Union tears apart fabric of industry

The Textile Clothing and Footwear Union just don't get it!  The icon Australian clothing company Fletcher Jones has announced that, after 70 years, it will close their local manufacturing operations in Warrnambool, Victoria and Mt Gambia, South Australia.  In response, the union has accused Fletcher Jones of being un-Australian motivated only by higher profits, and by implication guilty of incompetent management.

What the union doesn't get is that, if any alleged managerial deficiencies exist, they are at least in part directly attributable to the union campaigns and regulations that flow from the campaigns.  The union movement across most sectors barely recognises the link between its activities, labour regulation and managerial competency.

The clothing manufacturing award is the only major Australian award that has not been subject to award simplification under the Workplace Relations Act.  It is long, hugely complex and constraining on management decisions.  Among its many clauses, it dictates rates to be paid, for example on the sewing of a button, determines how, when and if contracting out can occur and requires extensive reporting of activities to the union.

Running parallel to the award is outworker legislation in New South Wales and Victoria, which largely mirrors the complex award but goes further by controlling contracts between manufacturers and retailers, including extensive reporting to the union of contract details.

Supporting this industry controlling regulation is perhaps the most successful business intimidation campaign conducted in Australia, run by the union, heavily funded by state governments and co-ordinated with church and other groups.

The end result is the systemic destruction of entrepreneurial management flair within the industry.  The clothing sector in Australia now no longer cares about manufacturing locally because any entrepreneurial effort cannot produce results, given the risks posed by destructive regulation and brand attack.  The clothing sector is resigned to a future where some design is done locally and all manufacturing done off shore.  The manufacturing management capacity has been stripped from the industry.

The union blames tariff elimination.  They don't understand that domestic clothing manufacturing could have a future but only if management and entrepreneurship is free wheeling within the structures of normal commercial regulations.  The destruction of management capacity through labour regulation that has nothing to do with workers' rights destroys creative entrepreneurship.  Consequently, say goodbye to the industry and jobs!

It's this, that perhaps more than anything else, that has motivated the major industry association, such as Australian Chamber of Commerce and Industry, Australian Industry Group, Australian Mines and Metals Association, Housing Industry Association and the Business Council of Australia to express concern with the federal ALP industrial relations policy.  Each of these industry associations understands that for businesses and industries to prosper entrepreneurship and management capacity must be maximised.

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Long on Flaws, Short on Fixes

According to the ACCC's consultants, price and access regulation of gas and electricity networks has increased national wealth by somewhere between $2 billion and $11 billion.  On several occasions the ACCC's Energy Commissioner, Ed Willett, has cited these estimates.  The first time he did so they were faithfully reported by a naïve cadre of journalists, keen to ingratiate themselves with an ACCC ever willing to offer inside information in private briefings.

However, under scrutiny the ACCC's estimates have been demolished.  They stem from economic modelling based on price reductions mandated by the ACCC.  Illogically, the modelling would show even greater gains if the ACCC had required prices to be set at zero!  This carries particular weight in the light of a series of successful challenges to the price determinations the ACCC has set for gas pipelines.

The Productivity Commission's (PC) recently released Review of the Gas Access Regime included a scholarly dismantling of the ACCC's trumpeted estimated benefits from its price decisions.  The PC review is the latest in a series of reports the Commonwealth has commissioned into the regulatory arrangements for gas.  The PC rejects the ACCC's stoutly maintained view that its regulatory approach encourages rather than deters investment.  Like earlier reviews of gas, the latest PC Review recommended some deregulation of the present controls on the gas pipeline industry, especially with regard to new facilities.  Such recommendations have been endorsed by deregulatory rulings of Australian Competition Tribunal regarding the Eastern Gas Pipeline (Bass Strait to Sydney) and by the Minister Macfarlane on the Moomba to Sydney pipeline.

However, the PC's fine analysis is let down by the anodyne nature of its recommendations.  Following the series of earlier reviews and decisions, forceful and specific recommendations were needed from the Productivity Commission in order to operationalise a less intrusive regulatory regime.

Unfortunately the PC has largely relied upon setting overarching objectives which can be readily interpreted to support a wide range of positions.  Central to its recommendations is an objects clause, "To promote economically efficient operation and use of, and economically efficient investment in, the services of transmission pipelines ..." Any regulator would readily claim such wording as describing precisely how it currently operates.  Yet the PC is clearly dissatisfied with the decisions taken by regulatory agencies (the ACCC and National Competition Council)

The PC offers no guidance on when market disciplines provide better outcomes than regulation for existing networks and how (or whether) to provide a transition to a deregulated state.  It should, for example, have offered firm guidelines that regulation is unnecessary once a market is supplied by competing pipelines.

In addition, although it reiterates findings of other advisory bodies in recommending regulatory holidays for new pipelines, it advocates Ministerial discretion over such a decision rather than making it automatic.  This guarantees an additional regulatory hurdle.

Similarly, recognising the costly and lobby-intensive nature of the current intrusive price setting model, the PC also recommends a light handed monitoring option.  However its recommendations on this were somewhat weaker in its final report compared to the draft report.  The latter envisaged that the present approach of "access arrangements with reference tariffs would only occur in the more extreme circumstances".

Again, although it assesses that the price determinations by the ACCC have been inappropriately harsh to the supplier, the PC's solutions to counter these offer little promise of improvement.  Thus, the PC recommends that tariffs should be set to meet the efficient costs of providing access to the reference services and give a return commensurate with the risks.  This might amount to little more than an exhortation to the regulator to undertake the process it already considers it follows.

And the PC makes a suggestion that prominent people be assembled to develop a consensus position of how to set an agreed "capital asset pricing model" by Australian regulators.  It is doubtful that the desired consensus could emerge.

Unfortunately therefore, although the PC offers robust criticism of current heavy handed and intrusive regulatory practices, its report is remarkably short in offering future directions on how to correct this.  This is regrettable in view of the pivotal role most authorities consider that gas must take in Australia's energy policy.

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This "Innovation" is a Charade

It is time to stop the charade!  The Victoria Government's innovation strategy is a destructive joke.

Last month I was at a conference attended by well-informed Australian and Asian business people, where Minister for Innovation John Brumby lauded the many supposed successes of his government's innovation strategy.

When he claimed that Melbourne was the centre of the funds management industry in the Asia Pacific region, ripples of suppressed laughter spread through the audience.

When he went on to brazenly claim that Melbourne had a thriving aeronautical industry, the laughter spread further.

OK, these are just harmless absurdities.  Moreover, the Bracks Government should not be held responsible for failing to turn Melbourne into a combination of Toulouse and Hong Kong.

However, when Mr Brumby went on to laud his government's actions on agricultural biotechnology and the food industry, the absurdities become serious.

These are two areas in which Victoria has a real and substantial industrial base and scope for expansion, but because of policies of the Bracks Government, they are going backwards.

The Bracks Government's recent decision to ban commercial trials of GM food crops, despite clearance on health, safety and marketing grounds, has effectively killed the agricultural biotechnology industry in the state.

Numerous research programs have already been stopped by the decisions.

Researchers may be willing to continue with pre-commercial research, but only if it is government funded.

And of course if this research ever gets to a commercial stage, it will need TO go elsewhere, resulting in Victorian taxpayers underwriting the commercial ventures of foreigners.

Victoria has a large food processing sector with much potential, but it also is going backwards.

This sector is currently undergoing a major restructuring worldwide.

Accordingly the Victorian industry faces a major challenge.

But the biggest impediment to the local industry successfully meeting this challenge is the inflexible nature of the industrial relations environment in the state, aided and abetted by the government.

These policy failures could be fixed quickly and cheaply.

Instead, the government not only avoids doing so, but pretends they do not exist and uses its $321 million Innovation Strategy to buy silence from the industry.

