2.3 National competition policy reform

Overview

This chapter provides a brief overview of national competition policy, its impact on the ACT and the associated activities that have been undertaken since the 1998 budget. The chapter also provides a brief insight into the activities scheduled for the forthcoming year.

Background

At the Council of Australian Governments (COAG) meeting of 11 April 1995, the heads of Australian government signed three agreements which together form the National Competition Policy. These agreements are:

These Agreements provide the legislative and policy framework for promoting competition and restricting anti-competitive activities by establishing the conditions for fair trade.

Specifically, the Competition Principles Agreement requires each government to undertake and implement:

These are discussed in more depth later in the chapter.

The Conduct Code Agreement provides the legislative framework, through the Competition Code, for the extension of the conduct rules set out in Part IV of the Trade Practices Act (TPA) 1974 to all persons including government business activities. Part IV of the TPA regulates behaviour in a number of areas that may restrict competitiveness in markets:

The Commonwealth agreed to provide all States and Territories with financial assistance conditional upon satisfactory progress with the reforms. The Agreement to Implement the National Competition Policy and Related Reforms sets out the general requirements to be met by the parties to the agreement to receive the three tranche payments. In the Agreement, the Commonwealth from 1997-98 agreed:

The Agreement sets out the payments to the States and Territories provided they make satisfactory progress in implementing the agreed reforms. The overall financial benefit to the ACT is estimated to be $243m from 1997-98 to 2005-06. Since the agreements were signed in 1995 significant changes have occurred in national financial policy that will affect the terms of the agreement. For example, the introduction of the GST will abolish Financial Assistance Grants, although an equivalent amount to that which would have been paid in the grants will be paid as part of the GST transitional arrangements.

Competition Payments

The National Competition Council is responsible for assessing the States’ and Territories’ progress in implementing competition policy and related COAG reforms. The Commonwealth Treasurer is then advised and subsequently makes a decision on each jurisdiction’s eligibility for payment.

The ACT fulfilled all its first tranche commitments and received the entire first competition payment. The Territory’s commitments consisted of:

The assessment of the ACT’s eligibility for its second tranche payment (approximately $7.2m) commenced in April 1999 and is conditional upon:

Legislation Reviews

The National Competition Policy process requires all governments to reform legislation that unjustifiably restricts competition. The first element of this process is to review legislation against the guiding principle of the competition test. That is,

legislation...should not restrict competition unless it can be demonstrated that:

a) the benefits of the restriction to the community as a whole outweigh the costs; and

b) the objectives of the legislation can only be achieved by restricting competition.

This principle is intended to establish whether the maintenance of restrictions on competition are justified, by an assessment of the costs and benefits of current restrictions and that no alternative means of achieving the same policy objectives would more effectively deliver those net benefits.

Public Benefit

The net public benefit is determined by applying a public interest test. The test is based on the premise that restriction of competitive economic behaviour imposes net costs on the community. However, the test also acknowledges that there may be situations where unfettered competition is inappropriate and restrictions on competition may achieve a more efficient outcome for the community.

The process considers all costs and benefits associated with a proposition, including both quantitative and qualitative data. It is important to recognise that not only financial issues are considered in assessing public benefits but that social costs and benefits must also be given equal weight.

Regulatory Reform

In considering regulatory reforms more generally, all proposals advocating new regulatory arrangements should reflect the five principles of good regulation endorsed by the Financial System Inquiry (The Wallis Inquiry). These principles are:

In the ACT, responsibility for conducting reviews has been devolved to agencies. All agencies, under clause 5(3) of the CPA, are required to review and, where appropriate, reform portfolio legislation containing anti-competitive provisions by the year 2000.

Legislation reviews are proceeding according to the revised 1998 schedule which reflects the schedule published in 1996 but modified with the benefit of experience with reviews since that time.

In the ACT, reform of regulation that impacts on business predates the national competition agreements. The processes of regulatory reform mirror those associated with the implementation of clause 5 of the Competition Principles Agreement. Consequently both processes are being pursued simultaneously.

To assist understanding of the principles and practice of reviews and the compliance requirements associated with reviews, the ACT Regulatory Reform Manual was circulated in 1997. The Manual includes a set of guidelines to assist in the preparation of legislation reviews. A revised manual, based on both a manual arising from the ACT’s Red Tape Review and Commonwealth guidelines and practices focuses on the recommendation that all proposed regulation must be accompanied by a Regulatory Impact Statement (RIS). Briefly, a RIS should describe the issue that has given rise to a need for regulation, why the regulation is necessary, what alternatives are available, a comparison of the possible options for dealing with that issue, an assessment of the costs and benefits of each option, followed by a recommendation supporting the most effective and efficient option.

The ACT is maintaining progress on the implementation of legislation reviews, according to the revised schedule. The initial schedule was published in 1996 and modified in 1998 with the benefit of experience with reviews since that time.

The National Competition Policy Unit in the Chief Minister’s Department oversights the timeliness, rigour and robustness of the reviews and any subsequent reforms.

The ACT’s gambling legislation was independently reviewed in July 1998. The report was referred by Government to a Select Committee for consideration. The Committee found that the independence of the reviewer, the robustness of the process, including extensive public consultation complied with the requirements of clause 5 of the CPA.

Other legislation currently being reviewed across the ACT includes legislation relating to health facilitates, public utilities, surveyors, bookmakers and aspects of gambling.

