How to Pay for Electricity Network Upgrades

A Submission to the Review of
Electricity Distribution and Service Delivery for the 21st Century

http://www.energy.qld.gov.au/electricity/edsd_Review.asp

estd. by the Queensland Government, March 1, 2004

Summary

The benefits of sinking power lines underground — including fewer power outages, higher power quality, improved public safety, and a more attractive suburban landscape — have only marginal effects on the quantity of electrical energy that can be sold or the price that can be charged per unit. Consequently, electricity distributors whose income depends solely or almost solely on electricity sales have little incentive to bury their cables, or indeed to incur capital costs for any purpose except the connection of new customers.

If the aforesaid benefits are not offset by higher electricity bills, they are manifested in the prices of admission to suburbs with underground power lines — in other words, land prices. So if underground cabling passes a cost-benefit test, the increase in land values will exceed the cost. If that cost is met by the State government (by borrowing if necessary), and if that government automatically receives a sufficient fraction of the increase in land values (e.g. by a comprehensive land tax) to repay the loan within the service life of the underground cables, then the government will have a fiscal incentive to finance the sinking of power lines, and the electricity distributors can simply be tenderers for or managers of the project.

Similar arguments apply to all infrastructure projects of which the costs cannot realistically be recovered through user charges, and of which the benefits are therefore partly or wholly manifested as increases in land values in the serviced areas. If the tax system fails to recapture a sufficient fraction of those increases, projects that pass the cost-benefit test are frustrated because they fail the fiscal test, which may be understood as a cost-benefit test ignoring all stakeholders except the government.

To remove this artificial impediment to infrastructure projects, including necessary improvements to the power distribution network, we submit that a substantial selection of State taxes should be replaced by an extended land value tax (LVT) with minimal exemptions, and with either no threshold or a threshold equal to the land value at the time of the last transfer of title prior to the tax reform. If the sinking of power lines were to be self-funding, the marginal LVT rate would need to be about 4 percent per annum, assuming no exemptions. But many other infrastructure projects would be self-funding with lower LVT rates and/or more exemptions. In general, if g is the ratio of the total uplift in taxable land values to the fiscal cost of the project (net of user charges received by the government), then the project will be self-funding in the fiscal sense if the LVT rate is at least i / (g-1) where i is the discounting rate (“interest rate”). This single LVT rate is sufficient for all projects having at least the given value of g; the required LVT rates for the individual projects are not additive.

Whatever the necessary LVT rate may be, the change in the tax mix does not require an overall increase in taxation; if the initial change is revenue-neutral, subsequent infrastructure projects will automatically pay for themselves through growth in the tax base with no further changes in tax rates. The higher the LVT rate, the longer the list of other taxes that can be abolished; for example, the aforesaid 4 percent LVT would be enough to replace payroll tax, all stamp duties, debit tax and the ambulance levy.

Property owners would benefit from this proposal because projects that would increase property values would become self-funding and consequently more likely to proceed. The clawback through the tax system means that the owners would receive only a fraction of the increase; but a fraction of something is better than 100 percent of nothing. That the owners would receive a net benefit is guaranteed because the market value of land takes account of the consequent tax liability: if the land increases in value, the market has decided that the owner is better off in spite of the tax.

From the viewpoint of property owners, it is obviously possible for land taxes to be too high. The surprising implication of this Submission is that, from the viewpoint of property owners, it is also possible for land taxes to be too low.

1. The infrastructure funding problem

In a market economy, a firm normally receives revenue proportional to sales, from which it must pay not only its proportional costs (i.e. costs that increase with sales) but also its fixed costs (i.e. costs that are incurred regardless of sales). Consequently, if the firm is to remain solvent, it must keep its sales above a certain threshold. This is difficult enough under the best of circumstances.

But if the “firm” in question is a public utility — that is, if it sells a product that can be consumed only in certain areas, where certain infrastructure is in place — then it faces two special difficulties. First, the fixed costs, including the interest (paid or forgone) on the capital cost of the infrastructure, are unusually high in relation to the proportional costs. Second, most of the benefit of that capital expenditure does not accrue to the users of the product in proportion to their use, but is manifested as increases in land values in the areas serviced by the infrastructure; the mere existence of the infrastructure makes those areas more desirable, so that the land in those areas becomes more valuable, and the benefit accrues to the owners of the land regardless of whether they actually use — and pay for — the product.

Consequently, if a public utility attempts to cover its capital costs simply by selling its product, customers will pay as customers for benefits that they do not receive as customers, if at all. Customers will therefore feel that they are paying too much — even if they cannot articulate the reason. Subsidizing the utility through conventional taxes does not solve the problem, but merely changes the mechanism by which people pay for the benefits that they do not receive: instead of paying through exorbitant utility bills, they pay through excessive taxes.

In some cases the customers respond by boycotting the product, so that the utility is condemned to run at a loss, to depend for its survival on limited public funds, and to operate on a scale far smaller, and at a standard far lower, than the public interest demands. That has been the fate of public transport all over the world.

In other cases the customers cannot realistically boycott the product or greatly reduce their consumption. So they vent their anger at politicians, who impose price caps and revenue caps on the utilities, which are therefore obliged to cut corners in investment and maintenance and to concentrate their expenditure in areas that bring a quick and reliable reward in terms of sales. This has been the fate of Queensland’s electricity distribution network.

In short, funding of infrastructure is a problem because public utilities create positive externalities, i.e. benefits enjoyed by people who do not pay. So the essence of any solution is to internalize the externality, i.e. to make the free-riders pay.

1.1 The case of electricity distribution

At this point we can address some of the Terms of Reference of this Review:

2. Evaluate capital and operational expenditure of ENERGEX and Ergon to:

* Determine adequacy of current levels of expenditure on capital works and maintenance to cater for current demands and expected growth, as benchmarked against appropriate comparisons…

As admitted by Energex in a leaked draft submission to the Queensland Competition Authority, current levels of expenditure are woefully inadequate, with the result that substations are regularly overloaded and trunk lines do not have enough spare capacity to deal with faults.

We are not at all surprised that the network has been run down in this way, because the resulting unreliability has only a marginal effect on sales, so that, from Energex’s point of view, rectification would not generate enough additional revenue to justify the cost. For Energex, the only attractive capital investments are those that allow substantial additional sales, e.g. connection of new customers.

