EXECUTIVE SUMMARY
Vigorous competition delivers increased efficiency, more jobs and the higher living standards to which most of us aspire. Competition policy works in tandem with secure property rights in bringing about these benefits.
The National Competition Policy operates in two broad fronts:
- the review of laws that restrict competition; and
- a national access regime and price controls over "essential facilities".
The review of laws and regulations agreed to by all Australian jurisdictions is to be undertaken from a deregulatory perspective. It continues a policy, which commenced over fourteen years ago, that recognised the deleterious effect on Australian productivity of excessive regulation. We welcomes the continued review with the incentive payments the National Competition Policy has put in place. Our submission demonstrates the vast improvements in productivity in the electricity supply industry since competition has been permitted.
The National Access regime is designed to combat the excessive prices that might arise for the use of infrastructure facilities that are natural monopolies. The regime carries substantial merit where system were previously built under monopoly franchises. It is an especially useful in ensuring that a government owned facility is opened to all suppliers and customers on terms that are fair and reasonable.
In other circumstances, the National Access regime could frustrate the achievement of efficiency. Where owners or builders of facilities are under government direction in operating those facilities and in the price other parties can obtain access to them, they will be excessively cautious in embarking on new projects. Such caution is likely to have been intensified by draft decisions of the Australian Competition and Consumer Commission and the Victorian Office of the Regulator-General in setting low prices in their draft decisions on Victorian gas pipelines. Low regulated prices also adversely affect owners' incentive to maintain and improve service with existing assets.
In fact, natural monopolies are extremely rare. Normally, if an incumbent supplier's price is deemed excessive new suppliers will emerge. Such a process is already being observed in Victoria with electricity distribution. This was previously considered to be a natural monopoly but rival businesses are planning to "invade" the territory of incumbent businesses with new lines where they have spotted profitable opportunities. This brings an automatic restraint on prices, which is far superior to a regulator.
Aside from our reservations on the access policy, we take the view that the adverse socio-economic consequences of the competition policy are negligible. Some employees may regret the trend, which deregulation is accelerating, for working arrangements centred on the needs of the consumer rather than the producer. One example of this change is the longer opening hours of shops. But this is a major benefit to the public at large who have more convenient access to shopping facilities.
Competition policy has no adverse environmental or regional community effects.
INTRODUCTION
BACKGROUND TO THE CURRENT COMPETITION REFORMS
Building upon a reform perspective that dates back to the early years of the Hawke Government, Australian Governments have sought to reduce regulatory impediments to the efficient operations of business. Prime Minister Hawke, addressing the Business Council of Australia in September 1984, said:
I am convinced that after eighty-four years of federation, we have accumulated an excessive and often irrelevant and obstructive body of laws and regulations. We will examine critically the whole range of business regulation, most importantly with a view to assessing its contribution to long term growth performance. We will maintain regulation which upon careful analysis, clearly promotes economic efficiency, or which is clearly an effective means of achieving more equitable income distribution. And we will abandon regulation which fails these tests.
The dominant theme running through this quotation was to "excessive and irrelevant regulation". This offered a clear signal favouring deregulation -- perhaps the clearest such signal previously given by an incumbent Government in Australia. But it was tempered by an agnostic view that some regulation promotes economic efficiency and that some regulation may be a justifiable means to the promotion of equity in income distribution.
Following the Hawke initiative, regulation review units were set up in the Commonwealth and most States (1) with a view of arresting and reducing the plethora of regulatory barriers to the supplier/consumer interface. Insufficient powers and resources were given for these regulation review watchdogs to have a major impact. But the initiative marked a change in attitude of government intervention in the economy. Previously government leaders had largely taken the view that their actions were unambiguous in bringing benefits. The initiative recognised that the sand thrown in the wheels of commerce by governments was itself often the problem.
In this respect, the Hawke initiative echoed, albeit palely, the reforms that underpinned the economic take-off that we call the (English) industrial revolution. The 200 years to the 1870's marked a systematic culling of laws and regulations. Of the 18,110 Acts passed since the Thirteenth Century, over four-fifths were repealed.
