Thank goodness we didn't have the pandemic in 2014

Failed Leiberal Prime Minister Tony Abbott has given us (another) reason to be grateful that the COVID pandemic struck in 2020 not 2014. Of course, being as far into the 21st century has already been a good thing because of the wider prevelance of smart phones making QR code use and contact tracing easier. But in Mr Aboott's contribution to a book to be released in March with the awful title Cancel Culture and the Left’s Long March (awful as it unthinkingly siomplt links two new right slogans neither of which has any substantive meaning), which was published in The Oz on Saturday, he tells us we have been all wrong in managing the pandemic.

Mr Abbott observes that the National Pandemic Plan while he was Health Minister did not include 'advice to close state borders, shut workplaces and cancel mass gatherings in a moderate pandemic.' He then goes on to argue that these measures were unneccessary in the current pandemic, and that acting otherwise has been a betrayal of 'conservative values.'

It is interesting that a theme of Mr Abbott's writing from his campaign speech for preselection through writing Battlelines to this contribution, he steadfastly claims that we should 'stop knocking our country' or that we should have a 'renewed emphasis on the active virtues and robust attitudes that have made Australia a country to be proud of.' Yet all he does in all of these is criticise Australia by criticising everyone who doesn't agree with him.

On the core issue of COVID Mr Abbott falls into the camp that claims the global response has been an over-reaction. He says 'When the Italian hospital system seemed to be collapsing under the strain of COVID cases, a degree of public panic was understandable. But nine months later, with the virus much better understood and much less likely to kill...it's still being treated like the grim reaper.' As to death rates Mr Abbott observes 'To what extent should everyone be locked down in order to protect a vulnerable minority.'

This is a complete failure to understand the virus - or viruses in general. Firstly, it wasn't public panic, it was professional assessment of the capacity of the health system to cope. The goal was slowing the spread sufficient to get health resources in place. We discovered that using standard pandemic controls - correctly identified by Abbott as dating from the Spanish flu - we identified that our borders made it possible to go beyond slowing the spread to eradication. 

As we are discovering the health impacts are not only death (which is concentrated in, but not restricted to, the elderly) but longer term impacts including breathing difficulties and no doubt more yet to be identified.

But the other reason for wanting to suppress the virus is that every time it is transferred increaes the possibility of dangerous mutations. We are already seeing mutations that make the virus more infectious, but mutations could also make it more dangerous. 

Mr Abbott's real concern appears to be that Government is doing anything at all - based on what he identifies as 'conservative' principles. He writes:

For all governments at all times, the challenge is to get the balance right betweeen keeping people safe and keeping people free....The pandemic has presented all governments with invidious choices, but especially conservative ones that are normally intent on minimising official intrusion into people's daily lives.

This is consistent with his other writings, but really confuses being 'conservative' with being 'liberal.' A true conservative is someone who just thinks we don't need change - the original Tories supporting the monarchy and aristocracy against the dangerous liberal ideas of the merchant classes and the socialist ideas of the working classes. The victory of the liberal democratic order changes all that so - yes - a conservative can be someone who is intent on promoting liberty. But in doing so, these conservatives are living contradictions - they are supporting the unthinking retention of the victories of previous progressives.

Mr Abbott's explanation for why we pursued strategies that weren't included in his pandemic plans is that there are 'seismic cultural shifts now underway in the West, writing:

We are materially rich but spiritually poor, and generally more fearful. More self-confident governments would not have placed so much faith in unelected and unaccountable experts....Societies that retained more 'faith in the world to come' would have been less alarmed by a virus like those that have readily been seen off before.

It is hard to tell if the reference to the 'world to come' is that we should welcome death as our pathway to heaven, or, in contradiction to being a conservative Mr Abbott believes in a unidirectional arrow of progress. 

It is Mr Abbott's attitude to the advice of experts that is most telling. To not place faith in experts is to suggest their advice should be ignored, that Governments did whatever they suggested and bugger the consequences. But Governments have been doing exactly what Mr Abbott claims they should do, getting 'the balance right betwen keeping people safe and keeping people free.' To that could be added keeping people prosperous - i.e, caring for the economy. And on this Governments also took advice from experts.

He tries to inject a degree of political bias, suggesting that Labor Premiers have been 'revelling in slamming shut their borders, restricting their businesses and giving orders to the public.' But despite his protestations the Liberal Premiers have been no different. Steve Marshall ordered an immediate lockdown for a week after a quarantine leak, NSW slammed shut its borders with Victoria (and - one might add - in a way that didn't deal well with the border towns). 

Mr Abbott's criticism is therefore of all Australia leaders, all of whom are enjoying widespread public support. His criticism is founded in decision making not being 'conservative' enough. He writes:

Always, it's the job of a thoughtful conservative to question and to doubt; to insist that new measures be justified and proportionate, especially when change goes counter to considered positions that conservative political movements have been supporting for decades. 

And there is the rub. The response to the pandemic was wrong because it took actions that limited 'freedoms' of some kind. Nevermind the jurisprudence around concepts of freedom such as  the judgement of Oliver Wendell Holmes, Jr. in Schenck v. United States, where he wrote:

The most stringent protection of free speech would not protect a man in falsely shouting fire in a theatre and causing a panic. ... The question in every case is whether the words used are used in such circumstances and are of such a nature as to create a clear and present danger that they will bring about the substantive evils that Congress has a right to prevent. It is a question of proximity and degree.

