A Crisis of Our Own Making

Thankfully, judging from their comments at this week's Ministerial conference, our political leaders appear to have got the message that something is fundamentally wrong with the public liability insurance market.

The Ministers could have taken the populist route -- like Prof. Fels the nation's competition czar -- and blamed the big bad insurance industry.  But they did not and for good reasons.  While ructions in the industry have accentuated the crisis, they did not cause it.

As a recent study by the ACCC (Prof Fels' own agency) shows, the insurance industry has experienced large and increasing losses on its underwriting or claims business over the 1990s.  And these losses are expected to increase further without changes.

For most of the 1990s the industry was able to compensate for underwriting losses with high return on investments.  However, by the late 1990s this was no longer possible, as result overall returns in the industry have been unsustainably low for the past four years.

The worst results have been in the professional indemnity and product and public liability areas where return on capital has been negative since the mid 1990s.

As the ACCC study makes it crystal clear where the problems lie.  It says "the main cost driver of public and product liability [and professional indemnity] is the level of litigation, the awareness of the general community to making a claim and precedent-setting court cases;  e.g. a large claim setting a precedent for future claims".

Last year the domestic industry was severely disrupted by the collapse of HIH and the world insurance market was hit with its largest loss in history -- the bombing of the world trade center.  But while these shocks have forced up costs, they are not the underlying cause of the crisis.

The Ministers could also have taken the populist line and blamed "ambulance chasing lawyers".  While the legal profession may be the main beneficiary of the crisis and may be self serving in its defence of its lucrative niche, lawyers are in the end just facilitators, acting for clients within the law.

The main culprit is both the judiciary and us.

As Judge James Thomas, formerly of the Queensland Court of Appeal, "Some (judges) have enjoyed playing Santa Claus, forgetting that someone has to pay for our generosity.  We have allowed the test for negligence to degenerate to such a degree that people can be successfully sued for ordinary human activity".

For centuries the courts were the guardians that limited the powers of governments and adjudicate in an even handed manner the rights of all individuals, rich and poor.  Not any more.  For decades judges -- and the High Court is the main culprit -- have fallen over each other to be generous with other peoples' money and rights.  This in turn has lead in Judge Thomas' words to "a compensation-oriented society in which people know that a minor injury is a means of getting more money than they could possibly save in a lifetime".  Now the cost of such a society has caught up with us.

Thankfully it appears that the Ministers have got the message.

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Clothing Industry in Tatters

Exactly what's going on in the clothing industry?  Just recently another two icon clothing brands, Hugo Boss and Holeproof announced plant closures with 300 Victorians losing their jobs.  Thousands of clothing industry jobs have now been lost in the last few years.  There's a crisis and the industry is in terminal collapse.

Most blame international competition but that's just an excuse!  Farmers face as a tough an environment as the clothing industry yet they get out there and win.  No, the clothing industry has been hit with a severe case of Australian wowserism that's doing great harm.

Since about 1996 a coalition of church, union and activist "community" groups with heavy doses of government funding has waged war against the domestic clothing industry.  Under accusations that clothing outworkers are earning $2 an hour they have picketed clothing stores, conducted strip sessions in stores, and sought to damage the brand names of major manufacturers.  Country Road for example has been severely hurt.

This anti-industry campaigning has come out at a recent Victorian Parliamentary inquiry into outworkers.  The campaigning has successfully convinced governments to introduce legislation and regulation that ties the industry in knots.  The clothing award is the only award never simplified and runs to more than 850 clauses.  Manufacturers have been heavied into signing "Codes of Conduct" and price-controlling legislation has been introduced that stops competition.  More legislation is proposed.

The outcome is that barely any clothing item can be made without manufacturers having to keep boxes of records tracing every transaction.  The union has an automatic right to and does inspect sensitive commercial records.  Outworkers privacy is invaded because names must be provided to the union without outworkers consent.

But are outworkers exploited?  Last week I had dinner in Springvale with a group of Cambodian friends.  Half were outworkers.  The rest have parents who were outworkers.  The building in which we ate was owned by Chinese outworkers.  The Vietnamese restaurant was run by ex-outworkers.  Most of my outworker friends own several houses.  They wanted to know where this $2 an hour business comes from.  They thought it was a great joke because their children will not baby-sit for that rate.

These outworkers pay tax, have ABNs and don't rort the social security system.  They know of outworkers who don't pay tax and collect social security without declaring income.  Perhaps they suggest these are the $2 an hour people?  However none know anyone who would be prepared to work at these rates.

So where does this anti-industry campaigning come from and how is it controlled?  At the Victorian Parliamentary inquiry the organization, Fairwear indicated they "facilitate" the campaigning but don't take responsibility.  When asked about outworker membership they stated, "there are no outworkers on our committee".  The Uniting Church and the clothing union back Fairwear.  Where are the outworkers?

My outworker friends say the industry is dying.  They say that soon accusations of exploitation will disappear because in a few years no clothing will be made in Australia.  We're a strange country!

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Compulsory Workplace Insurance and its Effect on Productivity

Address to H R Nicholls Society's XXIII Conference
The Changing Paradigm:  Freedom, Jobs, Prosperity
23 March 2002

CENTRAL ISSUES

The central issues are how to reduce the costs of injury.  Particularly important in this task is bringing into accord the incentive structures of the various participants so that they each reinforce one another in pursuit of these goals.

Essential in this incentive structure is the need to avoid the familiar insurance concerns of:

• moral hazard, whereby parties have little interest in acting in the best interests of the community as a whole and, indeed, may have an interest in acting in ways that detract from that interest;  and,
• adverse selection, whereby parties have perverse incentives to select themselves into lower risk categories, opt out of coverage or classify their employees as falling within other jurisdictions if they consider the costs discriminate against them.

There is considerable capacity for political intervention in a mandatory insurance system.  As with other such areas, the best approach would see premiums set so that the true costs are sheeted home as accurately as possible to the parties in the best position to take action to ameliorate these costs.

Ensuring the price and other elements of the incentive system works to promote efficiency is of relevance to the different stakeholders and the premium design is the crucial element in:

• employers ensuring the right amount of effort and expense is incurred to reduce the costs of accidents to the firm and the community
• employees ensuring that they take sufficient care in the work environment
• agents taking actions to assist in claims reductions;  agents are the first line of assessment and the sales and processing arm of state systems like those in Australia but can have different incentives if their remuneration structure is not aligned with that of the state systems' interests
• removing any incentive of assessors to be indulgent in the sick notes they provide, out of sympathy with the injured employee or simply to avoid losing a client
• avoiding offering incentives for the employee to feign injury or, when injured, to remain off work longer than necessary

A low cost market-oriented compensation scheme is a significant element in the competitiveness of a nation and particular state.  New ventures in particular examine the costs of each location where they have discretion in their location decision–Virgin Airlines is a recent example.

I want to pursue three themes today.

• What are the trends in worker injuries and insurance costs?
• How does compulsory and essentially no (worker) fault insurance fit into our preferred market structure?  Where does it stand with the common law?
• How can incremental changes to the present system reduce costs and levels of injury

I won't address the safety and industrial relations issues that interface with workers' insurance except to say that:

• they are clearly means of bringing on a blue as seen in Victoria's Royal Commission into the building industry
• Victoria's Manslaughter Bill puts added pressure in offering union representatives more influence in the management of firms;  some would argue that the present round of graphic advertisements for WorkCover, most of which point to employer culpability for deaths, are a softening up process to this end;  there is no evidence to support this but a government controlled entity is always vulnerable to political pressure and this is all the more reason to shift WorkCover more comprehensively towards the private sector.

TRENDS IN WORKER INJURIES AND INSURANCE COSTS

Injury at work amounts to about 15 per million hours worked.  The measure of Disability Adjusted Life Years puts work injury at a level massively below obesity, or lack of fresh fruit to say nothing of smoking and alcoholic consumption.  It is in fact slightly more prevalent as a cause of mortality or morbidity than unsafe sex.

Work related deaths from injury are put at about 5.5 per 100,000 workers with about another 4 per 100,000 through disease. ⁽¹⁾  By industry, fatal injuries are highest in farming, mining and transport.  Non-fatal injuries are also highest in these industries and in manufacturing and construction.  The following table illustrates this.

Source:  Data on OHS in Australia, The Overall Scene,
National Occupational Health and Safety Commission October 2000, Sydney

If non-fatal illness is added to injury, the rates rise in relative terms for public administration, community services and education, and fro recreation, personal and other services.

These figures refer to 1995.  The mining industry's injury rate has in fact halved since then.  Indeed, the minerals industry "lost time injury frequency rate" fell from 70 per million hours in 1988/9 to 15 by the end of the 1990s

Injury rates have in fact been declining markedly.  Victoria has seen hours lost per million-worked fall from about 25 at the start of the 1990s to 12 by the end.  Other States have fared similarly:  SA 32 to 15;  NSW 24 to 19;  Queensland 28 to 16;  Tas 27 to 14;  and WA 27 to 16.

In Victoria, WorkCover went through a period of success in bringing down the average level of insurance premiums and at the same time edging away from insolvency.  This process came to a halt and has been reversed over the past few years, partly as a result of the partial restoration of common law rights.  Victoria's premium rates remain somewhat below the average as can be seen in the following chart

One difference that would tend to inflate the Victorian achievements is the 10 day "excess" required of employers in paying injured workers, a level that compares to 5 days or less in other states and is not present at all in some overseas jurisdictions.  This said, in a comparative analysis, the Upjohn Institute ⁽²⁾ places Victorian outcomes on a par with Michigan, widely regarded as the world's most successful private scheme.

Ominously however, the system has shifted back to insolvency with assets covering less than 90 per cent of liabilities.  Moreover, this result is in spite of a very advantageous foreign exchange book stemming from the agency's decision not to hedge its considerable overseas holdings, a strategy which last year allowed it to earn a 6.8% return on investment.  Of course, this strategy could have the opposite impact in future.

A FREE MARKET FOR WORKPLACE INSURANCE?

A free market for workplace insurance would leave it to the employer to determine what insurance he should prudently take out and employees would assess this against the general liquidity of the employer and their own risk/reward trade-off.

The fact that people do react rationally to different levels of workplace risk is seen in a number of studies.  Viscusi and O'Connor published a piece in the American Economic review in 1984 where some workers were told they would be working with harmless sodium bicarbonate and others were told they would be working with TNT, the latter demanded $3,000-$5,000 a year compensation.  Other work has examined payment by job adjusting for skill levels and other factors and derived the premium workers require for different levels of risk.  This can be most trenchantly seen in outrider cases:  in the American West, the best paid job was the wagon driver who transported nitroglycerine to mine sites.