In Australia, most areas of intervention of governments in business decisions have been much reduced over recent years. Social regulation over standards, pollution and the like has tended to mount but the regulation of businesses through tariffs and subsidies, and directions to offer services, has been much reduced. The net position has been little change in the explosive growth in regulation which is illustrated in the chart below.
One area where regulation has been increased, ostensibly on the basis that increased regulation is necessary to promote competition, is access to monopoly services.
ECONOMIC WELL-BEING: THE ROLE OF COMPETITION AND THE RULE OF LAW
Over the longer term, successful economic performance requires market competition with established property rights. Competition means a ceaseless striving to steal a march on rivals by cost-cutting and better pleasing the customer. Established, secure property and contract rights offer the incentive of personal gain from searching out new and changing needs of consumers and continuously seeking ways meet these more cheaply. The Socialist or command economies collapsed under the weight of bureaucratic controls and lack of incentives that are the inevitable corollary of attempts to improve upon the atomistic outcomes of market processes.
Stable institutions with the ultimate backing of law are essential to sustained growth in living standards. Government intervention, whether through owning businesses, directing resources into favoured areas, or reviewing commercial decisions will detract from and possibly arrest this process.
COMPETITION POLICY
OVERVIEW
On 11 April 1995, the Council of Australian Governments (COAG) signed three agreements establishing a National Competition Policy (NCP) for Australia. The three agreements are:
the Competition Principles Agreement (CPA);the Conduct Code Agreement;the Agreement to Implement the National Competition Policy and Related Reforms.The reform measures that comprise national competition policy are designed to improve the efficiency of the economy. This is effected by injecting increased competition into economic interchanges, by removing regulatory impediments to the achievement of higher levels of productivity and ensuring that public sector businesses operate along the same market and profit oriented lines as are required of private sector businesses.
Recognising that the dividend to government exchequers will largely accrue to the Commonwealth, under the NCP Agreements, the Commonwealth agreed to make special payments to States and Territories that made satisfactory progress in implementing the national competition policy reforms. If a State or Territory does not take the required action within the specified time, its share of the payments will be withheld. The National Competition Council (NCC) program is to assess whether the conditions for payments to the States and Territories, have been met. The first formal assessment was made prior to 1 July 1997, and basically required only that a program be in place. The next assessments are to be made prior to 1 July 1999 and 1 July 2001 and will examine the outcomes of reforms in greater detail.
The money which has been allocated to these special payments is set out in Figure 1 below (estimated nominal $ million).
Figure 1: Competition Payments
| 1997-1998 | 428 |
| 1998-1999 | 646 |
| 1999-2000 | 1113 |
| 2000-2001 | 1369 |
| 2001-2002 | 1888 |
| 2002-2003 | 2184 |
| 2003-2004 | 2499 |
| 2004-2005 | 2833 |
| 2005-2006 | 3188 |
| |
| TOTAL | 16147 |
Source: National Competition Council Brochure (October 1996)
The agreements are best grouped into five facets of reform:
the review and, where appropriate, reform of all laws which restrict competition by the year 2000;the restructuring of public sector monopoly businesses and the implementation of reforms agreed to by COAG covering the electricity, gas, water and road transport industries;the introduction of competitive neutrality so that public businesses do not enjoy unfair advantages when competing with private businesses and the extension of the operation of Part IV of the Trade Practices Act 1974 to government business enterprises and unincorporated businesses;access to nationally significant infrastructure services to promote competition in related markets; andthe extension of prices surveillance to government businesses to deal with those circumstances where all other competition policy reforms prove inadequate.REVIEW OF LAWS THAT RESTRICT COMPETITION
The Review Procedures
The regulation review and competition principles offer a prospect of improving business efficiency with considerable consumer benefits. The key provision on general regulatory measures is Clause 5 in the Competition Policy Agreement. Under this, governments agreed that legislation should not restrict competition unless it can be demonstrated that:
- a) the benefits of the restriction to the community as a whole outweigh the costs; and
- b) the objectives of the legislation can only be achieved by restricting competition.
