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Productivity in electricity, gas and water: Measurement and interpretation

Staff working paper

This paper by Vernon Topp and Tony Kulys was released on 4 April 2012.

It examines productivity trends in the Australian utilities industry and highlights some significant issues relating to the measurement and interpretation of changes in measured productivity over time.

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  • Key points
  • Contents
  • Multifactor productivity (MFP) growth in Australia's market sector has been considerably below average since 2003-04. Utilities (Electricity, Gas, Water and Waste services), have played a significant role in this, with MFP growth being strongly negative between 1997-98 and 2009-10 (MFP falling, on average, by 3.2 per cent per year).
  • To better understand why, this study examined MFP at the subdivision level, with a particular focus on the two largest subdivisions - Electricity supply (ES), and Water supply, sewerage and drainage services (WSSD). MFP growth between 1997-98 and 2009-10 was negative for both ES (on average, -2.7 per cent per year) and WSSD (-4.3 per cent per year).
  • Around half of the MFP decline in ES was due to an increase in the ratio of peak to average electricity demand, which lowered average rates of capacity utilisation. This was largely attributable to rapid growth in household use of air conditioners.
    • Three other contributors were: cyclical investment in lumpy capital assets, which temporarily increased inputs ahead of growth in output; a shift to greater undergrounding of electricity cabling, which raised costs and the quality of output, but not the volume of measured output; and policy induced shifts away from coal-fired power to higher-cost, but less polluting, sources of new supply.
  • In WSSD, two developments contributed around 80 per cent of the decline in MFP after 1997-98. First, restrictions on water demand in response to widespread drought conditions led to lower measured output. Second, stricter sewage treatment standards increased industry costs, but there was no adjustment to measured output to account for the quality improvement.
    • Two other contributing factors were cyclical investment patterns, and a shift to higher-cost sources of new water supplies, particularly desalination plants, to improve water security.
  • The negative influence on utilities MFP growth of two of these influences - the cyclical surge in new investment and the 2000s drought - is expected to be largely temporary. However, the remaining factors are structural, permanently raising input requirements in the industry (though in some cases bringing an increase in the quality of outputs)
  • This study highlights some of the challenges involved in measuring and interpreting estimates of MFP growth in utilities.
    • A particular concern is the influence of changes in capacity utilisation arising from either cyclical investment patterns, or changes in the structure of electricity demand.
    • Also, government policies, regulatory settings and external shocks (especially the weather) can impact on the quantity or quality of measured output, and on the choice of production technology, thereby influencing estimates of MFP.

Background information

Shiji Zhao (Assistant Commissioner) 02 6240 3342

  • Preliminaries
    • Cover, Copyright, Contents, Preface and Abbreviations
  • Overview - including key points
  • Chapter 1 Introduction
    • 1.1 Project aims and outcomes
    • 1.2 Project methodology and approach
    • 1.3 Organisation of this study
    • 1.4 Related Productivity Commission research
  • Chapter 2 Declining MFP in the utilities division
    • 2.1 Impact on the market sector
    • 2.2 The rise and fall of utilities MFP
    • 2.3 Three phases of MFP growth in the utilities division
  • Chapter 3 MFP by subdivision
    • 3.1 Subdivision MFP
    • 3.2 Relative importance of the different subdivisions
    • 3.3 Other productivity studies
    • 3.4 Subdivision MFP results
  • Chapter 4 Productivity in Electricity supply
    • 4.1 Structure of the Electricity supply subdivision
    • 4.2 The operating environment of Electricity supply
    • 4.3 Measurement of outputs and inputs in Electricity supply
    • 4.4 Proximate drivers of MFP in Electricity supply
    • 4.5 Explaining the moderate MFP growth phase (1974-75 to 1985-86)
    • 4.6 Explaining the rapid MFP growth phase (1985-86 to 1997-98)
    • 4.7 Explaining the negative MFP growth phase (1997-98 to 2009-10)
  • Chapter 5 Productivity in Water supply, sewerage and drainage services
    • 5.1 Subdivision structure
    • 5.2 The operating environment of water supply
    • 5.3 Measures of output and inputs (volume terms)
    • 5.4 Assessing productivity trends
    • 5.5 Summarising the quantitative impacts on MFP
  • Chapter 6 Productivity in Gas supply
    • 6.1 The Gas supply subdivision
    • 6.2 Inputs, output and MFP in Gas supply
    • 6.3 Implications
  • Chapter 7 Explaining negative MFP growth in utilities
    • 7.1 Cyclical investment
    • 7.2 Output measurement
    • 7.3 Shifts to higher cost technologies
    • 7.4 Unmeasured quality improvements
    • 7.5 Lessons and implications
  • Appendix A Methodology and data sources
  • References

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