the excesses and intellectual dishonesty of the Aboriginal movement and its supporters in recent years.  But unless mainstream Australians start taking an interest in the reconciliation process, future generations of schoolchildren will be required to recite a corrosive and totally inadequate Declaration of Reconciliation.

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Firm Access Rights: The Key to Efficient Management of Transmission

Submission to the NECA Transmission Pricing Review

SUMMARY

REGULATED PROVISION OF NEW TRANSMISSION IS CAUSING MARKET DISTORTION

Regulated determination of new transmission links is distorting the electricity supply industry.  Efficient market outcomes are obstructed where transmission decisions are taken by a regulatory agency with the costs financed by a form of taxation.  This also deflects suppliers' energies from customer orientation to wastefully focussing on lobbying the regulatory agencies.

Regulated provision could be avoided if there was a specification and vesting of property rights to transmission use.  The lack of this denies the various parties confidence to take long term capital positions.

RECOVERING COSTS OF THE PRESENT NETWORK

Transmission systems presently in place were built by government agencies.  Although generators ostensibly bear no significant part of the transmission costs, in Victoria they were sold with implicitly assured, customer-financed transmission rights.  Hence the sale price bundled in transmission rights and costs.  In all States generators have contracted on the basis of the present cost recovery allocations.

Placing all cost recovery directly on customers is unlikely to be the optimal means of financing these costs.  But, financing sunk costs is a secondary matter.  There is little to be gained by now dividing payments between generators and customers, as those payments are only incidental to decisions on the assets' operations and augmentation.

In addition, transmission revenue caps undermine efficiency, as they offer transmission providers inadequate incentives to pare costs.  The close regulatory oversight they require also will divert management resources from a customer focus.  A more appropriate price cap procedure would apply a CPI-X formula to existing charges, using total factor productivity to determine the X factor.

NETWORK AUGMENTATIONS

Future decisions on augmentations should be made by market participants on a commercial basis.  A non-regulatory regime would segment the transmission system for future lines into those parts (radial links) paid for by generators and those (the meshed network) paid for by customers.  Accompanying the payment stream must be some rights to the capacity or the financial equivalent.

A means of reconciling the treatment of new and existing lines is also required.  This is likely to entail an explicit vesting of the present implicit rights to capacity, particularly radial lines.  New generators would need to purchase transmission capacity, build their own capacity or operate without firm rights.  If a generator operating without firm rights to a line constrains-off a generator with firm rights on the line, it must compensate the constrained-off generator.

INTRODUCTION:  THE NECA REVIEW

PROVISIONAL CONCLUSIONS ARRIVED AT BY NECA

In its June 1998 paper examining the Effectiveness of Current Arrangements, NECA found:

• Although acceptable for the present transmission backbone, TUOS charges do not offer incentives to allow augmentation to be undertaken efficiently.  Interconnector property rights would allow price hedges which would provide the incentives for the transmission provider to ensure optimal capacity is available.
• Full costs of dedicated connection costs should be recovered by the relevant participant.
• Customer Use of System Costs are inadequate.  Efficiency means having opposite incentives on generators and customers.  CRNP actually diminishes to individual users at high usage levels because the revenue is shared over higher volumes (and if set high to reflect a projected increased need at some future times this may needlessly reduce the present level of usage).
• There is no application to generators, even though generators upstream may benefit.
• There is no particular justification for a 50/50 postage stamp/CRNP applied to customers in any event.  And postage stamping creates the possibility of inefficient bypass.
• Network charges should be set so that they impose a progressively increasing premium cost as congestion becomes more likely and an opposite incentive for loads and generators to locate where congestion can be alleviated.
• Although welcoming the revenue cap approach as a means of encouraging efficient maintenance, the NECA review points out that the arms length nature of the regulated NSP from the users offers no incentives as to the correct amount of maintenance in the network and how to allocate spending priorities between different areas.
• The Code sees justification for augmentation where net benefit to customers is maximised.  But, as seen in the SANI case, a benefit to one set of customers and generators will mean a loss to others -- customers downsteam of the augmentation gain but those upstream lose, and conversely with generators.  And as the SANI case demonstrated, it is impossibly difficult to determine the best possible expenditures.  Where procedures are in place to allow blocking coalitions, as in Argentina, this has led to less augmentation than many observers consider desirable. ⁽¹⁾
• In the case of postage stamp funding, even if the measure did not materially influence behaviour, those that were charged the same fees as high users for a system they used only sparingly would be inequitably treated.

The NECA review notes that the benefits of a new augmentation are potentially capturable if they exist but that steps to achieve this would need to be taken in advance of the expenditure.  Charging higher than marginal costs once a facility exists is likely to reduce usage below optimal levels.

