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Economic Society of Australia Business Symposium University of Sydney 30 September 2004. Infrastructure Investment in Australia - Is there an Emerging Crisis? Implications for Economic Regulation of Future Infrastructure Investment. John Tamblyn Chairperson

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Economic society of australia business symposium university of sydney 30 september 2004 l.jpg

Economic Society of Australia Business SymposiumUniversity of Sydney30 September 2004

Infrastructure Investment in Australia

- Is there an Emerging Crisis?

Implications for Economic Regulation of Future Infrastructure Investment

John Tamblyn

Chairperson

Essential Services Commission, Victoria

1


Overview l.jpg
Overview

  • Is there an infrastructure investment crisis?

  • Economic regulation and long term investment

  • Conclusions of recent policy reviews

  • Recent Victorian regulatory experience

  • Observations on the regulation/investment debate

  • Implications for economic regulation


Is there an infrastructure investment crisis l.jpg
Is there an infrastructure investment crisis?

  • Popular view of major infrastructure under investment

    • transport, water, energy sectors

    • needed to meet future demand/sustain growth

    • support efficiency, reliability, sustainability goals

  • Policy view of infrastructure under investment

    • COAG/MCE etc communiqués – Parer/PC reports

    • supporting analysis of extent/causes is qualitative, anecdotal and fragmented

  • AUSCID infrastructure report card/modelling

    • underlying analysis superficial and unconvincing

    • blames market, regulatory, policy failure

  • Clearly a significant problem for economy/community

    • BUT: weak analysis of scope, causes, solutions


Economic regulation and l t investment l.jpg
Economic regulation and L.T. investment

  • 10 years of access regulation experience

    • Part IIIA/CP Agt – energy, transport, telecom regimes

  • Focus was on natural monopoly NW industries

    • but application to partially contestable sectors

  • Regulation has sought more efficient outcomes by:

    • imposing CPI-X price caps using BB approach to;

    • encourage more efficient costs and prices; and

    • prevent misuse of monopoly power

  • Have the costs of regulatory failure exceeded those of market failure thro:

    • regulatory errors in setting price caps

    • intrusive/costly regulatory methods

    • discouraging L.T. infrastructure investment


Conclusions of recent pc reviews l.jpg
Conclusions of recent PC reviews

  • PC Part 111A and Gas Code reviews concluded:

    • coverage wrongly applied to contestable markets

    • regulation has been costly and intrusive

    • too much focus on S.T. cost/price efficiencies

    • regulation has discouraged L.T. investment

  • Particular investment incentive concerns:

    • coverage risk  whether asset covered or not

    • regulatory risk  uncertainty about regulatory decisions

    • asymmetric truncation  cap upside returns not downside

  • PCs ‘Gas Code recommendations include:

    • binding no-coverage rulings pre-construction

    • existing Code options (eg fixed principles/extended periods)

    • But had difficulty addressing truncation issue


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Recent Victorian regulatory experience

  • 2000 electricity distribution price review

    • BB approach, post tax WACC, tariff basket control

    • cost/service efficiency c/o incentives

    • reductions in proposed OPEX and CAPEX programs

    • significant Po price reductions (9.1 – 18.4%)

    • vocal industry concerns about profit/investment impact

  • 2002 gas distribution price decision

    • improvements on EDPR BB approach

    • modest Po reductions

    • significant allowances for replacement CAPEX investment

    • ESC concern about delivery of capital program

  • Difficult to deal with L.T. capital proposals under the BB price cap approach


Slide7 l.jpg

Electricity experience to date (1)

  • Revenue tracking above forecast

    • Demand growth

    • S-factor/efficiency carryover

All DB Revenue Forecast v Actual

M$ 1999

Forecast

Actual


Electricity experience to date 2 l.jpg

Capex & opex expenditure tracking below forecast

What is the reason?

Excessive forecasts/regulatory gaming

Deferral of necessary expenditure

Efficiency improvements

Other

Electricity experience to date (2)

Forecast ($m real 1999)

Actual ($m real 1999)


Electricity experience to date 3 l.jpg

Service standards are improving & exceeding targets, although capex / opex below benchmark

But is medium-term reliability at risk?

Electricity experience to date (3)


Observations on the regulation investment debate l.jpg
Observations on the regulation/investment debate although capex / opex below benchmark

  • Accept that under-investment more costly than higher S.T. prices

    • cost of NW reliability failures

    • loss of dynamic competition potential

  • Limited empirical analysis showing under investment

    • PC uses first principles reasoning and anecdotal evidence

    • significant investment since regulation introduced

    • has it been too little/too late or about right?

  • PC concludes regulation has discouraged/deferred efficient investment BUT …

    • regulation can cause over or under investment

    • have outcomes been biased against investors or users


Observations on the regulation investment debate 2 l.jpg
Observations on the regulation/investment debate (2) although capex / opex below benchmark

  • Must distinguish “deferred” and “efficient” investment

    • more or earlier investment not necessarily efficient

    • delaying investment sound if demand/viability uncertain

  • Regulatory innovation can reduce regulatory/investment risk

    • revenue/loss sharing mechanisms (but PC concerns)

    • treat investment to meet D growth as efficient

    • pre-investment rulings for small town gas extensions


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Implications for economic regulation although capex / opex below benchmark

  • L.T. investment/reliability clearly a priority for regulation/regulators

  • Useful policy options proposed by PC

    • adopt a single Code objective of “efficiency”

    • regulated prices to satisfy pricing principles

    • focus price cap regulation on natural monopoly infrastructure businesses

    • permit lighter-handed regulation models where competition is emerging

    • allow binding no-coverage rulings

    • allow price cap methods other than BB


Implications for economic regulation 2 l.jpg
Implications for economic regulation (2) although capex / opex below benchmark

  • Regulatory measures under access rules

    • regulatory consultation/guidelines/precedents

    • fixed principles on parameter methods/values

    • extended access periods (eg 10 or 15 years)

    • flexible depreciation schedules/capitalisation of losses

    • pre-construction approval of access prices/conditions

    • provider initiated reviews w.i. Period

  • Regulators must be pro active/transparent in applying these measures to reduce investment risk

  • BUT: assessing CAPEX/network augmentation requirements remains a difficulty for regulators

    • balancing cost efficiency incentives/L.T. reliability risks


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