It's been a year of anniversaries: 50 years since The Australian
Financial Review became a daily, 30 years since the floating of the
dollar, 21 years since the Council of Australian Governments replaced
the special premiers' conference and 15 years since the start of the
national electricity market.
In the Fin Review's self-congratulatory
anniversary edition - apparently, the paper brought about micro-economic
reform single-handedly - one of my old bosses, Vic Carroll, made a
point most of us have forgotten, if we ever knew.
Before Paul
Keating began opening Australia to the world in the 1980s, we first
needed to break down the barriers between the six states to get one
national market. In theory we've had a common market since Federation;
in practice it didn't start until the 1960s.
We had separate stock
exchanges and even big companies tended to stick to their own state.
Coles and Woolworths didn't start to invade each other's home states
until the 1960s. The big banks were concentrated in their home states
until eight merged to become four in the early 1980s.
For many
years the brewers defined much of the Riverina as part of Victoria and
thus out of bounds to Sydney-based Tooth and Co. It took the Trade
Practices Act of 1974 to make agreements on competition-reducing
territorial carve-ups illegal.
A main role of COAG has been to
gain agreement between the states to align their regulation of markets
and in other ways facilitate cross-border trade. Progress has been
painfully slow and at Friday's meeting it gave up trying to introduce a
national occupational licensing scheme.
But that makes COAG's
initiative of establishing a national electricity market (covering all
states bar WA) in 1998 the more remarkable. Before then, we had six
separate, state-owned vertically integrated monopolies.
The
Australian Energy Market Commission has celebrated the national market's
15th anniversary by commissioning KPMG consultants to prepare "a case
study in successful micro-economic reform". The idea was to record the
insights of key players before they were carted off to retirement homes.
It
took eight years of preparation before the market began. Step one was
for each state to break its monopoly electricity commission into
separately owned power generators and separately owned electricity
retailers, leaving the transmission and distribution network ("poles and
wires") as the irreducible natural monopoly.
The generators could
be made to compete with each other (and probably privatised) and the
retailers made to compete with each other (and privatised) by giving
them equal access to the network.
The hard part was setting up the
continuously trading wholesale auction market in which competing
generators supply power to competing retailers. Once the state networks
had been physically connected to a single grid, this was made possible
by the "fungibility" of electricity. If one unit of power is identical
to any other, I don't have to actually generate the power I end up
selling you.
That's handy, but it makes the market, with all its
derivative contracts, horrendously complex. Its smooth operation is a
notable tribute to the economist's art: it's a quite artificial,
geek-designed, government initiated and regulated market. T. Abbott and
other sceptics please note.
The case study should prove a useful
guide to would-be reformers. One tip is that this radical change was
achieved through many small steps. Each state set up its own market
before they merged into one after many trial simulations.
Though
the federal government had no responsibility for electricity, it was
deeply committed to micro reform and, since it would benefit from higher
tax collections, transferred these to the states as incentive payments
for reforms achieved.
No business people or economists need
telling that many people find money highly motivating. Premiers more
than most. But the study warns "there are risks that the incentive
becomes payment maximisation rather than policy optimisation".
Likewise,
establishing a competitive industry structure must take precedence over
doing things to maximise the proceeds from privatisation. "Incentive
payments are not a substitute for mutual commitment to policy outcomes,"
we're told.
Careful planning, widespread consultation and good
processes are all necessary, but the study emphasises the key role of
committed leaders. At the political level, reform was pushed by Bob
Hawke and Nick Greiner, by Paul Keating and Jeff Kennett, then by John
Howard.
But the person who deserves greatest approbation was the
chairman of the National Grid Management Council, John Landels, formerly
of Caltex. His strengths were he was beholden to no one, kept the board
focused while letting the technocrats get on with the details, and he
had pull with prime ministers and premiers. And I doubt he was doing it
for the money.
