Power Shocks Gillard Back To Life


In case you didn’t realise it, Julia Gillard cares about your electricity bill. "Power bills have become the new petrol prices," she said in a speech on Tuesday, "not just an essential of life that always seems to be going up, but a vital commodity, where what we consume each day, or pay every quarter, seems beyond our control."

The Prime Minister was giving an address to the Energy Policy Institute of Australia, in which she aimed to set out the reasons why household utility bills are exploding. (Hint: it’s not the carbon tax).

She’s sheeted home the blame to the electricity networks: the big monopolies that own and operate the grids in each of the states. "People are paying much more for the so-called "poles and wires" — not to produce electricity but just to move it around the system," she said in Tuesday’s speech. "A long term trend of price increases like this cannot be sustained." Gillard also drew attention to the "patchwork design of National Electricity Market itself", which she described as "a complex mix of co-ordination and competition, public and private ownership, national and state regulation."

After belatedly recognising that power prices are causing real pain for ordinary householders, it’s not surprising that Labor is moving to reframe the debate about who’s to blame.

After all, as many Prime Ministers down the years has discovered, if you are casting around for someone to blame for a particular issue of public policy, the states are ever-available public enemies one through six.

And there’s no doubt that the state electricity networks in Queensland and New South Wales are partly to blame for rising electricity bills there. The issue was first brought to public attention by Ross Garnaut last year, in his update to the Garnaut Review. Garnaut argued at the time, using convincing data from the National Electricity Market, that the state-owned grids were gold-plating their network infrastructure and passing the cost on to consumers.

Garnaut’s research was based on work done by Bruce Mountain of the Energy Users Association of Australia. The graph below is from a report by Mountain on this issue, entitled "Australia’s Rising Electricity Prices and Declining Productivity: the Contribution of its Electricity Distributors".

Actual and projected network revenue in private and government-owned electricity networks, 2001-2014. Source: Energy Users Association of Australia.

As you can see, networks charges from government-owned electricity distributors are climbing rapidly, outpacing modest increases from private operators.

But why are the distributors able to hike their prices up so quickly? The short answer is: because they can. Gillard is right to draw attention to the scrambled mess of energy regulation: Australia’s electricity system is a hybrid system of regulation and public-private partnerships, in which publicly-owned companies compete side-by-side with global multi-nationals.

Competition varies from state to state and from jurisdiction to jurisdiction. At the retail end of the market, particularly in Victoria, there is often fierce undercutting and door-to-door carpet-bagging, as electricity retailers compete to win customers away from each other. Generation is also highly competitive, with big coal-fired power plants competing with wind, solar and gas generation facilities to sell electricity onto the national grid in five-minute increments.

But between the generators and the consumers, the grid is still basically a series of integrated monopolies, in which one company controls all the poles and wires for a particular geographical area. Pricing is highly regulated by a series of state and federal regulators, all of which have follow a so-called "cost pass-through" method to determine charges. Translated, this basically means that grid companies can make up a forecast of what they think demand will be, build a bunch of poles and wires to accommodate it, and then pass through those costs (plus a profit margin) to the end user.

Unfortunately, in recent years those demand estimates have been wrong. Very wrong. Instead of electricity demand rising as predicted, it has actually fallen. Nevertheless, the new infrastructure has still been built, and the costs are still being passed on to the consumer. Perhaps that’s because the regulators are effectively captured—  as in the case of the Australian Energy Market Operator, which is a public-private partnership that is 40 per cent owned and funded by the energy industry.

And, of course, in Queensland and New South Wales, the industry is also the government. This has enabled the big government-owned distribution companies to pay fat dividends to ever-hungry state treasuries. Mountain estimates that from 2004 to 2010, Queensland’s distributors paid the Queensland state government $2.6 billion in income tax equivalents and dividends, delivering a return on equity of 9.8 per cent. The New South Wales distributors paid the government $4.1 billion in income tax equivalents and dividends, delivering a whopping 16 per cent return on equity.

So Gillard is right to point to the role of the states in driving up electricity bills. On the other hand, both the Queensland and New South Wales governments were run by the ALP when these price rises were set in train. Nor has federal Labor shown any great enthusiasm for electricity market reform previously.

But politically, such pesky details may matter little. The handy side-effect of attacking the states on electricity pricing is that it keeps the government on the front foot, and Tony Abbott on the back foot. The Opposition Leader appears to fallen for the trap of trying to deny that any infrastructure gold-plating is going on in the first place — an unfavourable position from which to argue, and one which distracts from his preferred line of attack about the evils of the carbon tax.

The government has had a good fortnight, convincingly winning a battle against the states on the National Disability Insurance Scheme, and then enjoying a rare "bounce" in the poll figures. Attacking the states looks like a useful tactic. We’re a long way from talking about a "revival", but if the Prime Minister can keep Abbott discomforted, and the opinion poll rebound going, the pall of despair that has long enveloped Labor might slowly start to dissipate.

Ben Eltham is New Matilda's National Affairs Correspondent.