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Chapter 8 – Input Costs

INPUT COSTS

ACT Main Submission to the 2004 Review 143

Key Points of ACT Argument The input costs factors take account of non-policy differences in costs of

inputs to service provision: wages and salaries, office accommodation and electricity. These inputs are common to all State functions, and input cost disabilities are thus assessed for most expenditure categories.

Wages and Salaries disabilities component

The ACT supports the continued assessment of an input costs factor, as evidence available supports the view that there are a large number of non-policy influences (demand and supply side) which affect wage differentials between the States.

The ACT supports the use of a non-State sector proxy for wage differentials, which combines Commonwealth public sector wages and private sector wages, as it is the most appropriate policy-neutral measure for assessing wage cost disabilities.

The uniqueness of particular arrangements, such as the community policing arrangements with the AFP, and the proximity of the Commonwealth and ACT Public Sectors, only serves to strengthen the evidence that:

there are linkages between State and Federal wages; and

the non-State proxy should include both private and Commonwealth wages.

In regard to past arguments, the ACT contends that:

contributions from superannuation and other non–wage payments should not form part of the assessment as they may result in the determination of inaccurate wage relativities; and

no dominant employer effect exists as wages are largely determined through external labour market forces.

The ACT requests that:

the current practice of standardising State employment by the national employment distribution be examined as it may not reflect a truly policy neutral position on which to assess wage input cost disabilities; and

the discounting of the raw wage input cost factor be revised downwards from 50% to 25% given the improvement in the reliability of the Average Weekly Ordinary Time Earnings data and the changes in the composition and mix of the workforce since the 1999 Review which suggest changes to the heterogeneity judgements made by the Commission are required.

The ACT considers that the econometric analysis developed by Queensland in their Workplace Discussion Briefing notes, used to make comparisons about interstate wages, is deficient for a range of reasons. Most notably:

contrary to Queensland’s view that the ACT has lower than average State



a comparison of States’ actual public sector wages is defective, given that they are directly influenced by State Government policy and do not represent an appropriate policy neutral basis for assessing States’ relative wage disabilities.

Electricity cost disabilities component The premise for rejecting the ACT’s request to revise the electricity cost

disabilities, on the basis that electricity generating cost prices are used is unfounded.

the Electricity Supply Association of Australia (ESAA) data to assess electricity cost disabilities is based on average retail electricity prices, not generation cost data.

While the ACT agrees that the most appropriate assessment of electricity cost disabilities would result from the use of generation cost data, this data is not available.

The ACT considers that the electricity cost disabilities for WA and NT should be based on independent ESAA data as the current assessment:

relies too heavily on broad judgement; and

may reward States for taking higher cost policy options in relation to electricity generation and moving more slowly towards full implementation of the national electricity market (NEM).

The purpose and structure of the NEM as a completely interconnected single electricity market, requires an electricity cost disability assessment of one (1) for NSW, Victoria, Queensland, SA and the ACT.

There is no basis for SA to be provided with a disability factor or any more favourable treatment than any other State participating in the NEM.

The Territory considers that Tasmania should also receive a relativity factor of one (1) given its relative abundance of electricity supply and pending connection to the NEM via BASSLINK.

For those jurisdictions which are not participating in the NEM – WA and NT, the ACT considers that the most appropriate proxy measure of electricity cost disabilities remains the ESAA independent average retail electricity price data.

Appropriately then:

all States participating in the NEM, as well as Tasmania, should receive a disability equal to the Australian standard (1.00000); and

the disabilities for WA and NT, which are currently overgenerous, should be reduced to 1.30000 and 1.60000 respectively (based on ESAA data).

Weight applied to electricity and accommodation disability components The ACT supports the current weighting of 2% for accommodation input costs.

However, based on electricity expenditure as a proportion of total government expenditures, the ACT requests that electricity input costs be reduced from a weighting of 1% to 0.4%.


The input costs factors take account of non-policy differences in costs of inputs to service provision: wages and salaries1, office accommodation and electricity. These inputs are common to all State functions, and input cost disabilities are thus assessed for most expenditure categories.

In concept, the input cost assessment measures the ‘cost’ disabilities (the differences in unit price of inputs to services), as opposed to the ‘demand’ disabilities (the differences in the per capita demand for State services).

Given the above average wage costs faced by the ACT in the provision of government services, and hence the relative importance of the input costs assessment, the ACT has given a priority to the examination of this input cost methods.

In the 1999 Review several States attempted to dilute the intent of the input costs assessment. This position appears not to have changed in the 2004 Review, with Queensland in their Workplace Discussion Briefing Notes disputing the current methods of assessment. The ACT endorses the current approach, albeit with some minor changes.

Introduction

The ACT supports the application of the current input costs assessment to the 2004 Review, and considers that no substantial changes are required given the veracity of the current approach.

Importantly, the ACT views the non-State sector (as opposed to the private sector alone) as representing the best possible proxy for assessing wages and salaries disabilities. The ACT considers that other approaches suggested by a number of States for the determination of disabilities are poor in comparison to the non-State sector. For example:

the use of private sector wages alone would result in disabilities that are not reflective of circumstances faced by all States; and

State public sector wages would compromise the policy neutral approach which the Commission has been able to achieve through the use of the non-State sector.

In regard to the input costs wages assessment component, the ACT requests that wage disabilities continue to be assessed:

1 From this point onwards, the words ‘wages and salaries’ are referred to as ‘wages’ unless otherwise specified.ACT Main Submission to the 2004 Review 145

Background

Wages and Salaries Component


for both the general and specific provision of government services given the extent of the disability faced by the ACT; and

based on the non-State sector as it represents the best policy neutral measure of wage differentials between the States. In doing so, the ACT also requests that:

current practice of standardising State employment by the national employment distribution as it may not necessarily reflect a truly policy neutral position on which to assess wage input cost disabilities; and

the discounting of the raw wage input cost factor be revised downwards from 50% to 25% given the:

improvement in the reliability of the Average Weekly Ordinary Time Earnings statistical series as advised by the Australian Bureau of Statistics (ABS); and

the changes in the composition and mix of the workforce since the 1999 Review which suggest that changes to the heterogeneity judgements in the assessment are required.

Support for the input costs assessment

The need for State a wage differential assessment

The ACT supports the continued assessment of wages disabilities given that the Territory’s above average wages are a cost disability affecting the provision of all government services.

The ACT faces relatively high public sector wages for a selection of key occupations.

Structural Nature of Wage and Salary data

The ACT considers that the major drivers of State wages are the labour market conditions and the socio-economic characteristics existing in each State. The variables that have greatest amount of influence on wages include both demand and supply elements.

Demand elements include:

education and skill levels;

union influence/industrial strength;

the relative size of the State labour force; and

levels of unemployment.

Supply elements include the:

number and size of firms;

industry composition of all firms;



cost of living; and

level of economic activity.

In the ACT’s case, non-State employment comprises a much greater proportion of total employment than any other sector. The ACT Government regularly competes against Federal Government Departments in the local labour market in many similar occupations where more homogenous employment opportunities exist between State and non-State areas of employment.

The ACT considers that as there are non-policy influences which affect the wage differentials between the States, an input costs factor for each category (for both the scale affected component and other relevant components) should continue to be assessed.

Assessment of the Non-State Sector

The ACT supports the conclusion contained in the 1999 Review of General Revenue Grant Relativities. That is, that a non-State sector proxy for wage differentials, which combines Commonwealth public sector wages and private sector wages, should be used to assess wage disabilities.

The ACT supports the view put forward by a number of the States in the 1999 Review that the non-State sector proxy is a robust way of measuring wage disabilities. The use of non-State wages represents a policy neutral position and therefore reflects the best measure available for State public sector wage differentials.

The use of private sector wages by itself:

increases the variability of the sample, with a consequent reduction in the veracity of the assessment; and

would result in disabilities that are not reflective of circumstances in all States.

