An electrifying inquiry could bring power sector to account

The energy sector has been making its own rules for too long. John Koetsier

The Senate Select Committee on Electricity Prices inquiry may finally bring the electricity sector to account. After five public hearings around Australia, a clear story is emerging.

The key contributors to the problem of increasing electricity bills seem to be the policy makers, led by the Standing Committee on Energy and Resources, chaired by Commonwealth Energy Minister Martin Ferguson. Others, including CoAG, public service policy advisers, energy regulators and the energy industry itself, must carry their share of the blame. Policy people in other areas, including economic, social and environmental policy are not without responsibility either.

It is well beyond the time when government leaders should have intervened in a process that has been off the rails for over 15 years: but this is a responsibility on which leaders of both sides of politics have scored poorly.

Maybe leaders were frightened of taking on the complexity and power of the energy sector – including their own energy ministers? Or maybe they were lulled into a false sense of confidence in an informal arrangement that meant the energy sector was left to run free as long as it kept the lights on and energy prices stayed low?

Keeping competitors out and costs high

Electricity policy is set by energy ministers through the Standing Committee on Energy and Resources (SCER), formerly the Ministerial Council on Energy. They take advice from DRET (Department of Resources Energy and Tourism) and state energy agencies. They frame the objectives, terms of reference and overarching direction of the energy sector. CoAG does not have the detailed expertise to challenge the SCER. So the buck stops at SCER.

In the inquiry hearings, the regulators and other agencies have emphasised that they simply work within guidelines set by policy makers. But they have tended to interpret the framework in ways that favoured the incumbent industries at the expense of emerging competitors, the Australian community and the environment.

Energy efficiency struggles to access a fair marketplace. Andrew Huff

They have done this largely by using the inadequate proxies of “low energy prices” (instead of total costs), reliability and safety to show they are working in the long term interests of the community and economic efficiency. This has been a flawed approach. When consumers complain or struggle financially, it is because of the total cost of their energy bill, not the price per unit of energy.

When emerging competitors such as energy efficiency, demand management and renewable energy cannot access a fair marketplace, it is because of flawed market signals and sophisticated use of market power by incumbents.

The energy industry has tried to make a profit and deliver services within this flawed context. But they have been aggressive and used their market power to block competitors and undermine outcomes that would have been in the public interest. They may not have served their shareholders well, as their success has created uncertainty and conflict that is undermining future profitability.

It is a very complex problem, compounded by a staggering rate of technological, social and structural change. The lack of transparency and real, comprehensive data make it very difficult to develop practical solutions. Not even the electricity generators can access detailed data on demand trends.

Putting people ahead of profit

As Senator Milne and others have proposed, the National Electricity Market Objective must be changed.

One option would be to clarify the energy sector’s responsibility to consider social and environmental issues equally with economic issues, and put the welfare of the incumbent industry to one side in the interests of society. DRET and other energy industry people reject such a change, and argue that their job is to design and run an economically efficient electricity market, not solve broader policy problems.

Another option would be to require policy makers in other areas, such as social welfare, buildings, appliances and tenancy to formally take into account energy issues in their policy development. The energy sector must constructively contribute information and expertise.

For example, building energy regulation and appliance policy largely ignore the potential for buildings and appliances to limit peak energy demand. Social welfare agencies are trying to address fuel poverty and threats of disconnection due to high energy bills, but they have limited resources and expertise.

The energy sector is run by an exclusive club. setev/Flickr

If energy policy makers insist that they should continue to focus only on “economics”, then these other policy groups need a lot of help to drive measures that will “out compete” energy policy and deliver the broader policy outcomes that national policy rightly promotes.

Let go of group think

Second, the governance of energy markets must be changed. Consumers, distributed generators, social and environmental advocates should take their places at the table to analyse, set, interpret, manage and demand accountability and outcomes from the energy market. Energy regulators must have adequate powers and resources.

The energy sector is run by an exclusive club that has a culture very different from mainstream society. Energy regulators believe they hold the industry to account, but are often captives to it because of the pervasive “group think” and isolation of the industry from the broader community.

The energy sector’s response to the inquiry is to claim that they have processes in train; if we are just patient, they will sort it all out. Unfortunately, independent analysts who presented to the inquiry were unanimous that these efforts are inadequate.

Time to privatise?

Another agenda in the inquiry hearings was the desire of many to see government ownership of electricity assets eliminated (and this has also come up recently in a Productivity Commission report). The almost universal argument was that state governments who own electricity assets have a conflict of interest that can only be resolved by selling off those assets. But community resistance to further privatisation has been widespread.

Governments have a long history of coping with conflicts of interest. While some big issues related to public ownership of electricity assets must be dealt with, such as siphoning of money from energy suppliers to governments, it would be a pity to see this confused with the ideology of privatising ownership of public assets. Research by noted economists such as John Quiggin has raised doubts about the economic benefits of energy privatisation that have not been answered by its advocates.

The Senate Committee is under heavy pressure to report quickly, so that the next CoAG meeting can set directions for the next round of network pricing reviews. It would be better if it were to provide interim advice on urgent issues, while taking a more considered approach to the broader questions that will refocus the energy sector on its important role in society, not just on the profitability of the market participants.