* Assess whether the internal systems and processes of the above entities ensure efficient and targeted allocation of resources to capital works and maintenance of the electricity distribution system. This assessment should include a review of the planning criteria used to trigger expansion and reinforcement of the distribution network…

The problem with the “internal systems and processes” is precisely that they are internal, whereas the benefits of “capital works and maintenance” are largely external; that is, the benefits are not reflected by proportionate increases in revenue for Energex/Ergon. And the “planning criteria” are obviously constrained by revenue. Under these circumstances, economic theory and common sense concur in predicting that expenditure on “capital works and maintenance” will be deficient.

* If deficient, recommend solutions for achieving improved resource allocation by the entities.

In the case of electricity distribution, the solution is a mechanism whereby the electricity distributors are rewarded for performing necessary “capital works and maintenance”. But we first state the solution in its full generality.

2. A comprehensive solution

The tariffs, fees and fares charged by public utilities do not cast the net widely enough: some beneficiaries don’t pay. Conventional taxes cast the net too widely: some payers don’t benefit. In each case, the mechanisms of payment do not fully reflect — or do not reflect at all — the mechanisms by which benefits are received, so that even when the right people pay, they do not necessarily pay the right amounts. What is needed is a “tax” (for want of a better word) apportioned to those benefits, and only to those benefits, that are conferred by the provision of infrastructure but not recaptured by the utilities through their tariffs, fees and fares.

Because the benefits of a piece of infrastructure are restricted to a particular geographic area, the price of access to those benefits has two components:

• the visible component, namely the price paid for the service delivered through the infrastructure, and
• the hidden component, namely the price of living or doing business in an area serviced by the infrastructure, as opposed to an area where no equivalent service is available.

These components are inversely related: the lower the visible price of the service, the greater the attraction of locations where the service is available, and the higher the price of admission to those locations.

Living or doing business in a particular area requires access to a building (or a share thereof) plus a site, i.e. a piece of land (or a share thereof). Because of competition between new and existing buildings, the price of a building cannot rise much above the depreciated replacement cost, while the rent of a building cannot rise much above the interest on that cost. Nor can the price and rent of a building fall far below these respective levels (unless surrounding developments have rendered the present building unsuitable for the location). So, if infrastructure drives people to pay more for the privilege of living or doing business in a particular location, they pay more for access to the land, not for access to buildings.

As soon as it becomes known that a new piece of infrastructure will be created to serve a particular area, land prices in that area increase in anticipation; the corresponding rental values increase when the infrastructure eventually comes into service. When land in that area is bought or rented after the increase in price or rent, the value of the infrastructure for the buyer or tenant is offset by the higher price or rent, so that the real benefit of the infrastructure goes to the seller or landlord.

In short, the hidden component of the price of access to infrastructure is expressed in land values in the areas serviced by the infrastructure, and is paid by land buyers and tenants to the incumbent owners.

But when a system of land value taxation (LVT) is in place, every increase in the value of land causes a proportional increase in the annual tax payable by the land owner. As explained in Appendix A, the tax increment can be understood as a fraction (always less than 100 percent) of the increase in the rental value. Converting these annuities to their present values and adding them over all of the affected land, we find that the present value of the increase in public revenue is the same fraction of the total increase in capitalized land values. Now remember that the latter increase represents the benefit of providing the infrastructure (net of charges on users) and is therefore greater than the capitalized cost of the infrastructure (again net of charges on users) if the project passes a cost-benefit test.

It follows that if the LVT rate is sufficiently high on a sufficiently broad base, every desirable infrastructure project automatically pays for itself through additional tax receipts without any further changes in tax rates.

Notice that the italicized statement says nothing about the overall level of taxation or the overall state of the budget, but solely concerns the LVT system and the marginal effect of infrastructure on the budget. Indeed, from a fiscal point of view, the attractiveness of any infrastructure project depends not so much on the overall state of the budget as on the marginal budgetary impact of that project. So if the existing land tax system is inadequate for the funding of infrastructure (as is clearly the case in Queensland), the necessary expansion of the land tax system need not amount to an overall tax increase, but can be compensated by cuts in other taxes. The initial tax reforms will then be revenue-neutral, but subsequent infrastructure projects will have a neutral or positive effect on the budget — not the negative effect that such projects have under the present tax system.

Admittedly, the increase in revenue caused by each project will be an annuity, while the capital cost of the project will be a lump sum. However, a lump sum can be converted to an annuity by borrowing. Debt by itself is clearly undesirable. But, as every property owner knows, debt leads to a desirable combination of circumstances when it makes possible the acquisition of an asset that generates (or saves) more than enough income to pay off the debt within the service life of the asset. If, in addition, the asset in question is not merely acquired, but produced, it represents a net addition to the wealth of the community, so that the benefit is not confined to the borrower. In these circumstances — and only these — we submit that public borrowing is responsible.

So, after the necessary tax reforms are in place, the chief criterion for approval of any infrastructure project is that the project cause a sufficient increase in land values to generate a sufficient increase in public revenue to amortize the capital cost over the service life. If this criterion is met, the government can simply call tenders for the project and finance the capital cost itself — by borrowing if necessary — knowing that the project will pay for itself in fiscal terms.

In the case of an upgrade to the electricity distribution network, such as underground cabling, the responsible distributor (Energex or Ergon) could be a tenderer or could manage the tendering process on behalf of the government. As long as the distributors remain government-owned monopolies, the latter option seems more likely. But the important point is that the upgrade would be financed by LVT receipts (which would significantly increase in consequence of the upgrade) and not by the distributor’s operating revenue (which would not).

But if the necessary tax reforms are not made, desirable infrastructure projects will continue to be blocked because, while they satisfy the overall cost-benefit test, the government or its agencies would bear too much of the cost and receive too little of the benefit.

(The method by which land values are calculated for the purpose of taxation is described in Appendix B. Some minor details of definition are relegated to Appendix E.)

3. Inferior and ad-hoc solutions

3.1 Stamp duties

Stamp duties on property conveyances are apportioned to the purchase prices and are therefore capable of recovering some of the increases in property values caused by the provision of infrastructure. But there is little else to recommend them. Stamp duties, being transaction taxes, are shared between buyers and sellers in inverse relation to their bargaining power. First-time buyers therefore pay higher prices than they otherwise would, but not for the benefit of sellers. By discouraging the transactions from which they raise their revenue, stamp duties impede their own ability to raise revenue from increases in land values and hence to finance infrastructure. For the same reason, they impede the efficient allocation and reallocation of resources and hence reduce economic growth, to the detriment of property owners and everyone else. Under current implementations, the stamp duty rate applies to the total value of the transferred property — land plus buildings — whereas the adequacy of stamp duties for recovering the cost of infrastructure depends on the rate applied to the land value alone. When this rate is also applied to buildings, it raises more revenue but gives no further encouragement to the provision of infrastructure. Worse, it discourages building, renovation and maintenance, so that properties fall into disrepair and drag down the values of surrounding properties. If stamp duties were apportioned to land values alone, some of these problems would be solved, but turnover in the property market would still be impeded and prices for first-time buyers would still be inflated — but still not for the benefit of sellers.