For example, in June it sent a huge contingent of bureaucrats and friends to BIO 2004 in San Francisco and launched its new Biotechnology Strategy.

Both at the conference and in the strategy itself, the government lauded its supposed successes in agricultural biotechnology, and blindly avoided mentioning the fact that it had just banned the technology for food crops.

At BioFest, a government subsidised conference, last week, Mr Brumby announced that he had lured a major international agricultural biotechnology conference to Melbourne in 2006.  This is like funding a "Life.  Be in It" campaign at the Melbourne morgue.

As for the food industry, the government has responded to the shrinking industry, not with improvements to the industrial relations climate, but with waves of bureaucrats and grants to help market food to Asia.

As if Cadbury Schweppes and Heinz need help in marketing.

The state's future would be much brighter if the government eliminated Innovations, gave the money back in the form of tax cuts, and instead simply allowed the private sector to get on with its business.

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Will Climate Warming Really Turn Off the Tap?

I agree that carbon dioxide levels are currently increasing and this could bring a warmer climate.

But I differ from Professor Tim Flannery and others (see The Land letters, August 12, pp 10, 11) about whether current trends will really bring doom and what we can do about it.

Over the past few decades there have been many studies of the effect of increasing carbon dioxide levels on plant growth and it is all good news for farmers.

CSIRO has stated that:  "The direct effects of increased carbon dioxide in the atmosphere will probably have a substantial positive impact on Australian agriculture and forestry".  For example, doubling of carbon dioxide levels over the next 100 years could increase growth rates in wheat and barley by 30 to 40 per cent (CSIRO Media Release, 97/122).

Professor Flannery and the doomsayers would argue "but we won't have the water to grow the crops".

Indeed, the recently signed and much trumpeted National Water Initiative infers it is going to get drier and "water access entitlement holders are to bear the risks of any reduction or less reliable water allocation arising from reductions to the consumptive pool as a result of seasonal or long-term changes in climate".

Yet about 100 Australian climatologists recently predicted that it will generally getter wetter as it gets warmer (Australasian Science, June 2004).

The bottom-line appears to be that there is no coherent picture of regional climate change and this is especially the case when predicting rainfall.

So what should we do?

The new age environmental fundamentalists believe that the road to salvation -- more usually referred to as sustainability -- is paved with feeling guilty, using wind power and taking water off irrigators and giving it back to the environment.

These mystical medications are unlikely to cure potential real world dilemmas.

I am optimistic that technology will eventually solve our fossil fuel dependence and in this way address the issue of carbon dioxide emissions.

But there is still the possibility -- the worst case scenario -- that rainfall will be reduced across southern Australia.

The National Farmers Federation recently suggested the solution lay in initiating research into new crop varieties that can handle reduced rainfall and a hotter climate.

Biotechnology offers the potential for more drought tolerant GM crops.  There are currently research program focused on drought tolerance.

But State Governments have banned the commercialisation of new GM food crops following intense lobbying from environmentalists.

Last year the Wentworth Group of Concerned Scientists, of which Professor Flannery is a member, were asking all irrigators to voluntarily give up 10 per cent of their water allocation without compensation.

I wonder what the Wentworth Group's position is on supporting an increase in water use efficiency of say 10 per cent through the development and commercialisation of new GM crop varieties?

I suggest we confront the future, including climate change, with our eyes open to all the possibilities, a positive mind set, and a capacity to innovate.

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Critics go overboard, voters unimpressed

"The electorate will render its judgement accordingly".

John Howard's political hero, Robert Menzies, once said that if 12 people witnessed a car accident there would be at least six different versions of what happened.  There are only two versions of what the Prime Minister was or wasn't told on the night of November 7, 2001.

Put simply, the first version is that of Mike Scrafton, a former Defence official who claims he said to the Prime Minister that there was no evidence of children being thrown overboard from an asylum-seekers' boat.  The second version is that of Howard, who maintains he was told only that the evidence was inconclusive.  To support his public statement that children had been thrown overboard the Prime Minister relied on a report from the Office of National Assessments.  That report was later found to be incorrect.

For those who see duplicity in everything Howard does, Scrafton's comments have been taken as "proof" that the Prime Minister lied, but this ignores a number of issues.  It is quite possible that Scrafton thought he was saying one thing while the Prime Minister understood him to be saying something either different or more ambiguous.  Such misunderstandings are common and not just confined to politics.  Even if Scrafton had been as definite in his opinions as he claims he was, there remains the issue that an Office of National Assessment report contradicted him.

One doesn't necessarily have to believe in the post-modern idea that "there is no such thing as truth" to appreciate the difficulty, or even the impossibility, of establishing precisely what was said and what was thought to have been said three years ago.  As to the whole sequence of events of the children-overboard affair, the fact that the Senate inquiry into the affair split along party lines indicates at the very least that there are two, or more, sides to the story.

The effort of the Opposition and numerous journalists and academics to get to the truth of the matter is understandable, but will ultimately prove to be fruitless.  The process by which politicians and governments, and indeed individuals in everyday life, make decisions is complex and isn't explicable in the few simple sentences demanded by the media.

The obsession displayed by some of the Prime Minister's critics in their pursuit of him about children overboard has blinded them to one obvious question.  Does the electorate care?  On the face of it, the answer is no.

This is not to argue that it is irrelevant whether politicians lie, or that the merits of any question are to be judged solely by reference to the opinion of the electorate about them.  The point is that our system of government provides a mechanism for resolving disputes such as this through a democratic vote at the ballot box.  Surveys conducted before and after the 2001 election indicated that if any one single event decided the outcome then it wasn't children overboard or Tampa.  It was the terrorist attacks on Washington and New York on September 11.  What these did was reinforce the public's desire for strength of leadership, which the coalition was perceived to have and which Labor wasn't.

Certainly an election is a blunt instrument for gauging the will of the community, but it is the best we've so far devised.  If what Scrafton said to Howard is as important as those who are calling for the Prime Minister to stand down believe it is, the electorate will render its judgement accordingly.

Not every person concerned by the questions concerning children overboard is of the Left political persuasion, but it would be true to say that the issue has become totemic for the Left.  The issue has been used to challenge the legitimacy of the Howard government.  There is nothing unique to those tactics and such a strategy conveniently ignores the reality of electoral outcomes.  Such an approach by the Left was applied in the 1950s against the Menzies government over the alleged manipulation of the defection of the Russian spy Vladimir Petrov.  Twenty years later it was employed against the Fraser government following Whitlam's sacking.

The circumstances of the federal elections of the 1950s, 1970s and 2001 share a common characteristic.  The public did not share the attitude of the Left in relation to the supposed malefactions of coalition governments.  In each case, at the election immediately after the government was supposed to have committed its travesty, the government was re-elected.  Perhaps those supposed travesties might have been more imagined than real.

Menzies came to within one seat of losing government, and Fraser was defeated in 1983, not because of the reasons for which they were hated by the Left, but because of self-inflicted wounds caused by poor economic decision-making.

That is the political lesson for Howard and Mark Latham.  If Howard wins the federal election it will be because his economic management is trusted.  If Latham wins it will be because the electorate has decided it is time for a change it won't be because of the revelations of the last few days.

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Bold reform is just a few risks away

During the past eight years the coalition government can claim some important successes.  Financial management has been sound with the economy undoubtedly in a better condition than in 1996.  Growth has not just been fuelled by some fortuitous raw materials boom or a buoyant world economy.

The Asian economic collapse and the terrorist attacks of 2001 had a more dramatic effect on Australia than did the fall of the Berlin Wall.  But the coalition's ambitious international agenda has deflected its attention from a domestic program.