 

Restrictions on movement to protect public health is not a restriction of freedom - either legally or ethically. It is not the action of anything other than a liberal democratic state exercising its responsibility to keep people safe. To suggest otherwise is delusional - a word often used about Mr Abbott.

*********************************
Life is what happens while you are busy making other plans JWL

Regulators and hammers - recent folly of the ACMA

In the great wash up of regulatory analysis, one of the reasons why regulation should be avoided is because it requires regulators. And regulators have a tendency to supplant the objective of the regime they are regulating with the objective of regulating.

The Telecommunications Act 1997 expressly recognised this regulatory risk, and specifies a regulatory policy at section 4.

The Parliament intends that telecommunications be regulated in a manner that:

                     (a)  promotes the greatest practicable use of industry self‑regulation; and

                     (b)  does not impose undue financial and administrative burdens on participants in the Australian telecommunications industry;

but does not compromise the effectiveness of regulation in achieving the objects mentioned in section 3.

 
Way back in the late 1990s the then Australian Communications Authority labelled the regime 'co-regulatory' to reflect the fact that the regulator had significant powers to require the development of codes, to register and enforce codes and to make 'standards' in the absence of codes. The Minister can direct the ACMA to make a standard.

The regime also very clearly delineates three kinds of entities covered by the legislation - carriers, carriage service providers and content service providers. To own network infrastructure that is used for supply to the public a person needs a carrier licence, which you obtain from the ACMA. Anyone who supplies services is a service provider, and there are obligations under the Act that then apply including being a member of the TIO, but you don't need to apply to be a service provider.

In 1999, for no other reason than the Government was trying to highlight the extensive consumer protections in the regime, some Parts of the TA were deleted and re-legislated as the Telecommunications (Consumer Protections and Service Standards) Act 1999. (By recollection the current Minister for Communications was at the time an Adviser to the then Minister). This largely pointless, and unsuccessful, political gesture has simply made interpretation of the regime difficult. As a simple example the concept of a 'standard telephone service' does some heavy lifting in both Acts, but is defined in s6 of the T(CPSS)A. 

That the existing legislative structure is complex and confusing has been demonstrated recently by the regulator (the Australian Communications and Media Authority) itself, that in a submission to a review of legislation has simply made errors in its own interpretation of its powers. The conclusion the ACMA reaches is, as suggested by my introduction, that the regulator needs to regulate more, writing:

We consider that clearly drafted and properly enforceable rules made by the regulator—rather than the current co-regulatory arrangements— are required to deliver these essential consumer safeguards. Simple, clear and better-defined commitments would also provide more certainty to industry of its obligations to consumers than current code requirements, which are often confusing and not necessarily well-understood or applied by all providers.

The ACMA starts its Executive Summary by asserting that self-regulation was chosen as policy because the focus of the Act was introducing competition and 'the framework prioritised the use of industry selfregulation so that the then nascent industry could develop rules as real-life issues emerged.' Noting there are now some 1400 providers the ACMA concludes the Act has achieved that goal and self-regulation is no longer appropriate. 

This is simple bunkum - the Explanatory Memorandum to the Bill states:

The Bill also contains a statement to the effect that the Parliament intends that telecommunications be regulated in a manner that promotes the greatest practicable use of industry self-regulation and does not impose undue financial and administrative burdens on participants in the industry, but does not compromise the effectiveness of regulation in achieving the objects of the legislation (see clause 4).  This is intended to guide the telecommunications regulators in the performance of their functions and the exercise of their powers.

The ACMA then informs us that telecommunications is now an essential service - which perhaps comes as a surprise since the Acts include the Universal Service Obligation created because they already were an essential service. What the ACMA may be trying to address, and doing pooorly, is that broadband internet access is now an essential service not just voice telephony.

It was in recognition of this development that the Rudd Government introduced the National Broadband Network - universal wholesale access to the NBN provides universal broadband and telephony access. 

The NBN, we are then told by the ACMA, is part of complex supply chains which somehow or other are also meant to be new. Once again this is not the case -- apart from Telstra everyone else was providing most broadband over infrastructure that had similar supply chains (the ULL for access plus acquiring transmission from exchanges to internet nodes). The ACMA shows the ongoing confusion about carriers vs service providers by listing as different modes of supply:

> licensed carriers that provide services to customers and carry other retail providers on their networks

> retail providers that do not own their own network infrastructure.

 

Only Telstra as a carrier was ever carrying the majority of its traffic end-to-end over its own infrastructure. The industry works through interconnection, an activity undertaken entirely on the basis of processes agreed through the self-regulatory framework - with pricing determined by the ACCC in some circumstances.

In reality it is only carriage service providers that provide services to the public, in some cases that uses some infrastructure owned by the provider who also therfore is a carrier.

The ACMA also thinks there is a need for 'transparency of the performance of carriage service providers (CSPs) against key metrics related to essential consumer protections.' As a citizen I don't need to provide a report to anyone on a peridic basis that I haven't stolen anything, or that I haven't littered, or how often I've treated others as I would like to be treated. 

The ACMA says its research shows 'In addition to the factors identified in the consultation paper, recent ACMA data and research reveals an increasing misalignment between matters that are important to consumers and the performance of industry in these areas. Unsurprisingly, our research shows that the majority of Australian adults, households, and small and medium-sized businesses consider customer service and faults management to be important telco issues.'

