Myth and the Murray -- With an Update

Address to Macquarie Cotton Growers Association,
Warren, 29 April 2004

INTRODUCTION

Ladies and Gentlemen,

Thank you for the opportunity to visit Warren, see the Macquarie River, and to talk about my monograph, Myth and the Murray:  Measuring the Real State of the River Environment -- launched by the VFF in December last year.

The Murray River is not the Macquarie River, but as many of you will appreciate, the Murray is the icon/the flagship/the example that is driving water policies which impact on all irrigators in the Murray-Darling Basin and indeed across Australia.

The general thrust -- evident in the environmental campaigns, the research reports, policy documents, the metropolitan media -- is that our river environments are being degraded and are now in crisis because irrigators are taking too much water.

I came to the issue in July last year.

At that time, both the government and the opposition had made "Saving the Murray" a key policy platform.  Increasing environmental flows by taking water from irrigators was seen as the solution -- in the case of the Opposition, by as much as 1,500 gigalitres.

I am the son of a farmer.  I grew up believing that problems are not for complaining about, but rather for fixing.  It is easier to fix a problem if we understand the problem -- that is, if it is properly defined.

Boxing at shadows can be exhausting -- but achieves nothing.

Basic environmental statistics can give an indication of the nature and magnitude of the problems we face, as well as the extent to which current programmes are successfully addressing the issues.

I started with Murray River issues by looking for the data that I assumed existed, and that I assumed supported the media headlines -- namely, that we have deteriorating water quality, declining native fish stock and dying red gums along the River Murray.  This afternoon I will test these beliefs by considering the available evidence for water quality, Murray Cod, red gums and also let us consider the geography of the Murray River's mouth.  I will then update you with reference to the findings of the Standing Committee for Agriculture, Forestry and Fisheries before concluding with some thoughts on Environmentalism.

HOW IS THE WATER QUALITY?

Key water quality indicators can give an indication of the health of a river.

Here is a plot of what increasing salt levels in the Macquarie River might look like, Figure 1.

It has been said there are lies, damn lies and then there are statistics.

When you look at a graph, it is important to check a few things.  The time frame -- is it appropriate?

The site -- is it relevant?  The indicator -- is it what we are really interested in?

Actually, this is not a water-quality graph, but rather a plot of the spot price for sugar on the New York Stock Exchange for a very short period two years ago when the price was improving.

The point I really want to make and emphasize is that if you can read a commodity graph, you can read a water-quality graph.

Key water quality indicators are nitrogen, phosphorus, turbidity and salinity levels.

The message with respect to water quality and Murray River salinity in July last year was very clear:  The Wentworth Group said that "deteriorating water quality was seriously affecting the sustainability of agriculture", and the CSIRO Website was unambiguous:  "salt levels are rising in almost all of the Basin's rivers".

I asked the CSIRO for the data to support the statement on their Website.  After some time, they said they didn't have the data and referred me to the MDBC.  I discovered that daily readings for salinity are available on request from the Murray-Darling Basin Commission (MDBC) for many key sites, including Morgan in South Australia.

Morgan is considered the key indicator site for water quality in the Murray--Darling Basin because it is below the inflow from the Darling and just upstream of the pipeline off-takes for Adelaide's water supply.  According to the MDBC, "its use as an indicator site emphasizes the relative importance of river salinity impacts on all water users in the system."

A plot of the yearly averages for salinity, since recordings were first made back in 1938, show current salinity levels at Morgan are equivalent to pre-World War II levels, Figure 2.  I was surprised -- I was expecting an increasing trend.

The peak in 1982 is attributed to the drought at this time, with low flow conditions normally associated with higher salt levels.

A plot of yearly average salinity levels for the last 20 years indicates that salinity levels have dropped since the drought of 1982, Figure 3.  Concentrations did not return to the 1982 levels despite the recent drought.  Water quality has, in effect, improved.

Upstream -- at Swan Hill and Yarrawonga -- salinity levels are stable, Figure 3.

Contrary to information that was posted on the CSIRO Wwebsite, salinity levels are not increasing at key sites.

The MDBC suggested a plot of five-year rolling averages rather than yearly averages, Figure 4, but concurred with my findings and indicated that average salinity in the river Murray has improved over the last decade.

The improvements are attributed to the salt interception schemes and improvements in on-farm practices.  The salt interception works are purported to give a benefit of reducing salinity by 200 EC units, Figure 4.

Interestingly, by comparison, the report of the Expert Reference Panel (the focus of Professor Gary Jones article in The Land newspaper just last week), estimated that sending 350-750 GL down the river as environmental flow would give an improvement of 20-35 EC units, while 1500 gigs would reduce EC by 90 units to an absolute reference condition of 594 EC.

I subsequently plotted other key water quality indicators.  Nitrogen, phosphorus and turbidity levels are not increasing -- water quality is not deteriorating in the Murray River.

If we walk around in a dream with our eyes wide closed to the real world, we risk walking into things, bumping our heads, falling down flights of stairs.  If we drive our tractors with our eyes closed we will surely bog them, Figure 5.

Yet there is this idea that negotiations can occur and that public policies can be determined on the basis of ideas that are not supported by the evidence -- that is, by the real world data.  There is this idea that we can effectively move forward on the basis of belief alone.

BUT THE REAL PROBLEM IS DECLINING FISH NUMBERS?

I wrote up my water quality work as a small paper titled "Received Evidence for Deteriorating Water Quality in the Murray River".  The paper was widely circulated on the Internet after the seminar I gave in Canberra on 25 July 2003.

The Deputy Prime Minister's response to this "good news" was typical of many.  Speaking in Moree some few weeks later he said, "though we are achieving environmental improvements in some areas, such as reducing the salinity of the Murray ... one indicator of a much broader problem is the decline in native fish numbers throughout the basin."

Murray Cod had just been listed by the Federal Environment Minister, David Kemp, as a vulnerable species under the EPBC Act on the basis that there had been a 30 per cent decline in Murray Cod numbers over the last 50 years.

Would you be surprised, however, if I told you there are no data to support this claim made in the media release associated with the listing and which was reported extensively in the media?

The Australian newspaper has been running a "Saving the Murray" campaign since February 2001, so it immediately runs all and any bad news stories on the river.  It picked up on the Minister's media release and ran stories with the headlines "Murray cod on national list" and "For cod's sake, Murray needs stronger flow".

So what do the available data look like for the Murray Cod?

The most widely quoted source of information on native fish status in the Murray-Darling Basin is a survey undertaken in 1995--96 by NSW Fisheries.  The survey does not provide any trend data.

The report's principal conclusions include the statement that:  "A telling indication of the condition of rivers in the Murray region was the fact that, despite intensive fishing with the most efficient types of sampling gear for a total of 220 person-days over a two-year period in 20 randomly chosen Murray-region sites, not a single Murray cod or freshwater catfish was caught."

A local Murray River fisherman's retort to the scientist's declaration that they didn't catch any fish goes something along the lines, "The scientists, although having letters behind their name, spending some $2million on gear, and 2 years trying, evidently still can't fish."

It is evident from fishing magazines and the results of local fishing competitions that Murray Cod are present.

But perhaps most remarkable is the fact that, at the same time, in the same years, in the same regions that the scientists were undertaking their now much-quoted survey that found not a single Murray Cod, commercial fishermen harvested 26 tonnes of Murray Cod!

I gave a lecture to environmental science students some weeks ago.  I was asked to speak to the topic the "burden of proof in the environment sphere".  I put it to them that proof/evidence is increasingly unnecessary as more and more scientists are operating on the basis of belief.  I laboured the point for the best part of the hour.  One student said:

"But belief is important -- it's what makes the world go around".

"Point taken", I replied, "but can we agree there is a huge difference between 'evidence' and 'belief'?"

He didn't seem too convinced.  Then again, many beliefs are not troubled by facts because they have nothing to do with fact.

Some people want to live in their own world untroubled about the reality around them.

The reality is that Murray Cod should probably have been listed as vulnerable to extinction 40 years ago when there was a collapse in the fishery, Figure 6.  The fishermen tell me that that was when aluminium dinghies first came on the market and before bag limits.

The commercial fishery was closed in 2001, there has been a significant restocking effort and there is a lot of anecdotal information to suggest that cod numbers are now on the increase and carp numbers on the decline.  But we don't know, because no proper monitoring programme is in place.

The MDBC's Draft Native Fish Strategy has only one graph and it is the plot of the total commercial catch for Murray Cod wrongly labelled "Catch per Unit Effort".  Yet the actual catch per unit effort is trending in the opposite direction, Figure 7.

Some time late last year, the Victorian rural weekly The Weekly Times ran a great cartoon (Figure 8) with a fellow reading the newspaper saying to his mate, "The MDBC aren't coming clean".  The mate replied, "My goodness.  Are they that short of water?"

BUT HEY, THE RED GUMS NEED SAVING!

Tim Flannery and the Wentworth Group's second report, Blueprint for a National Water Plan, stated unambiguously that vast numbers of 300-year-old red gums were dying along the Murray.

Of course they presented no data.  The Wentworth Group's report cited an MDBC survey which also presented no data, the report said they undertook a visual survey and did not distinguish between stressed trees and dying trees, did not estimate the age of the trees -- and certainly didn't count any trees.

After the COAG meeting in November last year -- at which the state and federal government council made the decision to allocate not 1,500 gigs to the river, but 500 gigs for icon sites including the Barmah-Millewa forest -- the SA Environment Minister said it would be the very first time water had been allocated to the environment.

Yet the Barmah-Millewa forest has had an environmental allocation of over 100 gigs a year since 1993, with allocations able to be carried over from year to year.

Despite claims that river red gum forests are dying from lack of water as a result of river regulation since the 1930s and extensive logging, the data actually show that, for example, in the Barmah forest, the trend was one of increasing saw log volume and growing stock during the twentieth century.

Contrasting the number of river red gums along the Murray near Swan Hill in 1896 with numbers in 1996 gives something of a reality check, Figure 9.  Much of the current extent of river red gum forest in this area is considered a consequence of flooding in the 1870s that corresponded with the end of Aboriginal burning.

A DRY RIVER MOUTH BECAUSE IRRIGATORS TAKE TOO MUCH WATER?

Soon after taking on the position of Leader of the Opposition, Mark Latham promised to "save the whole Murray River" starting with an allocation of "450 gigalitres to keep the mouth of the Murray open".