There is a sense that the coalition has lost its appetite for bold measures.  It is not that the government has been without policies far from it.  It is just that by the time many of its policies are implemented they are completely compromised.

After some early defeats in the Senate the coalition abandoned efforts at fundamental reform and opted for incremental change.  But in policy terms merely tinkering at the edges can sometimes make matters worse.  This is exactly what has happened, particularly in the area of corporate law.

If former industrial relations minister Peter Reith's original plan had been put into effect we would have gained a deregulated labour market.  In 1997 the coalition considered a double dissolution to get the legislation through but decided the risk wasn't worth it.  Seven years later the product of that decision is a labour market that is more centralised than that of even New Zealand.

Likewise the GST.  The government's original idea of using a consumption tax to fund a wholesale reduction in personal income tax, and aligning the top marginal personal rate with the corporate rate was a good one.  Instead the deal with the Democrats produced a new tax with additional regulation but without any substantial change in tax rates.

Last weekend the Australian Financial Review published its survey of the opinions of 17 chief executives of major companies.  (AFR, August 7-8).  About half said the government had run out of ideas and was suffering reform fatigue.

Here's an outline for a real reform agenda:

TAX

Start again.  Regard the tax system as a way to encourage enterprise, not as a mechanism for government control over taxpayers' lives.  Align the top marginal personal tax rate with the company tax rate at 30 per cent and increase the tax-free threshold to provide incentives for individuals to move from welfare to work.  This can be funded by a combination of expenditure reductions and if necessary an increase in the GST rate.  This would require an end to the automatic payment of GST revenues to the states.

INDUSTRIAL RELATIONS

Back to basics.  Reinstate the principle that individuals should be free to enter voluntary contracts, and should be bound by them.  Abolish the Australian Industrial Relations Commission.  Expand the coverage of Australian Workplace Agreements, with their enforcement being the responsibility of the federal court system.  Abolish the current unfair dismissal legislation and allow the conditions for termination of employment to be the subject of agreement between employer and employee.

BUSINESS

Encourage it, not persecute it.  As the side of politics committed to free enterprise the coalition should suppress the urge to join unions and certain talkback radio hosts who attack business at every opportunity.  The government should not allow its agencies to engage in gratuitous assaults on companies or involve themselves in general politicking.  The approach of the Australian Competition and Consumer Commission has done much to injure the public's attitude to companies.  Either reform the ACCC to limit its powers and restrict its anti-business campaign's or abolish it.  Tax legislation needs to be simplified.  It is so complex it can't be understood by taxpayers and allows the ATO excessive discretion.

CORPORATE REGULATION

Trust the market.  Re-establish the principle that the primary responsibility of a company is to its owners it is not to the community and it is not to stakeholders or interest groups.  Scrap Clerp and the Financial Services Reform Act.

SUPERANNUATION

It's a failure.  The area is complex, confusing and over-regulated.  Attempts to raise the national savings rates have been compromised by successive governments regarding superannuation as an area for revenue raising.

MEDIA

Another shambles.  Apply one simple principle the only role for government in the area is to help lower the barriers to entry of new players.  It is not the job of politicians to decide how many television stations there should be, what they can broadcast, and when.  The growth of new media is making the cross-media ownership laws obsolete and they should be scrapped, as should local content regulations.  The rest of Telstra should be sold with the money used to retire debt.  As long as the ABC remains in public hands it will continue to be accountable to no one but its own staff.  The coalition should either sell the ABC or stop complaining about its bias.

INDIGENOUS AFFAIRS

Continue reform.  Make reform on the basis that practical reconciliation will make meaningful improvements to people's lives whereas symbolic reconciliation won't.  There should be a shift of emphasis away from providing native title to communities towards having individuals possess freehold title, which they can buy and sell, and borrow against.

WELFARE

Full of contradictions.  Decide that the objective of welfare policy is to have every person who can work in work.  The introduction of Work for the Dole was a worthwhile first step.  If the incentives are right individuals will leave welfare for employment.  While in the short-term at least welfare reform could cost money, substantial savings can be made through the abolition of many measures of middle class welfare, for example the baby bonus.

In conclusion, there is no doubt that if the government controlled the Senate many of these policy ideals would now be in legislation.  But the existence of the Senate cannot continue to be used as an excuse to avoid reform.  In any case a double dissolution is available to a government that can't get its legislation passed.  Given that the coalition is unlikely to win a Senate majority in the foreseeable future, the question the government has to ask itself is, what is it willing to risk for real reform?

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Who controls your contract?

Ladies and gentlemen.

There is an Internet online newsletter called "Workers Online".  It describes itself as "the official journal of LaborNet, a union portal sponsored by the Labor Council of NSW in partnership with Social Change Online" and "is recognised as a world-leader in union communications ... emailed to about 5,000 subscribers across the globe."

Late last month, Workers Online ran an editorial in response to a ruling released by New South Wales' highest court (Fish v Solution 6, July 21 2004).  The article began as follows:

Kill the Lawyers

What's left of the HR Nicholls Society must be popping the champagne this week, with a NSW court ruling that sees the triumph of their 20-year battle to kill industrial relations and replace it with a "rule of law".

It's such a good editorial that I shall quote it at length.

That's the upshot of this week's ruling by the NSW Court of Appeal that employment contracts have become so complex that the Industrial Relations Commission no longer has the expertise to deal with them.

It is an argument bizarrely circular in its logic -- it goes something like this.

The industrial relations jurisdiction was established to provide cheap, practical, negotiated settlements to workplace disputes free from the formal bonds of black letter law.

Industrial commissioners and advocates were traditionally practitioners rather than professionals, able to nut out conciliation by banging heads together and delivering an arbitrated outcome where necessary.

The system hummed along for the best part of 100 years delivering practical outcomes with bipartisan support until the neo-conservative ethos of union busting was imported into this country.

The prime attack weapon was the "rule of law" -- advocating for legislative change to the Trade Practices Act and corporations laws to shift employment and industrial matters out of the tribunals and into the courts.

The logic was venal, in tribunals the settlement was invariably a compromise, in the courts it was winner take all.  And with laws in your favour and the greater legal firepower that the wealthier party brings to the table, the odds suddenly shifted in favour of the boss.

Workers Online goes on to explain the horrors of the Howard period, then says:

Thanks largely to the Carr Government, NSW tribunals were not emasculated but retained a place where justice could prevail over these power relations.

In fact the industrial jurisdiction has extended so that workers whose conditions were set by contract, but were really just employees, could also avoid costly court litigation.

It was coincidental that, on the day the NSW Court of Appeal released the ruling that so inflamed Workers Online, I had an article published in the Australian Financial Review.

In part, I said:

The key point about NSW is that IR legislation introduced by the Carr government does not regulate relationships between employers and employees.  The legislative scope embraces "work in an industry".  This simple definitional shift away from normal employment regulation to regulation of "work" has turned the NSW Industrial Relations Commission into a powerful regulator of commercial transactions.  The implications of this comparatively recent and radical shift are now only being understood as the NSW Commission tests its new powers ...

The NSW Court of Appeal is unhappy.  A surprise twist in the NSW legislation is that appeals against decisions of the full commission are not allowed. ... The Supreme Court (has) stated it was "troubled by the continued intrusion of the NSW IR Commission into commercial contracts".  The court also expressed "grave doubts" as to the constitutional validity of denying people their right to appeal to the High Court of Australia.

In their ruling of 21st July, the NSW Court of Appeal denied the Industrial Relations Commission the jurisdiction to hear the case in question, stating that the Commission was largely comprised of judges from the specialist industrial bar and was an inappropriate forum for the dispute.  It explained that

Few, if any, of the members of the commission have substantial experience of commerce or of commercial law

And

The defect in the jurisdiction of the commission is patent, plain or clear.

