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Generators gamed in the power price fight

Incumbent power suppliers have so much at stake with electricity regulation they can buy more and better muscle to define the house rules. They tend to ultimately prevail.

I don’t envy the senators assigned to the inquiry into electricity pricing.

This whole debate around electricity prices, network regulation and demand management can be incredibly tough to keep up with. Those that are not central players can quickly find themselves tied  in knots by the bewildering details and the range of players and processes through which the electricity market rules are written and interpreted. To participate in this game you better get yourself settled in to read thousands upon thousands of pages of deathly boring documents.

In the end, the amount at stake for the incumbent electricity supply industry is so big, they can afford to dedicate teams to it. Meanwhile those trying to break into the electricity club or involved at the periphery, such as consumers, tend to get worn down and give up. Inevitably it means government rule makers and regulators, entirely unintentionally, become attuned to seeing things from the way the incumbents see things.

How do you explain why the Queensland utility regulator considers it “unfair” for households to consume the electricity generated from their own power system rather than buying electricity from the grid? For someone outside of the power industry this can seem utterly baffling. But when you’re used to the idea that electricity generators operate in a wholesale market, with networks as a fixed cost that is not open to competition from substitutes and must be paid for, then it makes complete sense.

The reality is that electricity networks are a bit like the Las Vegas casinos from Martin Scorsese’s film Casino. Robert De Niro’s character explains how no matter the circumstances and no matter how clever the gambler, in the end:

It’s all been arranged just for us to get your money.
That’s the truth about Las Vegas.
We’re the only winners.
The players don’t stand a chance.

A few weeks ago I was blown away by an incredibly frank presentation given by a senior Australian regulatory economist who had first-hand experience regulating electricity networks. He openly acknowledged that in regulating monopoly networks, authorities were driven primarily by just one objective: keep the network business in business.

According to this economist, authorities had decided to not worry too much about price, and not worry too much about sending the right signals to energy suppliers and users because this was too difficult and largely considered not worth the pain. Instead it was far easier to focus on making sure network businesses invest in sufficient capacity to keep the lights on. It also didn’t help, according to him, that the boss of the authorities happened to also be a tax revenue-starved owner of the network businesses.

The AEMC is now recognising that this simplistic approach can’t be sustained. This is recognised by its recommendations across its three major reviews released recently on transmission frameworks, distribution network regulation and the Power of Choice review. But the recommendations are very deliberately incremental to avoid putting any incumbent’s nose seriously out of joint, and there is plenty of room between now and implementation for the process to go off the rails. The incumbents’ continual chipping away to suit their own interests, as well as consumers’ aggressive and sometimes irrational resistance to removal of smeared pricing, means that without strong political leadership there will be little reform.

Indeed even one of the most experienced players in this game was worn down by this endless battle against energy suppliers. In a little noticed news story a few weeks ago, the head of the Energy Users Association, Roman Domanski, stepped aside. While Domanski and I have been on opposing sides of an argument on several occasions, particularly on support for renewable energy, you couldn’t help but respect his thorough understanding of how the energy market and regulatory mechanisms ticked.

There are generally three types of people that head industry associations: talking head puppets; party political ideologues; and issue-driven policy wonks. Domanski is definitely an issue-driven policy wonk. Over the past few years most industry associations have been engaged in an almost blind ideological war against a carbon price out of all proportion to its financial impact on business interests. But Domanski could see good public policy merits in a carbon price and largely kept out of the sloganeering. Free of ideological blinkers and with a keen eye for the machinations of the energy regulatory processes, he could see the real threat to energy users lay with arcane rules encouraging excessive investment by network businesses.

But even with the Prime Minister agreeing that the rules had supported network gold plating, backing by big corporates, and sound knowledge of the rules, he couldn’t manage to win the day. The AEMC has proposed handing greater powers and discretion to the energy regulator (AER) to scrutinise network businesses. But it will still allow government network business to earn a return on network investments far above their borrowing costs.

Domanski is pretty sceptical as to whether the AER will have the resources to be able to combat the firepower and inside knowledge of the network businesses. Not to mention the political pressure from state governments addicted to dividends from the networks.

Considering Domanski’s difficulties, I find it hard to believe that the senators undertaking the inquiry into electricity prices will do much more than scratch the surface of the issues at play. The best one can hope for is that they call for an independent review to be undertaken of our electricity market regulatory structures by overseas experts.

A fresh set of knowledgeable eyes to look over our energy market, free from any personal attachment or commercial interest in present structures, is well overdue.

*This article was first published at Climate Spectator

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    Bruce McCarthy
    Posted Wednesday, 26 September 2012 at 1:51 pm | Permalink

    Let’s face it. In view of deficiencies with the GST, electricity prices have become a “de facto” tax for cash starved state governments. Ideologically, it is a reasonably fair “tax”- the more you use the more you pay (excluding large corporates). I cannot see the current situation changing until the GST is modified to provide more funds to the state governments.

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