There is a real problem in the telco market because consumers either have such a low expectation of customer service that they buy regardless or they have such a high level of expectation they buy regardless. More regulation only creates more of the latter, while the ACMA's survey only provides more of the former. What is needed is clarity for consumers that service provider quality is a variable and how to find out about it. I made my own suggestions for how to do this back in 2009. But you solve nothing through reporting on 'essential' consumer protections.

The issue with the ACMA research process is that it doesn't help consumers in exercising choice. The survey needs to be about actual providers and rate providers on their performance on things that matter to consumers. To do this effectively the ACMA needs to use a biased sample to make sure enough customers of smaller telcos are sampled to be statistically significant. 

The ACMA further asserts 'The absence of an ability to exit providers that are responsible for repeated or egregious failures to comply with essential consumer protections from the market has made it easier for some unscrupulous providers to continue to operate. This is to the detriment of consumers.' This is an interesting observation, but no evidence was provided of the magnitude of the problem. The provisions to be able to get a carrier to exit or prohibit return were all to do with the liability of the carrier to pay licence fees and USO levies - not customer service outcomes.

The ACMA is also wrong to assert that in energy providers have to register. Retailers do, because they have financial obligations to settle in the market. But to date thousands of 'embedded network operators' haven't been required to do so.

While personally I support the idea of a 'register of carriage service providers' the only criterion that should apply to the register is providing evidence of TIO registration. However, a similar outcome could be achieved by a simple determination that carriers (including NBN Co) can only provide services to a service provider once the provider has demonstrated their membership of the TIO.  

Further the ACMA makes what are simply ludicrous claims about the state of competition, saying:

There is also evidence that impediments exist for a significant number of consumers to take advantage of Australia’s competitive telecommunications sector by changing provider. Our 2020 telco consumer experience research shows that 47 per cent of Australian adults had not changed their mobile service plan or provider in the previous two years. A little over half (53 per cent) of Australian adults have been with their current telco for their mobile phone for more than five years.

Given that plans that include the bundling of handsets are still widely prevelant it is unsurprising that consumers don't churn at durations less than contract terms. Secondly, mobile coverage is not uniform between providers and for this reason alone a degree of 'stickiness' is to be expected. 

The ACMA also still seems to be tying itself in knots over artificial distinctions between 'over the top' services and 'telephony' and the archane description of a 'standard telephone service.' There is a far simpler approach than empowering the ACMA to make some additional rules - simply change the definition of the STS. A 'standard telephone service' is any service that enables the establishment of a communications channel to another person by means of a telephone number. 

The ACMA in seeking the power to make rules provides no evidence that it has been frustrated by the existing process. Given the ACMA can make standards if requested codes are not forthcoming or there are deficiencies in existing codes, one would expect the ACMA to have exercised this power if the codes process was deficient. Similarly, if the matter was egregious and important, the ACMA would have had the opportunity to seek a direction from the Minister.

The central consumer protection code - the Telecommunications Consumer Protection Code - was initially made in 2012 when Senator Conroy was Minister and I was a new adviser in his office. The development of the code had reached an impasse over some clause (that I can't remember) and the ACMA was preparing to reject registration of the code and move to make a standard. When the ACMA understood that the Minister would regard this as a failure a new round of negotiation took place between the ACMA, CommsAlliance and ACCAN and a resolution was reached.

My personal experience is that regulations made by regulators are usually so abstracted from operational reality as to be worse than the drafting of industry codes. Once again the ACMA provides a littany of assertions about code processes without any demonstrated cases. 

I simply won't be drawn on the ACMA's poor discussion of the differences between aspects of the consumer protection regime, other than to note that providers are still bound by the Australian Consumer Law. One of the drawbacks of the telco regime has been the propensity for the ACCC and ACMA to both stand back and argue it is the other who should take action over some specific conduct. The ACCC quite rightly notes the hurdle for the ACMA direction is much lower than the legal hurdle for prosecution, while the ACMA argues its directions have little effect.

The practical matter is that increasing the ACMAs enforcement powers will only have two consequences - the first is that it will constrain the ACMA in deeper levels of legal analysis and secondly the scope of any proposed regulations will be much narrower than the existing provisions.

The ACMA's submission is a perfect case study in regulation and why regulators are the central problem in most regulatory schemes. 

Unfortunately the paper to which the ACMA was responding was also poorly constructed. It should have started with a simple question - what consumer protections required in a communications market made up of broadband, telephony over broadband and widespread mobile penetration? What is the most effective way of delivering these protections?

As the saying goes, when all you have is a hammer everything looks like a nail. The policy principle favouring self-regulation is as relevant today as it was in 1997, and the ACMA's submission provides the bulk of the evidence of why that is so. 

*********************************
Life is what happens while you are busy making other plans JWL

History is always written by the victors - MTM morphs back to NBN

Today the Communications Minister announced a plan to bring 'ultrafast broadband' to millions of families and businesses and he welcomed the release of the NBN Co corporate plan demonstrating how this can be financed from the company's internal resources and assume on its own books the debt previously provided by Government. (2)

The recognition that the MTM isn't the ending point seems to have surprised some. But it was always Malcolm and Paul's contention that the most cost effective way to this future was in a two stage build. These upgrades include some fibre to the premises but it also includes the actual deployment of G.fast and HFC upgrades that have been part of the government's and the company's rhetoric for seven years.

We do need to be thankful that the coalition has managed to churn through its leaders though. Tony Abbott may well not yet be convinced that 25 meg is 'more than enough' for any household as he famously declared in April 2013. Malcolm Turnbull may not yet want to admit that the advice he received in his strategic review and cost benefit analysis that higher bandwidths would never be required because of compression was just ex post justification of the MTM by advocates rather than experts.

