Skyrocketing electricity costs fuel network provider profits

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(Image via electricityandgas.com.au)

Competition in electricity pricing has led to skyrocketing profitability for network service providers at the expense of the public good, writes Mark Zanker.

LET US just get to the truth about why electricity prices are so high and why businesses in Australia – in manufacturing, horticulture and agriculture, to name a very few – will be destroyed.  

Let's also look at why impoverished, or even moderately well to do people, will suffer great harm from rapidly increasing electricity prices that competition was supposed to fix.

First let us look at the Electricity Market Rules promulgated by the Australian Energy Market Commission (AEMC), a statutory authority whose function is to promulgate such rules. These occupy a volume of over 1,500 pages of legislative materials divided up into 11 chapters, dealing with registration and approval of participants, metering, spot price bidding and a whole raft of other matters. Anyone suffering insomnia can throw away their sleeping pill medication and instantly achieve slumber by downloading this material from the AEMC website (aemc.gov.au) and trying to read through it when they go to bed for the night.

Chapter Six, dealing with economic regulation of distribution services, is the area in relation to which the most disputation occurs between the regulators and the industry participants arises because that is about the money issues. As we have seen, the Australian Energy Regulator (AER) made determinations about recoverable revenue over regulated period of five years that involved making determinations on the basis of material provided by industry that included many thousands of words, graphs, econometric analysis, consultants reports and the like, on issues such as the regulated asset base, the depreciated optimised replacement costs for networks and the like. 

These determinations made in 2014 for the period out to 2019 – the five-year regulatory period – were appealed by the network service providers to the Australian Competition Tribunal which overturned the AER's determinations and remitted them to be revised in accordance with the Tribunal’s reasons for the decision. This decision of the Competition Tribunal was delivered in February 2016. The AER, in turn, appealed to the Federal Court in October 2016, under administrative law decisions legislation and the court gave its judgment last month, on 24 May 2017 — some six months after the hearing of the appeal.

It is easy to understand why it took such a long time for the Federal Court to come to the decision it did, because it had a mountain of evidentiary material to consider, as well as the determinations of the AER and the reasons for the decision of the Tribunal, against the comparatively simple criteria against which the correctness or otherwise of administrative law decisions are assessed.

So here it is in mid-2017 and the revenue recovery determination for the period to 2019 has not yet been settled because of these disputes over its validity. Overlaid on all this are annual pricing determinations, another matter altogether, but you get my drift — this system appears to be seriously flawed.

We often hear complaints by business interests about red tape and regulatory requirements hindering the efficient conduct of business. In the case of the electricity distribution industry, however, the complexity of the regulatory system is to the advantage of industry, because it enables them to bombard the regulator with an overwhelming amount of material that requires detailed consideration by the regulator, that the regulator simply lacks the resources to deal with. 

In those circumstances, appeals against determinations by the AER are encouraged, because to adequately defend their original decisions they have to deploy their resources in justifying every single aspect of each decision that is made as a matter of law. If they fail to do so, of course, they lose the case they are defending and are buried in legal costs, which can amount to millions of dollars in cases involving the Competition Tribunal and the full bench of the Federal Court. This means that the regulator’s resources are even further depleted and, in a context where tight budgetary constraints are imposed by government, it invariably leads to a failure in appropriate regulation.

One then must ask whether this sort of regulatory model is the correct model to use in the electricity market, where the regulator is staffed by economists and accountants, and where the only real value is the profitability of the distributors — and only lip service is paid to public and social good considerations.

Let us consider for a moment another area of activity where a statutory authority promulgates subordinate legislation for the regulation of industry: civil aviation. In this country, the Civil Aviation Safety Authority, staffed as it is by people with expertise in aeronautics, engineering, physics metallurgy and the like, are responsible for the regulatory regime. Understandably, the values underlying this regulatory system have nothing to do with the profitability of aircraft operators or manufacturers but rather with the safety of the travelling public, and those on the ground that could be exposed to serious injury, death or property damage by the operation of a defective aircraft in flight. Were it otherwise, there would be serious public disaffection with the regulatory regime.

In the case of electricity, there are obviously public good concerns such as avoidance of bush fire risks from arcing events caused during summer periods from high winds. There is also avoidance of network collapse as occurred in South Australia in 2016 owing to severe weather — tornadoes blowing down voltage transmission lines, as well as other failures in the distribution system such as interconnected failure. 


Now if the network investment has been so good under this market system, one must ask how it is that such major infrastructure failed. I believe this is because of lack of investment in the system, notwithstanding that the revenue return regime and the so-called investment incentives referred to in the electricity rules provide for. What has really happened? Price gouging and skyrocketing profitability for network service providers at the expense of public good.

In the political scramble to attribute blame for the South Australian power failure last year, attention was focussed on matters that have no bearing whatsoever on the integrity and robustness of the distribution network — the source of generation be it coal, gas, solar wind or biomass. The failure of the distribution network is just that. It has nothing whatever to do with the generation fuel of the energy it transmits.  

In a complicated, opaque regulatory regime, it is very easy for citizens to be misled, and it is very easy for politicians and vested interests who finance them to give dishonest information to the public, which is exactly what occurred. 

The sort of regulatory regime that is devolved to technical experts, as in the case of civil aviation, is entirely inappropriate in a case where profitability, as determined by economists and accountants, is the only real criterion for price setting. And where public good regulation in relation to fire safety, vegetation management, structural integrity, corporate taxation and related costs are able to be offset or compensated in the revenue recovery mechanism. 

Do we complain about this as we would if profitability was the only criterion governing aviation?

Mark Zanker is a retired lawyer and diplomat. You can follow Mark on Twitter @MZanker.

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License

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