Because the congestion rentals are much smaller than the cost of the system, (and would be zero after an augmentation) most users would prefer to pay them rather than the fixed costs of the grid. ⁽²⁾

The NECA review also points to the "free rider" difficulty where subscribers might not come forward because they expect others to do so.  Even if the subscribers are given rights to any rents (congestion premiums), post construction these rents are likely to be small.  This is all the more the case as there are economies of scale which will be likely to result in a link in excess of that which is required immediately.

One solution it proposes is to apply a surcharge to users who had not prepaid for the transport rights.  The issue is how to do this.

THE ERNST AND YOUNG PROPOSALS TO NECA

The Preferred Approaches

The four Ernst and Young papers on Cost Reflective Network Pricing, noted that NECA had concluded that we should retain the present arrangements for treating sunk costs in the existing network (i.e. not imposing a charge on generators).  They argued that new investments, including replacement and renewal expenditure, should be charged for on the basis of the benefits derived.

For new investment they outlined three principles.  The first of these:  competition in network services should be promoted wherever practicable was treated as less relevant because the work sought to evaluate the procedures for new investment that is not subject to competitive market considerations.

The other two criteria focussed on

• transparency, stability and non-discrimination between users;  and
• regulation that mirrors the outcomes likely in competitive markets.

The papers' preferred approach, labelled Option B, would:

Determine a split between customers and generators (as a group) to apply to each individual transmission investment, ie the split may be different for each specific transmission investment.  This allocation can then be translated into a use of system tariff which is applied differentially to generators based on their usage of the asset

The papers reject a market based approach as being outside its terms of reference which presume a continuation of central planning.  They also say, We should not under-estimate the consequences of market failures in the provision of transmission augmentations. (Paper 2).  The market failures refer to the benefits that small customers gain from augmentations and the free rider phenomenon which entices those gaining from augmentations to avoid contributing in the expectation that someone else will incur the costs and risks.

The favoured approach seeks to allocate benefits of a transmission to different participants on the basis of;

• fuel cost savings (constraint costs) to generators;
• avoided load curtailment to customers;  and
• reduced losses 50% to customers and 50% to generators.

Difficulties are acknowledged in allocating the increased benefits, and therefore charges, to individual generators.  Although these difficulties are not spelled out, they would include the failure of the actual benefits to emerge in line with those forecast due to changes in bidding behaviour and new plant commitments.

At the end of the fourth Issues Paper there is a suggestion that those who pay for new investments might receive a form of property right such as preferential access or rights to settlement residues.

Three papers that examined the Cost Reflective Network Pricing approach accompanied the four Issues Papers.  They examined how greater flexibility could be introduced so that the overall costs are not smeared across the network but instead take marginal costs into account.  This is so that the prices better reflect spare capacity and offer signals to new investment while minimising uneconomic bypass.

Appraisal of the Ernst and Young Preferred Approach

These papers represent a well-considered attempt to construct a synthetic market to mirror what might occur in a real world with genuine competition.

In aiming at more flexible pricing structures, the papers are consistent with recent FERC approaches announced by Commissioner Hebert. ⁽³⁾  But they say little with regard to a further point by Hebert concerning "merchant plants" like Transenergie's NSW-Queensland link and to distributed generation.  Hebert suggests, "with competition coming, the useful life of transmission facilities may become the life of the contract rather than the life of the line as it has been until now".  Such an outcome would have profound effects on establishing a regulated rate of return.

Ernst and Young addressed the issues to be considered in allocating new investment:  efficiency, cost recovery, eliminating "free riders" and so on.  All of these are highly commendable and should be -- perhaps always have been -- the goals of a sensible regulator.  But they only give general guidance for implementation.  Indeed, one of the criteria, price stability, seems to be redundant.  Price instability to customers from transmission charges would typically be about 1.4 per cent for every 20 per cent change in price, which in any case can be insured against.  Moreover, price volatility may be desirable to encourage better line utilisation.

One of the positions tentatively arrived at is that the losers from an augmentation should not be compensated.  This accords with sound economic principles -- a supermarket should not be compensated if a rival locates nearby. ⁽⁴⁾  The papers also note that:

• there is no hard and fast definition of an augmentation;
• a system wide tariff has merit but offers more advantage to some than to others.

The general thrust envisages a continued form of planned transmission with new links decided upon after consultation but without the parties paying for the links having any veto powers.