3.2 Reliability incentives

The Issues Paper [ 1] asks:

Are customers (as a group) prepared to pay more for their electricity to have a higher level of reliability?

Yes, but they are used to paying this premium in the form of higher land prices or rents in suburbs where the power lines are underground. The premium may be hard to discern because suburbs with underground power lines tend to be newer and outer suburbs, which tend have cheaper land than older and inner suburbs. But all else being equal, underground power lines confer a premium.

How much more are customers willing to pay and for what reliability improvements?

The reliability improvements due to underground cabling include near-immunity to wind, fire, flora, fauna and vehicular impact, and reduced susceptibility to sea-salt accumulation and lightning damage. How much more consumers will pay for this is a question for real estate agents and valuers, who are familiar with the price premium conferred by underground power lines (see Section 7 for an example). Admittedly, the premium may have more to do with the attractiveness of the suburban landscape than with the reliability of the power supply. But that simply increases the premium and makes it easier to finance underground cabling through the resulting increases in land values.

Is a service quality incentive mechanism appropriate for improving service quality?

This line of questioning seems to envisage a scheme whereby electricity consumers will pay more for a lower incidence of blackouts, brownouts and voltage/frequency fluctuations, even if they consume the same amount of energy. Because glitches in the power supply are caused by random or chaotic phenomena, such a scheme would make power bills unpredictable and hard to budget for, and would lead to customers complaining that their power quality has improved! It is better if they complain that their land values have increased, because the latter benefit is more predictable, more tangible, more verifiable, more readily convertible into cash, and consequently less likely to evoke sympathy over the ensuing tax bills!

Alternatively, customers might pay a premium to have their power delivered through upgraded equipment which is claimed to be more reliable. But, again because of the unpredictability of power supply glitches, such equipment will inevitably be accused of failing to deliver, and the ungrateful customers will complain about the upgrades. Again it is better that they complain about rising land values.

In either case, there would be calls for customers to be allowed to defer their “unexpectedly high” electricity bills until they are in a better position to pay. This raises the problem of tracking customers for the purpose of collecting old debts. No such problem arises when property owners are allowed to defer land tax, because the tax liability is attached to the land, not the person. Land doesn’t run away.

Moreover, a service quality incentive mechanism, by its very nature, is directed at a particular service, and not at the quality of infrastructure in general. Land value taxation, in contrast, is a general solution to the infrastructure funding problem. Why solve part of the problem when you can solve the whole?

3.3 Improved call centres

The Issues Paper [ 1] asks:

Is the capability of ENERGEX and Ergon Energy Call Centres sufficient to cope with extreme weather conditions? What improvements could assist the performance of the Call Centres under these conditions?

Penny-pinching by understaffing of call centres is a perennial cause of customer resentment not only in electricity distribution, but in all customer-oriented industries in both the public and private sectors. Of course customers calling such centres have a right to be served within a reasonable time. If placed in a queue, they have a right to be told their position in the queue and how fast the queue is being processed. Managers of call centres have a duty to be familiar with queueing theory and to staff their centres accordingly. (In particular, they need to know that in order to maintain the queue at a reasonable length, one must be able to process customers at twice the average arrival rate; as the average arrival rate approaches the processing rate, the expected length of the queue approaches infinity!) And all these rights and duties should be enforceable.

But all this is of secondary importance, because no amount of improvement in the handling of fault reports is as good as preventing the faults in the first place. Fault prevention being largely a question of capital expenditure, this Submission concentrates on how such expenditure is to be financed.

4. Render to Caesar…

It is shown in Appendix A that if the capitalized (lump-sum) value of a site increases while the LVT rate remains constant, then the net rental value of the site (that is, “net” of LVT) also increases. So in spite of the additional annual tax liability, the owner is better off not only in terms of capitalized value, but also in terms of annualized value. This is to be expected because the market price of land takes account of the tax liability: when the price increases, the market expresses the judgment that the owner is better off in spite of the additional tax. In the case of owner-occupied residential land, for which the increase in rental value is not immediately realized as a cash flow, but for which the increase in capitalized value is realizable on sale, the owner is normally allowed to defer any additional tax until the time of sale. But that concession is itself taken into account by the market: if owner-occupants were not allowed to defer increases in LVT, and if this were seen as a difficulty, then the land value and the associated tax liability would not rise as much.

So LVT satisfies the “capacity to pay” principle in that higher tax payers are better off than lower tax payers even after they have paid tax. But it also satisfies the “beneficiary pays” principle by targeting increases in “capacity to pay” caused by publicly funded projects. These windfall gains, being the results of projects funded by the public, rightly belong to the public, so it is only fair that they be at least partly recaptured through the tax system: “Render to Caesar the things that are Caesar’s.”

Putting aside the connection between public infrastructure and land values, and considering LVT simply as a general-purpose tax, we must conclude that LVT is an exceptionally convenient, efficient and progressive method of raising revenue. It is convenient because it has negligible compliance cost. It is economically efficient because the value of land is not due to any activity of the owner, so that taxing the value in the hands of the owner cannot discourage any economic activity. It is progressive because the value of land owned by a household tends to increase more than proportionally with household income — so much so that even a flat-rate LVT is more progressive than any practical “progressive” income tax.

5. Friendly fire: Property owners and infrastructure

People of privilege will always risk their complete destruction rather than surrender any material part of their advantage.

— John Kenneth Galbraith.

Property owners and their associations are vociferous in complaining about land taxes and opposing any suggestion that LVT rates be increased. In so doing, they reveal a talent for counting costs while neglecting benefits.

Property owners obviously want their asset values to increase. To that end, they want their land to be serviced by new and improved infrastructure. This will not happen unless the infrastructure is funded, and the surest way to fund it is to give back some of the increases in land values caused by the infrastructure [ 2]. LVT is a mechanism by which properties owners indeed give back some (not all) of those increases. Of course this means that the owners retain only a fraction of the increases, but a fraction of something is better than 100 percent of nothing! If the LVT rate is too low and/or the base too narrow, property owners suffer because projects that would increase the value of their land are blocked by lack of funding.