This brief story -- comprising the tirade from Workers Online and the ruling of the NSW Court of Appeal -- is not the end of, but rather a major flash point in, a protracted and hugely important social and economic battle being waged in Australia.  In years to come, historians who choose to look at it will mark it as a defining point in the evolution of our society.  It is a process in which members of the HR Nicholls Society have been observers and bit players.  It is a process which has, as its centre, wholesale "cheating at Scrabble^®".

The pocket history is that, for some 20 years, Australasian labour regulators have been trying by legislative means to rope the commercial contract into their net.  They failed in New Zealand.  They succeeded in New South Wales and Queensland.  They have had a little success in Victoria.  They are trying in South Australia and attempting to do it via the back door in Western Australia.  Legislatures are currently silent in Tasmania, although review is under way.  The federal ALP intends to do so in their jurisdiction if they win office.  NSW is the pack leader, with nearly a decade of legislative success and years of experimenting with implementation.  But, it would appear, the highest court in NSW has just put the whole process on hold -- perhaps even frozen its application for the moment.

The Scrabble^® game and cheating involves a protracted but sophisticated technique of inventing new language, giving alien and contorted meaning to words with already established meaning, leveraging the contortions and new language in the public domain to create the impression of community will, and then plonking these words onto the legislative Scrabble^® board to see what can be got through.

In the area of labour law, the most significant cheat Scrabble^® words in play include

Dependent contractor, outworker, homeworker, employment deeming, triangular relationship, employee like, cascading contract.  The list can go on.

The cheat words roll over into other areas and include

Corporate manslaughter, corporate social responsibility, triple bottom line, and others

My focus, clearly, is the labour area.  In this forum and in many others, I have repeatedly sought to study and explain the cheating that is going on.  Today, I want to cut to the chase and look at the core of the cheating.  I then wish to enunciate the only way I think we can move forward to stop this foolish, self-delusional and socially and economically destructive legislative game.

To this end, Workers Online has provided a great service.  Its editorial contains all the elements of not only how Australian legislatures are engaged in wholesale cheating at Scrabble^®, but most importantly why they are cheating.

Workers Online summarises the essential assumptions underpinning all labour regulation across the globe in the last 100 years thus:

1. The employment relationship is one of unequal power -- employers are powerful;  employees are powerless.
2. Employees must collectivise their efforts to redress this power imbalance.
3. Employers are so all-powerful that the state must institutionalise and give special monopoly authority to the manifestation of employee collectives, that is, unions.

These assumptions are the air of every breathing moment of the labour lawyer and academic community, and constitute the principal formula that focuses the minds of the human resources management community.

Within our professional economics community, there exists strong tensions between those who reject the idea of the inequality of power in employment, those who are ambivalent or confused, and those who side with the labour lawyers.

It is now universally accepted that, over the last 15 years or more, labour arrangements have entered a phase of change not seen in the previous 100 years.  Workers Online reasons that this change is a con, a sham, a subterfuge designed by the bosses to reassert their position of power.

Their reasoning is that

1. Trickery by way of the law is being used to stop workers accessing the protections available to them.  That is, that the law of contract is being used against workers.
2. The people who use this trickery -- bosses, lawyers and judges -- pushed by the neo-conservative politicians and their string-pullers, are immoral at best, evil at worst.
3. Legislatures must stop this legal trickery by rewriting law and imposing discipline on judges.

The headline "Kill the lawyers" is a scream of frustration at having their rewriting of law usurped.

But, most importantly, what can be noticed from Workers Online is the passionate, religious-like genuineness of their belief.  Let us put to one side the naked desire for old-fashioned rent-seeking which demands state monopoly privilege for the most conservative of institutions, the union movement.  Let us also forget that the unions' claim to be representative of all workers is wafer-thin and rejected by workers themselves.

Let us look, instead, at their central insistence that employment is an environment of unequal bargaining power.  On the inequality of power, the passion, the commitment, the genuine belief in this as a fundamental truth cannot be denied and must be respected.

And it is on this single point -- that is, on the perceptions of power -- that the entire cheating game hinges.  Assess this point accurately and every other item in the debate becomes clearer.  And on this point we find that all sides to the debate cheat at Scrabble^®.

What I am about to say next, I have dared occasionally to say in forums of persons who are supposed to be on the employer side of the debate -- including HR Nicholls gatherings.  On every previous occasion that I have uttered what I am about to utter, I have raised ire, annoyance, resentment, anger and denial from a significant sector of the audience.  Lawyers write me off, CEOs choose to ignore me, human resource managers think I'm ignorant and economists think I'm strange and lack credibility.  I normally lose the attention of large parts of the audience because of a deep-seated, negative, emotional response.

The fact is that Workers Online is correct.  Employment is a contract of inequality in bargaining power.

The employer side of the debate cheats at Scrabble^® by not accepting this single truth.  And the employers' cheating is the principal explanation as to why policy resolution is not being achieved, why the cheaters on the other side get away with what they do, and why economic development is more constrained that it need be.

The facts are clear for anyone who chooses to look.

Every superior court legal ruling that considers the contract of employment looks for a string of elements which, when tied together, identify one single thing:  does the employer have the right to control the employee?  And control denotes power.

The Independent Contractors of Australia have identified some 22 separate elements from which the courts will choose to test if an employment contract exists.  They include the traditional elements of intention, withholding of money for holidays and sickness, delegation, working for a result, capacity to create goodwill, and so on.

What surprises me is that, within the legal, labour economics and regulation fraternity, these "template" elements are treated as if they are disparate, disconnected and confusing.  As a result, they assert that the employment contract is ill-defined.  But when these elements are looked at and studied carefully, what emerges is a clear template directed toward finding one thing -- is there control?

For example:

1. The withholding of wages for holidays and sickness is a control and power function.  Employees have income withheld from them so that the managerial class can use the money withheld as the bargaining tool for the organisation of non-work periods at the convenience and discretion of the managerial class.  This managerial power is thought necessary for the efficient operation of the firm, certainly on the Taylorist model of the firm.
2. The inability of employees to create goodwill when they work is a control and power function.  The value of a firm is seen to lie substantially in the goodwill it creates around its activities.  The function of employees, it is reasoned, is to spend their time, effort, energy and, most importantly, their creativity in the building of goodwill for the firm -- goodwill which is owned by the firm.  Employees are not allowed to garnish goodwill for themselves because it diminishes that collective goodwill which is the property of the firm.  Or at least that's the Taylorist-modelled thinking.
3. The inability of an employee to delegate is a control and power function.  An employee is not allowed to have someone else do their job in their place.  Power of delegation is exclusively vested in the managerial class to ensure managerial control of the firm.

Each of the 22 elements can be discussed in this way to show how the template is used by the courts to look for one thing -- control, and hence power.

In this setting, it is an unavoidable truth that that the employment contract is an evolved derivation of the master-servant relationship, and in the current context it is a contract that remains closer to master-servant than is often admitted.  Master-servant embodied a higher level of control than the current employment contract, but control and power remain the issue

The words of the great nineteenth-century American jurist Oliver Wendell Holmes remain closest to the truth, even when he described the employment contract this way in 1892:

There are few employments for hire in which the servant does not agree to suspend his constitutional rights of free speech, as well as idleness, by the implied terms of his contract.  The servant cannot complain, as he takes the employment on the terms which are offered to him.

Holmes's words have not dated.  No matter how much the convoluted processes of 20th Century legislative activism or common law evolution may pretend or appear to alter this legal reality, Holmes's words still describe the core fact of the employment contract and the expectations of it constituted within the law.

Workers Online is correct.

How do we know this?  Quite simply, the judiciary almost daily instructs the community through their published rulings on the law of employment contract.