In some cases, State wages are largely influenced by Commonwealth wages, and it could be argued that State public sector wages are more reflective of Commonwealth public sector wages, than of private sector wages. The importance of Commonwealth wages is primarily due to the:

similarity and homogeneous nature of public sector occupations between the States and the Commonwealth; and

fact that a reasonably large proportion of Australia’s workforce (around 38%) are employed pursuant to federal enterprise awards.

The ACT is also opposed to the use of State public sector wages, in whole or part, to derive disabilities as this approach would compromise the policy neutrality method which has been achieved through the use of the non-State sector.



Police Wages and Salaries

In the ACT’s case, the wages of police officers represents a very strong example of the relationship between State public sector wages and Commonwealth public sector wages.

The ACT, via an agreement with the Commonwealth, remunerates Federal police officers, to provide community policing functions in the Territory. The Australian Federal Police (AFP) is, for all intents and purposes then, the ACT’s State police force as it provides the same functions as the forces in the other States (this matter is discussed in more detail later in this chapter).

While the strategic policy decisions regarding the AFP’s employment are still undertaken by the Commonwealth Government, the agreement has the effect of limiting the role the ACT has in relation to setting employment conditions and controlling expenses. The ACT is therefore obliged to remunerate ACT police at levels imposed by the Commonwealth. This example highlights the extent of one of the influences which the Commonwealth has on the ACT’s State wages. This gives further support to the need for the non-State sector to include Commonwealth wages.

Nursing and Teachers Wages and Salaries

In regard to other occupations such as nurses and teachers, the situation is no different. It is important for the ACT to remain competitive with the Commonwealth and prevent a departure of vast numbers of talented and qualified staff to equivalent, higher paying Commonwealth Government occupations. For example, teachers might seek Commonwealth positions in a range of occupations such as with the:

CSIRO; and / or

Federal Department of Education, Training and Youth Affairs; and / or

ACT’s six post secondary educational institutions (driven largely by the fact that the Commonwealth Government is located in Canberra):

the Australian National University;

the University of Canberra;

the Australian Catholic University (Signadou Campus);

Canberra Institute of Technology;

Australian Defence Force Academy (University of NSW);

Australian Defence College; and / or

various other training and other education based positions.



Public Service Wages and Salaries

Increasingly, it has become necessary for the ACT to respond to moves by the Federal Government regarding raising wages for Commonwealth employees. The ACT must respond to these actions in order to attract and retain high quality staff.

The close proximity of the Commonwealth and the ACT Public Sectors within the ACT, and their interrelationship, lends itself to a high degree of workforce mobility. It is common for public servants to span their careers within both sectors, particularly because of the adoption of similar employment conditions and superannuation arrangements.

In addition to its proximity, the significance of the Commonwealth Public Sector in the ACT 2 impacts on the ACT Public Sector (ACTPS) wages and employment conditions.

The consequences of a significant gap in wages and conditions are a combination of both:

serious deterioration in the quality of the workforce; and

associated decline in productivity.

States regularly compete in the labour market for employment. Employment and wages in each of the states reflect the different socio-economic characteristics of the states. Essentially, States compete for employment in the same geographical labour market and it is the non-State sector that determines wages.

The ACT considers that a non-State sector proxy for wage differentials, which combines Commonwealth public sector wages and private sector wages, is the most appropriate policy-neutral measure for assessing wage costs disabilities.

The ACT considers that while the flow-on effects of increased wages from the Commonwealth to the States occurs in each jurisdiction, it is stronger and more direct in the ACT than in any other State.

The uniqueness of particular arrangements, such as the community policing arrangements with the AFP, and the proximity of the Commonwealth and ACT Public Sectors, only serves to strengthen the evidence that:

there are strong linkages between State and Federal wages; and

the non-State proxy should include both private and Commonwealth wages.

In summary, the ACT supports the:

retention of input costs as an assessment for the 2004 Review;

2 The Commonwealth Public Sector employs approximately one third of the ACT workforce.ACT Main Submission to the 2004 Review 149


assessment of the non-State Sector as the most appropriate measure of State wage differentials; and

use of ABS Average Weekly Ordinary Time Earnings to derive wage disabilities.

Support for various aspects of the input costs assessment

Superannuation and Non-Wage Payments

The ACT supports the finding that the assessment of input costs for wages should not include superannuation contributions and other non-wage payments.

The ACT considers that the inclusion of these payments might compromise the current input costs assessment to a degree as some evidence to date has suggested that data availability on these payments is not satisfactory.

The ACT considers that unless reliable data can be found that can indicate the overall impact which these non-wage payments have on each States’ wage input costs, any attempt to include contributions from superannuation and other non–wage payments may result in the determination of inaccurate wage relativities.

Dominant Employer Effect

Several States have argued against the inclusion of Commonwealth wages in the non-State sector proxy as they consider that the Commonwealth has the ability to exert excessive influence over wages. In other words, it has a dominant employer effect.

It has been determined by the Commission that for a dominant employer effect to in fact exist, a number of assumptions would have to be positive. Principally, there would need to be substantial labour market segmentation as well as a relatively immobile workforce. The ACT does not believe that this is the case.

The ACT notes that research conducted by the Commission indicated, in relation to the quantitative tests, that no amount of wage differentiation that enabled a dominant employer effect to be present, actually existed.

In relation to the qualitative tests undertaken on teacher and nurse salaries in NSW, some similarities between the movements in private and public sector wages was always found. “On the whole we think that there is some dominant employer effect for salaries paid to teachers and nurses in NSW and Tasmania.” 3

3 Commonwealth Grants Commission, Research on Reports in Progress, Volume 2, 1995, page 29. ACT Main Submission to the 2004 Review 150


Despite lengthy tests being conducted on this issue, many of the other tests conducted to trace dominant employer effects remain inconclusive. The ACT considers that it was correctly concluded in the 1999 Review that wage differentials resulting from dominant employer effects are due to non–policy influences, and are therefore, dealt with appropriately through the current assessment methods.

Wage differentials are predominantly a result of the influence of market forces and the increased expenditure associated with maintaining a high quality workforce, and the other demand and supply influences referred to earlier on in this chapter, rather than the actions of States.

The ACT agrees with research indicating that wages are largely determined through external labour market forces and that therefore, no dominant employer effect exists.

National Benchmarking

Smaller States such as WA, SA and Tasmania have previously indicated that movement towards a national award scheme would remove wage differentials among States. The argument put forward is that State workers will be more motivated to argue for wages which reflect the characteristics and national circumstances for their occupations.

The system of industrial relations in Australia has undergone substantial transition in the last twenty years. The introduction of enterprise bargaining throughout the country since 1991 has increased the impetus for employers and employees to negotiate wages and conditions that will deliver them the most desirable outcomes given their individual circumstances.

In vast numbers, each State’s labour force has started to embrace enterprise bargaining.

The ACT considers that with the acceptance of enterprise bargaining, and its reflection of individual workers’ circumstances, wage differentials will continue to exists between the States.

Suggested Changes to the Input Costs Assessment

Industry, Occupation Structure and Education

As part of the recommendations in the 1999 Review, it was determined that the variables of occupational structure and industry composition had a significant effect on wage differentials. The influence of differing occupational structures was removed by standardising each States’ employment structure by the national distribution of employees by industry.

It appears that reasons for introducing the national employment distribution were based largely on the work undertaken by Borland and Lye 4,

4 Dr J Borland and Dr J Lye, Employee Income Relationship Between the Public and Private Sector, 1995.ACT Main Submission to the 2004 Review 151


where an econometric analysis was undertaken estimating earnings differentials for all States.

Larger states such as NSW and Victoria are not affected to a great extent by this exercise, mainly because their employment structures dominate national averages. Given the relative size and diversity of employment in some of the smaller States, however, this exercise is likely to have the greatest impact upon the ACT:

“Clearly the most populous states (NSW and Victoria) are hardly affected by the standardisation (since their employment data dominate the national averages), while the greatest effect is for the ACT.” 5

The ACT requests that the results of the econometric analysis by Borland and Lye be discounted largely because of the effects on the ACT and other smaller States.

