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*Mark Pearson is the Chief Risk Officer of the Australian Competition and Consumer Commission (ACCC). He oversees the ACCC’s deregulation efforts and also has a coordination role in relation to its regulatory functions. Prior to this, Mark was responsible for managing the ACCC’s Regulatory Affairs Division, first as Executive General Manager and then as Deputy Chief Executive Officer. Mark has around 20 years’ experience in senior management roles in the public service. In addition to his primary responsibilities at the ACCC, Mark sits on the Bureau responsible for governing the OECD’s Network of Economic Regulators. Simon Haslock is an Assistant Director in the Regulatory Coordination Unit at the ACCC, providing support to the ACCC’s regulatory line areas and senior management. Prior to this, he was in the ACCC’s Communications Group for five years. Issue 52 September 2014 Measuring and Assessing the Performance of Regulators Mark Pearson and Simon Haslock* Recently, the question of how best to measure and assess the performance of regulators has been gaining significant traction in Australia, and also internationally. A range of reports released in Australia over the last 12 months focus on best- practice principles for conducting performance assessments of regulators, such as the Productivity Commission’s (2014) Regulatory Audit Framework and the Australian National Audit Office (2014) revised guide to administering regulation. These reports feed into the broader objectives of the Australian Government, which is committed to regulatory reform, with the stated aims of boosting productivity, increasing competitiveness, reducing unnecessary regulation and lifting regulatory performance. Internationally, the Organisation for Economic Co-operation and Development (OECD) (2014b) has made a contribution to the field through the release in July 2014 of its own best-practice principles for regulatory policy and governance. These principles have been the subject of significant consultation with national regulators over the past two years, including the Australian Competition and Consumer Commission (ACCC). This article provides some insight on the key elements of the OECD principles, while also noting the ongoing work that is being conducted by the OECD’s Network of Economic Regulators to devise a fit-for-purpose performance assessment framework for economic regulators. Background In 2012, the OECD’s Council on Regulatory Policy and Governance made a number of recommendations focused on developing a systematic governance framework that could deliver ongoing improvements to the quality of regulation in member countries. One of these recommendations (OECD 2014a) was that countries develop ‘a consistent policy covering the role and functions of regulatory agencies in order to provide greater confidence that regulatory decisions are made on an objective, impartial and consistent basis, without conflict of interest, bias or improper influence’. This recommendation has acted as the impetus for the OECD’s work on best-practice principles for regulatory policy and governance in the intervening period. The Council’s recommendations were the result of assessments made by the OECD’s Regulatory Policy Committee, established in 2009 to provide intellectual and practical support to countries in their regulatory reform efforts. OECD policy analysts had identified a gap in support mechanisms for countries facing reform pressures, and established the Regulatory Policy Committee in response. The Regulatory Policy Committee aims to provide a platform to help countries adapt regulatory policies, tools and institutions and through that, support member countries to undertake effective regulatory reform. It has a broader remit than economic regulation per se, which led to the more recent decision to establish the Network of Economic Regulators. Contents Lead Article 1 From the Journals 7 Regulatory Decisions in Australia and New Zealand 10 Notes on Interesting Decisions 16 Regulatory News 19

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*Mark Pearson is the Chief Risk Officer of the Australian Competition and Consumer Commission (ACCC). He oversees the ACCC’s

deregulation efforts and also has a coordination role in relation to its regulatory functions. Prior to this, Mark was responsible for managing the

ACCC’s Regulatory Affairs Division, first as Executive General Manager and then as Deputy Chief Executive Officer. Mark has around 20

years’ experience in senior management roles in the public service. In addition to his primary responsibilities at the ACCC, Mark sits on the

Bureau responsible for governing the OECD’s Network of Economic Regulators. Simon Haslock is an Assistant Director in the Regulatory

Coordination Unit at the ACCC, providing support to the ACCC’s regulatory line areas and senior management. Prior to this, he was in the

ACCC’s Communications Group for five years.

Issue 52 September 2014

Measuring and Assessing the Performance of Regulators

Mark Pearson and Simon Haslock*

Recently, the question of how best to measure and assess the performance of regulators has been gaining significant traction in Australia, and also internationally. A range of reports released in Australia over the last 12 months focus on best-practice principles for conducting performance assessments of regulators, such as the Productivity Commission’s (2014) Regulatory Audit Framework and the Australian National Audit Office (2014) revised guide to administering regulation. These reports feed into the broader objectives of the Australian Government, which is committed to regulatory reform, with the stated aims of boosting productivity, increasing competitiveness, reducing unnecessary regulation and lifting regulatory performance. Internationally, the Organisation for Economic Co-operation and Development (OECD) (2014b) has made a contribution to the field through the release in July 2014 of its own best-practice principles for regulatory policy and governance. These principles have been the subject of significant consultation with national regulators over the past two years, including the Australian Competition and Consumer Commission (ACCC). This article provides some insight on the key elements of the OECD principles, while also noting the ongoing work that is being conducted by the OECD’s Network of Economic Regulators to devise a fit-for-purpose performance assessment framework for economic regulators.

Background

In 2012, the OECD’s Council on Regulatory Policy and Governance made a number of recommendations focused on developing a systematic governance framework that could deliver ongoing improvements to the quality of regulation in member countries. One of these recommendations (OECD 2014a) was that countries develop ‘a

consistent policy covering the role and functions of regulatory agencies in order to provide greater confidence that regulatory decisions are made on an objective, impartial and consistent basis, without conflict of interest, bias or improper influence’. This recommendation has acted as the impetus for the OECD’s work on best-practice principles for regulatory policy and governance in the intervening period.

The Council’s recommendations were the result of assessments made by the OECD’s Regulatory Policy Committee, established in 2009 to provide intellectual and practical support to countries in their regulatory reform efforts. OECD policy analysts had identified a gap in support mechanisms for countries facing reform pressures, and established the Regulatory Policy Committee in response. The Regulatory Policy Committee aims to provide a platform to help countries adapt regulatory policies, tools and institutions and through that, support member countries to undertake effective regulatory reform. It has a broader remit than economic regulation per se, which led to the more recent decision to establish the Network of Economic Regulators.

Contents

Lead Article 1

From the Journals 7

Regulatory Decisions in Australia and New Zealand 10

Notes on Interesting Decisions 16

Regulatory News 19

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The establishment of the Network of Economic Regulators was first considered at an April 2012 meeting of the Regulatory Policy Committee, where two major themes emerged. Firstly, appropriate governance models for regulators, including the institutional setting; and, secondly, the criteria that relate to a world-class regulator. The Regulatory Policy Committee decided to sponsor the Network of Economic Regulators on the basis that effective economic regulation is a fundamental pillar of economic reform and development.

The Network of Economic Regulators aims to be a forum in which regulators can develop best practices, identify key operational principles, provide advice on challenges and how to overcome them, and develop case studies for the benefit of member countries and their reform processes.

The Network of Economic Regulators considers the ability to move away from a pure sectoral approach (that is, communications, energy, post, ports) allows a much broader perspective to be brought to bear on regulatory issues, thereby improving the performance of individual regulators and the policy processes underpinning them.

The OECD’s Best Practice Principles for Regulatory Policy

The OECD Best Practice Principles for Regulatory Policy seek to construct an overarching framework to support initiatives to drive further performance improvements across regulatory systems in relation to national regulatory bodies or agencies. The OECD considers that efficient and effective regulators, with good regulatory management and governance practices, are needed to administer and enforce regulations.

Regulatory activity has become increasingly important in the modern state in both policy formation (regulatory design) and in policy execution (regulatory delivery) because regulators have special expertise in drawing on the relevant evidence from the natural and social sciences, including economics, finance and behavioural theory (OECD 2014b).

While the OECD acknowledges that there are different institutional models for regulators, it considers improving the governance arrangements of regulators can benefit the community by enhancing the effectiveness of regulators, and, ultimately, the achievement of important public policy goals.