Each government has prepared a timetable for its reviews of restrictive regulation and provided this to the National Competition Council. The reviews are to be completed by the year 2000.
The review guidelines proposed two criteria for identifying legislation which restricts competition:
legislation restricting entry to a market; andlegislation restricting competitive conduct by those in a market (2)These matters complement the regulation review procedures that are in place in most States. Thus, the Victorian Subordinate Legislation Act 1994 requires economic analysis and public scrutiny of all substantive regulations via a Regulatory Impact Statement. (3) This applies to all existing regulations, which expire ten years after their enactment, and to new regulations. The Act draws attention to the possibility of regulatory failure and seeks to ensure that any regulation that is deemed necessary is the most efficient solution to the identified problem.
Other states have similar mechanisms. Indeed, Queensland has formally integrated the competition policy review process falling under the aegis of the Business Regulation Review Unit (BRRU) within the Department of Tourism, Small Business. The BRRU completed a Systemic Review of Business Legislation in 1996. Tasmania has adopted a similar approach. As in Victoria, regulations in these States are sunsetted after 10 years (under the Statutory Instruments Act 1992).
Outcomes in Reducing Government Controls
The process of regulation review under the competition policy agreements is now well underway. It would take an extreme optimist to take the view that this will lead to the sort of culling that occurred in the previously mentioned English review, if only because of the time span the latter encompassed.
Even so, the process is useful in signalling the continued march of regulatory reform that commenced with the Hawke address to the Business Council in 1984. All States have developed a compendium of regulations which must seek renewed justification if they are to remain on the statute books.
The NCC's role in assessing the performance of the individual jurisdictions could assume some importance. It has indicated the matters that can be taken into consideration in establishing interventions in the public interest. The criteria for doing so adopt a deregulatory approach but make clear the ultimate objective is not competition per se but using competition and deregulatory measures to enhance the community's living standards and employment opportunities.
Under Clause 1(3) of the CPA, several issues may be taken into account in determining what constitutes the "public interest". These cover a wide range of matters including:
- (d) government legislation and policies relating to ecologically sustainable development;
- (e) Social welfare and equity considerations including community service obligations;
- (f) government legislation and policies relating to matters such as occupational health and safety, industrial relations and access and equity;
- (g) economic and regional development including employment and investment growth;
- (h) the interests of consumers generally or of a class of consumers;
- (i) the competitiveness of Australian businesses: and
- (j) the efficient allocation of resources.
The NCC noted (4) that there were no weightings to these particular provisions. It argues that the onus is on those promoting an exemption of an arrangement to demonstrate that it will be a superior approach. In this respect, the NCC draws attention to the "net public benefit" test applied by the Australian Competition and Consumer Commission (ACCC). The ACCC approach is that, unless there are clear arguments to the contrary, competition is to be enhanced in order to meet the objectives of the Trade Practices Act (TPA) on which the competition reforms are largely predicated. The TPA's objective is to "enhance the welfare of Australians through the promotion of competition".
Deregulations likely to Emerge from Regulation Review
The specific areas where reviews might bring deregulation in the short term are difficult to predict. Some areas that would appear to be prime targets include:
agricultural marketing authoritiesshopping hoursLicence Reduction ProgramReforming Planning, Land Use and Natural Resource Approvals SystemsLocal government local laws and planning schemesoccupational registration and performance standards for good and services.THE NATIONAL ACCESS REGIME AND PRICE CONTROLS
The New Legal Regime
With regard to wires, ports and pipelines, we can say with confidence that the lowest consumer prices and the optimum production rates will be achieved if there are many customers competing for the capacity and many independently owned producers vying to supply those customers.
The Hilmer recommendations rightly focus upon the importance of competition in bringing about a more efficient and productive economy. Government should do all possible to prevent its own agencies and institutions from inhibiting this process. This means abandoning exploitative monopolies in the form of utilities and outlawing procedures that create barriers to commercial entrants or which prevent the full force of competition. Where, as in the case of electricity, provision of a good has been supplied by a vertically integrated business, a common strategy is to de-integrate the business to allow rival provision of those parts (e.g. electricity generation) that can be offered competitively.