The Australian Conservation Foundation (ACF) has made the River's mouth a symbol of River health and impressed upon the Australian public the belief that the mouth runs dry because irrigators take too much water from the river.  The reality is much more complex.  Let us have look at the geography of the area.

The Murray River runs into a large lake system, Figure 10.  Famed explorer Charles Sturt was the first white man to travel down the Murray.  He left Sydney with a few men and bullock cart in November 1829.  They found the upper Murrumbidgee and followed it.  When the going got tough with the bullock carts, Sturt and his men assembled the whale boat they were carrying in one of the carts.  They made it down the Murrumbidgee in the boat, and into the Murray.  The Darling was flowing, as were the Rufous and other rivers.

It was February 1830 when they arrived where the river meets Lake Alexandrina, Figure 10.  Sturt wrote in his journal that, "The view was one for which I was not altogether prepared.  We had, at length, arrived at the termination of the Murray.  Immediately below me was a beautiful lake, which appeared to be a fitting reservoir for the noble stream that had led us to it;  and which was now ruffled by the breeze that swept over it."

According to his journal, he had bad toothache and food supplies were low, they wanted to avoid the Aboriginal tribes that they feared would murder them if they proceeded back by the river -- and intended to do this by proceeding to Launceston, Tasmania, in the whale boat.

As they crossed the Lake he remarked, "I was surprised at the extreme shallowness of the lake in every part, as we never had six feet upon the line." And, "Thus far, the waters of the lake had continued sweet;  but (on the second day) the transition from fresh to salt water was almost immediate".

As he attempted to reach the ocean on his way to Tasmania from the southern extremity of the lake complex he observed,

it was in vain that we beat across the channel, from one side to the other it was a continued shoal (submerged sandbank), and the deepest water appeared to be under the left bank.  The tide, however, had fallen, and exposed broad flats, over which it was hopeless, under existing circumstances, to haul the boat.  We again landed on the south side to the channel, patiently to await the high water.

But subsequent attempts were also futile with Sturt reporting that, "Shoals again closed in upon us on every side.  We drag the boat over several, and at last got amongst quicksands ... I found we had struck the south coast deep in the bight of Encounter Bay."

The next day he reported, "If I had previously any hopes of being enabled ultimately to push the boat over the flats that were before us, a view of the channel at low water, convinced me of the impracticability of any further attempt.  The water was so low that every shoal was exposed, and many stretch directly from one side of the channel to the other".

So, in February 1830, Sturt wrote that the Murray River terminated at the entrance to Lake Alexandrina.  The southern perimeter of the Lake, now officially the Murray's Mouth, was then a maze of impassable sandbars.  The explorer's observations indicate that Lake Alexandrina was shallow and salty and without a navigable passage to the ocean many decades before water was first extracted from the Macquarie, Darling and Murray Rivers for irrigation.

I call the ACF's conclusion that water extractions for irrigation are directly responsible for the Murray mouth's closure one of those "wet paddocks cause rain stories".

Confusing correlation with cause, along with collecting few useful statistics, burying good news stories, endorsing policies that will have significant social and economic impact while delivering few environmental benefits seems to be the current state of affairs.

FINDINGS OF THE FEDERAL PARLIAMENTARY COMMITTEE

Earlier this year, sometime in February, I was contacted by the Standing Committee on Agriculture, Fisheries and Forestry and asked if I would attend a meeting in Canberra with the Committee and also Professor Gary Jones who heads the CRC for Freshwater Ecology, Dr John Williams (formerly head of the CSIRO Division of Land and Water), Dr Peter Gehrke (also from CSIRO) and Dr Lee Benson (the Principal of consultants Ecology Management).  The Committee asked that the meeting be a frank discussion with a view to resolving the disagreements over the science underpinning the Living Murray Initiative.

Professor Jones began by appealing to his authority as the head of the CRC and also to a scientific consensus.  The briefing notes he distributed state:  "To my knowledge, there is not one reputable, independent river scientists in Australia who believes that the rivers in the MDB are doing fine." And without quoting a single statistic he stated, "Scientists point to the large body of evidence that, collectively, provides a compelling case for a widespread and on-going decline in river health."

I found the meeting frustrating.  While Dr Benson and I were keen to discuss in some detail the science, Dr Williams and Professor Jones spent much of the 3 hours restating that they represent the establishment and the consensus.

This was also the position that Professor Jones took in his article published in The Land last week (22 April 2003) in which, without providing any evidence, he also referred to the decline in the abundance and distribution of native fish, birds and floodplain vegetation.  Taking this as a given, he then focused his article on whether government should take 350, 750 or 1,500 gigalitres of additional environmental flow.

This was the focus of the Science Reference Panel Report that began by restating the accepted wisdom:  "There is significant evidence that the overall health of the River Murray system is in decline" and "multiple threats to the health of the River Murray system include ... increased salt and sediment loads".

In March 2004, the Federal Government's Standing Committee on Agriculture Forestry and Fisheries handed down its Interim Report which emphatically stated that the scientific evidence does not support the claim that the Murray River needs saving.

The committee relied heavily on my monograph and also the work of ecologist Dr Lee Benson.  The majority report of the Committee (which comprised seven Coalition, three ALP, and one Independent member) recommended that, as a matter of urgency, the government delay its proposal to commit water for additional environmental flows.

The committee cited concerns with the quality of the science advice and understanding which underpinned the mooted policy recommendations, which cumulatively are likely to have a significant negative economic and social impact.

The Australian newspaper, which has been running a "Saving the Murray" campaign, immediately responded with three pieces that were all overwhelmingly dismissive of the committee's report, "MP revolt on rescue of Murray", "River mouth needs less talk, more water" and "Downer rejects Murray water delay".  Two days later, the national daily followed up with two more articles:  "Delay in Murray flow catastrophic" and "Red gums water of life comes down to the river" one of which ran with the subtext, "There may be some people who think a healthy river is a waste of water -- I'm not one of them".

Not one of the stories explained why, for example, the delay might be "catastrophic" or why the river mouth needed more water.  No effort was made to understand or analyse why the Parliamentary Committee was providing such strong advice that challenged the existing environmental policies of both the Government and the Opposition.

ENVIRONMENTALISM

In material, standard-of-living terms, Western democracies have progressed and benefited enormously from the secularization of society and the power of independent science.  There is, however, increasing evidence that many scientists and scientific organizations are struggling to maintain the distinction between the empirical evidence and their belief in "The Litany" -- that our air, land and water resources are deteriorating despite evidence to the contrary.

Embracing that Litany and working with environmental campaigns also promises buckets of easy government money for government scientists.

Michael Crichton, notable American writer and author of Jurassic Park, has described environmentalism as a perfect 21st century remapping of traditional Judeo-Christian beliefs and myths:

There's an initial Eden, a paradise, a state of grace and unity with nature, there's a fall from grace into a state of pollution as a result of eating from the tree of knowledge, and as a result of our actions there is a judgment day coming to us all.  We are all energy sinners (for the purposes of the Murray and Macquaire Rivers, water sinners), doomed to die, unless we seek salvation, which is now called sustainability.  Sustainability is Salvation in the church of the environment.

If we accept environmentalism as the new religion, then it is perhaps easier to understand much of the current public policy agenda regarding water.  It is as much about process as outcome.  It is as much about what is morally right and wrong as it is about the real state of the river environment and fixing real environmental problems.  Furthermore, if we accept that the extraction of water from rivers as sinning, then perhaps all irrigators are doomed to live in a state of permanent sin regardless of how much water you leave in our rivers and dams!

Thank you.

---

For the Parliamentary Interim Report mentioned in this speech, [130k PDF], please click here

Respect My Right to Choose GM Foods

John Hepburn, the Greenpeace anti-GM Campaign Leader, has told us that transferring a gene from one species to another -- the process of genetic modification (GM) which is also known as genetic engineering (GE) -- is "inherently unpredictable" (The Land, April 22, page 8).

I guess that makes cotton -- with about 90 per cent of growers now planting GM cotton -- our most inherently unpredictable crop!

The anti-GM campaigners usually also tell us it is not natural.  Then again, so much of what we use and consume is not natural and a product of science and technology.

I tried my 15-year old daughter's lip gloss the other day.  I have never tasted anything so "artificial".  Yet it is not being banned.

I sometimes think we should ban flying in airplanes and mobile phone -- but I love the internet so it should stay.

I have been told people will never accept GM because it is not natural to transfer genes between species.

The problem with this argument is that professors of genetics can explain how genes move between species naturally.

The most famous mobile gene is Mariner (named after Samuel Taylor Coleridge's "Rime of the Ancient Mariner").  It has been found in many species, both plant and animal.  These mobile genes apparently move about by hitching onto viruses, and some may be transmitted by mites.  The presence of the Mariner gene doesn't frighten me.  I am actually rather impressed.

GM foods don't frighten me either.  In Sydney last year, Greenpeace re-launched its True Food Guide.  The big names of the Australian food scene attended the launch.  Margaret Fulton declared that she hoped to keep Australia free from GM food and thus our food "safe to eat for my children, grand children and great grandchildren".

Never mind that the fast food shop down the road was probably selling fish and chips cooked in vegetable oil produced from cotton seed from GM cotton plants.

I can respect Margaret Fulton's desire not to eat GM food -- in the same way that I respect the rights of Moslems not to eat pork -- but the anti-GM campaigners do not appear to accept my right to choose GM.

I know some Woolworths and Safeway stores now sell cinnamon donuts made from GM soy.  I applaud Woollies for being brave enough to do so.

I asked a friend what she thought of the anti-GM activist last week painting "Stop GE Imports" on the side of the ship carrying 13,000 tonnes of GM soy meal from the US;  feed for Ingham chickens and perhaps also some dairy cows.

"Greenpeace is doing its job", she replied.  Mr Hepburn would have appreciated that answer and then asked for a donation.

Once upon a time the protest might have been against the importation of stock fed from an overseas competitor.  I guess we are now benefiting in a roundabout sort of way, from the US farm subsidies.

Unlike Greenpeace -- which makes money out of stunts -- Monsanto and Bayer are dependent on the commercial success of their actual products.

With the continued moratoriums on the commercial planting of GM canola it is Greenpeace, however, which has had the big wins of late.  Fancy our state governments preventing planting food crops on the basis of belief.

The decision should be left to the market -- so people like me can choose GM and Margaret Fulton can go organic.

ADVERTISEMENT

Japanese Retreat is a Great Loss for Australia

The announcement by the giant Japanese restaurant chain Saizeriya that its has finally scrapped its remaining investment plans for food manufacturing in Australia, is the end of one of the most disastrous industrial relations debacles witnessed in this country.

