Recent discussions about electricity affordability have centred on electricity generation and the 15‑20% price rises in some states. But this discussion ignores so many other issues. In this address, ACCC Chairman Rod Sims reviews the likely drivers of our current electricity affordability issues, and shows why a focus on generation is too narrow.
Check against delivery
I am delighted to welcome you to this year’s ACCC & AER Regulatory Conference.
I have now been closely following infrastructure issues in relation to telecommunications, electricity and transport for an embarrassingly long period. I think the focus on these issues has never been greater in Australia; partly due to changing technology and partly for the wrong reasons.
In communications we have huge and daily focus on NBN issues, but we also have fascinating new technology and new competition including TPG’s entry into mobile. The ACCC’s current market inquiry is examining a range of potential market failures and entry barriers to determine how to improve the sector’s efficiency, competition and consumer outcomes.
In both electricity and gas the Government has directed the ACCC to conduct Inquiries. The focus is on the affordability of electricity and the availability of gas. Both are vital issues for Australian businesses and consumers.
In transport, be it to do with ports, rail or airports, the focus is mainly on whether to regulate monopolies, which I sometimes find amazing, and on how to regulate them if we decide to do so.
Given my limited time this morning I thought I would make a point in relation to electricity. This is that it is terrific that we now, at long last, have a separate focus on electricity affordability.
For way too long electricity affordability has not been considered at all as policies have been introduced to deal with a wide range of other issues, one prominent one being a desire to boost Government revenues.
The current electricity focus is on electricity reliability, sustainability and affordability. To listen to some you would think the same set of policies would deal with all three issues simultaneously.
This is not so.
Each issue needs its own focus. To be sure they are linked, as Alan Finkel’s report shows but, of course, Alan Finkel’s report was largely focussing on reliability and sustainability.
The ACCC’s Inquiry is solely focussed on electricity affordability. We are working extremely closely with Paula Conboy and the AER, as you would expect, and we are also in contact with the AEMC, AEMO and Alan Finkel’s team.
Indeed, I have recently spoken with John Pierce (AEMC), Audrey Zibelman (AEMO), and Alan Finkel, and will have further detailed discussions with each of them.
Recent discussion of electricity affordability is focussing on electricity generation, and the 15‑20% price rises in some states. But this discussion ignores so many other issues.
Indeed, we have a huge energy affordability problem not because of the recent 15-20% price increases, but because of the likely more than doubling of electricity prices after inflation over the last 10 years.
The current narrow focus on generation shows why we need a separate focus on electricity affordability.
Our Inquiry will determine what has driven electricity price increases over the last 10 years, and what can be done to address these and future affordability issues.
A simple review of some of the likely drivers of our current electricity affordability issues shows why a focus on generation is too narrow and why affordability needs its own focus.
I will mention just six issues.
First, a key driver of our current electricity affordability issues was the loosening by government of the regulation of the poles and wires monopolies around 10 years ago. This was done largely to maintain or boost government revenues, with no or little concern as to affordability.
This problem is also a contemporary one as shown by the recent appeals by NSW and the ACT of the AER’s decisions in relation to their businesses. The AER, in essence, determined that consumers should not continue paying for the inefficiency of these poles and wires monopolies. The NSW and ACT appeals sought to have electricity consumers in NSW and the ACT pay up to $6 billion more for electricity than otherwise.
I note that the Queensland Government decided not to appeal a similar AER decision. Electricity consumers in Queensland will benefit from this decision for years to come.
Second, some years ago NSW and Queensland in particular made changes to their network reliability standards that could be seen as an overreaction to specific outage incidents. These changes have also seen costs rise to consumers.
Third, we have increasing concentration in the electricity industry. This concentration was, of course, made worse by the sale by the NSW Government of the Macquarie and Liddell generators to AGL a few years back, which the ACCC strenuously but unsuccessfully opposed. This sale particularly increased the level of vertical integration in the industry.
Then we had Queensland consolidating its three generators into two; they have two-thirds of electricity generation capacity in Queensland. They can often bid in at high prices knowing they will be dispatched. Indeed, their market power is shown by the recent Queensland Government direction to alter their bidding; wholesale prices fell immediately.