Let's just revisit some of this. Quoting a report of one of these advocates (Robert Kenny) the Strategic Review (P. 78-9) said:

A recent UK study estimates that the median UK household today requires a maximum download speed of 8Mbps...  By 2023, even as new applications (such as over-the-top video and cloud computing) become more widespread, this is forecast to grow to 19Mbps. This takes account of improvements in compression.

The review also noted:

Only a small proportion of consumers in Western countries have so far taken up plans offering greater than 50Mbps (11 percent or less in 2012), and penetration of greater than 50Mbps plans is expected to remain less than 20 percent by 2017 in most Western countries. 

At any point in time, there will be consumers willing to pay more for higher speeds.However, consumer research indicates that for the majority, price is the most important factor in selecting a broadband service, and faster broadband speeds have diminishing marginal value.

The review used these arguments to reduce the revenue forecasts included in the NBN plan and hence increase its total funding cost, unfortunately the Strategic Review did not include any detail on the revised expected take up of different speed tiers. Today the Minister announced that 75% of consumers are selecting plans of 50 Mbps or more. Yet the Strategic Review and the counterfactual embedded in it remains the narrative that the media accepts.

It is indeed rewarding to see Fletcher make the announcement. Even though he and I worked together on alternatives to Telstra's 2005 pitch for a regulatory holiday to build FTTN, in his boook Wired Brown Land he argued Australia had no broadband crisis and that it was all only a play by Telstra to get that access holiday. My then new CEO at AAPT Paul Broad (now of Snowy Hydro) shared the fantasy that an FTTN build could be constructed as infrastructure based competition. 

COVID-19 has shown us all how much we can do online, why upload speeds are as important as download speeds and that it is easy to have five or more services operating needing high speeds simultaneously. There is no doubt that the experience would have been better had we had FTTP NBN in place everywhere. But the coalition has successfully claimed the space that the true NBN could not be rolled out on time and on budget. Their rhetoric is 'thank goodness for the MTM because it gave us broadband in time for the pandemic.'

My former colleague Andy Byrne (he whose premises were raided by the AFP - remember that) wrote a really great piece for Labor's 2016 election policy that manifestly destroyed the three counterfactuals that had been spun by the coalition about the true cost of the true NBN. These three counterfactuals (their 2013 policty, the strategic review, and the analysis with the first MTM corporate plan) are however what is now believed.

Never mind that had we proceeded with the FTTP rollout the upgrade to gigabit access would have already occurred. The cash flow of NBN Co would now be diverted to extending fibre into areas currently served by fixed wirelees. This was never documented.

The NBN may be unique as being one infrastructure project financed as part of two financial crises. The reason why Conroy had to meet Rudd on a plane in January 2009 to get agreement on the NBN was that Rudd was jetting around the country that way on a speaking tour talking about GFC response (1). Wayne Swan revealed in his book The Good Fight that the NBN was nearly announced as part of the February 2009 statement on additional stimulus. Today Finance Minister Cormann said This is the right time for this network upgrade. There is a long term trend of broadband demand growth – with a very significant spike this year as COVID-19 has changed the way we use the internet. This is a major infrastructure investment which will bring immediate demand stimulation, with some 25,000 new jobs over the next two years. 

The really depressing part is the other part of the work Conroy was prosecuting as the Minister for Broadband and the Digital Economy. Labor recognised the need for other work to be developing society and the economy to deliver the full benefits of the investment in broadband. This included, among other things, programs to develop rtele-health and tele-education. When the pandemic hit we saw the government scambling to temporarily introduce telehealth by telephone calls -- we should already be at the point where telehealth by video call is a normal mode of delivery. Students and teachers who had no experience of tele-education were plunged into online resources and hastily developed zoom skills -- how much better if we had developed the ability to join a student from anywhere to a class already, be it for specialist teaching, remoteness or quarantine.

Ignoring the 'why' of broadband of course fitted the coalition narrative that the 'what' of broadband needed to be so much less than Labor's plans.

Finally, lurking online I am continually hearing complaints about NBN Co pricing - which alludes to the comments above about consumer expectations of price. The ABS in its CPI data publishes index numbers for the goods and services that make up the CPI. The data for telecomms has been around since September 1980. The chart below shows the real telecommunications index (telco index/CPI) and for comparison the real electricity and gas indexes. It is an interesting graph. Firstly it shows a steady price decline across four decades in telco prices (the blue trend line). The green trend line is prices from the start of competitive fixed broadband (2000 with declaration of ULL) to September 2013 as the NBN built up speed and the brown trendline is the period post 2013. The rate of price decline has been accelerating under the NBN (and structural separation). 

An alternative data source is the ACCC's etail price monitoring. The chart below shows this as two series with 2013-14 set to 100 (the ACCC changed its methodology after the 2015-16 report).

For comparison the double blue line is the ABS index rescaled to make 2013-14 equal 100. Important parts are that fixed broadband series starts in 2006-07, that fixed line voice is now not measured and that mobile has been split between voice and broadband. These also are for all sectors not just households. They reveal that the ABS data is reliable, but that mobile prices continue to decline faster than fixed broadband. This in itself is fascinating because when we were heading to the 4G auctions the talk in telco land was that operators were worried that they couldn't make money out of 4G.