Saizeriya is a 500-plus chain of Italian style restaurants serving quality food to the Japanese at reasonable prices.  It is now expanding into China, is a high profile leader in Japanese food retailing and closely watched by the Asian investment community.

Saizeriya has always had its meals prepared by external contractors.  It decided, however, to centralise its food manufacturing operations to a state-of-the-art, purpose built facility at Melton on the outskirts of Melbourne.  It was the most important development to date in building the vision of turning Australia into a value-adding, food-manufacturing hub for Asia.

If completed, the Saizeriya complex would have involved more than $350 million in investment, with eight large factories and direct employment of more than 1,200 people.

But it went sour even before a spade was lifted to begin building the first plant.  In one of the worst examples of the destructive culture of Australian unionism, the National Union of Workers was given the enterprise agreement rights over the running of the complex.

The Australian Manufacturers Workers Union claimed they should have been given coverage, declared war, and co-opted the CFMEU to attack Saizeriya during construction, hoping they could leverage control over the enterprise agreement and future potential membership.

The ensuring construction fiasco caused the construction to have massive cost overrun, delayed opening by some two years and at one point triggered a slide in Saizeriya's share price.

The Victorian government, which had promised the Japanese smooth construction and operation phases, worsened the problem by high-level ineptness.  The consequent loss of face for Australia from the perceived, persistent lies has been an investment wrist-slitting exercise inflicting incalculable damage.

It seems that deals with Australian unions have the reliability and strength of sodden tissue paper.

Further, it highlights the fact that the continuing public pretence by many governments, their bureaucracies, some political elites and industry groups -- that sour industrial relations cultures are not killing job creating investment -- is a problem in itself.

In this Saizeriya example, the victims are the thousand and more people who are denied secure jobs opportunities who have been thrown to the wind, farmers who have lost millions of dollars in fresh food supply opportunities, construction workers who have seven fewer factories to build and every Australian for the loss of millions of dollars in investment, export and tax income.

What compounds the issue, is that signs abound of further impending disinvestment in food manufacturing over the next few years.

ADVERTISEMENT

Unions Start to Use Influence

While the industrial relation environment appears to be in a period of remarkable calm, real tensions lie under the surface.

These will inevitably surface in the next federal election.

The main source of tension is the decline in power and influence of the union movement.  The union movement now represents less than 18 per cent of the private sector work force.

To put this into perspective, there are now as many people employed under Australian Workplace Agreements (non-union, individual agreements) as employed under union agreements.  And individual contractors- that is people working outside the coverage of the industrial relation system -- are greater in number than union members.  These trends, under current policy settings, are set to grow, with union membership shrinking and individual contracts and contractors growing.

The union movement has used its power over state ALP governments to try to halt its decline.  In the WA for example it pressured the Gallop Government into enacting legislation to replace non-union individual agreements with union-based collective agreements as well as giving union's additional powers over non-unionised workplaces.  This was done despite the cost imposed on that state's vital mining sector, which had shifted almost entirely to individual agreements.

In South Australia the Rann Government has a draft bill that attempts to force contractors into the industrial relations system by redefining contractors as employees, thereby subjecting them to union influence.  Similar legislative changes have been tried in Victoria, NSW and Queensland.  These changes have been promoted by union;  contractors and businesses that employed contractors have resisted them.

The unions have now pressured the federal opposition into promising to re-unionise work places.  In its 2004 Platform the federal ALP committed to eliminating AWA's, thereby forcing over 455,000 workers in 7,600 businesses into unionised collective agreements -- including most WA mining firms that adopted AWAs when state-based individual agreements were phased-out.  The Platform also commits a future ALP Government to regulating contractors as employees;  thereby bring more than 1.6 million contactors under industrial relations system and union influence.

The Platform includes a raft of other pro-union changes including:  forcing employers of non-unionised workforces to bargain with unions;  giving union officials a legal right to access non-union business;  allow secondary boycotts;  applying unfair dismal legislation to small business;  giving preference in government contracts to unionised businesses;  and giving casual workers the right to convert their employment to regular part time.

At the same time, it is abundantly clear that existing industrial relations system, particularly enterprise agreements and collective agreements, are not providing the level of flexibility and innovation necessary to sustain competitiveness.  This is becoming more apparent with the higher exchange rate and rise of China.

As a result there is a need to not just to continue down the path of labour market deregulation but to accelerate the pace.  In short to do what Keating proposed in 1993.

These conflicting tensions -- the desire to save a declining union movement and to maintain labour market deregulation -- will define the IR debate and potentially the whether the ALP is fit to govern.

ADVERTISEMENT

Murray River Scientists Caught Playing Politics

Full marks to Sussan Ley and other members of the House of Representatives Standing Committee on Agriculture, Fisheries and Forestry for their interim report on the Murray River, handed down 10 days ago.

Their report clearly states the available evidence does not support the claim that the Murray River is dying.

The committee discovered that key research organisations have been using advice from "expert panels" rather than undertaking basic data collection.

Professor Gary Jones, head of the Cooperative Research Centre for Freshwater Ecology, professed to being "astounded that the committee had rejected the views of 60 independent scientists in favor of one or two consultants from vested interest groups".  Clearly the committee was interested in evidence rather than the views of many.

I am continually dismayed at the extent to which Professor Jones calls names rather than puts forward his case.  He accuses me of being a one-eyed consultant, and appeals to consensus rather than providing evidence.

Consensus is not science;  it is politics.  Science is about evidence and the parliamentary committee clearly caught the Murray River scientists playing politics.  The message is they have no evidence that the health of the river is in decline.  They have, however, for some time been talking up "impending catastrophe" based on the hypothetical.

Environmental advocates masquerading as scientists have been misleading us on the geography and health of the river system for years.

The successes of the initiatives that fixed many of the real environmental problems of the 1970s and 1980s have gone largely unreported.  Ironically, many environmentalists want only to see problems and seem unable to acknowledge success.

The advocates have become so bold over the last few years that it was probably not that difficult for the committee to find the inconsistencies between their politicking and the evidence.  What is perhaps surprising is that the urban media still refuses to do any investigative journalism and decide for themselves whether or not the evidence stacks up.  Journalists at The Age and The Australian newspapers, for example, just keep quoting the advocates who now occupy positions of power and authority.

I would like to think the situation is going to improve, but an announcement by the Minister for Environment and Heritage on 10 March does not bode well.

The Minister has appointed Professor Jones to the committee that will oversee the Australia State of the Environment Report 2006.  In the media release announcing the appointment, the Minister also stated that the report would be "our most robust and scientific measure of the environmental condition of the Australian continent".

If Professor Jones is to discharge this duty, he will need to stop playing politics and submerge himself in the evidence.

ADVERTISEMENT

Competition Benefits from Electricity Interconnectors

Submission to the ACCC's Review of the
Regulatory Test for Network Augmentation

1. INTRODUCTION AND SUMMARY

A private investment in a transmission facility gains its revenues from arbitraging prices (including via contracts) between two areas.  Such an investment offers no compensation to consumers in exporting areas if they face higher prices as a result of its trade facilitation.  Nor would it obtain all the gain from its transport capacity.  Consumers in the importing area would obtain at least some of the benefits of lower prices from the supply actually sourced through the investment, while its owners would be unable to obtain any of the benefits of lower prices its presence might force on existing sources.

Under many circumstances, the collective supply characteristics of electricity transmission networks are thought to rule out standard market provision.  Hence a proposal is assessed on the basis of its estimated costs and benefits, compared with those of alternative investments.  A proposal passing these tests is authorised by a regulator and funded by mandatory charges.

In addition to its conventionally measured costs and benefits, where the investment causes prices to fall there is a further "competition benefit".  This is equivalent to an increase in real net income or "welfare" that the investment expenditure brings about.  In principle this comprises the combination of lower prices and consequent increased consumption in the importing region, less the real income losses (if any) of higher prices and lower consumption in the exporting region and on other goods.

In fact, competition benefits are typically very small -- even if a new investment caused a 20 per cent price reduction, competition benefits would be unlikely to exceed one per cent of costs.  Moreover, uncertainties in demand and price outcomes mean that these competition benefits are difficult to estimate and can easily be confused with income transfers, which are already accounted for in the conventional cost/benefit framework.  Furthermore, it is not likely that a commercial venture would be able to obtain the competition benefits.  Hence, their inclusion brings potential bias against commercial investments.

Market intervention that favours regulated investment will deter new commercial investment and should be avoided.  Offering preferred treatment to regulated transmission investments is of considerable importance in the electricity industry where there are alternatives means of achieving outcomes similar to those of such facilities.  As well as merchant transmission links, these include gas pipelines, generators and demand saving strategies.  If a policy favours a regulated supply approach the consequent distortions to competition will prevent the gains from lower commercial supply costs and their subsequent pass-on to consumers.

2. THE EFFICIENCY OF THE ELECTRICITY SUPPLY SYSTEM

2.1 PRICE OUTCOMES IN THE AUSTRALIAN NATIONAL MARKET

Increased efficiency encompasses the reliability and security of the system and sustainably low prices.

Since wholesale markets commenced operation in 1996, competition has driven down ex-generator prices, (which make up about half of the costs of electricity to the consumer).  Wholesale prices had been expected to average of the order of $40 per MWh, the level that notionally prevailed under the centrally controlled system that markets replaced.  For most of the period of the National Market, however, average prices have been only three quarters of this, and even less in real terms.

Table 1 shows average prices in the regions comprising the National Market.

Table 1. Average Prices in the National Market Regions ($/MWh)

Year	NSW	VIC	QLD	SA	SNOWY
1999-2000	28.88	26.11	45.25	60.61	27.79
2000-2001	38.36	45.39	42.19	57.33	37.72
2001-2002	34.76	30.97	35.34	31.61	31.59
2002-2003	32.9	27.54	37.77	30.1	29.82

Source: NEMMCO

Beyond the generators, electricity supply has natural monopoly characteristics.  Where this requires regulation, the industry is likely to be less conducive to increased efficiency than in competitive markets where suppliers need to beat rivals for the consumer's dollar.  Nonetheless, over the past decade enormous efficiency gains have been made in the regulated parts of the Australian electricity supply as well as in those parts disciplined by competition.  This greater efficiency has entailed improved levels of reliability and has, broadly speaking, been translated into lower prices.