The Ernst and Young prescriptions are market contrivances.  They can never capture the full diversity of costs and opportunities that the stimulus of a Profit and Loss Statement forces on market participants.  As synthetic market structures, the proposals will fail to provide commercial parties the appropriate signals and will lead to the participants continuing to "socialise their costs and capitalise their profits".  Regulated prices are a poor substitute for market determined prices founded on known and tradeable property rights.  For electricity, the basis of these are nodal Transmission Congestion Contracts (TCCs).

ADDRESSING THE ISSUES

THE MAJOR CONCERNS OF MARKET PARTICIPANTS

Transmission issues impact both the customer and the supplier.  Where customers pay the same price irrespective of location, they will tend to disregard costs in their site decisions and engender increased costs.  Similarly, if the generator pays nothing for transmission other than the costs associated with line losses to the node, the generator will have every incentive to locate close to fuel supplies even where a closer location to the market may, overall, be a lower cost solution.

For generators, the concerns are:

• ensuring the upkeep of existing links in the context of asset sales that gave them an implicit right to use the transmission system, without directly paying for the costs;
• arranging for the transmission system's expansion;
• arranging for optimal levels of service, with assurances on the certainty or degree of certainty that transmission is available for all power generated (or that compensation is available).

For customers, additional issues are the lack of pricing transparency and the politically inspired rolling-in of many costs irrespective of the location.  Even where cost reflective pricing is involved, as is largely the case in Victoria at present, the ability of only a few customers (three in Victoria) to pay separately for transmission and distribution line charges and the standard distribution costs across distribution business areas gives very weak locational incentives.

The issues concerning transmission are considerably magnified by the uncertainty about the capacity of transmission links.  Merril ⁽⁵⁾ analyses the transmission capacity between two US systems (AEP and Commonwealth Edison).  He notes that the theoretical capacity of 3,500 megawatts can actually vary between 1,600 MW and 6,000 MW.  Establishing firm access rights for any more than 1,600 MW is not possible unless there is an offsetting insurance.

The highly complex interactions and loop flows in the USA create much more difficult situations for generators than those found in Australia.  Thus whereas Sydney has one main generator-customer interface node (Western Sydney) and Melbourne is similarly placed (at Thomastown), Los Angeles has five different nodes where lines supply power into the meshed network.  Some power stations use more than one of these lines and there is significant loop flow that could reduce effective capacity of individual lines by up to six sevenths.

THE IMPORTANCE OF PROPERTY RIGHTS AS EFFICIENCY DRIVERS

"If prices don't provide the right incentives, consistent with the impacts on the overall electric power system, the participants will respond in their own self interests without concern for the system effects and the market operator will be driven inexorably to intervene in the market and restrict choice".

The GPU Submission to the NECA Transmission Pricing Review, from which the above quote is taken, seeks to avoid having transmission centrally planned.  It advocates comprehensively defined and individually owned property rights, and tradability of those rights.  For generators, such rights comprise access to the network on a firm basis or some other basis that is fully understood.  A key adviser to GPU, William Hogan, has written elsewhere

To support a competitive market ... the old implicit allocations of rights must be made explicit. ⁽⁶⁾

Markets operate most efficiently when all valued assets are individually rather than collectively owned.  This is because owners use assets for their highest valued purposes.  Even though transmission assets may be privately owned, where their usage rights are communal the incentives to frugality are absent -- there is a "tragedy of the commons" effect. ⁽⁷⁾  Attempts to combat the deficiencies stemming from lack of ownership mean a permanent role for an intrusive regulatory agency.

It follows that the area of communal rights should be narrowed as much as possible.  It may be the case that the meshed transmission beyond major nodes has "public goods" characteristics and must remain communal but the transmission lines to these nodes serve clearly identifiable generators.  These generators must, as Hogan says, have their implicit rights and associated usage charges specified and made explicit.

Not only should this apply to new transmission links but it should be put in place for existing facilities.  This encourages considered decision making by those with the rights on their usage and, where they are of value, allows rights holders to negotiate sharing arrangements or sales to others better able to profit from them.  Such actions can be expected to bring deferral of capital expenditure and better use of existing lines.

The merits of this approach are not materially affected by the present arrangements under which customers rather than generators pay for transmission.  If, as generators strongly maintain, disturbing these arrangements on existing transmission would diminish their aggregate asset values and upset contractual commitments, the present arrangements should be left in place but vested as a transferable contractual property right.

These principles must be the bedrock for the approach to the issues raised in the various NECA review documents.  These include efficient locational signals, bypass rights, the incidence of TUOS charges, and the treatment of embedded generators.

Because Australian transmission systems have been State owned, the access has been assumed to be statewide for both generators and customers.  This will need to change as the monopoly of the incumbent transmission businesses is eroded.  Differences in supply availability may mean more rather than fewer Australian regions and the rights to the system by generators will need to be more clearly defined.  There certainly cannot be a single Australian region.

