The Productivity Commission has put the hard word on the nation’s first ministers when they next meet under the Council of Australian Governments umbrella in mid-December.
Asked by Wayne Swan to look at benchmarking the power network system as part of the Gillard government’s ongoing efforts to deflect attention from carbon pricing, the commission has opted to give policymakers a big sermon on how to deal with a core power price problem.
Really big. It runs to more than 800 pages.
At this stage of the game, the commission says, benchmarking is too unreliable to set regulated revenue allowances for the networks, but CoAG needs to get on with the job of a more fundamental set of reforms.
As a report card for governments, this could be annotated "Can do a whole heap better.”
The problems, says the commission, are caused by:
– A poor focus on consumers, despite their interests being the over-arching objective for regulation.
– Costly ways of achieving (sometimes excessive) reliability.
– Inadequate demand management.
– Ongoing government involvement in some state businesses.
– And a bunch of problems with how the regulator is set up and resourced and with the rules under which it operates.
The Productivity Commission’s core message for politicians is straightforward: you have lost track of the needs of consumers.
It wants CoAG to set up an energy consumer body and give it the skills to be an effective participant in the regulatory process, charging the bill to the networks – which, of course, means eventually to the customers.
It also wants governments to better establish what customers really want in reliability rather than by "prescriptive (sometimes politically influenced) standards.”
Above all, given that augmenting networks to deal with peak demand results in a quarter of consumer costs going to fund about 40 hours of extreme consumption each year, the commission wants the state governments to get on with the job of rolling out smart meters and introducing time-based pricing.
Apart from anything else, it says, this will reduce the large, hidden cross-subsdies from people who are not heavy users at peak times – often lower-income households – to those who do.
As an example of how governments can dither around, the commission reports that, several years after the muddled Victorian experiment in rolling out smart meters, the cost of a similar exercise across the rest of the "NEM” is still unclear.
It’s a "major source of uncertainty” and the difference between the Victorian costs and an efficient program could be more than a billion dollars.
This just prompts the question: Why has CoAG proved incapable of resolving such a relatively simple but crucial question?
Of course, the commission wants New South Wales, Queensland and Tasmania to get out of the business of owning networks.
No surprise here, but politically it is a message of potential doom for state governments, with the unions out of their blocks like electrons on hearing the news.
(The commission wasn’t asked to look at Western Australia or the Northern Territory, but the "sell” message would surely apply there too and have an equally explosive political impact if taken up by incumbent governments.)
There is another verdict from the commission that simply got ignored in the widespread coverage of the draft report by the media, which has spent a year beating up on networks for "gouging” and "gold-plating.”
It is important not to blame network businesses for the current inefficiencies, says the commission. Mostly they are responding to regulatory incentives and structures that impede their efficiency.
Of course, the Gillard government is happy to seize selectively on the PC messages to give the Coalition-run state governments a fresh serve.
Consumers, says Swan’s sidekick, Assistant Treasurer David Bradbury, "should be actively put front and centre” in the networks picture.
Oh yes – and pray tell why this hasn’t happened over the past decade when the ALP had control of governments in Brisbane, Sydney, Melbourne, Adelaide and Perth?
And over the past five years when it controlled government nationally in addition to all these states for most of the time?
Why does the political commentariat let Gillard & Co get away with this humbuggery?
Meanwhile, the commission provides a piece of context for electricity price pressures that also tends to be ignored when the political and media are jumping up and down: "Community concerns have been accentuated by the coincidence (of 50 per cent higher power bills) with similarly large increases in the costs of other regulated essential services – water and sewerage (69 per cent between mid-2007 and mid-2012) and gas and other fuels (45 per cent).”
Are all these service providers "gouging” and "gold-plating”?
Julia Gillard has been waving a "big stick” at state governments – her targets mainly being the O’Farrell and Newman regimes – with the implied message to voters that she is going to work wonders with their power bill problems, but the Productivity Commission puts a somewhat different slant on things: "While gains from reforms are large, they will not happen overnight. Long-term investments and regulatory decisions have already been made. But future cost savings rely on (these proposed) reforms being made now.”
Into this let me interpolate a comment from Port Jackson Partners’ Edwin O’Young at a conference I chaired in Sydney last week.
Last year O’Young forecast that power bills would double between 2011 and 2017.
Is this still on, I asked him, and his response, allowing for the carbon policies continuing, is yes with the caveat that it may be a bit longer than 2017.
As for the Productivity Commission report, it has more points than an echidna in its 800 pages.
Analysts from government, industry and other stakeholders will be flat out assessing the draft and getting back to the PC by November 23.
The final version will appear around Easter next year.
For the Gillard government, it is a classic example of getting more than you bargained for.
For all governments on the east coast, it is a salutary reminder of why, if more regulation is their answer, they had better look again at their questions.
For network service providers, it’s a curate’s egg – and they will need to hustle to take advantage of the good bits because, at least on a first reading, this report offers them a gateway to a better business environment.
For the commentariat, and those pollies on the make, it is a smorgasbord – ignore what you choose not to hear and seize on the juicy bits.