There have been two features regarding the on-going developments in the common law with respect to worker insurance for harm incurred in the workplace.  The first of these has been the virtual disappearance of any liability of the worker herself.  This has largely been the result of common law interpretations over the past 50 years.  Thus, Courts have found against employers, even in situations where the worker has been injured after an unauthorised attempt to repair a machine and when this involved unscrewing safety barriers.

The second is the inconsistency of a common law system in cases involving worker disability with high levels of efficiency or productivity.  Traditionally the common law involved prominent people passing judgement on an issue of dispute.  The essence was to arrive at the decision quickly so that commerce could continue.  Gradually, as the sovereign took control of the courts, the system became ponderous and ceased to have as much merit for many disputes.  This is especially disadvantageous for handling claims involving injured workers, since the incapacitated worker has an incentive to remain injured until there has been a judgement to maximise the payout.  This not only rewards malingering but also harms worker health as all studies demonstrate that the faster workers return to work, even with re-arranged duties, the faster the recovery.  Indeed, long periods of injury time-off tends to create a psychosis of injury to the detriment of the injured worker in general.

If we go back far enough we can find the system of worker-employer or master-servant relationship that was much different from that which emerged in the industrial economy.  Noblesse oblige meant that an employer or a landlord assumed responsibility for an employee who had been harmed in the course of his work, even if the harm was due to the employee's own incompetence.  Of course the system did not always work.

Sometime with the onset of the factory system these traditional relationships broke down and employer ceased being seen to be automatically liable for a damaged worker's welfare.  The workers' insurance system developed in a way that Peter Huber in addressed in his book "Liability, the Legal Revolution and its Consequences". ⁽³⁾  As Huber puts it the system has shifted from one where contracts held sway and people could choose where they worked on the basis of the work's remuneration, its working conditions location and safety.  In Huber's view, "Not long ago, workplace safety was something to be decided between employer and employee often through collective bargaining ….. while compensation for accidents was determined by state compensation laws".  Unravelling this ability to contract and substituting court or government imposed conditions has been a major feature of liability law.

Indeed, in 1905 the US Supreme Court rejected a law (enacted on safety grounds) that restricted bakery employees to a 10 hour day.  The Supreme Court did so on the grounds that the bakery workers were fully "able to assert their rights and care for themselves without the arm of the State interfering with their independence of judgement and of action".  And in overturning the law on bakery workers the Court extended that view to a whole host of other worker–carpenters, printers, and the like (as well as law clerks).

That freedom to contract started breaking down early in the twentieth century and it is difficult to see it being reinstated this century.  It is, moreover, unlikely that it can be skirted by a stratagem of using contractors.  Contractors would probably have their contracts re-visited under liability law and, as they have with others, the Courts would tear up the contracts and thereby deny the parties the ability to contract.

In redefining liabilities Courts are doubtless reflecting sympathy for the injured, often on the basis that a major firm can afford to offer compensation.  However, such redefinitions create new systems of incentives and change behaviour.  In the case of product liability generally, applying strict (or, in effect, total) liability to the seller, requires the firm to engineer into the product or service much higher levels of safety.  The costs of this are incorporated into the product and paid for by the consumer, and in some cases the demand is severely curtailed as a result.  Huber points to many products and services where what he calls the "liability tax" is higher than the naked service or product price.

In the case of employment, the costs of tilting the insurance/liability law towards the employer are eventually born by employees, or rather the employees other than those who are of a reckless disposition.  The increased costs are factored into wage and employment levels, in both cases reducing them from the levels that would otherwise prevail.

IMPROVING THE SYSTEM

OPERATIONS OF WORKCOVER

Accident insurance in the context of employment relationships has considerable scope for affecting outcomes (such as workplace safety) when parties are constrained in their ability to reassign or reallocate risks.

There are several hundred classifications that are presently in place.  These offer a major target for "gaming" the system by either the firms or by agents anxious to win their business.  Prices are open to such flexibility by the insured firm by:

• segmenting its workforce so that high premiums are restricted to only the most direct operators with others classified into low risk white collar work.
• definition hopping where work takes in several different activities.
• reclassifying the activity, for example sheep farming, which WorkCover gives a rating 7 into combined meat and sheep (rating 5.78).

The actuarial approach to specifying ratings is necessarily static since it takes no account of the ability of incentives to improve outcomes.  The presence of explicit "price signals" (together in concert with the prevailing penalties and liability rules) creates the appropriate incentives for all actors (employers and employees alike) whose actions or inactions may affect the likelihood or severity of workplace accidents.  All this said, the biggest employers are already experience rated (and automatically so if they are self-insurers).  For any Victorian employer with a payroll of over $1 million some experience rating affect is included in the overall rate set, though this is quite small for payrolls of smaller companies.

In Victoria, the VWA is the monopoly insurer but uses agents to administer the scheme and act as the interface with the insureds.  In March 2000, VWA announced an opening for new firms to undertake this essentially sub-contractual work.  None have yet been appointed as the tender process remains underway.  A tender process involves the VWA engaging in a "beauty contest" form of selectivity.  Yet determining appropriate levels of efficiency is difficult and it is generally preferable to have simple open access to an activity (providing adequate fiduciary arrangements are in place) and leave it for suppliers to fight for the market.  In this respect, compared to the ten agents licensed in Victoria, there are hundreds in the low cost beacon jurisdiction of Michigan. ⁽⁴⁾  A preferred approach to that of VWA is to have open access of insurers subject only to normal assurances being required of funding adequacy etc.

SELF INSURANCE

A change brought in by Victoria's 1998 legislative amendments facilitated selfinsurance.  This removed a fixed capital threshold and minimum employee requirements as preconditions of eligibility to apply for and maintain approval as a self-insurer.  Not only may employers now opt to self-insure, the Second Reading Speech also envisaged the possibility of employers engaging suitably qualified external parties to undertake claims management powers and functions on their behalf (ie. third-party administrators).  However, employers remain accountable under the legislation for their injury and disease prevention, claims management and return-towork performance and for underwriting their own risks.

Self-insurance enables an organisation to manage its own claims and have full responsibility for meeting its claims liability.  From an economic standpoint, self insurance leads to a full internalisation of an employer's cost in regards to claims management and return to work of the injured worker and, as a consequence, it creates sharper incentives for the employer to manage workplace risks and safety.

Most schemes attempt to replicate this, in part by giving discounts based on performance.  But in general, this is only practicable for the largest firms and is less than satisfactory even for them.

In contrast to individual firms' rating systems, under self insurance, cost savings derived from reducing liabilities are retained wholly by the employer rather than shared.  Many firms self insure because want to control their own performance and benefits/costs.  In addition, self insurance avoids the automatic cross subsidy that occurs with any insurance scheme and which is added to in most state based systems by capping the rates of the most injury prevalent industries and by implicitly using larger firms to subsidize the smaller.  In most US jurisdictions where insurance is open to competitive provision some 40-50% of employees are covered by employer self insurer schemes.

In recognition of the costs (and financial hardship) that would be imposed upon injured workers should a self insured employer fail, the jurisdiction requires employers to satisfy a stringent set of prudential and financial conditions before they are approved as self insurers.  Basically employers have to demonstrate that they have the financial capability to meet their current and future claims liabilities, including those arising at common law or in respect of past and future work injuries.

There are currently 31 employers approved as self insurers in Victoria, having been increased from 23 a couple of years ago.  Around 12 per cent of Victorian employees are under these schemes.

The latent demand for self-insurance is at least as great as the number of eligible employers (thought to be over 300 ⁽⁵⁾ even prior to the recent liberalisation, although the requirement that self-insurers must be "above average" in claims safety, performance etc. presumably halves the potential number!).  The fact that only 31 employers have sought (and received) self insurer status raises a question as to the factors that would transform the latent demand into realised demand.  These factors may be primarily organisational in nature.

According to information from overseas, firms that self-insure have injury rates that are 30% below expectations. ⁽⁶⁾  Similarly, self-selected groups of firms are cited as bringing cost savings in New York of some 5% in addition to the premium concessions they are given.  These self-insurers also tend to spend more on accident prevention and rehabilitation.  Firms that self-insure avoid the policing costs of ensuring people are appropriately categorized.  They also (should, at least partly), avoid the bundled costs of the poor performing firms within their categorization and the incidental costs of promotion, advertising campaigns etc.  In fact, in Victoria they are obliged to contribute to these common costs.  Some of these clearly involve common goods-type benefits.

Increased numbers of self-insurers would lift the economy-wide performance.  It would do so partly because of the effects on the firms taking such activity and partly because it would transfer costs back to other firms that should rightfully bear them and in doing so encourage those other firms to look more carefully at the cost/benefits of changed work practices.

Divorcing a firm's performance from an aggregate industry average is at the heart of using the premium and associated pricing system to drive lower costs.  Self selection of smaller firms into quality groupings is the equivalent of the self-insurance facility presently available to larger firms.  As with self-insurance it would be expected to bring a better alignment of fees to risks and offer better incentives to take the necessary action to reduce risks.  In short, it would reduce the level of injury.

DEREGULATION

Deregulation involves jurisdictions no longer setting rates nor oversighting those set by insureres.  One of the best publicised cases of deregulation was Michigan, where a 32 per cent decline in the average rate was seen 1978-1984. ⁽⁷⁾  Barkume and Ruser ⁽⁸⁾, in a more comprehensive study of 50 states, show a major reduction in premiums and days away from work when competition was introduced.  They estimate a fall in days away from work of about 9.5% and a 13% reduction in premiums.

Normally deregulation is accompanied by a fall-back rate for those who would otherwise be uninsured.  A relatively low fall-back rate can, of course, frustrate the deregulation by leaving no head-room for competition.

Allowing agents and combinations of firms to gain financially where such gain is warranted can be a vital part of the cost/injury reduction strategy.  It can bring a better alignment of costs and premiums thereby reducing the potential for moral hazard.  The potential gains from an approach that uses the agents as catalysts and mechanisms for achieving those gains will be fully investigated.

Establishing strong relationships with and seeking a measure of control over the medical advisers to injured workers is an essential element in complimenting the very successful media campaign to encourage injured workers to return to their employment at an early stage.  Nonetheless, a major cost to the system is the "long tail" of injured people who remain off work for many months.  In many cases, this is a symptom of wider dissatisfaction of the employer with the employee or vice-versa.  Means of identifying these underlying causes and establishing incentives or penalties to the symptoms are an integral part of the premium model.