2.2 TIMELY COMMISSIONING OF NEW GENERATION

A relatively free market has proved to offer adequate incentives for new capacity.  Since the late 1990s in the eastern connected system, this has amounted to over 4,000 MW -- about a ten per cent increase in a system that was largely over-supplied.  This has been broadly of the type that might have been expected to be built:  a mixture of intermediate and peak in increasingly peaky South Australia and Victoria, mainly baseload in Queensland, where demand is growing more rapidly.  Table 2 indicates the particular capacity commissioned.  In addition to this, construction of over 700 MW of capacity is committed and considerably more at various stages of evaluation.

Table 2

	Year	Max capacity (MW)
Oakey Creek	1999	344
Roma	1999	84
Callide C	2001	1000
Millmerran	2002	900
Swanbank E	2002	410
Total Qld		2738
NSW Redbank	2001	150
Bairnsdale	2001	94
Somerton	2002	160
Valley Power	2002	390
Total Vic		644
Ladbroke Grove	2000	100
Pelican Point	2001	510
Quarantine	2001	100
Hallett	2002	220
Total SA		930
NEM Total		4462

This investment outcome is a vindication of the "energy only" market approach adopted in Australia.  Supplier bids that are free to incorporate all costs provide the same incentives for entrepreneurs to build new capacity in electricity as they do in all other industries.  As long as there is workable competition, prices that are free to fluctuate will give the appropriate signals.  Such market structures are superior to other options like a two part tariff with a "supply" charge and a "capacity" charge.  They avoid regulatory guessing to set prices for capacity payments and consequent restraints on each plant manager's price strategy to ensure that market bids reflect marginal costs.

3 TRANSMISSION AND ITS DEVELOPMENT

3.1 MAINTAINING PRESSURE ON IMPROVING EFFICIENCY

While market signals have delivered adequate supplies of new generation, many see little scope for these signals to operate effectively for transmission and distribution.  An absence of competition weakens suppliers' efficiency drivers, even where suppliers have been placed on a commercial footing.  On-going improvements in costs and reliability are, therefore, driven by market mechanisms only in the form of cost-paring to improve profits -- and even this may be weak under government ownership or tight regulatory control.

A regulatory substitute to markets is also likely to fail to ensure cost-reflective pricing.  Regulation is far less potent in promoting the dynamic gains that are fostered by the threat of competition.  Of particular importance to a country like Australia with vast distances is that the cost of transmission will always be likely to be relatively higher than in other countries.  Leaving new development to regulatory decisions which do not have the disciplines of profit and losses without competition is therefore especially risky.

Taking sectors out of the regulated umbrella and into the market sphere whenever possible is therefore a means of promoting increased efficiency.  Parts of transmission are candidates for such a shift out of the regulated sector.

3.2 RECENT TRANSMISSION DEVELOPMENTS

Lack of transmission capacity has not to date been a major issue for system reliability in most of Australia's electricity industry.  This reflects an overbuilding of electricity transmission (as well as base load power plants) under the integrated government systems that prevailed prior to the mid 1990s.

Transmission investments that have proven to be grossly premature include the lines from the brown coal district of the La Trobe Valley to Melbourne.  Twenty years on and having experienced a 40 per cent increase in capacity demand these remain underutilised.  It seldom makes economic sense to build so far ahead of demand.

The Australian transmission grid has continued to expand as shown in Figure 1 below.  Even so, the means of bringing new transmission capacity on stream and at the right time continues to be an area of considerable discord.  In particular, issues are arising about how to bring incentives for increased capacity in those areas that were over-supplied but are likely to see capacity strains emerging.  These revolve around features of many regulated markets, namely how to ensure timely provision of capacity without gold-plating investments.

Figure 1Source: ESAA

The nature of electricity trade between the states has changed over the past decade.  Additional generation capacity in South Australia has reduced exports from Victoria, while the NSW-Queensland link has brought increased energy flows into NSW and the National Market has brought an expansion of exports from Victoria to NSW through the Snowy link.

Figure 5 shows snapshots of interstate trade over the past decade.

Figure 5Source ESAA (Percentages are of "energy sent out" based on each jurisdiction's electricity generated).

The need for transmission expansion may be less pressing where load growth is peak rather than base demand.  Where there is a shift of requirements to greater peaking capacity, this may be best supplied by stations that are gas fired and located closer to loads than coal or hydro power stations.  Where the gas is supplied to a plant through a pipeline that is built on a different basis than gas-derived electricity delivered along a transmission line, there is potential for inefficiency.

3.3 TRANSMISSION'S ROLE IN TRADE FACILITATION AND RELIABILITY

3.3.1 Transmission as a Trading Link

Like virtually all grids, Australia developed transmission interconnections first within individual jurisdictions and later, on a gradual basis, between jurisdictions.

As with any other trading medium, transmission involves creating value by moving a product from a lower to a higher valued location.  To be viable, these links must take into account not only the difference in price but the costs of transmitting the electricity, including operating costs, amortisation and line losses.

The conventional gains from trade -- using lower cost energy sources to supply loads across different regions -- are one of two considerations in establishing the case for high voltage links.  The second consideration is an option value for increased reliability brought about by an additional link (an additional power station would offer comparable levels of comfort).

Improving reliability by sharing power in emergencies was normally the key motive for Australian inter-State transmission developments. ⁽¹⁾  Aside from the Snowy Mountains hydro development, high voltage transmission links for interstate trade that takes advantage of low cost energy at its source have really only been seen over the past 15 years.  Other than for short term operational stability, it is not clear that improved reliability and greater capacity are different products rather than simply different facets of the same product.

3.3.2 The Effects of the Collective Nature of Transmission on Electricity Markets

The case for subsidisation of electricity reserve capacity provision is ostensibly strong because of its nature as a "collective good".  Users simultaneously benefit from increased reliability and free-rider issues appear since the beneficiaries will attempt to avoid paying.

One aspect of this, system stability, is maintained by using ancillary services to ensure that the system stays in balance.  This balancing function must be administered centrally and its costs, which typically entail less than one per cent of total costs, recovered from users.  In the Australian National Market attempts are made to recover these costs from the users who actually cause them.

In contrast to this, system adequacy does not require subsidised provision or making payments mandatory.  Over the longer term retailers contract or plan for the power they need in line with their marketing goals and obligations.  Nor is regulated provision required in the shorter term;  retailers operate under strict credit controls to ensure they have supplies in place on the day.

Different suppliers' electricity is delivered along the same transmission system to different customers, but as with goods that move along highways this does not mean suppliers and purchasers losing control of these transactions.  Buyers and sellers make their own future supply arrangements, as with other goods and services, without government intercession.  Clear property rights and contracts mean all the electricity has buyers and sellers that can be identified and free-riding is thereby prevented.

3.4 TRANSMISSION'S ROLE IN FACILITATING GREATER COMPETITION

3.4.1 Competition Benefits

Trade is a clear benefit when it allows lower cost goods or services to be moved to places where supply is otherwise more expensive.

As with other economic improvements, the drivers for such efficiencies may constitute huge gains for success to the individual firm but such success are likely to be modest in an aggregate economic framework.  A worked example is offered below.

Traditionally the gains from easing a monopoly price situation are drawn as in the Figure below.  The gain from reducing the price from the Monopoly Price (MP) to the Competitive Price (CP) is as shown in the triangle ABC.  This represents a "welfare" or real income gain representing higher levels of real consumption net of transfers between different consumers and between consumers and producers.  The size of the gain can be visualised by applying some numbers to the NEM.  Thus: if increased competition in South Australia from a NSW interconnect reduced SA's prices to the average of those of NSW were to bring a price reduction in South Australia of 8 per cent (NSW prices were actually 8.5 per cent above those of South Australia in 2002/3);  and if the price elasticity of demand is 0.5, this will bring a demand increase in SA of 4 per cent (0.08*0.5). The size of the welfare triangle gain is usually expressed as one half of the product of the two percentages, or 0.16 per cent (0.08*0.04*0.5). In money terms this amounts to an annual gain in South Australia, based on sales of electricity at $400 million, of $640,000.  Even if the estimates were to be conducted on the basis of the values at the retail level, the annual gains would still be under $1.5 million. Even the small level of gain estimated above is likely to be an over-estimate, not only because price differences are often counter to expectations (as observed in 2002-03 SA had lower prices than NSW, the main source of the projected energy imports;  similarly, NSW had lower prices than Queensland, the main source of projected energy transfers from a reinforced QNI).  In addition: Line losses also figure, and the negative effect of higher prices in the exporting region need to be factored-in (A comprehensive formulation would also include a deduction for the real income effects of the reduced expenditure on "all other goods").

It is however the case that links between markets create an additional dynamic to that stemming from high cost areas having access to low cost supplies.  The effects of increased competition in driving down prices can be seen in markets like the European Union where the weight of additional producers has forced cost savings and greater consumer-orientation.  Much of the Australian and North American pressure for additional transmission seeks to tap those same sources of benefit.  But it is likely to be counter-productive to seek them through subsidisation.

Trade facilitation allowing goods to be moved from low cost to high cost areas is often a stimulus for commercial investments.  Such investments involve benefit transfers with the investment's owners taking a share of the two areas' price differential.  This share would only be obtained for the goods transferred and the investment facility would rarely be able to extract any of the consumer benefit brought about by lower prices from the receiving market's incumbent suppliers.  Nor would the facility need to indemnify the consumers in the exporting areas.

Commercial facilities are developed outside the social cost/benefit framework of welfare economics on which public capital investment decisions rest.  It is difficult to develop a basis for public financed or regulated facilities to be developed within that commercial framework.

New trade links should be market driven and where possible represent the full costs to the beneficiaries.  It is seemingly beneficial for the government to subsidise a means by which low priced goods could be moved to areas where prices are higher.  However, whether in the form of a trade-facilitating transmission line or a price-suppressing new power station, such outcomes are likely to be self-defeating.  If private investors consider that a profitable opportunity they spot will be undermined by government action, this will prevent the search for and subsequent action on such opportunities.  Ultimately, it will be left to the government to build or guarantee all facilities with a reversion to high cost, highly regulated systems.  The benefits of lower prices and appropriately increased capacity that emerge from the interplay of demand and competitive market provision will be lost.

3.4.2 Transmission Expansion

At issue with transmission in Australia and elsewhere is devising the appropriate incentives to build the correct amount of new capacity.  Although augmenting transmission for reliability reasons is high on the political agenda, it is seldom possible to make an economic case for a regulated link on such grounds.  Placing a value on reliability improvements is just too complex, and in any case is not totally divorced from the more pedestrian cost-saving case.  Instead, the case must largely be made on cost savings through the availability of cheaper power.  Cook ⁽²⁾ assembled the estimates of regulatory test benefits of four proposals as follows.