The OECD (2014b, p. 19) has identified two broad aspects of governance relevant to regulators, which are:

external governance (looking out from the regulator) – the roles, relationships and distribution of powers and responsibilities between the legislature, the minister, the

ministry, the judiciary, the regulator’s governing body and regulated entities; and

internal governance (looking into the regulator) – the regulator’s organisational structure, standards of behaviour and roles and responsibilities, compliance and accountability measures, oversight of business processes, financial reporting and performance management.

The OECD Best Practice Principles for Regulatory Policy mainly focus on external governance arrangements and their effect on the performance of regulators. However, some important elements of internal governance are addressed, including performance evaluation for regulators. Internal governance is the main focus of this article.

The OECD has identified seven principles for good governance, being:

role clarity;

preventing undue influence and maintaining trust;

decision making and governing body structure for independent regulators;

accountability and transparency;

engagement;

funding; and

performance evaluation. Below is a summary of some of the key guidance provided by the OECD in relation to measuring and assessing the performance of regulators. Where relevant, the ACCC’s approach to these issues has been drawn upon as a case study in the Australian context.

Accountability and transparency

The OECD suggests that a good mechanism for ministers and regulators to achieve clear expectations is for ministers to issue a statement of expectations to each of their regulators. These statements should outline relevant government policies, including the government’s current objectives relevant to the regulator, and any expectations on how the regulator should conduct its operations (OECD 2014b, pp. 81-82). The regulator should then formally respond by outlining how it proposes to meet the expectations of government in its corporate plan or a statement of intent. This document should include key performance indicators (KPIs) agreed with the relevant minister.

This process is already in place in Australia. Earlier this year, the Australian Government issued its Statement of Expectations to the ACCC and other regulators (Australian Treasury 2014a). The ACCC responded in turn with a Statement of Intent (ACCC 2014a). The ACCC has published both documents on its website for review by the public.

In addition to publishing objectives, the OECD recommends that regulators produce and publish

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clear operational policies covering compliance and also enforcement and decision reviews. The regulator should also disclose what rules, data and informational inputs will be used to make decisions (OECD 2014b). The ACCC already implements these measures, updating the ACCC Compliance and Enforcement Policy on a regular basis to ensure its priorities and strategies remain relevant (ACCC 2014a). The ACCC also provides public versions of all draft and final regulatory determinations on its website.

Performance evaluation

The OECD notes that it is important that regulators are aware of the impacts of their regulatory actions and decisions. This will help drive improvements and enhance systems and processes internally. It also helps to build confidence in the regulatory system. The OECD considers this is best achieved by the identification and implementation of performance measures (OECD 2014b, p. 107).

The OECD recommends that the regulator should report against a comprehensive set of meaningful performance indicators, set with reference to the goals it is expected to achieve. These indicators should incorporate quantifiable aspects of the regulator’s activities that provide metrics to assess its performance and the costs that it imposes (OECD 2014b, p. 107). Regulators should consider which operational indicators can be used to demonstrate the systems, processes and procedures that are applied within the organisation to complete tasks. In addition, regulators should consider which outcome indicators can be linked to their actions to demonstrate the overall strategic results of regulatory intervention (for example, investment in infrastructure) (OECD 2014b, p. 106).

The OECD suggests that regulators should conduct internal performance evaluations as part of good internal governance practices. These should be complemented by external evaluations. The OECD notes that, while regulators have a number of audiences for their performance evaluation, including government, regulated entities and citizens, the main purpose of the evaluation should be towards achieving self-improvement and accountability (OECD 2014b, p. 108).

Traditionally, the ACCC’s primary reporting mechanism on its performance has been its Annual Report, which has been produced in conjunction with the Australian Energy Regulator.

1 This report has

responded to the framework in the Treasury portfolio

1 Available at: http://www.accc.gov.au/publications/accc-aer-

annual-report

budget statements, which outlines a number of outcomes the ACCC is expected to achieve during a financial year (Australian Treasury 2014b). The Annual Report provides a detailed account of deliverables against each of these outcomes.

The ACCC, along with all other Commonwealth entities, is currently working with the Australian Government in relation to the development of a Commonwealth Performance Framework. The Public Governance, Performance and Accountability Act 2013 (PGPA Act), which came into effect on 1 July 2014 and replaced the Financial Management and Accountability Act 1997, established the Performance Framework as one of its four core objectives. The Performance Framework is being developed to promote improvements in the quality, reliability, and availability of descriptive and instructive information about the non-financial performance of Commonwealth entities.

The Public Governance, Performance and Accountability Act 2013 establishes a number of requirements that are related to the development of the Performance Framework (Parliament of the Commonwealth of Australia, 2013). These include:

a new requirement that all Commonwealth entities prepare a Corporate Plan;

a new requirement that all Commonwealth entities prepare an Annual Performance Statement; and

a restatement of the current requirement for all Commonwealth entities to prepare Annual Reports.

Performance statements will be part of an integrated Annual Report that brings together information about an entity’s strategy, governance and financial and non-financial performance. A copy of the statement will need to be included in an entity’s Annual Report when it is tabled in Parliament.

Development of a Performance Assessment Framework for Economic Regulators

Building on the OECD Best Practice Principles for Regulatory Policy, the OECD’s Network of Economic Regulators is committed to developing a Performance Assessment Framework for Economic Regulators. It is widely accepted that there are many challenges in performance measurement and assessment and developing appropriate KPIs for economic regulators. For example, gaming by businesses can impact significantly on the ability of regulators to achieve desired outcomes in regulatory processes. However, these challenges must be overcome as governments, parliaments and other stakeholders are increasingly demanding assurances around effectiveness, efficiency and impact of economic regulators.

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Regulators play key roles in various industry sectors, thereby influencing growth, development and investment. Having an effective measurement framework is likely to lead to better outcomes for society, by providing for robust benchmarking of regulatory performance to ensure regulators are meeting the objectives they were established for and achieving value for money.

Discussions amongst regulators at the OECD have been aimed at identifying ways of measuring their performance and impact on the sectors they regulate, and economic welfare more broadly. These discussions have included case studies on the development of KPIs, regulatory audits (especially of economic regulators undertaken by the UK’s National Audit Office)

2 and papers prepared by the

Secretariats of the Regulatory Policy Committee and the Network of Economic Regulators.

The Performance Assessment Framework for Economic Regulators that is being developed under the auspices of the Network of Economic Regulators aims to operationalise in an economic regulatory context the principles of the Regulatory Policy Committee’s Framework for Regulatory Policy Evaluation (OECD 2014a). This framework was developed by the OECD Secretariat, working with member countries, to address the lack of guidance on exactly how to undertake assessments of regulatory policy within individual jurisdictions. There was also a recognised need to develop appropriate methodological tools to assist jurisdictions and those undertaking the assessments. The aim of the framework is to provide countries with a methodology that assists the capture of information sufficient to allow them to make decisions about where to invest scarce resources.

While there are particular issues relevant to specific sectors, there is a growing understanding of the broad similarities and issues that all economic regulators face in measuring and assessing performance. The Performance Assessment Framework for Economic Regulators recognises and will build on the efforts of a number of economic regulators to develop assessment processes for their own performance. It aims to help fill any gaps in particular regulators’ work programs and to provide solutions across sectors through a common framework for regulatory learning.

The Network of Economic Regulators is currently testing the Performance Assessment Framework for Economic Regulators, including utilising a questionnaire to assess Columbia’s

2 Examples of these regulatory audits are available at:

http://www.nao.org.uk/search/type/report/.

telecommunications regulator, the Comision de Regulacion de Comunicaciones. A set of recommendations will flow from this assessment and include:

information on approaches and methodologies for setting measureable objectives and targets;

methodologies for developing specific indicators;

measurement techniques; and

the institutional processes and arrangements for using performance measurement.