Property owners also want compensation whenever their land is devalued by planning decisions. This is reasonable because if those planning decisions are in the public interest, they will cause more increases than decreases in property values, so that the winners (i.e. those whose properties increase in value) will still be winners even if they are forced to compensate the losers. At present, however, the losers have no legal right to compensation because “the taxpayers” allegedly cannot afford it. But it is the winners, not “the taxpayers”, who have the moral obligation to pay compensation, and the simplest mechanism for extracting compensation from the winners is LVT. (Furthermore, under a comprehensive LVT régime, even if the law does not recognize a right to full compensation, the losers automatically receive partial compensation in the form of reduced tax assessments.) At present, the lack of such compensation causes desirable planning decisions to be opposed by the prospective losers (“NIMBYists”) to the collective detriment of property owners, who, on average, are among the prospective winners.

From the viewpoint of property owners, it is obviously possible for land taxes to be too high. But the implication of the foregoing is that, from the viewpoint of property owners, it is also possible for land taxes to be too low. In Queensland, the chronic underinvestment in infrastructure and the lack of compensation for devaluation of property indicate that property owners are indeed suffering due to under-utilization of land value taxes.

6. Infrastructure and “housing affordability”

At first sight, it may appear that first home buyers and tenants are harmed by increases in land prices and rents caused by infrastructure projects. But to argue thus is to confuse accommodation in a particular locality with accommodation of a particular standard.

When a new infrastructure project increases land values, it does so in a particular geographic area, and does so because the absolute amenity of that area is improved. This does not mean that accommodation of a given standard of amenity becomes more expensive. And because residential property is being developed and redeveloped all the time, neither does it tell us anything about the minimum cost or average cost of accommodation. So, while the infrastructure confers benefits on the owners of land in the affected area, their gains are not the losses of tenants or first-time buyers in general. Neither are they the losses of prospective tenants or first-time buyers in the affected area, because these people will not only pay more, but also get more for their money.

Furthermore, some forms of infrastructure (notably including public transport) reduce the non-land component of the cost of living in the serviced areas, so that prospective residents are willing and able to pay more for the land component. In such cases, the higher land values are caused by higher capacity to pay and therefore do not represent a loss of affordability — although again they represent windfalls for owners of land in the affected areas.

At first sight, it may also appear that landlords would shift any increases in land tax onto their tenants. This argument forgets that other taxes on landlords would be reduced. Moreover, because land tax reduces landlords’ tolerance for vacancies, any increase in land tax would strengthen the bargaining position of tenants relative to landlords and consequently make rents more affordable (see Appendix D). Yet this does not imply that landlords would suffer, because rents would still be related to tenants’ capacity to pay, and that capacity would be enhanced by reductions in other taxes, better infrastructure, and the fruits of economic growth (see Appendix C).

Obviously there is some tension between the interests of established property owners on one hand, and the interests of tenants and prospective buyers on the other. But the interests of the two groups are not completely irreconcilable, because tax reform, contrary to popular perceptions, is not a zero-sum game; it is not simply a matter of “cutting the cake”, but also affects the size of the “cake”. Our claim is that greater reliance on LVT and less reliance on other taxes would promote greater economic growth — partly because of improved infrastructure — and share the benefit of that growth between property owners and non-owners, so that both would gain.

7. Implementation

By 1997, only 6.4 percent of power lines in Australia, and only 4.5 percent in Queensland, were underground [ 3]. These figures attest to the difficulty of funding the sinking of power lines from general revenue. Only one local authority has done this, and its experience is instructive: between 1983 and 1997, the City of Subiaco (inner Perth, WA) sank the power lines on about a third of its streets at a cost of $3000 to $4000 per lot, with the result that property values increased by about $10000 per lot [ 3]. Taking the higher cost figure and assuming that it is not offset by any additional charges paid by users to the government, we find that the uplift in land values is 2.5 times the cost; that is, the factor g in Appendix A is 2.5. At a discounting rate of 6 percent per annum, the required LVT rate [from Eq.(14) in Appendix A] is 4 percent per annum. At this rate, property owners would get 60 percent of the increase in land values.

(The required LVT rate is more sensitive to g than to the discounting rate; for example, if the cost falls to $2500 per lot or the increase in value rises to $16000 per lot, so that g rises to 4, then the required LVT rate falls to 2 percent per annum and property owners can keep 75 percent of the increase in land values. This observation is important because, with the passage of time, land values can be expected to rise faster than project costs.)

A land tax rate of 4 percent, with no exemption for owner-occupied principal residences, may look politically scary until one remembers that the LVT is meant to displace other State taxes on a revenue-neutral basis. If all the land in Queensland is valued (conservatively) at $100 billion, the proposed LVT would raise $4 billion per annum, which would be enough to replace payroll tax, all stamp duties (not only on property conveyances, but also on mortgages, insurance and vehicle purchases), BAD tax, and the new ambulance levy. Of these taxes, payroll tax is buried in prices of goods and services and is widely and correctly perceived as a tax on jobs, while all the others are experienced as visible out-of-pocket expenses in addition to their flow-on effects on prices.

Notwithstanding the substantial compensation given through abolition of these various taxes, political considerations would demand some additional concession for owner-occupied principal residences.

In terms of equity and economic efficiency, the most acceptable concession is a more or less automatic right to defer part or all of the tax, at a minimal interest rate, until the property is sold or bequeathed. (As the unpaid tax would be a lien against the land, the interest rate need not include any allowance for risk.) The subjective experience of the taxpayer would then be similar to that caused by the new NSW stamp duty payable by sellers — except that the deferred LVT would not deter the sale, because any delay in the sale would increase the cumulative tax bill. Deferred LVT is payable at the time of transfer, but in all other respects it is still LVT.

Another possible concession, which need not be limited to owner-occupants, is to allow a threshold equal to the land value at the time of the last transfer of title prior to the tax reform; each piece of land would then have its own threshold, which would not change with subsequent transfers of title. A conventional land tax threshold is a uniform amount and therefore excludes from the tax net all land holdings valued at less than that amount; that is, a conventional threshold acts as a de facto exemption, reducing the pool of properties whose increases in value can be taxed, thus making it harder to finance infrastructure projects from those increases. But a threshold based on a past valuation of the land does not have this effect, because past values are almost always less than the current value. Such a threshold also overcomes one often-heard objection to increases in land tax rates, namely that the extra land tax is in addition to the interest on the purchase price of the land but was not taken into account in the price. Such a threshold does not impair the ability of the LVT to finance infrastructure, because that ability depends solely on the marginal rate [see Eq.(14) in Appendix A]. But it reduces the LVT revenue and hence the opportunity to displace other taxes; therein lies its disadvantage.

