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Annual Reports
The Chairman’s and Chief Executive Officer's Report
IPART had a busy and successful year during 2007/08. During the year, IPART continued its work as the economic regulator of monopoly services in New South Wales. We also continued to develop our role as an economic and policy think tank and adviser to government.
The work of IPART during the year is described in detail in this annual report.
In particular, during the year IPART:
- Completed a new determination of prices for the Sydney Water Corporation for the period from 1 July 2008 to 30 June 2012.
- Completed a review of applications by the retail suppliers of gas for gas prices increases under special circumstances.
- Reported on possible improvements to the interface between the land transport industries and the stevedores at Port Botany.
- Completed a review of the NSW Registered Clubs Industry.
- Received a silver award in the environmental category in the Premier's Public Sector Awards for the administration of the Greenhouse Gas Reduction Program over the last few years.
In early 2008 IPART surveyed many of its stakeholders. The questions asked in the survey emphasised respondents' perceptions about the quality of IPART's processes and the quality of its work.
Respondents were very positive about IPART in 2008. For example:
- 99 per cent of respondents either agree or tend to agree that IPART's staff demonstrate a high level of professionalism.
- 95 per cent of respondents either agree or tend to agree that Tribunal Members demonstrate leadership.
- 94 per cent of respondents either agree or tend to agree that IPART's consultative processes are of high quality.
- 94 per cent of respondents either agree or tend to agree that IPART's decision making processes are of high quality.
- 93 per cent of respondents either agree or tend to agree that IPART's regulatory reports are of high quality.
The results are a distinct improvement on the very good results that were achieved in 2006. In particular, a higher proportion of respondents assess IPART's leadership and consultation processes favourably in 2008 than was the case in 2006. Respondents considered that IPART significantly improved its performance between 2006 and 2008 in the following areas:
- Whether IPART adopts a light handed approach to regulation.
- IPART's independence from government.
- The adequacy of IPART's decision-making processes.
- The transparency of IPART's reports.
- The credibility of IPART's reports.
- The timeliness of IPART's decisions.
There are no areas where performance is thought to have deteriorated between 2006 and 2008.
We asked stakeholders whether they thought IPART has the capacity to act as an economic and policy think tank and adviser to the government. Responses were favourable. For example, 89 per cent of respondents to the survey either agree or tend to agree that this is a valid role for IPART. Those who disagree tend to think that a policy role would detract from IPART's independence in undertaking its regulatory role. Although we understand these concerns about IPART's dual role, we think that the role of IPART's independence can be managed if IPART ensures that its advice is provided in a report that is subsequently made publicly available by the Government.
Comments by Respondents
Respondents to the survey raised a number of issues for IPART's consideration. These include the following;
- Concerns about the perceived excessive influence of consultants on some of IPART's decisions.
- The need to attract and retain high quality staff.
- The need for IPART staff to have more industry experience.
- IPART's changing role as national regulation develops in some areas.
- Concern about the extent to which the increasing complexity of issues faced by IPART allows for genuine input from service users.
IPART understands these issues and is developing strategies to address them. Details can be found later in this report. We are, for example, re-examining the way in which we use consultants to ensure that their expertise is transferred to IPART's Secretariat, examining how we can continue to attract and retain staff with a wide range of expertise, and finding ways to make IPART's consultative processes and its reports as accessible as possible to all stakeholders.
During 2008, IPART commissioned a household survey of energy and water use in the operational areas of Hunter Water Corporation, Gosford Council and Wyong Council. The survey collected data on household characteristics (including income), appliance ownership, usage, and views on contestability and marketing for gas and electricity. Similar surveys were undertaken for Sydney in 2006 and 2003. These surveys assist IPART to consider the affordability of its pricing decisions, and provide valuable information on the extent of competition in the residential energy market.
IPART has also made a more concerted effort to encourage participation in relevant reviews in non-metropolitan areas. Public hearings were held in non-metropolitan areas for the developer charges investigations as well as for IPART's review of the registered clubs industry. In addition we more carefully targeted the rural press to advertise the release of issues papers for reviews affecting non-metropolitan communities.
Policy Think Tank
During 2007/08 IPART continued to develop its expertise as a policy adviser to the NSW government. IPART's consultative and evidence based approach provides a useful mechanism to develop policy particularly in the early stages where the Government is able to consider a number of approaches.