The Australian Context

As noted earlier, a number of reports have been released in Australia focusing on the performance of regulators. Two in particular provide frameworks for measuring and assessing this performance. The Productivity Commission’s Regulatory Audit Framework (2014) offers guidance for auditing the performance of regulators in regard to the compliance costs they impose on business and other regulated entities. The Australian National Audit Office’s Better Practice Guide – Administering Regulation (2014) has a broader focus, providing a framework to assist regulators in assessing the quality of their administrative practices and identifying improvements that can be made.

The Productivity Commission (2014, p. 5) asserts that the need for a process to audit regulator performance reflects ongoing concerns that the way some regulators interact and engage with businesses and other regulated entities is responsible for much of the unnecessary cost imposed by regulation. The Productivity Commission (2014, p. 5) considers there is currently ‘no systematic process by which the costs that regulators impose on business are assessed ex post.’

The Productivity Commission’s (2014, pp. 9-10) audit framework sets out a number of steps that it considers should be taken by a regulator to measure and assess its performance, with particular regard to the compliance costs they impose. These steps are:

1. Establishment of an agreed set of indicators of good performance appropriate to each regulator. This should be documented in an audit plan. It should form part of the regulator’s stated intent for administering their regulations in a way that imposes the least cost on business.

2. Collection of information and data on the chosen indicators. The audit plan should set out what data should be collected for annual reporting, and the form in which they should be collected and collated.

3. Conduct of an external audit. A written assessment of the regulator’s performance

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against the indicators should be published in a central location.

The Productivity Commission notes (2014, p. 15) that a key step in developing an audit plan is identifying the particular metrics or measures that will reflect achievement of the chosen indicators (step one, above). The Productivity Commission suggests that the metrics chosen should ideally reflect outcomes rather than processes or outputs.

The Australian National Audit Office considers that well-documented and carefully-structured management systems and procedures provide a regulator with the tools to define regulatory outcomes and administrative priorities, and measure and report on performance (Australian National Audit Office 2014, p. 27). The Australian National Audit Office suggests that performance information systems should be designed to inform internal and external stakeholders about the performance of the agencies’ activities including (p. 27):

whether the regulation is achieving the Australian Government’s stated policy objectives;

the costs associated with administering the regulation; and

the cost of compliance for regulated entities.

The Australian National Audit Office outlines a set of key considerations in measuring, reporting and reviewing regulatory performance. These considerations are similar in nature to the steps proposed by the Productivity Commission. Initially, the Australian National Audit Office suggests that a regulator should define relevant effectiveness and efficiency indicators to support reporting for internal management and external accountability purposes. The regulator should then undertake periodic reviews to consider the effectiveness of the regulation being administered, and the efficiency and effectiveness of the agency’s regulatory administration. Throughout this process the regulator should draw on stakeholder views to understand their expectations about the effectiveness of the regulatory regime, whether an appropriate balance is being achieved in relation to risk, the underlying regulatory burden, and the efficiency and effectiveness of the regulatory regime (Australian National Audit Office 2014, p. 28).

To summarise, there are some recurring themes across the Australian and OECD reports in relation to how regulators (or third parties) should go about measuring and reporting on their performance, including:

clearly define a set of indicators of good performance that are relevant to the regulator’s specific responsibilities and activities – this process should involve stakeholder input;

identify appropriate data and information that can be used to measure performance against the indicators;

conduct regular audits/assessments of performance against the indicators – this should include structured feedback from stakeholders subject to the regulation; and

publish findings in a public forum, such as on the regulator’s website.

Conclusion

This article has demonstrated there is significant interest in governmental and regulatory policy circles regarding how best to measure and assess the performance of regulators. Regulators themselves are increasingly interested in implementing systems that allow them to closely analyse their own performance and focus on areas for improvement. As an example, the ACCC has implemented a number of self-reporting measures relevant to the conduct of its responsibilities, including producing a detailed Annual Report and publishing its priorities in relation to its enforcement and compliance functions on a regular basis. The ACCC will also continue to work closely with the Australian Government to implement the new Performance Framework for Commonwealth entities.

In addition to domestic developments, the OECD’s Regulatory Policy Committee, and Network of Economic Regulators, are building a significant body of theory and practical advice relating to the performance of regulators that can be implemented across international jurisdictions. International forums such as these are particularly useful in stimulating the exchange of ideas and experiences across a wide range of regulators. These exchanges help to illuminate what is ‘best practice’ in the international context. The ACCC will continue its active engagement in these forums to ensure that it remains abreast of new thinking and approaches that can be applied to the measurement and assessment of its performance.

References

ACCC (2014a), ACCC Compliance and Enforcement Policy, February. Available at: http://www.accc.gov.au/publications/compliance-and-enforcement-policy.

ACCC (2014b), Accountability – Government Expectations. Available at: http://www.accc.gov.au/about-us/australian-competition-consumer-commission/accountability.

Australian National Audit Office (2014), Better Practice Guide – Administering Regulation: Achieving the Right Balance, June. Available at:

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http://www.anao.gov.au/Publications/Better-Practice-Guides/2013-2014/Administering-Regulation.

Australian Treasury (2014a), Statements of Expectations, available at: http://www.treasury.gov.au/Policy-Topics/PublicPolicyAndGovt/Statements-of-Expectations.

Australian Treasury (2014b), Treasury Portfolio Budget Statements 2014-15 – ACCC. Available at: http://www.treasury.gov.au/PublicationsAndMedia/Publications/2014/PBS-201415/Report/ACCC.

OECD (2012), Recommendation of the Council on Regulatory Policy and Governance, March 2012 available at: http://www.oecd.org/gov/regulatory-policy/2012recommendation.htm.

OECD (2014a), OECD Framework for Regulatory Policy Evaluation, June. Available at: http://www.oecd.org/regreform/framework-for-regulatory-policy-evaluation.htm.

OECD (2014b), OECD Best Practice Principles for Regulatory Policy: The Governance of Regulators, July. Available at: http://www.oecd-ilibrary.org/governance/the-governance-of-regulators_9789264209015-en

Parliament of the Commonwealth of Australia (2013), Public Governance, Performance and Accountability Act 2013, Replacement Explanatory Memorandum, pp. 32-33. Available at: http://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r5058_ems_7f7ccf98-dd9f-40a6-949c-fdd9a2830ddf/upload_pdf/381803.pdf;fileType=application%2Fpdf

Productivity Commission (2014), Regulatory Audit Framework, March. Available at: http://www.pc.gov.au/research/submission/regulator-audit-framework

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Critical Issues in Regulation – From the Journals

The Causes and Effects of Deregulation, Paul

MacAvoy and Richard Schmalensee (eds), Edward

Elgar Publishing, 2014.

This is a collection of previously published articles on

the causes and effects of deregulation in the areas of

energy, telecommunications and transport. Edited by

Paul MacAvoy and Richard Schmalensee (who

provide an original introduction), it brings together in

two volumes 41 articles published between 1968 and

2012. The articles are collected under these

headings: overview; railroads; trucking; airlines;

natural gas; telecommunications; electricity and cable

television. Contributors include: Severin Borenstein,

Jerry Hausman, Paul Joskow, Alfred Kahn, Roger

Noll, Sam Peltzman, Nancy Rose, George Stigler,

Peter Temin, and Michael Whinston. There are many

seminal articles reproduced, including: Stigler’s

theory of regulation; Noll’s article on the politics of

regulation; two articles by Wesley Wilson on railroad

deregulation; Kahn’s article on vested interests and

deregulation in airlines; Macavoy’s article on the

natural gas market; Hausman on regulated costs and

prices in telecommunications; and Joskow and

Schmalensee on incentive regulation of electricity

utilities.

This note is based on information about this

collection available at: http://www.e-

elgar.com/bookentry_main.lasso?id=14986

[accessed on 16 September 2014].

