Better Regulation of Infrastructure Needed

In its latest annual report, released today, the Productivity Commission brings together some key policy messages arising from its recent inquiries into the regulation of Australia’s economic infrastructure.

‘The Commission sees a continuing role for pro-competition regulation of monopoly infrastructure to curtail abuses of market power and enhance economic welfare,’ said Gary Banks, Commission Chairman. ‘However, some modifications to existing arrangements are needed to reduce the risks of regulatory failure.’

Although the problem of market power should not be overstated, access and price regulation of essential infrastructure have the potential to promote the efficient use of resources. According to the Commission, the regulatory challenge is to ensure that the right facilities are targeted and that prices are set neither too high nor too low.

‘The major risk associated with the current regulation of essential infrastructure is that setting prices too low could deter new investment in the facilities themselves’ said Mr Banks. ‘While available evidence of adverse impacts on past investment is largely anecdotal and difficult to verify, the potential risks from regulatory action appear to be looming larger.’

Getting the balance right is not straightforward but it is critical to achieving efficient outcomes for the benefit of consumers over the longer term. An important step is for governments to provide clearer guidance to regulators: greater clarity about the objectives of regulation, the behaviour at which intervention should be targeted and the principles governing the type of intervention.

‘With the inherent uncertainties and information difficulties, there are limits to what regulators can achieve. This makes it doubly important for regulators to intervene only when the potential gains are sufficient to warrant incurring the inevitable regulatory costs’ said Mr Banks.