Category: Markets & Regulation

Putting the customer back in front: How to make electricity prices cheaper


A new report from the Grattan Institute’s Energy program, Putting the customer back in front: how to make electricity cheaper, presents a concrete set of proposals for substantially reducing the power bills of Australian households.

The main problem driving excessively high prices for consumers is that the regulation of electricity distribution networks is broken. Changes over recent years to the way distributors operate and charge customers have allowed them to make unduly high profits, given the relatively low level of risk they face.

Governments have also intervened to ensure that distributors deliver power at a level of reliability no serious cost-benefit analysis can justify.  Again, it is consumers who pay. To restore the balance, governments should:

  • Direct and empower the Australian Energy Regulator (AER) to set the parameters that determine customer costs and company profits, and ensure that the parameters are consistent with the low risks these businesses face.
  • Reduce the risk of political interference by transferring responsibility for setting reliability standards from state governments to the Australian Energy Market Commission (AEMC) and the AER, the national bodies that set and enforce the rules of the market.
  • Implement more robust corporate governance standards for government-owned businesses to ensure they operate as efficiently as those that are privately owned. Otherwise they should be privatized.
  • Prevent over-investment in the networks by empowering the AER to review the companies’ capital expenditure forecasts annually against credible market demand forecasts, and subject any over-expenditure to a rigorous cost-benefit analysis.

Recent rule changes proposed by the AEMC are going in the right direction, but are still too general to instill confidence that the desired result will be delivered.

Of course distribution companies should be allowed to make fair and reasonable profits. At the same time, regulators should not only have more resources and power – but should be directed – to act in the long-term interests of consumers.

The Report states the recommendations in this report could save customers about $2.2 billion a year, or $100 a year for every household, as well as creating a fairer, more efficient electricity distribution system.

Challenges await Australia’s new Tax Commissioner

by Miranda Stewart

In January 2013, Mr Chris Jordan AO starts as Federal Commissioner of Taxation in charge of the Australian Taxation Office (ATO). He follows Mr Michael D’Ascenzo AO, who was not reappointed after his seven-year term.

Mr Jordan will be only the 12th Commissioner and only the second external appointment in the ATO’s history. All appointments have been male. The first Commissioner, George McKay, appointed from the New South Wales public service in 1910, seems to have died from overwork in 1917 after administering on a shoestring the federal land tax and income tax introduced in 1915 to help fund World War I. The next Commissioner, Robert Ewing, appointed an assistant commissioner to help. In his 22 year innings until 1939, Mr Ewing oversaw a new federal estate tax, payroll tax, and the turbulent time before World War II, when the federal government took over the income taxes of the States.

Mr Jordan is a former chairman of KPMG and company director. His appointment has been widely welcomed especially by business and professional groups. He has been on the Board of Taxation since its establishment in 2000 and was appointed chairman in June 2011. His early working life as a policeman may also stand him in good stead.

So what are the challenges facing Mr Jordan in his new appointment?

Today, the ATO is an organisation of 25,000 people that collected net tax of $273 billion in 2010-11. Mr Jordan will be responsible for the income tax, GST, fringe benefits tax, petroleum and mineral resource rent taxes, medicare levy, fuel taxes and higher education levies. The ATO also administers parts of the superannuation system, child support, the Australian Business Register and Valuation Office.

The ATO is under constant pressure to increase revenue collection. Most revenue is collected through its highly effective income tax and GST withholding systems. These ensure electronic transfers from taxpayers to government coffers throughout the year. The ATO manages these systems at a remarkably low administrative cost of a little under $3.5 billion a year, a cost to revenue ratio of about 1 per cent. This does not include compliance costs of taxpayers and business and we know that these are significantly higher than direct governmental costs of tax collection, and regressive in their impact.

Mr Jordan’s main responsibility – and biggest challenge – is to keep this efficient organisation running well. He will have to manage his staff so that sick days are kept to a minimum and make sure the next computer roll-out stays on budget. He has lost one valuable support in this task, as Jennie Grainger, former Second Commissioner in charge of Compliance, has just taken up an appointment in Her Majesty’s Revenue and Customs in the UK. Several other leading ATO staff are also retiring, including senior legal experts.

Some have suggested that Mr Jordan can – and should – lead a change in ATO culture, presumably to make it more business and taxpayer-friendly. One commentator, for example, suggests that he will better understand the plight of small business.

It is true that the ATO has a strong organisational culture. Being the subject of widespread popular dislike will do that. ATO staff also understand their importance to government. Still, caution is needed: that strong culture contributes to the morale of ATO staff, and that helps keep the revenue rolling in.

Mr Jordan has demonstrated his effectiveness in liaison with government and business. He will no doubt strengthen the work begun by Mr D’Ascenzo in engaging with taxpayers and the tax profession about most aspects of administration and interpretation of tax law.

But it is important that the Commissioner of Taxation is – and is perceived to be – absolutely independent both of the government of the day, and of undue professional or business tax influence.

