Airport market power ‘fact check’

September 2018

Today the ACCC submitted to the Productivity Commission’s inquiry into airport regulation that the current price monitoring regime is not effective in constraining airports’ market power, and that increased regulatory intervention is required (see here). But the ACCC’s evidence for the exercise of market power is thin: an assertion as to rising average revenues per passenger and quality of service metrics that remain ‘stable’. Substantial new investment in runway and terminal capacity has been overlooked, and the ACCC’s average revenue per passenger metric is heavily distorted by the changing mix of international and domestic passengers.


HoustonKemp analysis for the Australian Airports Association (see here) shows a very different picture. The long term profitability of aeronautical services provided at each of the four monitored airports show no signs of market power, with returns on investment over ten years all converging to within the range of weighted average cost of capital estimates previously adopted by the ACCC itself and New Zealand’s Commerce Commission.

We look forward to the Productivity Commission’s evidence-based analysis.

Posted on September 18, 2018 and filed under Reports.

The economics of regulation – some examples from Australia

August 2018

Luke Wainscoat gave a lecture on competition policy and how regulation is applied in Australia at the University of Sydney. This lecture is part of an undergraduate course on the economics of regulation. In the lecture Luke provided an introduction to competition policy and regulation before describing how airports, railways and electricity distributors are regulated in Australia. The lecture finished by providing an overview of the access regime in Australia. The slides to the lecture can be found here.

Posted on August 21, 2018 and filed under Presentations.

Queensland’s declaration triple-header takes shape

July 2018

The three, newly minted, economic criteria governing the ‘declaration’ of infrastructure services under Part IIIA of the Competition and Consumer Act 2010 (CCA) are being given a thorough work out in an unprecedented, triple-header declaration review being undertaken by Queensland’s Competition Authority (QCA).

In the 23 year history of the Competition and Consumer Act 2010 (CCA) framework for third party access, no infrastructure service in Queensland has been formally assessed against the declaration criteria. Side-stepping the national regime, the state of Queensland deemed three services to be declared and developed bespoke regimes for the economic regulation of their terms of access. Those declared services are:

  • below rail services provided by Aurizon’s central Queensland coal network;
  • coal handling services provided at Dalrymple Bay coal terminal (DBCT); and
  • below rail services provided by Queensland Rail’s network, comprising all Queensland’s rail lines other the coal network operated by Aurizon.

Following legislative change in 2010, the declared status of each these services is set to expire in September 2020, and the QCA is charged with undertaking a review and recommending whether each should continue to be declared. The Queensland Treasurer will be the ultimate decision-maker, upon recommendation from the QCA.

 Source: Shutterstock

Source: Shutterstock

The declaration criteria to be applied by the QCA are essentially the same as those under the national access regime set out in the CCA, but with two important procedural distinctions. First, the declaration review body (normally, the independent National Competition Council) is the same as that which regulates the services concerned. A QCA recommendation that any of the services should no longer be declared would see it voting to discontinue a substantial portion of its existing functions. Expect close scrutiny of the QCA’s reasoning for any hint of self-interest.

Second, there is no right for interested parties to seek merit-based review of the Treasurer’s decision. In contrast, most declaration decisions made under the national regime have been referred for merits review by the Competition Tribunal and, in several instances, judicial review by the Full Federal Court. On three occasions, critical elements of the declaration regime have been decided by the High Court. Expect close scrutiny of the QCA’s reasoning (or, if different, that of the Treasurer) for any hint of procedural or legal irregularity.