An alternative method of bringing owner-occupied principal residences into the land tax system is to deliver a wide variety of government services in cash rather than in kind, and then means-test the cash against the value of the land. Such a scheme would be more easily implemented at the Federal level as a welfare reform [ 4], in which case it would not contribute to the funding of State projects unless the withheld welfare payments were granted to the governments of the States from which they were withheld.

It is sometimes argued — as we ourselves have argued elsewhere — that an owner-occupant does not benefit from a property bubble because (s)he always needs somewhere to live, and because the higher sale price of the old home is offset by the higher purchase price of the new one, regardless of whether the old home was initially acquired by purchase or by inheritance. This argument, however, applies to demand-driven booms which infect the whole country and which are not necessarily related to improved amenity. It does not apply to the increases in value caused by infrastructure, which are concentrated in particular geographic areas and related to improved amenity, and from which owner-occupants can indeed profit by selling and moving — or perhaps even by staying put and enjoying the new services. Moreover, while LVT promotes sustainable increases in property values by facilitating investment in infrastructure, it actually suppresses unsustainable speculative bubbles and the ensuing crashes, because property buyers, knowing that price increases will be partly offset by recurrent tax increases, are keen to ensure that the prices they pay are based on sober assessments of rental value and not merely on the assumption that some other fool will pay a higher price next year. By financing investment in infrastructure and by forcing property buyers to do their sums, an appropriate level of LVT makes property a safer investment and ensures that owner-occupants get their share of the gains.

Another interest group that is said to demand exemption from land tax is the charitable sector. However, given that a particular activity is deemed worthy of government support, it is debatable whether that support should take the form of an excusal from contributing to public revenue or a direct allocation from that revenue. The latter option is more transparent. But if the former option were chosen, the loss of revenue would be minor. In either case, the significance of the question can be minimized by appropriate use of zoning: if land is zoned exclusively for charitable use, it has little market value and therefore attracts little tax.

The Subiaco figures (above) indicate that if the sinking of power lines is to be financed by LVT, then owner-occupied residences must be included in the net; if they were not, the total increase in values of other properties might not cover the cost of the project [that is, the g factor in Eqs. (13) to (19) would fall dangerously close to unity, so that the owners of the taxed properties might receive no net benefit, or worse]. Nevertheless, a land value tax with substantial exemptions would be sufficient to finance many desirable infrastructure projects, certainly including numerous extensions and improvements to public transport, and possibly including other upgrades to the electricity network. So, if the State government decides that the extension of LVT to owner-occupants is not a politically acceptable means of funding infrastructure, notwithstanding the abolition of so many other taxes, it should remember that the sinking of power lines is one of the more difficult examples, and should still be willing to use a more limited LVT to finance more modest projects.

8. By way of conclusion

Both ground-rents [i.e. the rent of land under buildings, as distinct from the rent of the buildings — Ed.] and the ordinary rent of land [i.e. the rent of agricultural land according to its yield — Ed.] are a species of revenue which the owner, in many cases, enjoys without any care or attention of his own. Though a part of this revenue should be taken from him in order to defray the expenses of the state, no discouragement will thereby be given to any sort of industry. The annual produce of the land and labour of the society, the real wealth and revenue of the great body of the people, might be the same after such a tax as before. Ground-rents and the ordinary rent of land are, therefore, perhaps the species of revenue which can best bear to have a peculiar tax imposed upon them.

Ground-rents seem, in this respect, a more proper subject of peculiar taxation than even the ordinary rent of land. The ordinary rent of land is, in many cases, owing partly at least to the attention and good management of the landlord. A very heavy tax might discourage too much this attention and good management. Ground-rents, so far as they exceed the ordinary rent of land, are altogether owing to the good government of the sovereign, which, by protecting the industry either of the whole people or of the inhabitants of some particular place, enables them to pay so much more than its real value for the ground which they build their houses upon, or to make to its owner so much more than compensation for the loss which he might sustain by this use of it. Nothing can be more reasonable than that a fund which owes its existence to the good government of the state should be taxed peculiarly, or should contribute something more than the greater part of other funds, towards the support of that government.

— Adam Smith (1723-1790),
The Wealth of Nations, V.ii.75,76.

Appendix A: Mathematics of LVT

The present value of a series of n annual payments, each of an amount A, with the first payment due at the end of the first year, is
P = (A / i) [1 – 1/(1+i)n ] where i is the annual discounting rate or “interest rate” (e.g. if i=0.06, the discounting rate is 6 percent per annum). We shall assume that all amounts are expressed in today’s dollars, so that the discounting rate is real, not nominal.

In the case of a perpetuity (i.e. a perpetual annuity), we let n approach infinity, so that the term 1/(1+i)n approaches zero, and we have simply
P = A / i. (1)

This is the present value of a payment of A per year in perpetuity, with the first payment due after 1 year.

To apply this to land rents and land value taxation (LVT), let A be the annual net rental value of a piece of land (“net” of LVT); that is, let A be the rent (net of LVT) that a landlord could get for the land, or the advantage (net of LVT) that would accrue to an owner-occupant making optimal use of the land. Then P in Eq.(1) is the present value of the perpetual rent stream, which is the value (selling price) of the land. If we rename this value as V, then Eq.(1) becomes

V = A / i. (2)

This V is the unimproved capitalized value (UCV) of the land.

Now let E be the annual gross rental value of the land, including LVT; that is, let E be the market rent that a tenant would pay for the use of the land, knowing that the actual remittance of LVT is the landlord’s responsibility. If the annual LVT payable is T, then
A = E – T. (3)

And if the annual LVT rate is t, with a threshold M, then
T = t(V – M) (4)

provided that either V > M, or the “tax” is allowed to be negative if V < M.