A new part, Part IIIA of the Trade Practices Act was introduced in 1996 which gives a legal avenue to a firm to require another firm to give it access to certain infrastructure that it owns. This is intended to promote greater competition in supply of the gas, electricity water, etc. carried by that infrastructure.
The notion of requiring business to give access to their facilities is one that derives from the US legal system's development of the concept of an "essential facility". It also has similarities with the way some of the traditionally shared facilities, like roads, are operated. The key difference between roads and the other shared facilities is that the former are usually government owned and impose no specific charge for usage.
Some Consequences of the New Legal Regime
While it makes sense for businesses to share common delivery systems -- and many do so without government intervention -- governments must be careful in requiring such a sharing. Requiring a facility to be shared brings reduced incentives to undertake the risky entrepreneurial activity of building it in the first place. It is also likely to deter a business from embarking on a new development if it thinks another business will take the risk and it can subsequently "free-ride" on the investment.
Requiring access must also, in the final analysis, mean setting the price for that access. If a regulator is to determine the price at which a facility may be accessed, that price is likely to be lower than the price sought by its owner. If this were not so the parties would come together without the regulatory intercession.
The importance of a national access regime is strongest in those industries where governments have previously legislated to forbid competition. The most entrenched monopolies -- perhaps the only ones with durability -- are those supported by government. The heart of the Australian competition reforms was to dismantle these. What is left is residual apparent monopolies covering wires, pipes, ports and roads.
Disaggregating vertical government owned monopolies so that those parts which are potentially competitive can be made subject to commercial rivalry is a fundamental reform. Ensuring open access to the core essential facilities of these previously protected assets, is an essential component of the reform, at least in the early stages until the potential of rival providers is tested.
But while government is at liberty to insist on certain access rules for its own facilities, it must be careful not to impose these on private facilities that are already in existence and that were built under different contractual arrangements.
The requirement for open access to these facilities might have perverse effects both on the competitive process itself and on economic efficiency. Some entrepreneurs will want to have greater control of the sources of supply and the throughput of the facility than would be permitted under open access. Either they would build a suboptimal facility so that only their own booked capacity is transmitted or they may be discouraged from building any facility, with consequent loss of additional supply to the market.
Is a Regulated Requirement to Share Facilities Necessary?
The codes covering access and pricing to gas and electricity networks are subject to requirements on price and access that presume they are monopolies. Yet, recent events have demonstrated the potential for active competition in this area of supply. In Victoria rival electricity distributors are planning to drive new lines into each others' territory. Further evidence of the potential is observable in the skill that AGL has shown over many years in setting their NSW pipeline charges at a level that allows them to profitably ward off rival facilities. AGL has responded to competitive threats by reducing prices in areas where those threats have greatest potential.
The nightmare for a utility business is that it will face a rival supplier which will leave its asset "stranded". Fear of having "stranded" assets means that little by-pass is actually likely to eventuate. But the control over excess prices that competition brings does not require that a competitor physically emerges. Contestability for the market is quite adequate.
Competition or contestability is much superior to a regulator. Indeed, the regulator's role is to make judgements that, in his view, correspond to those that would emerge in a competitive market.
The problem with a regulated price is that it is likely to bring distortions. If set too high, and the facility is indeed a monopoly, excessive prices will shift customers towards activities and expenditures that offer less value than would be the case with market-determined prices. Of course, if the facility is not a genuine monopoly, prices set too high are irrelevant because competition will force them down to market determined levels. If prices are set too low, entry will be unprofitable and competition will be pre-empted, and the facility owner will have inadequate incentive to properly maintain and expand the system.
No facility -- at least no facility unprotected by government franchise -- has untempered monopoly powers. Many facilities can be by-passed and almost all others supply products, like gas, that compete with electricity. That facilities have an element of natural monopoly is not cause of itself for the suppression of property rights. Nor is it incompatible with the concept of access for others' product. Where excess capacity exists, access can be marketed at a price which reflects the tremendous level of capital and expertise necessary to construct a large scale system. The alternative to a market based on the assignment of property rights may be that of significant under-investment in the gas sector, at a significant loss to suppliers and consumers.