CONCLUDING COMMENTS

Compulsory workplace insurance is here to stay.  While a perfect centralised system of compulsory insurance is feasible, experience and data demonstrates we won't get this.  Deregulation of worker insurance, while maintaining it as a compulsory system is probably the most practicable route to reform.  It would likely bring advantages of:

• savings and lower costs that have already been demonstrated overseas
• premiums more closely aligned to risks and a better discovery process of the true risk as a result of competition for business rather than a monolithic premium structure
• removing new contingent liabilities from the taxpayer (although existing claims have a long tail)
• removong an area of potential political patronage and claims that the government agency is being used to pursue unrelated agendas.

Particularly in view of the long tail of claims and the sometimes lengthy period before an injury manifests itself, moving to a more deregulated more privatised system would also have to be considered in the light of transition costs that might be involved.

Any system would be mightily assisted, in terms of costs to employers, and therefore jobs since these costs must be passed on, if Courts started to shift from the strict liability ideology that has increasingly prevailed.  There needs to be a balance of responsibilities between the worker and the employee and this has probably tilted too far away from the employee.  As a result costs are driven up and we have a case of the reckless worker penalising the jobs and the income levels of the great bulk of employees and potential employees.

---

ENDNOTES

1.  NOHSC reports, "The WRFS 2 21 provides the only reliable, comprehensive national data on workrelated fatal injury.  No information on work-related disease is provided by the study.  Number of deaths each year:  450.  Rate of deaths:  5.5 per 100,000 working persons per year.  The NDS is the only current source of on-going information on work-related deaths, but it probably significantly underestimates the overall level of work-related death.  Number of deaths each year:  406 (260 from "injury" and 146 due to "disease") Rate of deaths:  5.8 per 100,000 working persons per year."

2.  Hunt, H Allan Three Systems of Workers' Compensation, Employment Research B Fall 1998

3.  Basic Books, New York 1988

4.  Hunt, H.A., and Klein, R.w., Workers' Compensation Insurance in North America:  Lessons for Victoria?  Upjohn Institute Technical Report No 96-010, November 1996

5.  Department of Treasury, Review of workplace accident compensation legislation, January 1998.

6.  One US State study guardedly reported that self-insured employers achieved a much faster return to work.  For those cases involving more than 30 days off self insured averaged only about 59 days, while the other groups averaged 97-115 days.  In the case of those off work for less than 30 days, self insured were only 0.3-1.5 days less than the other groups.  Worker's Compensation System Performance Audit Report 98-9, State of Washington Joint Legislative Audit and Review Committee, December 11, 1998.

7.  Allen H. Hunt, Alan B. Krueger, & John F. Burton, Jr., The Impact of Open Competition in Michigan on Employers' Costs of Workers' Compensation, in Workers' Compensation Insurance Pricing 109 (David Appel & Phillip S. Borda eds. 1998).

8.  Barkume A.J., and Ruser J.W., Deregulating property-casualty insurance pricing:  the case of workers' compensation, Journal of Law and Economics, vol. XLIV, (April 2001)

Trade Unions and Civil Society

An Address to the HR Nicholls Society XXIII Conference:
The Changing Paradigm:  Freedom, Jobs, Prosperity,
23 March 2002

INTRODUCTION

The economist Colin Clarke, who among other distinctions, was the only Australian whose work was quoted in Keynes' General Theory, remarked to me when I was an economics student, and resident at Mannix College, Monash University, that the wages of Australian workers had little to do with the deeds of the trade union movement.  They had to do with the economic factors in the generation of wealth (the guns, steel and germs view of economic advancement).  He may have been right, and I unfortunately, lacked the presence of mind to ask if he thought unions had impeded the growth of wages.  In the absence of his response, we can nevertheless observe that probably all successful modern economies have contained a free trade union movement.  We can further observe that, from time to time, these associations have cooperated with governments to achieve mutual economic and social objectives.  In other words, the role of trade unions cannot be so easily dismissed.  They are significant actors in free societies, and it is best they are understood to be so.

The environment that confronts trade unions in 2002 is extraordinarily different to that which they faced at their origins, and in their heyday.  The new environment consists of a political and intellectual consensus that competition, not protection, is the appropriate response to the challenges of a more highly integrated world economy.  It consists of a legislative climate, less favourable to a union monopoly in workforce representation.  It consists of a legislative climate more favourable to individual legal action, and to the legal intervention by other intermediaries, thus further undermining the trade unions' monopoly.  It consists of macroeconomic management and a welfare state that reduces the risks that may result from working in the free market.  It consists of an electorate less motivated by class politics, and where a great deal of political activism centres on post-material values and themes.  Consequently, it also consists of a greater competition for political space from other political activists, particularly in the form of Non Government Organisations (NGOs).

The responses by the trade union movement to the new environment have been considerable.  At times in the last twenty years, where the option was available, trade unions have worked closely with government.  At times, they have sought to build considerable head-office capacity, in order to equip them to operate in every area of government policy.  At times, they have sought to restructure, principally through amalgamation, to achieve strength through fewer and larger unions.  At times, they have sought to return to local activism and recruiting, particularly after a period of appearing to "run the government".  And, at times they have had to rethink their political allegiance to the ALP, and to forge links with NGOs.

CIVIL SOCIETY

To understand trade unions and civil society, it is important to clarify the sense in which civil society is understood, and more important, the way in which political actors seek to use it.  Trade unions -- along with friendly societies and mutual cooperatives ⁽¹⁾ -- are among our earliest manifestations of "activist" civil society;  they are original NGOs.  They exist as a collection of private individuals seeking solutions to collective, as well as to individual, problems.  However, and just like Australian political parties, they are also part of the system of government, the democratic institutions and the rule of law that helps keep us "civilised".  The trade unions' preferred vehicle for advocacy depends on the extent to which trade unions share the ruling party's objectives for the labour market, and the impact of its chosen vehicle on its organisational strength.  On the government's part, if the objective is free employment contracts, unions are unlikely to be a useful ally.  If the object is the orderly conduct of employment relations, they may well be useful.

Ideologues use both concepts of civil society, "activism" and "government", as it suits their purpose.  The political "left" prefers the commanding heights of government to achieve their collectivist aims, and when successful, government and the state become, in their view, the true expression of the will of the people.  When out of government, or when government fails them, the Left believe that the will of the people exists in civil associations.  At these times, government is demonised as the instrument of corporations.  The political "right" also prefers the commanding heights of government, if only to keep them out of the hands of the Left.  The Right like the idea of private association, however, because they are less instrumental and collective in their goals, civil associations under their stewardship generally have less political impact.  For example, the Red Cross is quintessentially an organisation peopled by conservatives (the Right), and its objects are focussed on individual amelioration, not on system change.  By contrast, the Australian Conservation Foundation, in latter years, has been overtaken by the Left and has vowed to change the economic and, it seems, the political system (in a way that places the environment first).  They recently announced, that "by 2050 Australia will be a civil society.  There will be a high level of community engagement in decision-making processes, ... a higher level of trust ... with their decision-making institutions."

Translated, this means that civil associations will overtake the state.  A government of activists ensues!  This position is at the extreme, one that cashed-up NGOs favour.

Trade unions are old players at positioning themselves in civil society, but they suffer the twin difficulties of having been part of government, and thus -- as far as their competitors are concerned -- part of the problem.  Second, they have to service a membership, not just entertain a support base, as do advocacy NGOs and political parties.  They carry some heavy ideological and structural baggage.

THE DEATH OF LABOURISM

Australian trade union ideology was never Socialist, it was Labourist.  "Australian Labourism's central principle was that the capitalist state could be managed to the advantage of working men by a combination of a strong trade union movement with a parliamentary Labor Party.  In Australia, Labourism added three distinctive credos:  protection, to keep out cheap goods;  a White Australia policy, to keep out cheap labour;  and a system of compulsory arbitration, to keep the fair employer fair." ⁽²⁾  The latter, in particular, also stimulated the growth of trade unionism.

Among Labour thinkers, ⁽³⁾ the belief that the capitalist state can be managed to the advantage of workers, albeit in a globalised economy, remains.  In 2002, however, almost nothing else of Australian Labourism does.  Working men, have become working men and women. ⁽⁴⁾  To the extent that the culture of union solidarity was based on the male breadwinner, it is now long gone.  Indeed, "workers" no longer exist in a single dimension -- as a unit of production, or in a single master/servant relationship with their employer -- the consumer is now sovereign.  The purpose of production is the satisfaction of the customer, not the producer.  More workers have experienced self-employment ⁽⁵⁾ and thus begun to understand the exigencies of employing labour and creating wealth.  More workers are employed in small organisations ⁽⁶⁾, where the distance between performance and earnings is shorter than in a large one.  More workers own capital, for a long time as homeowners ⁽⁷⁾, but more recently as recipients of redundancies and superannuation.

Indeed, many have become investors, either indirectly through their superannuation funds, or directly through shares. ⁽⁸⁾

This is not to argue that house ownership and share ownership are inconsistent with a large union presence.  Australian home ownership has been consistently high throughout the period of decline in trade union density, and the nation with the highest level of individual share ownership, Sweden at 66 per cent, is the country with the highest level of union membership, at 91 per cent. ⁽⁹⁾  Nevertheless, in recent decades, Australians appear to have chosen a path of high individual capitalisation and low collective action.

In 1976, over half (51 per cent) of all employees were members of a trade union, in 2001, less than one quarter (24.5 per cent or 1.9 million people) were members. ⁽¹⁰⁾  Clearly, in the last quarter of the 20th century, trade unions have been losing members and/or recruiting only a small proportion of employees entering the workforce.  There appear to be various factors contributing to the decline in union membership: ⁽¹¹⁾  The open economy and the burden of increased competition have fallen on industries that were traditionally more unionised.  The growth of employment has occurred in industries that have low levels of union membership.  The rise in part-time employment has made recruiting more difficult.  Since 1990, and Accord Mark VI, enterprise bargaining and a shift away from centralised wage negotiations, has diminished the role of unions, and changes in State jurisdiction legislation have made compulsory unionism more difficult.  The Workplace Relations Act 1996 reduced the matters that could be covered by federal awards, and provided for individual Australian Workplace Agreements and collective agreements between employers and employees.  Other changes included revised provisions for unions' right of entry to workplaces, restrictions on industrial action, and the banning of discriminatory action against non-unionists (removal of "closed shops" or compulsory unionism) and unionists.

