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Deregulation is crucial for lowering Australia’s electricity costs

The issue of deregulation of the energy retail market is an important one and I think the much-anticipated Energy White Paper, released by Energy Minister Martin Ferguson yesterday, does well to emphasise…

Deregulation of the energy retail market will address the current politicisation of energy prices. Bes Z/Flickr

The issue of deregulation of the energy retail market is an important one and I think the much-anticipated Energy White Paper, released by Energy Minister Martin Ferguson yesterday, does well to emphasise it.

The last round of electricity market reform focused on the wholesale market rather than on the retail market. The idea was to introduce competition into the generation sector and to empower independent regulators to approve tariffs for the natural monopoly network operators. However, by not allowing market forces to determine retail tariffs, the reform process was incomplete and many problems of waste and inefficiency remain.

In all states but Victoria, the retail price of residential electricity is set by government agencies rather than by competing retail firms. Such government control of the retail market always leads to a politically motivated price setting regime. In other words, the electricity price is used as a political tool.

So, for example, we often see the retail price of electricity remain relatively unchanged in the year before an election and then rise rapidly in the year after an election. For example, between 2009 and 2011 we saw retail electricity prices for residential customers in Western Australia rise by a total of 57%. But we are now four months out from a state election. So this year electricity prices rose by only 3.5%.

Moreover, this year happened to be the year in which the government owned network company, Western Power, was required to submit a five year investment plan (with associated network tariff increases) to the Economic Regulation Authority, a supposedly ‘independent’ regulator.

But being an election year we saw the ERA get uncharacteristically tough on Western Power and reject the investment plan and tariff increases. Moreover, we saw the Minister for Energy make a Ministerial Direction to Western Power forbidding the firm from appealing the ERA’s decision.

We also often see uniform tariff policies set by state governments. Uniform tariff policies are usually paid for via cross-subsidies, meaning customers in some areas with relatively low costs of supply subsidise customers in other areas with comparatively high costs of supply. That is, some electricity customers are made to pay for more electricity than they actually consume and others less. The result is a retail electricity price which never reflects the costs of its supply to any particular customer.

Similarly, depending on the government in power at the time, we sometimes see the retail electricity price being used as arm of the government’s social welfare policy. By this I mean that to support people on low incomes, retail electricity prices are sometimes kept artificially low for all consumers.

This can cause major problems for the state budget if the difference between price and cost is covered by general revenue. Moreover, a large consumer of electricity benefits more from this policy than the average pensioner does. A better welfare policy would be to let the electricity price reflect its actual cost in a competitive market and then send cheques in the mail to low income people to help them with their utility bills.

Electricity price control in Western Australia and Tasmania has involved legislation to make a state government owned retailer a statutory monopoly. That is, the retailer is a monopoly by law. This means that a private sector enterprise which believes it can enter the market and provide the same service as the government-owned business at a lower cost is forbidden from doing so. Clearly, this does not create much incentive for the government-owned business to become more efficient.

It is only in Victoria that the state government has no involvement in the setting of retail electricity prices and it is only in Victoria that electricity prices reflect the cost of supply.

So, in general I support the White Paper’s proposition that we need deregulation in electricity retail markets.

However, the Energy White Paper’s policy action on this reads “ensuring competitive and efficient … retail markets by seeking a clear commitment and timeframe for deregulating retail price controls where effective competition exists” which doesn’t feel very sharp in the tooth. I am left wondering whether the Federal Government has the coercive power to require the states to implement the reform.

The recent history of federal-state relations has seen Council of Australian Governments' negotiated policy reforms fall mainly along party lines. So if you are in an ALP governed state you have a much better chance of seeing electricity market deregulation than you do if you live in a state with a conservative government.

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  1. John Phillip
    John Phillip is a Friend of The Conversation.

    Grumpy Old Man

    Adam, as a conservative, I find myself extremely conflicted on this topic. Our experience in Qld with privatisation has not been a happy one. I distinctly remember our former premier, Mr Beattie, enthusiastically touting the benefits of privatisation of power for the consumer. Still waiting for the cost savings (whilst desperatley trying to pay-off riduculously expensive power bills).
    In a country this size, surely it has to be more efficient (and here I start to choke a bit) to have one government supplier. It would have to reduce duplication of mangament etc. I've got no facts or data at all to back this up, so I'd appreciate any comments that fill in the blanks. It justseems that everytime something gets privatised, it results in the consumer getting screwed.

    1. Michael Shand

      Software Tester

      In reply to John Phillip

      BTW having worked for the four main distribution companies in Victoria and working on the retail side implenting their management plans and operational systems my experience is that these business are driven by regulation.

      Ideally the distributors didnt want AMI, its expensive investment but well worth it, however if they didnt have to spend the hundreds of millions of dollars - they wouldnt have and what proves this is that they havent anywhere else in Australia.

      When you talk about Deregulation being good and regulation being bad you over simplify the situation and come away witha skewed view of how business works.

      Regulation drives our industry to provide the best for our customers, when we go through fault analysis we do it by compliance with market regulations first and foremost and trust me, you dont want these business regulating themselves, ENRON anyone?

  2. Michael Shand

    Software Tester

    BS - The price of Electricity is set at generation and distribution

    When the government sets the retail price they are putting a cap on how much extra they can charge the consumer.

    The issue is with the distributors and how they allocate work and manage their network.

    The idea that removing regulation will somehow produce what is in the publics best interest is baloney - corporations act in the corporations best interest and the corporations best interest is to make money.

    If we regulate the market so that the only way to make money is to provide the public with the best service - thats when we get good results.

    The idea that corporations wont co-op to set prices is rediculous so I assume you still want laws and regulation to prevent this?

    A blanket statement that deregulation is key is ignorant and propaghandist

  3. Dave Smith

    Energy Consultant


    Your arguments might apply to WA and Tasmania; but they do not apply to SA, Queensland and NSW, where retailers are private firms. Regulators (not governments) set the retail price cap; competitive retail prices are set below that cap. Retail prices certainly do reflect costs. And there is no way that lower regulated retail prices would or could be funded out of government revenue.

    The issue around uniform tariff policies mainly arises from regulated distribution pricing and exists irrespective of whether retail prices are regulated (eg it is an issue in Victoria too).

    You really should look beyond WA if you are going to write an article about electricity markets across Australia.

  4. James Sanders

    logged in via email

    Anyone remember what deregulation did for Enron and/or the Californian energy crisis?