Sims slays the 'gold-plating' myth

The nation's chief watchdog, Rod Sims, has said something important about the key drivers of electricity prices increases – and not a soul has reported it.
Sims, chairman of the Australian Competition and Consumer Commission, has disassociated himself from the term "gold-plating” in a speech to big energy users.

"It is a term I have never used,” he declares.

But it is a term that PM Julia Gillard, Greg Combet and a slew of others have used. And the media have embraced it with vim.

As Rob Burgess put it (A carbon tax win but not for the Greens, October 18), a great many people accept that it is gold-plating of distribution networks that is responsible for the surge in electricity prices.

Sims, who argues that power bills have risen "for a number of unnecessary and inappropriate reasons", has articulated the real causes.

First, he blames the rules, changed mid-last decade, that create a "unique” regulatory situation where the Australian Energy Regulator (described by NSW energy minister Chris Hartcher as the ACCC's little brother) is placed under a large evidentiary burden for its judgements and has been bowled over numerous times by the Australian Competition Tribunal in appeals by the networks.

Sims says the rules require the AER to accept "reasonable” capex proposals and don't give it the leeway available overseas to impose an independent judgment on outlays.

The rules require the regulator to prove a forecast is not efficient or prudent and they encourage distributors to submit forecasts at the high end of the "reasonable” range.

What he doesn't add is that there is a widespread view, and it was embraced by governments approving the rule changes, that the transition period of the late 1990s and early 2000s saw insufficient investment allowed on the networks.

The evidence now points to policymakers stuffing up twice – and creating a "burst pipe” situation instead of supervising a steady stream of investment (and a smooth pattern of price rises) over 15 years.

Sydney distributor Ausgrid, for example, had 110 overloaded 11kV feeder lines at the point the AER approved it spending $8 billion from 2009 to 2014.

Sims claims the AER defeats in the Competition Tribunal have cost customers $3 billion, but he does not say over what period.

Is it annually or over the five years of the determination period?

The amount sounds huge – but it breaks down to about $330 per east coast residential customer.

Over a year, this amounts to some $6.40 per week – spread over five years, to $1.06 and I think the latter is probably the case.

Second, Sims blames the high reliability standards, leading to large increases in capital investment "for inevitably modest reliability gains”.

This has nothing to do with the distribution businesses.

As the O'Farrell government has pointed out in a late submission to the Senate inquiry into power prices, the Labor regime in NSW in 2005, acting under pressure from the unions, legislated the standards "driving significant amounts of investment".

There was a similar move in Queensland.

Sims is unhappy that the debate – and this is a reference to the pushback from the east coast Coalition state governments after Julia Gillard's incendiary August 7 speech – has turned to blaming the AER for the current situation, with the governments wanting to cut it loose from the ACCC, reshape it and make it more accountable for its decisions.

He finds this "deeply frustrating” and argues that the need is to focus on addressing the deficiencies in the rules and in reliability settings to ensure that "consumers pay no more than is necessary for a reliable electricity supply”.

A large part of Sims' speech to major users amounts to a pitch to business to support the AER staying under the ACCC umbrella.

"Let it not be forgotten,” he argues, "that it is the AER, along with IPART (which he chaired before shifting to the ACCC) that highlighted the problems and took the lead in proposing changes.”

His core point is that, if the state governments have their way and a new, independent regulatory body is established, the change process will be delayed, "regulatory continuity will be damaged” and implementation of new rules will be threatened.

Sims acknowledges some may think he is crossing the line into the political debate, but "these issues are too important for (my) points not to be made".

His summing up to the major users, arguing the case for retaining the AER in its present guise and effecting rule changes, works both ways, I think:

"If the issues driving unnecessary price increases are not properly understood, how can we change them?” he says.

Surely, this is true for the networks, too – businesses that Sims now implicitly agrees should not have been accused of "gold-plating?”

TransGrid chief executive and Grid Australia lobby group chairman Peter McIntyre told the same forum that the risk the accusers in the "blame game around electricity prices” are running is that we will end up with short-sighted decisions that threaten power security.

Meanwhile, Sims went nowhere near another major cost that is impacting on network charges, something spotlighted by the O'Farrell government in its Senate submission – increases in labour-related costs (wages, allowances, superannuation and accruing entitled) adding 6 to 7 per cent a year to opex, all imposed by the previous NSW Labor government in thrall to its union masters.

He didn't enter the dividends debate, either.

The Coalition governments owning networks in NSW and Queensland have been accused of "gouging” customers through the dividend process, with Julia Gillard in the van of the lynch mob

But, "the dividends are not a tax,” the O'Farrell government has told the Senate, echoing an earlier submission from Unions NSW, the former home of the committee chairman, Mark Thistlethwaite.

"They provide funding for core government services, like roads, hospitals, teachers and police,” it says, adding: "If the dividends were not collected, (there would need to be general) service cuts or higher taxes.”

Exactly the unions' point.

Finally, a curious aspect of the Sims speech – for me – is that it steered round a big ticket reason for large capex outlays and ensuing increases in charges: the need to replace aging assets.

The O'Farrell government makes a cogent point to the Senate inquiry that part of the current problem is the "echo effect” of past peaks in network when there was large-scale expansion in the 1950s and 1960s.

These assets are now past their use-by date and need replacement at a cost of billions.

This also is not "gold-plating".

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of 'Powering Australia' yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.