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 bestpractice 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
*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.
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 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 OECD has identified seven principles for good
governance, being:
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
Regulatory Policy
Practice
Principles



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.
for
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.
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.
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.
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.
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
In addition to publishing objectives, the OECD
recommends that regulators produce and publish
2
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.
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.
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
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:
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).
at:

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.
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.
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
Available
annual-report
a new requirement that all Commonwealth
entities prepare a Corporate Plan;
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.
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).
1

http://www.accc.gov.au/publications/accc-aer-
3
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.
telecommunications regulator, the Comision de
Regulacion de Comunicaciones.
A set of
recommendations will flow from this assessment and
include:
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.
methodologies for developing specific indicators;

measurement techniques; and

the institutional processes and arrangements for
using performance measurement.
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.
The Network of Economic Regulators is currently
testing the Performance Assessment Framework for
Economic
Regulators,
including
utilising
a
questionnaire
to
assess
Columbia’s
are available

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.
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.
Examples of these regulatory audits
http://www.nao.org.uk/search/type/report/.
information on approaches and methodologies
for setting measureable objectives and targets;
The Australian Context
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.
2

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
at:
4
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.
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.
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).
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-andenforcement-policy.
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:


ACCC (2014b), Accountability – Government
Expectations.
Available
at:
http://www.accc.gov.au/about-us/australiancompetition-consumer-commission/accountability.
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;
Australian National Audit Office (2014), Better
Practice Guide – Administering Regulation: Achieving
the Right Balance, June.
Available at:
5
http://www.anao.gov.au/Publications/Better-PracticeGuides/2013-2014/Administering-Regulation.
Australian Treasury (2014a), Statements
Expectations,
available
http://www.treasury.gov.au/PolicyTopics/PublicPolicyAndGovt/Statements-ofExpectations.
of
at:
Australian Treasury (2014b), Treasury Portfolio
Budget Statements 2014-15 – ACCC. Available at:
http://www.treasury.gov.au/PublicationsAndMedia/Pu
blications/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/regulatorypolicy/2012recommendation.htm.
OECD (2014a), OECD Framework for Regulatory
Policy
Evaluation,
June.
Available
at:
http://www.oecd.org/regreform/framework-forregulatory-policy-evaluation.htm.
OECD (2014b), OECD Best Practice Principles for
Regulatory Policy: The Governance of Regulators,
July.
Available
at:
http://www.oecdilibrary.org/governance/the-governance-ofregulators_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/legislatio
n/ems/r5058_ems_7f7ccf98-dd9f-40a6-949cfdd9a2830ddf/upload_pdf/381803.pdf;fileType=applic
ation%2Fpdf
Productivity Commission (2014), Regulatory Audit
Framework,
March.
Available
at:
http://www.pc.gov.au/research/submission/regulatoraudit-framework
6
Critical Issues in Regulation – From the Journals
size rather than profits – plays an important role in
many areas.
The Causes and Effects of Deregulation, Paul
MacAvoy and Richard Schmalensee (eds), Edward
Elgar Publishing, 2014.
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 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 paper is available by subscription to the Journal
of Industrial Economics.
Running Out of Power?
Commission
Moderates State Aid for Electricity, Michael
This note is based on information about this
collection
available
at:
http://www.eelgar.com/bookentry_main.lasso?id=14986
[accessed on 16 September 2014].
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.
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.
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’.
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
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
7
2030, with current subsidies eventually being phased
out.
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 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.
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
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.
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.
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.
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
8
and ‘open to improvements’.
Some suggested
improvements are outlined in the paper.
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:
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.
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 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.
This
report
is
available
at:
https://www.uspsoig.gov/sites/default/files/documentlibrary-files/2013/rarc-wp-13-008.pdf [accessed on 16
September 2014].
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.
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. 112121.
This article is available by subscription to the Journal
of Air Transport Management.
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.
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.
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’
9
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/nerafiles/PUB_Equity_Risk_Premium_Utilities_0614(1).pd
f [accessed on 16 September 2014].
10
Regulatory Decisions in Australia and New Zealand
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-andtransmission-services
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-thebasement 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
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 firefighting and rescue services to airports and airlines.
ACCC-does-not-object-to-price-increases-byairservices-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-cbhlong-term-arrangements
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
