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Issue #1561      22 August 2012

Behind the skyrocketing electricity prices

Earlier this month Prime Minister Julia Gillard accused state governments of jacking up electricity prices for services associated with distribution networks (known as the “poles and wires”). She threatened to introduce stricter regulatory powers and to get the Australian Competition and Consumer Commission and the Australian Energy Regulator to restrict prices charged by state-owned distribution corporations.

Within the last four years demand for power has actually fallen, as consumers struggled to minimise their energy use. Yet state electricity charges have risen by 48 percent on average, with a 68 percent rise in NSW.

Under electricity pricing regulations the dividend which the state-owned distribution corporations can return to their governments is based on the infrastructure’s assessed value.

According to the Prime Minister, some state governments have been carrying out excessive works to their infrastructure, (“gold-plating” them) and using the unnecessarily increased capital value to justify raising the rates and maximising the dividends.

Behind the spin

The NSW and Queensland governments blame the carbon tax for their rate rises. “The best way to stop prices from rising is to scrap the carbon tax”, thundered NSW energy minister Chris Harcher recently.

This is nonsense. The rises were imposed over the last four years but the tax was only introduced seven weeks ago. This financial year the carbon tax will be equivalent to only about half the foreshadowed 18 percent rate increase in NSW.

The current pricing arrangements, which were entered into in 1995 under state and federal agreements, allow state governments that still own distribution networks to rort the system as Gillard has described.

The federal electricity regulatory authority has complained it can’t restrain price hikes because of the current legislation which enshrines the relationship between dividends and infrastructure value.

The legislation certainly needs to be amended, but it’s not the only problem.

In South Australia and Victoria the distribution networks have already been sold. The NSW and Queensland governments still own the distribution networks, but the NSW Premier Barry O’Farrell says he will privatise them if returned to office at the next elections. The Newman government will doubtless do the same in Queensland.

By jacking up the rates the NSW and Queensland state governments are preparing the ground for privatisation of the distribution networks.

By increasing the rates prior to the sale of the assets, the state government can provide prospective purchasers with crucial information on profitability, for example the tendency of consumers to defer expansion plans, use power more economically, or obtain energy from other sources.

Moreover, by blaming rate rises on the carbon tax the state governments are supporting the federal opposition’s ambition to block any climate change initiative the Gillard government might make that would adversely affect the coal industry.

The grand shemozzle

The current row over electricity rate rises has highlighted, among other things, the ineffectiveness of the carbon tax. Its imposition will simply be accepted with a grumble by the energy corporations as part of their operating costs – just as the tobacco companies do with regard to taxes imposed on them.

The tax alone will certainly not stimulate state governments to lower energy rates. Moreover, imposition of the tax has been accompanied by a tax reduction for low and middle income earners. Although understandable, this is self-defeating, since it effectively invites the corporations to jack up the rates as compensation for the tax.

Another problem is the massive complexity of the current nationwide electricity arrangements. Reaching agreement on the national grid and electricity pricing was difficult enough, given the different objectives and programs of the state and federal governments. However, allowing private firms to enter the industry while simultaneously attempting to regulate their activities has complicated matters to the nth degree.

Fairfax columnist Michael West declared:

“The industry structure is a shemozzle. Deregulation has spawned a confusing array of corporatised and sometimes privatised bureaucracies – power generators, distributors, transmission providers and planning bodies – empires within empires.”

He could also have mentioned the regulatory authorities, state and federal, and the private corporations. Australia’s massively complex arrangements have been a total failure at providing power for energy consumers at minimum cost. They now receive the most expensive power bills in the world.

Referring to the situation that prevailed in NSW prior to deregulation, West commented:

“In the old days, the bigwigs of the State Electricity Commission would trudge up to State Parliament to be questioned by an economics committee over a five percent rise. They would be responsible. There is no way they would have presided over 18 percent price rises two years in a row. But who is responsible now?”

Electricity is crucial for national sustenance and development, but is fraught with problems of conflicting state ambitions and the private sector which sees each of them as a cash cow.

Cameron O’Reilly, CEO of the private lobby group the Energy Retailers Association, blames the problems of the electricity industry on “regulatory intervention such as price capping”, “an array of climate change policy measures”, the Renewable Energy Target and “generous state and federal subsidies for technologies like roof-top solar”.

O’Reilly claims that Victoria has benefited by the sell-off of its energy industry, which has resulted in “the most competitive retail energy market in the world”, in which “households have the choice of a dozen suppliers competing largely on price”. He didn’t mention that Victoria has had both price hikes and power failures.

Despite these failures, the private sector is calling for total electricity deregulation. Martin Ferguson, the federal minister for energy, has joined them, calling on state governments to sell off all their remaining state-owned electricity assets.

What the federal government should do is take over the whole electrical generation and distribution industry, evict the private profiteers, eliminate state wrangles and steer the industry towards a renewable energy future, based on the best technology with the least cost for consumers.

Alas, neither of the current major parties will do so. We will have to look to a coalition of left and progressive forces for that to happen.  

Next article – Candidates gear up for Territory election

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