On Welfare Losses due to Imperfect Competition, Robert Ritz, Journal of Industrial

Economics, March 2014, 62, 1, pp. 167-190.

This paper is about welfare (efficiency) losses due to

imperfect competition; particularly where businesses

pursue objectives other than profit maximisation.

While it is primarily a theoretical paper, the author,

Robert Ritz, makes reference to a number of

empirical studies; particularly in wholesale electricity;

and in banking and finance. The paper features a

comprehensive reference list containing 44 items.

The author contends that existing contributions to the

literature on the efficiency effects of imperfect

competition assume, either explicitly or implicitly, that

firms are profit-maximisers. In contrast, Robert Ritz

focuses on situations where corporate managers and

executive compensation (strategic incentives) place

significant emphasis on measures of business size,

such as sales revenue or market share. Ritz

presents evidence suggesting that, in practice,

competition for rankings in ‘league tables’ – based on

size rather than profits – plays an important role in

many areas.

How large are efficiency losses due to imperfect

competition when firms employ such strategic

incentives? Ritz observes that, while it is well-known

that such departures from profit-maximisation lead to

lower prices, only very little attention has been paid

actually to quantifying their welfare impact. Welfare

losses are defined in terms of the loss of economic

surplus as a proportion of maximum possible

economic surplus. Ritz’s theoretical model with n

symmetric businesses suggests equilibrium welfare

losses are of order 1/n4, and thus ‘vanish extremely

quickly’ as the number of businesses increases.

Efficiency losses are less than five per cent for many

empirically relevant market structures. This is

despite significant business asymmetry and industry

concentration. These efficiency losses can be

estimated using only basic information on market

shares. These results apply to strategic forward

trading; for example, in restructured electricity

markets.

This paper is available by subscription to the Journal

of Industrial Economics.

Running Out of Power? Commission Moderates State Aid for Electricity, Michael

Kraus, Oxera Agenda, April 2014.

This brief article is about the European Commission’s

revised Environmental and Energy Aid Guidelines.

The article has many detailed references relating to

these guidelines. Many of these references relate to

the German reaction to the guidelines and are in the

German language.

According to the author, the guidelines ‘have had a

rocky start, fostered by an intense consultation

process with member states’. As the guidelines

eventuated, the proposed technological neutrality

became subject to concessions and existing state aid

to renewable generation was allowed to continue.

According to Michael Kraus, ‘the new Guidelines are

less revolutionary than might have been expected

when the draft emerged towards the end of 2013’.

In the shorter term, member states will retain

substantial discretion as to their energy policy. This

discretion is particularly valued in the context of

Germany’s Energiewende. For example, the German

Government had opposed technological neutrality.

The Guidelines allow a transition en douceur, where

the new rules suggest that renewable energy sources

should become ‘grid-competitive’ between 2020 and

8

2030, with current subsidies eventually being phased

out.

This article is available by subscription to Oxera

Agenda.

Canadian Wireless Market Performance and the Potential Effect of an Additional Nationwide Carrier, Brattle Group for the

Canadian Commerce Commission, 12 May 2014.

Canada’s Competition Bureau engaged The Brattle

Group to evaluate the competitiveness of the

Canadian wireless market to provide evidence in

relation to the Canadian Radio-television and

Telecommunications Commission’s (CRTC’s) review

of wholesale mobile wireless services. The resulting

study was prepared by Kevin Hearle, Giulia McHenry,

James Reitzes, Jeremy Verlinda and Coleman

Bazelon. The study is 144 pages in length including

the authors’ biographies and three appendices.

The authors first assess existing market power in the

Canadian wireless market based on wireless

performance metrics and the potential profitability of

the wireless carriers. To expand the analysis, the

competitive impact on prices and consumer surplus

from the introduction of an additional nationwide

carrier is estimated. The analyses build on previous

research and offer new approaches to evaluating the

effect of additional competition on wireless customers

and incumbent producers.

The engineering of wireless networks and scarcity of

wireless spectrum imply a trade-off between the

benefits of increased competition and the higher

costs resulting from individual carriers having less

spectrum with which to build their networks. The

analysis attempts to quantify some of these added

benefits and costs.

Canadian wireless industry metrics suggest that

additional competition would benefit consumers.

Canadian wireless carriers are highly concentrated,

especially at the province-level. At a nationwide

level, international comparisons, particularly with the

United States, suggest to the authors that Canadian

wireless is underperforming in several respects.

TELUS and Rogers Communications’ wireless

businesses are generally making above-normal

returns on their capital employed, consistent with the

exercise of market power. Using stock price effects,

the authors predict that the entry of an additional

nationwide carrier would increase consumer surplus

by approximately $1 billion annually, which

represents five per cent of 2012 industry revenues.

The authors estimate that an additional nationwide

carrier would expand wireless penetration from 78 to

81 per cent, and drive down incumbents’ average

prices by about two per cent.

The analysis in the fourth section estimates the

additional network infrastructure cost to existing

carriers that arises from the emergence or entry of an

additional nationwide carrier. The market simulation

model does not explicitly consider whether entry

could significantly affect the fixed costs of network

build-out facing the emergent or incumbent wireless

carriers. Providing mobile wireless services requires

building capital-intensive networks that use a specific

scarce resource; radio spectrum. The engineering of

wireless networks and scarcity of wireless spectrum

imply a trade-off between the benefits of increased

competition and the higher costs resulting from

individual carriers having less spectrum with which to

build their networks. The authors attempt to quantify

some of these added costs.

This report is available by following this link:

http://t.e2ma.net/message/as6jg/ya16kg [accessed

on 16 September 2014].

Analysis of Postal Price Elasticities, Office of

Inspector General United States Postal Service,

White Paper, 1 May 2013.

This paper analyses the effect of increases in postal

prices on revenue and volume. Analysis of the

demand for postal products in the United States

shows that price increases will increase revenues,

suggesting that demand for postal services is price

inelastic. Recent events such as the global financial

crisis and the growth of use of the Internet do not

change this broad conclusion. The Office of

Inspector General United States Postal Service

(USPS) retained Lauritis R. Christensen Associates,

an economic consulting firm, to conduct the analysis.

Christensen Associates reviewed the demand

models that the USPS filed with the Postal

Regulatory Commission in 2011 and 2012. The

USPS uses these models in financial forecasting,

pricing, marketing, and planning processes.

Christensen Associates also reviewed other

econometric formulations of the demand for postal

services. This econometric evaluation of Postal

Service price elasticities uses both the USPS’s

models and an alternative set of models. The paper

is in the form of a detailed technical report, including

several references to relevant literature.

Price elasticity is estimated using econometric

models of product demand. The USPS has produced

its econometric demand models for more than 30

years with periodic refinements to reflect changes in

both the economy and in the postal industry. Some

argue that the models provide evidence of an upward

trend in price elasticity and that the price elasticity of

postal customers is ‘in flux’ due to the increase of

electronic alternatives and the disruptive effects of

the global financial crisis. In order to test these

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propositions, the Christensen study examines the

demand for three classes of market dominant postal

services: First-Class Mail, Standard Mail, and

Periodicals. These classes account for the majority

of mail volume, mail revenue, and contribution to

institutional costs. The study finds that the demands

for all three categories is inelastic with respect to

price, and – if anything – is getting more inelastic

over time. The overall conclusion is that:

to the extent the analysis shows own price

elasticities to be ‘in flux’, the changes are

predominantly in the direction of lower own price

elasticities. Additionally, the data do not suggest

that the inclusion of older observations in the

demand regressions result in smaller elasticity

estimates. The overall picture is that while

demands for market dominant postal products

have shifted substantially due to a combination

of factors other than postal prices, they remain

own price inelastic.