 Source: Dalrymple Bay Coal Terminal Pty Ltd

Source: Dalrymple Bay Coal Terminal Pty Ltd

The Queensland process presents complex issues, each to be assessed against new criteria. The service providers have all contended their particular service should no longer be declared, but each cites different combinations of criteria that are said not to be satisfied:

  • Aurizon contends that its continued declaration does not satisfy the criterion (d) net public interest test, citing evidence of ‘regulatory failure’ under the present regime;
  • DBCT Management maintains that its service does not satisfy the material promotion of competition test under criterion (a), the criterion (b) natural monopoly test, and that its continued declaration is not in the public interest, as required by criterion (d); and
  • Queensland Rail contends that its heavily subsided services do not satisfy declaration criteria (a) or (d), that competition from road may mean its rail lines do not satisfy the criterion (b) natural monopoly test, and that five of its eight rail systems do not meet the Queensland significance test under criterion (c).

All four criteria must be satisfied for a declaration recommendation to be made.

The various submissions from service providers and users are supported by legal opinions and expert economic reports, as well as a second round of further material submitted in response to the first. Come late July, the QCA will slip into ‘regulatory purdah’ to consider all the material, with its eagerly awaited, precedent-setting draft decision anticipated by December 2018.

HoustonKemp’s economic experts are advising DBCT Management and Queensland Rail throughout the declaration review, and have filed four expert reports for consideration by the QCA.

Not quite a cartel: Applying the new concerted practices prohibition

March 2018

Luke Wainscoat and Caitlin Davies have an article in the most recent issue of the Competition and Consumer Law Journal (volume 25, part 2) looking at how the new concerted practices prohibition should be applied, and how it is likely to be applied, based on overseas experience.

The new law has two limbs - it prohibits:

  1. one or more persons engaging in a concerted practice;
  2. that has the purpose, or has or is likely to have the effect, of substantially lessening competition (SLC).

A concerted practice is likely to include a wide range of conduct if the ACCC’s guidelines and overseas experience is any guide (although Australian courts may not go along with this). This includes every communication of private and competitively sensitive information between firms, including one-off conversations.

This would leave the SLC test to do a lot of work, and there has been little, if any, debate about how that test should be applied to concerted practices in Australia.

Luke and Caitlin argue that examining whether some conduct is likely to have an SLC purpose or effect requires more than a checklist of factors to mechanically assess the state of competition in a market with and without the conduct. What is needed to avoid overreach is a principled approach, based on sound economic theory, supported by facts, to demonstrate how conduct will negatively impact competition.

In particular, Luke and Caitlin suggest that the SLC test be applied as follows:

1) Assess the degree of competition in the factual, i.e. with the information sharing. This should include a coherent theory of harm – that is, an explanation of how the information sharing would cause competition to be substantially lessened relative to the counterfactual. The assessment should be:

  • based on a theory that is economically sound;
  • internally consistent; and
  • consistent with the facts of the case.

2) Assess the degree of competition in the counterfactual, i.e. without the information sharing, consistent with the theory of harm.

3) Assess the difference between the degree of competition in the factual and counterfactual

In the case of concerted practices, the theory of harm will almost always be that there will be an increased risk of collusion, in which case there will only be an SLC if collusion is made more likely by the conduct. Determining that question in any given case will require an examination of whether the market structure, conduct of firms and market outcomes are consistent with collusion or competition.

This is similar to the approach in the United States which uses ‘plus factors’ to determine whether conduct is consistent with self-interested unilateral behaviour, or with collusion. In other words, they can be thought as of evidence that the collusive theory of harm is more likely than an alternative theory that firms were competing unilaterally. We expect that cases in Australia could make use of similar types of evidence as that used in the United States, such as:

  • evidence of market structure identifying the features of the market in question which make it more or less likely that conspiracy will occur – for example, levels of concentration, barriers to entry, and availability of information; and
  • evidence that the market, and the competitors within it, actually behaved in a competitive or non-competitive manner – for example, fixed market shares, exchanges of price information, identical bids, and previous overt price fixing in the industry.
Posted on April 11, 2018 and filed under Announcements.

Big data reveals Uber is all upside

January 2018

The upsurge in Uber’s ride-sharing service has been resisted all over the world – mostly by licenced taxi interests, fearing the winds of competition would take away passengers.

