Gillard wakes up to electricity price disgrace

Julia Gillard will give a speech this afternoon, about two years late, which finally acknowledges that state government-owned electricity network companies have been ripping us off to the tune of billions of dollars.

While the media and opposition have been jumping up and down over the carbon price, they have been completely negligent in reporting on the main game behind a huge spike in electricity prices over the past five years. While much is made of the NBN, there has been precious little coverage of how government regulators signed-off on monopoly networks spending more than $40 billion within five years doing upgrades of poles and wires that it turns out we won't need. The chart below illustrates the huge blow-out in electricity prices that started in 2007, well before the carbon price came into effect in July this year.

Source: Bruce Mountain (2011)

Back in 2009 and 2010, energy market economists, Bruce Mountain and Stephen Littlechild blew the lid on how poorly structured electricity market rules in Australia were encouraging state government-owned electricity networks to gold-plate network infrastructure. This was then championed by Ross Garnaut in his 2011 update on the economics surrounding climate change and energy policy.  

However federal and state governments largely ignored Garnaut's advice. Energy Minister Martin Ferguson and Prime Minister Gillard continued to spout the lines they were fed by the electricity industry and industry-captured bureaucrats that this huge expenditure was a necessary catch-up on years of past underinvestment.  Meanwhile state governments pocketed a huge windfall of additional revenue from their network businesses which is detailed in the table below, sourced from Gillard's speech.

In essence state governments have used a quirk in how both private and government-owned network businesses are regulated around a single cost of capital estimate (the interest rate or rate of return network businesses face to raise debt and equity finance). This gave state governments an arbitrage opportunity between their very low cost to borrow funds via government treasury bonds, and the higher cost of capital allowance in network regulatory rules that catered to Victorian and SA privately-owned network businesses.

In addition there are a range of other problems with the way the electricity market regulatory rules are set which act to encourage the augmentation of poles and wires infrastructure and discourage competition from service providers who might reduce peak demand.

At its core, the problem is two-fold:

1)      State governments as owners and also regulators of electricity network businesses have had a strong incentive to laxly regulate, enabling their network businesses to act as additional subtle revenue raisers. And with the carbon tax about to be introduced, they knew they had some cover to hide their price rises behind.  

2)      A lack of political courage to roll-out key measures to contain demand growth which would face opposition from community and industry groups. Growth in peak demand has moderated recently, but further efficiencies could be gained through the roll-out of time of use pricing meters in the residential sector and opening-up networks to competition from companies offering demand reduction services.

Now that Gillard has owned-up to the problem, we now need to see what she plans to do about it. As covered in Climate Spectator in March, don't hold your breath waiting for electricity market reform to happen.