Posts tagged #Greg Houston

Airports not exercising market power – Productivity Commission

February 2019

The Productivity Commission today released its draft report on the Economic Regulation of Airports. 

We recently prepared analysis for Australia’s major airports and showed that airports have not been exercising market power in aeronautical, car parking or ground access services.

The draft report finds that existing airport regulation benefits the community and remains fit for purpose, and agrees with our analysis that Australia’s four major airports have not systematically exercised market power.

In aeronautical services, airports are constrained by the countervailing power of airlines, and generate “returns sufficient to promote investment while not earning excessive profits”. Prices at airport car parks are “not the result of market power”, but reflect the high opportunity cost of land near airport terminals, and act as signals to manage demand and reduce congestion. Airports are constrained in car parking by the myriad ways to access the airport.

The PC also finds that the current approach to regulation works well and wholesale changes are not justified. Instead, it recommends updating the current monitoring regime so that airports include more detail in their cost and revenue reporting to assist in future assessments on the effectiveness of regulation.

The PC is now accepting feedback on the draft report ahead of the final report in June.

The HoustonKemp team advising Australia’s major airports included Greg, Luke, Brendan, Sarah, Bronwyn, Alyse and Nick.

Airport market power – taking off or pie in the sky?

August 2018

Greg, Luke, Sarah, Bronwyn and Nick recently advised Australia’s four major airports as part of the Productivity Commission’s inquiry into airport regulation. We analysed the extent to which the airports have market power in car parking and ground access, and whether they have used any such power.

Our analysis shows that, despite the ACCC’s repeated claims of “very high” profit margins (see here), the airports do not appear to be exercising market power in the provision of car parking or ground access services. Indeed, car parking prices appear to be explained to a significant extent by locational rents and convenience premiums, which are key elements of efficient pricing.

The airports are materially constrained in car parking by off-airport car parking operators and the availability of many other transport options with a diverse range of features and prices. The airports also have a strong incentive to maximise the number of visitors accessing the airport, since ground access revenues tend to represent only a small proportion of total airport revenue.

Our reports can be found here: Brisbane Airport, Melbourne Airport, Perth Airport and Sydney Airport.

Posted on September 11, 2018 and filed under Reports.

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.

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.

Competitive effects of office product suppliers merger

November 2017

Greg prepared two expert reports on behalf of Complete Office Supplies that, with the assistance of Luke and Tony, were submitted to the High Court of New Zealand. Complete Office Supplies’ brought injunction proceedings to prevent Platinum from acquiring rival office supplies firm OfficeMax. The Commerce Commission subsequently joined the proceedings. Later Platinum agreed to divest Winc to a purchaser approved by the Commission once it acquired OfficeMax.

Posted on November 29, 2017 and filed under Reports.

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.

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: http://www.abc.net.au/7.30/content/2017/s4619264.htm

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

Compensation for extinguishment of native title

March 2016

Greg Houston testified in late February 2016 Federal Court proceedings seeking to determine the appropriate compensation for various Northern Territory government acts that extinguished native held by the Ngaliwurru and Nungali peoples. The acts took place in the 1980s and 1990s, in the process of forming what is now the NT town of Timber Creek (2015 population: 231), and form a 'test case' that will establish legal and economic principles to be applied in many other such native title compensation claims. More information can be found here.

Posted on March 24, 2016 and filed under Announcements.

HoustonKemp Seminar Series: Allowed rate of return

November 2015

Recent debate on the allowed rate of return for regulated energy networks has absorbed thousands of pages of service provider, expert and regulator analysis, much of which now sits for decision by the Competition Tribunal. In the first instalment of the HoustonKemp seminars series, our experts Greg Houston, Simon Wheatley, Brendan Quach and Daniel Young, provided a ‘lay person’s review’ of the issues that will drive allowed return outcomes over the coming year. Our speakers’ presentations can be found here.

Posted on November 30, 2015 and filed under Presentations.

New Zealand Commerce Commission’s review of Input Methodologies

August & September 2015

Greg Houston and Carol Osborne assisted New Zealand electricity lines and gas pipelines business, Powerco, in relation to the Commerce Commission’s review of its ‘input methodologies’ for setting price and revenue caps. In a report on the methodology for determining the regulatory WACC, we identified elements with the potential to improve the incentives on businesses for prudent and efficient decision-making. In a second, supplementary report, we responded to submissions by the Major Energy Users Group and Sustainable Electricity Association New Zealand. These reports can be found here and here.

Posted on September 16, 2015 and filed under Reports.

Private Financing of Airport Infrastructure Expansions

July 2015

In the almost two decades since Australia privatised its capital city airports, sustained passenger growth has now used up most of those airports’ then spare capacity. Sydney, Melbourne, Brisbane and Perth airports are now each engaged in the planning and execution of capacity expansions on a scale that, amongst privately-owned airports not subject to formal price control, is without precedent, globally.

Greg Houston recently delivered an ‘Aviation Insights Series’ address to the Singapore Aviation Academy on the economic and financial challenges arising when major airport capacity upgrades must be planned, financed and built on a foundation of voluntary commercial agreements with airlines. Greg’s presentation can be accessed here.

Posted on July 20, 2015 and filed under Presentations.

Commerce Commission’s Proposed Framework for Chorus

May 2015

HoustonKemp was engaged by Chorus, the New Zealand telecommunication network owner, to provide advice in relation to the Commerce Commission’s framework for assessing whether an uplift should be applied to the WACC and/or price for Chorus’ unbundled cooper local loop services. We concluded that the Commission’s proposed framework did not give sufficient attention to the implications of its decision on investment incentives. Our report can be found here.

Posted on May 18, 2015 and filed under Reports.

AEMC Public Forum

25 February 2015

On 25 February 2015, Greg Houston presented at the AEMC Public Forum in Sydney as part of the East Coast Wholesale Gas Market and Pipeline Frameworks Review. Greg provided insight to the current Council of Australian Governments' gas market vision, an overview of an appropriate assessment framework for the review and some candidate focus areas for consideration. Greg's presentation (along with the presentations of all other speakers) can be found on the AEMC website.

Posted on March 9, 2015 and filed under Presentations.