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Deregulation is crucial for lowering Australia’s electricity costs

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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