23. CONCESSIONS AND COMMUNITY SERVICE OBLIGATIONS … · CONCESSIONS AND COMMUNITY SERVICE OBLIGATIONS Key Points of ACT Argument ... 23.13. The NCP reform process is …

Chapter 23 - Economic Activities – Concessions & Community Service Obligations

ACT Rejoinder Submission to the 2004 Review 305

23. CONCESSIONS AND COMMUNITY SERVICE OBLIGATIONS

Key Points of ACT Argument

Assessment Framework

• The proposed assessment framework underpinning the economic activities of the States’ Public Trading Enterprise sector, namely, Electricity and Gas; Water, Sanitation and Protection of the Environment; and Non-urban Transport is, with one exception relating to general subsidy payments, supported by the ACT.

Cost of Capital

• The ACT supports the removal of the Cost of Capital component. This should prevent jurisdictions from claiming payments that represent policy decisions and industry assistance for infrastructure development projects that are otherwise not regarded as a CSO.

• These types of payments do not represent genuine concessions and should not be differentially assessed as a result.

National Competition Policy, General Subsidies and State Needs

• The ACT, in conjunction with NSW and Victoria, supports the view that no differential assessment of needs should be assessed in relation to general subsidy payments that States provide to their PTEs.

• All States will fully implement National Competition Policy and the rate at which it is introduced is not relevant to the application of HFE in the long run. Methods of service delivery continue to change, resulting in a reduction of State funding obligations as competitive pricing and full-cost recovery is achieved.

General Subsidies – Electricity and Gas

• A service delivery scale factor is not supported for the assessment of general subsidies for Electricity and Gas Services. A Commission assessment resulting in reimbursement of subsidies for the provision of energy to the more remote areas of States may act as a deterrent or barrier to national energy market reforms.

General Subsidies – Water, Sanitation and Protection of the Environment

• A differential assessment is not required for general subsidies in relation to water and sewerage services given the move towards full cost recovery.

• The ACT supports a differential assessment of the dispersal of sewerage in fragile environments. The Territory experiences additional costs in treating sewerage because of the ACT’s location near the headwaters of a major river system of south eastern Australia.



Introduction

23.1. The ACT agrees in principle with the proposed framework associated with the economic activities categories outlined in a series of Discussion Papers, and in particular, Discussion Paper CGC 2002/35 Concessions and Community Service Obligations. It provides, in the main, a sound platform for a differential assessment.

Scope and Structure 23.2. The underlying principles of the proposed 2004 Review framework have their origins in the 1999 Review with the concessions and community service obligations (CSOs) forming the basis for a differential assessment of the economic activities undertaken by the States. Associated disabilities recognised in the Electricity and Gas, Water, Sanitation and Protection of the Environment and Non-urban Transport assessments. 23.3. The key to these principles is that the assessment of needs will focus on the disabilities faced by States in making CSO payments rather than on those relevant to direct service provision. Equally important is the principle that standards will be based on direct government expenditure in the form of CSOs and not the operating transactions of the economic activities in question. 23.4. Likewise, the application of the principles to three of the four categories of CSO assistance appears reasonable on the surface and is reflective of what States actually do in an operational sense, namely:

• Services to industry;

• Concession Payments; and

• Industry Assistance. 23.5. Parties should be confident that CSO payments can be readily identified and classified into this structure for all economic activities. The underlying test for the application of this framework will be the States’ abilities to accurately identify cost components for each category using Government Finance Statistics (GFS) data as outlined in the Special Data Request Concessions and Other Payments forwarded to the States by the Commission in December 2002. 23.6. The one area of disagreement relates to the intention to include a fourth category of CSO payment, attempting to recognise general subsidies paid to a State Public Trading Enterprise (PTE). The ACT would agree with the arguments put forward by both NSW and Victoria that a differential assessment should not be applied for this type of subsidy. The ACT’s views are further elaborated in the following paragraphs. 23.7. A number of other specific issues have also been raised by States regarding the four-category structure. Several of these matters are outlined in the following paragraphs.



Cost of Capital 23.8. In its Main Submission, the ACT highlighted that capital related expenditures represented industry assistance and as a result should not be considered to be policy neutral. Development expenditure on large scale, one-off, industry assistance projects, does not constitute standard government policy for all States. 23.9. Specifically, concerns with the inclusion of costs of capital include the fact that:

• cost claims may reflect PTE arrangements and financial reporting methods;

• hypothecation of expected grants funding based on the implementation of infrastructure projects may lead to projects which would otherwise not proceed, leading to economic inefficiency;

• such costs do not reflect a standard level of service; and

• the measures would encourage States to provide these services rather than require the developer to meet these costs – this will drive resource allocation inefficiencies.