Fourth, we have considerable concentration in the retailing of electricity, with the three vertically integrated players having the lion’s share of the market. We seem to have high standing or default prices which for a range of reasons are not being competed away.
Fifth, we have had some stunningly over generous green schemes. For example, in some states consumers were paid solar feed-in tariffs of 40-60 cents per kilowatt hour, many times the cost of energy, not only on the electricity they sent back to the grid, but also, amazingly, on the electricity they consumed themselves. The cost of this was smeared over all electricity consumers; a straight subsidy to those consumers with solar panels from those without them.
Finally, of course, we have very high gas prices, often way higher than netback prices, which boost the cost of gas-fired generation. The approval of the three huge LNG exporters seemed to coincide with bans or polices that have stopped gas production in Victoria, NSW and potentially the Northern Territory.
Many of these problems were a long time in the making, and will take a long time to solve. But there is hope.
The ACCC will look closely at retailer behaviour and offers to see if there are ways to help people find much cheaper electricity offers.
The Commonwealth is moving to remove Limited Merits Review of the AER’s decisions; companies will still be able to review decisions from a process point of view. This will replicate the same system that we have in telecommunications. Having no Limited Merits Review works well in telecommunications and it will work well in electricity.
Indeed, removing Limited Merits Review will see an end to extremely costly appeals that have seen what I think are unnecessary cost burdens on consumers.
The ACCC will also be closely examining the implications of high concentration in the electricity industry.
We will be examining what can be done, firstly, to lower entry barriers and, secondly, to deal with the consequences of this concentration.
As you can see, these are all issues to do with affordability. They need their own focus.
There are, of course, many links to reliability and sustainability.
One link that is often neglected is that to deal with, for example, sustainability, you need a “social licence”.
Australia’s current electricity affordability problems threaten this.
With all that off my chest I will now get back to today’s focus.
This conference is a key event on our calendar, and brings together industry participants, policy makers, academics and regulators from around the world to hear and discuss the latest ideas about the theory and practice of regulation.
We are privileged to hear the insights of experts with a diverse mix of professional experience. I would like to thank all of our speakers for making themselves available for the conference, and especially those who have travelled so far to be here.
The theme of this year’s conference is Innovation and Better Regulation.
Many of the sectors regulated by the ACCC and AER are adopting innovative practices to meet the challenges and opportunities posed by new and disruptive technologies. Regulators are also responding to change by adapting how they carry out their functions.
The second session today is aptly described as ‘speed dating for the regulatory community’ as it offers a series of short presentations highlighting recent key regulatory innovations from around Australia and New Zealand.
After lunch, we’ll tackle the important question of how we can reduce the risk of regulatory failure. I’m expecting a robust discussion about what our speakers perceive a successful regulator should be able to achieve. I know you won’t hold back!
With the Productivity Commission due to conduct a review of whether we need airport regulation next year, it is timely to consider what we can learn from the regulatory oversight of airports in other jurisdictions. We are fortunate to have one of the world’s leading experts on airport performance and regulation to discuss what models of regulation appear to be delivering the best outcomes and the innovative approaches that are emerging.
This afternoon’s other breakout session will discuss the lessons that can be learned from the significant legal reviews of regulatory decisions that have occurred in Australia, Canada and New Zealand in recent years.
Tomorrow morning’s breakout sessions focus on how disruptive technology is driving changes in each of the communications and electricity sectors, and will no doubt raise complex issues about the role of regulators and the potential for regulatory frameworks to affect innovation.
We have endeavoured to be innovative for the final session tomorrow, and will utilise the online tool Slido to guide the Q&A session with a panel of our speakers.
Instructions on how to access Slido using your phone to suggest and vote for questions are in the conference program.
It’s now my great pleasure to introduce my colleague Paula Conboy, chair of the Australian Energy Regulator, who will introduce a trio who have accepted the challenge of bringing us up to speed on some of the big regulatory issues in the US, UK and Europe.
Thank you Colette, Martin and Jean-Michelle for accepting that challenge.
I am really looking forward to what you all have to say.
And thank you all for attending this years’ conference, and your contribution to the discussion about how innovation can deliver better regulation