Pursuit of a myth of a single region where there are demand/supply imbalances within the region can lead to serious consequences and undermine a market structure.  This can be observed with the Pennsylvania-New Jersey-Maryland system's single transmission zone.  June 1997 saw prices vary between $12 and $89 and the Systems Operator was unable to arrange sufficient transmission.  The incident produced striking evidence, if this was needed, of the potency of profit driven decisions to undermine a scheme with ill-devised prices and usage rights.

THE CODE

The transmission and distribution systems were envisaged under the Code to remain fundamentally centrally planned.  It was the general view that these assets would remain largely as natural monopolies and the various parties would not be able to arrange their augmentation and maintenance except under central direction.  The Code specifies that revenues should be raised solely from customers with prices regulated based on a 50/50 share between Cost Reflective Network Prices and a "postage stamp" price.

For the most part the Code took the view that interconnectors and network augmentations would be established following recommendations of the Inter-regional Planning Committee (IRPC).  The IRPC would develop a statement of opportunities and an annual review recommending augmentation options to NEMMCO (5.6.5).  Provision was made for augmentations that are not deemed justified by NEMMCO to be undertaken.  These provisions were spelled out more in the section covering interconnectors across regions (5.6.6).  But it was left, under clause 3.12.2, to NECA to establish rules for non-regulated interconnectors.

The relatively low share of transmission in total supply costs, the abundance of capacity for most purposes, and the inevitable co-mingling of electrons brought the general view that, aside from shallow connection and some other participant specific costs, the service should be charged as a compulsory levy on customers.  This has started to break down as:

• embedded generators object to having their customers pay for a service they do not require;
• participants substitute a regulated "free" good for one that they must pay for directly;  one notable example was the $104 million augmentation linking Tarong power station which was paid for by customers;
• the SANI debate and the recognition that the producer beneficiaries could be paid by customers, including customers that may be prejudiced by an augmentation;
• the TransEnergie proposal (now underway) for an entrepreneurial link indicated that commercial opportunities are a potential option.

THE PROSPECTIVE SOLUTIONS

THE GPU PROPOSALS

GPU's submission focuses is on competition and incentives within the framework of well established property rights.  It takes the view that if such solutions are not used for transmission, the regulatory arrangements are likely to pollute the entire market.

It builds a simple case of a new stand-alone radial servicing just one plant.  In that case it sees the costs as being unambiguously allocated to the plant being served -- an outcome that did not occur with Queensland's Tarong upgrade where Powerlink used regulated revenues to pay for the radial upgrade from the Tarong plant.  However the difficulty of defining capacity is magnified where the link is interconnected.  This rules out a literal system of physical property rights.

A transmission congestion contract provides the financial equivalent.  A transmission business would be paid the long term costs of expanding transmission and provide a contract to the participant who pays for it to ensure the price of the power was that in the target market.  This could be done either by maintaining the wires or assuming the financial responsibility.  Contracts would be specified to hubs, passing through one regional hub and into another.  They would be the equivalent of firm rights to and from the hubs and a hedge across interconnectors between the hubs.

The firm access rights could be priced on the basis of previous bid patterns to establish an estimate of the incremental cost of the plant.  The difference between these bids and the grid price could be used to define the estimate of losses and the implied obligation.  The typical contract would allow for some normal period of outages as a result of maintenance.  These features need to be structured so that the incentive is on the transmission provider to schedule outages when demand and price is low.

Where there are congestion limits, low cost power plants may be constrained-off and replaced by higher cost power plants.  There are therefore two sets of prices.  If the customer pays the pool price at the constrained area, say six cents, and the generator is constrained so that it receives only four cents, it may negotiate a congestion contract with an NSP to receive the additional two cents. ⁽⁸⁾  The NSP has the incentive to minimise the occasions when it pays the congestion contract by augmenting the line capacity.

With multiple participants and transmission businesses, this becomes more complicated as there are many different transmission combinations.  A feasibility test can be used to arrange specific contracts, as occurs at five minute intervals with the present dispatch.  With multiple owners of the transmission grid there would need to be a sharing mechanism for responsibility.

The PJM system, which was the testing ground for this approach, overcomes disincentives by requiring participants to have adequate transmission capacity.  Even so, the compensation for expanding the system, based on congestion cost differentials, has meant rationing of Firm Transmission Rights.  Some means of vesting ownership in these is therefore required.