The ACT considers that the inclusion of the Commonwealth sector within the non–State sector proxy is enough to remove the effects of differing occupational composition from salary and wage data.

The ACT requests that the current practice of standardising State employment by the national employment distribution be examined as it may not necessarily reflect the real underlying wage input cost disabilities.

Discounting

Data Quality and sampling variability

The ACT supports the current treatment of discounting, with a few minor amendments. In the 1999 Review, it was considered appropriate to discount the raw wage cost factor by 50% in order to:

minimise the impact of variable AWOTE data; and

take account of market segmentation issues between the private and public sectors.

The ACT requests that the extent to which the raw wage cost factor is discounted, be examined. The ACT considers that changes in relation to data quality have improved to such an extent since the 1999 Review, that the raw wage discount factor should be reduced from 50% to 25%.

Principally, the relatively small population in the ACT compared with the larger States results in a much greater standard error being allocated to the ACT by the ABS in the Survey of Employee, Earnings and Hours. Currently, the assessment takes into account the effects of sampling

5 Input Costs and Fiscal Equalisation, Report to the ACT Government, 15 January 1996 Draft, page 29. ACT Main Submission to the 2004 Review 152


variability by extending the coverage of data to nine years in order to generate more accurate information from the time series.

The Standard error is defined as the degree to which an estimate may vary from the value that may have been obtained from the full population. Another method of estimating the sampling variability is the relative standard error, this method involves expressing the standard error as a percentage of the estimate to which it refers.

“The relative standard error is a useful measure in that it provides an immediate indication of the percentage errors likely to have occurred due to sampling, and thus avoids the need to refer also to the size of the estimate.” 6

The relative standard error is also a measure of sampling error. The ACT considers that reductions in the relative standard error for the States and the ACT since the 1999 Review warrant a reduction of the discount factor from 50% to 25%.

The most recent wage and salary data contained in the ABS Survey of Employee, Earnings and Hours undertaken in May 2001, has been substantially redesigned and modified from earlier editions. The ABS has advised that changes to the methodology and also the accuracy of the sampling have been put into place.

Heterogeneity of Commonwealth-State Sector Employment

The ACT questions the judgements that were made regarding heterogeneity.

The ACT notes that the composition of public sector employment in the ACT has evolved substantially since the 1999 Review. Specifically, this includes a number of head office functions of the Federal Government being relocated to the regions and to other States.

One of the results has been the similarities between the Head Office functions of the Commonwealth Governments and State Governments. The ACT considers that State Government employment today, more than ever, appears to mirror Federal employment.

In addition, given the extent of privatisation that has occurred, along with the sale of government assets and outsourcing of a number of services, the private and State public sectors have moved closer together in structure, content and service delivery.

It appears that the decision to discount the final wage factor by 50% because of heterogeneity reasons is overly judgemental.

6 Australian Bureau of Statistics, Employee Earnings and Hours, 6306.0, May 2000. ACT Main Submission to the 2004 Review 153


The ACT requests that the discounting of the raw wage cost factor be reduced from 50% to 25% due to improvements in data sampling and the realignment of the non-State sector with the State sector.

Introduction

As previously indicated, the ACT, in the main, supports the current approach to the wages component of the input costs assessment.

The ACT notes that a number of other jurisdictions in the past, and more recently, Queensland in their 2001 Workplace Discussions Briefing Notes, have raised a number of objections regarding the non-State sector (private and Commonwealth sectors) as a proxy for determining wage differentials amongst the States.

In putting forward these objections, States have generally argued that the non-State sector is an unreasonable proxy because they believe that either the:

private sector is deficient as a proxy for the State public sector; and/or

Commonwealth is a poor proxy for the State public sector.

Unfortunately, States have often argued their case on the basis of only one of the components, which make up the non-State sector. The ACT contends that neither private sector nor Commonwealth sector wages on their own would represent a sound proxy for the underlying State public sector wage differentials. It is a combination of both components, which represents a sound proxy.

It would appear that the one sector approach is adopted by some States because it suits the arguments being put forward at the time.

The ACT considers that the issue of differential wage costs should continue to be examined in its entirety to ensure that any decisions made concerning possible revisions to the input costs assessment are fully explained.

States’ focus on one component of the non-State proxy

The ACT is concerned that a number of States and more recently Queensland in their workplace discussions, have focused only on the relationship between private sector wages and State public sector wages. It would appear that no examination of the relationship between Commonwealth public sector wages and State public sector wages has been made by Queensland (at least at the time of writing of this chapter).


Response to arguments raised by other jurisdictions


The ACT questions the validity of the results arrived at by Queensland. Irrespective of this, however, the results appear to give general credence to the ACT’s and Queensland’s relativity position under the current assessment approach.

The implication of Queensland’s analysis is that a State should not be a recipient of positive needs from the wages component of the input costs assessment unless its public sector wages are higher than the Australian average. Clearly, this would not be a policy neutral approach. The ACT considers that based on the data presented by Queensland, the evidence generally confirms the trend calculated for the ACT and Queensland.

Under the 2002 Update input costs assessment, the ACT receives the highest relativity (1.028604) and Queensland the lowest (0.977638). Notwithstanding that data in Table 2 of Queensland’s analysis is policy influenced by the States, its shows the differences in States’ public sector wages from the Australian average. The ACT is ranked third (third highest wages), while Queensland is ranked last (lowest wages). If the ACT’s police wages were included in the analysis, which should be the case given that the ACT pays the wages of the Australian Federal Police for community policing functions as previously highlighted, it would be ranked higher.

The ACT notes that Queensland contends that State labour markets are not entirely efficient as evidenced by the fact that higher than average private sector wages are not flowing through to higher public sector wages in a consistent manner for all States.

More specifically, Queensland has argued that in States such as the ACT and NSW where private sector wages are high, it follows that public sector wages would also be high. Queensland has tried to demonstrate that this is not the case, and in doing so, has argued that no relationship exists between private and public wages, at least at an aggregate level (all occupations rather than specific occupations). That is, private wages are a poor proxy for State public sector wages.

Contrary to Queensland’s view that the ACT has lower than average State public sector wages, the Territory considers that, based on evidence presented in this chapter, employees of the ACT Government are amongst the highest paid State employees in Australia for a range of selected occupations. Labour force data on wages indicate that wages in the ACT are the highest for all states. Given the details of the evidence provided, it becomes apparent that the non-State sector represents the best proxy for assessing relative wage disabilities across the States.

Notwithstanding the ACT’s earlier comments that the private sector by itself is not a sound proxy for State sector public wages, the ACT contends that:

a strong relationship exists between private sector and State public sector wages over a longer-term horizon; and



Queensland’s examination of the difference of State public sector wages from the Australian average for each jurisdiction is deficient on a number of grounds.

In regard to the latter dot point, the ACT contends that the econometric analysis, used to make comparisons about interstate wages, is deficient. Indeed, the analysis is flawed on several grounds:

a comparison of States’ public sector wages relative to the Australian average is flawed, given that, as correctly recognised by the Commission, State public sector wages are directly influenced by State Government policy and are thus not reflective of the wages disabilities faced by a jurisdiction;

picking one individual occupation category is not representative of the wage disabilities faced by a State;

‘point in time’ comparisons of data are used which fail to capture the latest wage information, which in the ACT’s case, includes a 17.5% wage agreement for its nurses;

the aggregate calculations are deficient in that they exclude the ACT’s policing wages, and do not reflect the latest available circumstances and data;

the ACT’s above average wages for nurses, teachers and police have not been recognised; and

the varied importance of different occupations in each State is not recognised.

Deficiencies with Queensland’s analysis

Analysis of variations in jurisdictions’ State public sector wages from the Australian average is not a policy neutral measure

The current assessment structure does not use State public sector wages to assess wage relativities. The ACT considers that it is correct to recognise that they are directly influenced by State Government policy.

