TiP

Mud sticks, no matter how unfairly flung.

Ross Garnaut’s accusations against the electricity network businesses and the Australian Energy Regulator, accompanied by such headlines as “Power firms given free rein to gouge public” and “Bad regulation adds to power bills,” will create endless problems for both.

The large customers, of course, will be delighted. Garnaut, the Energy Users Association said immediately, was “spot on.”

Use by Garnaut of such emotive phrases as “gouging” and “gold-plating” will feed populist media criticism of the networks capital program, not least because the next tranche of price increases resulting from the current AER determinations is only months away.

Garnaut’s game, of course, is to set up a large distraction from the focus on the cost for consumers of the mooted carbon price. His thesis is that there needs to be an immediate review of networks regulation because the large price increases are making it harder to win acceptance for the small rises to be imposed by the carbon price.

The fact that, at core, the network expenditure is driven by need – to meet continuing demand growth, to cope with surging peak demand and to replace aged equipment – while the carbon price is a political option pushed by vote-grabbing rather than any prospect of an impact on global climate change without an international regime is to be brushed aside.

The real news from Garnaut’s eighth, and thankfully last, reprise of his review is his confirmation that average households will face an extra cost of $4 to $5 per week in their power bills from a carbon charge, that is $208 to $260 a year. Lost in the fog, of course, is that this is the initial impact – even the proposed trajectory for the Gillard/Brown tax will send the cost higher than this later in the decade and the real cost of meeting the 2020 abatement target will more or less double this impost.

For householders, it must also be pointed out, this cost is only the direct burden of the tax. Neither Federal Treasury nor anyone else has produced a comprehensible indication of what the flow-through effects in the terms of the cost of goods and services will be when the tax is in place.

That old Flinders Lane rag trade jibe of “Never mind the quality, feel the width” applies here – in spades.

Meanwhile, the networks and the AER have to live with Garnaut’s claim that “on the face of it, it looks like there might be a problem with the regulatory arrangements.”

The Energy Supply Association retorts that we have an independently-regulated system that challenges the network businesses and controls what they are allowed to do, but the mud has already stuck.

Garnaut’s chief weapon appears to be the claim that the regulator allows too much for the cost of capital, an issue that has been continuously on the boil through the recent round of network determinations.

However, even if the rate was slashed and a different approach to reliability and so forth resulted in a reduction of 20 per cent in distribution capex outlays for 2009-14, the expenditure would still be in excess of $25 billion and substantial charges would still be required.

This means, to quote Garnaut, that power bills will still go up regardless of the carbon price – and the point remains that the network expenditure is essential while the tax is optional and cannot be demonstrated either to have any material effect on the climate change issue or even, at the levels proposed, as likely to deliver the 2020 domestic abatement target.

It is worth drawing attention to the latest AER annual review and the four pillars it highlights for distribition system expenditure: rising demand driven by more new dwellings and greater use of energy-draining appliances, like air-conditioning, the need to replace infastructure dating from the 1950s to the 1970s, stricter government requirements for security, safety and reliability in networks and the borrowing costs of suppliers having risen in the wake of the global financial crisis.

Higher debt financing charges on their own have increased network revenue requirements by five to nine per cent.

The AER calculates that network revenues for the current determination period will be $55 billion, including $11 billion for transmission, and that they are, on average, 41 per cent higher than for the previous regulatory period.

The household share of this cost is about $15 billion over five years.

Nothing is going to change this outlook. The regulatory dice have been rolled. At issue now is what the approach will be for 2015-19, the next regulatory period. The outlook is for similar capex requirements.

Let’s suppose Garnaut’s argument could lead to a 10 per cent reduction in network charges. That would notionally represent a $1.5 billion benefit over five years on the present numbers – in reality more.

Meanwhile the Gillard/Brown carbon tax, taking Garnaut’s word, will add about $2.6 billion a year to aggregate householder costs – at a minimum.

And I repeat again – the network outlays/costs are essential or supply failures will ensure but the carbon tax is a political charge.

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