The open economy and its needs, and governments prepared to encourage the workforce changes they regard as essential to prosper in the open economy are the principal drivers of change.  In addition, the consciousness of extracting an income from capital has changed the mindset of the "wage labourer".  More workers have become knowledge workers, they have become valuable commodities -- as opposed to industrial fodder -- in their own right.

They are expected to think about the performance of the organisation, and their performance in it.  In short, once the worker realised that his or her well-being depended on the contribution to the success of the enterprise, and not in screwing the enterprise, the game of industrial relations changed.

Despite these massive changes, trade unions are still the largest collection of citizens in any association, the biggest NGO.  Unlike other NGOs -- environmental, human rights -- however, they are bound to represent the direct interests of their members, and they are accountable by means of the election of officials.  Most of the largest NGOs consist of supporters and a collective of activists and professionals, who are not directly accountable, and who do not operate in the direct interest of, nor service their members or supporters.  In these NGOs, scrutiny by the membership is less pressing, less accepted.  One of the prices that trade unions have had to pay for their prominence is a high level of state regulation and scrutiny.  The same cannot be said for NGOs in general.

The old certainties are less evident, and the workforce belief in the purpose and strength of unionism has diminished.  A survey of workers' attitudes to trade unions, conducted by the NSW Labour Council, shortly after Labor's Federal 1996 defeat, found that while there was some residual commitment to unions based on the heritage of the movement, they were nevertheless, perceived to be "dinosaurs". ⁽¹²⁾  Trade unions find themselves in an alien environment;  an open economy, a less regulated bargaining system, and competing in a market of interest groups, but with a smaller and less loyal membership.  "Coping with individualism of the new workforce will be the trade union movement's greatest challenge.  Traditional collectivist notions will increasingly be seen by the workforce as reflecting the philosophy of a by-gone era." ⁽¹³⁾

TRADE UNION RESPONSES

GOVERNMENT RELATIONS

Trade unions have responded in one or more of three ways to the emerging environment.  The first is the oldest, the safety of the government system.  This avenue is not always available, it depends on the government of the day, the prevailing economic ideology and the strength of the trade union movement.

There have been times when both sides of politics have sought a close relationship with the trade union movement.  Alternatively, there have been times when both, in turn, have disdained it.  "Menzies had remarked, when Prime Minister in 1940, that it was impossible to govern Australia efficiently without the consent of the trade unions." ⁽¹⁴⁾

Indeed, Harold Holt as Minister for Labour and National Service, established the "Holt-Monk axis" during the 1950s.  Holt struck an agreement with the ACTU, in particular its president, Albert Monk, that all trade union representations to the government were to come through the ACTU.  Ministers were not to receive deputations from federal unions until the president of the ACTU had been notified.

The Whitlam Government, although close in many respects to the ACTU, particularly through the joint presidency of Bob Hawke of the ALP and the ACTU, failed to discuss its plan to introduce across-the-board tariff cuts in 1973, and the ACTU vigorously and successfully opposed the 1973 prices and incomes referendum.  By contrast, the ACTU Accord with the Hawke Government in the 1980s was a model of cooperation, each side offering, and able to deliver, significant benefits to the other in pursuit of common policy objectives.  The Hawke Government was attempting to engage the workforce in award restructuring and enterprise bargaining.  The trade union movement offered the government a voice in the electorate that it would otherwise have not had.  These objectives could not have been achieved by government fiat, or with the simple agreement of the Industrial Relations Commission.  Workers had to be engaged in the process, which required that they be convinced of the worthiness of the cause.

Towards the close of this period, as the Assistant Minister for Industrial Relations, I attended a meeting of steel workers in Newcastle to discuss these questions.  The meeting was coming along pretty well, until one worker asked, "are you blokes interested in this stuff anymore?" It became immediately clear to me that although the government and the union movement had set a task for the workforce, to encourage enterprise bargaining, it had failed to continue to rally the team and encourage the players.  In the twilight of the long Labor reign of 1983-1996, enthusiasm for the cause had dissipated.  The ALP/ACTU Accord was the high point of union cooperation with the state.  The unions used their considerable power to prepare the workforce for a more open economy.  They helped weaken the addiction to what remained of the Labourist credo;  protection and compulsory arbitration.  In so doing, unions paid dearly for their role.

The prospects for close relations between the present government and the union movement are obviously poor;  the Coalition seeks a freer employment market, unions desire protection.  Nevertheless, governments do not operate at the level of the enterprise, so they do not have the same incentive as employers to foster local bargains.  They also have larger objectives in mind, such as the maintenance of industrial peace, workforce training, controlling inflation and ensuring full employment.  Employers often seek the assistance of government to achieve these objectives.  The Coalition will not relinquish too many of the levers they now control in employment relations until they are sure that labour market reforms are a significant factor in the achievement of their objectives.  In other words, the historical reliance of employment relations on a collectivised and formal legal process of conciliation and arbitration may be part of the problem, but no Commonwealth Government will relinquish its entire interventionist arsenal.  The portfolio still exists, the formal political elements, like the Australian Labour Advisory Council still exists, indeed, the industrial relations infrastructure remains largely in place.  There may come a time when the electorate demands the use of such instruments.  There may come a time when the government wants to appeal to the workforce through its representatives.

RESTRUCTURING AND REORGANISING

On the structural front, the number of separate unions fell from 295 to 132 in the period 1990-1996, mainly through amalgamation, but sometimes through absorption.  For example, the National Union of Workers was as much an absorption by the Federated Storemen and Packers Union of lesser unions, as an amalgamation.  In all, from 1989, six unions progressively merged into the one larger union.  The six unions were established in the early part of the 20th century and some at least -- United Sales Representatives and Commercial Travellers Guild (Est. 1888), Federated Millers and Manufacturing Grocers Union (Est. 1909), Commonwealth Foremen's Association (Est. 1912) -- were barely viable.  So there was sense in bringing together these many small unions.  The union membership of the union is now around 90,000. ⁽¹⁵⁾  In contrast, while the Construction, Forestry, Mining and Energy Union is Australia's main trade union in those industries, it is an amalgamation in name only.  While it exists in three divisions, it is, in effect, three unions. ⁽¹⁶⁾

Larger unions were the strategic response to declining numbers, they may also have hastened it. ⁽¹⁷⁾  The standard critique of the period of amalgamation is that larger unions may be less responsive to workplace level issues and to individual member input.  For example:

Trade union strategies in Australia have long relied on high levels of leadership prerogative and the use of highly researched argument placed before the country's various tribunals.  In such an environment the employment of analysts and legal advisers rather than organisers and recruiters has more often been the order of the day, with rank and file organisation and input into trade union strategies being minimal at best.  This top-down approach has always had the potential to alienate members from the movement's aspirations. ⁽¹⁸⁾

These sentiments, and the generally accepted analysis of the causes of the decline in trade union density have sent unions back to basics -- organising and recruitment.  For many years, trade unions had become more professionally staffed ⁽¹⁹⁾ and more policy-oriented.  Most particularly in the use of labour law firms as a training ground for union officials. ⁽²⁰⁾  Wages, terms and conditions appeared to take a back seat.  The movement pursued issues in the public arena increasingly outside the realm of work.

In terms of restructuring and reorganising, trade unions are now heading in two directions, organising and recruiting on the shop floor and chasing the new activists and their methods in the new NGOs.  The irony in this of course, is that the trade union movement has in the past, often sponsored, or acted as the catalyst for many of the most successful NGOs.  Australian unions have a combined revenue base of about $500 million per year, and the ACTU believes that not enough of this is invested in organising and recruiting.  Currently around 210,000 new union members are recruited each year in Australia.  However, in order to maintain current membership levels unions must collectively recruit 285,000 members each year. ⁽²¹⁾  In the long-term, union density will only increase if unions are active in areas where employment is growing, not declining.  Those areas are call centres, computer services, tourism and hospitality, which are all increasing in employment -- these are the industries attracting young people.  The unions aim to establish delegates, activists and collective structures at every union workplace, educate and activate delegates to recruit, bargain and handle grievances.  They aim to reallocate union resources to recruit and organise new members in workplaces and industries where jobs are growing and create an organising section in the union, with a coordinator and specialist organising teams.  These are the aims of the Organising:  Unions@Work program established by the ACTU in 1999.  The difficulty of achieving any growth, however, is underlined by the fact that the program follows an earlier version, Organising Works, which commenced around 1993, with the aim of training young union officials and recruiters.

The ACTU Unions@Work campaign has also decided to "form strong alliances with other groups in the community".  In other words, it feels the need to maintain its links with the post-materialist values of one section of its membership, the middle-class, particularly teachers.  An example of this activity at an international scale is the Millennium Review of the International Confederation of Free Trade Union's (ICFTU). ⁽²²⁾  The 2000 ICFTU Congress determined "to undertake the most radical review of the international trade union movement since trade unionism".  It commissioned a survey of NGOs operating at an international level, and investigated the campaigning techniques used by them in pursuit of their objectives.

An analysis of that study, completed for Australian trade unions, argues that the public perception of trade unions is that they focus on labour rights only.  It believes that trade unions have not been effective at defining their role in the broader social agenda.  For example, often unions do not clearly explain their role in establishing and maintaining basic human rights (of which labour rights are only one component) to their own members, let alone a broader audience.  It has only been recently that unions have had to justify many of their actions as union density has been in decline.  Demonstrating their role in the broader social agenda has not been a priority.

These sentiments will serve to increase the divide between the two constituencies of the union movement and possibly ensure that unions become just another, albeit large NGO, rather than a representative of employees in the workplace.  To this end, they will be of little use to their members and of no use to any government who, at some point, may want an avenue to speak to the workforce.

THE PUBLIC INTEREST

Collective legal processes, which -- like compulsory arbitration -- determine employment relations, may be in abeyance, but individual ones are certainly not.  The statutory scheme that ensures a redundant worker's entitlements at the collapse of a firm does not require the intervention of a union.  Superannuation entitlements are guaranteed by statute.  The right to sue an employer for unfair dismissal, or for discrimination on the job have been enhanced.  Collective bargains, while still a strong part of the system of wage and condition setting, are nevertheless buttressed by minimum conditions, making those who wish to negotiate without union support more able to do so.  The ability to sue for injury has ballooned.  The statutes for health and safety are comprehensive and policed by the state.  In a myriad of ways, statute has put trade unions out of a job.  Workers may need lawyers, but they do not necessarily need organisers.