In short, it is pleasing that the Liberal/National government are understanding the signiificance of broadband as national enabling infrastructure. Consumers are doing very well on prices as well. It would be nice if the Morrison government could now address the other programs to further leverage the infrastructure investment 


Footnote

1. It is refreshing to hear it again being called NBN Co rather than 'nbn' which was some marketing gurus scheme to rebrand the unrebrandable.

2. The meeting on the plane has been subsequently repeatedly written up as the NBN being crafted on a beer coaster or a napkin on these flights. As the original story (that in the SMH) notes there was nothing of the sort - the Minister was having a perfectly normal discussion with the Prime Minister about the need to take a different policy proposal to cabinet. That is how cabinet works, Ministers can only work up submissions approved by the PM. The actual plan was discussed by the cabinets sub-committee (the gang of four) and full cabinet before announcement. Rudd's movements that week are detaile in John Button's A Year in My Father's Business. 

I haven't linked to the various documents housed on my digecon.info website as I am having some DNS issues with it at the moment. 
*********************************
Life is what happens while you are busy making other plans JWL

More confusion in energy land

Phil Coorey in the AFR told us the PM's tactic (it isn't big enough to call it a strategy) is to use 'energy week' to reset focus on the recovery Today he rocked up to Newcastle for the second element of this with some very confused messages about electricity and gas. 

The big announcement was:

To ensure affordable, reliable power, we need the market to deliver 1,000 MW of new dispatchable capacity by the summer of 2023-24, with final investment decisions by the end of April 2021. Now that’s less than eight months - and we’re counting. Each day.

So, this is the plan. If the energy companies choose to step up and make these investments to create that capacity, great, we will step back. If not, my Government will step up and we will fill the gap. 

And to this end, Snowy Hydro is already developing options to build a gas generator in the Hunter Valley should the market not deliver.

The problem is, Snowy Hydro is just one of the companies. Indeed, despite its name, Snowy Hydro does more than just hydro - it already owns and operates three gas-fired power stations, with a total generating capacity of 1,290 MW and it also owns 136 MW of reciprocating diesel engine peaking generation in South Australia, located at three facilities. So Snowy Hydro can go make that investment. And for those who don't know Snowy Hydro is one of those 'gentailers' the 'big stick' legislation was designed for. It runs those outrageous jingoistic - if not xenophobic - 100% Australia Red energy ads. 

At the same time the PM seems greatly worried about gas prices. Gas is an essential feedstock in a number of chemical processes, especially for making fertiliser. It is also the best fuel if you want industrial heat. As pointed out here it makes more sense to stop burning gas for elerctricity. 

What the NEM needs is storage, and it isn't getting as much as it needs because of the market overhang from Snowy 2.0. For the historically inclined, Liddell has previously been responsible for power shortages in NSW. In 1981 stator winding faults took out three of the 500MW generators with some power restrictions in June and further power restrictions imposed for twenty days in December 1981, and twenty-six days in March-April 1982. The situation was temporarily relieved by additional power provided by 12 25MW gas generators purchased by Elcom and permanently once the first 660MW generator at Eraring came on line. 

The PM's announcement (or threat) continues the shambolic governance in the sector. The Australian Energy Council and Energy Networks Australia have commissioned a report from CEPA that has questioned the adequacy of the governance arrangements for the Australian Energy Market Operator, saying:

Given AEMO’s crucial, and growing, role in the NEM, we suggest it is timely to

revisit the existing governance framework. We consider that there is a case for reconsidering the strength of the accountability mechanisms that apply to AEMO, consistent with the level of scrutiny that is applied to system and market operators in other markets. 

This is a significant concern given the centrality of AEMO's work to the conclusions being drawn by Ministers. The simple facts are that AEMO has the incentive to 'catastrophise' the state of energy supply. But its own Integrated System Plan still saw value in new gas generation only if the price of gas is significantly lower than it is today.

The CEPA report also suggested that, in keeping with other global models, AEMO as a monopoly market operator should be subject to economic regulation by the AER. But the AER came in for its own scrutiny from the Australian National Audit Office that found it only 'partially effective.'

The PM in his statement also said:

We must also though, modernise the way the electricity market operates to take account of technological change and to put more power into the hands of consumers. Now 21st Century electricity market needs 21st Century rules. A package of market reforms will come forward next year as part of the biggest shake-up of the National Electricity Market since it was created in 1998. New rules will take account of the increasingly distributed nature of generation and better recognise the critical stabilising role played by dispatchable generation.

The immediate focus will be on security measures, better integrating different generation technologies and a reliability framework. Longer term reforms will focus on rules for a two-sided market, revised investment programs and a framework for the exit of ageing thermal generators. 

These reforms, to be developed and agreed through National Cabinet’s new Energy Reform Committee, which tasked this work at our last meeting in fact just over a week ago. 

This of course is a reference to the Energy Security Board's Post 2025 project. This is a most curious project that began as an aside after discussion of summer readiness plans at the COAG Energy Council's October 2018 meeting. The Communique noted:

Ministers discussed the ongoing work by market bodies to implement Finkel recommendations on reliability and system security in the NEM. Ministers also asked the ESB to provide advice on a longterm, fit-for-purpose market framework to support reliability that could apply from the mid 2020’s as the market transitions. The ESB will report back to Council in December 2018 on a forward work program for endorsement. 

After the December 2018 Council noted:

Ministers also agreed a work program for the ESB to develop advice on a long-term, fit-forpurpose market framework to support reliability that could apply from the mid-2020s. 

