Baird Government hypocrisy on power privatisation

Back in November the NSW Government hailed the energy regulator's decision to slash network charges as proof Labor's privatisation scare campaign was a lie. Yet now they've decided to oppose this ruling, supporting the network businesses' claims for further price rises. Have they learnt anything from the Queensland election?

A few days ago I touched on how the Newman Queensland Government undermined its own attempt to sell the benefits of privatisation, and ultimately its hold on power, by sending confused and dishonest messages to the electorate about the drivers of power price rises.

Now the NSW Government seems to be making the same mistake, although in a different way.   

Back in November Climate Spectator reported that the Australian Energy Regulator (AER) had acted to unwind NSW network businesses prior five-year spike in power charges (Power bills down as regulator unwinds NSW networks' gold plated gains) for the next five-year regulatory period.  

At the time this draft decision was hailed by the NSW Minister for Energy Anthony Roberts as an indicator of how wonderful his government was.

His November 27 press release stated:

Minister for Resources and Energy Anthony Roberts has welcomed a Draft Determination for the NSW electricity businesses from the Australian Energy Regulator (AER) that may reduce household electricity bills even further.

Mr Roberts said, “The continuing downward path of electricity prices shows once again that Mike Baird is the man you can trust to keep the lid on cost-of-living pressures, while John Robertson will always send them through the roof to help his union mates.

The press release went on to say that the AER’s decision had undermined Labor’s scare campaign about privatisation driving prices up, and showed that prices would be controlled by an independent AER.

However, today we learn in the Australian Financial Review that the NSW Government is opposing the regulator’s decision, saying it would put power reliability and safety at risk and potentially lead to disruptive fights with the unions. Instead of the 10% drop in household retail prices the AER ruling would deliver, the NSW Government is standing by the networks’ demand for hikes of as much as 8% on top of previous large hikes in the preceding regulatory approval period.

In the end, this is all about NSW Treasury trying to plump up the profits of the networks to maximise their sale price.

The evidence suggests that the AER’s decision was justified, in spite of the predictable attempts by the network businesses to scare the general public that this will threaten their safety, thereby bullying the regulator to back down.

NSW power consumers have suffered substantial increases in power prices thanks largely to government-owned power network companies’ managing to persuade the regulator (or judges in appeals against the regulator decisions) that they had to massively expand their network to cope with an expected spike in peak demand.

As illustrated in the chart below, government-owned network businesses in NSW as well as Queensland have managed to triple the value of assets per customer connection, with the spike commencing in 2006, while privately-owned networks businesses have been far more efficient.

Source: Bruce Mountain of Carbon Energy Markets (2014) Presentation to Australian Institute of Energy Economists

Yet in the end the spike in peak demand the networks said justified their huge expansion in revenue never materialised. This flat peak demand was much the same for the government-owned networks (Ergon, Energex, Essential, Ausgrid and Endeavour) as the privately-owned networks.

Level of peak demand across different Australian electricity network businesses (2006-2013)

Source: Bruce Mountain of Carbon Energy Markets (2014) Presentation to Australian Institute of Energy Economists

As AER benchmarking analysis has shown, once you correct for differences in customer density there is very little evidence that government-owned networks deliver materially better reliability than private sector businesses, in spite of vastly greater expenditure.  

Now if this is in fact a problem with union power and featherbedding in government-owned businesses, then what better way to force their hand than have a third party in the AER enforce a budgetary constraint?

That way the network businesses/government can tell the unions their hands are tied thanks to the AER and there is no other choice but reduce wages or improve labour productivity.

It is ridiculous to ask an economic regulatory authority in the AER to somehow apply a special union inefficiency allowance to government entities. It’s interesting that on the other side of the coin the government network businesses insist on receiving the same financial rate of return on their capital expenditure as private businesses even though their cost of capital – government bonds – is vastly lower.   

The decision by the NSW Government to privatise their network businesses is the right thing to do. But convincing the public is incredibly difficult as the Queensland election result shows.

The Baird Government’s decision to intervene in the AER’s regulatory process, asking for them to roll back cuts to bloated network expenditure, makes their sales task even harder.