This has a bearing on recent decisions by the ACCC and the Victorian Office of the Regulator-General. In the draft decisions, the regulators opted to set a much lower return than the Victorian Government had sought. The most appropriate return on a monopoly facility is that which is presently in place or lower if the owner so wishes. As owner, the Government had decided to reduce prices from those previously in operation. But the regulators' adoption of an even lower price, while conferring consumer benefits in the short term, carries considerable disadvantages over the long term. These are:
the disincentive offered to present operators to incur costs and improve service reliability and other carriage features; the pre-empting of competition simply because the service is under-priced; although the existing assets may be "sunk" the specification of a low price for them gives a market signal that will discourage entrepreneurs from embarking on new risky projects;Regulators that pursue pricing decisions that apparently favour consumers in the first instance are likely to see these backfire over the longer term. In these respects the national access regime and its associated price controls has to be carefully managed if it is not to prove counter-productive.
EXPERIENCE IN INDUSTRIES THAT HAVE UNDERGONE REFORM: THE CASE OF ELECTRICITY
Electricity reform has been the touchstone of the Hilmer reform agenda. At least since the 1991 IC report on electricity generation, (5) it had been recognised that Australia was experiencing low levels of productivity in this industry. Victoria was the least efficient system and the Cain/Kirner Governments commenced a program of tackling its over-staffing prior to 1990.
The following two charts compare productivity in Australia to that in other countries.
Chart 1: Electricity multilateral TFP for Australian states and the US, 1975-76 to 1993-94
Chart 2: Electricity customers per employee -- predominantly thermal systems, 1993-94(a)
(a) Employee data excludes construction personnel.
Data source: BIE 1996.
Since the early 1990's, a very rapid improvement has taken place, especially in Victoria and NSW. Productivity in Victorian generation increased threefold and that in NSW increased by 70%. The following chart illustrates the trends (Tasmania is distorted because major new construction activity was completed during the period).
In fact, the productivity performance of the Victorian stations is greater that shown -- over the period since 1989 staffing in what was the State Electricity Commission has been reduced from over 12,000 to less than 2,000 (plus the equivalent of 500-1,000 in outsourced staff). Queensland, previously acknowledged as the most efficient of the Australian systems, has not shown an increase over recent years -- a major factor in the reforms introduced in that State in 1996.
Not only was productivity increased in terms of number of employees per GWh generated but the plants themselves are more available to operate than in the past as shown in the chart below.
Similar gains have been made in much of the distribution side of the electricity industry, again with the most spectacular gains being seen in Victoria. In Victorian distribution, numbers were reduced from about 14,000 in the bad old days to rather less than this at privatisation. Since then numbers have been further reduced and are rather less than half their pre-reform levels. One CBD distributor now employs only 40% of the staff it employed at the time of its sale, prior to which numbers had already been reduced. Its rule of thumb has been that the employment saving has yielded a 30% cost saving with about 70% of the jobs being essentially outsourced. Another Victorian business has outsourced much of its maintenance to an electrical contractor and made comparable savings.
Measures of reliability, notwithstanding misinformation published in certain areas of the media, have generally improved. These measures are monitored by the Office of the Regulator-General and show outages to be lower than under the old SECV. In this respect, the power disruptions in Queensland and Auckland have often been erroneously attributed to privatisation. In neither case was a single share of the businesses concerned owned by a private investor.
Although full information on the actual prices paid by customers is confidential, the competition amongst retailers and generators means that the greater part of the gains from cost savings and the termination of monopoly provision will have been picked up by the customers. Those customers which are "contestable", and free to strike their own deals, have done particularly well. Other customers have also benefited from the reforms, with a regulated price reduction -- in Victoria for small commercial customers this is scheduled to be 22% between 1995 and the wear 2000.
The major price reductions result from the intensified competition among generators. Generation accounts for about 60% of the total price for the medium and large business customers which are free to contract on this basis. Spot prices for electricity in the first six months of 1998 averaged about $12 per MWh in Victoria and NSW. This compares with pre-reform notional prices prior to the market set at about $40 in Victoria and $44.5 in NSW. Very few customers would have negotiated the full amount of the reduction because it was not anticipated (and, indeed, since July 1998 prices have risen to an average of $22 per MWh, a level closer to the expected long term price of $35-$40). But anecdotal evidence indicates an average reduction in price of about 30%.