Yes, the very black letter lawyers that Workers Online wishes (metaphorically) to kill concur with Workers Online.

Yet I find it incredible that if one talks to most practising lawyers, they will state that the employment contract is unclear.  Talk to almost any economist and complete ignorance of the ABCs of the contract of employment is nearly always displayed.  Yet these are the professions with most influence over parliamentary approaches to labour regulation.  It is ignorance of the simple fact that power lies at the heart of the contract of employment, which is the primary cause of our legislatures cheating at Scrabble^®.

However, note that my remarks to date have been specifically about the facts of the employment contract.  The word "contract" is the critical item.

Now I need to paint the picture of the employment relationship.  Because, then, a different picture emerges.  "Contract" and "relationship" are different and understanding the difference leads us to understand how Scrabble^® cheating has come about.

Simple, basic contract law teaches us that a relationship does not constitute a contract.  For a contract to exist, there must be a relationship, but that relationship must also have the key elements of intent, offer, clear terms, consideration and acceptance.  Take out any one of those elements and no contract exists, although the relationship may continue.

When the important difference between contract and relationship is understood, the confusion that exists in the labour regulation debate becomes clearer.

Economists focus on the employment relationship.  They assert that there is no predetermined or systemic power imbalance in the employment relationship.  They are correct.  But a finding at law on employment is a finding of a contract, not a relationship.  And regulation of labour is a process of legal regulation of contracts, not regulation of relationships.  But economists invariably fail to recognise this.

Pro free-market economists tend to make the fatal error of engaging in the public policy debate while missing the point that when they talk about labour regulation they must specifically consider the employment contract.  Instead, they wax lyrical about the behaviour of people in economic relationships, thinking that this is the same as employment contracts.  Consequently, their musings come to be ignored by legislatures.

It is this failure to play Scrabble^® correctly, to distinguish between contract and relationship, which prevents economists and others within the "employer" camp from understanding the issues, winning the debate and moving towards better regulatory structures for all parties.

I'll repeat my point.  It is vital to understand that on labour issues that legislatures and the common law regulate contracts, not relationships.

I will qualify that by noting that in areas of equal opportunity, anti-discrimination and occupational health and safety, regulations embrace attempts to dictate relationships but get themselves into terrible difficulty as a result.  My comments today however do not stretch into those two areas but are confined to the core area of economic labour regulation described generically as industrial relations.

And, for emphasis, I'll repeat my point again.  Appreciate and openly accept the difference between contract and relationship, and that the employment contract is one of control and power, and we can move forward.

But I want to add another element into the Scrabble^® mix.  On this additional element, economists and the employer camp are not cheating, but our friends at Workers Online and their followers are.

The commercial contract is a very different contract to the employment contract.  The commercial contract is a contract of equality.  It is a contract in which all parties have equal rights to control the contract and in which no-one has control over another.  This does not mean that the commercial relationship does not have elements of inequality of control, or that bargaining power inequalities do not exist.  In fact, they always will.  The vagaries of human nature are such that nothing in human relationships is ever equal.  But in the commercial contract, equality before the law is assured.

The evidence of the equality of the commercial contract is the same evidence that demonstrates the inequality of the employment contract.  And for the same reasons that the employer camp rejects the fact of the employment contract, the Workers Online of the world seem unable to accept, and refuse to fathom, the equality of the commercial contract.

In my personal life's choices, I reject the employment contract.  I am not alone.  Some 28 per cent of the Australian private-sector workforce earn their livelihood without recourse to the employment contract.  Some people are consciously and intellectually aware of why they are not "employed".  Most operate on instinct, an instinct perhaps surprisingly well enunciated by one of the 20th Century's greatest industrialists.

John Paul Getty once said:

When human beings relinquish their individuality and identity of their own volition, they are also relinquishing their claim to being human.

For those of us who work without the employment contract, Getty's words form the essence of the decision.  To be on an employment contract is to relinquish individuality and identity to the greater good of a firm and to become part of a firm.

The commercial contract enables humans to retain their individuality, identity and their humanity and simply to sell their services to the firm.  The firm can then do what it likes.

I will not today explore this area further because it involves a fundamental rethink about the nature of the firm, how an economy operates (including considerations of issues such as wage-induced inflation), and a very fundamental re-conceptualisation of commercial regulation in a free market economy.  They are issues to be touched on in my developing book.

But when Workers Online and its fellow travellers induce legislatures to cheat at Scrabble^® and to create legislation the likes of which we have witnessed in NSW and Queensland (and which has been attempted or is being attempted in other States), Workers Online is the instigator of inequality, not the protector of equality.  To destroy the commercial contract by legislative means or to give tribunals the power at will to treat and regulate a commercial contract as if it were an employment contract, is to destroy a primary cornerstone of an equitable and fair society.

Workers Online does not understand this and, consequently, gravely misunderstands the decision of the NSW Court of Appeal.  In jurisdictionally pulling the NSW IR Court back toward its traditional employment contract matters, the Court was not acting in cahoots with evil employers seeking to usurp the rights of workers.  The Court was moving to protect the core contract that underpins economic equality in the community and upon which economic transactions and our economic prosperity are founded.  In their cheating at Scrabble^®, Workers Online poses the gravest and greatest of threats to economic equality.

The HR Nicholls Society exists for one simple reason.  It is a network of people who hold to the view that current labour regulation regimes suppress the economic creativity of Australians.  As a result, our nation is less wealthy than it should be, the affliction of unemployment touches vastly more people than it should, and economic wealth is less equitably distributed than should be the case.  And the disease of poor labour regulation is global, not just local.

But if, in our quest, we consistently fail to deal with truths, we will never successfully make our points and see the changes that Australia sorely needs.  We must stop cheating at Scrabble^® and accept the legal fact of control and power inequality that lies at the heart of the employment contract.  If we do that, we can advance the debate in a vastly more constructive way.

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Workers of the Future

There has been a silent revolution going on in the business of work which is now beginning to gain voice.

Workplace regulations have traditionally been based on the idea that employment is inherently a master-servant relationship.  That is, employers have the power to dictate the type and conditions of work, and thereby exploit workers.

The response, both here and abroad, has been to regulate the contract of employment separately, and differently, from other commercial contracts.

In Australia, this has led to the formation of special laws and courts to adjudicate employment contracts, and special negotiating rights to third parties such as peak employer groups and unions.

The focus of general contract law is to allow individuals freedom to contract;  bolstered by competition law to guard against monopolies or unfair advantage.

In employment law, the rights of individuals to enter into contracts for work are greatly restricted and co-operation and collusion between employees and employers are promoted while competition between workers is inhibited.

Some types of workplace and employee, for which the master-servant paradigm clearly does not fit, have long been allowed to operate outside the formal industrial relations system -- family owned and operated businesses, the professions and senior managers.

The home building industry has also been uniquely successful in keeping itself based on a system of individual contractors and therefore outside the industrial relations system.

Nonetheless, most other workplaces have traditionally been forced into the master-servant system, whether it fitted or not.

The situation is, however, changing.  The master-servant paradigm fits a shrinking proportion of workplaces -- in particular, it is often not appropriate for many of the fast-growing service industries such as IT, communications, personal, finance and householder services.

It also no longer fits the expectations of a growing number of younger and older people, who place a high priority on maintaining flexibility, control and independence.

The simply fact is that in the world of work, where brains and individual skills are paramount, these days workers are more often the master than the servant.

As a result, more people are operating outside the industrial relations system by being independent contractors.  Indeed, 25 per cent of the private sector work force is now independent contractors.

In contrast, only 17 per cent of private sector workers are members of a union.  Importantly, the movement to independent contracting is being driven in the main not by businesses seeking to avoid the restrictions of the formal system, but by people seeking an arrangement that best fits them.