Eliminating A and T between Eqs. (2), (3) and (4) gives

V = (E + tM) / (i+t). (5)

Then back-substituting for V in Eqs. (2) and (4) gives, respectively
A = i(E + tM) / (i+t) (6)
T = t(E – iM) / (i+t). (7)

Because of the proportionality between V and A in Eqs. (5) and (6), the fraction by which the LVT reduces the sale value of the land is the same as the fraction of the gross rental value taken in tax. That fraction is T/E, which may be found from Eq.(7):
T/E = t(1 – iM/E) / (i+t). (8)

For example, if the LVT rate is equal to the discounting rate (t = i), and if there is no threshold (M = 0), then the sale value of the land is reduced by half. But Eqs. (5) and (6) imply that no positive value of t can reduce V or A to zero. This peculiarity arises because the annual LVT is expressed as a fraction of the “reduced” sale value, i.e. the sale value in the presence of LVT, not what the sale value would be in the absence of LVT.

A.1 Application to infrastructure

Eqs. (5) and (6) also imply that, for a given LVT rate, V and A are increasing functions of E. That is:

* For a given LVT rate — however high it may be — any development that increases the gross rental value of land also increases its sale value and net rental value.

We may therefore speak simply of “developments that increase the value of land” without having to specify which measure of “value” we mean.

So if the value of a piece of land increases because of some desirable “development” — e.g. relocating power lines underground — then a landowner who can realize the increase in A as a cash flow (e.g. a landlord who charges market rents or a business owner-occupant who uses the land optimally) wins in every way. Another landowner who cannot realize an increase in A (e.g. a residential owner-occupant) does not have any additional cash flow to cover the additional LVT, but can still realize the increase in V provided that the additional LVT is allowed to accumulate as a lien against the land until the next transfer of title; if all else fails, the increase in V can be realized at any time by selling and moving to another location. In summary:

* For a given LVT rate — however high it may be — all property owners gain (or have the opportunity to gain) from any development that increases the value of their land.

Now let us find the condition under which the government also gains. From the government’s viewpoint, let the annualized cost of a piece on infrastructure be dX, where X stands for expenditure, so that dX is an increment in expenditure. Let the corresponding increment in LVT receipts be dT, where T, as usual, means tax. Then the project will pay for itself in fiscal terms if
dT/dX > 1. (9)

This is the self-funding condition in its most naïve form. To make it useful, we must rewrite it in terms of the LVT rate, the project cost and the uplift in land values. First we apply the chain rule:
(dT/dE)(dE/dX) > 1. (10)

Differentiating Eq.(7) w.r.t. E gives
dT/dE = t / (i+t). (11)

(This is the ratio of the increase in annual tax to the increase in gross rental value, whereas Eq.(8) simply gives the ratio of the annual tax to the gross rental value.)

By invoking Eq.(7), whose derivation assumes that the rent of land is a perpetuity, we have tacitly assumed that the increase in rent due to the provision of infrastructure is also a perpetuity; in other words, we have assumed that the service life of the infrastructure is sufficiently long that it may be taken as a perpetuity for the purpose of computing present values.

Now let g (for “gain”) be defined as the ratio of the total uplift in taxable land values to the capitalized cost of the project (as seen by the government) if the effect of LVT on the uplift is negligible (as it is now). This “capitalized cost” is net of the present value of any user charges received by the government. When the uplift in land values and the capitalized cost are converted to annuities, they are both scaled by the same factor, so that their ratio remains the same; that is,
g = dE/dX. (12)

Substituting Eqs. (11) and (12) into Eq.(10) gives the self-funding condition in practical terms:
gt / (i+t) > 1. (13)

Rearranging this equation, we find that the required LVT rate for a given gain is

t > i / (g-1) (14)

and the required gain for a given LVT rate is
g > (i+t) / t (15)

whereas if the LVT rate and the gain are both given, the required discounting rate is
i < (g-1) t. (16)

The right-hand side of Eq.(16) is the internal rate of return of the project from the government’s viewpoint.

It is vital to note that our reasoning is independent of scale. Eq.(14) gives the required LVT rate in terms of i and g. Eq.(12) gives g as a ratio of two quantities, each of which may be proportional to the size of the project. But g itself is not proportional to the size of the project or to the number of sub-projects into which the “project” might be divided. In other words, the required LVT rates for various projects are not additive; if each project has at least the given value of g, and if the uplifts in land values due to the various projects are additive, then the same LVT rate suffices for them all.

Returning to the property owners’ viewpoint, let r (for “retained”) denote the fraction of the increase in gross rental value that is retained by property owners. This fraction is 1 – dT/dE, which may be found from Eq.(11):

r = i / (i+t). (17)

Observe that no value of t can reduce r to zero; this confirms that, regardless of the LVT rate, property owners gain from increases in land values caused by infrastructure projects. As a further check on the above results, we may substitute Eq.(14) into Eq.(17), obtaining
r < (g-1) / g , (18)

which should be another form of the self-funding condition. And indeed, if the project is to be self-funding, the government must take back at least what it spends, which is 1/g of the uplift in land values, so that the fraction left for property owners must be at most 1-1/g, i.e. (g-1)/g.
A.2 Special case: No threshold

If there is no threshold, then M = 0, so that Eqs. (4) to (8) become, respectively:

T = tV (4a)
V = E / (i+t) (5a)
A = iE / (i+t) (6a)
T = tE / (i+t) (7a)
T/E = t / (i+t). (8a)

Eqs. (9) to (18) are unchanged. Note the convergence between Eqs. (8a) and (11).

Appendix B: Computing Unimproved Capitalized Values (UCVs)

First a note on terminology: improvements to a block of land include buildings, fences and other structures on the land, but not roads or power lines or other services that pass by just outside the land; the latter are regarded as contributing to the locational value of the land, which is part of the unimproved value. Improvements are so-called because they normally add to the economic value of the land as measured by the market; the terminology is not intended to express any moral or aesthetic judgment.

Now, every time a property is sold or let, we can obtain a spot value for V (the UCV or sale price of the land) as follows:

(a) If the property is sold without improvements, the sale price is V.

(b) If the property is let without improvements, the annual rent is E, and V is found from Eq.(5).

(c) If the property is sold with improvements which are promptly demolished by the purchaser, then V is the total price that the purchaser was willing to pay for the bare site, i.e. the sale price plus the anticipated cost of demolishing the improvements.

(d) If the property is sold with improvements which are used by the purchaser, the depreciated replacement value of the improvements is subtracted from the sale price to obtain V.

(e) If the property is let with improvements, the depreciated replacement value of the improvements is multiplied by the applicable interest rate to produce an annualized value, which is then subtracted from the annual rent to produce E. Then V is found from Eq.(5).

Recent spot values are brought up to date with reference to local trends. Then their accuracy is checked, and unknown values are filled in, by exploiting the requirement of spatial continuity: in the absence of significant boundaries (see note iii below), the unimproved rental value per unit area must be a smoothly-varying function of position.

