Bloated power sector must be reined in

That's right. Zero growth in supply to the national electricity market but a workforce which has bloated from 35,000 in November 2006 to 71,900 in 2012.

The industry spin on rising capacity, and consequent overspending, has been that it has been required to meet the rise in "peak demand". The reality, however, is that peak winter demand has fallen 1.9 per cent since 2006 and peak summer demand has fallen 4.6 per cent since 2006-07. So peak demand has fallen while the workforce has doubled.

You would not know it from reading some of the stuff submitted to the Senate inquiry into electricity prices. Take this assertion from Grid Australia, the peak body that represents the transmission providers.

"Electricity price increases over recent years," it says, are due to "ageing infrastructure" and an "increase in demand". These are the "recognised, industry-wide reasons that contribute to rises in electricity costs".

Electricity prices have increased in recent years, all right, up 60 per cent in the most recent three years, but demand has dropped - unless, like the industry, you are inclined to define "recent years" over an extended historical timeframe, stretching back to the age of Herodotus, perhaps. The bloating of the sector has hardly done the economy much good, let alone the household budget. But so determined is it to perpetuate the myth of peak demand that the power industry has now begun threatening its detractors with lawsuits. We won't go into specifics here. These will emerge in good time.

Thankfully, the admissions of "gold plating" - over-spending by network providers - and their effects on prices, have finally come in the past couple of months. Vince Graham, head of Networks NSW - the newly merged trio of Ausgrid, Essential Energy and Endeavour Energy - said the other day that he was aiming to contain the network price rises to CPI for the next five years: "That's six years of keeping prices capped at CPI or below. Networks NSW has committed to slashing $2 billion of the $14 billion spent by the networks by June 2014.

"The power businesses have a number of unsustainable work practices which will be removed, such as employees receiving 26 per cent contributions to superannuation."

Graham's frankness should be applauded, at least in light of the denialism of his peers. Power companies have been earning a 21 per cent return on equity, the sort of number to put even the bank oligopoly to shame. As for 26 per cent super contributions ... that has to be some sort of world record.

So there is a lot of fat, and industry executives have to cut it when demand is flat to falling and governments, squeezed for revenue, are pining for privatisations.

But it has to be done. Consumers have twigged. High prices have dampened demand. Regulators have been gamed enough. The carbon price has been outed as a minor culprit in the nosebleed energy bills. The gold-plating party is over.

When Graham says Networks NSW has committed to slashing "$2 billion of the $14 billion spent by the networks by June 2014", he is probably referring to the five-year regulatory period ending in June 2014. As this is just 19 months away it is telling how easily the new Networks chief has been able to find $2 billion in savings, especially in a sector which has so forthrightly insisted on the "essential" nature of its infrastructure spending.

Many of these power projects take more than a year in the planning and construction.

Two conclusions can be drawn. Either this spending that had been earmarked was not essential to the reliable operation of the electricity supply or Networks NSW is recklessly cutting essential expenditure and endangering the safe and reliable electricity supply. It is unlikely to be the latter. And so the question naturally arises: just how much of the $2 billion which has already been spent was not essential?

Surely, a complete audit of all distribution and transmission expenditure over the last five years in the NEM should be undertaken and the non-economic gold-plating written off? What other "essential projects" in other states might have been canned or deferred? How many more billions could be saved elsewhere?

Remember that the spending is determined by budgets struck on forecasts for each regulatory period, forecasts which have been proven to be wildly optimistic.

From Graham's account it seems it could not have been too hard to cut $2 billion from the current budgets. Bear in mind that many of the projects take longer than a year to plan and build. Only 19 months remain in the current regulatory period and they managed to kill a number of "essential" projects.

Whether Graham's admirable aim of keeping price rises to CPI can be achieved is moot.

As demand falls the industry must recover its fixed-cost base over a smaller number of megawatts. Prices will therefore rise in relation to falls in demand.

The distribution companies are only one part of the supply chain. With the falls in demand that we have been seeing the generators are cutting back capacity, which should lead to a more balanced market. The wholesale price at some point will bounce back a little, from prices that are the same level as they were in 2000, which should lead to higher power bills.

And now, with gold-plating unveiled, and prices and demand under pressure, the power companies must find their next trick.

By the looks of the universal industry call for the introduction of smart meters, that is it.

Industry analyst Bruce Robertson says the complexity of a smart-meters regime will enable the sector to "game" its consumers just as it gamed the regulators with gold-plating.

"The retailers will ensure that price rises continue as they roll out smart meters at a cost, if Victoria is anything to go by, of $80-$120 a year," Robertson says.

"In my view it is also likely that they will be able to 'game' new deregulated flexible tariffs to improve their profitability. In summary, I don't see any relief for consumers yet. I do applaud the moves by Networks NSW to save costs and rein in network spending."