This report is available at:

https://www.uspsoig.gov/sites/default/files/document-

library-files/2013/rarc-wp-13-008.pdf [accessed on 16

September 2014].

Guaranteed Return Regulation: A Case Study of Regulation of Water in California,

Michael Crew and Rami Kahlon, Journal of

Regulatory Economics, 46, 1, August 2014, pp. 112-

121.

This paper analyses some of the forces at work that

are leading to the development of a new form of

regulation in the energy and water sectors in

California. This is known as guaranteed return

regulation (GRR). The authors argue that a previous

regulatory approach – rate-of-return regulation (ROR)

also known as cost of service regulation – resulted in

excessive use of both capital and other inputs. Price

cap regulation (PCR) had then been proposed for its

superior efficiency properties. In energy and water

there has now been a move away from PCR into an

extended form of ROR, referred to as GRR. The

article is substantially non-technical in its exposition

and has a reference list containing eight items.

According to the authors, GRR is employed to

implement a policy, namely taxation, that legislators

are unwilling to apply by transparent methods, but

are willing to apply opaquely through the regulatory

process. The authors argue that GRR does not

promote efficiency and, in their view, the California

experience shows the guarantees it provides are

limited.

In summary, Michael Crew and Rami Kahlon argue

that the success of GRR in California has been mixed

and it should be considered to be a ‘work in progress’

and ‘open to improvements’. Some suggested

improvements are outlined in the paper.

This article is accessible by subscription to the

Journal of Regulatory Economics.

The Design of Light-handed Regulation of Airports: Lessons from Experience in Australia and New Zealand, Margaret Arblaster,

Journal of Air Transport Management, 38, 2014, pp.

27-35.

This paper is about the use of light-handed regulation

as an alternative to traditional regulation that involves

the direct determination of prices and quality of

service. Margaret Arblaster observes that experience

with light-handed regulation of airports is primarily

confined to Australia and New Zealand. The paper

contains an examination of the design features of

light-handed regulation in these two countries in

relation to their stated objectives. The analysis is

qualitative in nature, and a comprehensive reference

list of 44 items is presented.

The author identifies important aspects associated

with the design of light-handed regulation including

the incorporation of a credible threat of stronger

regulation, and the characteristics of this, and an

apparent trade-off in objectives achieved with

different approaches to light-handed regulation.

This article is available by subscription to the Journal

of Air Transport Management.

The Decoupling of Treasury Yields and the Cost of Equity for Public Utilities, Kurt G

Strunk, NERA Energy Policy Briefing Note, 13 June

2014.

In this NERA briefing note, Kurt Strunk examines how

– in the context of utility regulation in the United

States – capital market conditions affect the cost of

capital for utilities. The note contains a table and four

references.

The note includes a table covering the years 2006 to

2013 showing the thirty-year Treasury yield (that

decreased substantially from 4.91 per cent to 2.91

per cent before increasing slightly in 2013) and a

measure of the average allowed return (ROE) for

electric utilities (which ‘hovered’ in the range of 10.0

to 10.5 per cent). According to the author, if the

market risk premium had been unchanged during this

period, the allowed ROEs (‘which themselves are

based on the capital market data put forth by public

utilities and intervenors alike’) would have declined

as much as the Treasury yields did.

10

The author observes that:

Anyone who has attended a rate case hearing

recently is well aware that the debate over the

rate of return now tends to focus on the

implications for public utility investors of a largely

unprecedented trend in the current capital

markets – specifically, intervention by the

Federal Reserve in the government bond

market.

The current capital market conditions are unique from

a historical perspective. No US government policy

intervention in recent history has had such an

important effect on the risk-free rate relied upon by

public utility analysts in their routine modelling of

market and utility-investor behaviour.

The author concludes that it is important to ensure

that the rate of return somehow incorporates the

current forward-looking investor expectations and

does not rely solely upon unadjusted historic

expectations.

The article is available at: http://www.nera.com/nera-

files/PUB_Equity_Risk_Premium_Utilities_0614(1).pd

f [accessed on 16 September 2014].

11

Regulatory Decisions in Australia and New Zealand

Australia

Australian Competition and Consumer Commission (ACCC)

TPG FTTB Deployment – No Action

On 11 September 2014 the ACCC announced that it

has completed its investigation into a complaint that

TPG Limited’s (TPG) plans to connect large

apartment buildings in metropolitan areas to its

existing fibre networks and to use fibre-to-the-

basement technology to supply high-speed

broadband services to residents of those buildings

would be in breach of the ‘NBN level playing field

provisions’ in the Telecommunications Act. The

ACCC does not intend to take any action to prevent

TPG implementing its plans, having concluded that

TPG’s planned deployment is permitted under the

Telecommunications Act. Media Release on TPG

here

GrainCorp’s Wheat Port Access Undertaking – Draft Decision

On 21 August 2014 the ACCC the issued a draft

decision proposing to consent to GrainCorp’s

application to extend and vary its 2011 Port Terminal

Services Access Undertaking. GrainCorp’s 2011

Undertaking governs third-party access to port

terminal services at GrainCorp’s East Coast

Australian bulk grain ports. The undertaking is

currently set to expire on 30 September 2014 with a

mandatory code of conduct anticipated to commence

on 1 October 2014. Media Release on Graincorp

Emerald’s Wheat Port Access Undertaking – Draft Decision

On 7 August 2014 the ACCC issued a draft decision

proposing to consent to Emerald’s application to

extend and vary its 2013 Port Terminal Services

Access Undertaking. The 2013 Undertaking governs

access to port terminal services at Melbourne Port

Terminal and is currently set to expire on 30

September 2014. A mandatory code of conduct is

anticipated to commence on 1 October 2014.

Emerald MR here

Fixed-line Services Inquiry Announced

On 24 July 2014 the ACCC released a discussion

paper seeking views on setting primary prices for the

regulated fixed-line services supplied using Telstra’s

copper network. This consultation is part of the

ACCC’s inquiry into making final access

determinations for the seven regulated fixed-line

services. The primary prices are the monthly and

usage charges paid for the regulated services and

include charges for access services (such as the

unconditioned local loop service) and for resale

services (such as wholesale line rental and wholesale

ADSL). Telstra’s-fixed-line-services-and-

transmission-services

Air Services Australia Prices

On 26 June 2014 the ACCC announced that it had

decided it had no objection to the proposed price

increases by Air Services Australia. Airservices

Australia provides air traffic control and aviation fire-

fighting and rescue services to airports and airlines.

ACCC-does-not-object-to-price-increases-by-

airservices-australia

CBH Wheat Port Access Undertaking – Draft Decision

On 26 June 2014 the ACCC issued a draft decision

to accept Co-Operative Bulk Handling Limited’s

(CBH) proposed 2014 Port Terminal Services Access

Undertaking, subject to drafting amendments. The

undertaking would govern access by third-party

exporters to CBH’s port terminal services for bulk

wheat export at CBH’s four port terminals in Western

Australia. ACCC draft-decision-to-approve-cbh-

long-term-arrangements

Australian Energy Regulator (AER)

National Electricity Law and National Gas Law – Quarterly Compliance Report

On 1 August 2014 the AER released its quarterly

compliance report on the National Electricity Law and

the National Gas Law. Compliance Report here

Individual Exemptions for the Sale of Electricity

On 2 September 2014 the AER announced the grant

of individual exemptions to supply electricity to: SE

Solar 3; PPA Direct; PPA Energy; PPA Farm; PPA

Electrical; PPA Now; PPA Solar; PPA Green;

Pietermaritzburg; and Green Urban Group.

On 29 July 2014 the AER announced the grant of

individual exemptions to supply electricity to: Nue

Pty Ltd; ET Solar Australia; Soly; Skycell; ePho; RF

Industries; and SE Solar 1 and SE Solar 2.