Moreover, the movement to independent contracting is gaining force despite change in the formal system which allows greater personal choice such as individual contracts.

The problem has been that aside from the Housing Industry Association, independent contractors have not had a voice in policy circles.

That is, until the recent formation of Independent Contractors of Australia.  This has become an influential voice for contractors across industries and issues.

The inaugural ICA summit will be held on the August 24 in Canberra.

Judging by the quality of its speakers and participants, it is set to be a major event and policy makers are increasingly listening to the views of independent contractors.

This represents a potential sea change in the world of work.

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Forecast is for Hot Air and Guesswork

At last there has been some rain across the NSW grain belt.  But what is the longer term forecast?

On the 23rd June on ABC Television's 7.30 Report, Dr Tim Flannery, a member of the Wentworth Group of environmental scientists, predicted global warming is going to "affect Australia sooner and harder than anywhere else on the planet".  The impression was that we might be going to enter an "eternal drought".

Dr Flannery went on to suggest Perth may soon become a "ghost metropolis" as a consequence of water shortages induced by global warming.

My colleague, Professor Bob Carter, recently had a paper published in the influential American journal Science (Vol 304, pg 1659).

Professor Carter is a geologist who has been involved in the international ocean drilling program for many years.  In the paper he interprets the climate record for the last 4 million years from a sediment core taken off the coast of New Zealand.

Four million years is a long time!

Carter's interpretation of the data, and the cycles evident in his sediment core, fit closely with what are known as the Milankovitch Cycles.

These cycles last about 20,000, 40,000 and 100,000 years, and reflect changes in the tilt of the earth's axis and the eccentricity of its orbit as it circumnavigates the sun.

These cycles, along with significant events on earth, including volcanic activity associated with the pulling apart and stitching together of continents, have been used to explain past ice ages.

At the moment we are enjoying an inter-glacial warm period.

Looking at the cycles in Professor Carter's paper it would be reasonable to conclude that we will enter another ice age sometime soon -- in the next few hundred or so years.

While atmospheric carbon dioxide levels are currently rising, associated with fossil fuels burning, it is worth noting that it is generally accepted that carbon dioxide levels 500 million years ago were approximately 20 times higher than they are today.

Dr Flannery's comments on television were really a gross exaggeration of results from CSIRO Atmospheric Research climate modelling based on scenario modeling developed by the Intergovernmental Panel on Climate Change (IPCC).

However, the IPCC takes the view that "a coherent picture of regional climate change via available regionalisation techniques cannot yet be drawn".  CSIRO Atmospheric Research also acknowledges this, especially when predicting rainfall.

The Internet publication Coolwire has compared the Australian Bureau of Meteorology (BoM) three monthly rolling "Outlook" predictions for rainfall with the real world results.

Coolwire finds that even on a short three-month scale, the BoM modellers have problems getting the outlook to resemble the observation.

What reliability, then, for computer models which attempt to predict the whole planetary climate 100 years ahead?

Interestingly, on the same day that Flannery was telling Australia that Perth was in trouble, the city's dams were filling earlier than they have in the previous 4 years.

A couple of weeks later the Western Australian wheat belt was given a good soaking, raising the prospects of an above average season.

The only constant in the natural world is change.  So, one other thing that you can be quite sure about is that if you haven't had rain yet, the drought will break for you one day.

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What we have achieved and where the parties will lead us with energy policy

Though the notion of energy policy can be very broad, its commonly understood framework comprises first the policies governing the gas and electricity industries and secondly the interface of energy and environmental policy, in particular greenhouse gas emissions and energy conservation.  This assessment compares and contrasts the major parties' approaches to achieving an efficient energy industry while pursuing social objectives and meeting environmental goals.

POLICIES COVERING ELECTRICITY AND NATURAL GAS SUPPLY

It is only over the past decade or so that electricity, and to a considerable degree gas, was anything other than a state based industry totally under state government control and, for the most part, ownership.  The present arrangements, which still do not fully apply in Western Australia and the Northern Territory, have replaced state monopolies with a market-based supply industry.  The industry now comprises a mixture of government firms (in NSW, Tasmania, and most of Queensland, WA and the NT) and privately owned businesses.  In the generation and retailing sectors all these firms compete with each other.  The natural monopoly areas of local distribution and most long distance transmission are controlled at arms length from government by regulatory agencies like IPART in NSW and Victoria's ESC.

Overwhelmingly, the changes to the market structures have been bipartisan.  They have been undertaken within the framework of National Competition Policy.  The most recent modification has led to the creation of the Australian Energy Regulator as a semi-autonomous part of the ACCC and the Australian Energy Market Commission in place of the National Electricity Code Administrator.  These changes bring the national gas and electricity regulations under a single agency structure and are intended to expedite decision making procedures.  Significantly, they include some commitment to ensure a more harmonised national set of regulatory procedures and a steady abandonment of the administrative roles conducted by the 13 state regulators, which presently control pricing and network access conditions.

The Commonwealth Minister has been a major force in pushing through these measures but has enjoyed the general support of his Shadow counterpart, as well as from the State Ministers, particularly Victoria's.  This unusual degree of cooperation offers greater confidence that the agreement can be put into operation.

Much will rest on continuing cooperation if we, in the event, achieve the foreshadowed faster resolution of specific market rules issues as they arise, the elimination of the state based regulators and the greater consistency in trading rules (especially those governing electricity retailers).

Some of the matters involved in States wishing to retain controls go beyond the simple issues of ministerial empires.  Governments have been keen to ensure that cross subsidies are in place in electricity and gas to offer benefits to regions and to the less well off.  There is little sign that these concerns are diminishing, though the greater openness of markets, with implications of incumbent suppliers having their more profitable customers cherry-picked automatically puts pressure on governments to release pricing strangleholds.

Of course such cross-subsidisation is alien to efficiency and contrary to the competition reforms to which all governments have acceded.  The National Competition Council has sought to pressure the states on the matter, including recommending suspension of some payments to Queensland, the most blatant offender.  Contrary to its obligations, Queensland has no plans to fully open its markets to retail competition and lift price caps and, along with NSW, has a system of mandatory insurance that benefits state based retailers.

Similarly, the public ownership of the generating industry in NSW, Tasmania and Queensland gives governments in those states a different set of interests.  In Queensland, there is evidence of the government using its planning powers to hamper investment from new non-State owned generators.  Tasmania has used its monopoly generator to finance the Basslink transmission link to the mainland, a link that few consider could have been viable at the present time without such a subsidy.  NSW has used its own planning powers to attempt to thwart the construction of a new power station committed to, perhaps unwisely, by one of its state owned retailers.

Regulatory arrangements for gas pipelines have been highly contentious.  These largely stem from misguided bureaucratic attempts to lower prices so that they reflect marginal costs not competitive market outcomes.  They also represent the aspirations of the ACCC to retain its regulatory control powers even when there is commercial rivalry.  State governments, in particular Queensland, and the Commonwealth Minister have sought to limit the ability of the ACCC set competing pipelines' prices rather than leaving them to market forces.  The main focus of attention has been the rival Moomba and Bass Strait pipelines to Sydney.  A more difficult issue concerns the Dampier to Bunbury pipeline which has been bankrupted by the determinations of the WA regulator.

GREENHOUSE ISSUES

While industry policies, consistent with National Competition Policy, have sought to reduce energy prices, environmental impositions are driving them up.

It is the intersection of energy and the environment that nowadays provides most political fuel.  The Mandatory Renewable Energy Target (MRET) is the centrepoint of current government policy.  This is an obligation on energy retailers and other users to source specific quantities of energy from designated low carbon dioxide emission sources.  Wind power is the dominant eligible source.  The obligation is tradeable and there is a fall back tax of $40 per MWh for businesses failing to secure their required allocations (existing trades are a little under the $40 penalty).  The current cost per year can be estimated at some $360 to $380 million in increased energy bills by 2010.