As highlighted in the following quote from Queensland, policy influences are inherent in State wages, and should not be used to determine disabilities:

“The importance of State policy in such wage determination was highlighted again in September 1996 in the decision by the New South Wales Government to grant a 16% pay increase to New South Wales Teachers.” 7

The tables and conclusions that are provided by Queensland do not appear to reflect this. The ACT notes that considerable efforts have been

7 Queensland Treasury, Commonwealth Grants Commission, 1999 Review of State General Revenue Grant Relativities, February 1997, page 118. ACT Main Submission to the 2004 Review 156


made to exclude the effects of public policy from wage and salary data. As such, to base conclusions on the State wages for Nurses and Public Teachers as Queensland has done, represents a policy influenced approach to assessing wage disabilities.

Fundamentally, it is important to exclude the policy influence that States have over State public sector wages. Again, the analysis that Queensland has provided does not appear to indicate a source for Table 1.1, given that wages for public sector state occupations such as legislators and nurses are included, one can only assume that the source of the data is State wages.

Picking One Individual Occupation Category is not Representative of the Entire Workforce

Queensland’s analysis has focused on a number of specific occupations and has made particular assertions about those occupations, and their variance from the Australian average, to support their case.

Selecting individual occupations such as Nurses, Miscellaneous Clerks and Teachers does not provide an accurate indication of differences in interstate wages and salaries. It also appears that Queensland’s analysis only emphasises the occupations of Nurses and Miscellaneous Clerks. To base the results using this analysis may result in a disproportionate or inequitable outcome.

The ACT supports the assessment structure adopted in the 1999 Review as it is predicated on the appropriate and most comprehensive statistical series available. The ACT considers that the ABS Average Weekly Ordinary times Earnings of Employees (AWOTE) of the non–State sector represents the best available information to accurately assess wage differentials for all the States. The use of other information does not represent an accurate proxy or accurately mirror differences in interstate wage differentials.

As explained earlier in this chapter, wages of Commonwealth employees significantly impact upon all State employees. These arguments together suggest that the non-State sector represents the most accurate measure (proxy) of state wages that is available. The ACT therefore requests that the current method of using the non-State sector when assessing wage disabilities be retained.

The analysis is based on ‘point in time’ comparisons of data

The ACT considers that comparisons that are made at one particular point in time may provide misleading results. It appears that Queensland has used only one complete year of data, rather than several years worth of data (time series). This will have implications for the accuracy of the results, particularly given the cyclical nature of wage increases in the States and their flow-on to other States, as previously highlighted in this chapter.



Large differences in interstate wages can give misleading implications about wage levels in each State. This is, at least in part, why, in calculating an accurate measure of relative interstate wage disabilities for the current financial year, an average wage level using five years worth of data was adopted. If wages were assessed on the basis of a single year’s data, the impacts of a policy change, or an economic shock such as the Asian Economic Crisis, may distort the data for that year.

An example of the difficulty in comparing data is highlighted by the fact that Queensland’s point in time comparisons have not picked up the latest enterprise bargaining agreement covering members of the Australian Nursing Federation employed within the Territory’s Public Hospitals. There are important trends in the data that cannot be explained unless an appropriate time series is used. Essentially, this is why several years of the (AWOTE) data is used when calculating interstate wage relativities.

The ACT supports the current assessment structure which uses wages data over a five year period in order to arrive at the most accurate assessment of disabilities.

In January 2002, an enterprise bargaining agreement was reached between the ACT Community Care on behalf of the ACT, and members of the Australian Nursing Federation (the ACT Nurses award). Details of the agreement stated that nurses would receive a 14.25% pay rise over two years as well as a $1,500 bonus. This represents a combined increase of around 17.5%.

In addition, the ACT Community Care Nurses agreement also extends to cover award wages for nursing staff who are employed at the Calvary Hospital. Clause 2D of the Calvary Hospital Award 2000–2001, states that nurses who are employed by the Calvary Hospital will be bound by the ACT Nurses award, and receive the same pay.

Given the current chronic shortage of nurses in Australia (and in other parts of the world such as in the United Kingdom), Canberra Hospital management had little choice other than to offer higher salaries in order to maintain high quality staff.

As a result of these agreements, public sector nurses employed in the ACT are currently the highest paid nurses in the country.

In summary, the aggregate calculations put forward by Queensland are defective as they do not:

use time series data, instead relying on the use of point in time data; and

reflect the latest available circumstances of the ACT – the latest wage agreement for nurses.

Exclusion of the ACT’s Police wages from the Queensland analysis



The aggregate calculations also exclude the ACT’s policing wages, and do not reflect the latest available circumstances and data.

The ACT pays the wages of the Australia Federal Police (AFP) in regard to community policing. However, the wages are determined by the Commonwealth.

While the ACT is unable to exert any policy influence over the determination of the wages of AFP, it does have a limited policy role concerning the functions and emphasis of community policing in the Territory.

As the Commission would be aware, the ACT is constrained from employing a police force other than the AFP as, legislatively, it is responsible for the provision of the policing function in the Territory. Two Acts support this conclusion:

Section 23(1)(c) of the Self-Government Act, which states that: “…the [ACT Legislative] Assembly has no power to make laws with respect to: the provision by the Australian Federal Police of police services in relation to the Territory”; and

Section 8 of the Australian Federal Police Act 1979 which lists the functions for which the AFP is responsible, of which, in particular, Section 8(1)(a) states that a primary function of the AFP is “…the provision of police services in relation to the Australian Capital Territory”.

Given that the ACT pays the wages of its police force in regard to community policing (in this case the AFP - it is prohibited from employing any other police force), just like all other States, the AFP in the context of ACT community policing, should be regarded in the same way as other police forces.

On this basis, it is anomalous to exclude the AFP from the analysis as has been done.

Figures 8.1 and 8.2 highlight the average police and non-police staffing costs for each of the States respectively. They clearly show that policing costs in the ACT are the highest in Australia, with the exception of the NT and NSW. Average police staffing costs in the ACT are around $72,275.

Non-police staffing costs in the ACT are substantially higher than the national average and are also the highest of all jurisdictions, amounting to $63,724 compared to a national average of $50,114.

This graph is indicative of the pressures faced by the ACT in terms of competing with the Commonwealth in the employment market. The large differences in average wages for non-police between the ACT and the other States directly reflects the influence of Commonwealth sector salary levels in the ACT. Non-police wages are based on Commonwealth public sector salary levels.



FIGURE 8.1, AVERAGE POLICE (1) STAFFING COSTS, BY STATE, 2001-02

Source: Productivity Commission, Report on Government Services 2002, Volume 1. Average police staffing costs includes salaries and payments in the nature of salary paid to sworn police officers, divided by the number of sworn police Officers.

FIGURE 8.2, AVERAGE, NON-POLICE (1) STAFFING COSTS, BY STATE, AUSTRALIAN AVERAGE, 2001-02

Source: Productivity Commission, Report on Government Services 2002, Volume 1. Average non-police staffing costs includes salaries and payments in the nature of salary paid to civilian and other employees, divided by the total number of such employees.

The ACT considers that the analysis developed by Queensland is defective for the Territory as it excludes the payment of AFP wages. As such, it does not accurately assess the wage differentials for the States.


$78,180

$71,282 $69,456 $68,963$72,275

$77,182

$57,227

$66,454

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000

NSW VIC QLD WA SA TAS ACT NT

Polic

e C

osts

($)

Aust. Avg.

$70,127


Queensland’s analysis fails to recognise the ACT’s above average wages for nurses, teachers and police

Queensland’s analysis suggests that if a State’s public sector wages are lower than the Australian average, then the non-State sector is a poor proxy for assessing wage disabilities across the States (as higher private sector wages are not flowing through to higher State public sector wages).

Intuitively then, the implication is that a State should not be a recipient of positive needs from the wages component of the input costs assessment unless its public sector wages are higher than the Australian average.