On 3 July 2014 the AER announced the grant of

individual exemptions to supply electricity to: RE

Power Shoalhaven; Suntrix; Sungevity; Geits ANZ;

12

Solar Professionals; Zero Cost Solar; Infinity Solar;

Applied Environmental Solutions; Solar Financial

Solutions; and Voltaic Energy.

ACTEW/AGL’s Regulatory Proposal – Issues Paper

On 25 July 2014 the AER issued an Issues Paper on

ACTEW/AGL’s Regulatory Proposal. AER MR here

Annual Tariff Variations Accepted

On 26 June 2014 the AER accepted annual tariff

variations for: Envestra Queensland Gas Network;

Dawson Valley Pipeline; and Allgas Energy Gas

Network.

Australian Energy Market Commission (AEMC)

Distribution Network Prices – New Rules Proposed

See ‘Notes on Interesting Decisions’

2014 Retail Competition Review Published

On 22 August 2014, the AEMC released its report on

competition in retail electricity and gas markets for

small customers in the National Electricity Market,

along with new research on consumer experiences.

The level of competition ranges from effective in

South East Queensland, New South Wales, Victoria,

and South Australia, to less effective in the Australian

Capital Territory and is yet to emerge in Tasmania

and regional Queensland. Competition in retail gas

markets is at different stages of development

between and within states and territories. Access

the AEMC review through here

National Competition Council (NCC)

Dawson Valley Pipeline – Coverage Revocation Determination

On 8 September 2014 the NCC received Minister

Macfarlane’s decision and statement of reasons.

The Minister's decision was to make a coverage

revocation determination for the Dawson Valley

Pipeline. The Minister’s decision and statement of

reasons are available here.

Envestra’s Queensland Gas Distribution Network – Application for Light Regulation

On 18 August 2014 the NCC received an application

from Envestra Limited under the National Gas Law

for the light regulation of its covered Queensland Gas

Distribution Network which distributes gas in the

Brisbane Region (Brisbane CBD, Ipswich and

suburbs north of the Brisbane River) and Northern

Region (Rockhampton and Gladstone). The

NCC received three submissions in response to its

invitation for submissions on the application by

interested parties. Further information is available

here.

Australian Capital Territory

Independent Competition and Regulatory Commission (ICRC)

ACT Electricity Feed-in Scheme Activity Summary: 30 June 2014

On 2 September 2014 the ICRC released the ACT

electricity feed-in scheme activity summary for 30

June 2014. The ICRC has worked with ActewAGL

Distribution and ActewAGL Retail to improve the

quality of the data. The June 2014 report

incorporates revisions to the data made since the

September quarter 2009. The MR with access to

the report can be accessed here

New South Wales

Independent Pricing and Regulatory Tribunal (IPART)

External Benefits to Public Transport

On 26 August 2014 the IPART released an issues

paper on benefits to the wider community when

people use public transport. This is to determine how

future fares should be set. Fares recover only a

small proportion of the total cost of providing public

transport in Sydney and surrounding areas – the

NSW Government pays the bulk of the cost. When

the IPART determines maximum fares it must decide

how much of the total cost should be paid by those

who use public transport (through fares) and how

much by the NSW community as a whole (through

the Government subsidy). The review will consider

how much car use is avoided when people take

public transport in Sydney, quantifying the net value

of this avoided car use to the community. The IPART

is also considering whether there are other things it

might need to take into account. Information on the

IPART review here

Carbon Tax Repeal – Revised Regulated Gas Prices

On 15 August 2014 the IPART announced it had

agreed to revised regulated retail gas prices for 2014-

15 following the repeal of the carbon tax. The IPART

has reviewed gas retailers’ proposals for revised

prices, and is satisfied that savings from the carbon

tax repeal have been appropriately passed through to

13

customers. IPART MR on Gas Price Effects of

Carbon Tax Repeal

NSW Rail Access Undertaking – Final Decision

On 15 July 2014 the IPART released its final report

on the rate of return and remaining mine life that will

apply to RailCorp’s Hunter Valley Coal Network rail

assets from 1 July 2014. This applies to the five

sectors (21 kilometres) of track between Newstan

and Woodville Junction. IPART Final Decision for

NSW Rail Access Undertaking

Northern Territory

Utilities Commission

New Electricity Licence Granted

On 11 August 2014 the Utilities Commission issued a

licence for the selling of electricity to Rimfire Energy

Pty Ltd in accordance with Part 3 of the Electricity

Reform Act. MR on Rimfire Licence

Queensland

Queensland Competition Authority (QCA)

Regional Feed-in Tariff – Carbon-exclusive

On 5 September 2014 the QCA reminded customers

in regional Queensland that the 9.07 cents/kWh solar

feed-in tariff paid by Ergon Retail will soon be

reduced to 6.53 cents to align with the lower value of

wholesale energy after repeal of the carbon tax.

QCA MR on Carbon-exclusive-regional-feed-in-

tariff

Aurizon Network’s Draft Access Undertaking Withdrawn

On 5 September 2014 the QCA released a Position

Paper titled Long-term framework for SEQ Water

Retailers – Weighted Average Cost of Capital

(WACC). QCA SEQ Water WACC paper

Aurizon Network’s Draft Access Undertaking Withdrawn

On 11 August 2014 the QCA announced that Aurizon

Network had withdrawn its draft access undertaking

and had submitted a revised proposal. MR on

Aurizon DAU

Gladstone Area Water Board Price Monitoring

On 8 July 2014, at the direction of the Treasurer and

Minister for Trade, the QCA announced that it has

commenced a price monitoring investigation into the

Gladstone Area Water Board for its 2015-20 prices.

MR on Review-of-Gladstone-Area-Water-Board’s-

2015-2020-prices

South Australia

Essential Services Commission of South Australia (ESCOSA)

Charter of Consultation and Regulatory Practice

On 10 September 2014 the ESCOSA announced that

it had completed its revised Charter of Consultation

and Regulatory Practice. The revised Charter:

includes revised Commission Values; provides

additional guidance on the methods of engagement

used; and reflects changes in the ESCOSA's

functions in the electricity and gas industry, following

the introduction of the National Energy Customer

Framework and deregulation of energy retail prices in

February 2013. Access Link to revised Charter

Report to the Minister on Retail Energy Prices

On 31 August 2014 the ESCOSA released its 2013-

14 Report to the Minister on Retail Energy Prices in

South Australia, covering gas and electricity prices to

small residential and business customers. Energy

Pricing Report here

Impact of Carbon Tax Repeal on Minimum Retail Feed-in Tariff (R-FiT)

On 24 July 2014 the ESCOSA announced that the

carbon-tax component of the minimum R-FiT

payment amount will no longer apply from 1 July

2014. From 1 July 2014 the minimum R-FiT payment

amount will be 6.0 cents/kWh, compared with 7.6

cents/kWh for the period that there was a carbon tax.

All customers that export energy from qualifying solar

photovoltaic (PV) generators are now entitled to

receive at least 6.0 cents/kWh from 1 July 2014 until

31 December 2014. The ESCOSA will be conducting

a review of the R-FiT to apply from 1 January 2015.

Water and Sewerage Pricing – Release of Draft Report

On 16 July 2014 the ESCOSA released its Draft

Report on Water and Sewerage Pricing Reform.

Follow for Link to Draft Report

14

Tasmania

Office of the Tasmanian Economic Regulator (OTTER)

Electricity Supply Industry Performance and Information Reporting Guideline Revised

On 15 September 2014 the OTTER issued version

2.3 of its Electricity Supply Industry Performance

and Information Reporting Guideline. This

followed a review of the wholesale reporting

requirements imposed on Hydro Tasmania under the

Basslink Ministerial Notice (in force under section 36

of the Electricity Supply Industry Act 1995). The

review identified a number of opportunities to

streamline the reporting processes and remove

duplication. Hydro Tasmania was consulted and

supported the changes.

