The watchdog cometh

This could be the most important week of the year for the electricity supply industry – which is saying something, given what has gone before.

However, Wednesday’s publication of the interim report in to the affordability of electricity by the Australian Competition & Consumer Commission is at the very least highly important in the extraordinary political melee that has developed since the Prime Minister declared an “energy crisis” at the beginning of the year. It could prove seminal in the political pursuit of a fix for an issue that is engulfing the governments and their opponents at a time when elections loom.

In particular, the imminence of the Queensland election, in which electricity issues are set to play a large part, as well as the Victorian government’s push for re-regulation will see the ACCC report played up by all sides.

Last week’s National Press Club address by ACCC chairman Rod Sims has set the scene for Wednesday’s announcement.

Sims told the Press Club that the large increases in electricity prices over the past decade have not been matched “at all” by increases in other prices or wages. Industry players, he went on, routinely point to policy uncertainty and its impact on generation investment as the sole reason for today’s power affordability problem. “This ignores a lot.”

However, he pointed out, when you divide retailer revenue by all customer usage, you find that power prices have not doubled as politicians and media constantly say they have – they have risen by 50 per cent overall or, on average, in cents per kilowatt hour by 62 per cent for the mass market.

Sims sees three factors in this.

The first is that consumers are using less electricity. The second is that some are benefitting from solar panels “with generous subsidies.” The third is that the costs of so-called “standing offers” from retailers have doubled but many households have opted for cheaper market offers (as the suppliers and the federal government keep urging them to do).

A key part of the price surge has been network costs, accounting for 41 per cent of mass market bills. Sims points the finger at “particular” State governments who achieved, he says, looser regulation a decade ago to protect their revenues from publicly-owned assets. (This is going to be a leading debating point in the Queensland election, with the Liberal National Party already beating this drum vigorously.)

Sims also acknowledges that network prices have been pushed higher by government decisions to increase reliability standards. He thinks it “highly doubtful” that householders are willing to pay so much for “a very small” increase in reliability.

In the Press Club speech, Sims signaled that there is no way the ACCC is going to climb down from its hobby horse of attacking concentrated ownership of generation, an issue on which the courts have rebuffed its stance several times. The NEM rules, he asserts, did not envisage two or three generators controlling 70 per cent of market share in various States (which, having been on hand when the NEM was created, I can say is true although some observers at the time could see the writing on the wall).

Factors in the current investment drought, Sims says, include “high current profits” by the coal-burning generators and who will own the renewable generation now being built or proposed?

While noting that much higher gas prices in eastern Australia and tighter supply availability are impacting on wholesale power prices – some gas turbine plants have had their fuel bills treble – Sims is also pointing a finger at the renewables games politicians have played over the past decade. “We have had some stunningly generous green schemes,” he told the Press Club. And he added: “The cost of green schemes is not transparent; it is smeared over all electricity consumers” and it is “often inequitable” as the minority with solar panels are subsidized by the majority who don’t have them.

Generation costs and green scheme costs together account for 35 per cent of household bills.

And then, of course, there is the controversial issue of retailers’ profit margins – Sims is saving the full story, as the ACCC sees it, until the report appears this Wednesday.

The commission’s broad advice to governments, set out in last week’s talk, is interesting. First, says Sims, weigh carefully what is spent to improve reliability. Consumers will pay for these measures. Second, be careful with “new or enhanced ideas” incurring costs that end up being smeared across all customer bills. Third, think carefully about new retail regulations; “they can have unintended consequences.” Fourth, “realize that moves to re-regulate prices will see many consumers pay more” and may inhibit innovation. Fifth, look at market power in retail and generation in making new policies. (This is the one that the big gentailers will fret most about, I suspect.) And last, don’t muddle affordability with reliability and sustainability in making policy. “Beware of silver bullets that are said to address all three objectives.”

He finished up at the Press Club with this point: “We know we have an energy affordability problem and we have some things we can do to address it. But more steps, yet to be determined, will be needed. Some will be controversial – but the consequences of not acting are dire for many Australians.”

Expectations (and concerns) about this Wednesday’s ACCC report will have stakeholders across the energy spectrum, including governments, on edge. There is media anticipation that the review will not be kind to the Gladstone LNG producers – with Turnbull’s finger poised on the gas export restrictions trigger – and that,as well, to quote one story, the commission will “turn up the heat on the big power players.”

As with the Finkel report, politicians will flick the switch to politics (or vaudeville, as Paul Keating would have it) immediately the report becomes public – it’s what they do – and media coverage will slavishly follow the “biff.” But, as Sims signaled last week, there are deep, serious issues that need to be addressed and the CoAG members have a collective responsibility to take up the overall challenge, not an easy task in an election atmosphere.

Expectations in the commentariat (as well as in business, I suspect) of an adequate response by policymakers are not high. Ross Gittins in the Sydney Morning Herald today declares: “The electricity market is such a mare’s nest of stuff-ups and problems it’s impossible to see the deeply divided Turnbull government making much progress in fixing it.” A really important point is that it is not Turnbull’s problem alone; all east coast governments share the blame and the burden of providing a fix. What suppliers, whether electricity or gas, have to fear is that, for these governments, the quick fix lies in beating up on them.

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