CoAG December 2012: all Agony no Ecstasy

Tomorrow’s meeting of CoAG will offer another opportunity for the Prime Minister to roll out a new reform agenda.  While disability taxes (insurance be buggered!) and electricity are billed as the top issues, the PM has opened up opportunities for additional lobbying.

BHP – for once both Big and Good – is calling for governments to cooperate with each other and ease environmental regulation overlap.  Fat chance unless it means combining all measures.

Dow Chemicals is calling producers to be forced to supply them gas on the cheap. That one is a clash between Gillard’s instincts for combatting free markets and Ferguson’s preference for development.

On disability “insurance”, with a cost of $15 billion even before “anomalies” are discovered to augment the spend, NSW has joined Mr Abbott in supporting the latest dirigistic push.

Electricity might offer a few sparks.  Ostensibly the CoAG agenda addresses increased costs, but Julia’s main aim will be to deflect the blame for these onto state governments.  She wants new regulatory rules and institutional changes which appear to target costs but which simply add to them.

The electricity supply industry’s period of reform two decades ago has been flung into reverse since the turn of this century.  Privatisation and competition in retailing and generation brought a productivity dividend by forcing cost reductions with labour shedding and improved work practices as suppliers fought for profitable market shares.  The industry workforce was halved and yet reliability increased by leaps and bounds – in generation for example plant availability in Victoria rose from 70 per cent to 95 per cent.

But all this started to go pear-shaped as governments heaped successive layers of regulation on the industry.  These included regulations covering renewable energy, disconnections, energy efficiency management schemes, and metering, requiring additional regulatory staffing expenses on top of the direct costs.  In response to blackouts from the early vogue of forcing networks to under-investment, governments became risk-averse and insisted on very high reliability standards with the associated costs these entail.

These costs blew out all the more because the poles and wires companies were able to exaggerate the required expenditures and even have those that the regulator rejected as unnecessary included in their price base.   The incentive to do this and to spend every cent the regulator authorised was considerable for the state owned network businesses in Queensland and New South Wales.  Such incentives are absent with the private networks in Victoria and South Australia, since they have genuine shareholders who will ensure they, and not employees, get the benefits of any possible savings in terms of dividends.  Any gold plating that might be present at an initial price setting in the privately owned networks is therefore quickly ratcheted down at subsequent rounds.

The bottom line is that the government owned network businesses in NSW and Queensland cost about 70 per cent more per connection than their Victoria and South Australian counterparts.

The current political focus on the industry has come about in response to a 30 per cent increase in electricity prices over the past three years.  About half of this is due to the network price increases with the rest split between the carbon tax and the various green schemes (renewable energy targets, feed-in tariffs, and energy management schemes like requiring low voltage light bulbs).

State governments in Queensland and South Australia (as well as Tasmania) have responded to retail cost increases by suppressing household prices.  This is a backward step in an industry with dozens of competing retailers, which place electricity among the industries least likely to allow retail price gouging.  Hence price fixing regulations cut straight into suppliers’ bottom lines with possible severe effects on the competitive nature of the industry.

Removing taxes and regulations and privatising the network businesses would deliver considerable benefits to the consumer.  However the Prime Minister, while she may favour privatisation now that the political backlash will fall on coalition state governments, is intent on introducing new regulations.  These include costly new requirements to roll out “smart” meters, a policy that adds far more costs than it saves, and arbitrary price reductions on the network businesses.  Even more regulatory resources are proposed, including a brand new consumerist lobby body, the Consumer Challenge Panel.   Not the right direction for reform but one that sits well with the PM’s socialist instincts.

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6 Responses to CoAG December 2012: all Agony no Ecstasy

  1. stackja

    True flexibility allows for failure. How many want to lose their jobs?

  2. Samuel J

    offer another opportunity for the Prime Minister to roll out a new reform agenda

    Reform? That’s a word not in Julia Gillard’s vocabulary.

  3. Biota

    Reform? That’s a word not in Julia Gillard’s vocabulary.

    It is, but needs Macquarie Dictionary clarification: Reform to revert to ancient and long overcome restrictions and inefficiencies.

  4. mundi

    If peak demand drops, since 80% of price is distribution, then the price of electricity must actually go up. The same thing happened in QLD during the drought.

    Labor is still in denial over what happened in QLD. The real reason QLD Labor got routed is because electricity and water (not to mention all other state government services) went up in price way way way beyond inflation. In just 5 years my water bill has gone up more than 150%, and electricity has gone up 50%. Mean while average use of water and energy per person dropped!

  5. Will

    Reform? That’s a word not in Julia Gillard’s vocabulary.

    “reform” to a socialist is like Stalin’s agricultural reforms of the 1930’s – they all lead to the glorious workers paradise

  6. H B Bear

    The Australian federation is just another manifestation of the legislative and regulatory strangulation of the nation. COAG is ASEAN without the funny shirts.

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