The PJM approach was a half-way house between common carriage and individual ownership has tended to adopt the features of the former.  Spiwak ⁽⁹⁾ is one writer who considers the entire common carriage regime for transmission is doomed to failure.  Rejecting "regulated" transmission expansions, he considers that open access at controlled prices will not offer sufficient incentive for the building of new lines;  this lack of incentive is exacerbated if prices are based on short run marginal costs.

Price discrimination is essential if new facilities are to be provided without the colossal waste and inefficiency of central planning.  Discrimination would be based on certainty of access to a line, initial capital funding and so on.  This allows competition to play a crucial role bringing efficiency for which more choices is only one element.

Spiwak argues that central planning of transmission in the US has been a failure because of its inevitable pricing rigidities.  He points out that in the US, since FERC Order 888 required divestment of transmission from generation, there has been little new entry other than marketing firms, and new transmission build has fallen 46 per cent.  This is creating considerable reliability difficulties in the US and is doubtless a factor in the issues raised by FERC Commissioner Hebert (see page 4).

FIRM ACCESS

DEFINING ACCESS RIGHTS AND THE DIFFERENT COMPONENTS OF TRANSMISSION

Generator firm access rights are used in several different senses.

• First, at their most fundamental, they refer to the rights an individual facility has to tap into a main transmission line that carries power from several sources into a major market.  These "shallow" connections are paid for by the generator concerned and are undeniably best left to that generator to ensure optimum expenditure levels on them.

• A second notion of access rights concerns those shared between several generators to a major node.  The previously integrated electricity supply system maintained a level of transmission sufficient to serve specific generators or clusters of generators.  It is said that in Victoria the transmission capacity serving the Latrobe Valley was designed to allow all stations to operate at their maximum capacity for some 99.8% of the time.

  Derived from this, the incumbent generators could claim to have a degree of firm access rights implicitly vested in them.  If these are made explicit, new or augmented supply would need to accept a diminished level of certainty (perhaps generating but compensating another generator that is constrained-off), arrange for a level of availability from an existing generator to be transferred to it, or augment the shared transmission line.

  An alternative, more conventional view is that the NSP operates an open access line of a given capacity and no generator has any preferred rights to the line.  If the NSP has, indeed, operated along these lines, it is in a strong position to obtain increased revenue from customers by offering certainty to some (but correspondingly less certainty to others).  But this open access approach is likely to result in free riders bringing suboptimal line usage.

• A third notion of firm access rights concerns the residual level that was never planned to be met, the 0.2% of the time that the access would be expected to be not available.  One issue to be addressed, if this is taken to be the implicit contract, is what does the 0.2% comprise?  Often it would, in reality, be power at or near VoLL, hence the reason why it may be sought.  If firm access is to be bought, it would need to be specified.  The parties involved would need to agree at the price or compensation that would be offered for firm access in addition to that already available In that case, the NSP is in a position to offer insurance or improved reliability through, for example, contracting some reserve power or building in greater redundancy.

• Fourthly, firm access rights can be applied to an interlink between two major load centres.

• Finally, although not usually thought of as a firm access right, the generator might come to regard its loss factors as "firm".  Thus, if a generator in year one is given a static loss factor of 0.025 and, due to supply growth on the lines it shares with other generators, this is increased in year 2 to 0.035 (without any generator actually requiring to increase its capacity rights) it may arrange for the NSP to improve line cooling so that less power is lost in transmission.  In order to recoup the expenditure concerned, it will need to negotiate a lower line loss factor.

SPECIFYING ACCESS RIGHTS

Attachment 1 specifies the Code's connection agreements.  These are vague in terms of concrete obligations on the part of the transmission business.  As previously argued, efficiency requires rights to be specified and both these and the corresponding obligations should rest with the party best able to act in ways that maximise their efficient use.  Fundamental to any arrangements on what firm access rights comprise is a definition of what rights, if any, each generator currently has to transmission capacity.  If such rights are properly specified, the requirement to have a regulator determine the appropriate levels of service and expenditure is reduced.

Unless a level of access is specified in the connection agreements, there is no basis for seeking an improvement in the level of service or otherwise modifying it.  There is, for example, no incentive for the transmission business to undertake maintenance at times when the value of the link to the generators is low.

Designating the transmission system beyond the "shallow" connections as a single entity with open access and assigning the costs to consumers is operationally sound where there is an abundance of capacity.  But as capacity need increases, this procedure creates distortions.  It impedes the building of new capacity, imposing reduced certainty on each generator's ability to transport power to the customers.

In addition, if the existing transmission lines to the meshed network are open access, new generating capacity, unless it is accompanied by new transmission capacity, will mean that the existing generators will face an increased likelihood of being constrained-off.  This introduces a risk dimension to incumbent generators without offering them any means of defraying it.