Mr Jordan faces the challenge of handling revenue collection in relation to high wealth individuals, including investigations into international tax evasion started under Mr D’Ascenzo. He must oversee controversial large corporate audits that challenge cross-border transfer pricing activity and tax planning. He becomes Commissioner in an era of unprecedented and expanding inter-governmental tax cooperation.

Mr Jordan will be in charge of new risk-based audit, settlements, and real-time information disclosure arrangements with large business. UK Secretary of Taxation Mr Dave Hartnett was at the forefront of these developments. He recently retired amid public controversy that he took “enhanced relationships” with big business too far. Within limits, a prickly relationship between business, the profession and the Commissioner is probably healthy. It won’t be Mr Jordan’s job to be liked.

What of Mr Jordan’s role in tax reform? That is only a small fraction of the job. In 2002, Treasurer Peter Costello moved the tax legislation function into Treasury. Mr Jordan will keep his seat on the Board of Taxation, but only as an ex officio member. He may be able to strengthen the voice of the core administrator in Treasury’s tax law reform processes. That would be a good thing. But his main job is to keep that revenue – about $750 million per day – rolling in to fund government to do what the public wants it to do.

Miranda Stewart is a Professor at Melbourne Law School, University of Melbourne.

This article was first published at www.theconversation.edu.au

 

You talkin’ to me? Gerry Harvey’s one-man, online retail debate

Gerry Harvey is great media talent. When I first became interested in online retail, I almost immediately became interested in Gerry.

As far back as 2000, Gerry told ninemsn on a live chat forum “that most of the online business will be conducted by traditional retailers and that over 90% of the e-retailers will in fact all go out of business one after the other”.

In 2008, he famously told Smart Company that online retailing “is a complete waste of time”. During his short-lived campaign to have GST applied to all goods bought by Australians from overseas websites he said that online retail was “escalating to proportions that are quite unbelievable” and was threatening to put scores of retailers out of business.

By June 2011, he was sanguine: “We find people will order smaller things online, but for bigger items they’ll mostly come to the store, go home and order online”.

You might think this was Gerry changing his mind over time about the implications of online retail. But then I saw this interview on Lateline. If current affairs television consistently reached this level of rollicking entertainment, I would watch it a lot more often.

Gerry came across as a more avuncular and amusing version of Queensland’s late Joh Bjelke-Petersen. It became obvious watching this interview that there was no evolution to Gerry’s opinions on online retail – he held them all simultaneously.

There’s a popular line of thought that Gerry is a dinosaur, a man out of time who doesn’t get the internet. On the contrary, I think that there a lot of people who don’t get Gerry, or perhaps his business, and its complicated relationship with online retail.

When Gerry talks about the internet he is addressing at least two very different audiences. The first is the investment community who want to know that Harvey Norman has a digital strategy, understands “omnichannelling” and is forward focused.

The second are Gerry’s army of franchisees who want to hear that someday this war will be over. All of Harvey Norman’s Australian stores operate as franchises, aside from the recently acquired Clive Peeters and Rick Hart outlets. In the last financial year, franchisee sales revenue fell by 2% and the fees Harvey Norman Holdings received from their franchisees fell 5%.

Gerry has to walk a tightrope – being seen to embrace or at least understand online retailing while convincing his franchisees that the internet is not going to destroy their livelihood.

The franchisee structure makes it incredibly difficult for Harvey Norman to wholeheartedly embrace online retail. This underscores a very important point about the internet. It’s a disruptive technology. For a lot of businesses, it is not simply a matter of adding another channel. The landscape will change so much that a new business or business model is required. This is something that Fairfax Media and News Limited know only too well.

When Gerry talks about online retailing, most people think they are listening to a retailer. But Harvey Norman is also a major retail property owner and developer. It owns 74 sites across Australia and has a $2 billion property portfolio that includes properties in New Zealand, Malaysia, Singapore and Slovenia.

For retail property owners, online retail is not such a good thing. The investors who want to hear that Harvey Norman has a digital strategy also need to hear that the internet is not going to devalue its retail property portfolio. This is a tricky message to sell.

The strategy of banks and other businesses in the 90s and 2000s to divest themselves of property now looks very sensible. Australian banks have wholeheartedly embraced the internet and their customers have in turn embraced online banking. Banks may be affected by other people’s commercial property devaluing, but mostly they don’t have to worry about their own.

Online retail promises or threatens to greatly change how Australians buy and sell over the next few years. However it works out, I hope that Gerry Harvey is around a fair bit longer, saying things to provoke and amuse us.

Anybody who tells us omni-channelling, a glib and ugly expression if ever there was one, is “bullshit”, deserves an audience.

Scott Ewing is a Senior Research Fellow – The Swinburne Institute for Social Research at Swinburne University of Technology.

This article was original published online at The Conversation

 

The Unrepentant And Unreformed Bankers

By Phil Angelides

Money laundering. Price fixing. Bid rigging. Securities fraud. Talking about the mob? No, unfortunately. Wall Street.