Table 3

The Calculation of the Regulatory Test Benefits Benefit ($M) Riverlink1 QNI2 Murraylink3 SNI4 Energy 4 90 82 25 Reliability - - 62 - Deferred generation 158 571 54 154 Deferred network 15 - 24 18 TOTAL 177 661 222 197 1 Report on Technical Issues, Costs and Benefits Associated with the Riverlink Interconnection -- Between the Electrical Networks of South Australia and New South Wales, undated, Schedule 2 2 London Economics, 1997 3 Murraylink Transmission Company Application for Conversion and Maximum Allowed Revenue, Decision 1 October 2003, ACCC, page 75 4 Economic Evaluation of the Proposed SNI Interconnector, Roam Consulting Pty Ltd, October 2001, Results for Simulation 1-S-M Note: SNOVIC1400 Regulatory Test benefits unavailable

Following the estimates of the deferred benefits of these facilities, new generation came on stream attracted by the same profit opportunities identified by those estimates.

Thus, in the case of the proposed regulated Riverlink line between NSW and South Australia, the estimated value of deferred investment was $158 million.  This was largely predicated on reserve capacity estimates being a relatively low 12.5 per cent.  However in the three years following the proposal over 1000 MW of new capacity was commissioned on top of the pre-existing South Australia capacity of 2980 MW bringing the reserve capacity margin to 32.8 per cent.

Similarly, QNI (between NSW and Queensland) was estimated to bring $571 million of deferred generation benefits included $351 million for Queensland where supplies were tight at that time.  In the event, in the subsequent two years, Queensland's pre-existing capacity of 8,400 MW was augmented by 2,500 MW of additional capacity.

In these and other cases, the estimates of value of the proposal were based on a static situation in which other suppliers are assumed not to react to the same opportunities.

Yet, though market forces did in fact respond by increasing investment to meet the same opportunities that a regulated transmission development meets, there is considerable pressure to relax the criteria under which a regulated link is assessed.  The ACCC's recent Draft Decision, ⁽³⁾ expressed an inclination to expand the benefits it includes within a proposal to incorporate "competition benefits".  As well as the welfare triangles addressed earlier, as presently defined the price benefits appear also to include price benefits to consumers.

This is a departure from the outcome obtainable by a private entrepreneur.  A private entrepreneur would be most unlikely to be able to capture all the value from arbitraging prices between two areas in the way the ACCC's analysis proposes.  The entrepreneur could not arrange for the price discrimination necessary to obtain the consumer surplus that is represented.  Still less would the entrepreneur be able to capture the consumer surplus value that stems from the price reductions forced on incumbent suppliers.  Hence a regulated investment justified on the basis of such benefits is overvalued vis-à-vis a private investment.

3.4.3 Removing Excessive Market Power

In facilitating regulated augmentation to reduce market power, the authorities need to be clear that such power actually exists.  In aggregate terms, it is implausible that Australian generators have been able to exercise market power to boost their profits.  These profits have remained low, as have wholesale prices.

Most generators do, however, have market power at some time, in the sense that they are able to hold back supply or increase their prices above marginal costs, thereby setting or benefiting from a higher pool price.  But they are constrained from this by their being uncertain when such strategies might be successful, because rival generators are seeking the same opportunities and can maroon their bids above the pool price.

Cramton ⁽⁴⁾ uses probability analysis to present a model of when and by how much a profit maximising firm should bid above its marginal cost.  He shows that this is normal market behaviour which customers can counter by forward contracting (as they do in most electricity markets).  If forward contracts incorporate excessive costs due to market power, this will attract new supplies.

Cramton correctly points out that perfect competition cannot operate in most markets since the marginal unit cannot recover its capital cost and will not enter.  Under these circumstances, if the regulatory authorities seek to force an outcome equivalent to perfect competition, too little new investment will be built and supply shortages are likely to emerge.  The outcome may be a spiralling down in available capacity and increasing levels of regulatory intervention impairing the efficiency of the industry and its commercial viability.

3.4.4 The Relative Importance of Distortion Caused by Regulated Transmission

Expanding transmission coverage and capacity for trade or competition augmenting reasons is a relatively uncontroversial issue when transmission is a tiny part of aggregate costs.  However, when it comprises a relatively large share of total electricity costs, unwise decisions impact on costs per se, as well as crowding out alternative investment, particularly generation.  And Australia's distances mean that transmission tends to be more costly than in other countries.

This is especially so with regard to the marginal expansion costs represented by new connections.  SNI from NSW to South Australia, for example, has a capital cost of $110 million for a capacity of 250 MW, a price that compares to the capital cost of $300 million for building a new 250 MW gas generator. ⁽⁵⁾

Where transmission involves considerable costs and is sanctioned by a regulator and financed through mandatory payments and generation is market-provided, the former can undermine market approaches and create inefficiencies.  The introduction of new transmission that passes an easier hurdle than the commercial test that generators must face can pre-empt a more efficient solution involving constructing new generation, possibly fuelled by gas delivered to a power station close to the load.

3.5 AUSTRALIAN TRANSMISSION ISSUES

3.5.1 Transmission Expansion Proposals

NEMMCO's Annual Interconnector Review identifies the following options which, if completed, would result in little price separation between the different regions.

Table 4

Interconnector	Project	Additional Capacity (forward/reverse) MW	Timing
Tasmania to Victoria	Basslink undersea cable	630/300	2005 (committed)
New South Wales to South Australia	SNI	250/250	2004 (advanced proposal)
	High voltage DC interconnection	800/800	5 Years (from approval)
New South Wales to Queensland	Upgrade QNI	200/200	2-3 years (from approval)
	High voltage AC interconnection	800/800	5-7 years (from approval)
	High voltage DC interconnection	2000/2000	5 years (from approval)
New South Wales to Snowy & Victoria	NEWVIC 2500	400	2006/07
	NEWVIC 3500	1400	2006/07
	NEWVIC HVDC	1400/1400	2006/07
	Moama HVAC	N/A	5 years
Victoria to South Australia	Heywood interconnection series compensation upgrade	150	18 months

The greater price convergence which these proposals would bring has already been experienced as a result of new generation and transmission capacity.  NECA has commissioned work, reproduced in Figures 3 and 4 below, that demonstrates this.

Figure 3Source: Dr John Field

The analysis underpinning Figure 6 also indicates a pattern of reduced volatility of demand has emerged over the past few years.  Figure 7 analyses the forward price curve and finds the volatility and price dispersion continue to be low.

Figure 4Source: NECA

3.5.2 Price Convergence as a Benefit

Many would regard the outcome of the combination of new capacity and transmission illustrated in Figures 3 and 4 above as positive.  However, price equalisation ought not be the goal if such equalisation doesn't represent an underlying similarity of costs.  If prices are equalised across regions but costs are dissimilar, this means that high cost load areas are being subsidised and low cost load areas are being taxed.

Subsidies are a transfer tax, one result of which is a diminution in overall income.  Cost-smearing also blunts the incentives to locate new energy using industries in the areas which are favoured by the lowest cost supply.  Hence, the appropriate location signals are tempered if costs of transmission (those over and above the shallow connections from generators and line losses during transmission) are paid for by a general charge on customers.

3.5.3 Transmission and Australia's Economic Geography

Australia's long distances between different markets and between areas of potential supply and loads add a unique dimension to its electricity supply industry.  In terms of TWh per thousand square kilometre, Australia comes in at 29 compared to 418 in the US and 1,575 in the UK.  It might be argued that this measure exaggerates the extent of Australia's distance because much of its acreage comprises highly remote areas.  But even if Western Australia and the Northern Territory were excluded, Australia would still have only one eighth of the US density of coverage.

Figure 5 below illustrates the density of electricity coverage among selected countries by geographical spread and consumer usage.

Figure 5

Farrier Swier graphically introduce some implications of Australia's size by pointing out,

"In comparison to one of the world's largest integrated electricity markets, PJM, the NEM covers an area around 23 times greater.. and serves around half as many final consumers and meets a co-incident peak demand of around 1/3 that of PJM.  However the transmission network within the NEM is around 30% longer than that in PJM." ⁽⁶⁾

3.6 DETERMINING PRIORITIES FOR NEW TRANSMISSION

The natural monopoly features, said to be inherent in electricity transmission, present a fundamental challenge as a result of the interplay between the alternative means of meeting load growth through transmission and generation.

The geographic setting of Australia's electricity supply industry, in particular the long distances and relative absence of loop-flow, offer some potential advantages in setting policies for transmission.  In most jurisdictions, the meshed nature of transmission means contract paths are not easily determined but Australia's long, stringy system does not have that complexity.

The greater certainty of Australia's electricity path flowlines allows the application of more simplified hedging arrangements.  Whereas highly meshed systems generally need to specify rights between different points without identifying the energy path, the Australian system can identify the path along which energy will flow.  Other systems which allow pricing for transmission do so on the basis of financial transmission rights (FTRs).  In Australia, the settlement residues (SRs) capture some of the difference at a particular juncture when prices diverge but some supply transfer occurs.  Future SRs are auctioned to give a partial price hedge for transfers (the auction does not offer a comprehensive hedge where the line constrains and prices separate).

The settlement residues also offer indications about the need for augmentation of interconnects.  Where residues are accruing to supplies in the "to" region this indicates the lines might justify augmentation from the exporting region.  The justification hangs on a mixture of the value of the additional capacity, its reliability, the cost of the addition/augmentation, the costs of alternative means of supply and the availability of supply from the sending region.

Though there are often guides like this as to where the most appropriate investment should be undertaken, the nature of the political process tends to contaminate these guidelines.  Australia's electricity transmission decision framework was developed conscious of the distortions that political interference can bring.  Even so, political override of commercial and even neutral technology based decisions is evident.  Strong political pressure to build SNA as a regulated link between New South Wales and South Australia is an example of this.

Other politically motivated decisions may also be inferred from investments that have been made.  Thus, based on value, as measured by settlement residues, the line most in need of additional capacity is Snowy to NSW.  (Though all of this SR in 2002/3 was associated with a single event.) ⁽⁷⁾  The others are Victoria to South Australia and the Queensland NSW link, especially that coming south.  In fact the most important augmentation has been south into Victoria, which has added 400 MW to a 1,700 MW transmission line, though the cost of this was, at only $40 million, quite modest.