 In March 2019 the work program for the project was posted on the Energy Council website with the following commentary:

The COAG Energy Council has tasked the Energy Security Board with developing advice on a long-term, fit-for-purpose market framework to support reliability that could apply from the mid-2020s. By the end of 2020, the ESB needs to recommend any changes to the existing market design or recommend an alternative market design to enable the provision of the full range of services to customers necessary to deliver a secure, reliable and lower emissions electricity system at least-cost. Any changes to the existing design or recommendation to adopt a new market design would need to satisfy the National Electricity Objective. This forward work plan was approved by the COAG Energy Council at its December 2018 meeting.

Any significant changes to the electricity market design would need to be well considered, including substantial input from stakeholders and detailed consideration of alternative market designs, and telegraphed well in advance of any change to ensure there is minimal disruption to the forward contract markets for electricity.

If changes are required to deliver a long-term, fit-for-purpose market framework by the mid-2020s, then consideration of any required changes should be concluded by the end of 2020 to enable sufficient time for the market to transition to the new market framework.

The very clear expectation was a full consideration of changes considered by the end of 2020. 

There is only one aspect of this project that needs to be highlighted here, which is the question of scenarios. The work plan stated:

Market design options will be informed by reasonable expectations of the generation mix in 2025 and beyond, the extent of take-up of distributed resources, the ways consumers interact with the system, the configuration of the transmission network, external policy settings, future technology price paths, the potential development of a hydrogen industry, and the way these factors could all evolve over time (several of which of course will be influenced by market design options). Clearly there are various ways in which these factors can diverge from where we are today. Well-developed scenarios are also necessary for testing expected outcomes from the alternate market designs. This does not mean that the alternate market designs will or should be tailored to the scenarios, given that they represent only a handful of possible futures. 

Various parties, including the energy market bodies have developed and are developing multiple scenarios to inform their own analysis. However, scenarios are always to some extent designed for the particular use to which they are being put, and so this project will need to develop its own set of scenarios to be an appropriate tool for analysis. In doing so, it will undoubtedly draw on other similar exercises for input.

The work plan also listed scenario development as an activity in March-May 2019. When the ESB published its Issues Paper in September 2019, the accompanying website post said "The ESB is seeking feedback on the possible future scenarios that will be used when assessing options for change." The paper itself said:

The most comprehensive future scenarios of the NEM are set out in the Integrated System Plan (ISP). It is likely that the post-2025 project will use the ISP scenarios as the starting point for investigating possible future market designs across different technological scenarios.

How the ESB went from the belief that it needed to develop its own scenarios to a proposition that it should adopt the ISP scenarios has never really been explained. A particular weakness of the ESB scenarios as used for the 2020 ISP is that none of them - including Step Change - is consistent with a patrhway to net-zero emissions by 2050.

The April 2020 Design Paper advised the focus of the project had now changed to three phases of program development and would constitute seven 'market design initiatives.' It also announced that initiatives would be assessed against a 'balanced scorecard' of the strategic priorities identified by the ESB in its Strategic Energy Plan. 

The intent of Energy Council in initiating the Post 2025 project was clearly on a 'longterm, fit-for-purpose market framework.' The different alternative future pathways of system development - the scenarios - are a critical element for ensuring a longterm design is fit for purpose. All the indicators are that the combined efforts of the Eneregy Council, the ESB and other market bodies will not be a market design for the full transition, but will be another instance of The Fifth Risk referred to in Michael Lewis's book of that name...pursuing short-term solutions to long-term problems.

Or as Fiona Simon so succinctly described it in her book Metaregulation in Practice, the need of politicians to be seen to be doing something. 

*********************************
Life is what happens while you are busy making other plans JWL

National Cabinet misfires on energy ministers’ ‘tasking’

George Santayana’s dictum “Those who cannot remember the past are condemned to repeat it” should be foremost in the mind of policy makers as we face a period of economic change and stress. The history of Australia’s energy markets and the policy making approaches provide valuable lessons that should guide future policy. We are at another critical juncture due to the announcement by Scott Morrison in May that the Council of Australian Governments (COAG) is no more and is to be replaced by the National Federation Reform Council, the National Cabinet, and six National Cabinet Reform Committees announced in June.

Following National Cabinet on Friday the Prime Minister told his media conference “We also agreed to the tasking of the National Cabinet Subcommittee on Energy … with short and medium-term priorities, and that does include the resetting of the gas market.”

Later, as reported in Australian Energy Daily, a media release provided a little more detail:

Energy National Cabinet Reform Committee

Leaders agreed to the tasking for the Energy National Cabinet Reform Committee. The Committee will progress critical reform of the energy system as a key component of Australia’s economic recovery. It will work to ensure an affordable and reliable energy system to support job creation and economic growth for the long-term benefit of customers.

The Committee’s work program will focus on developing:

• Immediate measures to ensure reliability and security of the electricity grid ahead of the 2020-21 summer
• The redesign, by mid-2021, of the National Electricity Market to take effect after 2025; and
• A package of reforms, by July 2021, to unlock new gas supply, improve competition in the market and better regulate pipelines.

These reforms will ensure the market serves consumers by promoting efficient investment, operation and use of energy services, and by delivering secure and reliable energy at least-cost.

At the time of writing that was the only detail available.

The National Cabinet has missed the opportunity to reset energy sector governance and make real progress to managing the energy transition at least cost to consumers while maintaining security and reliability.