Competitive Neutrality Complaints

Competitive neutrality seeks to ensure that competition between public and private businesses occurs on an equal basis by applying the same taxes, incentives and regulations to both sectors. The Competition Principles Agreement requires the removal of net competitive advantages arising from public ownership of GBEs.

When properly implemented, reforms aimed at introducing a competitively neutral operating environment for government businesses can deliver a range of benefits including:

The CPA sets out two broad approaches for introducing competitive neutrality to significant government businesses.

Firstly, where appropriate, GBEs should be corporatised. Secondly, where corporatisation is not appropriate, the CPA states that competitive neutrality should be achieved by:

A Debt Guarantee Levy based on the calculation of a market equivalent credit rating system, will be implemented in 1999. The Levy will assist in meeting the aim of clause 3 of the CPA to eliminate resource allocation distortions arising solely from Government ownership of business entities. It directly satisfies sub clause 3(4)(b)(ii) which requires governments to imposes debt guarantee fees on significant businesses.

Under the CPA, jurisdictions also agreed to establish a mechanism to ensure that competitive neutrality complaints are handled by an independent mechanism that is easy to access and deals with complaints expeditiously and publicly. Two 1998-99 competitive neutrality complaints were dealt with by the Competitive Neutrality Complaints Unit. In 1999-2000 it is anticipated that the complaints function will be transferred to the reformed independent regulator. The transfer will emphasise the level of independence and access that has been be achieved to date.

Independent Prices Oversight Arrangements

In situations where businesses operate in markets with natural monopoly characteristics or where competition is weak, there is potential for the business to engage in monopolistic behaviour by restricting output and charging higher prices. This behaviour is not in the spirit of competition policy. The CPA requires that States and Territories establish independent sources of prices oversight of monopoly or near monopoly suppliers of services.

In November 1997, the Government established the Independent Pricing and Regulatory Commission (IPARC), which replaced the Energy and Water Charges Commission. IPARC provides price determinations for regulated industries, such as electricity, water and sewerage services, prices for infrastructure access and arbitrates in access disputes.

IPARC is currently undertaking its third inquiry into ACTEW’s electricity, water and sewerage charges, the current inquiry being for the period 1999-2004. This is the first inquiry into a medium term price path. The first two inquiries set prices for single financial years. In all inquiries to date IPARC (NSW) has undertaken the technical analysis.

In August 1998 the Chief Minister tabled a Ministerial Statement in the Legislative Assembly to announce broadening the role of IPARC. In general terms the Chief Minister’s announcement proposed incorporating a stronger requirement to involve community consultation in the inquiry process. In addition the Chief Minister proposed transferring to IPARC some functions currently performed by the Chief Minister’s Department. The new functions will be incorporated in legislative amendments to be tabled in the Assembly in June, arising from the Utilities Task Force established in 1998 to develop the new regulatory arrangements for utilities.

In February 1999 IPARC released a draft direction to initiate the public consultation process for the public inquiry. The final report will be completed in May 1999.

IPARC has also released a draft direction for the inquiry into ACTION pricing. Public hearings commenced in March 1999.

Structural Reform of Monopolies

Clause 4 of the CPA requires governments to separate industry regulation functions away from the public monopoly. This must be done before competition is introduced into the sector supplied by the monopoly.

Governments have undertaken extensive structural reforms in the electricity, gas and water markets, and the States and Territories have also reviewed and reformed the structure of public monopolies.

ACTEW is competing in an increasingly open electricity market, with contestability to supply all customers using more than 160 megawatt hours per annum since 1998. The Utilities Task Force, is continuing to examine the regulations governing supply of electricity, water and sewerage services in the ACT. New legislation relating to regulation of utilities, including ACTEW, is scheduled to be tabled in June 1999 to be debated in October 1999.

A national competition policy review into the ACTTAB monopoly is being undertaken as part of the ongoing legislation review program and in response to concerns about the scope and impact of gambling. The review is expected to be completed by independent consultants in July 1999.

Access Issues

In many industries, infrastructure facilities have been built and operated by public utilities. While the facilities themselves may be monopolies by virtue of their economic scale, the supply of products that require the use of these facilities need not be. Previously, monopoly service providers have either had little incentive to provide competitors with access to their services or have enjoyed a monopoly over services as well as infrastructure access.

To achieve efficiencies and promote the benefits of competition to consumers, the Competition Principles Agreement includes requirements that enable businesses to use significant infrastructure operated services provided by other businesses. To facilitate access on reasonable terms, governments have been introducing and continue to introduce access regimes which are subject to independent regulation and certification at the national level by the NCC.

Annual Report on Reform Progress

Under clauses 3 and 5 of the CPA, each Party to the agreements needs to publish an annual report on its progress in achieving the Competition Policy Reforms. In 1999, the ACT delivered the third annual report to the National Competition Council. The report addresses outstanding issues from the first tranche assessments and issues raised by the Council regarding the second tranche assessment.

In November 1998, as part of the preparation of the annual report on which the second tranche assessments will be made, the NCC circulated a paper to jurisdictions providing guidance as to the issues which each State should address. For the ACT, these issues included:

Participation in Reform Forums

The success of competition reform is dependent on significant interaction with other governments. The National Competition Policy Unit represents the ACT on a number of intergovernmental committees and forums reporting to the COAG Senior Officials and the Leaders’ Forum. These are:

The ACT also participates in the national body dealing with utility regulation, the Regulators’ Forum.