As a share of firms' total costs, electricity accounts for anything between 3% and 30% (the latter comprising aluminium smelters, the great bulk of whose power is contracted ahead). Hence the fall in costs would have been translated in a fall in prices and increase in real value of goods and services throughout the economy. Even if these prices eventually rise, there are benefits to all from the present glut in supply, benefits that are unlikely to have emerged under the previous monopoly regimes.
Additional gains are likely to follow from the regulated change to the line charges. Under the competition principles, the prices charged for these "essential facilities" is determined by the ACCC for transmission lines and the jurisdictional regulator for local distribution lines. In making these determinations, the regulatory authorities have to guard against a temptation to make reductions that are too severe and reflect the "sunk" costs of the assets rather than their genuine market worth.
BROADER SOCIO-ECONOMIC CONSEQUENCES
Employment Gains
Gains from reform in all these areas have been identified and quantified by agencies like the Productivity Commission.
Australia has for several decades experienced low levels of productivity growth. The Industry Commission (IC) demonstrated that multi-factor productivity growth in Australia was 55% below the average of the small OECD countries in the years from 1970. (6) Multi-factor productivity is the residual increase in output that is not explained by increases in capital and labour inputs. The IC also points out that Australian productivity appears to have outpaced that of the rest of the OECD in the period 1989 to 1994.
The IC (7) and Economic Planning and Advisory Commission (EPAC) (8) have estimated future gains from the reform process at between 5.5% and 15%, with (in the case of the IC estimates) increased real incomes of 3% and the creation of 30,000 extra jobs.
The reforms have been underway for too short a short period to fully estimate their actual effects. However, there are indications of a lift in Australian growth rates caused by factors other than inputs of labour and capital. Dowrick (9) estimated the "residual growth" -- that part that can be attributed to increased general efficiency -- has averaged 0.8% per annum in the 1990s having been negative in the previous 30 years. Such gains provide the essential springboard for wider gains in incomes and employment.
For the individual business, its reform generally means a reduction in its levels of employment. The previous levels were normally supported by measures that protected the industry itself from competition. But employment artificially supported by such means brings higher costs elsewhere in the economy and a net reduction in aggregate employment levels. This is now generally understood and has been the premise upon which import tariff reductions have been implemented over a great many years.
Often, however, the downsizing in employment in a particular business within an industry is accompanied by increases elsewhere in the industry, sometimes as a result of the consequent price reductions and greater market orientation bringing increases in demand. This and the underlying increase in demand has been the case in telecommunications. Even though Telstra, the dominant player has shed tens of thousands of jobs, the sector has been experiencing employment growth at twice the national average.
Changed Working Conditions
One change that has been occurring in all economies, in the wake of greater consumer orientation from increased competition, is a change in working conditions. This is especially likely where valuable capital investment is incurred, since it is usually most productive to have the capital in operation for as much of the day as possible.
The effects of this are best illustrated in the deregulation in shopping hours, a measure likely to be expedited by the National Competition Policy.
Shopping hour limitations have a long history but are fundamentally in place to ensure that shop employees are not required to work outside certain core hours, to protect smaller shops (which in the main are not covered by the regulations) from competition from major outlets, and to protect those businesses that prefer not to open outside certain core hours from competitors which are prepared to open at those times.
Since the competition restraints adversely impact upon the interests of consumers, they must be examined critically under the deregulatory thrust of Clause 5 of the CPA. The restraints increase costs and reduce convenience to consumers. And the growing incidence of working wives means the inconvenience has increased over time.
Some retail employees and outlets would doubtless prefer to open at times of their own choosing rather than the times preferred by their customers. But customer orientation involves balancing the needs of consumers with the costs they are prepared to pay for that service. In the case of employees, the working arrangements are subject to negotiation between retailers and their employees (or the employees' agents, the trade unions). There is no monopoly of retail outlets and therefore no possibility of the outlets being able to exercise coercive powers on employees to work particular hours. Subject to industrial relations regulations, the parties involved can arrive at mutually agreeable working arrangements.
