Over the last two weeks the Australian Energy Market Commission (AEMC) – which sets the rules for how energy markets in Australia function – has released two major reports on reforming how we regulate and price energy network infrastructure. While there are some useful reforms in these reports, they fall short of what’s required to address excessive investment in networks.
The proposals for reform relate to two areas:
1) Transmission frameworks: How we charge for and plan the large transmission lines which act like the major highways of the electricity system taking power from the power stations to major electricity demand nodes.
2) Energy network regulation: How the regulator assesses and approves expenditure proposals of monopoly network businesses.
1. Transmission frameworks
On the reforms within point 1, the AEMC has proposed a change that will lead to greater costs in our electricity system. It should outrage Victorians, but has also let down energy consumers in other states.
At present how we manage construction of new transmission infrastructure in every state except Victoria suffers from a major conflict of interest. This is because transmission companies get to determine what new transmission infrastructure we need, while also making money from construction of that transmission infrastructure. Unfortunately the AEMC has proposed that Victoria adopt the same conflicted model as the rest of Australia.
The thing that the Kennett government wisely realised when they pioneered electricity market liberalisation was that while the planning of transmission was a monopoly service, the construction of new transmission infrastructure can be done through competitive tenders for each upgrade project. Consequently, in Victoria, the company that owns the transmission infrastructure (SPAusnet) is separated from the entity that plans new transmission infrastructure (the Australian Energy Market Operator). This avoids conflicts of interest and maximises the benefits of competition where it is possible.
Research soon to be published by the Energy Users Association of Australia indicates that Victoria achieves the same levels of service and reliability as the other states, but pays less. This takes into account differences in physical characteristics between states.
Another problem flowing from state transmission companies determining what transmission gets built, rather than the national body of AEMO, is that it discourages interconnection between states that can often save money.
So why did the AEMC recommend this sub-optimal approach? No real evidence, rather it was dictated to them by the terms of reference they were given by government officials.
This is a disgrace. Julia Gillard and Victorian Premier Ted Baillieu should be issuing a please explain to the Ministerial Council on Energy immediately.
2. Rules for regulation of networks
A few weeks ago I pointed out the key reason for excessive investment in networks was because state-government owned network businesses can finance network augmentations with debt at 4 to 5 per cent interest while earning returns set by the regulator at private sector finance costs of around 9 per cent.
The AEMC has made a number of changes that will allow the Australian Energy Regulator greater discretion in setting cost of capital margins that better reflect network companies’ actual financing costs. But they fall short of addressing this public sector discounted financing problem.
In fact the AEMC has actually rejected the idea that this is even a problem. In the report the AEMC states:
“As part of its rule change request, the EURCC [a group of major energy users] proposed that the return on debt for state-owned NSPs to be determined differently from privately-owned NSPs. The
Commission has considered this and does not support this aspect of the EURCC’s rule change request for a number of reasons, including competitive neutrality considerations”.
How does the idea of ‘competitive neutrality’ become a justification for providing a free kick to a state-owned monopoly? These guys aren’t competing against anyone.
Competitive neutrality is a concept developed around ensuring private sector businesses were not disadvantaged in competing against already dominant government-owned entities such as Telstra prior to privatisation. It has absolutely no relevance to this issue.
As Roman Domanski, head of the Energy Users Association of Australia put it to me, “Fred Hilmer [who led competition reform in Australia over the 1990’s] would turn in his grave if he wasn’t still alive.”
I asked Domanski where on earth this kind of justification might have come from and he didn’t hold back, “The Queensland and NSW Treasuries fed it to the AEMC and they swallowed it hook, line and sinker.”
It is deeply concerning that the AEMC has delivered a set of recommendations that appear to still be strongly influenced by the interests of state government owners of network businesses. And these state governments have an important say in who heads up the AEMC.