Moreover, as gas and electricity are rival fuel sources of power (and gas is a rival source of generation), the allocation of true distance related costs to gas haulage and the lack of such costs, aside from line losses, ⁽¹⁰⁾ to electricity is likely to distort decisions on the optimal location of new energy capacity.  If, for example, a gas fuelled generator obtains costless carriage for its electricity, it will locate close to the gas source while its less costly location might be close to the market.  Averaging of charges for electricity costs may also introduce distortions between gas and electricity as rival fuel sources.

GENERATOR PAYMENTS

It is difficult to envisage why any future radial transmission developments should be other than entrepreneurial.  Leaving an option for lines financed by consumer levies offers a hostage to those seeking to enlarge the notion of "market failure" into a concept where the market is deemed to have failed when it does not produce the outcomes the regulatory agency considers appropriate.  The stated aim of modern regulators is simply to produce outcomes that a competitive market would produce. ⁽¹¹⁾

Entrepreneurial electricity lines will almost always be financed (and perhaps owned) by generators.  As generators pay few of the costs of existing lines, this may give rise to some distortions.  These however are unlikely to be significant because the present arrangements have been factored into the energy price generators offer (and, in the case of privately owned generators, the purchase price for the asset).  Efficiency rests primarily on clear and unchangeable arrangements with the original specification of these arrangements a second order matter.

One distortion stemming from charges to the generators is "economic" bypass will not be contemplated by them.  It may help efficient decision making in this regard, if the customer funding for existing transmission links were to be allocated to and notionally passed through specific generators, though the basis of such an allocation would require some consideration.

Attachment 2 suggests how the costs of transmission might be best allocated to correspond to market signals.  In the attachment, these are based on an ideal system that neglect decisions previously taken.  This involves retracing the root of the implicit contracts that were part and parcel of the original integrated system and assigning them to the party best able to ensure efficiency.  Aside from the "shallow" connection costs, in the example given (which is a simplified version of the Victorian system), this breaks the payments into different parts, each with its own transaction structure.

Attachment 2 recognises a fundamental difference between the "meshed" transmission assets and those representing radial lines.  As previously argued, while the former may need to be regulated along the lines of common carriage road systems, the latter serve specific and identifiable (normally generator) interest.  The rights to them and (in the case of new facilities) their costs are best allocated to specific parties.  This gives a generator, or a coalition of generators, firm and exclusive tradeable rights to the lines themselves.  It would encourage efficient new build.

EXISTING FACILITIES

Customers have been required to pay for the existing network on the basis of their usage rates.  This system is in place and would require a demonstrably superior system to be devised if it is to be replaced.  But the existing network is not sunk for all time.

There are options in expenditure on maintenance and network operations on which the different parties may place different valuations.  The NSP with a regulated network may see the best value in expenditures in one area while suppliers may wish to have a greater certainty of reliability of the lines carrying their own energy.  Some means of ensuring the appropriate expenditure and service is achieved on specific parts of the network is required.  This is best accommodated by assigning the rights as fully as possible and ensuring the different parties have the correct incentives to meet the corresponding obligations.

Principle 1:  Existing generators have already purchased firm access reflected in the prices paid for the assets.

The precise rights involved in this need to be specified, or in the Victorian case, determined by examining the basis of the acquisition payments.  But, it would seem likely that a high degree of firm access for Latrobe Valley generators could reasonably have been assumed given the surplus transmission capacity then (and now) in existence.

It is unlikely that the level of firm access rights would have been 100% since this would obligate the NSP to provide compensation should a line be out of service.  In Victoria, GPU would argue that it would not have paid as much as it did if its assets carried a contingent liability to pay compensation to generators in such circumstances.  In addition, there are rare occasions when part of a Valley generator's output is constrained-off, reflecting some of the difficulties in fully defining capacity at all times, in all weather conditions, etc.

For existing generator capacity, total firm access would therefore be likely to require some form of additional payment.

With a designated level of capacity rights, any generator would then have an option to purchase more than its allocated firm capacity from the NSP in the form of a hedge contract.  This would offer the NSP, which is in the best position to improve access in the most cost-effective way, opportunities to be the counterparty to such a hedge.  The hedge price might be specified at a particular hub (probably Thomastown in the case of Victoria).  It may also contain force majeur clauses.

In effect, this would lead to a segmentation of the transmission network with one part constituting the transport of generated power to a hub and the other part comprising the meshed network from the hub.  If the generators were prepared to pay enough to remove congestion at a particular point, it would be removed in this way;  the degree to which a constraint remained would be dictated by the value placed on ensuring a levelised price.