Figure 6 indicates the SRs accruing across the regions.

Figure 6

3.7 MERCHANT TRANSMISSION

3.7.1 The Potential for Market Failure

The step beyond separating transmission decisions from political control is leaving a role for entrepreneurial or merchant transmission.  The larger that role the less likely it is that non-market based transmission decisions will corrupt market based decisions in other parts of the system.

Entrepreneurial electricity transmission lines are seen to have shortcomings stemming from:

• The difficulty of overcoming Kirchoff's Law with AC power lines, which makes it difficult to fully define the capacity of an individual line within a meshed system
• The evidence that cost recovery (strictly network variable charges) on transmission lines is low -- less than 25 per cent in the half dozen jurisdictions reviewed by London Economics in 1999 and less than 30 per cent in any study that they cite ⁽⁸⁾
• The fact that revenue is likely to be earned with a DC line only with the constriction of the line to create a price differential (or threatened constriction of the line if it is contracted forward).

One troubling feature about the first two of these assertions is that the difficulty they alert us to in determining the merits of a new investment is equally applicable to regulated investments.  If it is impossible or at least very difficult to define the added capacity that a new private investment brings, it is equally difficult to decide whether expenditure on a regulated investment is viable.  How then is the case for this investment to be determined?  Moreover, it is possible that if transmission can only earn 30 per cent of its costs that too much of it is being built.

The third point addresses concerns about "gaming" of a transmission line by bidding it in to take advantage of its scarcity value.  These concerns are equally applicable to generators and have given rise to a considerable body of review which, at least in Australia, has found bidding behaviour to be benign.  As previously addressed, a commercially viable electricity system is not possible if firms are required to accept prices based on marginal costs.  In electricity, the most marginal generating unit is likely to require a very high price for only a few hours per year if the unit is to be commercially viable.  Yet once built, such a unit is likely to be able to operate for far more hours and still cover its marginal costs.  Of course, if it were to be required to operate whenever its marginal costs are covered, it would be unviable and not be built in the first place. ⁽⁹⁾  This applies equally to transmission.

Joskow and Tirole, ⁽¹⁰⁾ however, argue that applying market principles is unlikely to work with transmission.  They take this view from their assessment that merchant transmission would be jeopardised by loop flows adding to a variety of more conventional market failure reasons.  One of these is that thin markets will lead to withdrawal of capacity and create artificially high prices.

Such analyses are based on a misplaced presumption that only atomistic markets can work.  In fact, much of the electricity market in generation is "thin" in so far as in certain periods there are few realistic supply options.  Buyers respond to market power, as with other goods, by adopting contractual arrangements.  Firms subject to market power from suppliers lock in contracts to prevent this being used.  This allows market determined prices to prevail.  In most markets, suppliers have some capacity to influence price and where buyers consider this creates too many uncertainties or excessive volatility, they will lock in a price through contracts.  Commonly, though not invariably, this "insurance" price will be above the average spot price.

3.7.2 Future Augmentations and Additions

The vast amount of power-distance the energy travels from generator to load is along the regulated system.  Regulated lines are rewarded by Transmission Use of System (TUoS) charges, offering a far greater return than those likely to be received in the form of short run marginal cost savings.

Options for future developments have to be assessed in the context of the system that is presently in place.  The existing system has created expectations, even forms of implicit property or contractual rights that cannot be dismissed.  Unscrambling that system is impracticable and probably not desirable.  Irrespective of the role of merchant transmission, most transmission that is in place and arguably some new transmission will, under any conceivable rules, continue to be remunerated by a government imposed charge.

While it is not easy to arrange for market provision where parts of the system are regulated, we do this with other infrastructure like roads, schools and hospitals.  In the case of roads, we are in fact, seeing an increasing co-existence of socialised road developments and those financed by tolls.  Though, in the main, the private provision is a form of government out-sourcing, this is not always so and is clearly not the case with schools and hospitals.

The entrepreneurial solution that could be grafted onto the present system might comprise long links like Basslink, the undersea link being developed between Tasmania and Victoria, and very short links like Heywood between Victoria and South Australia.  It is best to think of both of these as bridges between extensive transmission systems rather than new lines.

4 CONCLUDING COMMENTS

Creating market-driven arrangements for new transmission is perhaps the most formidable challenge facing the Australian electricity supply industry.  Ill-advised investments resulting from political/bureaucratic decisions are costly and may:

• prevent efficient new investment in generation where a consumer subsidy to transmission has reduced the cost penalties of transporting electricity from distant sources;
• bring about additional costs through blunting the real market signals to the locational decisions of industry and households;  and
• distort signals for energy sources, especially gas and renewables;  for example, the current arrangements place disincentives to the locating of gas fuelled power stations close to loads and are likely to favour over-investment in remote wind farms.

Provision of transmission facilities will tend to equalise the price in the linked areas.  Where this is undertaken by a risk-taking entrepreneur, some of the price (and volume) rearrangements from the parties benefiting are obtained by the transmission entrepreneur.  In such a market, no compensation is paid to those losing from the wealth transfer since requiring such compensation would amount to trade restriction.

Policies should not deter the creation of merchant links or other market responsive activities.  In addition, we need some means of activating the individual rights to existing transmission capacity that is in principle already present.  With those rights being made tradeable, new providers, (or loads in some cases) would need to finance the increased capacity they seek, perhaps by displacing high cost pre-existing supply sources.

ENDNOTES

1.  Linking a large region with multiple suppliers to a small region is likely to bring greater system reliability benefits to the latter since its chances of readily covering an outage by imports are greater.

2.  Cook, A, Maintaining the Security of Supply to South Australia through Interconnections, Address to South Australian Power Conference February 2004.

3.  Australian Competition and Consumer Commission, Draft Decision Review of the Regulatory Test for network augmentations, Canberra, 10 March 2004

4.  Cramton M, Competitive Bidding Behaviour in Uniform-Price Auction Markets, Proceedings of the Hawaii International Conference on System Social Sciences, January 2004.

5.  The case for the building of that particular new regulated transmission line between NSW and South Australia has been largely overtaken by events.  It was originally planned when there was no 500 MW Pelican Point (nor its proposed expansion), when the 180 MW Playford Power Station was scheduled for early retirement and when the line from Victoria was carrying up to 40 per cent of Victoria's electricity supply and frequently constraining.  The case for SNI has been clearly undermined by these developments and the building of the Transenergie merchant link, all of which are alternatives to regulated solutions.

6.  Transmission Issues Scoping Report, Farrier Swier Consulting, May 2003, page 25.

7.  See Statement of Opportunities, NEMMCO 2003, page 9-13 Table 9-4;

8.  Review of Australian Transmission Pricing, A report for the Australian Competition and Consumer Commission, London Economics, 1999.

9.  Attempting to reward fixed costs through capacity payments is commonly used in the US and was a feature of the original England and Wales design.  The two part form of remuneration suffers from deficiencies vis-à-vis obtaining all the reward from a single bid but this goes beyond the present paper's scope.

10.  Joskow, P. and J. Tirole (2003).  Merchant Transmission Investment.  mimeo.

Futility of an Anti-sweatshop Campaign

In years gone by it was comparatively easy to understand what was happening in industrial relations.  Unions would organise workers to engage in strikes, pickets and other industrial action to pressure the "bosses" to improve wages and conditions.  It was a form of orchestrated "class war" in which everyone seemed to know their place and their role.  The business of being a union was structured entirely around the maintenance of this class war.

But things have changed because of one basic fact:  union membership in the private sector is now down around 18 per cent.  More importantly, union membership and influence in most businesses is now so small (often non existent) that unions have enormous difficulty starting, let alone maintaining, class war within individual companies.

The outcome is that the business of being a union is under severe stress.  And to survive, some unions have undertaken far-reaching reconceptualisation of their processes and campaign models.  In applying these new models against targeted firms and industries, unions have changed the nature of the game in ways that firms do not understand.  One of these new campaign models creates industrial leverage by attacking a company's brand name.

Recently, the media monitoring company Rehame was subject to such an attack.  The campaign against the company is the early phase of a union push to capture the media monitoring industry and it closely follows campaigns conducted against call centres and the clothing industry.  In this new industrial warfare, nothing is what it seems and it takes business some time to understand what is happening and to sort out how to respond.

Media monitoring businesses engage people to read newspapers and magazines, listen to radio and watch television and to pull out material that names or affects the business of its subscriber clients.  In the industry, transcripts of media reports are usually delivered to clients within hours (sometimes minutes) of a media report appearing.  Some aspects of the business involve high-tech monitoring, but much entails people simply sitting and reading or listening.  The low-tech aspects ideally suit people who want to work from home -- including students, retirees, parents and others who want the lifestyle and income benefits of such work.

The trouble for unions is that industrial organisation of people who work from home is almost impossible.  Unions need employers to operate sweat-shop like factories if the business of being a union is to survive.  If a company follows family friendly type practices where people can work from home, unions have difficulty leveraging for members.  Hence the campaign against Rehame where unions alleged that people who work in their own homes are working in sweatshops.  This, "your home is a sweatshop" slogan, confuses community perceptions and masks union agendas.  And in their efforts to stop people having the right to work from home, the Victorian Government has been lobbied to discriminate against Rehame to stop them offering people these small business options.

To achieve the end game, the company's name is likely to be subject to considerable and sophisticated attack on a wide variety of fronts from coalitions of community groups organised through unions.  The company may risk losing clients and its competitors will duck for cover (all the while claiming that they are well-behaved) or could use the situation to gain increased market share at their opposition's expense.  The campaign intent is to stop the offering of work to small business people who operate from home.

Eventually a "white knight" industry association will negotiate a "peace" which, in effect, will deliver the union's agenda.  A "code of practice" will be established in conjunction with government and legislation stipulating the price of media monitoring operations in minute detail will likely follow.  The "settlement", operating outside normal industrial relations legislation, will effectively control vital aspects of how the industry is able to operate.  The campaign loop will be closed.  The industry will be captured.

How do we know this?  Because this is what transpired in the clothing industry over ten years, and in part, in the call centre industry in just fours years.  It will probably happen much faster in the media monitoring industry.

These campaign and control mechanisms effectively destroy domestic outsourcing operations.  But, paradoxically, there is no evidence that unions win more members as a result.  Instead, domestic outsourcing stops.  Companies shift their focus offshore and external outsourcing proceeds apace.  Witness the trends with call centres and the collapse of domestic clothing manufacturing!  The campaigns actually destroy local jobs.