It is now easier for other collectives to intervene in more legal matters than was once the case.  Some of these will impinge on employment relations.  The High Court of Australia in, Truth About Motorways Pty Ltd v Macquarie Infrastructure Management Ltd (2000) ⁽²³⁾ has widened the capacity of NGOs to take legal action against business.  The consensus of the High Court in TAM v MIM was that the Parliament had the power to legislate to allow "any person" or "a person", or the like, to have standing under Commonwealth statutes.  The Court stated that the Parliament may "allow any person to represent the public interest and, thus, institute legal proceedings with respect to a public wrong".  It further observed that a number of laws had been enacted in recent years, which allowed proceedings to be brought, by any "interested person" (for example, in certain laws relating to the environment, industrial relations and financial markets) or "person affected" (for example, in certain companies and securities, investment and environmental laws). ⁽²⁴⁾  This widening of the law of standing could prove fertile ground for lawyers and NGOs to press their agendas through the Courts in environmental, industrial relations, companies and securities and anti-discrimination, as well as privacy, and finance and investment arenas.

A more recent ACTU agenda that responds to the fact that workers are not onedimensional is that of shareholder democracy.  That is, the desire of employees as shareholders to enforce certain obligations on corporations.  This attempt to democratise the economy encompasses corporate governance, the social responsibility of corporations and ethical investment.  ACTU President Sharan Burrow has argued that Australian companies be required to report on their performance on the so-called "triple bottom line" -- economic, environmental and social performance.  For example, "there should be statutory support such as Amnesty International's human rights framework for Australian companies". ⁽²⁵⁾  This is, of course, the old protectionism dressed in new clothes.

These sentiments clearly support the Australian Conservation Foundation submission to the draft Financial Services Reform Bill asking for the compulsory details contained in a Product Disclosure Statement for a financial product (superannuation, managed investment, and life insurance products with an investment component) be expanded to include the following, "the extent (if at all) to which environmental, social or ethical considerations are taken into account in the selection, retention and realisation of investments". ⁽²⁶⁾  As far as I can ascertain, the Financial Services Reform Act 2001 requires such disclosure of all financial products.  This means that, other than for a nil return response, products will be screened in one or more of the following categories,

1. Environment -- logging native forests, wood chipping, mining, air and water pollution, land degradation/salinity, genetic engineering, energy usage.
2. Human rights -- exploitation of women and children, child labour, destroying indigenous culture/economies, racism/discrimination, and repressive regimes.
3. Community citizenship -- aggressive trade, closure of rural services by banks, large retail outlets displacing small business, taxation payment.
4. Workplace practices -- wages and conditions, hiring policy, safety, and education.
5. Animal welfare -- fur products, animal testing, transport and enclosure issues.
6. Product integrity policies and practices such as offensive advertising.
7. Corporate regulatory compliance.
8. Corporate governance.
9. Involvement in the manufacture, distribution, or promotion of products considered being socially harmful -- gambling, alcohol, tobacco, and defence industry.

A good illustration of the contradictions inherent in these agendas is the CFMEU position on sustainable development and the Kyoto Protocol.  On the one hand they mouth the environment litany, "increasingly [workers] want the assurance that their assets -- whether their labour power or their savings -- are being utilised in an environmentally sustainable manner". ⁽²⁷⁾  On the other hand, they argue that "sometimes it seems that the message from environmental groups is that the coal industry workforce should agree to be 'phased out' because the use of coal is too polluting.  We reject that view because it is absurdly simplistic, environmentally unnecessary, unjust and unworkable ... As part of any effective global solution of the greenhouse issue there will be a continuing role for coal for many decades to come -- and Australian coal is amongst the cleanest and cheapest to produce." ⁽²⁸⁾

CONCLUSION

The new environment and the trade union response, begs the questions, what is a trade union and what does a trade union do?  Is a trade union official a human resources adviser, a political representative, an investment adviser, a human rights advocate, a lawyer, a tout for Ansett airlines ⁽²⁹⁾, or someone who bullies the Governor-General? ⁽³⁰⁾

The answer is not simple, because trade unions are not of a piece, their behaviour and rhetoric varies enormously.  For example, the AWU sticks to core business.  "Through the first independent survey of 2500 AWU members last month, ... members listed their top concerns as job security, workers' entitlements, education and further training, and safety." ⁽³¹⁾  Similarly, "The TWU's main priority is to protect and improve the livelihood of transport workers and their families." ⁽³²⁾  These are very earthy pretensions with no regard to post-materialist agendas.  Likewise, the SDA, which is the largest trade union in Australia with more than 230,000 ⁽³³⁾ members is very down-to-earth in its approach and appeal, "good wages and conditions do not just happen.  They come about only because unions work for them." ⁽³⁴⁾

By contrast, the AMWU's agenda and rhetoric is megalomaniac.  "If we are to build a safer and more secure world, we must fearlessly struggle for the implementation of core labour standards in all multilateral and bilateral trade agreements.  We must work to fundamentally transform the WTO, the World Bank and the IMF so that social, environmental and humanitarian issues, not the interests of the corporations, dominate ... we must fight for a new world order." ⁽³⁵⁾

The most bizarre and ideologically destructive union, are the teachers.  Only a teachers' union president could make the following speech (post September 11), and not be stoned (double entendre intended!):

[W]e have identified the need to contribute to an anti-war and anti-racist movement in this country.  The last Federal election and the tawdry politics, which preceded it, have sullied us all.  John Winston Howard seeks to drag us back to the political correctness of the past -- where the white, Christian and middle-class values dominated political thought and practice.  When it was acceptable to be racist.  When Tory parties were the beneficiaries of distant, foreign wars.  Where the stranger was feared, not welcomed.

Our greatest power to resist this reactionary phase is in the curriculum.  The way we work as public educators dedicated to producing a liberal, inclusive, anti-racist, non-sexist young generation can hold off the regressive tide.  Our greatest hope is amongst the young.  This is perhaps the most vital work of teacher-unionists in the immediate future.  To build a better world in the hearts of our young. ⁽³⁶⁾

When unions speak on political agendas it is unlikely they speak for most of their members, often they speak for a minority.  The only issues on which they can speak with any confidence are workplace issues.  The legitimacy with which unions have spoken at large about politics was always contested, but now it is without much weight at all.  Moreover, the market place for the services they provide has changed.  Others can do the job cheaper.

Trade unions will have to decide if they are to service their members' immediate workplace needs, and deliver a service at a price which the customer is prepared to pay, or to become an advocacy NGO shouting anti-system slogans and relying on supporters, or indeed to become another political party and rely on public funding.  If trade unionism can reinvent itself, it will probably be as a collection of service providers rather than as a political force.  It cannot persist as it is, falling between stools.

---

ENDNOTES

1.  Lyons, M. 2001.  Third Sector:  The Contribution of Nonprofit and Cooperative Enterprises in Australia.  Sydney:  Allen and Unwin, 100.

2.  Hagan, J. 1981.  The History of the ACTU.  Melbourne:  Longman-Cheshire, 45.

3.  Latham, M. 1998.  Civilising Global Capital.  Sydney:  Allen and Unwin.  Tanner, L. 1999.  Open Australia.  Sydney:  Pluto Press.

4.  Participation rate for females 55.2 per cent of workforce in 2000-1, up from 53.8 per cent in 1995-6.  ABS, 2001.  Australia Now, "Labour:  The Labour Force" (Year Book Australia)

5.  22 per cent worked in their own business, and this has been steady for the last 6 years, but own account workers has been growing faster than the labour force.  ABS, 2001.  Australia Now, "Labour Employment Arrangements" (Year Book Australia)

6.  Over the period 1989-90 to 1999-2000, the average annual rate of growth in numbers of businesses ranged from 0.1 per cent for businesses with 200 or more employees to 4.9 per cent per year for businesses with 1-4 employees.  ABS, 2001.  Australia Now, "Industry Overview:  Number of Businesses and Employment by Size of Business".

7.  Between 65 and 70 per cent of households for the last 50 years.  ABS, 2001.  Australia Now, "Housing Special Article -- Changing Tenure Status".

8.  In the latter part of the 1980s, only 9 per cent of the Australian adult population held shares directly.  By 1999, 41 per cent (5.7 million Australians) held shares directly.  A further 13 per cent held shares indirectly, via a managed fund or personal superannuation (other than compulsory employer superannuation funds), taking the total to 54 per cent (7.6 million).  ABS, 2001.  Australia Now, "Financial System Special Article -- Equity Capital Raisings on the Australian Stock Exchange" (1999-2000).

9.  OECD, 1997.  Employment Outlook, "Trade Union Membership as Percentage of Employees, Selected Countries", July.

10.  Trade Union Members, Australia (Cat. no. 6325.0);  Employee Earnings, Benefits and Trade Union Membership, Australia (Cat. no. 6310.0).

11.  Griffin, G. and S. Svensen, 1996.  "The Decline of Australian Trade Union Density", Journal of Industrial Relations, 38(4):  505-47.  Bodman, P. 1998.  Trade Union Amalgamations, Openness and the Decline in Australian Trade Union Membership", Australian Bulletin of Labour, 24(1):  18-43.

12.  Costa and Hearn, 1997, Appendix 1, 265.

13.  Costa, M. 1997.  "Union Reform:  Union Strategy and the Third Wave".  In Costa, M. and M. Hearn, eds. Reforming Australia's Unions.  Sydney:  Federation Press, 20.

14.  Hagan, 1981, 318.

15.  National Union of Workers http://www.nuw.org.au/historyandbackground.html

16.  Construction, Forestry, Mining and Energy Union http://www.cfmeu.asn.au/

17.  "After overcoming a decade of post-amalgamation factional fighting and a rapid decline in manufacturing.  We have arrived at the crossroads." from an address by AWU National Secretary Bill Shorten to the National Press Club.  20th February 2002.  "Can Labour Win?  New Directions for an Old Union".  http://www.awu.net.au/media/media_releases/news57.html

18.  Abbott, K. 1999.  "Lessons for the Australian Trade Union Movement from the Industrial Relations Policy Experiences of Britain and New Zealand", Policy, Organisation and Society, 18:  39-58.

19.  Bramble, T. 1995.  "Deterring Democracy?  Australia's New Generation of Trade Union Officials", Journal of Industrial Relations, 37(3):  401-26.

20.  "I came to the AWU in 1994, after working for a labour law firm" Bill Shorten, 20th February 2002.

