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Access to wastewater transportation: optimal regulation in the event of declaration. [Paper presented at the ACCC 2005 Regulatory Conference, 28 - 29 July 2005)



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© Frontier Economics Ltd, London.

Access to wastewater transportation OPTIMAL R

E GULATION IN TH

E EVENT OF DECLARATION

28 July 2005

Boundaries to my talk |

The talk consists of my personal views only. | I shall not be addressing the criteria for declaration. |

I shall confine my remarks to appropriate regulatory environment if Services Sydney should succeed with their application.

Vertical wastewater chain

Customer service Reticulation Transmission Treatment Disposal

Activities proposed by Services Sydney

Customer service Reticulation Transmission Treatment Disposal

Is there a retail sewage collection market? |

NCC agrees that whether markets are functionally distinct requires a comparison of “the costs of co-ordination among activities within an enterprise”. If the former is lower than the latter, markets are functionally distinct. (para

6 .34)

NCC’s

a pproach is to let ‘the competitive

process’

decide

| “Where there is doubt as to the potential contestability of a market, declaration will facilitate resolution of this issue through the competitive process. Such opportunity should not be foreclosed by an initial view that the markets are not economically separable.”

( para

6.35)

What ‘competitive process’? |

Lesson from last ten years: whether markets work well or badly depends very much on the precise rules (John Macmillan) | What rules for access are likely to best guide the ‘competitive process’

referred to

by the NCC?

| The ‘competitive process’

referred to by the

NCC is a competitive test for by-pass.

Best test for efficient by-pass is ECP |

Efficient component pricing is a test for efficient by-pass. Set price for access at retail price minus avoided cost. | Example: if retail price is 100 and cost avoided by Sydney Water is 20, Services Sydney should pay Sydney Water 80 for the ‘transportation service’. Then if The incremental cost of SS is <20, their business will be viable.

Problems with ECP |

Estimating avoided cost may be controversial.

| Allocative efficiency not an issue because maximum retail price is set by IPART. | The only issue is productive efficiency - which is precisely what is tested by ECP.

Departing from building block approach |

ECP would depart from ACCC’s

t raditional

building block approach.

| England and Wales have recently introduced an access scheme for water transportation (but not for waste water). | Price of access is to be a retail minus (compared with usual cost plus).

| Access price = retail price -

a voided costs +

additional costs.

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