The ACT notes that the information presented in the following series of tables indicates that ACT wages are the highest in the country for nurses and are also among the highest for all states in the category of teachers.

Nurses’ wages in the ACT

As highlighted in Table 8.1, data shows that public sector nurses in the ACT are now the highest paid nurses in Australia (at both the minimum and maximum wages bands), partly due to the recent ACT nurses wage agreement totalling 17.5%.

TABLE 8.1: MINIMUM AND MAXIMUM ANNUALWAGES, PUBLIC NURSES, BY STATE, 2002

NSW$

VIC$

QLD$

WA$

SA$

TAS$

ACT$

NT$

Minimum 29,286 29,000 19,241 31,033 27,719 28,276 34,608 28,276

Maximum 94,338 95,526 73,476 75,961 93,301 88,394 98,162 75,349

Sources: The Canberra Hospital, Nursing Staff Agreement 2002-2004; Victorian Health Services Award, Part C, Registered and Mothercraft, 2000; Western Australia, Health Service Agreement, 2001; Northern Territory, Nurses (Northern Territory Public Sector) Award 2001; Queensland, Nurses (Queensland Public Hospitals) Award (no date) also Queensland Public Health Sector Certified Agreement (No. 4) 2000; South Australia, Nurses (South Australian Public Sector) Enterprise Agreement 1998; Tasmania, Nurses (Tasmanian Public Sector) Enterprise Agreement 1998; New South Wales, Department of the Premier, Human Resources Department, 2002.

Figure 8.3 highlights that the ACT’s nursing wages are significantly higher than the Australian average and are currently the highest in Australia.



FIGURE 8.3, MAXIMUM AND MINIMUM ANNUAL WAGES, PUBLIC SECTOR NURSES, BY STATE, 2002

Sources: The Canberra Hospital, Nursing Staff Agreement 2002-2004; Victorian Health Services Award, Part C, Registered and Mothercraft, 2000; Western Australia, Health Service Agreement, 2001; Northern Territory, Nurses (Northern Territory Public Sector) Award 2001; Queensland, Nurses (Queensland Public Hospitals) Award (no date) also Queensland Public Health Sector Certified Agreement (No. 4) 2000; South Australia, Nurses (South Australian Public Sector) Enterprise Agreement 1998; Tasmania, Nurses (Tasmanian Public Sector) Enterprise Agreement 1998; New South Wales, Department of the Premier, Human Resources Department, 2002.

Teacher’s wages in the ACT

SA in its submission to the 1999 Review, suggested that shortages of teaching staff in some States has put pressure on the government to bring salaries up to the national level. In addition, evidence was put forward in their submission that there have been particularly strong national influences to maintain teacher salaries.

The information contained in Table 8.2 indicates that ACT public teachers are among the highest paid teachers in the country. Their wages appear to be very competitive with wages of other states. In addition, public school principals in the ACT have recently voted to accept a new enterprise agreement which will have the effect of increasing salaries by 14% for public school principals over 19 months. As a result of the agreement, school principals in the ACT will receive substantially higher salaries than their counterparts in other jurisdictions. The most significant reason for employers in the ACT having higher State wages is to attract and retain good quality staff.



TABLE 8.2, MINIMUM AND MAXIMUM WAGES, PUBLIC TEACHERS, BY STATE, 2002

NSW

$

VIC

$

QLD

$

WA

$

SA

$

TAS

$

ACT

$

NT

$

Minimum 29,198 28,506 30,110 26,645 29,531 25,113 32,415 29,396

Maximum 56,516 52,623 54,863 52,395 57,147 67,629 80,931 55,031

Sources: Northern Territory Public Sector Teachers and Educators and Certified Agreement 2001; Australian Capital Territory, Teaching Service Agreement, 2000 – 2003; Western Australia, Government School Teachers and School Administrators Certified Agreement 2000; Victoria, Victoria Schools Service Agreement 2001; South Australia, South Australian Education Staff Award 2000; Tasmania, Tasmanian Public Sector (Teaching Service) Award; New South Wales, Crown Employees, (Teachers in Schools and TAFE), Crown Employees Award; Queensland, Education Queensland.

Figure 8.4 presents the information provided in the above table in chart form.

FIGURE 8.4: MINIMUM AND MAXIMUM ANNUAL WAGES,PUBLIC SECTOR TEACHERS, STATES, 2002

Sources: Northern Territory Public Sector Teachers and Educators and Certified Agreement 2001; Australian Capital Territory, Teaching Service Agreement, 2000 – 2003; Western Australia, Government School Teachers and School Administrators Certified Agreement 2000; Victoria, Victoria Schools Service Agreement 2001; South Australia, South Australian Education Staff Award 2000; Tasmania, Tasmanian Public Sector (Teaching Service) Award; New South Wales, Crown Employees, (Teachers in Schools and TAFE), Crown Employees Award; Queensland, Education Queensland.

The analysis does not recognise the varied importance of different occupations in each State



It appears from the briefing papers attached to Queensland’s workplace discussions, that Queensland’s analysis does not take into account the relative importance of occupations to a State’s public sector employment profile. Table 1, appears to indicate that only a few occupations have been selected for making the statistical comparisons and hence substantiating the argument made by Queensland.

The breakdown of occupations used by Queensland is clearly inconsistent with normal practice. It is essential that a correct proxy for State employment be used so as to generate a truly policy neutral measure. Indeed, based on the structure used in Queensland analysis, a number of important public sector occupations are excluded such as bus drivers and building tradesman. To exclude these occupations and rely on the results of the exercise would clearly result in an inappropriate analysis and generate an inaccurate relativity.

According to the data contained in Figure 8.5, the proportion of persons employed in the category of Managers and Administrators comprises only 9.3% of total employment. Professionals, which comprises around 17.1% of total employment for Australia is the largest occupation sector by employment. The next largest proportional sector of employment is Intermediate Clerical, Sales and Service Workers, which represents around 16% of total employment.

It appears that the categories of employment that have been selected in Queensland’s analysis bear little, if any, resemblance to the characteristics of the labour force.

FIGURE 8.5 - EMPLOYMENT BY OCCUPATION, PROPORTION (%), AUSTRALIA, 1996

Source: Australian Bureau of Statistics, Census of Population and Housing, 1996.



The ACT notes that the Territory has above average wages for at least three significant areas of public service provision - nurses, teachers and police.

One implication of Queensland’s analysis is that a State should not be a recipient of positive needs from the wages component of the input costs assessment unless its public sector wages are higher than the Australian average. The ACT notes that as its public sector wages are above the Australian average and that as it receives positive needs, the current approach to the input costs assessment is sound (were such an approach policy neutral).

Introduction

This section of the input costs chapter:

provides an overview of the ACT electricity market and the National Electricity Market (NEM);

examines the assessment approach adopted during the 2001 Update; and

details the course of action that the ACT considers should be taken in relation to future assessment of electricity input cost disabilities.

Overview of the ACT Market

The ACT electricity industry supplies some 135,000 electricity customers, over 122,000 (90.4%) of whom are residential. The balance are commercial, government and light industrial customers.

Residential and small business customers are concentrated below 50 Mega Watt hours (MWh), with the few large customers such as hospitals, universities and large commercial and government buildings representing a large volume of the electricity consumed. These customers are serviced by over 5000 kilometres of electricity reticulation lines. Almost all of the electricity consumed in the ACT is produced interstate – the ACT’s generation is limited to a small number of microgeneration facilities including minihydro and landfill gas plants.

Electricity distribution in the ACT is a monopoly operated by ActewAGL, a joint venture between AGL and the ACT Government-owned ACTEW Corporation. In retailing, ActewAGL is the monopoly provider for customers below 100MWh per annum (small customers). However, customers over 100MWh per annum have a choice of retailer.


Electricity component


The ACT currently has thirteen licensed electricity retailers serving this part of the market. The ACT Government is presently considering whether the market should be fully contestable. Provided there is a net public benefit, the market could become fully contestable later in 2002.