21.  http://www.actu.asn.au/vunions/actu/about_us.cfm

22.  Medforth, R. and P. Maguire, 2001.  Lessons From The Campaign Strategies of Nongovernment Organisations.  Unpublished analysis of the survey of NGOs by the International Confederation of Free Trade Union's.

23.  HCA 11 (9 March 2000).

24.  Australian Chamber of Commerce and Industry, 2000.  "High Court Empowers Social Action Groups".  http://www.acci.asn.au/index_key.htm

25.  Burrow, S. 2000.  Whispers Outside the Bedroom Door:  Making Working Australia's Money Talk".  The Sydney Papers, The Sydney Institute, 12(4):  93.

26.  The submission was made on behalf of the following organisations:  Australian Conservation Foundation, Environment Victoria, Friends of the Earth Australia, Greenpeace Australia, The Wilderness Society, John Poppins -- Coordinator BHP Shareholders for Social Responsibility, The Ethical Investment Trust (A Community Aid Abroad/Oxfam Initiative).

27.  John Maitland "Shareholders and the Non-Financial Agenda Workers Capital" Presentation to The Politics of Shareholder Activism:  A Centre for Corporate Public Affairs Conference http://www.cfmeu.asn.au/national/int_issues/20011203_Activism.html

28.  "The greenhouse effect, targets and Kyoto Information for coal industry unionists".  CFMEU Policy Paper/Backgrounder, Mining and Energy Division, October 1997.  http://www.cfmeu.asn.au/mining-energy/policy/greenhou.html

29.  The ACTU had worked closely with the Tesna (Lindsay Fox and Solomon Lew) bid for the Ansett assets.

30.  The Australian Teachers' Union has recommended to state schools that they not invite the Governor-General to visit, based on his remarks about cases of sexual impropriety leveled at the church in his time as Archbishop of Brisbane.

31.  Bill Shorten, 20 February 2002.

32.  Transport Workers' Union of Australia http://www.twu.com.au/

33.  Shop, Distributive and Allied Employees' Association http://www.sda.org.au/

34.  http://www.sda.org.au/about.php3

35.  Address By Doug Cameron National Secretary, AMWU International Metals Federation Congress, Sydney, November 11, 2001 http://www.amwu.asn.au/images/speech_cameron_imf.pdf

36.  Opening address by Denis Fitzgerald, Federal President, Australian Education "Union New Times, New Directions" Annual Federal Conference, January 16 -- 18, 2002 http://www.aeufederal.org.au/Media/Speeches/presaddress2002.html

Workplace Bill Distorts Justice

In the last 10 years there were 359 reported workplace deaths in Victoria.  Fortunately the rate of deaths has dropped from 46 in 1992 to 29 last year but any death is unacceptable.

The reduction of these deaths is the stated aim of the Victorian Government's corporate manslaughter legislation due to be debated in the current session of Parliament.  Unfortunately the legislation is seriously flawed with double standards and inconsistencies that run the risk of distorting rather than improving workplace safety.

The legislation holds "systems" instead of people criminally culpable, makes "senior officers" in corporations but not in government jailable, and causes transfer of criminal responsibility from one person to another.

To understand these distortions the Coroner's report into the tragic deaths of five volunteer firefighters at Linton in 1998 is valuable.  If corporate manslaughter principles were applied to the Linton tragedy, the head of the Country Fire Authority, the Director of the Department of Natural Resources, Ministers, and the Premier could be charged with manslaughter.  They could face jail terms of up to 7 years even though they had nothing to do with the Linton events.

The Coroner found that a "dysfunctional" system of control by the CFA and department contributed to the deaths.  Corporate manslaughter focuses responsibility on corporate control systems holding a board and directors responsible.  This shifts the idea of criminal liability away from personal, direct actions and holds one person jailable for the actions of another.  Would the jailing of a Premier stop another Linton tragedy?

But under the legislation corporations are criminally responsible but not government.  The chairman of a corporation can go to jail, but not the chairman of government.  Further, the legislation creates criminality for the death of an employee but not a volunteer.  A paid director of a corporation is liable but not an unpaid director.

If the Linton firefighters had been employees and the government departments corporations the senior managers could face criminal charges.  But they won't under this Bill!

Why the double standards?  Why is different value placed on the life of an employee, than the life of a volunteer?  Why should Ministers have a lower level of criminal liability than directors of a corporation?  Why should a paid director be held more liable than an unpaid director?

These inconsistencies are dangerous.  If two people are to be tried for exactly the same criminal act, why should one go free because they were unpaid while a paid person goes to jail?  Isn't a volunteer victim entitled to the same justice as an employee victim?  Shouldn't everyone have a right to equal treatment before the law regardless of their class, race or legal position?

In the last 10 years 45 workplace deaths occurred in the public and community services sectors, nearly as many who died in manufacturing.  Why should the public sector be treated differently to the private sector?

The Bill will impact on small and medium business and the rural sector.  Farming accounts for one third of workplace deaths.  Under the Bill the wife of a farmer could be criminally liable for a tractor-related death of her husband because she was a director of their family company?

No one has explained how distorting criminal justice will reduce deaths.  Instead there is a real risk it could increase deaths.

ADVERTISEMENT

Polish on a Rough Trade

Currently, the big trade news is the US decision to put barriers on steel imports.  As a major steel producer at BHP's Westernport plant, Victoria has a real interest in this issue.

Any moves that diminish our exports threatens jobs.  This is especially unfortunate in an industry like steel where Australia is highly efficient.

By the same token, the USA was facing a major threat to its employment levels from a torrent of imports.  In its actions, the Bush Administration seems to have abided by world trading rules, which provide for temporary import restraint measures in such circumstances.

For its part, the Australian Government is preening itself on its success in winding back the impact on Australia's steel exports to the USA from an initial level of 60 per cent of the total to 15 per cent.  Perhaps this is partly due to our favourable image in the USA, which has also brought USA agreement to negotiate a free trade treaty with Australia.  The benefits of such a treaty are amply demonstrated in the present steel case where Mexico and Canada -- two nations with a free trade agreement with the US -- are immune from cutbacks.  This is in spite of the fact that those countries' steel exports to the US are many times the size of Australia's.

It therefore makes no sense for the Federal ALP to argue against an Australia-USA free trade agreement.  And the Premiers of Queensland and New South Wales seem to have rejected the line taken by their Federal colleagues.

However, the benefits to Australia of a free trade treaty with the USA go far beyond the immediate issue of the day.  We also have a risk, following the farce of anti-globalisation demos in Seattle and here in Melbourne, that the movement towards freeing up commerce on a world level is grinding to a halt.  If we don't move forward in liberalising trade, we might well move backwards.

The US is a natural trading partner with Australia.  It supplies a fifth of our imports and is the market for over ten per cent of our exports -- and a far higher share than this for the faster-growing processed goods exports such as steel.  Our economy is tied closely to that of the US in terms of investments and technology exchanges.  Australian investment in the US is worth over $150 billion and US investment here is worth over $220 billion.

A free trade agreement does not foreclose more open multilateral trade, but if the world is to split into competing trade blocs, Australia is far better off with the US.  Like Australia, the USA is highly imperfect in ensuring its markets remain fully open to the cheapest supply.  But the US does tend to support the lower level of government intervention in commercial relations and imports, which we also espouse in Australia.

Moreover, a free trade agreement with the USA offers the prospect of greater agricultural access.  This is something that would be inconceivable with the European Union, which is the alternative partner if the world is to deviate from a multilateral trade setting.

ADVERTISEMENT

Market Contestability

Address to the Conference
Competition & Regulation in the Energy Industry,
15 March 2002

SUMMARY

• Opening up electricity and gas markets to competition forces retailers to seek better ways of meeting the needs of customers more cheaply and ensures that cross subsidies are made known.  The retailer is the agent of the customer and, in a competitive environment, must remain so to stay in business.  This means the retailer must constantly research consumer wants and match these with power at the lowest costs and the required availabilities.
• Victoria has moved fastest among the Australian States but progress to a fully competitive market has been marred by Government price fixing.
• Such a fully competitive market is important to ensure costs are kept down in a sustainable way and product offerings are tailored to the needs of customers.
• With electricity, the absence of low cost interval meters is hampering the gains that rivalry for consumer demand could bring.
• Structural separation between retailing and distribution has taken place without distributors favouring their retail affiliates.  Most of the private sector suppliers have voluntarily separated retailing and distribution into different corporate structures.
• All in all, comprehensive measures of Australian retail regulation shows it to be as well advanced as that for the leading North American jurisdictions.

MOVEMENTS TOWARDS FULL RETAIL COMPETITION (FRC)

Ostensibly, as shown in Table 1 shows, the movement to FRC in electricity and gas is encouraging.

Table 1:  Planned Schedules to FRC

Jurisdiction	Electricity	Gas
NSW	1 Jan 2002	1 Jan 2002
Victoria	13 Jan 2002	1 Oct 2002
ACT	Under review to be announced March 2002	1 Jan 2002
SA	1 Jan 2003	1 Sep 2002
WA	2005	1 July 2002
NT	2005 (subject to public benefit test)	n/a
Tasmania	2007	2007
QLD	No plans at this stage	Jan 2003 (subject to cost/benefit study)

However the true picture is less sanguine.  The actions of Australian Governments to date seems to indicate and extreme nervousness in liberating markets where there is a risk that prices may rise -- especially prices to smaller customers.  And it's all very well to avoid the political brickbats in doing so but if this undermines the ability of the producers to profitably build new capacity and new transport links, the outcome is higher prices all round.

The fact is that gas and electricity are commodity markets and like other commodity markets the basic products are likely to fluctuate in price.  Intermediaries between producer and consumer will smooth much of this, if allowed to operate properly, but will be frustrated if governments keep their hands on the levers.

This is most disappointingly observed in Victoria, even though Victoria has made the most energetic attempts to move into the world of competition.

In Victoria, as in other jurisdictions, successive tranches of retail customers have been freed to choose their own retailer.  The process has progressed smoothly and been an integral part of the great improvement in efficiency and reduced prices that are evident in the State.  Given this experience, there should be a strong presumption against regulated prices in the household sector.  After all, energy retailing has no entry barriers and many capable providers are already in the market.  With load profiling and FRC, any attempt by an incumbent retailer to raise prices above underlying costs would invite vigorous rival entry.

BENEFITS OF OPENING UP MARKETS TO COMPETITION

Net benefits are expected from opening markets by almost all analysts of the much maligned "economic rationalist" kind.