During the year, IPART published a report on the interface between the land transport industries and the stevedores at Port Botany. IPART's report confirmed the existence of congestion at Port Botany, analysed the reasons why congestion occurs and made a number of recommendations for improvement. Possibly the most significant recommendation was to even out the peak work loads by pricing the slots for access to the stevedore's terminals at Port Botany according to the demand for them through an auction system. In September 2008 the Minister for Ports and Waterways announced that the Government would implement most of IPART's recommendations. The price at peak times can be expected to be higher, although the government prefers an administered rather than a market price for slots in the first instance. The Government is, however, willing to give further consideration to an auction system if the administered price system proves to be inefficient in dealing with congestion.
IPART published a report on the Registered Clubs industry in NSW. This review examined the social contributions made by Clubs in NSW. After examining the adverse impacts of clubs (for example, increased problem gambling) we concluded that on balance clubs provide a net benefit to NSW. We made a number of recommendations to enhance the social contributions made by clubs, improve the financial viability of clubs and for better governance arrangements for clubs. Finally, we recommended that the Government and the Clubs Industry should take the recommendations of the report and work to develop a management plan that would, among other things, better document consultation procedures to be followed by both the Government and the industry in their dealings with each other. The Government and the clubs are now working to develop this management plan.
During the year IPART released the draft report of its review of taxation in NSW. IPART's draft report assessed the strengths and weaknesses of the taxes available to the NSW and Commonwealth Government. We made a number of recommendations to increase reliance on the broader based, simple and more transparent taxes that are available to the NSW government and to reduce reliance on narrowly based or less efficient taxes. However, we also noted that the largest benefits would come from a national approach and made a number of recommendations to the NSW government about how NSW can facilitate the development of a national approach.
In particular we noted that the methodology used by the Commonwealth Grants Commission can inhibit State government tax reform that is designed to improve the overall efficiency of the tax system.
Following the release of the draft report the Treasurer, Mr Michael Costa MLC, indicated that the Government was willing to support in principle most of IPART's recommendations.
What can be expected from an Independent Tribunal
An overseas regulator recently said that “The hardest part of my job is the politics”. What he had in mind was the difficulty regulators typically face in trying to find compromises between different interests, including different views regarding the public interest. This need to find such compromises is of course the essence of politics itself. So the question is why transfer the task to an independent regulator?
Regulators are independent experts who make decisions based on the assessment of evidence and give reasons for decisions. They are most likely to be successful where the public interest objectives to be advanced as a result of regulation are clear and the relevant evidence is readily available. But realistically this is a matter of degree. Arguably therefore there should be scope for the government to direct the regulator, provided that this direction is done in an open and transparent way so that accountability for the eventual decision is clearly established.
This issue of the appropriate basis and extent of government intervention to direct the Tribunal is considered further in the next few paragraphs.
Section 16A of the IPART Act
Under Section 16A of the IPART Act, the portfolio Minister for a government agency may direct IPART to include in a price determination on price methodology the efficient costs of complying with a requirement imposed on the agency by the portfolio Minister.
Section 16A directives provide a flexible and effective means of implementing Government policies. IPART's reviews of expenditure under Section 16A directions are, however, limited to assessing whether an agency's costs of complying with a directive are efficiently incurred. It is not open to the Tribunal to review whether the expenditure is required or represents the best way of achieving a policy objective, as would occur with other proposed capital and operating expenditures.
During 2007/08 the Minister for Water directed IPART to include in its determination of Sydney Water Corporation's prices from 1 July 2008 the efficient costs of complying with the Government's directions to undertake the desalination plant, the Western Sydney Replacement Flows Project and the Rosehill (Camellia) Recycled Water Project. These projects contributed in significant part to higher prices for Sydney Water customers, reflecting the Government's intent that the primary beneficiaries of the enhanced water security brought about by these projects should meet the costs.
As IPART's reviews of expenditure incurred under Section 16A directions are more limited, it is important that the policy objectives of directions are clear and their costs and impacts are disclosed transparently. As in the case of Sydney Water, IPART will seek to clearly set out the impact of Section 16A directives in future pricing determinations.
Government Policies and IPART Determinations and Recommendations
A related issue is the relationship between the terms of reference for an IPART enquiry or directions regarding government policies in a letter from the Premier, and the subsequent determination or recommendations that IPART makes.
Under its Act IPART is required to have regard to a number of considerations, so that IPART is sometimes faced with a situation where it is required to achieve a balance between potentially conflicting criteria. In these circumstances government directions as to where its policy priorities are, expressed transparently through the terms of reference or by an open letter from the Premier can be of considerable assistance. For example, the Tribunal was assisted by the terms of reference for its determination on retail electricity prices, which directed the Tribunal to give considerable weight to the Government’s objective of achieving a competitive retail electricity market.