For agricultural land, it may be impossible to obtain nearby recent spot values. However, such land can be valued from records of stock-carrying capacity, crop yields and operating costs; and the influence of public infrastructure on operating costs is readily estimated.

Notes:

1. Methods (a), (b) and (c) are preferred to (d) and (e), because if the location of a building interferes with its intended use, the value that the building adds to the site can be less than the depreciated replacement value of the building. An extreme example of this is found in method (c), in which the useless “improvements” have a negative effect on the sale price.
2. The equations in Appendix A assume that rent is paid annually in arrears. So in points (b) and (e) above, the “annual rent” must be defined as the future value, after one year, of the full year’s rental payments.
3. For the purpose of spatial continuity, significant boundaries obviously include visible barriers such as waterways, freeways and railways, all of which impede movement in the “across” direction. But they also include invisible lines such as boundaries of suburbs (some suburbs being more prestigious than others) and boundaries of catchment areas for state schools (some schools having better reputations than others).

The combined value of the land and improvements, known as the improved capitalized value (ICV) or capital-improved value (CIV), is usually more difficult to calculate than the UCV. If a comparable property has recently been sold or let nearby, this can be used as a benchmark. Otherwise one must estimate the depreciated replacement value of the improvements and then add the value of the land — in which case one cannot find the ICV without first obtaining the UCV. Moreover, the simple addition may not be valid (see note i above).

Appendix C: Effect of changing the tax mix

Appendix A takes the gross rental value E as “given”, and considers “developments” (e.g. improvements to the electricity network) as causing increases in E. But another cause of such increases is tax cuts.

Because business transactions take place on land, all taxes on transactions, such as income tax, company tax, GST, payroll tax, stamp duties and debit taxes, are effectively charges for various uses of land. Similarly, because government services are consumed on land, charges for such services are effectively charges for various uses of land. If such taxes and charges were reduced, the respective uses of land would become more profitable, so tenants would offer more rent for such uses, so the gross rental value of the land (E) would increase — by the amount of the reduction of taxes and charges. Hence, if the lost revenue from these taxes and charges were replaced by LVT, the increase in gross rent would cancel the increase in LVT, so that, on average, net rental values would be unchanged and landowners would be no worse off. (Landowners who cannot realize the increased gross rent would be allowed to defer the tax until the next transfer of title.)

Moreover, transaction taxes render some transactions unprofitable that would otherwise be profitable, so that the volume of transactions is reduced; this is called the deadweight effect of taxation. Reductions in transaction taxes would reduce the deadweight effect and increase the volume of business that could be done on each piece of land, further increasing its gross rental value. But the LVT replacing the lost revenue from transaction taxes would have no deadweight effect, because LVT is not a transaction tax and cannot be avoided by avoiding transactions; LVT is a tax on ownership of land, not use of land, and is apportioned to the land value, which does not depend on any activity of the owner/taxpayer. So the removal of transaction taxes would cause a net reduction in deadweight, which would fund an increase in the net rental value of the land (over and above the additional LVT replacing the lost transaction taxes). This represents a net gain to landowners.

Thus we have two more conclusions:

• LVT can generate sufficient revenue to compensate for any abolitions or reductions of transaction taxes.
• Property owners have nothing to fear from any LVT rate increase that simply replaces the revenue lost due to reductions or abolitions of transaction taxes.

Note: In the category of “transaction taxes” we can also include taxes on the values of buildings — including the component of municipal rates that falls on building values in States other than Queensland and NSW. Property taxes on buildings are transaction taxes in that (a) a tax liability is created by every decision to build, extend or renovate a building, and every such decision involves a transaction or set of transactions, and (b) the tax liability therefore discourages the decision to build, extend or renovate, and consequently has a deadweight cost. But the same cannot be said of LVT, because (a) the decision to buy land does not create a tax liability, but merely transfers the existing tax liability (reflected in the purchase price) from seller to buyer, and (b) even if the tax were to discourage the purchase, this would not amount to deadweight, because the purchase of land (unlike the purchase of buildings or other products) cannot create a new asset, but merely transfers ownership of an existing one.

Appendix D: Is LVT shifted onto tenants?

A reduction in transaction taxes, by itself, enables tenants to pay more rent, and competition between tenants ensures that they do. But an increase in LVT, by itself, does not enable landowners to charge higher rents or prices. Taxes on transactions are passed on in prices because if producers cannot cover these taxes, supply decreases and prices rise. But this mechanism does not work with land, because land has no producers and its supply is fixed. So landowners cannot shift the burden of LVT onto tenants or other customers; rather, tenants can shift the benefit of transaction tax cuts onto landlords.

Here are some more reasons why that the burden of LVT cannot be shifted:

• Because LVT is a fixed overhead cost, it does not change the prices at which traders maximize their profits (allowing for the effect of prices on sales); if traders could raise profits by raising prices, they would do so with or without the tax. “Traders” include landlords, for whom “prices” mean rents and “sales” mean occupancy rates. So neither can LVT be passed on in rents.
• Higher LVT makes it more necessary for landlords to fill their vacancies in order to cover the tax liability. You reduce vacancy rates by lowering rents, not by raising them!
• If it were more profitable to do business on one site than on another, the additional demand for the first site would raise its gross rental value so as to cancel the difference in profitability. So the effect of land rents is to equalize the profitability of all unimproved sites, reducing profit margins to those obtainable on marginal sites, i.e. sites with zero rental value. More desirable sites are called supermarginal (or viable) and yield positive rent. Less desirable sites are called submarginal (or unviable). LVT cannot cause supermarginal sites to become submarginal, because marginal sites pay no tax, while supermarginal sites pay only part of their gross rental values in tax. Because traders who own higher-taxed sites must compete with those who own lower-taxed sites, and because the tax does not reduce competition by putting any sites out of business, differences in LVT liabilities cannot be passed on in prices. Again, this argument applies to rents as to other prices.
• It is said that for every two economists you get three opinions. But virtually all economists agree that, under the appropriate assumptions, land taxes cannot be shifted.

The “appropriate assumptions” are

• that the tax does not exceed the rental value of the land, and
• that the fraction of the rental value taken in tax does not depend on the use (not to be confused with the zoning) of the land.