As the Energy National Cabinet Reform Committee energy ministers have had at least one meeting without the leadership of the market bodies present and without issuing a communiques from the meeting. Decision making without expert advice and in secret seems to be the fundamental change. This is the wrong direction, reform needs to empower the independent institutions and reduce the role of ministers.

The Council of Australian Governments (COAG) effectively ran from the Special Premiers Conference in October 1990 to its aboloition in May; in effect it existed from recession to recession. Despite the mythology, electricity sector reform in Australia wasn’t a result of Hilmer’s report on National Competition Policy, it was a decision of the second Special Premiers Conference in July 1991. The practical step taken at that meeting was the creation of the National Grid Management, as the Communique records:

The Council will encourage open access to the eastern and southern Australian grid and free trade in bulk electricity for private generating companies, public utilities and private and public customers. It will also co-ordinate planning of the generation and inter-connected transmission systems and encourage the competition sourcing of generation capacity and the use of demand management.

The National Electricity Market itself was created as a code agreed between the operators authorised by the ACCC. It wasn’t until the June 2001 COAG meeting that a commitment to a National Energy Policy created the Ministerial Council on Energy as one of its priority actions. COAG noted that “The new Council will have responsibility to provide effective policy leadership to meet the opportunities and challenges facing the energy sector and to oversee the continued development of national energy policy.”

This body subsequently became the Standing Council on Energy and Resources in June 2011. The latest iteration, the COAG Energy Council notes on its webpage that it was “a Ministerial forum for the Commonwealth, States and Territories and New Zealand, to work together in the pursuit of national energy reforms. The Council was established by the Council of Australian Governments (COAG) in December 2013 as part of a decision to streamline the COAG council system and refocus it on COAG’s priorities.”

The 2001 policy recognised the progress that had been made since 1991, but noted “there remain immediate and long-term issues that need to be addressed.” The issues they cited were National Electricity Market (NEM) issues of capacity, interconnection, pricing, (including transmission pricing), NEM governance, and regulatory overlap, the facilitation of increased market penetration of natural gas and improved demand management.

The agreed national policy objectives were listed as:

• Encouraging efficient provision of reliable, competitively-priced energy services to Australians, underpinning wealth and job creation and improved quality of life, taking into account the needs of regional, rural and remote areas;
• Encouraging responsible development of Australia's energy resources, technology and expertise, their efficient use by industries and households and their exploitation in export markets; and
• Mitigating local and global environmental impacts, notably greenhouse impacts, of energy production, transformation, supply and use.

We need not go any further into the detail of the 2001 policy, the outcomes of the high-level independent strategic review of medium to longer term energy market directions also established by the policy, or the specific tasks COAG assigned to the MCE. It is sufficient to simply compare the outcomes of the “effective policy leadership” of the Energy Council against the objectives specified.

The doubling in prices of electricity and gas in the decade after 2007 is well documented, the former in detail in the ACCCC’s Retail Electricity Price Inquiry. The ‘success’ in developing a natural gas export industry has come at the expense of the efficient use of gas by industries and households. And the ongoing failure to effectively join emissions policy and energy policy has been the fundamental failure of the last decade.

This failure was well described in the 2015 Review of Governance Arrangements for Australian Energy Markets chaired by Michael Vertigan. The review concluded that:

The pace of change in the energy sector is arguably unprecedented; and a ‘strategic policy deficit’ exists which has led to diminished clarity and focus in roles, fragmentation and a diminished sense of common purpose.

The most recent attempt to close the strategic deficit was the creation of an additional market body, the Energy Security Board, made up of the leaders of the three existing bodies plus independent chair and deputy chair roles. This structure has been recently reviewed and the intention is to replace it with a simple Market Bodies Forum.

To find an explanation for these very explicit failures we need look no further than Stephen Littlechild’s 2006 description of the reform process in the preface to Sioshansi and Pfaffenberger’s Electricity Market Reform: An International Perspective:

Proponents of electricity reform have had many and diverse aims, not always mutually consistent. The Introduction suggests that “the over-riding reform goal has been to create new governance arrangements that provide long-term benefits to consumers.” These benefits are to be realized by creating competitive wholesale and retail markets to improve efficiency and responsiveness to customer preferences, by incentive regulation of privatized transmission and distribution networks to improve their efficiency and facilitate competition across them—and, I would add, by reducing the role of government and political interference generally.

It is in the last of these objectives that the Australian arrangements have so spectacularly failed. Unfortunately, the National Cabinet has not recognised that there is something fundamentally wrong with the governance arrangements, and that reliance on a committee of ministers seems to be the cause of the problem. The ‘tasking’ from National Cabinet is doing little more than saying ‘keep doing what you are doing but look at improving gas supply.’ The latter follows the 2016 creation by COAG of the Gas Market Reform Group that completed its task in 2018, so in effect they are being instructed to redo this work.

A contrast between telecommunications regulation and energy regulation reveals that the superiority of the former isn’t really because of the clarity of the national constitutional responsibility, it is because the independent regulatory institutions (the ACMA and to a lesser extent the ACCC) have very clear mandates and full authority.

