Electricity dispute
Had the break-up of the old Western Power been an unmitigated disaster, forcing the state government to hike electricity prices and introduce a billion dollar taxpayer subsidy?
Readers of the popular press in Western Australia could be forgiven for thinking that is the case.
State opposition leader Troy Buswell has gone further, labelling it “the single biggest financial scandal in the history of government in WA”.
In stark contrast, Premier Alan Carpenter says last week’s decision on electricity pricing had nothing to do with disaggregation and everything to do with changing market conditons.
What’s going on here?
The four-way break-up of the old Western Power was one of the state government’s major reform initiatives.
The break-up was not an end in itself. It was a means of achieving genuine and transparent competition in both electricity generation and electricity retailing, while keeping intact the natural monopoly part of the business – the transmission and distribution network.
Critics of the break-up argued that the government’s case was built on overly optimistic assumptions about the efficiency gains that would follow.
The financial results reported by some of the successor businesses seem to confirm this line of argument.
The break-up was also meant to put downward pressure on electricity prices as generators and retailers competed for market share.
Far from declining, electricity prices are set to increase.
A widening gap
The premier announced last week there would be substantial increases in electricity prices in coming years, up 10 per cent in 2009-10 with further increases to follow.
The Office of Energy recommended the government go further.
Household electricity prices have been fixed since 1997, leading to a wide gap between the cost of supply and the selling price.
Every other state has increased electricity prices in recent years, leaving WA as the exception.
In order for tariffs to be ‘cost reflective’, the Office of Energy said they should increase by 47 per cent in 2009-10, 15 per cent in 2010-11 and 2 per cent in 2011-12.
The biggest contributor to the recommended rise was the so-called retail component of electricity prices, which basically reflects electricity production costs.
The Office of Energy relied on modelling by Frontier Economics, which assumed gas prices would be $8 per gigajoule (delivered).
That’s nearly triple the prevailing gas price of just a few years ago, which also enables competing fuel sources – coal – to charge a higher price.
ACIL Tasman director and economist Ian Satchwell agrees that rising fuel costs are the key factor in determining electricity prices, not the break-up of the old Western Power.
“The big issue has been the growth in gas demand and the rise in gas prices,” he said.
The Office of Energy said three other factors were putting upward pressure on electricity costs.
One was network tariffs, which represent about 30 per cent of total electricity supply costs.
The ‘new’ Western Power is spending about $1 billion each year expanding and maintaining the state’s transmission and distribution network, and like any service provider needs to recover those costs.
As a monopoly provider, its tariffs are set by the state government’s Economic Regulation Authority.
Second was the increased use of renewable energy, such as wind and biomass, which is more expensive than traditional energy sources such as coal and gas.
Third was the planned introduction of a national emissions trading scheme, which is meant to ensure that the cost of greenhouse gas emissions is added to electricity prices.
The trading scheme is not yet fully developed so there are a wide variety of estimates of the likely carbon credit price.
Frontier made estimates based on trading in the national electricity market, which operates on the east coast of Australia
Past lessons?
In rejecting the Office of Energy’s recommendations, the state government has chosen to subsidise electricity prices, at an estimated cost of $780 million over the next three years.
The subsidy will be paid to electricity retailer Synergy, which will pass through the money to Verve Energy and private sector generators.
This is a roundabout way of supporting Verve, which has been lumbered with loss-making vesting contracts to supply Synergy.
The new arrangement means that the magnitude of the taxpayer-funded subsidy is transparent.
It’s worth asking what would have happened in the old days, before Western Power was broken up?
Most likely there would have been internal cross-subsidies, so that profits in one part of the business would have been used to support other parts of the business.
Taxpayers and consumers would have been left in the dark as to the true cost of supplying electricity.
Crucially, the community as a whole would have been no better off.
The cost of producing power would broadly be the same, because the key driver would still be gas and coal prices.