The first assumption is guaranteed because under the LVT calculation, a positive tax requires a positive capitalized land value, which in turn requires a positive rental value net of tax (see Appendix A). The second assumption is violated by exemptions and concessional rates. For example, if owner-occupied principal residences escape taxation while rental properties are taxed, there will be more homes sold to owner-occupants and fewer to let, and some of the sales to owner-occupants will represent new household formation rather than reduced rental demand, so that rents will rise, albeit slightly. This is one argument against exemptions for owner-occupants.

Landowners tend to resent LVT because they cannot generally pass it on in rents and prices. So they campaign against it — by claiming that they can pass it on! But in so doing, they campaign against a mechanism for funding projects that would increase the value of their land, and for funding other tax cuts that would further increase the value of their land. So they pay the just penalty for their unenlightened self-interest.

Now let us summarize the effects on land values of replacing transaction taxes with LVT:

(i) The tax liability on the land reduces its after-tax rental value, hence sale value.

(ii) Landlords become less tolerant of vacancies, so that the bargaining position of tenants becomes stronger.

(iii) The abolition/reduction of transaction taxes makes the use of land more profitable, increasing rental values, hence sale values.

(iv) The reduction of deadweight increases the variety of profitable uses of land, increasing rental values, hence sale values.

(v) Public projects that increase land values become self-funding, so that more such projects are completed and more land values are enhanced by this mechanism.

We claim that (i) and (iii) roughly cancel out, while (iv) and (v) represent substantial gains to property owners. Point (ii) means that, even if rents rise in dollar terms, they become more affordable for tenants. This is possible because (iv) and (v) represent overall gains to the community, so that nobody’s gain needs to be anybody else’s loss: “if you make a bigger cake, everyone can have a bigger slice.”

Appendix E: UCV vs. Site Value (SV)

Improvements that could have been, but were not, natural features of the land are called merged improvements; examples include historical grading, tree-felling, tree-planting and unsealed drainage. The unimproved capitalized value (UCV), as used in Queensland, attempts to exclude the value of merged improvements. An alternative measure of value, known in NSW as the “land value” and in Victoria as the “site value” (SV), includes (i.e. ignores) the value of merged improvements. Proponents of the SV argue that it is more objective because it avoids the difficulty of distinguishing merged improvements from the natural state of the land.

Be that as it may, the difference between UCV and SV is usually minor compared with the difference between UCV and ICV. Accordingly, we would not be much concerned if Queensland were to change its valuation system from UCV to SV for both land tax and municipal rates; but we would vehemently condemn any attempt to introduce ICV/CIV rating.

Appendix F: The (ir)relevance of privatization

One of the web pages of the Office of Energy [ 5] makes the following statement, which we welcome as far as it goes:

Unlike many other industries where the transportation function is competitive, the most efficient way of delivering electricity to customers is through a single set of wires. The network businesses are known as “natural monopolies” because a single network will provide the most efficient means of delivering electricity…

Consequently, regulation of these businesses is necessary to protect the interests of consumers with the amount of revenue able to be earned from these assets being fixed. In the absence of regulation of these services, the benefits of the reforms could be captured exclusively by the network businesses instead of by the customers.

To achieve this objective, the regulatory environment must impose disciplines on transmission and distribution network businesses to ensure that:

• the networks are efficiently planned and constructed (i.e. “goldplating” is avoided);
• the networks are efficiently operated and maintained; and
• the network businesses do not extract “monopoly rents”.

Those objectives are achieved through several means, including the regulation of quality of service and the imposition of revenue caps on the regulated network businesses.

While we agree that goldplating must be avoided, those customers who lost power in the January storms or the February heat wave would suspect the opposite problem, namely inadequate expenditure on upgrades and maintenance. Their suspicion is plausible, given that the costs of maintenance and upgrades are not readily recovered through additional electricity sales.

More importantly, while we agree that regulation gives some protection against monopoly rents, the ultimate protection consists in the fact that the distributors are publicly owned. If a monopoly is owned by the government, any monopoly rents are public revenue and consequently flow back to the taxpayers as lower conventional taxes or as higher expenditure on government services. But if the monopoly is privatized, only part of the monopoly rent is recovered through income tax (only part of which comes back to the State in which it is collected); the rest must be made up by other taxpayers, so that the people are taxed twice — once by the government and once by the monopolist. When proponents of privatization allege that the discounted present value of the forgone rent is fully recovered in the sale price, they fail to acknowledge

• that the discounting rate applied by the market is higher than that applicable to governments, which can borrow at lower interest than the private sector, and
• “market indigestion” — i.e. the loss of proportionality between capitalized and annualized values due to the finite capacity of capital markets to finance large floats.

Nevertheless, we must emphasize that the funding mechanism proposed in this Submission — i.e. the State government calling tenders for an improvement to the electricity network and recovering the cost through land value taxation — works regardless of whether the successful tenderers are public or private, regulated or deregulated. Hence, even if some future State government is so irresponsible as to privatize and/or deregulate the electricity distribution industry, the case for land value taxation will not be weakened and its advocates will not go away.

References

[1] Darryl Somerville (chair), “Electricity Distribution and Service Delivery for the 21st Century: Issues Paper” (Queensland Government: March 24, 2004), http://www.energy.qld.gov.au/electricity/edsd_Review.asp.

[2] Don Riley, Taken for a ride: Trains, taxpayers and the treasury (Teddington, England: Centre for Land Policy Studies, 2001). Note: Numerous sources are cited in the footnotes; in particular, the idea that landowners stand to gain from high rates of LVT is apparently due to Prof. William Vickrey (1914-1996).

[3] John McIlwraith, “Underground Power Cables: Costs and Benefits” (Parliament of Australia, Current Issues Brief 11 1996-97), http://www.aph.gov.au/library/pubs/CIB/1996-97/97cib11.htm.

[4] Gavin R. Putland, “The Single Means Test”, submitted to the McClure committee on Welfare Reform (December 12, 1999), http://grputland.com/subs/mcclure.htm.

[5] Office of Energy, “Transmission & Distribution” (Queensland Government, November 19, 2003), http://www.energy.qld.gov.au/electricity/transdistr.asp.

Disclaimer / declaration

The reforms proposed in this Submission are aimed specifically at the funding of electricity network upgrades and are not necessarily the reforms that Prosper Australia (Victoria) would prefer if the terms of reference were wider.

The author of this Submission is Dr Gavin Putland, Communications Officer for Prosper Australia (Victoria) Inc. Being resident in Brisbane, Dr Putland is willing to appear in person before the Review Panel if the opportunity arises.

While the author has independently derived the equations in this Submission, most of them are well known and none is necessarily new.