The other shoe

Important as the Finkel task force report is for the management of energy supply – its political implications for Malcolm Turnbull personally and for the Coalition government over the vexed target issue are growing by the day – there is a document to come that may well land with a bigger bang.

The second shoe to fall in 2017’s wild debate on energy will be a report by the Australian Competition & Consumer Commission in to NEM retail electricity supply and end-user prices, with the media just starting to focus on the submissions it is receiving.

The commission, whose chairman, Rod Sims, says Australia has “major problems” with energy affordability, must provide a preliminary report by 27 September and a final one by 30 June next year.

What the ACCC is setting out to do is clear from its issues paper, published in May: “The inquiry will look at the drivers of retail electricity prices over time, including factors at all levels of the supply chain that may affect price, and whether there are options to address price impacts on customers. The inquiry will consider what can be done to improve the experience of customers in acquiring electricity services. The inquiry will also examine the industry structure, the nature of competition, the representation of prices to customers and any other factors influencing the price of retail electricity services.”

From a political and media perspective, the biggest bang will come from the commission’s consideration (as required by Treasurer Scott Morrison) of two things (1) “the profitability of electricity retailers through time, and the extent to which profits are, or are expected to be, commensurate with risk”, and (2) “all relevant wholesale market price, cost and conduct issues.” The latter goes in part to generator behaviour, a topic on which some stakeholders have strong views.

Overall, this is seriously important stuff for the players in energy supply, the more so as the final report is scheduled to emerge at a time when a federal election is imminent (bearing in mind that it must be held between August next year and May 2019).

The issues for residential users are much publicized in the media, but mostly in forms that deliver more heat than light; it is well worth reading the 12-page submission to the ACCC inquiry from Janine Young, the New South Wales energy and water ombudsman, for a serious dissection of not just the pain some low-income consumers are feeling but also the confusion that engulfs people plunging in to attempts to find the best deals, evidenced by the fact that three out of 10 NSW accountholders are still stuck on the “standing contracts” that are costing them much more than they need to pay. This is something of the order of a million households, not a small number in political terms.

The concerns of large industrial users, on display in the business sections of the main newspapers on an almost daily basis, are illustrated by the plea of Major Energy Users Inc for the ACCC to not merely dissect the causes of higher prices (“causing the progressive destruction of the competitiveness of many parts of manufacturing”) but to come up with solutions that will drive them down.

It will also be interesting to see how far Sims and his people focus on the impact of energy prices on the agricultural sector, which has sent in a strong submission. National Irrigators Council CEO Steve Whan says the price crisis is jeopardizing Australia’s ability to provide affordable food and fibre. Most consumers do not realize that much of what they eat comes from irrigated agriculture and irrigators have seen their costs “explode,” he adds.

So far as the mass market is concerned, the supply industry promotes the view that a high level of retail competition in the NEM is leading to continuous improvement in customer service with rising innovation in products and services and will deliver “downward pressure” on prices – which is code for “they won’t be as high in the future as they would be under business as usual.”

However, the industry argument that, in the coming decade, increased innovation will give customers greater choice and control over service, product and price runs head-on in to the pressure on politicians (and governments in office) to perform a here-and-now, Houdini-like escape on behalf of small consumers from today’s situation. Collectively, the mass market (aka voters) is growling at the body politic “don’t just stand there, do something!”

That this is a high-risk environment for both energy investors and, in the longer term, consumers (when the quick fixes turn pear-shaped, as they always do) should go without saying but it won’t stop MPs’ knees jerking.

No doubt the ACCC will focus on the fact that the issues affecting prices vary from State to State (as witness the rather shrill current public row over government-owned generators in Queensland).

The five privately-owned electricity distributors in Victoria, for example, are pointing out in a joint submission to the ACCC that their charges, in inflation-adjusted terms, have actually fallen 14.3 per cent since 1995 and now account for an average 25.4 per cent of the household bills.

(The rest of the breakdown, they say, is 4.3 per cent for transmission, 23.6 per cent for wholesale electricity costs, 12.1 per cent for “policy initiatives” – such as the RET and solar PV feed-in tariffs — and 25.5 per cent for the retail component.

(Now, hold on, that adds up to 90.9 per cent. What’s missing?

(The answer, of course, is the GST…..which takes about $140 a year on average or, I estimate, about $324 million a year from Victorian residential power users. Extend this across the country and the stealthy hand of government in the household wallet adds up to some $1.4 billion for power alone.

(In this environment, should there be a GST on electricity? Now there’s a thought.)

The network five also claim that, since the Victorian industry was disaggregated and privatized, the cost of policy measures (which include the compulsory roll-out of smart meters in this State) has accounted for 51.6 per of the rise in average annual household power bills.

On the topic of networks, every time I see a media report about “gold-plating” or “gouging” by the “poles and wires” people, I feel the urge to tweet a response that a large part of the capital outlays permitted by the regulator for 2007-2012, flowing through as substantial price rises for consumers, addressed the need to replace infrastructure built in the 1960s and 1970s with a working life of 30 to 40 years. (Try getting this in to 140 characters!) Replication across the east coast of the experiences in south-east Queensland in the previous decade (a big spur for the move to spend billions on remedial works throughout the NEM) would have created wholesale political panic by long before now. This dam burst because politicians had sat on outlays for years under the old non-market system to keep down charges and were now faced with nasty consequences.

Of course, the need to address ageing infrastructure is not the whole story of today’s network prices – but simply ignoring this aspect is bizarre.

How far the ACCC can go in disentangling the whole cat’s cradle of causes for power bills being where they are today – and communicating this in terms ordinary Australians can understand – remains to be seen. It needs to do so if the remedies politicians end up adopting from its report (and from Finkel’s) are not to turn eventually in to just more nasty (and therefore publicly unpalatable) medicine over time.

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