Chapter 5 Australia’s Experience Under the National Competition Policy

Introduction

This chapter compares the U.S. and Australian economic systems as they pertain to regulation of infrastructure assets, with emphasis on water and wastewater. This presentation is intended to explore the institutional similarities and differences between the U.S. and Australia in allowing competitive access to infrastructure assets.

USA/Australia—Some Comparative Notes

In August 1995, Australia passed the Competition Policy Reform Act of 1995 to implement “microeconomic” reforms. Moreover, the Australian Trade Practices Act (1974) was amended to allow “...third party access to nationally significant essential facilities.” This legislative package, in tandem with concomitant state legislation, comprises the National Competition Policy (NCP), which has significant implications for ownership and operation of Australia’s infrastructure assets.

The resulting changes in ownership and operational responsibilities for supplying and distributing Australia’s water and wastewater services are already underway. Several of these changes are noted in the text of this chapter. However, the most significant change that has taken place is the ongoing implementation of a national policy, backed by legislation and intergovernmental agreements¹, designed to improve economic efficiency (e.g., “microeconomic reforms²”).

To ensure national adherence to the NCP, an Australian Competition and Consumer Commission (ACCC) was established with enforcement powers. An incentive payment scheme from the federal government to the states was established to encourage and monitor implementation of the NCP. The National Competition Council (NCC) was given oversight powers to evaluate whether or not the various states and territories were complying with the three underpinning tenets of the NCP and should be awarded the scheduled “Tranche Issues” (incentive payments).³

In the U.S., there is existing anti-trust legislation. However, overall, there exists no centralized anti-competitive enforcement group analogous to the ACCC⁴ to push access to the infrastructure and to ensure that government activities are corporatized and made competitive on a level playing field (“neutral”). In the U.S. water industries, the only national policy announcement regarding privatization was President Bush’s 1992 Executive Order Number 12803, aimed at encouraging and facilitating private investment in EPA-funded municipal wastewater treatment facilities.

As highlighted in the state-by-state survey presented in Chapter 2 of this report, there are nearly as many water and wastewater policies in the U.S. as there are jurisdictional districts. In the federal array of agencies⁵ only the EPA (Environmental Protection Agency) and the FERC (Federal Energy Regulatory Commission) really address issues pertaining specifically to infrastructure. These agencies exist to regulate economic activity, not to promote it, as does the ACCC. However, the ACCC does have some antitrust function that mirrors those of the U.S. regulatory agency jurisdictions. The big difference appears to be that the ACCC can restrict government anticompetitive activity, an avenue not as apparently open to U.S. agencies vested with regulating economic activity.

The “invisible hand” guiding U.S. electric restructuring, especially in California, has been greatly aided by the presence of the Federal Energy Regulatory Commission (FERC). The CPUC⁶ required that Pacific Gas & Electric Company, Southern California Edison Company, and San Diego Gas & Electric Company file proposals with FERC, in order to establish both an independent system operator (ISO) and a power exchange (PX), that will soon oversee the operation of the state’s entire high voltage electricity transmission system.⁷

The important role of having a centralized agency such as the FERC involved in California’s electric restructuring is noted by the CPUC⁸:

One potential impediment to the timely implementation of Electric Restructuring comes from the unprecedented need to fund work that must be engaged in now in order for the yet uncreated ISO and PX to be able to begin operations by January 1, 1998. Although many of these needs can be financed and funded through FERC set rates after the ISO and PX exist and are providing service, during the time preceding the ISO and PX operation and rate setting, no mechanism exists for developmental work. This work raises novel issues of federal rate-making coordination that require speedy resolution. This ruling begins by outlining the key objectives of any solution the Commission may authorize, and ends by requesting the three investor owned utilities named above (IOUs) file for very specifically tailored rate treatment with a specific procedural scheme for review.⁹

In contrast to the Australian water industry, the U.S. water industry has no such centralized rate-making and oversight body to help create a national policy of privatization. Moreover, in Australia, all existing water (utility) entities (assets) were initially owned by the government. In the U.S., there is a mixture of public and private entities. A sale of public entities could leave private entities at a comparative disadvantage. Under the U.S. revenue requirements concept of rate-making, many U.S. utilities would have stranded costs associated with approved regulatory expenditures.

California is wrestling with an analogous situation in setting competition transmission costs (CTC) to help the electric IOUs recover prior Commission approved (mandated) investments in what will now be non-competitive assets (e.g., PG&E Diablo Canyon Power Plant).

Australia

In 1991, the Australian federal, state, and territorial governments agreed to examine economy-wide restructuring that could make the Australian economy more competitive. In 1992, Professor Fred Hilmer of the Australian School of Management, chaired a committee to examine “microeconomic reforms.” This committee submitted a final report in August, 1993.

