The PM’s electricity plan: it’s a Band-Aid not a cure

Electricity prices have been rising rapidly during the past decade. Sir Bennikins/Flickr

A few days ago, the Prime Minister Julia Gillard foreshadowed a “plan to make sure that families pay $250 less per year for electricity” to be discussed at this Friday’s meeting of the Council of Australian Governments (COAG).

It is not surprising that this “plan” draws from the conclusions and recommendations of four recent government reports – the Productivity Commission’s Electricity Network Regulatory Frameworks,the Australian Energy Market Commission’s (AEMC) report, Power of Choice, the report of the Senate Select Committee on Electricity Prices, and the 2012 Energy White Paper.

So the Prime Minister claims that the plan will deliver savings for families. How? What will be the impact on electricity prices if the plan is agreed (and that’s a big IF) by all State and Territory governments?

From the limited details released so far, the PM’s plan rests on four broad measures.

First, changes are proposed to the regulation which the Australian Energy Regulator (AER) uses to set the charges for the transmission and distribution of electricity; for the “poles and wires”. (Electricity prices comprise generation, transmission, distribution and retail charges. Distribution charges are the prime culprits of the recent price increases.)

The regulator sets these charges in accordance with the National Electricity Rules. But these Rules have some critical weaknesses, like limiting the ability of the regulator to scrutinise the efficiency of proposed investments by the distribution and transmission (network) companies.

The Rules require the regulator to accept the expenditure (investment) proposals of the network companies if satisfied that they “reasonably reflect efficient, prudent and realistic expenditure”. Now there may be more than one expenditure forecast that meets these criteria but the Rules currently preclude the regulator making an objective assessment of the efficiency, or the necessity, of the proposed expenditure and setting a lower level. This means that network businesses are effectively permitted under the Rules to “gold plate”; to provide the highest possible forecast of needed expenditure and investment.

So, there are a number of proposed regulatory changes which enhance the capacity of the regulator to push back on the proposed expenditure of electricity network companies.

But these regulatory changes, proposed by the Australian Energy Market Commission, will not reduce electricity prices. They might reduce the size of the increase due to transmission and distribution charges compared to recent years. But not until after 2014. So between then and now, expect further price increases of 30-40%.

These have already been approved by the regulator.

However, there are other significant regulatory issues – which impact on network investment and subsequent charges - about which the PM’s plan is silent.

As I stated to the Senate Inquiry, as did the recent Grattan Institute report, there is a need for:

  • national – not state-by-state - safety and reliability standards, because this is one of the core drivers of network investment and subsequent, network charges, and

  • an on-going review of electricity demand forecasts on which investment decisions, over a five-year regulatory period, are based.

A further measure in the PM’s plan is the deregulation of retail prices. COAG agreed to this in 2006 subject to effective competition being evident. Victoria is the only state to implement deregulation so far. Victoria’s electricity prices have increased by less than the other states in recent years. But this is not due to deregulation. It is due to lower transmission and distribution charges because Victorians rely less on electricity than the rest of Australia. Less need for investment in new network capacity leads to less of an increase in network charges.

Victoria did privatise its electricity companies in the mid-1990s but ownership, as the PM noted a few days ago, is not the issue. The issue is the Rules as noted above.

The third policy measure in the PM’s plan focuses on shifting and reducing peak demand for electricity use, and hence the need for investment in network capacity for only about 40 hours each year. This is where smart meters and time-of-use (ToU) pricing (also called cost-reflective charging) come in.

Different electricity prices at different times, time-of-use pricing, are proposed to discourage electricity use at peak times (the most costly). This is already occurring for large industrial and commercial users.

But you need smart meters for households to have information about their electricity use at different times. These are costly, as Victorian households have found out ($700 a pop) and households need the capacity to change their electricity use at peak times, which is not as easy as the Federal Minister for Resources and Energy Martin Ferguson suggests. How many households can shift 20% of their electricity demand out of the 2-8pm time period?

Smart meters will not reduce electricity prices. Nor will time-of-use pricing. Smart meters and time-of-use pricing will give households more information to make choices about when to use electricity and thus, more control over the decisions that they make about how much is spent on electricity.

Finally, a new Consumer Challenge Panel is proposed. This sounds like a “pinch” from the UK where such a group has existed since 2008.

The UK Group comprises experts – not consumers as such – who question the validity and legitimacy of the argument for price increases (by, you guessed it, the transmission and distribution companies) from a consumer perspective.

It is an advisory panel and the UK Regulator is not required to “act” on the recommendations of the group.

It is highly likely the same will apply here.

So, the bottom line is this: the PM’s plan will not cut electricity prices or stop increases. The PM’s plan is a Band-Aid; a temporary cover to stem the political blood loss.

Household electricity prices have been rising rapidly since 2007, the year the Federal Labor Government was elected. But it has taken five years for the political antennae to figure out there is a problem for the vast majority of Australian households (who also vote).

The AEMC Chairman stated earlier this week that the opportunity for “reform” only happens every 10 years or so. If this Band-Aid is the extent of reform that we can expect, swallow hard everyone because there is not much relief in sight for your electricity bills.