In a show case of the unprecedented power of big data to deliver insights into ‘what’s going on?’ in a market, recently published HoustonKemp analysis shows those fears are misplaced.

Following drawn out regulatory and enforcement skirmishes, Uber’s ride-sharing service was finally legalised in New South Wales in late 2015. Since then, would be point to point passengers have been free to choose between a regular taxi or its close substitute, a ride-sharing service.

In a recently published study for the NSW Independent Pricing and Regulatory Tribunal, my colleagues Adrian Kemp and Howard Gu analysed millions of payment card transactions, seeking insights into how the point to point passenger transport services market in NSW has changed since the legalisation of ride-sharing services.

Their analysis shows dramatic increases in the use of point to point passenger transport services, but little change in the expenditure on rides taken by taxi. In a huge win for passengers, in just 18 months Uber has expanded the market by more than sevenfold – as illustrated below.

IPART graph.png

Hundreds of thousands of people in NSW are now opting to use a ride-sharing service on occasions when, before, they would presumably have either walked, caught a bus or train, or perhaps not travelled at all.

These extraordinary results underline the huge potential for markets to grow when new services are unleashed, and the enormous benefits to consumers from the ‘disruption’ that is ride-sharing.

Our report can be found here

Posted on January 12, 2018 and filed under Articles.

ElectraNet public forums in Port Lincoln

November 2017


HoustonKemp has been working with ElectraNet on a RIT-T assessment of options for electricity transmission upgrades on the Eyre Peninsula.  We have undertaken the wholesale market modelling for the RIT-T assessment and also applied real option valuation – the first time this has been done formally for a RIT-T.  Ann Whitfield, Tom Graham and Sam Forrest are presenting on this approach at the ElectraNet public forums in Port Lincoln (November 20) and Adelaide (November 27).  ElectraNet’s RIT-T assessment can be accessed here.

Posted on November 23, 2017 and filed under Reports.

An example of using data analytics in a competition matter

November 2017

Luke Wainscoat gave a presentation at the Rising Stars Workshop on the use of data analytics in competition matters. His presentation showed how a new and very detailed dataset of financial transactions could be used to help determine the geographic dimension of retail markets. The analysis indicated that the ACCC may have adopted an overly narrow geographic market in a statement of issues regarding a proposed supermarket acquisition. The presentation is available here.

Posted on November 20, 2017 and filed under Presentations.

Applying economics to the analysis of mergers and vertical restraints

October 2017

Luke Wainscoat gave a lecture on how economics can be applied to assess the effect that mergers and vertical restraints have on competition at the school of economics in the University of Sydney. His lecture sets out some of the economic analysis and techniques that can be used to examine whether a merger will substantially lessen competition.

Luke explained what vertical restraints are, and some of the main anti and pro-competitive effects that they may have on competition, before setting out a mechanism by which the vertical restraints that are likely to substantially lessen competition can be identified. Luke’s presentation is available here.

Posted on October 27, 2017 and filed under Presentations.

HSC Economics at Sydney University

August 2017

Ann Whitfield is pleased to be speaking at an upcoming event aimed at high school economics students considering studying economics at university. The event is to be held by the School of Economics at the Charles Perkins Centre, University of Sydney on Tuesday 5th September from 4pm. Ann is one of several economists who will be speaking at this event, which also includes a hands-on workshop session. For more information on the event, or to register to attend please click here.

Posted on August 21, 2017 and filed under Presentations.

The economics of regulation – some examples from Australia

August 2017

Luke Wainscoat gave a lecture on competition policy and how regulation is applied in Australia at the University of Sydney. This lecture is part of an undergraduate course in the school of economics on the economics of regulation. In the lecture Luke provided an introduction to competition policy and regulation before describing how airports, railways and electricity distributors are regulated in Australia. The lecture finished by providing an overview of the access regime in Australia. The slides to the lecture can be found here.

Posted on August 21, 2017 and filed under Presentations.