TasWater Price and Service Plan

In September 2014, TasWater submitted its Price

and Service Plan for 1 July 2015 to 30 June 2018.

TasWater Plan here

Victoria

Essential Services Commission (ESC)

Minimum Feed-in Tariff for 2015

On 20 August 2014 the ESC announced it had

determined the minimum energy value of embedded

generation for 2015 to be 6.2 c/kWh with the carbon

tax removed. Minimum Feed-in Tariff Final

Decision for 2015

Standing Offer Tariffs – Variation following Carbon Tax Repeal

On 21 July 2014 the ESC announced it had

determined that it would allow retailers to vary their

standing-offer tariffs one additional time. The Carbon

Tax Repeal Act requires retailers to pass on to

customers all cost savings resulting from the repeal

of the carbon tax. In Victoria, the Electricity Industry

Act 2000 and the Gas Industry Act 2001 restrict a

retailer from varying its standing offer tariff more than

once every six months. This statutory restriction

could delay when a retailer can pass-through savings

from the removal of the carbon tax to standing offer

customers. The ESC has discretion on whether to

pursue enforcement action against a retailer for

possible breaches of Victorian energy laws. On 18

June 2014, the ESC released a Position Paper, and

invited submissions from stakeholders on its

preferred option, which was to allow retailers to vary

their standing-offer tariffs one additional time to

introduce a carbon price-exclusive standing offer tariff

without invoking enforcement action from the ESC.

ESC Final Decision

Western Australia

Economic Regulation Authority (ERA)

Goldfields Gas Pipeline – Revised Access Arrangements

On 15 August 2014 Goldfields Gas Transmission Pty

Ltd (GGT), on behalf of Southern Cross Pipelines

Australia Pty Ltd, Southern Cross Pipelines (NPL)

Australia Pty Ltd and Alinta DEWAP Pty Ltd,

submitted proposed revisions to the access

arrangement for the Goldfields Gas Pipeline (GGP) to

apply from 2015 to 2019. GGT is the complying

service provider for the covered pipeline. The ERA is

seeking public comment on GGT’s proposed

revisions to the access arrangement for the GGP.

The ERA MR is available here.

Microeconomic Reform – Final Report Released

See ‘Notes on Regulatory Decisions’.

New Zealand

New Zealand Commerce Commission (CCNZ)

Court of Appeal Judgment on UBA – CCNZ Response

On 8 September 2014 the CCNZ responded to the

Court of Appeal judgment in relation to Chorus’s

appeal against the CCNZ’s November 2013 decision

setting benchmarked cost-based prices for the

unbundled bitstream access (UBA) service. The

decision upholds the previous High Court decision in

April 2014. The Telecommunications Commissioner

said that ‘the decision will allow the Commission and

industry to focus on the cost modelling required to set

the UBA price in accordance with the “final pricing

principle”'. CCNZ response to Court of Appeal

Transpower’s Allowances and Quality Standards – CCNZ Final Decision

On 29 August 2014 the CCNZ released its final

decision on the allowances for operating and base

capital expenditure, quality standards, and reporting

requirements that will be used to set Transpower’s

price-quality path for the next five-year regulatory

period which begins in April 2015. The price-quality

path sets the maximum revenues Transpower can

recover and will be finalised in late November 2014

15

when the cost of capital for the regulatory period has

been set and other components of the path finalised.

CCNZ Transpower Final Decision

CCNZ Draft Decision on the Weighted Average Cost of Capital

See ‘Notes on Interesting Decisions’.

Chorus’s Proposed Changes to Regulated Broadband – CCNZ to Investigate Complaint

On 22 July 2014 the CCNZ announced it will

investigate a complaint that Chorus’s proposed

changes to the regulated unbundled bitstream access

(UBA) service are an enforceable breach under the

Telecommunications Act. The CCNZ received a

complaint from Telecom about the changes to the

(UBA) service. MR on complaint about UBA

Cost Modelling on UCLL and UBA – CCNZ Consultation

On 9 July 2014 the CCNZ released a consultation

paper seeking views on a number of decisions in

relation to the cost models it will build to price the

unbundled copper local loop (UCLL) service and the

unbundled bitstream access (UBA) service. The

paper sets out its views on: the regulatory

framework; the type of hypothetical replacement

network it will be the UCLL service, it will model a

fibre-to-the-home network, with fixed wireless in

remote areas; and for the UBA service it will model

costs using Chorus’s copper-based inputs. In both

models it proposes taking advantage of third-party

assets where possible. CCNZ Cost Modelling

Consultation

Assessment of Unregulated UBA Services – CCNZ Releases Issues Paper

On 7 July 2014 the CCNZ released an issues paper

relating to its assessment of whether the two new

unregulated UBA services, Boost HD and Boost

VDSL, proposed by Chorus on 14 May 2014, fall

within the category of regulated UBA service. The

issues paper seeks to clarify Chorus’s proposed

changes to the unbundled bitstream access (UBA)

service and obtain views and information from

industry participants for purposes of the assessment.

Chorus is proposing a number of changes to the UBA

service, including: offering two new unregulated UBA

services, Boost HD and Boost VDSL; withdrawing the

regulated VDSL service; and new bandwidth

management settings for the regulated UBA service.

Unregulated UBA Services

Draft Price-Quality Paths for Electricity Distributors

On 4 July 2014 the CCNZ announced it was seeking

submissions on its proposed average price limits and

quality targets for 16 electricity distributors. The draft

default price-quality paths cover the period 2015-

2020, and will take effect from 1 April 2015.

Following consultation, the CCNZ will make a final

decision on the reset of the default price-quality path

by 28 November 2014. CCNZ MR on Price-Quality

Paths

16

Notes on Interesting Decisions

Economic Regulation Authority Proposals on Microeconomic Reform in Western Australia

On 28 July 2014, the Western Australia Treasurer tabled the Economic Regulation Authority’s (ERA) Final Report on its Inquiry into Microeconomic Reform in Western Australia in Parliament on 28 July 2014. The objective of the Inquiry was to identify microeconomic reform measures that the Government could implement to improve the performance of the Western Australian economy. The ERA has examined a broad selection of areas of the Western Australian economy, broadly falling into the categories of: infrastructure; addressing disincentives for businesses; and removing barriers to competition. Areas were selected based on their potential to: improve the productivity and flexibility of the Western Australian economy; increase choice for consumers and businesses; increase opportunities for businesses to compete for national/international market share; and to reform unnecessary regulation. The ERA has made 46 recommendations for reform across the areas examined.

With respect to infrastructure, the ERA examines how the State can maximise the productivity of this important enabler of growth through: better decision-making; potentially divesting some public assets to the private sector; and providing incentives to use infrastructure efficiently through user charges.

There are a number of areas in which existing infrastructure could be better utilised. The ERA recommends that, before considering new infrastructure expenditure, the Government should investigate demand-management tools that may obviate the need for such expenditure. For example, in many cases the more efficient use of existing infrastructure may delay or reduce the need for capacity enhancement. In this review the ERA considers time-of-use electricity charging and road-congestion charging as measures that both reduce the need for infrastructure enhancement and provide significant productivity gains as a result of changing the behaviour of consumers.

Divesting government assets, where appropriate, has the potential to increase the efficiency and productivity of the asset, which in turn may benefit consumers. It may also help to address conflicting objectives that arise from Government ownership (for example, trying to maximise profits from government business enterprises while also seeking to achieve social objectives). Greater private sector involvement in infrastructure also has the potential to reduce costs, given that the private sector often has a greater incentive to operate more efficiently than

government. The ERA has developed a set of criteria for the Government to apply in reviewing the reasons for ownership of a business or asset. Access report here.

Proposals to Amend Distribution Network Pricing Arrangements – New Rules Proposed by the Australian Energy Market Commission

On 28 August 2014, the Australian Energy Market

Commission (AEMC) released its draft determination

on proposals to amend distribution network pricing

arrangements in the National Electricity Rules. The

broad aim of the new rules is to enable consumers to

make more informed decisions about how they use

energy services.

