Friday, November 29, 2013

Regulations driving up cost of electricity

In electricity supply, Victoria is widely regarded as the most competitive jurisdiction in the world.

Supply comes from dozens of generators including from three major businesses producing within the state.

Victoria's "poles and wire" networks are all privately owned and operate far more cost-effectively than those of other states.  Indeed, former prime minister Julia Gillard, though a lifelong socialist, urged New South Wales and Queensland to privatise their networks and thereby match Victoria's cost reductions.

And yet, according to information published by the Australian Energy Market Commission (AEMC), Victorian households' electricity prices are similar to those of other Australian states.  AEMC puts this down to Victoria's retail costs being three times as high as other states.  This is paradoxical because Victoria has Australia's most competitive retail market, the only one that's fully deregulated, and competition drives down high retail margins.

One reason for higher Victorian retail costs is the rollout of "smart" meters.  The Brumby government assured us this mandatory measure will be beneficial, but it adds huge costs.  However, even after adjusting for most meter rollout costs, apparent retail costs in Victoria remain twice those of other states.

Most of this discrepancy is illusory.  It stems from comparing the prices of the 20 per cent of Victoria's consumers who have stayed with their original retailer, and not taken advantage of better price offerings, with those in other states where everyone's price is regulated.

The Victorian Essential Services Commission has sought to make allowances for this.  It has suggested that AEMC measured average prices charged in Victoria might be overstated by as much as 14 per cent.

Even with this adjustment Victorian retail margins are high.  This is because Victorian regulatory measures raise the costs of doing business in the state, costs that have to be recouped, including:

  • "CONSUMER protection" requirements that no retailer may charge late fees and difficulties imposed on retailers seeking to disconnect non-paying customers.
  • HIDDEN costs of the "smart" meter rollout, with retailers required to move from four meter readings a year to 17,520.
  • COSTS associated with the operations of the energy Ombudsman in Victoria, who has been particularly receptive to complaints.  Retailers incur all the Ombudsman's costs as well as internal complaint handling costs.
  • THE low $20 maximum early contract termination fee which compares with a cost reflective fee proposed for NSW at $45-$130.

Politicians and bureaucrats fail to understand that costs loaded onto firms do not simply mean lower profits.  Firms that cannot recoup those costs go out of business.  We are seeing this with energy intensive firms that compete with overseas rivals unencumbered by Australia's various carbon imposts.

But electricity retailers face only domestic competition so regulatory burdens emerge as higher customer prices.

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