Gillard's imaginary power bill elixir

When I was a small boy it amused a bawdy Irish relative to point out to me that my aunt, if differently equipped, would be my uncle.

The Senate select committee on power prices, required to report by November 1 to suit whatever political agenda Julia Gillard is running as part of her heavy-handed approach to the issue, must be starting to feel that it is getting much the same message.

How the Labor senators on the committee plus Christine Milne of the Greens, representing the majority, will produce what the government wants/needs over the course of this month as they are confronted – in 100 submissions and hearings across the country – with the reality of the electricity system we have compared to what various people would like it to be is an interesting question.

One of the problems is that there is no national electricity supply system – and the situation in Western Australia is a lot different from that in, say, Queensland, even though both are boom regions where the state governments own most of the power assets.

At a hearing in Perth, the Labor senators bumped up against the uncomfortable fact that a large part of the cost price problem in the south-west corner of WA is down to what its side did over a long period in government.

Successive Labor regimes in the west played the populist card and sat on power prices for more than a decade – but now the ALP in opposition is yelling at the Barnett government for prices rising 57 per cent in under four years.

However, evidence to the Senate committee throws up that 47 per cent of this increase is simply to catch up with inflation – and just 10 per cent relates to higher generation costs (driven by high local domestic gas prices) and network investment.

Even so, WA taxpayers are still being hit with an extra $371 million a year subsidising their own power bills because the south-west tariffs remain way below being cost-reflective.

The WA Economic Regulatory Authority has told senators that residential prices will need to go another 17 per cent to bring an end to the burden on taxpayers.

This subsidy, by the way, is apart from the $200 million a year that south-west consumers shell out to subsidise household power bills in rural and regional areas.

Meanwhile, in Queensland, where the Newman government is picking up the pieces after an even longer Labor stint in office, government-owned distributor Energex is spending $1.3 billion a year today on its networks after outlays being held at $400 million annually for a long period.

When premier Peter Beattie finally buckled under community outrage about power supply reliability and did what an independent review in 2004 told him to do, the state's network capex shot up $12 billion in seven years, producing a 40 per cent improvement in reliability – and, of course, an even bigger jump than in WA in household bills, an average of 83 per cent since 2007.

Talking for Ergon Energy, which provides network services to 70,000 customers in 97 per cent of Queensland (an area of 150,000 square kilometres that would swallow Germany and France with lots of room left over), chief executive Ian McLeod gave it to the senators straight.

“There is the fact of under-investment pre-2000, where the network was in very poor condition,” he told them at a Brisbane hearing. “There is the replacement of ageing and unserviceable infrastructure. There have been natural disasters – cyclones Larry and Yasi and the floods – and there has been a significant growth in connections (because of the mining boom).

“We have had one of the biggest growth phases of all states in peak loads and connections due to the boom, sea change (population shifts), high immigration, increased personal wealth and investment in lifestyle appliances such as air-conditioning.

“The roll-out of rooftop solar PVs actually increases peak use while reducing base demand.

“There has been excessive regulation of the technical and customer service environment.”

McLeod also brought home just how difficult it is to plan for future demand in a state where the mining industry is such an important factor.

He says the tsunami of mining investment that was projected before the Chinese economy came off the boil invoked plans for $500 million in network capex that is now apparently not needed – or at least not required in the forecast time frame.

Pursuing the critics' line that there is a perverse incentive in the current regulatory system for network businesses to over-investment, the committee chairman, Senator Mark Thistlethwaite, was reminded by Energex (which has some 600,000 customers in the state's south-east corner) that, under requirements imposed as a result of Beattie's 2004 review, the distributor has had to spend substantial capital to meet security and safety standards as well as consumption growth in the country's fastest-expanding market.

And there is still more to be spent to meet these standards.

It was also pointed out that, as a result of the generous past subsidisation of solar power, there are now 450 megawatts of capacity on south-east Queensland rooftops that substantially reduce the energy throughput of the network while doing nothing to reduce summer evening peak demand, Ergon's McLeod also had a message for his own government owner.

Asked about the freeze the Newman government has imposed on price rises for this financial year, he responded: “I think any market intervention brings with it a whole lot of problems that need resolution down the track – as we have seen in WA.”

This, of course, is the broad point that needs to be understood by the senators and prime minister – the more you intervene in the power market, the more hassles you have to manage.

The senators are getting wide-ranging advice that the ongoing (and major) problem of peak demand requires the roll-out of smart meters and the introduce of time-of-use tariffs for householders – but this will come with large capex on the meters and a substantial “tail” of low-income consumers who will need government subsidies to cope with still-higher bills.

Finally, McLeod and Energex executive Peter Price got asked the question most householders want to raise: will power prices be cheaper in the future?

Answer: no, but they will not go up as fast as they have.

Having made so much fuss about this issue, I don't think that's a conclusion Julia Gillard is particularly keen to hear.