The AEMC observes that there are differences in the

ways individual consumers choose to use electricity,

due in part to new technology and changes in the

way people live. The way consumers are charged for

electricity has not kept pace with these changes.

Under current price structures, all consumers pay the

same network prices based on fixed charges and the

volume of electricity consumed, regardless of how or

when they are using it. Network prices are

responsible for about 50 per cent of the electricity

prices paid by residential consumers on average

across Australia, and a key driver of these costs is

peak demand.

Existing network prices over-recover revenue for off-

peak use of the network and under-recover for peak

use. This means consumers who use most of their

energy at off-peak times are paying more than it

costs to supply network services to them – while

those using energy at peak times are paying less

than it costs.

The amount of electricity used by individual

households at different times of the day can vary

depending on the appliances and technologies being

used. But consumers are not being given the option

of reducing their peak demand to save money, or

continuing to use electricity at those times when the

value they place on that use outweighs the costs.

The AEMC draft determination details the impacts of

different types of energy-use patterns on network

prices. For example, a consumer using a large 5kW

air-conditioner in peak times will cause about $1,000

a year in additional network costs compared with a

similar consumer without an air-conditioner, but the

consumer with the air-conditioner pays about an

extra $300 under the most common network prices

and the remaining $700 is recovered from all other

consumers through higher network charges. A

second example is of a consumer using an average-

sized north-facing solar PV system, saving about

$200 a year in network charges compared with a

17

similar consumer without solar. Because most of the

solar energy is generated at non-peak periods, it

reduces the network’s costs by $80, leaving other

consumers to make up the $120 shortfall through

higher charges.

The AEMC expects that the majority of consumers

would benefit from these changes through lower

network prices in the medium-to-longer term. Some

consumers would choose to respond to new network

price structures by reducing their use of the network

at peak times, which will reduce overall network

costs. Those cost savings would be passed on to all

consumers through lower future network charges.

Analysis undertaken for the AEMC estimates that up

to 81 per cent of consumers would face lower

network charges in the medium term under a cost-

reflective capacity price; and up to 69 per cent would

experience lower charges under a critical peak price.

While different technologies impact on network use in

different ways, the rules should be flexible enough to

result in efficient outcomes regardless of the

technology being used.

The AEMC proposals focus on establishing the right

regulatory regime for the future so everyone can

make clearly informed decisions about their energy

use as new technologies emerge. Under the

proposed rule change, consumers would have

clearer incentives to consider how, when and where

they use energy.

The new approach to structuring network prices

would help people see the value of different choices

such as: investing in more efficient appliances or new

technologies that can help manage their energy use

at peak times; installing solar panels that point west

so they can generate more energy at peak times;

investing in batteries to complement solar panels;

and choosing to locate their businesses in areas

where network costs are lower.

The proposed changes would be introduced over the

long-term. Network businesses would be required to

minimise the impacts of price changes on

consumers, for example, by gradually transitioning

consumers to new prices over five years or more.

While network prices would continue to be developed

by the networks with oversight from the Australian

Energy Regulator (AER), under the proposed new

rules consumers would have greater influence on the

decisions made and the prices they pay. There

would be more consultation with consumers and

retailers when networks develop their prices; and the

process for setting prices would be more transparent.

Network prices would be finalised earlier, giving

consumers and retailers more time to prepare for

price changes.

The AEMC consulted extensively with industry and

consumers in the development of the draft

determination. Further consultation is occurring

before the final decision is made in late November

2014. Network businesses would need to start

consulting on the development of new tariffs and

submit draft proposals to the AER in mid-2015 for

new prices to be phased in from 2017. AEMC New-

rules-proposed-for-distribution-network-prices

The Weighted Average Cost of Capital – New Zealand Commerce Commission Draft Decision

On 22 July 2014, the New Zealand Commerce

Commission (CCNZ) released its draft decision on

the weighted average cost of capital (WACC). The

WACC is used in the price-quality path and

information-disclosure regimes that apply to

businesses regulated under Part 4 of the Commerce

Act 1986.

The WACC reflects the cost of debt and the cost of

equity, and the respective portion of each that is used

to fund investments in the assets used to supply

regulated services. The WACC cannot be observed;

it must be estimated, so there is a risk that the

estimate is higher or lower than the true (but

unobservable) WACC. To mitigate this risk the

CCNZ calculates a distribution around the mid-point

WACC estimate based on the standard errors of

some of the key parameters. This defines a WACC

range. A percentile in this WACC range distribution

is then chosen, based on what best meets the

purpose of Part 4. It is a change to this percentile

that the CCNZ is currently proposing.

The draft decision proposes reducing the WACC

used to determine price-quality paths for electricity

lines and gas-pipeline services. The WACC used will

be the estimate at the 67th percentile of the WACC

range rather than the current 75th.

The proposal was opened to submissions, with the

CCNZ’s final decision due in October. The final

decision will affect the prices electricity lines

businesses can charge from April 2015, and from

2017 for gas pipeline businesses.

The CCNZ’s work on WACC was in response to the

High Court judgment in 2013 which questioned the

WACC estimate. The Court considered that the use

of the 75th percentile was insufficiently supported by

evidence, and might be inconsistent with the Part 4

objective to limit the ability of regulated suppliers to

earn excessive profits.

The CCNZ’s draft decision also proposes that, under

information-disclosure regulation, the 33rd to 67th

percentile WACC range is used to assess the

18

profitability of electricity lines and gas-pipeline

businesses.

Part 4 of the Commerce Act 1986 regulates a number

of markets where competition is limited, including

electricity lines services, gas-pipeline services and

specified airport services. The intention of Part 4 is

to ensure that suppliers have incentives to innovate,

invest, improve efficiency and produce quality

services for consumers, while also limiting their ability

to extract excessive profits.

Some of the services regulated under Part 4 are

subject to price-quality paths (electricity lines services

and gas pipeline services). This means the CCNZ

restricts the revenue a regulated business can make

or sets the maximum average prices it can charge, in

addition to setting service quality standards that must

be met. Other regulated services (Wellington,

Auckland and Christchurch airports) are only subject

to information disclosure which means they must

publish certain information about their performance.

Part 4 also requires input methodologies to be set to

promote certainty for regulated businesses and other

interested parties. Input methodologies are a range

of upfront regulatory rules, processes and

requirements covering matters such as: the valuation

of assets; the treatment of taxation; the allocation of

costs; and the cost of capital. Part 4 of the

Commerce Act requires the CCNZ to set input

methodologies for specified airport services,

electricity distribution and transmission, and gas

pipelines. The CCNZ must review each input

methodology no later than seven years after its date

of publication and, after that, at intervals of no more

than seven years.

At present, the cost of capital input methodologies

require that the CCNZ apply the 75th percentile

estimate of the WACC range (‘75th percentile’) when

setting default or customised price-quality paths

applying to electricity distribution businesses and

gas-pipeline businesses, or the individual price-

quality path applying to Transpower. Electricity price-

quality paths (excluding Orion) must be reset by the

end of November 2014.

The CCNZ intends to have the final decision released

in time to be incorporated into its final decisions on

price-quality paths for electricity lines businesses in

late November 2014. Draft decision available here.

19

Regulatory News

CCNZ Competition and Regulation Conference 2015

The CCNZ has confirmed that it will be holding a Competition and Regulation Conference in Wellington on 23 and 24 July 2015. View details on its website: http://www.comcom.govt.nz/the-commission/competition-and-regulation-conference-2015/

Network is a quarterly publication of the Australian Competition and Consumer Commission for the Utility

Regulators Forum. For editorial enquiries please contact Rob Albon ([email protected]) and for

mailing list enquiries please contact Genevieve Pound ([email protected]).