Competition watchdog shouldn’t be the carbon tax price police

With the carbon tax scrapped almost a month ago and the federal government promising A$550 savings in the first year for the average family, you might be wondering when everything is going to start getting cheaper.

But how does the government make sure that prices fall by the right amount now the carbon tax is gone, and with price savings backdated to July 1? The simple answer is that it can’t, and shouldn’t.

What’s more, the Australian Competition and Consumer Commission (ACCC), which will attempt to police the prices, has been given a difficult job that it shouldn’t have to do anyway.

The reason these promises will be tough to deliver in a straightforward way is that costs and prices change all the time, and these changes are best left to the market.

Costs and competition

Markets are not perfect. Depending on the level of competition in an industry, cost changes may be partially or fully passed through to consumers. But this happens on both the upside and the downside. Less competitive businesses tend to partially “absorb” both cost rises and falls because this maximizes profits.

Sometimes prices rise more rapidly when costs rise, and fall more slowly when costs fall. Economists call this phenomenon “rockets and feathers”, and it can certainly be frustrating. But most of the time markets work pretty well, adjusting prices in response to a huge range of changes in costs, technology, customer preference, and so on.

We don’t ask public servants to check whether prices are “right” in most markets – we just shop around for a better deal. So why is the carbon tax repeal any different? The short answer is that it isn’t.

Political promises

Unfortunately, this doesn’t suit the politicians. So the federal government has handed the ACCC a classic hospital pass, asking it to do something far more problematic and less necessary than it sounds.

The carbon tax repeal legislation has established new laws specifically to deal with companies' “carbon tax price reduction obligation”.

Roughly speaking, this gives the ACCC two new sets of powers under the Competition and Consumer Act. The first is aimed at electricity and gas suppliers who fail to pass on cost savings in full to their customers, and face fines equal to 250% of those costs.

In practice, this will involve the suppliers “substantiating” their price changes, the ACCC checking these prices and, if the ACCC disagrees with the supplier, the supplier being held guilty of overcharging until they can prove themselves innocent. These are pretty strong powers.

The second set of powers cover every other business in the Australian economy. And here there is nothing new.

Under the new laws, businesses cannot make false or misleading representations about the effect of the carbon tax repeal on prices for the next 12 months. But under existing consumer law it is already illegal for a business to make a “false or misleading representation with respect to the price of goods or services”.

So while the ACCC has draconian new powers for electricity and gas providers, it has no real new powers for anyone else. The changes are based on politics, not economics.

The tail wagging the watchdog

The carbon tax repeal laws are just the latest example of politicians using the ACCC for political ends. When the carbon tax was introduced, the Labor government directed the ACCC to check for price gouging.

When the Goods and Services Tax was introduced by the Coalition government in 2000, the ACCC had a three-year role monitoring “price exploitation”. The ACCC has long had the job of monitoring petrol prices, despite its own work showing that domestic prices largely track international ones.

All this is a problem because it distracts the ACCC from its real job of enforcing competition, consumer and utility laws.

But the damage is greater than that. Having the ACCC “check” price changes gives the public a false sense of its purpose. The ACCC’s role is to promote competitive markets, but the carbon tax repeal laws try to position it as a replacement for the market. The expectation is that the all-seeing, all-knowing ACCC will be able to tell us the “right price” and protect us from the “wrong price”. This is complete nonsense.

In reality, the ACCC can’t possibly know if a price is too high or too low. Alongside the carbon tax repeal are myriad other factors that also affect what the consumer pays: fuel prices, wages, interest rates, the weather, the exchange rate, you name it.

As long as businesses do not engage in misleading and deceptive conduct about the carbon tax repeal, there is little the ACCC can, or indeed should, do.

So the ACCC and the energy businesses will have to play a pointless game. Each business will have to present a case that their price changes include the carbon tax repeal (as well as numerous other simultaneous cost changes and market factors). The ACCC will have to judge these statements to check that the price is right, despite this being impossible. There will be a cost to business, taxpayers and ultimately consumers.

While politicians may benefit from this charade, the ACCC certainly won’t. A competition regulator is like a referee for markets. It implements rules of conduct on a fair and impartial basis. Using the ACCC as a price checker for political purposes undermines its reputation and credibility. And that is bad for us all.

Author

1. 

   Stephen King

   Professor, Department of Economics at Monash University