Gillard's hapless energy burn

The federal government needs to press harder on energy reform, but painting the states as villains is doing electricity users no favours.

Julia Gillard’s sudden lunge in to electricity market issues has gained her a bucket-load of media coverage, but it raises questions about how much damage she may have done to the cause of power reform by adopting full hectoring mode and painting state governments as villains.

The fast and furious reaction of these governments overnight suggests the role she is playing may be more wrecking ball than strong leader.

The cast-iron lesson of the power reform effort of the past 15-18 years is that it only works if the states and the federal government ride together on a complex and bumpy path.

Paul Keating, Nick Greiner and Wayne Goss did this exceptionally well in the early 1990s and carried other first ministers with them.

The result is the so-called “national electricity market” on the east coastthat has international recognitionas highly successful micro-economic reform.

Implemented by 1998, it has led to substantial gains in national efficiency and has been credited with contributing an additional $2 billion a year to national GDP.

But it is now almost 15 years old and is in need of substantial refurbishment, a task that is nearly as big today as it was in the 1990s because of the decarbonisation challenges and the lost recent years in tackling the problems.

Matthew Warren, the Energy Supply Association chief executive, summed the situation up quite well: “In many cases current state governments have inherited a legacy of failed reform from previous governments. They are not to blame for the problem but they must fix it.”

To see the prime minister abusing Coalition governments when she couldn’t or wouldn’t bring herself to get tough about power issues with the faltering, flailing Labor regimes that voters have now trashed invites deserved frustration.

The Achilles heel of the market has been in the networks area virtually from the get-go of the reform process.

Hassles that have arisen flow in a large part from state governments and their original semi-tame local regulators deferring spending on the system of poles, wires, transformers, switchyards and sub-stations which makes up half the power price.

Today the networks are old and, in more than a few areas, reaching a stage of life where things could go wrong with bad consequences.

In Sydney alone at the start of the present capital investment program in 2009 there were a large number of overloaded 11kV feeder lines, a critical part of the delivery system.

The current large capex program has halved the problem but not yet solved it.

The state and federal government realised in the early part of the past decade that the regulatory system needed a make-over and worked together – a Coalition regime in Canberra and Labor state governments – to create small-F federal legislation allowing for a regulator to cover the whole delivery system and to be overseen by an independent regulator.

But they created a set-up that, according to its critics, isn't coping especially well with the challenges it is encountering and now they have to think again – a process that is under way.

In addition, all the states bar Victoria have clung to retail price regulation and created a large amount of investor uncertainty in doing so.

Where the federal and state governments have especially dropped the ball is in allowing the peak demand problem to grow to its present level.

Left unchecked, the trend will see peak load on the east coast rise from 38,000 megawatts today to more than 50,000 MW by around 2020. And there's a risk, consultants have told governments, that it could be beyond 61,000 MW at the end of the ‘twenties.

At the latest meeting of state and federal energy ministers under the Council of Australian governments umbrella, the non-Victorian participants blithely declared that they couldn’t see themselves rolling out smart meters and introducing time-of-use tariffs “for some years.”

This is not on and the federal government needs to press harder for action. But it's hypocritical for Gillard to be abusing the states over the issue one minute and then saying, as she did at the Sydney lunch yesterday, that she did not intend for the federal government to try to drive the states harder and faster on what is a rather unpopular development.

Her line was that it is “a very bad thing for the supply side response to (peak power spikes) to be so deeply costly and inefficient and it’s a clear argument for reform.”

Yes, prime minister, and that is an argument for pursuing smart meters and “dynamic tariffs.”

Gillard wants the credit for whipping the states in to action and none of the voter displeasure for taking them down this road.

She also wants to sell herself as the St Georgia for “working families,” slaying the power price dragon, but she must know that a full east coast roll-out of smart meters will come with a price tag pushing towards $10 billion – which households will fund through higher charges even as the process eventually helps them avoid worse bills further down the track.

Gillard slipped in the weasel words in her Sydney speech so deftly that it was easy to miss them.

What she gave was not a pledge to cut prices but: “I am determined to get a plan in place to prevent unnecessary price rises.”

Listen carefully and you can hear the echo of L-A-W tax cuts from another era.

Power bills will not go down in the rest of the decade even if governments succeed in slowing the rate of increase – and there is every chance that sharp rises in wholesale gas prices will introduce new power cost pressures even as ways are found to slow the growth of network charges. To this can be added the carbon price.

Given her position in the opinion polls, Gillard is not on strong political ground and her “do what I tell you or I will hit you with a big stick” tone on Tuesday would not have gone down well with the state leaders even if they didn’t know, as they do, that the network regulatory system is a co-operative exercise underpinned by the same law being passed in all jurisdictions.

The stick is essentially a trick.

As Gillard demonstrated again yesterday, she can be good on her feet with a brief, but here she is striking the wrong tone at the wrong time.

She may come to rue this “seemed a good idea at the time” approach before the year is out.

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