The development of electricity consumption

June 2017

Stuart Morrison recently assisted Adrian Kemp in preparing visuals for his talk at Power & Electricity World in Manila last month. Stuart created the chart below showing the relationship between electricity per capita, GDP per capita and total national emissions. The visualisation of this data reveals some interesting trends, including:

  • the momentous rise of electricity consumption per capita in China – especially over neighbouring Malaysia;
  • the decrease in Greece’s GDP per capita from 2009; and
  • the decrease in electricity consumption per capita in Australia – driven by take-up of rooftop solar-PV and more efficient appliances.
Posted on June 20, 2017 and filed under Presentations.

HoustonKemp economists recognised for their expertise

June 2017

HoustonKemp is proud to announce that some of our colleagues have been recognised as leading economic consultants in publications by Who’s Who Legal. Luke Wainscoat has been listed in Competition: Future Leaders 2017, which includes competition economists aged 45 or under, whilst Carol Osborne and Greg Houston have once again been named in Consulting Experts: Competition Economists 2017, which lists the best consultant expert witnesses and advisers on economics in the world.  

Who’s Who Legal describes Greg as a “talented” expert widely acclaimed for providing “top-drawer, case-winning economic analysis” in court proceedings and regulatory tribunals.

Posted on June 1, 2017 and filed under Announcements.

Federal Court decision on NSW/ACT electricity appeals

May 2017

The Full Federal Court has handed down its decision on the application brought by the Australian Energy Regulator for judicial review of the Australian Competition Tribunal’s review of the AER’s allowed revenue determinations in respect of Ausgrid, Endeavour Energy, Essential Energy and ActewAGL. The court rejected the AER’s appeal in respect of the operating costs and return on debt elements, but upheld its appeal in relation to the Tribunal’s finding on the value of imputation credits.

Operating expenditure – Tribunal decision upheld

The court found that the Tribunal did not err in reaching a conclusion that the data relied upon by the AER for its economic benchmarking was not suitable for the purpose of determining operating expenditure and that there were limitations with the use of overseas data. It also did not accept the AER’s contention that the Tribunal’s directions left the AER with a lack of certainty on how to proceed – finding that a ‘bottom-up’ approach to setting operating expenditure could be justified both in law and by evidence.

A clear implication of the court’s decision is that the AER will need to reduce its reliance on benchmarking in a re-made decision as well as in future decisions, at least until the quality of its data improves. Given that the business’ actual operating expenditures have declined significantly since the AER’s original 2015 decision and their ‘revealed costs’ at the time, the means by which the AER re-makes its decision for the current period will also have important implications for its consideration of operating expenditures in subsequent regulatory periods. The decision that the AER makes on whether to re-instate the efficiency benefits sharing scheme for the current period (which it had set aside for some entities, on the basis of its benchmarking results) will be critical to these future arrangements.

Return on debt – Tribunal decision upheld and further guidance given

 The court stated that the benchmark efficient entity cannot be characterised as either regulated or unregulated, and so the Tribunal did not err in stating that it was not a regulated entity. Further, the court ruled that the Tribunal did not err in finding that the AER’s approach to the transition to a different method for determining the return on debt allowance was unreasonable.

Significantly, the court noted that that the NSW businesses already raised debt with effect similar to that of a trailing average, and that adoption of the trailing average would therefore impose no impacts on the service provider of the type that the AER needed to consider under the NER. The court stated that:

[572] Given that there were no such impacts, there was no need for the AER to take a step which, in the circumstances, r 6.5.2(k)(4) did not require for those service providers, namely a transition to the trailing approach of estimating the return on debt by adopting a mechanism to unwind hedging contracts…

These directions point strongly towards the immediate adoption of the trailing average for the NSW businesses and ActewAGL. However, it remains unclear exactly how they may be reflected in a re-made decision by the AER.