The gains from increased productivity in shopping more than counterbalance any loss in convenience to shop workers (especially bearing in mind that the shop workers themselves will prefer the increased remuneration they receive for working the unfavoured shifts).
Some incidence of the gains from deregulating shopping hours can be derived from a Mckinsey report, (10) which estimated that Australian retail productivity lagged that of the US partly because of restrictive regulatory requirements. In addition, a report delivered to a Productivity Commission Industry Economics Conference (11) estimated that deregulation of trading hours in Victoria would bring increased benefits to consumers of $330 million per annum and bring an increase in retail employment of around 2%.
Broadly speaking, if shops could open for 25% longer under a deregulated regime, this increases the productivity of the capital tied up in them. (12)
These sorts of changed working relations are likely to be seen increasingly as the economy shifts more towards services rather than goods. Workers preference for working in core 9 a.m. to 5 p.m. hours is likely to have been diminished over recent years and a great many workers -- like nurses, policemen, bakers and those in transportation -- never enjoyed working hours of this nature. The gradual breakdown of restrictive labour award conditions is likely to accelerate the trend away from the standard and traditional core working hours.
Social Welfare, Equity and Social Dislocation Issues
The increased efficiency in the economy's operations offers opportunities to address improvements in social welfare. Adverse effects on social welfare and equity are difficult to envisage.
Social dislocation from change is a feature that has received much prominence. Indeed, the downsizing of electricity employment would have resulted in certain dislocations. In Victoria, the reduction of staffing at the Latrobe Valley's stations from 12,000 to 2,000 certainly resulted in disruption in that regional economy.
However, the aggregate data fails to demonstrate a marked shift in the pattern of employees' longevity within their current job. If anything, the data shows a slight increase in tenure of jobs over the past 10 years. This is depicted in the following chart.
Source: ABS Cat. No. 6209. February 1998.
A similar pattern is revealed by examining the data on those who changed their jobs in a particular year. Thus in 1988, 13.3% of people changed their employee/business, a figure that fell to 11.4% in the year to February 1998. Similarly, there was a reduction over the period of people changing their locality but not employer/business.
There is much anecdotal evidence about people being less secure in their jobs and this should not be dismissed. It may well be that, although the pattern of employment duration in a specific job has actually increased, the reasons for parting with employers have changed. In the past, people seldom left jobs for reasons other than their own choosing. It may be that competitive pressures in the economy have resulted in a greater number leaving their employment either unwillingly or with a compensation package, rather than under their own volition to take up a new opportunity.
Environmental Impacts
Greater efficiency in the economy will, broadly speaking, allow improved environmental outcomes. Taking the broad sweep of environmental measures -- air and water pollution, noise, parkland, the built environment, etc. -- the richer an economy the better it compares. Over time, as Australia has prospered, its measured air and river pollution levels have been reduced. Land set aside from production has vastly increased.
One element of concern to some parties is the effect of the energy reforms on greenhouse gas emissions. A lower cost for energy, which is the aim and to date the outcome of reforms in electricity, will bring increased demand.
Of itself, greater competitive pressures will also put to test the claims of those who maintain that solar and other exotic supply sources provide a competitive solution. With businesses facing the full gale of commercial rivalry, the ability to offer subsidised power rolled in to overall power costs and therefore disguised is reduced.
With regard to greenhouse gas emissions, we made a submission to the House of Representatives in February of this year. (13) This sought to measure the price impact of a tax on carbon emissions. It recognised that per unit of energy, brown coal produces far more carbon emissions than black coal, which in turn produces more than gas, while hydro, solar and nuclear produce negligible amounts.
The effects of a tax at $10 and $100 per tonne of carbon on sources of power for electricity is indicated in the following table. Based on present estimates of costs of different fuel sources, even a $10 carbon tax tilts the competitive advantage away from brown coal. A $100 tax makes gas a cheaper option than black or brown coal providing the increased demand does not result in a scarcity driven price increase for gas. For renewables to be competitive, a carbon tax of at least $215 would be required. This would apply to a solar based system and even with such a tax advantage, the value of the renewable energy is likely to be discounted because of its dependence on weather conditions.
