Economic Efficiency. Market Failure and Regulation

2008/24175

Lyndon RoweChairmanEconomic Regulation Authority

28 April 2008

Economic Efficiency. Market Failure and Regulation – The Long Term Interests of Consumers

The Economic Regulation Authority

Functions• Administers Access to Monopoly Infrastructure• Licenses Service Providers• Monitors & Regulates Markets• Inquiries (Referred by Government)

The Governing Body

Full Time Chairman: Lyndon Rowe

Part Time Members: Steve Edwell, Peter Panegyres

Independent of Government, Industry & Consumers

Economic Regulation Authority

Governing Body

Lyndon Rowe – ChairmanSteve Edwell – Member

Peter Panegyres - Member

General ManagerPeter Kolf

Planning & Executive SupportChris Brown

Director

References & Research

Greg Watkinson

Executive Director

Licensing, Monitoring &

Customer Protection

Paul Kelly

Director

Gas & Rail Access

Russell Dumas

Manager

Finance & Administration

Pam Herbener

Executive Director

CompetitionMarkets &Electricity

Robert Pullella

Completed Inquiries - Mostly in the Water Industry

1. Annual Inquiry into the Bunbury and Busselton Water Boards’ Tariffs Feb 2008

2. Annual Inquiry on the Water Corporation’s Tariffs Jan 2008

3. School Bus Operators’ Charter Bus Operations Jul 2007

4. Annual Urban Water & Wastewater Pricing May 2007

5. Harvey Bulk Water Pricing May 2007

6. Country Water & Wastewater Pricing July 2006

7. Esperance – Kalgoorlie Bulk Water Supply Nov 2005

8. Urban Water & Wastewater Pricing Nov 2005

Current Inquiries

• Inquiry into Competition in the Water & Wastewater Services Sector

• Inquiry into Developer Contributions to the Water Corporation

• Review of the Grain Marketing Act 2002

Competition in the Water & Wastewater Services Sector

• Terms of Reference• Issues Paper

– Submissions closed 31 August 2007

• Draft Report– Submissions closed 1 February 2008

• Further Consultation Report– Submissions due 16 May 2008

• Final Report– Presented to Government 30 June 2008

Developer Contributions to the Water Corporation

• Terms of Reference• Issues Paper

– Submissions closed 14 December 2007

• Draft Report– Published 14 April 2008– Submissions due 16 May 2008

• Final Report– Presented to Government 30 June 2008

Review of the Grain Marketing Act 2002

• Terms of Reference• Issues Paper

– Submissions closed 8 February 2008

• Draft Report– Published 7 April 2008– Submissions due 16 May 2008

Gas Pipeline

Infrastructure:• DBNGP

• GGP

• AGN Dist System

• Kambalda Lateral

• 7 Licences

Electricity

Infrastructure:• SWIN

• 30 Licences

Rail

Infrastructure:• Westnet Rail

• PTA

Water

Services:• 30 Licences

Economic Efficiency

• Technical• Allocative• Dynamic

Electricity

All other commodities

Interests of Consumers

Optimum

Producer and Consumer Surplus

MC

AR

Price

Quantity

p

q

Consumer Surplus

p x q = Total Revenue

Producer Surplus

Total Cost

Supply of Goods & Services

Private GoodsBread, Butter etc

Mixed GoodsPipelines, Wires etc

Public GoodsFree to air, Defence etc

Common PropertyFisheries, Water resources etc

Market Failure

• Public Goods• Externalities• Market Power• Imperfect Information

ERA Regulation

• Market Failure is Monopoly Power• Access• Monopoly Pricing

Monopoly Diagram

P

Q

Ppm

Ppo

Qpm Qe Qpo

MR

MC

AC

D=AR

Natural Monopoly

Examples of the Challenge- Water Pricing

• Developer Charges• Usage Charges• Fixed Charges

Examples of Government Failure

• Environmental• Sprinkler Restrictions in Bunbury• Recycled Water in Bunbury

Quantity Restrictions

P

Q

S

D

Recycled Water in Bunbury

Concluding Comments

Economic Efficiency. Market Failure and Regulation.