Immediate History Prior to Adoption of NCP

Extensive negotiations between the various Australian governments ensued regarding the recommendations of the Hilmer report.¹⁰ These negotiations were complemented by considerable public input, resulting in the August passage of Competition Policy Reform Act 1995.

Main Elements of Reform

The reform principles underlying the new 1995 policy included:

• Competitive neutrality: a business should not be subjected to competitive advantage or disadvantage by virtue of government ownership.

• Legislative review: government will review and, where appropriate, reform legislation with anti-competitive elements.

• Prices oversight: government will establish independent sources of prices oversight for government owned business.

• Structural reform of public monopolies: Prior to introducing competition, government will review issues such as regulation, separation of competitive and monopolistic elements, and community service obligations.

In application, these principles resulted in the adoption of the following three main elements of reform:

• The Trade Practices Act was amended so that anti-competitive behavior, as delineated in Part IV, could be applied to all businesses in Australia. This nationwide anti-competitive policy is made possible through concurrent adoption of State and Territory legislation that universally prohibits anti-competitive actions by any entity—private or public. In Australian terms, government protection is called the “shield of the crown,” which was one of the processes the NCP was designed to remove.

• A new Part IIIA was added to the Trade Practices Act establishing a mode for accessing certain essential infrastructure facilities. For utility infrastructure assets, this Part is the lynchpin in the open access chain.

• The Australian Competition and Consumer Commission (ACCC) was established to administer all legislation regulating competition, including the Trade Practices Act of 1974 and the Prices Surveillance Act of 1974, as well as the 1995 reform legislation.

Regulatory Oversight

The Commission (ACCC) administers both the Trade Practices Act of 1974 and the Prices Surveillance Act of 1983. In addition, the ACCC, under the national competition policy reform program (NCP), is the watchdog agency against anti-competitive practices. The broad pro-competitive sweep of the 1995 legislation was intended to include nearly every business in Australia.

In broad terms, the Act covers anti-competitive and unfair market practices, mergers or acquisitions of companies, product safety/liability and third party access to facilities of national significance. The Commission is the only national agency dealing generally with competition matters and the only agency with responsibility for enforcement of the Trade Practices Act, as well as the associated State/Territory application legislation.

The Commission (ACCC) is part of the Australian Department of the Treasury. The Treasurer is the national Minister responsible for policing restrictive trade practices and monitoring prices. For consumer affairs, the responsible Minister is the Minister for Small Business and Consumer Affairs. The Commission’s consumer protection work complements that of State and Territory consumer affairs agencies.

The Trade Practices Act

The objective of the Trade Practices Act, as set out in the legislation, is to enhance the welfare of Australians through the promotion of competition and fair-trading, and by provision for consumer protection. The Act consists of five major parts:

• Part IIIA—third party access to nationally significant essential facilities.

• Part IV—anti-competitive practices.

• Part IVA—unconscionable conduct.

• Part V—unfair practices; product safety and information; conditions and warranties.

• Part VA—product liability.

In practice, under these provisions, the owner of a nationally significant asset, such as a major dam or pipeline, can be required to allow negotiated access by a third party. An arbitration process is available if the parties are unable to come to an agreement on the cost of access.

Prices Surveillance Act

Under the Prices Surveillance Act of 1983, the Commission has three pricing functions: (1) to vet the proposed price increases of any business organization placed under price surveillance; (2) to hold inquiries into pricing practices and related matters and to report its findings to the responsible Commonwealth Minister; and (3) to monitor prices, costs and profits of an industry or business and to report the results to the Minister.

Legislative and Intergovernmental Agreements

Economist Pat Ranald summarizes the Legislation and Intergovernmental Agreements as follows:¹¹

• “Extension of the Trade Practices Act (TPA) to apply competition to state owned businesses. State owned businesses are no longer exempt from the provision of the TPA, and intergovernmental principles outline an agreed framework for the application of legislation and competition principles, although governments have considerable discretion in implementing these (Competition Policy Reform Bill, Intergovernmental Agreements 1995:14-16).

• “Structural Reform of Public Monopolies. Each government may determine its own agenda within an agreed set of principles which could include that all public monopolies should be structured as commercial operations and subject to competition. Governments should conduct reviews before introduction of competition or privatization, but (contrary to Hilmer recommendations) they do not have to be public. Commercial functions should also be separated non-commercial functions. Any regulatory functions should be separated from non-commercial functions and established as independent entities. Community service obligations should be defined and appropriate means of funding determined (Competition Policy Reform Bill, Intergovernmental Agreement 1995:15-16).

• “Competitive Neutrality: no net advantages from public ownership. Competitive neutrality principles should be applied to all public business activities, so they operate on the same basis as private competitors. Again, governments can determine their own agendas. This applies to areas like payment of taxes and charges, and conformity with legislative requirements. The agreement does not formally oblige governments to end cross subsidies; however, these cross subsidies run counter to the competitive neutrality principles which include full cost pricing.