However, a balance needs to be struck as to how far the Terms of Reference should seek to prescribe to the Tribunal. The more the terms of reference, for example, seek to prescribe the Tribunal’s methodology, the more they will dictate the answer reached. There would come a point where the decision would effectively be a Government decision, and the Tribunal would seem to serve little purpose in calculating a price increase that was already pre-determined by the Government. The rationale behind the establishment of an independent authority to determine prices is that the authority should be and remain independent, and that it alone is then fully responsible and accountable to public opinion for its decisions. Indeed, both the Government and IPART have a considerable amount at stake in maintaining the credibility and independence of the regulatory regime.
In our view the purpose of Government directions should be to ensure that the Tribunal adequately considers an issue and has regard for government policy objectives. But the direction should not determine the outcome. So far IPART has been able to reach agreement with the Government on the terms of reference for all of its enquiries without considering that its independence has been compromised. An examination of all price determinations since 2000 confirms that IPART has responded to government policies where directed. Thus IPART has allowed for the efficient and prudent cost of implementing those policies in its price determinations, but IPART alone has been responsible for determining the actual amount to be recovered. However, as IPART enquiries relate ever more closely to significant issues of government policy it will be important to continue to ensure that the terms of reference for IPART enquiries do not compromise the independence of that enquiry.
Cumulative Impacts of IPART's Pricing Decisions
As discussed later in this annual report, the average household charges for services that are regulated by IPART were 5.4 per cent higher in 2007/08 than in 1992/93. If the impact of introducing the GST is excluded, regulatory decisions made by IPART have resulted in household charges being 1.4 per cent higher in real terms in 2007/08 than in 1992/93.
During the 1990s the agencies that are regulated by IPART were able to make significant gains in efficiency. These efficiency gains were passed on to customers in lower prices. At the same time, IPART was able to restructure prices to reduce the extent to which business customers in particular were required to subsidise residential customers. Prices have risen since around 2004 to fund investment that is required to upgrade NSW's electricity, gas, water and rail networks. In some cases (such as electricity and water) the community is increasingly using more expensive sources of supply in response to a changing economic and policy environment.
IPART's Capabilities
IPART needs a range of capabilities to undertake its responsibilities successfully. These include:
- Experienced and impartial decision makers.
- Adherence to administration law principles regarding natural justice, fairness and the avoidance of bias.
- The ability and willingness to undertake extensive consultation.
- The ability and willingness to maintain a professional and mutually respectful relationship with stakeholders, especially where there are areas of disagreement.
- An expert Secretariat that, supplemented by the use of consultants where necessary, can draw on a wide range of skills.
- Administrative systems that can store and retrieve large amounts of data and provide Tribunal members with the data required for decision-making.
- High quality human resources, information technology and office accommodation.
- A corporate culture that is open, mutually respectful and which rewards effort and achievement
- An emphasis on identifying and managing risk to IPART's continuing success.
During the year, IPART made a number of changes in its operations to improve its capability. In January 2008, IPART's previous office lease expired and the Government Leasing Service negotiated a new lease on IPART's behalf. We decided to remain in Sydney's CBD to ensure that we continue to remain accessible to key stakeholders.
On the basis of professional advice we designed the new office space to:
- Improve work flow and team interaction.
- Improve communications through upgraded technology.
- Provide flexibility to respond to IPART's changing regulatory and policy advisory role, new functions or temporary staff appointments.
- Provide flexible facilities for public consultation.
IPART's new office accommodation was successfully completed to enable us to relocate in January 2008.
IPART made a number of improvements to its information technology during 2007/08. We virtualised our computer hardware to improve flexibility and enhance business continuity. We also introduced customised templates to make it easier to produce documents. As a consequence IPART has been able to increase its publication of reports by 23 per cent in 2007/08 over previous years by using the same level of administrative resources. We improved our website to improve access to information for stakeholders and the general public.
There was significant capital expenditure during 2007/08 to fund the new space and systems. With Treasury's agreement IPART funded the relocation from its own cash reserves at a cost of nearly $2.5 million.
In mid 2007, IPART commenced planning to develop a new capabilities framework that will focus on the personal attributes and behaviours that are required for IPART to be successful. The new capabilities framework will focus our performance management, recruitment, and career planning and development.
In concluding we would like to thank our fellow Tribunal Members, Ms Sibylle Krieger and Dr Neil Warren for their wise counsel and participation in decision-making during the year. We would also like to thank the Tribunal's Secretariat for excellent professional advice and assistance.
Michael Keating AC James Cox
Chairman Chief Executive Officer and Full Time Member
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