Value of imputation credits (gamma) – AER application for review successful

 The court upheld the AER’s contention that the Tribunal erred in its construction of the expression ‘the value of imputation credits’, which led the Tribunal to reject the AER’s preferred estimation methods. The court stated that:

[752] …it was not therefore a reviewable error for the AER to prefer one theoretical approach to considering the determination of gamma over another. This means that it is not an error of construction for the AER to focus on utilisation rather than on implied market value.

 The court’s observations and decision affirm the AER’s approach to placing substantial weight on the ‘equity ownership’ and ‘tax statistics’ approaches to estimating the value of distributed imputation credits. 

Where to from here?

It is now over two years since the AER made its decision on allowed revenues for these network services providers, while the charging period covered by the decision extends back to 2014. Notwithstanding the lengthy process to date, it will most likely take many months or longer for the guidance provided by the court to be turned into adjusted revenue allowances, and to be reflected in network charges. In the meantime, the AER has a 60 day window in which to decide whether any aspects of the full court decision warrant an application for special leave and so review by the High Court.  

Posted on May 25, 2017 and filed under Announcements.

Dispute over regulatory investment test outcome

May 2017

HoustonKemp provided an independent report in relation to the first formal dispute of a regulatory investment test outcome.  The review related to SA Power Network’s RIT-D assessment of the Kangaroo Island submarine cable.  We were asked by the AER to consider whether the RIT-D had been applied in accordance with the regulatory framework and, if not, whether this is likely to have materially affected the outcome.  Our report has been published by the AER is and available here.

Posted on May 22, 2017 and filed under Reports.

Powering Sydney's Future

May 2017

As part of its Powering Sydney’s Future (PSF) RIT-T assessment, TransGrid has published a report prepared by HoustonKemp on the issues to be considered in determining a commercial discount rate for a RIT-T application.  Our report also provides a “first-pass” indicative commercial discount rate that we consider appropriate to apply to the PSF RIT-T.  Our report can be accessed here.


Posted on May 9, 2017 and filed under Reports.

Retail margin methodology

May 2017

HoustonKemp has prepared a report for ActewAGL Retail, in relation to the ICRC’s draft decision to change the methodology for determining the retail margin component of regulated electricity standing offer prices. We considered the adequacy of the ICRC’s approach in light of the factors that may be expected to affect the costs recovered by the retail margin, the rationale provided by the ICRC and the approach adopted by other regulators. Our conclusion is that the ICRC’s central assumption that retail margin costs move in line with changes to CPI is not supported by any evidence, and our own assessment indicates that there are other drivers of these costs.  Our report is available here.

Posted on May 4, 2017 and filed under Reports.

Expert report on proposed merger

May 2017

Greg Houston prepared an expert report for Minter Ellison in relation to the application before the Australian Competition Tribunal by Tabcorp for authorisation to acquire Tatts. The report examines the effect of the proposed merger on competition, and the public benefits that are likely to arise. Greg was assisted by a number of our team including Luke Wainscoat, Sarah Turner, Daniel Young, Sam Forrest, Stuart Morrison and Sarah Nelson. The report is available here.

National Disability Insurance Agency price review

March 2017

We are very pleased to be helping the National Disability Insurance Agency (NDIA) with the review of its price controls. Sam Forrest, Luke Wainscoat, Adrian Kemp and Greg Houston will design an impact assessment framework to assess potential changes to the NDIA’s price controls. They will draft a consultation paper on the options being considered and apply the impact assessment to prepare recommendations to the NDIA on the changes it should make to its price controls in 2017/18. For more information on the review please click here.

Posted on March 9, 2017 and filed under Announcements.

Five fixes for the NEM

February 2017

Load shedding in South Australia on Wednesday 8 February and successive ‘close shaves’ in NSW and Queensland as the heatwave spread north have exposed serious weaknesses in the national electricity market (NEM).

For some time now, it has been fashionable to blame South Australia’s near 40 per cent renewable (wind) generation mix for outages in that state. However, reliability problems in regions with much less renewable generation underlines that the challenges facing the power system are much more complex and extend far beyond South Australia.