“Following lobbying, the agreement was amended to clarify that public bodies can conform to government policy in areas like EEO, OH&S, employment conditions, environmental standards or other areas where policy might mean higher standards than the private sector. However, there is no protection of employment conditions for employees transferred to the private sector (Competition Policy Reform Bill, Intergovernmental Agreement 1995:14-15).

• “Application to business activities which are part of other government agencies. Competitive principles do not apply to the “non-business, non-profit activities” of public agencies, but can apply “where appropriate” to any “significant” commercial activity by any other government agency, e.g. sale of publications, school canteens or hospital pharmacies sector (Competition Policy Reform Bill, Intergovernmental Agreement 1995:14).

• “Access to public infrastructure in cases of natural monopoly, where it cannot be duplicated. The agreement establishes rules of access to infrastructure of national significance which cannot be feasibly duplicated. Competitors may negotiate access to publicly owned essential infrastructure and have access to arbitration if parties cannot agree on terms. In theory, this would apply to privately owned essential infrastructure. Access rules are intended to be national policy, but can vary within agreed guidelines at state level (Competition Policy Reform Bill, Intergovernmental Agreement 1995:17-18).

• “Prices surveillance monitoring. The legislation provides for a more nationally consistent system of price monitoring through application of the Commonwealth Prices Surveillance powers to state bodies or through the establishment of state pricing authorities operating on consistent principles sector (Competition Policy Reform Bill, Intergovernmental Agreement 1995:12-13).

• “Legislative Review in support of competition principles. Reviews of all Commonwealth and State legislation are to be conducted against the criterion of whether they can restrict competition. Restrictions of competition should only be permitted if it can be demonstrated that benefits outweigh costs and the objectives cannot be achieved by other means (Competition Policy Reform Bill, Intergovernmental Agreement 1995:16-17).

• “Establishment of National Competition Council and Australian Competition Committee. These are the bodies that will administer the legislation and agreements. Initially those appointed to these bodies were not required to have consumer or public interest expertise. As a result, lobbying appointments will now include one person on each body with consumer rights expertise, but following agreement of all governments. These bodies will incorporate the current functions of the Trade Practices Commission and of the Prices Surveillance Authority (PSA) in surveillance and monitoring prices of national companies in both public and private sectors.

• “Compensation to be paid from Commonwealth to states in return for implementation of the policy. The states argued that they would suffer revenue losses from GBEs (government business enterprises) as a result of the policy, and that the Commonwealth would gain revenues. Payments were required to secure the intergovernmental agreements. Payments of $A4.3 billion are to be made in 1997-1998, $A585 million and $A2.6 billion in 2000-2 for specific stages of policy implementation.

Ongoing Privatization in Australia’s Water and Wastewater Sectors

The current state of Australian water and wastewater privatization, as of July 1997, is partially summarized below¹². Other interesting developments have also occurred in Australia. For example, Sydney Water Corporation (SWC)¹³ has formed its own privatized (corporatized) technology subsidiary, Australian Water Technologies (AWT). This non-regulated offshoot of SWC is traded publicly and, interestingly enough, in the context of public-private partnerships, AWT advertises “[i]t gives the market the best of both worlds—private sector acumen and government ownership.”¹⁴

As in the U.S., Australian companies (e.g., Australian Water Services) are forming business liaisons with successful French (e.g., Suez Lyonnaise Des Eaux and Compagne Generale des Eaux) and British (e.g., United Utilities/North West Water) companies to ensure technical expertise, capitalization, and market entry. American Water Services Company teamed with Bechtel to bid, albeit unsuccessfully, on the lucrative Sydney wastewater contract. U.S. water companies have not replicated the success of their electric industry counterparts in Australia’s emerging competitive environment.

Table 5-1. Partial List of Privatized Water and Wastewater Projects in Australia¹⁵
BOO/Ts¹⁶

Comment

The Australian practice of using the Council of Australian Governments (COAG) to arrange the necessary meetings to hammer out agreements that would be constitutional is unknown in the U.S. At first blush, it appears to be another form of federalism.¹⁷ However, upon analyzing the above NCP implementation and, in particular, Section C. 6—Legislative and Intergovernmental Agreements, it appears that considerable latitude has been given the various Australian states for implementation policies. While federal payments might be an incentive, it appears that this market process has imploded back into the political arena. It appears too early to tell how effectively these “microeconomic reforms” will work. Certainly, the New South Wales government, an Australian Labor Party (ALP) Administration, is having considerable difficulty in convincing its more leftist members that sale of the state’s electricity assets will be in the best interest of the state.

As noted in other parts of this study, many members of the party fear that privatization will deprive the state of valuable revenues, be done below market value¹⁸ and leave the state extremely vulnerable to the pre-emptive taxing powers of the Commonwealth. Unlike the U.S., where virtually no taxing base is preempted by the federal government, the Australian states must live with a narrow base and depend on Loan Council grants.¹⁹