In the electronic age, most media monitoring can be done in India, Malaysia, Hong Kong or wherever fluent English-speakers reside.

Industrial relations is no longer just about class warfare controlled through industrial relations legislation.  There is an entirely new paradigm of aggressive war in which every business is lined up for targeting.  And the process is just in its infancy!

ADVERTISEMENT

One Image, Two Pictures

The Harold Clough Lecture for 2004,
delivered at The Western Australian Club,
Perth, 6 April 2004.

Ladies and Gentlemen

It's an honour as a creature from a land far to the East to be in Western Australia, a land that perhaps can be described as the "Middle Earth" of entrepreneurship in our vast continent.

Since the Second World War, the name Clough has been one of those names always at the centre of Western Australian entrepreneurship, not just physically in WA, but also using WA as a springboard into global markets which are sometimes free and sometimes not so free.

My first task here is to thank Harold Clough and the Clough family.  Not only are you dogged "doers" but you also recognise, in tangible ways, the need to think about, protect and expand the systems that enable free markets to function.  Your support clearly demonstrates the Clough family's long and durable commitment to free market defence.  The Harold Clough lecture series honours that commitment.

To an outsider, one thing that Western Australians seem to have consistently demonstrated is an intuitive sense that entrepreneurship can thrive only in free markets.

And free markets are what I'll be talking about today.  The second of the two pictures in the industrial relations image that I want to expose and discuss is the anti-free-market picture.

When free markets operate, they are funny things.  Free markets are about the business of getting on with business.  People who "do" free markets focus all their energy on the intricacies of the doing.  And so they should!  But it's not often that the same people who "do" the "doing" spend time, energy and resources thinking about and protecting the very systems that enable free markets to exist.  Here's the inbuilt self-destructive tendency of free markets.

Free markets systems are fragile because they are no more than thin lines of commonly-held ideas running through our collective minds.  In the necessary entrepreneurial obsession with "doing", we frequently fail to protect and maintain the systems that let us get on and do.  In being free, free markets contain the seeds of their own possible self-destruction.

I've hung around the Institute of Public Affairs and become heavily involved because I'm impressed with the 60-year plus tradition of dogged obsession with protecting free markets.  We have proven ourselves fearless and continues to place itself at the cutting edge of debate on free market ideas.  And being at the cutting edge has often put us at odds with powerful institutions -- particularly in recent times when the most powerful establishment institutions can best be described as "new age conservatives".  And new age conservatism is not pro-free market.  It seems odd to discover that, right now, to be pro-free market is to be anti-establishment!

In having the privilege to present this, the sixth lecture, I hope that I can make a contribution to that free market defence.  Because even though my topic is the thorny area of industrial relations, in fact I'm talking about free markets.  Free markets are the second picture in the industrial relations image -- although most of the time we see only one side, the "workers' rights versus the bosses' privileges" picture.

I'd like you to look closely at the image I've borrowed as the theme for this lecture.  You will, of course, see two women -- an old one facing side-on and a young woman facing away.  When you look, you will tend not to see both women at once, but rather will shift focus, first on one woman and then on the other.  Industrial relations is like this.

Industrial relations has two pictures contained in the one total image and our minds tend to focus on only one at a time.  But unlike the two-women image, in Australian industrial relations we have been culturally trained since the time of Federation to see only one picture, the workers versus bosses arguments.  My attempt today is to assist you to see the second picture with some clarity and once grasped, to alert you to new developments that threaten the very core structures of free markets.  My belief is that if you understand the second picture, then you will be better placed to run your businesses and defend them against new emerging threats.  But as I show you the second, please remember that both pictures exist with equal strength within the one total image.

I'll also explain the second picture by looking at its bits.  I'll break it down.  A lot of what I'll display will be quite familiar.  However, a warning!  I've got some R-rated stuff.  Experience has taught me that once I've exposed these bits, many people who operate in, and benefit from free markets, react against that exposure.  The ideas I'll present often confront prevailing perceptions of career paths, concepts of the existence and nature of a firm, how an economy is supposed to operate, personal worldviews of self-worth and egos.  Quite frequently, exposure of the bits produces annoyance and sometimes even simmering anger.

As obvious as it may seem, the first bit to understand is that industrial relations is about institutionalised, legalised and moralised price-fixing.  Normally, the fixing of wages through industrial relations tribunals is sold as a protection mechanism for exploited or exploitable workers.  That is one picture.  But the other, equally powerful picture is that industrial relations tribunals and systems are the legalised mechanisms in which free, fair and competitive pricing is constrained from operating.

Under the Trade Practices Act, businesses are prevented from colluding to fix or control prices.  Business persons who collude to fix prices risk jail sentences.  But what is the price of any good or service?  At its core it's an accumulation of the inputs of labour

In a highly simplified example, a bucket of dirt is dug from the ground.  Someone is paid to dig the dirt.  The dirt is transported.  Someone is paid to ship the dirt.  The dirt is transformed into steel through multiple processes.  Many people are paid at each point to do the processes.  The steel is turned into machines.  Many people are paid to make the machines.  The machines return to dig more dirt, or ship the dirt, or turn the dirt into steel and then make more machines.  People are paid to do each bit.  It's called an economy.  But at each step through the Australian economy, the price of labour is institutionally controlled and fixed through industrial relations institutions and processes.

The outcome is that the dominant item underpinning most prices for goods and services -- that is, labour -- is controlled.  And inevitably the complex institutionalised processes of legalised price-fixing through industrial relations is deeply at odds and in conflict with the anti-price-fixing and free-trade objectives of the Trade Practices Act.  Here are the two equally powerful pictures within the one image.

It is illegal for business persons to collude to fix prices.  But not only is it legal, it is required for business persons to collude through the state to fix labour prices.  We are a confused society.

But apparently it's heinously wrong for anyone to point this out or encourage discussion on it.  To do so is R-rated -- as I have discovered on more than one occasion.  Let me explain.

Towards the end of the Cole Commission inquiry into the construction industry, the Commission invited submissions discussing the interface between industrial relations and trade practices law.  The Trade Practices Act specifically prohibits the Act from applying to employment matters.  We made a submission suggesting that this prohibition creates a legal mask that enables malpractice in the construction industry to be institutionalised.

In a counter-submission to the Commission from another organisation, the statement was made that the Trade Practices Act exemptions are "the very foundations upon which Australia's industrial relations system is built".  Further, the claim was that removal of the exemption would "cripple a private employer's human resources activities" and "prevent employer associations and unions effectively representing the collective interests of their members".

The position put by us has excited considerable and often angry responses and demonstrated that this comparatively and normally dry topic in fact cuts to the heart of opposing interpretations of what it means to have a free society.  It is a fact that the anti-price-fixing objects of the Trade Practices Act and the price-fixing objectives of industrial relations law are in direct conflict.

The ways in which these opposing objectives are played out through our institutions, our businesses and our commercial dealings affect every one of us in our ability to trade, take risk, make profit, earn reward, earn an income, obtain a living -- in short, to be entrepreneurial.  Further, the opposing objectives and conflicts that play out between the institutions that sit on either side of the debate identify Australia as a constrained free market.

Let me give two very practical and current examples of how free-market destruction in Australia operates.

Number One:  Over the last few years, industrial relations law has taken one extra, but giant, leap into the area of trade practices law by imposing direct pricing controls over commercial contracts within one sector of the economy -- the clothing industry.

The clothing trade has been bullied into accepting new legislation in NSW and Victoria that controls prices at every level in the chain of contract manufacturing.  The legislation makes retailers and every manufacturer throughout the chain responsible for payments to the workers at the beginning of the contract chain.  The "code of practice" established through law stipulates the price to be paid for every process of manufacture -- from sewing a button to stitching a sleeve cuff.  Any work that is contracted out to another party must be reported to the Industrial Registrar and the union, with copies supplied to these bodies of each contract and all contract prices.  This is systemic, legalised price manipulation and control within an area that would normally be illegal price control under the Trade Practices Act.  The ACCC, however, has given its blessing to the legislation.

Quite recently a small business, contract manufacturer was fined $20,000 for breaches under these price-fixing processes.  In the action brought by the union, there was no evidence presented of complaints by the workers or of any underpayment or alleged exploitation.  The "crime" of the small company, Lotus Cove, was to fail to adhere to the bureaucratic requirements to register their contracted-out contracts with the Industrial Registrar and the union.  In the domestic clothing manufacturing industry, the freedom to engage in commercial contracts has been destroyed under the subterfuge of workers' rights arguments.  Commercial contract relationships are now controlled through Stalinist-like bureaucratic processes.

Number Two:  Recently, one of Australia's most eminent business observers and commentators stated that Australia has great potential with niche manufacturing.  Surprisingly, he identified the opportunity to manufacture high quality, fashion-branded clothing to the rising wealthy Chinese class as one of those emerging niches.  He emphasised, however, that flexible labour arrangements (which does not automatically or necessarily mean cheap) are critical to success.  In the current environment, the notion of Australia selling clothing into China might seem odd.  But we sell navel oranges to California and noodles to Japan and it's worth contemplating a potential market of, say, 10 million Chinese millionaires wanting Australian clothing.  Some niche!  But with a Stalinist-like industrial relations bureaucracy controlling every minute contract transaction down to the price of sewing a button, not only are the transaction costs unsustainable, but the creativity and entrepreneurship needed to realise the potential are crushed.  The niche potential has no hope of even being thought about, let alone being realised.

The end result of this control of commercial contracts is a diminution of entrepreneurship in those sectors of the economy where the process is applied.  And have no doubt, it is a process seriously on the agenda for application across every sector of commercial activity in Australia, both Federally and by the States.  The call centre industry is currently targeted for application of this process as are the media monitoring and market surveying sectors -- and more are being lined up.  Watch for indicator words such as "sweatshop" and "code of practice" to help identify when your sector is targeted.

But, apparently, we are not allowed to talk about it openly in the way I am today.  To do so is to invite intimidation from some industry sectors who believe that appeasement in the face of this anti-free market agenda is the only way to limit political damage.

Another aspect of the two pictures in one image is the area of competition.  Once again, the Trade Practices Act is supposed to be a primary defender of competition.

A principal catch-22 of free markets is that although people must be free to pursue opportunities, when given this opportunity, most people aspire to become monopolists.  That is, people want the benefits of being able to compete but don't like it when their business is subject to competition.  This is a natural and expected piece of human behaviour that should not surprise or shock us.  The art of free-market management is to maximise entrepreneurial opportunity but to forever frustrate monopoly achievement.  In Australia, the Trade Practices Act has monopoly frustration as one of its key objectives.