The industry is primarily regulated by the National Electricity Code and the ACT Utilities Act 2000. The Independent Competition and Regulatory Commission under the ACT Independent Competition and Regulatory Commission Act 1997 regulates prices for small customers.

Assessment approach

Background

In the 1999 Review, based on judgement, it was decided to provide the NT with a factor for electricity costs of twice the Australian average (a factor of 2 before rescaling), WA - a cost disability of half that of the NT (a factor of 1.5) and SA - a disability half that of WA (a factor of 1.25, now 1.10 in the 2002 update).

The ACT has made several requests to change the electricity cost factor in the input cost category.

As part of the 2000 Update New Developments Submission, the ACT requested that the electricity cost disabilities provided to WA, SA and the NT be reviewed. Whilst the ACT agreed at that time, that these States should be provided with disabilities related to electricity costs, at least in the short term, it considered that the disabilities were too high in light of data then available from the Electricity Supply Association of Australia (ESAA).

The ACT’s suggestion of using average electricity prices as a basis for determining the electricity cost disabilities was rejected by the Commission. In its 2000 Update Report on General Revenue Grant Relativities, it was stated that it would “…continue to use judgement to assess electricity cost disabilities. It continues to believe that electricity prices are influenced by State policies on electricity generation and reform progress”.

Defective grounding for rejecting the ACT’s request to revise the electricity cost disabilities

The ACT considers that the premise for rejecting the Territory’s request to update the electricity cost disabilities, based on the fact that it uses electricity generating cost prices, is anomalous.

In the 2001 Update Report, it was stated that:

“It considers that the data on electricity generating costs from ESAA it had used (a different data set to the average price data proposed by the ACT) and the information it had on States policies and on the



National Electricity Reform process lead to a better and less policy influenced set of factors”.8

After investigation of this matter with Commission officers, the ACT has since found that the data used to assess electricity cost disabilities are based solely on electricity price data (average electricity retail prices comprising residential, commercial and industrial prices) from the Electricity Supply Association of Australia (ESAA). It is not at all based on generation costs as stated by the Commission.

In light of this information, and in accordance with the agreed enhanced accountability and transparency guidelines agreed at the Priority Issues of Principles Conference held in 2001, the ACT considers that re-calculation of electricity cost disabilities is required.

The current electricity cost disabilities for WA, SA and the NT are overgenerous especially in view of SA’s full participation in the National Electricity Market and the convergence of prices in that market.

The ACT also questions the appropriateness of developing electricity cost disabilities based on broad judgement without, it would appear, reference to independent data. Such an approach may reward States for taking higher cost policy options in relation to electricity generation and moving more slowly towards full implementation of the national electricity market (NEM). If this is the case, the assessment is providing a perverse incentive for those jurisdictions receiving overgenerous electricity cost disabilities, an approach that is not warranted.

The ACT considers that the most appropriate and equitable data source for assessment of electricity cost disabilities is the NEM wholesale spot price.

Prior to the establishment of the National Electricity Market (NEM), independent data relating to generation or wholesale costs was not readily available and the ESAA independent assessments of retail prices were the best available independent data source. Under the NEM, however, wholesale cost data is available from the National Electricity Market Management Company Limited (NEMMCO). This data is not available for WA, Tasmania or the NT as these States do not form part of the NEM, and as such, the only alternative is to use independent ESAA data.

The purpose and structure of the NEM as a completely interconnected single electricity market would suggest that the assessment incorporate a disability factor of one for those States which are now participating in the NEM – NSW, Victoria, Queensland, SA and the ACT.

There is no basis for SA to be provided with a disability factor, or any more favourable treatment than any other State participating in the NEM. Such a move is contrary to the principles of the NEM, and continuing this

8 Commonwealth Grants Commission, State Revenue Sharing Relativities 2001 Update, Supporting Information, page 12.ACT Main Submission to the 2004 Review 167


approach would continue to reward SA for past policy decisions to limit interconnectivity – as greater interconnection capacity is being put in place. This factor should be taken into consideration.

The Territory considers that this group should also include Tasmania on the basis of its relative abundance of electricity supply and pending connection to the NEM via BASSLINK. That is, Tasmania should also receive a disability factor of one.

In order to understand the rationale of the ACT’s recommended approach, an understanding of the operation of the NEM and its impacts is required. A brief summary of the operation of the NEM is provided at Attachment B.

For those States which are not participating in the NEM – WA and NT, the ACT considers that the most appropriate proxy measure of electricity cost disabilities still remains the ESAA independent average retail electricity price data.

Electricity Factor Calculations for the Input Costs Factor

Convergence of prices

The ACT contends that, despite SA’s assertions, there is significant evidence of price convergence between SA and other States participating in the NEM, to justify a disability equivalent of one (1) for the NEM jurisdictions.

Furthermore, by virtue of participating in the NEM, South Australian electricity retailers are able to enter into contracts with generators in other jurisdictions, and so are able to limit their exposure to the infrequent and short term high regional spot prices that occur when their physical transmission constraints do actually bind.

Figure 8.6 below indicates NEMMCO Average Monthly prices and highlights the convergence in prices between the NEM participating jurisdictions and provides a good general indicator of price/cost movements.



FIGURE 8.6 AVERAGE MONTHLY PRICES, 2001-2002, BY REGION

Source: NEMMCO, http://www.nemmco.com.au/data/avg%20price%2001-02.htm.The ACT considers that there are a number of reasons why the NEM

spot price data is a good indication of the current trends. It is:

reflective of the current circumstances of the States, and in particular, the electricity cost disabilities facing States;

independent; and

robust, and based on information available to the independent manager of the market which is supported by each jurisdiction.

It is clear that electricity prices are a function of, or dependent upon, a range of costs, primarily generation, transmission and distribution costs. However, given the predominance of policy influences on these factors, the ACT contends that this further supports the case for electricity cost disability factors equal to the Australian standard for NEM participants (and Tasmania).

It is reasonable to assume that the NT faces electricity costs that are higher than the national average, however this is due not to the absence of raw fuel, [as stated by in the 1999 Review] but to the high cost of that raw fuel (gas) and transmission and distribution costs. Similarly, it is reasonable to assume that WA faces electricity costs that are higher than the national average, but on the basis of their high cost of distribution and transmission. Membership of the NEM negates this factor to a large extent given that similar transmission and distribution challenges are faced by a number of jurisdictions.

Apart from this current wholesale price data, previous work undertaken by the Productivity Commission for its 1999 report on the Impact


0

10

20

30

40

50

60R

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($/

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PeakJuly2001

Aug.2001

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Sep. 2001

Dec.2001

Oct.2001

Nov.2001

http://www.nemmco.com.au/data/avg%20price%2001-02.htm


of Competition Policy Reforms on Rural and Regional Australia, which was based on 1991-1997 retail price data, pointed to:

“…significant falls in usage charges in most jurisdictions since the commencement of the electricity reforms. While not all of the reductions are attributable to the reforms, the structural changes which have occurred undoubtedly explain much of the reductions.” 9

The following Table 8.3, based on information from the ESAA, highlights the falls in retail electricity prices between 1991-92 and 1997-98.

9 Productivity Commission, Impact of Competition Policy Reforms on Rural and Regional Australia, October 1999, page 104.ACT Main Submission to the 2004 Review 170


TABLE 8.3: REAL AVERAGE (AVERAGE OF COMMERCIAL, INDUSTRIAL AND RESIDENTIAL) ELECTRICITY PRICE MOVEMENTS

BY STATE FOR THE PERIOD 1991-92 TO 1997-98,

JURISDICTION % CHANGE

NSW -25%

WA -18%

SA -16%

NT -15%

VIC -13%

ACT -7%

TAS -3%

QLD -2%

Source: Productivity Commission, Impact of Competition Policy Reforms on Rural and Regional Australia, Inquiry report, Report No. 8, 8 September 1999.