On the face of things there are major differences between the Government and Opposition, differences that reflect their positionings between courting the green vote and avoiding excessive costs:

Labor favours ratifying the Kyoto agreement which would both put greater pressure of Australia to undertake abatement activity and, arguably, open up international markets for the trading of emissions;

• Labor also favours "lifting the (MRET) from its current two per cent of energy to five per cent".  The current target is actually 9,500 GWh by 2010 which is to rise to 20,000 GWh by 2020.  Although the current target is expressed in energy units, the ALP proposal for five per cent of energy is an approximate doubling of this and has been estimated by the Government to bring a cost of $11 billion compared to $5 billion from the present plans;
• NSW already has in place a supplementary MRET provision which entails a further $40 million annual cost to consumers, and the State ALP Ministers are consulting on how to bring in a more ambitious scheme in the event of a re-elected coalition government;
• Aside from its MRET scheme, the Commonwealth Government's greenhouse related energy policy is strongly focussed on subsidies for emission reductions and for the creation of carbon "sinks".  Its program, Securing Australia's Energy Future, announced in July 2004, contains new expenditures addressed to greenhouse gas reductions of over $700 million.  Annual Commonwealth expenditures, including MRET and other existing programs, are of the order of $840 million per annum.

These major differences are narrowed by two considerations.  First, the present government is acting as though it has, in effect, ratified Kyoto and accepted the scientific view that significant human induced global warming is taking place.  Australia negotiated a relatively low target (eight per cent above 1990 levels by 2010-2012), a position that reflects some acceptance internationally that Australia, as a major resource based economy, competes more directly with developing nations which do not have onerous greenhouse gas emission obligations.  In addition, some felicitous re-definitions of the level of obligation, plus the policies already introduced, mean that Australia is in fact much closer to its target than all but a handful of those that have ratified Kyoto.

The Government's expressed concerns at formally ratifying Kyoto stem from the universal acknowledgement that the reductions encapsulated in the treaty are totally inadequate for bringing about a stabilisation of greenhouse gas emissions.  The Government argues that ratification will bring future costs in terms of allocations below business-as-usual on a scale that is unaffordable.  In this respect, the Australian Constitution (like that of the US) tends to lock-in such legislation in contrast to the European Constitutions where decisions of the Government of the day can readily be changed.  The Government therefore is not contesting the view that global warming is a real threat but opposes incurring additional costs from the Kyoto tax or tradeable rights approach to its mitigation as inferior to using R&D to find technological solutions.

For its part, a Federal ALP Government, if elected, would doubtless re-visit those of its policies with major cost implications and consequent impositions on households and industry.  After all, it was a federal ALP Government that stood out against many of its own advisers and insisted upon Australia's relatively low Kyoto target.

In the event of a continuing coalition government in Canberra, state ministers have indicated that they will consider a cooperative approach to bring about a substantial further movement towards greenhouse gas abatement.  There is little chance of this succeeding if only because of the imperatives of state based development priorities.  The Victorian Minister, for example, has been careful to claim a special position for the intrinsically more CO₂ emitting brown coal generators.  More importantly, it is implausible that Queensland will accede to an agreement among state ministers.  This is because, in essence, such an agreement would require Queensland to relinquish its apparent destiny (derived from its low cost coal) to become the centre for the siting new electricity generation and entail subsidies to the southern states.

CONCLUDING COMMENTS

Considerable advances have been made in the electricity and gas supply industries in bringing about a national market and ensuring market forces do their job in driving down prices and ensuring consumers obtain the quality of supply for which they are prepared to pay.

Tensions remain about the appropriate policy approach to greenhouse gas emissions.  Though differences between the coalition and the ALP are real, these are easy to overstate.  The key difference is the increased requirement under ALP policies for the replacement of fossil fuelled electricity by wind power.  Wind and other renewable alternatives are more than double the cost of coal based electricity generation.  In addition, the intermittent nature of the lowest cost major renewable resource, wind power, brings about a need for increased capacity to ensure reliability -- a study for the South Australian Government (pdf, 560kB) indicated that only 8 per cent of the capacity for large scale wind power can be classed as firm, hence this form of power requires back up for 92 per cent of its capacity.

In the event of a continued coalition government in Canberra, it is possible for ALP controlled State Governments to reach an accord on emission reductions and impose this nationally.  However this is an unlikely outcome since it would involve States voluntarily foregoing -- indeed, reversing -- particular natural advantages in comparative energy costs.

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Gas Pipeline Access and Pricing: The Productivity Commission's Incomplete Agenda

The Productivity Commission Report on the Gas Access Regime

INTRODUCTION

The regulatory arrangements covering gas pipelines have been under review for many years.  The initial need for regulation stemmed from the natural monopoly inherent with most pipelines and the fact that those built pre the mid 1990s had some exclusive franchises and, in the context of the Hilmer reforms, required some fair basis under which they could be opened for use by new suppliers.  Prior to the PC's Gas Access Regime Review ⁽¹⁾ there were two earlier reviews.  These were that by the Productivity Commission of Part IIIA of the Trade Practices Act (Review of the National Access Regime),which reported in September 2001 and the Energy Market Review (the Parer Review), which reported in December 2003.

Both these reviews recommended some deregulation of the present controls on the gas pipeline industry, especially with regard to new facilities.  In addition, decisions by Australian Competition Tribunal in the Eastern Gas Pipeline (Bass Strait to Sydney) the Minister regarding the Moomba to Sydney pipeline have been deregulatory rulings that might set precedents.

Dissatisfaction with the present arrangements is clear given the failure of any transmission pipeline owner to accept the regulatory rulings of the ACCC or (in the case of WA) the local regulator.  Subsequent litigation and reviews have contributed to uncertainty.  Although strongly contested by the ACCC, most participants in the development of gas pipelines consider the current arrangements bring prices below those justified on market risk grounds and consider such outcomes are bringing a sub-optimal level of investment.  Issues are:

• when do market disciplines provide better outcomes than regulation both for existing networks and for new ones and how (or whether) to provide a transition to a deregulated state?
• whether there are less intrusive means of regulating pipelines other than the presently prevailing cost based price determination which leads to considerable lobbying costs and controversy regarding the prices actually specified
• are the present pricing principles appropriate?

Unfortunately, while the PC report contains much of value and incorporates a high standard of analysis, many of its key recommendations are anodyne, contain considerable ambiguity and would enable regulatory agencies to maintain the very approaches that the PC is highly critical of in its analysis.  Decisions made by the Commonwealth Minister and the Australian Competition Tribunal have provided guidance for the better administration of gas pipelines under National Competition Policy and under the Gas Code.  Following those decisions, in order to facilitate a more market-oriented administrative regime, the Productivity Commission should have been more forceful and specific in its recommendations.  It should, for example, have offered firm guidelines that regulation is unnecessary once a market is supplied by competing pipelines.

DEREGULATION OF EXISTING PIPELINES

The PC recognises that the existing Gas Access Regime is likely to be distorting investment as firms seek ways to escape oversight.  The PC notes that

The Gas Access Regime's coverage test sets too low a threshold for cost-based price regulation.  That is, coverage decisions could involve the regulatory error of applying cost-based price regulation when its costs outweigh its benefits, including with respect to investment. ⁽²⁾

And it adds

Generally, cost-based price regulation should be considered only if service providers have substantial market power.  Where market power is not strong, such as where there is emerging competition, in the long run the costs of regulated prices are likely to outweigh the cost of the market failure that such regulation attempts to correct. FINDING 4.5

The final PC Gas Report exposes at length the hubris and faulty analysis employed by the ACCC in its pro-regulatory approach to the industry.  But the recommendations offer no directions as to how this can be reformed.  Much reliance is placed on recommending an "overarching objects clause" that would:

"promote the economically efficient operation and use of, and economically efficient investment in, the services of transmission pipelines and distribution networks, thereby promoting effective competition in upstream and downstream markets."

