Why Gillard's contract won't kill bills

There's an old Melbourne joke that applies to the prime minister when it comes to power prices. It allegedly comes from the unscrupulous backstreet tailors of the 19th century: "Never mind the quality. Feel the width.”

In this mode, Julia Gillard fed a line to the Sunday Telegraph at the weekend that won her exactly the headline she wanted in a mass-circulation newspaper, repeated to thousands more through the News Ltd website: "Prime Minister's $250 lifeline for families' power bills”.

The story claims that "families” will save up to $250 a year on electricity bills "under a plan to give consumers greater choice and the power to question soaring price rises”.

Part of this spin is a plan to require the Australian Energy Regulator, the determinator of east coast network charges, to set up a "Consumer Challenge Panel”, an idea pinched from the British regulatory arrangements "to ensure consumers can question electricity network businesses over gold-plating”.

Politically, this is not a bad idea in an environment where there is so much media focus on power prices and it will provide at least the appearance of householders and small businesses having a seat around the table when network charge decisions are made.

In reality, it will business as usual up to a point – the regulator will still be the final arbiter of charges and its decisions will still be open to challenge before the Australian Consumer Tribunal.

What will be different from mid-2013 will be that the regulatory rules will have changed – so long as the Council of Australian Governments agrees to proposals before it on Friday. These will impact, in particular, on what networks can recover for debt repayments and on how appeals to the consumer tribunal may be pursued.

What is absolutely certain is that these new arrangements will not deliver a reduction in household or small business power bills.

This is borne out by what Federal Energy Minister Martin Ferguson has been saying – that the worst of the power bill hikes are over but Australians shouldn't expect to see their costs going backwards unless they take action themselves to find a lower-cost supplier and to change their patterns of consumption.

It is also borne out by what the key COAG advisor on energy regulation, the Australian Energy Market Commission, has said after an intensive 18-month review of current arrangements that canvassed opinion widely, including from many consumer groups.

In its "Power of choice” report delivered publicly last Friday, but already discussed by the committee of federal, state and territory energy ministers Ferguson chairs, the AEMC could hardly be more clear.

"It remains likely that prices will increase in the near future,” it has told the governments. "Investment in networks will continue to be a major contributor to these increases.

"This is primarily due to the replacement of ageing assets, impacts of increasing peak demand, rising costs of finance, input cost changes (such as the cost of steel, copper and labour), increased reliability standards and the connection of renewable generation.

"Wholesale price increases will continue to be driven by the carbon price as well as input and fuel cost increases.”

Not a word in any of this about "gold-plating”, a term the nation's chief consumer watchdog, Rod Sims, chairman of the ACCC, pointedly said last month that he had never used.

So where could household cost savings be found?

The answer lies in the rollout of so-called smart meters and the implementation of time-of-use tariffs, a process going on in Gillard's home state, Victoria, introduced by the former state Labor government, and wildly unpopular with a fair number of consumers.

The AEMC again is clear in its explanation of what pursuing use of the meters and of tariffs that reflect the real cost of supplying electricity can achieve – and of the hurdles on this route to realising the goals of lower peak demand and lower increases in prices.

Outside Victoria, it points out, most households and small businesses don't have the meters. This means that they cannot be offered tariffs that reflect the changing marginal costs of supply – and they can't be rewarded for shifting their consumption away from peak times.

Under the present arrangements, the costs of supply are averaged across households and small business users, resulting in "a high degree of cross-subsidisation between consumers with low and relatively flat consumption profiles and those with large consumption and relatively peaky profiles”.

To put it another way, the well-off in our society, with swimming pools, multiple air-conditioning units and other energy-intensive appliances, are benefitting at present at the expense of families and low-income households, hundreds of thousands of whom live in rented accommodation.

There is no quick fix for this situation.

It requires both the meter roll-out across the east coast and a massive public education campaign and a major change to the way in which each kilowatt hour of power consumed is billed.

In Queensland, where the people living in the populous south-east subsidise those living in the rest of the state to the tune of $640 million a year, this is a development politically unwelcome – as the Newman government is already saying.

The backdoor escape hatch of allowing households to choose whether they take up meters or not will not deliver the full scale of peak dampening that is being sought.

The AEMC is also clear on what savings can be delivered.

Modelling undertaken for it suggests that a roll-out of the new system, starting soon and continuing to the end of the decade, will enable annual savings for Queensland and South Australian households of about $500, with $350 for NSW and $120 for Victoria (where gas meets a lot of winter warming).

Meanwhile, the commission says, households with relatively flat consumption patterns can save $50 a year by just changing to a time-varying tariff – and $100 a year by shifting 20 per cent of their use from peak times (2pm to 8pm).

Households with high peak time usage can cut annual bills $200 by reducing demand in hot and cold weather by 15 per cent.

Now, where in all of this, is Julia Gillard's 'big stick' – with which she threatened premiers back in August – or her "consumer challenge” initiative going to change anything?

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.