Interestingly, some of the largest price declines have been experienced by WA, SA and the NT, the three States that benefit most from the assessed electricity cost factor disabilities. This implies that over time there is a growing convergence between prices nationally, and suggests that relative disability factors should be reduced.

The following figures 8.7 and 8.8 show the average (average of residential, commercial and industrial prices) nominal and real electricity prices (c/kWh) between 1992-93 and 1999-2000 for each of the States respectively.

Figures 8.7 and 8.8 also highlight the convergence in prices (particularly in the real prices graph) between the States.



FIGURE 8.7 - NOMINAL AVERAGE ELECTRICITY PRICES (c/kWh) FOR THE PERIOD 1992-93 TO 1999-2000, BY STATE

Source: Electricity Supply Association of Australia Limited, Electricity Prices in Australia 2000/2001, page 8.

FIGURE 8.8 - REAL AVERAGE ELECTRICITY PRICES (2000-01 DOLLARS, c/kWh) FOR THE PERIOD 1992-93 TO 1999-2000, BY STATE

Source: Electricity Supply Association of Australia Limited, Electricity Prices in Australia 2000/01, page 10.

Figure 8.9, using data from Electricity Prices in Australia 2000/01, between 1992-93 and 1999-2000, compares the variation from a calculated Australian ‘average’ over the period 1992 to 2000 and compares average nominal electricity prices for each State over the same period.



FIGURE 8.9 - PERCENTAGE VARIATION OF STATES’ NOMINAL AVERAGE ELECTRICITY PRICES (c/kWh) FROM THE AUSTRALIAN

AVERAGE FOR THE PERIOD 1992-93 TO 1999-2000

Source: ESAA Limited, Electricity Prices in Australia 2001/02, page 8.

The graph indicates that:

three States are below the Australian average – Queensland (-0.2%) NSW (-8.1%) and Tasmania (-38%); and

five States are above the Australian average - Victoria (5.9%), WA (33.5%), SA (11.9%), ACT (6.9%) and the NT (62.9%).

Taking the latest average nominal electricity prices available for the period 1992-93 to 1999-2000, the data shows:

firstly, that the electricity disability factors for the NT and WA are significantly overstated:

based on broad judgement, the NT receives a factor which is 200% of the standard (before rescaling), however, based on the ESAA data this should only be 162% of the standard; and

similarly, WA’s current factor is 150% of the standard, however based on this data, the relevant figure is 133% of the standard. A comparison of calculated relativities for WA and NT (based on the ESAA figures) are provided in Table 8.4.



TABLE 8.4: IMPLIED WA AND NT DISABILITIES, BASED ON DATA FROM THE ELECTRICITY SUPPLY ASSOCIATION OF AUSTRALIA

LIMITED

WA NT AUST

Average Price (c/kWh) $11.87 $14.49 $8.89

Current Disability 1.50000 2.00000 1.00000

Implied Disability 1.33521 1.62992 1.00000Source: Electricity Supply Association of Australia Limited, Electricity Prices in Australia 2000/2001, page 8.

Conclusion

The ACT considers that it would be appropriate, to develop assessment methods that are reflective of the 1991 CoAG agreement to reforms in the electricity industry and the 1995 National Competition Policy (NCP) objectives signed up to by the Commonwealth and all States as this is the standard policy.

To do this, the assessment could put in place methods that are consistent with the realisation of national efficiencies under the NCP.

Appropriately then, based on average retail electricity prices provided by the ESAA (which are already used as the basis of determining States’ electricity cost disabilities) between 1992-93 to 1999-00:

all States participating in the NEM, as well as Tasmania, should receive a disability equal to the Australian standard (1.00000); and

the disabilities for WA and NT, which are currently overgenerous, should be reduced to 1.30000 and 1.60000 respectively.

The new disability for each of the States is provided in Table 8.5.

TABLE 8.5: IMPLIED ELECTRICITY COST DISABILITIES FOR THE STATES

NSW Vic Qld WA SA Tas ACT NT Aust

Current Disability 1.0 1.0 1.0 1.5 1.25 1.0 1.0 2.0 1.0

New Disability 1.0 1.0 1.0 1.3 1.0 1.0 1.0 1.6 1.0

Obviously, if it is decided to continue to use the average electricity retail price data from the ESAA to determine the electricity cost disabilities, it



should use the latest available information for a five-year period. This would then be consistent with the assessments averaging approach.

An additional benefit of using the ESAA data is that the cost disabilities for WA and NT could be revised each update to make the assessed disabilities more current.

Introduction

In regard to the weighting of the accommodation and electricity components, the ACT requests that the relative weights be revised.

Currently the accommodation and electricity cost factors are calculated which are applied to 2% and 1% on the total category expenditure respectively.

The ACT has reviewed the weights for accommodation and electricity costs by investigating these costs as a proportion of total expenditure. The findings show that:

the current accommodation weighting of 2% is reasonable; and

electricity costs have decreased significantly since the 1999 Review, and that the weighting of 1% is overly high.

Accommodation

The ACT has examined its accommodation costs as a proportion of total expenditure, with the data suggesting that the weighting should remain at around the 2% level.

The ACT considers that there has not been a large enough movement in accommodation expenditure to warrant a re-weighting of costs for the 2004 Review.

Electricity

In relation to electricity costs, the ACT considers that the electricity cost factor should be applied to a smaller proportion of the total category expenditure.

As outlined in the previous section of this chapter, the ACT considers that significant electricity reform has resulted in changes to the standard electricity expenditure faced by the States. Indeed, the ACT is spending smaller proportions of their budgets on electricity, primarily due to the movement toward, and the amount of progress that has been made regarding the integration of a National Electricity Market (NEM).


Weighting of Accommodation and Electricity components


Cheaper overall rates for electricity usage, resulting from the introduction of contestability arrangements, at least for the larger users (which includes Government departments), has been one of the key drivers behind a lower proportion of public expenditure on electricity.

According to the information provided in Figure 8.10, ACT expenditure on electricity as a proportion of total Government expenditure has averaged 0.4% (average of 1999-2000 and 2000-2001) over the last few years. This is significantly lower than at the time of the 1999 Review and can largely be explained by the convergence of national electricity generation prices driven by the achievements of the NEM.

FIGURE 8.10, COMPARISON OF THE COMMISSION’S ELECTRICITY WEIGHTING WITH THAT DERIVED BY THE ACT FOR

1999-2000, 2000-2001 AND AVERAGE

Source: ACT Treasury, 2002.

Based on the data shown in the above graph, the ACT considers that the electricity cost factor should be re-weighted from 1% of total category expenditure to 0.4% of total category expenditure.

Conclusion

In summary the ACT:

supports the current accommodation weighting of 2%; and

requests that the electricity weighting be reduced, from 1% to 0.4%, given that microeconomic reform has resulted in lower electricity costs for larger users, and in particular, Government as a whole.



ATTACHMENT A

ACT ELECTRICITY EXPENDITURE

1 Table 8.6 provides a summary of the electricity expenditures as a proportion of total government expenditures in the ACT for 2000 and 2001.

TABLE 8.6 - ACT ELECTRICITY EXPENDITURE AS A PERCENTAGE OF TOTAL GOVERNMENT EXPENDITURE, 2000-2001 AND AVERAGE

2000 2001 Average (2000-2001)

Expenditure on Electricity ($) 8,585,642 9,138,143 8,861,892

Total Expenditure ACT Government ($) 2,102,458,000 2,398,499,577 2,250,478,789

Electricity Expenditure as a % of Total Expenditure 0.41% 0.33% 0.39%

Source: Budgets Section, Department of Treasury, ACT Government, 2002.



ATTACHMENT B

THE NATIONAL ELECTRICITY MARKET (NEM)

Background on the National Electricity Market (NEM)

Introduction

2 In December 1998, the NEM as it exists today was introduced. The Electricity (National Scheme) Act 1997 underpins the ACT’s participation in the NEM. Participants include NSW, Victoria, Queensland, SA, and the ACT. The National Electricity Market Management Company (NEMMCO) manages the NEM utilising a wholesale pool market model.