National Cabinet really needs to undertake its own review of the governance arrangements for energy rather than just effectively giving the cabal of energy ministers its fourth name in twenty years. To encourage National Cabinet, here are a few simple steps that could be taken:

1. Recommit to the Australian Energy Market Agreement, but refresh it and rename it the Australian Energy System Agreement. Extend the scope of the agreement to incorporate safety regulation and supply of all energy services in Australia. Make the core objective of the new agreement the transition of Australia to a net zero carbon emissions future (without a date though all states and territories have a 2050 or earlier target).
2. Recognise that the corporations power gives the Commonwealth the ability to legislate for energy (as it has recently done with the market conduct rules) and move the legislative authority to the Commonwealth. However, maintain a Council of Energy Ministers, and for constitutional clarity still have States adopt the national laws.
3. Create a new body – let’s call it the Australian Energy Authority – that replaces the Australian Energy Market Commission. Give it very clear objectives about managing the transition at least cost to consumers while maintaining security and reliability, with protection for vulnerable consumers.
4. Make the AEA the secretariat to the Council of Energy Ministers and abolish the committee of senior officials that currently sits beneath the Council. Give the AEA the ability to make subordinate instruments (Rules) on its own volition. Provide for the ability for the Council of Energy Ministers to disallow subordinate instruments.
5. Make the Chair of the AER and the CEO of AEMO ex officio members of the AEA. Change the legislation so that the powers, role and function of AEMO is specified by the AEA rather than in the legislation. Transfer some of the regulatory functions from the AER to the AEA, the AER should be focussed on the regulation of the natural monopolies.

The creation of strong independent agencies is not an undemocratic action. Our democracy is primarily defined by parliaments not the arrangements of executive government; indeed as an institution parliaments evolved to place constraints on executive governments.

Reconfiguring how often Energy Ministers meet or how many officials are in the room is not a substitute for substantial governance reform.

And finally, if governments really want to know how to increase the supply of, and reduce the price of, gas for industry there is a relatively simple solution. The most recent published Australian Energy Statistics cover the year 2017-18. Of 4,731 PetaJoules of natural gas produced in Australia, 1554 went to domestic consumption. A third of this, 572 PJ, was consumed in electricity generation.

While AEMO’s projections in the Integrated System Plan are for there to be no new gas peaking plants built it still foresees this demand for gas. However, more renewables backed with both short term storage and long term storage (batteries and off river pumped hydro) are a substitute – indeed they have characteristics that outperform gas. An aggressive program supporting the development of storage – in particular smaller distributed pumped hydro projects than Snowy 2.0 - will release more gas for industry. Considering that industry, with the exclusion of mining, only consumed 432 PJ accelerating renewables and storage would double the gas available to industry. 

*********************************
Life is what happens while you are busy making other plans JWL

Who is responsible for energy policy

Last week has seen the interesting prospect of the Victorian Government introducing derogations from the National Electricity Law in relation to transmission investment and instead providing quite broad planning powers to the Minister directly.

This raises two different sets of issues - the first is about constitutional responsibility for energy and the second is about the appropriate role of independent regulatory and market bodies and that of Ministers. This post is exclusively about the former.

In discussions of the move it is not uncommon to see variants of the claim that 'energy is constitutionally a state responsibility' as claimed in the Australian Energy Council's analysis.

It is important that we unpack this and realise that the correct expression is 'there is no explicit constitutional power for the Federal government over energy.' Then by default it remains with the States. Put simply State constitutions have very few limitations on what thy can make laws in relation to, but the Federal constitution specifies the things over which the Federal Parliament may legislate. These are mostly listed in section 51 of the constitution.

How items got included or not included in that list is an interesting part of history. For example subsection (v) gives the Comonwealt the power over 'postal, telegraphic, telephonic, and other like services.' Earlier drafting included only the internatioonal dimensions of those services, though they also had interstate trade characteristics.

Railways famously were not included - there was no international dimension and interstate trade was by coastal shipping (covered by subsection (vii)). Energy services were not included because they virtually didn't exist. The NSW Parliament only legislated after Federation to provide the power for municipal councils to generally provide electricity and gas services (earlier operations having been authorised by specific Acts).

So it is important to realise there wasn't a decision made that energy was a State constitutional responsibility, there just was no decision made.

We have seen recently however that the Commonwealth has been able to use other heads of power to unilaterally legislate. The decision to repeal Limited Merits Review, the imposition of the Default Market Offer and the Market Misconduct Bill were all achieved through the Competition and Consumer Act. That in turn depends on the corporations power.

While the States have all adopted net zero carbon targets, the practical rality is that Australia's emissions reduction obligations occur through a treaty. Were the Commonwealth to legislate in relation to this treaty and a state law was in conflict with it, federal law would prevail.

The interesting question is how other areas that weren't considered in the constitution have been subsequently dealt with. The radiofrequency spectrum is one such case. The Commonwealth has legislated for it, and initially did so for the purposes of managing the spectrum for defence purposes. But I believe the generic right is claimed through 51(v) on the basis that in 1901 the only use of radio was the telegraph, and so frequency is a like service.

This could be said of electricity - because the bulk of electricity being carried over wites in 1901 was telephony and telegraphs. Indeed, when the first Posts and Telegraph Act was debated it had a provision that gave the PMG complete rights over electric wires because of the interference they could cause to telphone and telegraph services.

While it is hard to argue that the Commonwealth has demonstrated it would manage energy well, there appears to be a very strong case that the Commonwealth could legislate the complete regulation of the energy sector under the corporations and external affairs powers with more than a nod to 51(v).

We might be better off with one Government and empowered regulators rather than nine Ministers all of whom want to be seen to be doing something.


*********************************
Life is what happens while you are busy making other plans JWL