These goals are unexceptional and would be readily agreed by all with any pretensions to "economic rationality" and perhaps also by those who express opposition to such themes.  Indeed, the ACCC has always formulated its decisions within such a framework.  In the event, therefore the PC has offered licence to the ACCC to continue on its present course.  That course has focussed on finding a basis for reducing the prices charged by gas pipelines in order to reduce prices to the consumer.  Critical in making assessments of pipelines' prices is the regulator's capital value assessment of the pipeline and estimated Weighted Average Cost of Capital that is employed.

In respect of the former, capital value once sunk is considerably less than when it is being contemplated.  A major debate among economists concerns how to estimate capital value of "essential facilities" that have monopoly power.  The ACCC has invariably sought to reduce the prices sought by pipeline owners, often by arguing that its value is less than its replacement cost.  The appointment of Professor Stephen King as a Commissioner is significant since his work for the ACCC and other clients has often featured a strong emphasis on having prices set on a basis that does not require the recoupment of many of the costs that the supplying firm has "sunk" in the process of its investment. ⁽³⁾  While a windfall to consumers, such approaches offer a signal to investors that has the "chilling" effect on investment about which the PC has expressed considerable concern.

The Energy Networks Association (ENA) has illustrated a declining margin over the "risk free" rate in regulatory decisions illustrated as follows ⁽⁴⁾ and claims that UK and US regulatory decisions are more generous to the investor (a claim the ACCC and its own consultants dispute).  The ENA's estimated trend is as follows:

Having assessed that the price determinations by the ACCC have been inappropriately harsh to the supplier, the PC's solutions to counter these are threefold:

• Specifying (Recommendation 7.1) that tariffs should be set to meet the efficient costs of providing access to the reference services and give a return commensurate with the risks.
• This might be little more than an exhortation to the regulator to undertake the process it already considers it follows.
• To assemble prominent people in order to reach a consensus.  Recommendation 7.11 says

  A study should be undertaken by a group of recognised experts in the field of financial economics that considers whether a robust method can be developed for setting businesses' expected rate of return on capital under incentive regulation.  This should include a review of the use of the capital asset pricing model by Australian regulators.

• It is doubtful that the desired consensus could emerge.
• The Report also recommends a light handed monitoring option.  The recommendation on this is somewhat weaker in the final report (in which the Gas Access Regime should "provide for a light handed form of regulation") compared to the draft report which added that the present approach of "access arrangements with reference tariffs would only occur in the more extreme circumstances".

These recommendations, which leave the ACCC as the main regulatory body, are dependent on that agency adopting a changed philosophical framework of control.  Yet there is no indication of such a change.  There is certainly no sign that the ACCC has agreed to the following statement of the Minister:

A Moomba to Sydney gas transmission service in future may be contracted for via the Moomba–Adelaide pipeline system (MAPS) and SEA [South East Australia] Gas pipelines and either of the Interconnect or the EGP [Eastern Gas Pipeline] ... It is therefore no longer appropriate to think in terms of gas transportation as being only from a single well head or processing plant along a single transmission pipeline to a single offtake point. ⁽⁵⁾

Indeed, in an address in Sydney, ⁽⁶⁾ the energy Commissioner, Ed Willett, said that it is incorrect to consider the Moomba to Sydney pipeline to be in competition with that from Bass Strait.  He argued that the price for gas carriage remains too high and maintained his faith in the synthetic estimates of the true price estimated by the ACCC's New York based consultants.  And he argued that the evidence of pipeline building, "rather put the lie to the industry's claim that ACCC regulation has, in the words of one major player "had a chilling effect" on investment." ⁽⁷⁾  The ACCC position remains one of unreconstructed faith in itself as an institution out-performing competition in creating efficiency.

In contrast, the Minister's decision on Moomba to Sydney cautiously reaches out to a market based approach.  For the PC to have offered support for this would have allowed some better underpinning of it.  In this respect the PC could have provided guidance about when regulatory agencies ought not to be routinely involved in price setting and access conditions.

In line with its assessments, guidance could have been along the lines implied by Minister Macfarlane in his statement and might have argued for "an onus on the regulator to exit regulatory control once more than one pipeline of a significant size was serving a particular market, whether or not there was duplication of the pipelines".

GREENFIELD SITES

The regulatory moratorium flagged in the PC's Inquiry into Part IIIA and the Energy Market Review is strengthened in the PC final report on Gas Access.  It also notes

The Gas Access Regime is likely to be distorting investment in favour of less risky projects, including altering the nature and timing of pipeline investments.  Pipeline construction might be delayed, for example, and there might be greater emphasis on building capacity that is essentially fully contracted prior to construction.  Such alterations can inhibit the emergence of competition in upstream and downstream markets and generate inefficiencies. FINDING 4.3

Other findings further develop this.  The final report recommends the Minister should be able to offer a binding no-coverage ruling for 15 years with the pipeline remaining uncovered thereafter unless a successful coverage application finds otherwise.

However, the regulatory approach is rather stricter than that envisaged by the Energy Market Review which argued that it would be difficult to foresee a case for regulating new transmission pipelines and that regulatory strictures should be developed accordingly.  This unfortunate backward step is aggravated by leaving the decision on coverage with the Minister rather than setting a standard on which the NCC might recommend a deregulatory approach.  This is especially so once it is recalled that in the past the NCC has expressed a wish to see all new pipelines regulated unless the pipelines offered competitive provision to the supply area as well as the market and unless they could be assured that the parallel pipes would operate non-collusively.  This very strict test of market power would never see a deregulated transmission system

MERIT APPEALS

The PC recommends a full merits appeal of the regulator's decision.

This is welcomed by the industry but in the context of a properly constituted regulatory organisation that has been set tight rules as to the approaches it must take, such a full appeal mechanism is unnecessary.  In recommending that approach, the PC is unfortunately (but realistically) acknowledging that its recommendations will not be sufficient to ensure a body determined upon a different regulatory outcome than that which it favours itself will be able to reinterpret the generalised form of any code that is developed in the light of the recommendations.  A more forceful and precise regulatory form could have obviated this.

ENDNOTES

1.  Review of the Gas Access Regime, Productivity Commission, Report No. 31, 11 June 2004 and made public 10 August 2004.

2.  P.107

3.  The PC quotes King and Gans as saying "... a regulator, who sets an access price after the relevant investment is sunk, has a strong social incentive to set a low access price.  Such an access price will promote efficient use of the facility, competition and social welfare without deterring the investment that has already occurred". (p. 104).  However there is also a recognition in their work of the adverse effects of "asymmetric truncation" that lops off the high returns of successful entrepreneurship.

4.  See Address by Bill Nagle to ACCC Regulation Conference, July 2004

5.  Macfarlane I. (Minister for Industry, Tourism and Resources) 2003, Applications for Revocation of Coverage of Certain Portions of the Moomba to Sydney Pipeline System:  Statement of Reasons.

6.  Ed Willett, Energy Market Access and Regulation, address to the Australian Energy & Utility Summit, 22 July 2004.

7.  In the same address on later occasions, the ACCC has cited the work of ACiLTasman in suggesting the benefit of the ACCC's regulation (of electricity plus gas) was somewhere between $2-11 billion.  That analysis was discredited at the ACCC's annual regulatory conference (30 July 2004) and also is heavily criticised in the PC Gas Access Review.