Of course, a generator's rights to the network does not guarantee it will run whenever it wishes.  Scheduling would remain the task of the system coordinator (NEMMCO) with the decision based on bids, line losses, constraints, etc..  The generator owning the rights to a line would be entitled to the revenue it brought in, whether or not its plant was running. ⁽¹²⁾

NEW FACILITIES

The SANI process has illustrated some of the difficulties with the expansion procedures envisaged under the Code.  With the SANI proposal a central planner was determining the best outcome and charging customers for the costs, even though some customers (those in NSW) would actually incur higher prices as a result of the investment.

New interconnects allow lower prices, to the benefit of all customers served and to the detriment of the producers in that area.  Ideally, the costs should be apportioned between the beneficiaries but no market operates that perfectly, while regulatory decision frames are even further from perfection.  But the sponsors of any innovation will rarely capture all the benefits from it.  Workable outcomes are nonetheless seen in other markets, including those where a new source of supply, paid for by a particular producer results in lower prices to all consumers, not only those using the new supply sources.

This indicates that it is workably efficient if the producer(s) who benefit pay for augmentations.  Those making the payments would naturally receive an exclusive right to the property.  However, this interfaces with a system in which the network is in place and its on-going costs are paid for by customers.  Producers will seek to ensure they are served by the existing system rather than paying for a new one, hence the need to formalise the present implicit rights to existing networks.

Principle 2:  New or expanded generators must purchase firm access.

If all the firm access is allocated, new generators must:

• tolerate a lack of firm access;
• purchase firm access from an existing generator;  or
• negotiate with an NSP for new capacity

Where there is excess capacity on a line, (the existing generators could not feasibly use all the capacity available), the NSP should be obliged to offer it to any party on the same conditions that describe the formerly implicit contract of the existing suppliers.  Should there be a surplus demand, the NSP should be free to obtain better terms.  If this were not permitted, queuing for capacity would occur and it is likely that "black market" transactions would take place.

Principle 3:  A Generator Transmitting Power Beyond its Rights

Generation in excess of firm access at a time of constraint would be handled by the generator having to compensate the NSP, which would in turn compensate the generator that was constrained-off.  There would be no penalty for excess generation if the lines were not constrained since no cost is involved.

PRICE AND REVENUE CAPS

Generators' rights to the network also have a bearing on the price setting for transmission.  Based on discredited notions of a wish to save energy rather than maximise efficiency, price caps have often been set on the basis of revenue needs.  This offers inadequate incentive for the transmission business to seek greater line utilisation and could bring considerable social costs.  In the UK revenue caps bring interminable wrangling over appropriately justified expenditure allocations.  Furthermore, the revenue caps very quickly collapse into a form of profit regulation, the very outcome they were intended to prevent.

Line charges are best set as a contractually fixed price (perhaps with a reducing rate) at a designated level of service.  This leaves the transmission business every opportunity to profit from making efficiency gains while protecting captive customers.  The possibility of by-pass places a discipline on an incumbent NSP to reduce prices (beyond any stipulated reduction) where these are excessive.  Of course, it would be illogical to allow the NSP to recoup from captive customers revenues lost from any consequential "stranding" of assets.

ISSUES TO BE RESOLVED

With both existing and expanded links, consideration needs to be given to the monopoly aspect of the transmission network:

• If the NSP is already being adequately compensated by TUOS, does the opportunity for improving the access of a particular generator offer a windfall?  Probably not if the parties have a defined level of reliability at the point of hub connection.
• Does an incumbent NSP have leverage over a generator seeking improved reliability as a rival NSP would be in an inferior position to offer this?  Probably the incumbent NSP is advantaged.

Other key problems are:

• Unless there is a constraint, the vast bulk of transmission costs are sunk, with only minor costs related to throughput.  Yet, cost recovery through TUOS is based on throughput.  This tends to be prejudicial to large users and beneficial to smaller users, since all should pay a similar access charge.  In other markets with a high fixed cost component but with charges based on usage, large users tend to be able to negotiate discounts, particularly where the service is contestable.  This is seen in water, gas, rail, etc.

• Once a link is constrained, losses rise considerably but the major beneficiaries of augmentation are customers in the constrained area since the augmentation leads to a reduction in the price for all electricity.  This was a rationale behind loading the charges solely onto customers but begs the question of how they might organise themselves to ensure delivery from a low cost source.

  In fact where power is deliverable through a constraint, a genrator, unless it delivers only a trivial quantity of power, is unlikely to see the full benefit of the higher price.  Its own increase in supply will tend to equalise prices across the board.  Generators in the previously constrained area will tend to see lower prices.  Outside of that area, prices will rise for all generators.  However, this is a problem with all forms of trade and does not require regulatory intervention.