Chart 6 offers some estimates of different power source competitiveness under different carbon tax regimes.
Chart 6:
Beyond a point, imposing a cost penalty on brown coal supplied stations means they cease to be viable and the power source becomes redefined as dirt. There is therefore a wealth effect with brown coal.
On these estimates, a tax at $100 per tonne would bring a 3 cents increase in price, or about a 25% increase in fuel bills once transmission and distribution costs are included. In addition, Australia has a comparative advantage in low power costs. Australia's future development is critically dependent on low cost power. Power intensive industries focus heavily on the price of electricity in their location decisions. This is readily seen after the 1974 oil crisis with the shift of Japan's aluminium production to lower cost energy locations like Australia.
Victoria, with its brown coal sourced electricity, is especially vulnerable to measures that force reduced greenhouse gas emissions. Phasing out brown coal electricity in the State would mean writing off assets worth over $11 billion and a migration of energy intensive industries from the State. Other States would see a similar reduction in later periods as further measures to reduce emissions became necessary.
An increase in carbon dioxide emissions from power generation is a likely outcome of the reforms in the electricity supply industry. Attempts to combat that increase would be likely to frustrate the intent of the reforms to the great detriment of the Australian consumer and industry.
The Relative Effect on Urban, Rural and Regional Communities
The reforms to competition policy are likely to be felt across all communities. This is not to say that some regions will face relative decline and others experience expansion. But the cheaper provision of goods and services, which is the main objective of the reforms will make activities more competitive across the entire spectrum.
In the case of many regional economies, the reforms to gas and electricity will see services provided that would otherwise not have been. Early evidence of this is the extension of reticulated natural gas to areas in the north of Victoria and Mildura. These extensions would have been difficult under previous arrangements since they would have required subsidies that were increasingly less affordable. They bring the benefits of cheaper power to relatively remote communities and offer opportunities for industry expansion in those areas.
The Treasurer announced on 28 August 1998 that the Productivity Commission is to examine this facet of competition policy.
ENDNOTES
1. In fact, embryonic units were set up in South Australia and Tasmania prior to the initiative.
2. The two criteria are derived from the Hilmer Review which recognised that the two principal ways in which legislation affects competition are through barriers to market entry and restrictions on competitive conduct by those in the market. See: Hilmer, F.G., Rayner, M.R., Taperell, G.Q. Report by the Independent Committee of Inquiry, August 1993, National Competition Policy, AGPS, page 191.
3. See Regulation Impact Statement Handbook, Office of Regulation Reform, Department of State Development, Government of Victoria.
4. Considering the Public Interest under the National Competition Policy, National Competition Council, November 1996.
5. Industry Commission Energy Generation and Distribution, January 1991.
6. Industry Commission, Assessing Australia's Productivity Performance, Research Paper, September 1997 (page 67).
7. Industry Commission, The Growth and Revenue Implications of Hilmer and Related Reforms, 1995.
8. Economic Planning and Advisory Commission, Tariff Reform and Economic Growth, 1996.
9. Explaining the Pick-Up in Australian Productivity Performance, Dowrick, S., in Microeconomic Reform and Produjctivity Growth, Workshop Proceedings, ANU February 1998, Productivity Commission, AGPS, 1998.
10. What Ails Australia?, The Mckinsey Quarterly, 1996, No. 1, pages 90-102.
11. Brooker R.J., and King, G. H., Open All Hours: the Economic Consequences of Deregulated Shopping Hours, Paper presented to the Productivity Commission Industry Economics Conference, Making Competitive Markets, Melbourne 1997.
12. Though probably not by the full amount of the increased opening hours since the productivity would tend to diminish with each extra hour of opening.
13. Inquiry into the regulatory arrangements for trading in greenhouse gas emissions, Submission to the House of Representatives Standing Committee on Environment, Recreation and the Arts, Wood & Associates.