These analysts expect such benefits because market opening and unfettered competition forces suppliers to search out the lowest cost inputs and ensure the services they provide are carefully geared to the demands of the customer.  To do otherwise will see suppliers losing customers and eventually being forced to leave the market.

That's why measures like the NSW ETEF, or other government regulations that prevent customers from shifting supplier find support with the lazy retailer who simply wants to sit back and avoid challenges.  Such measures are often promoted by governments because the consumer loss is hidden -- no new player means nothing better is revealed and those customers being subsidised remain happily subsidised while the others are no wiser about how better off they could become.

But major cost savings are missed and we risk stifling entrepreneurship in retailing.

This is the classic case of government mandated stagnation.  Suppliers are not forced to adapt to real needs of the customer.  One outcome of such policies upstream in generation was that the long period of government monopoly among Australian supply industries left us with a surfeit of large and relatively inflexible base load plants and a shortage of peakers.

However, a case for temporary price controls can be mounted along the lines that the household sector is less well informed at the present time about the options and, having been protected by a government determined tariff for many decades, some safety net is justified.  This was certainly the view taken in the UK and has been adopted for the household and 40-160 MWh customers in Victoria.  It rests on a theoretical foundation somewhat akin to the provisions regarding consumer protection codified under Part V of the Trade Practices Act.

The possible price exploitation rests on consumer inertia.  But unlike, say the banking industry, where there are real inconveniences to the customer changing retailer, in electricity and gas the process is straightforward and costless.  Even so, many would argue that since the host retailer at "Day 1" has a monopoly of the current franchise customers, this could give rise to short-sighted opportunistic behaviour. ⁽¹⁾  That said, it would surely need to be acknowledged that the underlying ability of the consumer to shift to any one of a great number of actual and potential alternative retailers, could never justify such oversight beyond a very short period.

There are clear dangers in overriding the forces of competition, dangers that intensify with the length of time the controls remain.  These dangers can be distilled into two primary failings related to where the regulator sets the controlled price too low.  Setting prices too low will:

• require cross subsidies and either bring an unravelling of the market balance and/or lead to financial distress among retailers and inadequate incentives for new investment;  an extreme outcome of these developments is evidenced in California;  and
• crowd out the competitive provision that is being sought forcing (reluctant) host retailers to continue serving unprofitable customers.

These considerations underline one matter on which pricing controls or guidelines must be firmly ruled out, that is the prevention of price increases on the grounds that consumers would prefer not to pay higher prices.  Already in Victoria we have put prices in place that have been regulated over the past six years with little provision having been made for the changing costs -- absolute and relative -- on which the prices were first justified.  Unless prices are allowed to adjust to the underlying cost shifts, retailing will be seriously harmed and the consumer is the eventual loser.

In this respect, Victoria's most recent decision placed a 3% upper limit on the deviation from the average price allowed of the maximum price for individual customer classes This cements-in distortions, making it easier for new retailers to avoid those customer classes whose tariffs have become highly unprofitable.  The danger is that the host retailers will gradually be left servicing the highest cost customers.

In addition, and of more immediate concern to the retailers, the Government put ceilings on the average price increases.  Rising energy costs in Victoria led electricity retailers to seek average price increases of between 15 and 21 per cent.  On the advice of the Essential Services Commission, the Government pared these back to between 2.5 and 15.5 per cent.

It may be that the Government would wish to shield some consumers from the true market price.  If so, there are well-established means of doing so.  Requiring cross subsidies from other consumers of the product is not one of these.

The preferred approach is direct provision of support to targeted customers through CSOs and the decisions on the increased prices to the rural customers went some way towards this, with subsidies paid direct to those users.  This aside, the upshot of the price restraints is that there has been little incentive for retailers to seek out new customers.  In Victoria, after two months of FRC only 3,000 small customers have switched retailer (but even this is fifteen fold the level of NSW).  To get to the UK benchmark of 38% of the market switching after 3 years would need upwards of three quarters of a million in Victoria and over a million in NSW.

Compared to setting the price too low, the dangers of allowing excessive prices are considerably less.  This is not the least because excessive prices bring their own remedy -- competitors find ways of winning the ostensibly captive markets.  The Productivity Commission draft report on Part IIIA of the Trade Practices Act drew attention to this asymmetry in the context of "essential services" and advocated erring on the side of allowing a higher price rather than risking an excessively low price.  These approaches are even more appropriate in retailing which does not have the long lived capital assets of network services and consequent ability temporarily to serve customers at marginal cost.

POSSIBLE FACTORS IMPEDING THE PROGRESS TO FRC

ENERGY RETAILING AND DISTRIBUTION GOVERNANCE

Monopoly and vertical integration are often associated with impediments to competition.

Structural separation of the former Victorian electricity monopoly left the retailing and distribution businesses as jointly owned.  The two arms were required to observe a strict structural separation in the form of a ring fence.  Two of the five businesses have since made ownership separations while two others have formed distinct businesses.  Similarly, South Australia has a corporate split between AGL and CKI/ETSA.

With gas, the separation is total in Victoria with retailers and lines owned by separate businesses though TXU has common ownership.  Other states also have separate companies owning gas retailing and distribution;  in NSW, AGL dominates with two separate companies;  in South Australia Origin has the retail with AGL and the pipes are owned by Envestra.  Envestra also owns half the pipelines in Queensland where Origin is the retailing arm, whilst Energex owns the other half both as a retailer and distributor.  Table 2 summarizes this.

Table 2:  Gas Distribution and Retailing

	Distribution	Retail
Victoria	Westar TXU Stratus Envestra Multinet (United)	Kinetik TXU Origin Pulse (United)
NSW	AGL Networks Ltd Envestra	AGL Retail/wholesal/ltd Origin Great Southern Energy Integral
Queensland	Energex Envestra	Energex Origin
South Australia	Envestra	Origin AGL

Neither the gas nor the electricity market is an oligopoly:  the energetic steps already being taken by retailers to attract customers in unregulated energy markets are evidence of this.

Procedures are in place to effect a speedy and costless transfer of a customer from its host retailer to another that is able to offer a superior price.

The notion that the incumbents are able to exploit their current monopoly is not plausible in the Victorian retailing situation.  Hence, even if there were no Trade Practices Act as an insurance for consumers, the case for regulation either to combat monopolistic pricing or promote competition is extremely slender.  Indeed, the downside rests with regulatory not market failure.  There is no evidence that host distributors have favoured their retailing arms and most privately owned suppliers have seen virtue in separation.  However, some may find economies in retaining the two tasks within a single corporate structure and we should not require costs be needlessly incurred by demanding corporate disaggregation.

METERING

An issue of considerable contention in Australia and overseas is the lack of demand side response within the electricity market.  It is said that there are only a few hundred MW of demand in the SA/Vic market that can be controlled.  This is a very small share of the market.  Clearly one reason for firms not wanting to negotiate demand side contracts is that, smelters excluded, energy only constitutes 2-10% of costs and downing tools is more expensive than making a small saving.

In the case of households the lack of interval metering is a major factor.  Indeed, this lack and the consequent need for load profiling has a perverse effect.  Retailers would find those households who are the heaviest users to be the most attractive targets, notwithstanding that such households typically use air conditioning which has been a major factor in bringing greater peakiness and hence higher costs.

A debate which divides retailers, consumerists and economists is what to do about the lack of metering.  It all comes down to price of the meters and costs of reading them.  But according to McKinseys, ⁽²⁾ household users exhibited considerable demand elasticity in a Texan study.  Without specifying the price changes involved, the study claims that an experiment with "dynamic pricing" through real time metering brought consumers to shift one third of their load out of peak periods.

Such a magnitude could vastly increase the savings from electricity markets and the importance of retailers in achieving these.  The issue remains the cost of roll-outs.  One firm, Email, is discussing a $60 meter if the volume is 400,000.  But this would seem to need additional expenditures for the meter to be a tool that can offer genuinely controllable usage.  The fact remains that notwithstanding all the potential gains and talk of mass roll-outs of interval meters nobody has yet done it.

MARKET LIQUIDITY

One feature of government controls, and a manifestation of their effect in preventing competition is the dampening effect this has on the development of alternative financial instruments.  Such instruments like swaps, caps and a whole host of exotic names develop in response to the need to defray risk.  That said, these derivatives are no different from the now ancient notion of futures to which Shakespeare gave such a bad name in The Merchant of Venice.

Bad name or not, it is to the mutual advantage of buyers and sellers to obtain greater certainty of expenditures and revenues.  This allows them to plan ahead without the innovatory-sapping and potentially financially devastating effect of government control.

There have been claims that the Victorian market has been short on liquidity.  The force of such claims was particularly strong in the period leading up to what was expected to be a tight supply/demand situation during the present summer months.  Lack of liquidity is more likely to occur where there are only few suppliers or customers.  The relatively isolated markets in Australia always will run such risks.

Whatever the merits of the claims for Victoria -- and any retailer that was undercontracted has in the event been fortunate -- there is a very rapid growth in derivative or futures contracts.  The Over-The-Counter data published by AFMA indicates a very strong growth in liquidity -- over 50% last year for the market as a whole.  Chart 1 illustrates this.

Chart 1

The other notable feature of Chart 1 is that in relation to the energy market, the turnover of contracts in NSW declined last year while that of Victoria increased fivefold.  Victorian retailers and generators were seeking out ways of defraying their risks but in NSW there was far less need to do so because the Government has mandated a form of insurance through ETEF.

Particularly strong growth was recorded in swaptions, an instrument that gives retailers to pursue business opportunities without being locked into energy.  In contract numbers, swaptions in Victoria increased fourfold while in NSW they decreased.  This is a most significant feature since an instrument like this gives marketers an opportunity, at low cost, to seek new custom secure in the knowledge that they have contract coverage in the event that they are successful.  Chart 2 shows the changing demand of different derivatives.

Chart 2

The compulsory insurance scheme ETEF is clearly the main reason for the difference between NSW and Victoria.  In NSW this is stunting the growth in the market and denying consumers the best deals.

AUSTRALIA ENERGY MARKET LIBERALISATION
AGAINST THAT OF OTHER COUNTRIES

A number of analyses attempt to grade different jurisdictions according to a range of 22 criteria including:

• Is there a detailed plan enabling consumer choice?
• how much of the market is open to competitors?
• what percent of customers have actually switched?
• Is there separation of distribution and retailing to prevent favouring affiliates?
• Is the generation structure privately owned and disaggregated from retailing?
• Is network pricing cost based?
• Is gas and electricity policy linked?

