Date: August 08 2012
The electricity industry suffers the conundrum of the lawyer - the more work it creates, the more it gets paid.
Even with the best of intentions, it is a daunting temptation for them to prolong the workload, just to keep the financial returns ticking over.
Coal prices, the carbon tax and the need for network upgrades are all minor villains in the piece being played out now in the public sphere. The chief culprit in the unfolding drama of Australia's spiralling power bills is a fatal flaw in the industry's structure.
That is, the power companies earn a regulated return on their asset base. Their revenue is calculated based on the value of their poles and wires. So the more money they spend, the more money they make. And the more money they make, the higher their dividend to state governments.
So when the Prime Minister, Julia Gillard, muscled her Minister for Energy and Resources, Martin Ferguson, out of the running to deliver a keynote address to the Energy Policy Institute at lunchtime yesterday, she knew she was on to a sure thing.
The blame for rising prices is apportioned quite unequivocally by the Independent Pricing and Regulatory Tribunal, even down to the last percentage point. Rising transmission and distribution costs are the chief culprits. And the chief beneficiaries of the big spending on network upgrades - the poles and the wires - are the power companies and the states.
A line item in the last NSW budget showed a rise of $250 million in dividends from the state's electricity transmission and distribution businesses. This 41 per cent increase in payments to Macquarie Street - up from $639 million to $901 million in only a year - comes at a time when power bills are poised to rise another 18 per cent.
Blaming the states though - like blaming the carbon tax - is too simplistic and political a ploy. This is the National Electricity Market after all, presided over by the Australian Energy Regulator. It is easy to argue that the states, or, in Victoria's case, the shareholders of the transmission and distribution companies, benefit from ''gold-plating'', or excessive spending on networks.
But the states alone are not to blame either. The chairman of the AER, Andrew Reeves, has made it clear the regulator needs greater powers to police the industry. Reeves and directors of IPART and the Australian Energy Market Commission have all expressed concern over excessive, unnecessary spending by those in the industry.
Then there are the forecasts for demand, which are also part of the problem. Actual consumption in the national electricity network has been way out of sync with forecasts. Consumption has actually been falling. People are switching off their lights.
So, for the past three years, industry has been forced to downgrade its forecasts. But still, even in the face of a clear downwards trend in actual demand, they are projecting hockey stick rises in consumption.
Again, as with the paradox of regulated returns, it is self-serving. The money spent on upgrading the networks is determined by these demonstrably wrong forecasts of demand and so, in turn, is their regulated return and the payola for the states.
Not only has the electricity industry failed to recognise a change of trend in total demand but in peak summer demand and peak winter demand, too. For years, the power companies have rationalised their high spending on networks as critical to meeting ''peak demand'', but the growth in peak demand, too, has been falling.
It is increasingly evident that the rise in power bills has been unnecessary and due in great part to the industry's overspending.
The rub is what to do about it. 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.
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 5 per cent rise. They would be responsible. There is no way they would have presided over 18 per cent price rises two years in a row.
But who is responsible now? TransGrid, Ausgrid, EnergyAustralia, Essential Energy, the generator, the retailer, the distributor, the transmission operator, or the co-generator? It's impossible to tell.
At present, we have a system in which a weak regulator presides over powerful industry concerns and state governments who benefit from rising power bills. It clearly doesn't work.
Australia now has the highest power bills in the world. The effects of a 70 per cent rise in the price of such a basic commodity are hard to estimate. The social cost alone is too high, but rising power prices also affect every business in the country and act as a drag on the entire economy.
Michael West is a BusinessDay columnist.
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