The NEM’s ‘energy only’ market design means that generators get paid when they are called to run, but not otherwise. It was and remains a fundamentally sound basis for organising generation markets.[1] However, the consequences of some poorly-conceived interventions in that market design are now starting to show.

At the time of its instigation, the bi-partisan renewable energy target (RET) seemed straight-forward: mandate that purchasers of wholesale electricity buy an increasing proportion from renewable sources, and impose stiff penalties for non-compliance. Few appreciated that subsidising one form of generation amounted to imposing a tax on all others.

Compounded by weak demand growth since 2009, the RET has driven a steady exodus of fossil fuel generators from the market. Some aging, CO2 heavy, coal-fired plants had in any case passed their time and needed to go if carbon reduction targets are to be met. But several much newer, CO2 light, gas-fired plants have also been mothballed – squeezed between high domestic gas prices and electricity market revenues deflated by subsidised wind turbines.

These forces have caused the once contemplated role of gas as the ‘transition fuel’ to a much lower carbon generation mix not to materialise, so that we now have a sub-optimal generation portfolio with too few highly reliable, shoulder- and peak-period generators.

With the planned closure of the giant 1600 MW Hazelwood plant next month, market rules and operating protocols must be adapted quickly if the past week’s problems are not to be much worse come the summer of 2017/18.

Here are five suggestions warranting close attention:

1.       The protocols and norms by which market operator AEMO makes decisions need careful review, so that the system is run more conservatively and with greater emphasis on the consequences of ‘getting it wrong’ – for example, in assessing capacity requirements in South Australia, AEMO assumes a contribution towards peak demand from wind of nine per cent, yet when demand was high last Wednesday the weather delivered only half that amount. On its face, a much more cautious approach is needed.

2.       Greater caution as to target levels of supply reliability would also assist the case for AEMO invoking its ‘reliability and emergency reserve trader’ powers more frequently and, longer term, for much stronger interconnection between NEM regions. Heatwaves rarely hit all of the south eastern states simultaneously, and providing for greater diversity of supply across regions is critical.

3.       The generator playing field must be levelled so that the structural disadvantage imposed by the RET on forms of generation that can be scheduled with very high reliability (eg, fossil-fuelled and solar-thermal units) is eliminated, thereby improving the incentives to invest in this form of capacity. There should be no need to throw out the energy-only market design, but there is opportunity for market-saving innovation, perhaps by introducing a price premium for output from scheduled generation, paid for by a discount on the output from semi-scheduled generators (mostly, wind) that only ‘turn up when they can’.

4.       The market price cap should be raised so that it more closely reflects the cost to customers of losing load, and encourages peaking plant to be more available – even if deployed for just a few days per year. For the energy only market design to work as intended, it must not prevent peak period prices from reflecting the high cost of load shedding or non-supply. Ensuring the demand side of the market can see and respond to high price events would also assist energy consumers to make informed choices on peak days.

5.       Lastly, the Victorian and NSW governments could assist by easing their moratoria on gas exploration and development, and facilitating arrangements that enable land-owners to share a greater proportion of the potential value of onshore gas reserves. Improved availability would take the pressure off domestic gas prices and strengthen the viability of gas-fired generation.

The first four of these measures would all add to the cost of generating and delivering electricity, and so the prices paid by consumers, while the fifth is also far from popular. However, the cost to consumers and the economy as a whole of an unreliable power system is a much higher price to pay. Decarbonising our energy system involves hard choices, and time is running out for those choices to be made.  


[1] By contrast, generators in Western Australia (not part of the eastern states market) get paid just for being available, and WA consumers now pay a high premium for capacity they do not need.


Greg Houston was interviewed in relation to the challenges facing the NEM on ABC’s 7.30, Monday 13 February. See:

Article originally published on LinkedIn
Posted on February 14, 2017 and filed under Articles.