CONCLUDING COMMENTS

The complexities of the different incentive structures comes back to some need for reassignment of payments and therefore of rights and obligations to the transmission system.

For new transmission lines, there is wide agreement that the costs are best paid by the parties benefiting most.  Thus, in the SANI case, these are NSW generators who gain a new market in South Australia and South Australian consumers who obtain cheaper power.  This would be difficult to arrange in a commercial market and the outcome would be that the suppliers would pay all of the costs, just as they do with, say, a satellite link.  In any event none of the costs should be borne by NSW consumers who would actually see higher prices as a result of the link.  If the procedures are to mirror market outcomes there would be no payment required of consumers in this and most other radial links.  Exceptions would comprise isolated areas or new townships where it is not profitable for particular generators to finance supply.

It would be preferable to integrate past and future charging for transmission lines by revisiting the cost allocations originally set.  For existing lines this would confer an agreed form of firm access on to generators up to the node prior to the meshed network.  The generators would pay fees for the rights that correspond to the implicit costs (and TUOS charges by customers would be reduced accordingly).  Given decisions already taken, the generators' fees would be paper transactions raised from customers.

The generator fees would best be structured as a two part tariff to incorporate fixed costs (about 90 per cent of the total) and variable costs for actually running (about 10 per cent of the total).  A generator with firm rights would receive compensation if it was constrained-off by a generator without such rights.  The compensation would be payable by the generator without the rights.

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Attachment 1
Connection Agreements Under the Code

5.5 (f) of the Code specifies

The Network Service Provider and the Generator shall negotiate in good faith to reach agreement as appropriate on the:

1. connection service charge to be paid by the Generator in relation to connection assets to be provided by the Network Service Provider;
2. use of system services charge to be paid by the Generator in relation to any augmentations or extensions required to be undertaken in respect of all affected transmission networks and distribution networks;
3. amount to be paid by the Generator to the Network Service Provider in relation to the costs reasonably incurred by the Network Service Provider in providing generator access;
4. compensation to be provided by the Network Service Provider to the Generator in the event that the generating units or group of generating units of the Generator are constrained off during a trading interval;  and
5. compensation to be provided by the Generator to the Network Service Provider in the event that dispatch of the Generator's generating units or group of generating units causes another Generator's generating units or group of generating units to be constrained off during a trading interval.

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Attachment 2
A Stylised Depiction of the Cost Allocations

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ENDNOTES

1.  If there is inadequate new capacity, this is likely to be due to the interplay of regulated transmission and market-based generation providing incompatible incentive structures.

2.  London Economics have found short run charging for losses and congestion rarely covers more than 20 per cent of transmission costs in any jurisdiction and is commonly much less than this.  London Economics, Review of Australian Transmission Pricing, A Report for the ACCC, April 1999, p. 67

3.  Hebert, C.L., and Rokach, J.Z., Where We Go From Here, Public Utilities Fortnightly, May 1 1999.

4.  Even so, there are situations where compensation should be paid.  These occur where the actions of a rival or an entity engaged in business that bears no relation to that of the incumbent are detrimental.  Structures that take light from existing structures are common cases.  In transmission, the building of a new line can result in diminished access to a market for some suppliers because of the physics of electricity flows.  Such new building would require compensation for those who lost access.

5.  Hyde M Merrril, Exploiting the Random Nature of Transmission Capacity, Public Utilities Fortnightly, September 15 1998.

6.  Transmission capacity reservations and transmission congestion contracts, Scott M. Harvey, William W. Hogan, Susan L. Pope, June 6, 1996 (revised March 8, 1997) p.55.

7.  Where it is argued that the common ownership of agricultural land brought overgrazing, inadequate maintenance and land degradation.

8.  Although, as discussed later, where the increased supply would have led to a lower price, the two cents would actually overcompensate the generator.

9.  Spiwak L.J., You Say ISO, I Say Transco, Let's Call the Whole Thing Off, Phoenix Center Policy Paper.  No. 4, www.phoenix-center.org

10.  Because line losses are based on marginal rather than average losses, they are actually about double the true losses and this partly compensates for a lack of explicit transport costs.

11.  Markets "fail" for highly specific reasons:  the presence of monopoly, overwhelming externalities, or because the benefits they bring are "public goods" like defence.  While the meshed network might have some public goods characteristics, this cannot be claimed of radial lines the benefits from which can be appropriated by particular parties.

12.  The revenue to the generator would need to be determined by its bidding.  Where the generator without firm rights set the price, it could expect to obtain all the revenue;  its share would be determined by its previous bidding pattern in other cases.