However, although not spoken of and not formally contained within industrial relations legislation, the informal processes that surround industrial relations work toward the limitation of competition and the creation of monopoly.  The processes are quite straightforward.  Let me give a simple example.

In one market area with which I'm familiar, a dominant player has an Enterprise Bargaining Agreements (or EBA) with pay rates some 30 per cent above those of the relevant Award.  All of its much smaller competitors operate on the industry award.  The dominant player last year unofficially complained to the union that this situation was not fair and that they couldn't compete.  Union membership in the industry is almost solely with the one dominant player.  The union has now launched a campaign to increase the award rate -- and they will succeed.  This will not result in increased union membership amongst the award-based businesses, but the pay-off for the union is that it will solidify the union presence in the dominant player's business.  The pay-off for the dominant player -- when the award rate is increased -- is that it will limit the capacity of its competitors.

Competition limitation is a significant and familiar part of the history of industrial games in the WA mining industry.  The great battle in the Pilbara during the 1980s and 1990s was, in large part, about competition between the three iron ore mines in the Pilbara and the limitation of competition between them through industrial relations processes.  When Charles Copeman and his deputy Herb Larratt broke the back of the processes it was instructive that their greatest difficulties were not with the workers or the unions, but with a powerful business-government establishment.  The business establishment dumped on Charles and his team, pressured them to cave in and never really forgave them for their success.  But Charles and his team led the way for an explosion in the productivity, profitability and expansion of the WA mining industry from which WA continues to benefit.

This limit on competition is an important aspect of how big business is done in Australia -- it used to be called the "industrial relations club".  It is one picture in the total image that needs to be grasped if the business of doing business in Australia is to be properly understood.  For many people, it's also an R-rated topic.

Make no mistake:  unions and some businesses actively collude under the mask of industrial relations to limit competition.  It's a systemic process operating in the commercial construction sector, but only partly uncovered by the Cole Commission because of a dark curtain of silence.

And I've been personally chastised for stating this.  The argument put against me is that businesses that collude with unions don't want to collude, they simply have no choice.  There is substantial truth to this.  Mafiosa rules, rule.  But the fact is that collusion does occur.  Let's not pretend it doesn't.  But for the most part it's legal while it's covered within employment law and practices.

The final bit of the second picture I want to discuss is the myth of the employer-employee relationship.  And it is this bit of the second picture that seems to attract the greatest level of R-rated reaction -- although no-one has yet made threats against me!

Since the 1930s, the principal academic and economic concept of the modern version of the firm has been wedded to the idea of the employer-employee relationship.  The employer boss controls the firm through the command-and-control mechanisms of the employment relationship, thus enabling transaction-cost management.  This leads directly into industrial relations systems in which employer organisations are supposed to exercise control or influence over economic activity through their part in the IR institutional frameworks.

But the fact is that, in the main, the employer-employee relationship is an illusion.  Only in small business does the employer-employee relationship truly exist.  In every area outside small business, the employer is principally a legal figment of our collective imaginations.  The employer is, in reality, a hierarchically-structured bureaucracy in which delegated employees play the part of being the employer.

At the pointy end of the employer bureaucracy are the human resources and industrial relations professionals standing in front of CEOs, GMs, CFOs, Boards and all the downstream executives and managers.  When this bit of the "employer" picture is realised and accepted, the true dynamic of employer-employee relationships is seen for what it essentially is, namely, one of employee-employee relationships.  The people who allegedly represent and act for the employer are in fact employees who, in their decision-making behaviour, will always and must be expected to be motivated more by "employee thoughts" than "employer thoughts".  Further, when we consider employer representative associations, the associations are themselves run by employees whose behaviour and motivations must be expected to be more along the lines of employee interests than what we think of as the collective interests of employers.  There are exceptions to this where industry associations see their role and clearly act to protect free market operations within their particular industry sectors.

In this context, the game of industrial relations is not one of the employer boss against the employee worker, but rather a complex process of manoeuvrings over who captures the spoils of the firm and how they are distributed.  In fact, industrial relations is an attempt to govern relationships between multiple classes of employees.  It's employee-employee warfare, not employer-employee warfare.

Remember, however, we are looking at two pictures within one image, so the employer-employee relationship is not without some significance.

What are the implications of the employee-employee warfare under industrial relations?

First, we should not be surprised by the behaviour of executives who seem to obtain positions of control within a firm and then either rip-off the firm or cause it to fail.  Corporate financial misappropriation is mostly a product of employee behaviour.  And the greatest financial disasters are normally caused by the employees who are at the top of the bureaucratic tree and who allegedly act as "employers".  Given recent problems in the likes of HIH for example, we would do well to consider this systemic downside of employment.

Second, we should realise that unions are run by employees of unions, not union members.  It should be expected that union employees will act with "employer" employees to find mutual self-benefit, one for the other.  Personal career positioning and income enhancement should be an expected motivation of each party in negotiations that will drive them together.

Third, we shouldn't pretend that all players in the game are benevolent.  There are high levels of genuineness, integrity and truthfulness operating amongst many of the players but, equally, the rules of Machiavellian subterfuge normally determine the winners and losers.  Because of the employer myth, industrial relations is a game in which nothing is ever what it seems.  Double play is always at play.  Apparent enemies are often in coalition.  Apparent coalitions always have enemies within.

These rules apply to every side, but we pretend they don't.  Our pretence makes us foolish.

So why talk about this?  Isn't what I've described simply the reality of the way serious business is done in a small economy?  Doesn't this process benefit Australia because a small economy needs to make sure it's properly organised under a national plan?  The answer traditionally has been "yes" -- that the economy needs to be organised like this through powerful coalitions of businesses, unions and governments.

But at the same time this marks Australia as not a truly free market society.  It's the mark of an orchestrated economy.  And orchestrated economies restrict the creative potential of their people.  If we wish to see the development of a truly shared and expanding wealth, free markets have proven thus far to be the system that takes us there.

So my primary point is that industrial relations in Australia must be understood for the other picture that it is -- an institutionalised, anti-free-market system.  Understand this second picture and industrial relations takes on a new and clearer perspective from which policy debates and business processes and actions can be approached.

My warning is that we are in a new era in which industrial relations has expanded into new territory by moving against core structures that enable free markets and thus business to operate.  There are great dangers to the national economy and individual business viability in this development.  Let me explain.

Our afflicted manufacturing friends at Lotus Cove who suffered the $20,000 fine for failing to report their contract arrangements are a stark example of the new game.  The fining of Lotus Cove demonstrates that we are not dealing with a new theory but rather a new reality.  And the end game is the de-construction of free markets through multiple processes which control commercial contracts and thus business operations under labour and other laws.  It's no joke!  It's no light matter!  And it's happening now!

I'll summarise some of what is currently occurring.  We are witnessing the removal of the right of independent contractors to be independent contractors.  We are seeing corporations being declared to be employees.  We have industrial manslaughter legislation and codes that breach key principles of criminal justice by declaring that corporations as collectives can act criminally.  We have the invention of "co-employer" ideas within legislation that effectively destroys contract law by allocating commercial liability and responsibility where no contract exists.  We have plans afoot by governments and aspiring governments to totally prevent the Trade Practices Act having any interface with industrial relations law.

And why are we seeing these developments?  There are a number of reasons, but two statistics tell us a good deal.  Only 18 per cent of the private-sector workforce are now union members.  Yet 28 per cent of the private sector earn a living without being employed.  Non-employees work under the many forms of engagement generically described as "independent contracting".  These two figures indicate a massive shift in the nature of work from 20 years ago.  Industrial relations in the private sector is being replaced by non-industrial relations.  So those who oppose this social and work trend -- often at a deeply ideological level -- need new agendas to halt and reverse the trend.

And who are the coalitions forcing this new agenda?  Look again at the clothing industry.  The "end game" in the clothing sector was created under the auspices of the front, or umbrella, organisation Fair Wear.  Its campaign funding came from the following groups:

• The Uniting Church in Australia -- New South Wales Synod and Assembly
• The Mercy Foundation, NSW
• The NSW Department of Industrial Relations
• The Australian Federal Government
• Asian Women at Work Inc
• Sisters of Charity Foundation Ltd
• Australian Manufacturing Workers Union, NSW State Office
• Labor Council of NSW
• Federated Municipal and Shire Council Employees' Union of Australia
• Flight Attendants Association of Australia, Domestic/Regional Division
• Textile, Clothing and Footwear Union of Australia, NSW Branch
• The Stegley Foundation

Activist campaign training was provided by Greenpeace.  Industry associations co-operated in a process of appeasement thinking that they could manage the situation, but that very appeasement resulted in the industry finally being captured.

In looking at these groups the new anti-free market coalitions can be identified.  They include, for example, remnants of the liberation theologists in the Catholic Church and their activist like-minded partners in other churches.  There are governments which under normal circumstances appear to support free markets, but which work against free markets under the mask of industrial relations.  There are Greens who view free markets as a system responsible for ecological destruction.  And there are those more familiar entities within the union movement who have difficulty servicing their members under free market rules.  There are Machiavellian organisations, including some tax-free trusts, who give the pretence of being pro-business.  Each of these entities has come together, each with its own motivations and self-interest, in a new common cause against free markets.  We are witnessing a battle between a new broad church of regulators (the new age conservatives) and the rights of consumers.

What we once thought was industrial relations is no more.  It continues to have elements of the old game but it has also expanded and has new forms and new objectives.  This is my alert to you all.

This is why the dual pictures in one image is important.  As traditional industrial relations continues to play out its usual games with many of the same outward processes and forms of language, we must at the same time recognise that industrial relations is not just a workers versus bosses issue.  We must also see and address industrial relations within the context of free market defence.  And we must learn to recognise that a new anti-free-market game is at play which constitutes a massive expansion on traditional industrial relations.  And the new game has as its central objective the destruction of the basic structures upon which free markets rely.

We need to recognise that if these old and new anti-free-market agendas succeed, then competition will be rorted, prices will be fixed, new forms of monopoly will be created, creativity and entrepreneurship will be devalued and shared prosperity will be diminished.  The stakes are high.  This affects us all and we must approach this new era with our eyes wide open.

Once again, to the Clough family, my thanks for the opportunity to present "One Image, Two Pictures".  I trust my thoughts contribute to clarity rather than confusion and help throw light on pathways forward.  In addition, if I've been truly successful, I hope I've sparked as many questions as I may have answered!