23.10. Additionally, as these capital related costs are often embedded in general subsidies, the calculation of a separate cost of capital component is fraught with difficulty as the identification of these direct costs is problematical and double-counting could result. 23.11. In summary, the ACT supports the Commission’s decision and rationale to abolish the cost of capital component.

National Competition Policy, General Subsidies and State Needs

23.12. The major area of contention between States in the context of the four category structure relates to the extent to which National Competition Policy (NCP) impacts on the subcomponents, principally in the General Subsidies area. 23.13. The NCP reform process is still under way and different approaches have been adopted in every State, making it difficult, in the ACT’s opinion, to compare the impacts of various measures between the States. Different policy decisions, such as those to privatise rather than corporatise, have resulted in varying impacts on the operations of these enterprises with a varying level of State subsidy. 23.14. Indeed, there is considerable doubt whether the Commission would be able to identify areas of service delivery receiving subsidies because consistent and measurable subsidies paid by States could be difficult to identify, notwithstanding the requirement for their reporting under NCP guidelines.



23.15. The Commonwealth is also undertaking a review of energy policies, particularly subsidies, and may implement major changes as part of the May 2003 Federal Budget. 23.16. In its Main Submission81, the ACT stated that until a range of microeconomic reform processes were completed, it would be unrealistic for any attempt to be made to assess relative disabilities or impacts, with so-called disabilities claimed by some jurisdictions to be simply reflective of the differing State policies in relation to implementation. 23.17. If the Commission decides to proceed with a differential assessment, as a minimum the ACT would support the retention of the current general subsidies component. That is, assessed on an equal per capita basis, without the assessment approach including an NCP efficiency criteria adjustment as eluded to by some parties at the November Conference. 23.18. The NCP does not focus on a particular set of outcomes, instead requiring governments to undertake reform processes. It is unclear as to what efficiency adjustments should come into play.

General Subsidies – Electricity and Gas

23.19. To date, Commission staff are inclined to recommend that a service delivery scale factor be adopted for the assessment of general subsidies for Electricity and Gas Services. It is proposed that the factor be based on States’ total populations, with a cost weight applied to populations in different regions. 23.20. The ACT does not support this approach. A Commission assessment resulting in reimbursement of subsidies for the provision of energy to the more remote areas of States may act as a deterrent or barrier to national energy market reforms. Electricity transmission costs are one example, for which Recommendation 4.9 of the National Energy Market Review Final Report (the Parer Report) states that an increased number of regions in the National Electricity Market should be implemented. An increase in the number of regions will go a long way towards rationalising high electricity transmission costs experienced in remote areas that have led to cross subsidies by consumers in the more populated coastal regions in the larger States where electricity generation has traditionally been located.

General Subsidies – Water, Sanitation and Protection of the Environment 23.21. Commission staff are inclined to recommend that a comprehensive physical environment factor be devised for the assessment of general subsidies for Water, Sanitation and Protection of the Environment. It would also reflect the relative proportions of each State’s population in

81 Main Submission to CGC 2004 Review, May 2002, page 564, paragraph 27.26.



non-metropolitan areas with the possibility of cost weights being applied to affected sectors of the non-metropolitan population. 23.22. Again, the ACT is supportive, in general terms, of the Victorian position that a differential assessment is not required for general subsidies in relation to water and sewerage services. The rationale for not assessing these subsidies differentially is, in essence, the move towards full cost recovery in accordance with COAG agreements. As a consequence, country water expenses will reduce over time as cost recovery arrangements are put in place. 23.23. It is also noted that the Commission may assess disabilities in respect of the disposal of sewerage near, or in, fragile environments given that extra costs of treatment are incurred because States cannot take advantage of the cheaper treatment options provided by the use of deepwater ocean outfalls. The ACT supports such an approach given its own circumstances. As evidence of the additional costs faced by the ACT, it should be noted that the Commonwealth grant to the ACT partly reflects the additional costs involved in treating sewerage due to its location near the headwaters of a major river system. 23.24. There is no question that an inland location does add to the cost of treatment and disposal of water and sewerage effluent. The ACT’s specific grant from the Commonwealth, however, is not simply in recognition of the extra cost of treatment but a myriad of factors unique to the ACT. This includes the excess capacity built into the water and sewerage storage and reticulation systems, high staff costs, including superannuation overheads, as well as recognition of the need for high quality treatment due to the direct discharge into a major river corridor of south eastern Australia. 23.25. A differential assessment would require recognition of ACT’s unique circumstances as outlined in the previous paragraphs if appropriate disabilities are to be assessed.

Concessions and CSO Data Attachment A - Information Provided by States Tables A1 to A9 23.26. The ACT has examined the data representing the Territory’s policies and confirms that all entries are correct.



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23. CONCESSIONS AND COMMUNITY SERVICE OBLIGATIONS … · CONCESSIONS AND COMMUNITY SERVICE OBLIGATIONS Key Points of ACT Argument ... 23.13. The NCP reform process is …