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Public vs Private Infrastructure & Regulation June 08. Public vs Private Infrastructure & Regulation. K Peter Kolf General Manager & CEO Economic Regulation Authority 23 June 2008. Overview. Issues Economic Regulation Authority Some Economics Private/Public Infrastructure & Regulation

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public vs private infrastructure regulation
Public vs Private Infrastructure & Regulation

K Peter Kolf

General Manager & CEO

Economic Regulation Authority

23 June 2008

overview
Overview

Issues

Economic Regulation Authority

Some Economics

Private/Public Infrastructure & Regulation

Challenge for the future

introduction
Introduction

Reflect on experience to date

Note major move to independent economic regulation

Provide feedback

Not offering policy prescriptions

part 1 issues
Part 1: Issues

What is the most efficient arrangement?

What are the pitfalls?

What role does regulation play?

Does regulation make a difference?

What forms of regulation work best?

Where to in future?

part 2 the economic regulation authority
Part 2: The Economic Regulation Authority

Functions

  • Administers access to monopoly infrastructure
  • Licenses service providers
  • Monitors & regulates markets
  • Carries out inquiries (referred by government)
key features of the era
Key Features of the ERA
  • Independence
  • Transparency
  • Consultation
objectives of independent economic regulation
Objectives of Independent Economic Regulation
  • Facilitate private sector provision of services
  • Make best use of monopoly infrastructure
  • Enhance competition upstream/downstream
  • Consumer Protection and Fair Trading
    • Interface with Energy Ombudsman
economic regulation authority
Economic Regulation Authority

Governing Body

Lyndon Rowe – Chairman

Steve Edwell – Member

Peter Panegyres - Member

General Manager

Peter Kolf

Planning & Executive Support

Chris Brown

Executive Director

Competition

Markets &

Electricity

Robert Pullella

Director

Gas & Rail Access

Russell Dumas

Executive Director

Licensing, Monitoring & Customer Protection

Paul Kelly

Director

References & Research

Greg Watkinson

Manager

Finance & Administration

Pam Herbener

objective matters to be taken into account
Objective & Matters to be Taken into Account
  • No overriding objective

Key matters which the Authority must have regard to:

  • Promoting outcomes that are in the public interest
  • The interests of consumers, investors & service providers
  • Encouraging investment in relevant markets
  • Promoting competition & fair market conduct
  • Preventing abuse of monopoly power
  • Promoting transparency and public consultation
new national gas law
New National Gas Law

The objective of this Law is to promote efficient investment in, and efficient operation and use of, natural gas services for the long term interests of consumers of natural gas with respect to price, quality, safety, reliability and security of supply of natural gas.

part 3 some economics
Part 3: Some Economics

Economic Efficiency

  • Productive efficiency
  • Allocative efficiency
  • Dynamic efficiency (long run)
    • Inefficient markets waste resources
    • Singularity
    • Does not address the distribution of income or wealth
slide13

Optimum

Long Term

Interests of Consumers

Max π

Electricity

All other commodities

objective function
Objective Function

Maximise:

  • Long term interests of consumers

Subject to:

  • Social advancement
  • Environmental protection
  • Economic prosperity
  • Interests of investors & service providers
  • Re-elect Minister
slide15

Interests of Investors

Election of Minister

LongTerm Interests

of Consumers

Economic Prosperity

Environmental Protection

supply of goods services
Supply of Goods & Services

Rivalry

Private Goods

Bread, Butter etc

Common Property

Fisheries, Water resources etc

Not

Excludable

Excludable

Mixed Goods

Pipelines, Wires etc

Public Goods

Free to air, Defence etc

No Rivalry

other monopoly factors
Other Monopoly Factors
  • Economies of scale
  • Economies of scope
  • Barriers to entry
    • infrastructure
    • legislative (legal)
externalities
Externalities
  • Environmental
  • Technical
  • Social
part 4 private public infrastructure
Part 4: Private/Public Infrastructure

Objectives of private sector participation:

  • Economic efficiency
    • Continuous adjustment to changing circumstances
    • Decentralised decision making
    • Innovation
    • Low regulatory & administrative costs
    • Non pervasive regulatory frameworks
    • Minimisation of basis for dispute
  • Equity
    • Fairness
    • Simple and easily understood rules
private infrastructure
Private Infrastructure
  • Commercially driven
  • Sees regulation as just another commercial burden
  • More likely to test the regulatory envelope
  • Has commercial incentive and legal obligations to behave as monopolist

Note: Edward Chamberlin: The Theory of Monopolistic Competition Harvard University Press 1965

public infrastructure
Public Infrastructure
  • Is a form of regulation
  • Executive government has direct influence
  • Mix of commercial, social & political objectives
  • Public corporations tend to be reasonably compliant
  • Protective of monopoly rights
which works best

Monopoly

Competitive

Which works best?

Not regulated

Regulated

Private

Public

monopoly the main problem
Monopoly the main problem
  • A problem in either private or public sector
  • Independent regulation of public sector may be more effective, but
  • Social & political objectives of public sector inefficient
  • The strong commercial focus of private sector may still provide better outcomes
  • Regulation not always effective
bottleneck infrastructure

Upstream

Energy Resources,

Water Sources,

Electricity Generation

Downstream

Retail,

Trading

Bottleneck Infrastructure

Transmission & Distribution

isolate monopoly elements
Isolate Monopoly Elements

Market based regulation:

  • Third party open access
  • Structural separation
  • Markets in contestable elements
  • Artificial markets where possible
  • Price or revenue cap if all else fails
slide26
“What’s Yours is Mine”Open Access and the Rise of Infrastructure SocialismAdam Thierer & Clyde Wayne Crews Jr.

Criticisms of Open Access:

  • Ushers in bureaucratic processes that hinder competition
  • Expands the role of government planning in markets
  • Leads to litigation and high costs
  • Discourages investment and innovation
  • Turns networks into lazy public utility like vessels
  • Creates mutant entities (ie artificial, that would not evolve naturally)
  • Regulation should not discourage network duplication
  • Regulation should not hinder bypass
competitive tendering
Competitive Tendering
  • Privatisation
    • Government captures monopoly rents (tax)
  • Competitive tendering of monopoly rights
    • Government captures monopoly rents (tax)
  • Competitive tendering of works
    • Monopoly rents can be passed to consumers
allocation of risk
Allocation of Risk

High Risk

Why bother ?

Public

Private

Alchemy

Licence to print money

Low Risk

performance of ppps allen consulting group for infrastructure partnerships australia 2007
Performance of PPPsAllen Consulting Group for Infrastructure Partnerships Australia 2007
  • PPPs
    • Superior in both cost & time dimensions
    • Far more transparent than public projects
    • Performed better the bigger the project
  • Australia likely to spend $400 b next decade on infrastructure
  • Significant benefits for all States to follow Victoria’s, NSW’s & Qld’s lead in PPPs
challenge for the future
Challenge for the future

The challenge for the future is to increasingly identify and define boundaries within which individuals, companies and organisation operate pursuing their own objectives commercially without the need for detailed centralised systems of planning and control.

This has the potential to see a change in regulation from intrusive information intensive and administratively costly approaches to decentralised decision making through market based approaches.

ERA Annual Report 2006/07 p46