One in the US by CAEM ranks Pennsylvania, Texas and New York as the most liberal (though New York has a peculiar wholesale market whereby the jurisdictional regulator can override the supplier's bid price in real time -- a contingency which seems to be highly intrusive).  Table 3 reproduces the CAEM rating of the US states.

Table 3:  US Ratings by Market Liberalisation

Pennsylvania	66
Texas	65
New York	64
Maine	62
DC	56
Maryland	56
New Jersey	47
Arizona	47
Virginia	45
Illinois	45
Montana	44
Connecticut	43
Michigan	42
Massachusetts	41
Ohio	39
Rhode Island	36
California	34
Oklahoma	0
South Carolina	0
South Dakota	0
Tennessee	0
Utah	0
Wisconsin	0
Wyoming	0
Nebraska	-8
Colorado	-8
Idaho	-8
Alabama	-8
Louisiana	-8
Minnesota	-8
Mississippi	-8

The Canadian Province of Alberta scores slightly higher than any of the American States, though Ontario scores poorly and the other provinces are down with the US Good Ol' Boys and farming states.

Within Australia, my own estimates ⁽³⁾ (see Appendix) are that Victoria would be close to the levels of liberalisation of the leading US states and that NSW would also get close to this except for one blemish (in the CAEM eyes, though a Blue Ribbon to some) namely the lack of privatisation.  In fact NSW actually rates just above California!  This though turns on the degree to which the FRC s are bringing true market openings and there has to be doubt with regard to Victoria and considerable scepticism with regard to NSW.

A similar study in Europe, commissioned by the British and Dutch Governments and undertaken by the Oxford University group OXERA found the UK and Norwegian markets were most liberalised and that of France the least.  That too developed its measures in response to examinations of market share, barriers to entry and the switching and price impacts of liberalisation.

The indicators still show Australia to be ahead of most other jurisdictions in electricity and gas reform but our position can easily be punctured.  Of course, there is some inevitable arbitrariness in these league table measures.  Remember, only two years ago, California was harnessed with Pennsylvania, New Jersey, Maryland in the van of reforming states in the US!!  Even so, measures like these are useful in placing pressure on jurisdictions to move in the right general direction.

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APPENDIX

APPLICATION TO AUSTRALIA OF US LIBERALISATION CRITERIA

Attribute	Jurisdiction	Score	Notes
1	Qld	-10	adopted for users over 200MWh/pa;  rejected for smaller users
	NSW	10	adopted for all;  market fully open from 1 Jan 2002, with some constraints
	Vic	10	adopted for all;  market fully open from early 2002, with some constraints
2	Qld	3	actual percentage not obtainable, but some customers contestable (clearly less than 50%)
	NSW	10	all customers contestable
	Vic	10	all customers contestable from early 2002
3	Qld	0 (customers) 1 (load)	10 percent contestable customers have switched (source:  report on costs and benefits of FRC).  This is <1% customers and about 10% load
	NSW	0 (Customers) 2 (load)	about 20% of contestable business customers switched no household
	Vic	0 (Customers) 5 (Load)	about 28% of contestable business customers switched few household
4	Qld	7	corporate separation with codes of conduct;  legal separation of distribution/retailing under Elect Reg 94;  financial and accounting separation under NEC
	NSW	3	financial and accounting separation under NEC; draft paper on ring-fencing proposes legal separation and conduct rules
	Vic	3	financial and accounting separation under NEC; position paper on ring-fencing does not propose legal separation but proposes conduct rules
5	Qld	2
	NSW	2	Qld, NSW, Vic part of national market with some interstate connectors but with different rules on full retail contestability and different market reconciliation IT systems
	Vic	2
6	Qld	10	retailer sends consolidated bill including TUOS and DUOS
	NSW	10	as above
	Vic	10	as above
7	Qld	10	NEC permits any person to apply for registration as a metering provider:  clause 7.4.2
	NSW	10	NEC permits any person to apply for registration as a metering provider:  clause 7.4.2
	Vic	10	NEC permits any person to apply for registration as a metering provider:  clause 7.4.2
8	Qld	-10	generation mostly public (>90%)
	NSW	-10	generation mostly public (>95%)
	Vic	10	generation privatised
9	Qld	3	permits bilateral and these comprise >95% of sales. This accompanied by mandatory "gross" pool
	NSW	5	as above
	Vic	5	as above
10	Qld	10	not an issue
	NSW	10	not an issue
	Vic	10	not an issue
11	Qld	10	not an issue
	NSW	10	not an issue
	Vic	10	not an issue
12	Qld	5	national privacy legislation forbids release of information without affirmative customer consent
	NSW	5	as above
	Vic	5	as above
13	Qld	0	Household Retail Competition rejected
	NSW	5	brochures
	Vic	10	benchmarking studies, brochures, list of suppliers, customer charters, advice to large users on how to tender arrangements
14	Qld	-5	Household Retail Competition rejected
	NSW	-5	incumbent is the default, no requirement to switch
	Vic	-5	incumbent is the default, no requirement to switch
15	Qld	5
	NSW	5	Regulator regulates tariffs for default customers
	Vic	5	Default provider must publish intention to change tariffs two months in advance
16	Qld	5
	NSW	5
	Vic	5
17	Qld	10	Regulators given discretion under National Electricity Code to adopt price caps or other incentive-based forms of regulation. Qld has revenue cap, cost of service approach
	NSW	10	NSW has revenue cap, cost of service approach. Distribution companies consider they have been short-changed
	Vic	10	Vic has weak service incentive scheme. Distribution companies appealed latest decision but lost
18	Qld	2	distance and congestion related transmission pricing.  Very limited real time pricing at retail level (eg economy and super economy plans -- tariffs 31 and 33)
	NSW	4	Differentials to reflect distance
	Vic	4	as above
19	Qld	5	NEC permits distribution generation interconnection to grid.  Some critics have raised questions over adequacy of prices paid to such generators
	NSW	5	as above
	Vic	5	as above
20	Qld	0	some regulatory commentary on issue of convergence.  Little concrete action.
	NSW	5	Integrated decision making
	Vic	5	as above
21	Qld	10	Commission now totally changed from regulatory model
	NSW	5	Elements of monopoly power purchase remain
	Vic	10	Commission now totally changed from regulatory model
22	Qld	0	Government allocation increased from $5.16 million in 2000 financial year to $5.68 million in 2001 financial year
	NSW	10	Government allocation increased from $5.648 million in 2000 financial year to $7.038 million in 2001 financial year
	Vic	10	Government allocation increased from $7.9 million in 1999 financial year to $12.9 million in 2000 financial year

CAEM ATTRIBUTE DESCRIPTION AND SCORING

1. Issue:  Has the PST adopted a general policy favoring retail electricity restructuring or customer choice either by legislation or by commission order?  If yes, has the public utility commission or board also established a detailed plan enabling customer choice?  Conversely, has the PST explicitly rejected retail competition?

   Weighting:  8%

2. Issue:  How much of the market is open to competitors?

   Weighting:  5%

3. Issue:  What percentage of the PST's electric customers have actually switched from the traditional utility's service to the services of a different supplier?

   Weighting:  10%

4. Issue:  Has the PST adopted rules that prevent utilities from using market power over distribution facilities to favor their competitive functions (provided by either the utility or its affiliate)?

   Weighting:  10%

5. Issue:  Has the PST adopted uniform business practices for all utilities in their jurisdiction?  Has the PST agreed to implement uniform business practices in concert with other PSTs?

   Weighting:  10%

6. Issue:  Which billing method has the PST adopted?  Does the utility send both its own and another provider's bill, or are bills for both services sent by the marketer?  Or does each company send its own bill?

   Weighting:  3%

7. Issue:  Does the PST allow metering to be a competitive service provided by a third party?

   Weighting:  3%

8. Issue:  What market structure has the PST adopted for electric generation?

   Weighting:  10%

9. Issue:  Does the PST require bilateral contracts or a pool structure for wholesale electric transactions?

   Weighting:  5%

10. Issue:  How does the PST determine the amount of stranded costs that a utility will be permitted to recover?

    Weighting:  3%

11. Issue:  How does the PST permit utilities to recover stranded costs?

    Weighting:  3%

12. Issue:  Is customer information available to marketers in a manner that facilitates competition among service providers?  What arrangements are made between the utility, other retail providers, and the customers to facilitate the identification of customers, their usage, and their location?

    Weighting:  3%

13. Issue:  Does the commission administer a mass-media consumer education program as part of its restructuring efforts?  If yes, does the commission evaluate the program for customer awareness and understanding of how to select a retail electric supplier?

    Weighting:  3%

14. Issue:  Has the PST mandated a regulated option (default service) for customers who do not choose a competitive supplier, or are consumers required to choose a competitive supplier (or assigned to one)?  If such a default provider is mandated, must the utility be the default provider or can a nonutility company bid to be the default provider?

    Weighting:  3%

15. Issue:  If a default provider exists, is it required to sell at a firm price, is there provision for an adjustment after the fact, or is there a volatility passthrough provision?

    Weighting:  3%

16. Issue:  If a default provider exists, how is the default rate established?

    Weighting:  3%

17. Issue:  Has the PST adopted performance-based pricing for distribution facilities?

    Weighting:  3%

18. Issue:  Has the commission adopted efficient pricing reforms for network assets?

    Weighting:  3%

19. Issue:  Has the PST adopted policies to facilitate interconnection of distributed generation to the grid?

    Weighting:  3%

20. Issue:  Does the PST link the restructuring of its electric market to the restructuring of its gas market?

    Weighting:  2%

21. Issue:  Has the PST comprehensively reformed its internal organization, practices, procedures, and processes to take into account the changing dynamics of regulation in moving from a monopoly model to a customer choice mode?

    Weighting:  2%

22. Issue:  Is the funding adequate for the PST commission or board to perform its traditional regulatory responsibilities, in addition to new obligations resulting from the transition to customer choice?

    Weighting:  2%

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ENDNOTES

1.  In fact the so-called Cournot model of oligopolistic competition predicts that the markup of a supplier depends not only on demand elasticity but also on the supplier's share of market output.  The larger the share, the more market power a supplier has and the greater its markup.

2.  Power by the Minute, February 2002 http://www.mckinseyquarterly.com/article_abstract.asp?tk=83967:1142:8&ar=1142&L2=8&L3=48

3.  Jennifer Hocking and Michelle Tandy greatly assisted in preparing this assessment.