Australian Energy Regulator (AER)
National Electricity Law and National Gas
Law – Quarterly Compliance Report
Emerald’s Wheat Port Access Undertaking –
Draft Decision
On 1 August 2014 the AER released its quarterly
compliance report on the National Electricity Law and
the National Gas Law. Compliance Report here
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
Individual Exemptions
Electricity
for
the
Sale
of
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.
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
On 3 July 2014 the AER announced the grant of
individual exemptions to supply electricity to: RE
Power Shoalhaven; Suntrix; Sungevity; Geits ANZ;
11
Solar Professionals; Zero Cost Solar; Infinity Solar;
Applied Environmental Solutions; Solar Financial
Solutions; and Voltaic Energy.
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.
ACTEW/AGL’s Regulatory Proposal – Issues
Paper
Australian Capital Territory
On 25 July 2014 the AER issued an Issues Paper on
ACTEW/AGL’s Regulatory Proposal. AER MR here
Independent
Competition
and
Regulatory Commission (ICRC)
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.
ACT Electricity Feed-in Scheme Activity
Summary: 30 June 2014
See ‘Notes on Interesting Decisions’
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
2014 Retail Competition Review Published
New South Wales
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
Independent
Pricing
Regulatory Tribunal (IPART)
Australian
Energy
Commission (AEMC)
Market
Distribution Network Prices – New Rules
Proposed
National
(NCC)
Competition
Dawson Valley Pipeline
Revocation Determination
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
Council
–
and
Coverage
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.
Carbon Tax Repeal – Revised Regulated Gas
Prices
Envestra’s Queensland Gas Distribution
Network – Application for Light Regulation
On 15 August 2014 the IPART announced it had
agreed to revised regulated retail gas prices for 201415 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
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
12
customers. IPART MR on Gas Price Effects of
Carbon Tax Repeal
NSW Rail
Decision
Access
Undertaking
–
Gladstone Area Water Board for its 2015-20 prices.
MR on Review-of-Gladstone-Area-Water-Board’s2015-2020-prices
Final
South Australia
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
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
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
Report to the Minister on Retail Energy
Prices
Queensland
Queensland Competition Authority
(QCA)
On 31 August 2014 the ESCOSA released its 201314 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
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-intariff
Impact of Carbon Tax Repeal on Minimum
Retail Feed-in Tariff (R-FiT)
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
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.
Aurizon Network’s Draft Access Undertaking
Withdrawn
Water and Sewerage Pricing – Release of
Draft Report
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
On 16 July 2014 the ESCOSA released its Draft
Report on Water and Sewerage Pricing Reform.
Follow for Link to Draft Report
Aurizon Network’s Draft Access Undertaking
Withdrawn
Gladstone
Monitoring
Area
Water
Board
Price
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
13
introduce a carbon price-exclusive standing offer tariff
without invoking enforcement action from the ESC.
ESC Final Decision
Tasmania
Office of the Tasmanian Economic
Regulator (OTTER)
Western Australia
Electricity Supply Industry Performance and
Information Reporting Guideline Revised
Economic
(ERA)
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.
Authority
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.
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
Microeconomic
Released
Victoria
Essential
(ESC)
Regulation
Reform
–
Final
Report
See ‘Notes on Regulatory Decisions’.
Services
Commission
New Zealand
New
Zealand
Commission (CCNZ)
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
Commerce
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
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
Transpower’s Allowances and
Standards – CCNZ Final Decision
Quality
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
14
Draft Price-Quality
Distributors
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
Average Cost of Capital
on
the
Paths
for
Electricity
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 20152020, 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
Weighted
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
15
Interesting
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.
Economic Regulation Authority Proposals on
Microeconomic Reform in Western Australia
Proposals to Amend Distribution Network
Pricing Arrangements – New Rules Proposed
by the Australian Energy Market Commission
Notes
on
Decisions
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.
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.
With respect to infrastructure, the ERA examines how
the State can maximise the productivity of this
important enabler of growth through: better decisionmaking; potentially divesting some public assets to
the private sector; and providing incentives to use
infrastructure efficiently through user charges.
Existing network prices over-recover revenue for offpeak 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.
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 roadcongestion 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.
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 averagesized north-facing solar PV system, saving about
$200 a year in network charges compared with a
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
16
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 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 Newrules-proposed-for-distribution-network-prices
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.
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.
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 costreflective 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 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 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 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 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.
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.
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 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
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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 pricequality path applying to Transpower. Electricity pricequality 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.
18
Regulatory News
CCNZ
Competition
Conference 2015
and
Regulation
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/thecommission/competition-and-regulation-conference2015/
Network is a quarterly publication of the Australian Competition and Consumer Commission for the Utility
Regulators Forum. For editorial enquiries please contact Rob Albon (Robert.Albon@accc.gov.au) and for
mailing list enquiries please contact Genevieve Pound (Genevieve.Pound@accc.gov.au).
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