Owning up to electricity price shocks

Opinion piece by CEDA, Chief Executive, Professor the Hon Stephen Martin, published by The Australian Financial Review 15 November 2012.

It is time we acknowledged the real reason for significant electricity price rises in states such as NSW and Queensland: public ownership.

Energy Minister Martin Ferguson, in releasing the energy white paper last week, called for changes to ownership of electricity assets. And he's right, but the white paper's premise, that price rises are a result of new infrastructure requirements to meet peak demand and a resulting lack of productivity in energy infrastructure, does not provide the full picture.

CEDA research, released this week, has found the biggest contributor to electricity price rises in these states is the ownership structures of energy utilities and in turn inefficient infrastructure spending to meet peak demand.

In particular it is the perverse incentives of state government-owned network service providers to grow their regulatory asset base and income tax grab which is a significant contributor to price increases for households. As Bruce Mountain from Carbon Market Economics highlights in CEDA's research, state governments are effectively using their utilities as a means of indirect taxation.

There are two key areas of concern. The first is that state governments collect income tax on energy utilities they own, rather than the federal government, if they were privately owned. For example, in Victoria income tax is paid by energy utilities to the federal government. However, where there is state government ownership, the states collect the income tax.

It would be more efficient to have these as private companies, which would want to minimise income tax payable. The federal government would collect this income tax and could then compensate the state governments for lost income.

Unfortunately the situation provides incentives for state governments to keep increasing their asset base, so they can increase the amount of income tax they derive from these assets, which also highlights why reducing peak demand is so vital.

The second key issue is that states borrow at a rate around half that of private companies for infrastructure renewal or expansion. However, all energy assets, regardless of public or private ownership, are regulated at the same rate - as if they are borrowing at private rates, providing greater return for state government-owned assets. So again there is incentive to spend on energy infrastructure to increase the return for state government-owned assets.

At the very least, if states are unable or unwilling to divest ownership, then the ownership structure of network service providers should be considered when determining a return on the regulated asset base, and the regulatory oversight arrangements for jurisdictions where states maintain ownership should be examined.

The federal government, despite being on the opposing team to the governments in NSW and Queensland, has through the energy white paper provided a narrative for discussion to support this change and it is an opportunity that should be harnessed.

The other key issue on CEDA's agenda through this new research is making energy consumers more active participants in the market, and while this has significant benefits for individual consumers, it also has the benefit of reducing the justification of continued expansion of state and privately owned energy infrastructure - meeting peak demand.

Capital expenditure to meet peak load growth in the national electricity market in the current five-year regulatory control period accounts for more than 45 per cent of approved total expenditure.

Billions are being invested in energy infrastructure to manage peak demand periods, such as extremely hot days. However, if we can educate consumers about the impact of their use and give them the right price incentives, we can cut network costs by reducing the investment needed in new infrastructure, reducing everyone's energy bills.

Steps should be taken to speed up the roll-out of smart meters and time-of-use pricing. Smart meters would allow the introduction of time-of-use pricing which would provide households with more control over their energy bills by allowing them to make decisions about when they use high-energy consumption appliances and at what price.

Energy hardship concessions, in particular for families, should also be top of the agenda for the federal government. Our research found that families might be at increased risk of energy hardship, particularly those with young children, but might not be able to access concessions.

It is vital that momentum is not lost on these issues now the federal government's energy white paper has been released, as that is really only the first step.

Opinion piece by CEDA, Chief Executive, Professor the Hon Stephen Martin, published by The Australian Financial Review 15 November 2012.