These days, the business sections of newspapers read like rap sheets. GE Capital, JPMorgan Chase, UBS, Wells Fargo and Bank of America [2] tied to a bid-rigging scheme to bilk cities and towns out of interest earnings. ING Direct , HSBC and Standard Chartered Bank  facing charges of money laundering. Barclays caught manipulating a key interest rate, costing savers and investors dearly, with a raft of other big banks also under investigation. Not to speak of the unprecedented wrongdoing that precipitated the financial crisis of 2008.

Evidence gathered by the Financial Crisis Inquiry Commission clearly demonstrated that the financial crisis was avoidable and due, in no small part, to recklessness and ethical breaches on Wall Street. Yet, it’s clear that the unrepentant and the unreformed are still all too present within our banking system.

A June survey of 500 senior financial services executives in the United States and Britain turned up stunning results. Some 24 percent said that they believed that financial services professionals may need to engage in illegal or unethical conduct to succeed, 26 percent said that they had observed or had firsthand knowledge of wrongdoing in the workplace, and 16 percent said they would engage in insider trading if they could get away with it.

That too much of Wall Street remains unchanged is not surprising. Simply stated, the banks and their leaders have paid no real economic, legal or political price for their wrongdoing and thus have not felt compelled to change.

On the economic front, the financial sector has rebounded nicely from its brush with death, thanks to an enormous taxpayer bailout. By 2010, compensation at publicly traded Wall Street firms had hit a record $135 billion.

Last year, the profits of the nation’s five biggest banks exceeded $51 billion, with their chief executives all enjoying pay increases. By 2011, the 10 biggest U.S. banks held 77 percent of the nation’s banking assets.

On the legal front, enforcement has been woefully inadequate. Federal criminal financial fraud prosecutions have fallen to a two-decade low. Violations are settled for pennies on the dollar – the mere cost of doing business, with no admission of wrongdoing and with the bill invariably picked up by insurers or shareholders. (When it’s shareholders, that’s not someone else far away, that’s your 401(k), pension fund or mutual fund.)

When Goldman Sachs was charged with failing to set policies to prevent insider trading, it was fined $22 million, an amount the bank collects in about seven hours of trading. Goldman’s record $550 million penalty for securities fraud in 2010 amounted to less than 2 percent of that year’s revenue.

On the political front, after a brief stint in the penalty box, the big banks have resumed the political muscling that got them two decades of deregulation.

To block reform, the financial industry has spent more than $317 million on lobbying in Washington over the past two years and more than $230 million in federal political contributions in the 2010 and 2012 election cycles.

It’s been to good effect. Two-thirds of the regulations called for in the financial reform law passed two years ago are still not in place. And the House Republicans, the banks’ sturdiest allies, have slashed at the budgets of the Securities and Exchange Commission and theCommodities Futures Trading Commission to impede their ability to investigate wrongdoing.

Clearly, the present order is unsustainable. We need to demand fundamental changes now, breaking up the big banks to snap their stranglehold on our markets and our democracy, ensuring that the newly minted financial reform laws are implemented, and wringing out rampant speculation.

But true reform can only occur if we root out the corruption that has distorted our banking system and undermined the productive work of the many good people in the financial sector.

The system of financial law enforcement is clearly broken. Think of it this way: If someone robbed a 7-Eleven of $1,000 but could settle a few days later for $25 and no admission of guilt, would they do it again?

Only enforcement with real consequences will work. That means vigorous pursuit of criminal cases against individuals involved in wrongdoing, the surest method to deter malfeasance.

It means enforcement agencies eschewing weak settlements in civil cases and seeking remedies with teeth such as civil penalties, restitution and executives forfeiting their jobs. And, it means tougher financial fraud laws. In that regard, the bipartisan proposal by Sens. Jack Reed, D-R.I., and Charles Grassley, R-Iowa, to increase fines for securities fraud is a place to start.

To make any of this a reality, the U.S. Department of Justice and the federal regulators must have the will and the resources to do the job. President Obama has asked for additional funds for the Department of Justice, the SEC and the Commodities Futures Trading Commission.

Giving these agencies the tools to detect and prosecute wrongdoing will more than pay for itself – the Commodities Futures Trading Commission’s fine against Barclays for interest rate manipulation alone will pay for almost an entire year of that agency’s budget.

None of these changes will come easily, but this much is clear: We cannot allow Wall Street to continually flout our sense of right and wrong, to erode faith in our legal and political systems, and to put our financial system and economy in jeopardy.

Originally published in The San Francisco Chronicle.

The Next Banking Crisis

by Hugo Radice

In the ongoing Euro-crisis, our political leaders are constantly criticised for “playing catch-up” and not being “ahead of the curve” (although others might feel that they are completely round the bend).   Perhaps, therefore, it is time to look up from the turmoil in the sovereign bond markets and the counsels of the European Union, dust off the crystal ball, and look forward to the next banking crisis.  For it is becoming increasingly clear that banks across Europe face a much more serious problem than a 50% haircut on their holdings of Greek government bonds;  and that problem goes to the heart of what is wrong with the current culture and practices of the financial sector.

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