3 The system operates as a pool because:

it is not possible to distinguish which generator produced the electricity consumed by a particular customer; and

electricity cannot be stored, hence electricity supply and consumption must be balanced and matched instantaneously in order to provide electricity at safe and acceptable quality standards.

4 NEMMCO matches the generating capacity made available by generators against its forecast of demand for electricity each day. Generators provide a dispatch offer to NEMMCO that specifies a minimum level of output for the generator, plus prices and increments of generating capacity above that output. The dispatch offer indicates to NEMMCO the quantity of electricity a generator is prepared to sell, and at what price, for each half-hour of the next day.

5 Market customers, which in all but one case are retailers, inform NEMMCO of how much electricity they wish to buy to meet their scheduled loads. As with the bids submitted by generators, these requirements are broken down into increments of consumption by price for each half-hour during the day.

6 As electricity demand fluctuates in each half hourly period throughout the day, so does the amount of generation scheduled for production. When demand is low, the lowest offer price generators are in production and when demand is high, the more expensive generators are sequentially brought into production until supply meets demand.

Constraints

7 The scheduling of generators to meet demand across the interconnected power system will sometimes be constrained by the physical transfer capacity of the interconnectors between the regions. For example, when the interconnector limit is reached between Victoria and SA, NEMMCO will need to dispatch the next lowest priced generator offer in South Australia to meet electricity demand in that region.



8 SA is upgrading the interconnector, but previously made a conscious policy decision to limit the interconnector capacity to protect incumbent suppliers prior to privatisation.

9 ACT demand for electricity is supplied almost entirely from generators in other jurisdictions, however, the ACT suffers virtually no physical interconnection constraints. The capacity of the NSW generators, and transmission infrastructure is such that the ACT load is carried easily under normal operating conditions.

The Spot Market

10 The spot market is the mechanism by which Market Generators are paid for the electricity they sell to the pool and Market Customers are required to pay for their electricity consumption. The spot price is calculated by NEMMCO using the price offers and demand bids made by Scheduled Generators and Market Customers in the pool, and in effect represents the marginal cost of production at any given time. NEMMCO provides a ‘Settlement’ service that performs a clearinghouse function for the billing and settlement of all spot market transactions.

11 There are two steps in calculating the spot price. First, a dispatch price is recorded as the marginal cost of supply to meet demand for each five-minute interval in a half-hour after adjusting the offers and bids for electrical losses on the network. This marginal cost is generally equal to the offer price of the last scheduled generator to be dispatched to meet that demand. The spot price is calculated as the average of the six dispatch prices in a half-hour.

12 The National Electricity Code (the Code), which sets the market operation rules for the NEM, places a limit on the maximum spot price. For example, when it is necessary to interrupt supplies involuntarily (for example, load shedding) to Market Customers in order to balance the overall electricity supply and demand, the spot price may rise to no higher than what is called the ‘Value of Lost Load’ (vol) as prescribed in the Code. Through this provision, the maximum spot price (VoLL) is currently set at $5,000 per MWh.

13 The spot market has been designed to provide economic price signals to generators, customers, and Network Service Providers to assist them in their decision making in relation to alternative investment options for new generation, demand side management (for example, consumption curtailment in response to high prices), and network augmentations. These price signals are also important because of their impact on consideration of alternative energy proposals.

Contracts between buyers and sellers

14 Buyers and sellers of electricity may seek to reduce the risk of a volatile spot price market through entering into long or short term contracts that set an agreed price for provision of agreed amounts of electricity at agreed times. ACT Main Submission to the 2004 Review 179


The form of the contracts may consist of bilateral deals, over the counter derivatives, and exchange traded derivatives from centralised exchanges. 15 The most basic and common form of contract is a bilateral hedge contract where two parties agree to exchange cash against the spot price to ‘fix’ the price of the electricity traded between them.

16 The behaviour of the hedge market over the last year has been one of high prices and low liquidity. Generators are offering forward contract rates that are higher than they were two to three years ago. These contracts may be kept confidential and they may take any form the parties to the contract wish to negotiate.

Retail Market

17 The vertical integration of the electricity industry is being broken down by reforms in line with the development of the NEM and Full Retail Competition (FRC). Jurisdictional regulators, such as the Independent Competition and Regulatory Commission (ICRC) in the ACT, have been considering imposing conditions upon the NEM participants. Some of these conditions address issues surrounding ‘ring fencing’ between the different roles performed by Distributors and Retailers.

18 In the ACT, supply has always been negotiated within a small set of retail tariffs due to the relatively small size and low demand of the ACT’s industrial sector. The final price of electricity has a number of components including the cost of the energy (that is, the cost of the generator producing the electrons), its transportation cost (the transmission and distribution network costs), wholesale market costs (offset by the extent of hedging contracts), and the retailer’s costs including profit.

19 Retailers are looking to minimise the risk that they carry in terms of unexpected changes in the load that they must deliver. An important factor in providing this stability is the commitment of a volume of electricity demand on which they can rely. Certainty of the volume and pattern of electricity consumption and the length of time for which a customer will commit to the retailer is also translated into a margin to be applied to the above considerations.

20 A customer signed up to a retailer for a long period of time and with a stable pattern of demand reduces the potential risk to a retailer. In the current climate of partial retail competition, however, the diminished risk is not reflected in lower tariffs.

21 With the spot market experiencing rising prices, and the generators exerting market power, the resultant contract prices have been rising. For a retailer, this means reduced profitability for electricity that they sell to customers on regulated tariffs.

The Effect of Rising Wholesale Prices



22 While it is impossible to predict the future wholesale price of electricity in the NEM, there are a number of factors that may mitigate against a continued rising trend. In addressing the core imbalance causing the current market behaviour, the NEMMCO Statement of Opportunities has identified investment opportunities in new generation plant, and this statement can be found on the NEMMCO website.

23 The commissioning of a number of ‘peak load’ gas fired generators is being considered, particularly in regions that are experiencing high peak demands. This will decrease the ‘price push’ from the supply side of the wholesale pool. Governments, particularly in Victoria and SA where peak demand is greater than generating capacity, are considering a number of demand side management initiatives that will slow the rate of increase in demand. Thus, the pressure on prices will diminish.

24 However, the effect on retail prices is not as simple as this. It is not possible for any Government to predict the likely retail costs at any time. As discussed in the section on the retail market, hedge contracts between retailers and generators are private in nature and their terms are therefore difficult to discover. What little anecdotal evidence is available to Government is that the contract prices being struck at present continue to be high.

25 Retailers then offer a range of pricing options that are usually based on consumption volumes. These tend to result in lower volume users being offered a low fixed cost component with a relatively high volume charge (cents per kilowatt hour) while higher volume users are offered a higher fixed cost component but a lower volume charge.

26 Regardless of the pricing structure offered, it is generally accepted that the energy cost component accounts for approximately 40% of the price of electricity. The network costs are fixed by the various relevant regulators - the ACCC and the ICRC. As it is the energy component only that is traded on the NEM, it is the energy cost that is susceptible to market price movements, which in turn flows into the final price of electricity.

27 This means that the exposure of consumers to movements in wholesale electricity prices is generally off a base of 40% of their final electricity costs. For example, a family that pays $800 per annum for electricity is paying around $320 in energy costs (40% of $800). At this rate, a 10% increase in wholesale electricity costs would translate into an annual increase of $32, or $0.62 per week. An increase of more than 16% in wholesale prices would be needed to cause a $1 per week change.

28 It is a matter of pure speculation as to where prices may move in the wholesale market over the medium term. However, retailers have extensive incentives to enter into financial and volume contract trades in the commercial market to hedge their exposure to spot market variations. To the extent that retailers manage their risks through these various financial instruments, the exposure of end consumers is also relatively protected. However, there are few mechanisms currently available to identify the extent to which any retailer has hedged their market risks.


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