Energy prices are high because consumers are paying for useless, profit-boosting infrastructure


Bruce Mountain, Victoria University

The preliminary report on energy prices released last week by the Australian Competition and Consumer Commission (ACCC) suggests that the consumer watchdog is concerned about almost every aspect of Australia’s electricity industry. It quotes customer groups who say electricity is the biggest issue in their surveys, and cites several case studies of outrageous price increases experienced by various customers.

The report is long on sympathy about the plight of Australia’s electricity users. But the true picture is even worse – in reality, the ACCC’s assessment of Australia’s energy prices compared to the rest of the world is absurdly rosy.


Read more: Power bills can fall – but the main attention must be on affordability: ACCC


Australia has internationally high energy prices

The ACCC quotes studies from the Electricity Supply Association and the Australian Energy Markets Commission (AEMC) to compare electricity prices in Australia with those in other OECD countries. But the ACCC’s comparison is based on two-year-old data, and badly underestimates the actual prices consumers are paying.

The AEMC’s analysis assumes all customers are on their retailer’s cheapest available offer. This is an obviously implausible assumption, and gives a favourable impression of the price that customers are paying.

As previously pointed out on The Conversation, the Thwaites review – which looked at customers’ actual bills – found that in February 2017 Victorians were typically paying A35c per kilowatt hour (kWh) – 42% more than the AEMC’s estimate. What’s more, we know that Victoria’s electricity prices are lower on average than those in South Australia, Queensland and New South Wales, and hence below the Australian average.


Read more: Australian household electricity prices may be 25% higher than official reports


A part of this 42% gap – around 15% – is explained by the latest price increases that are not included in the ACCC’s comparison. But this still leaves a 27% gap between what the AEMC assumes and the evidence of actual prices.

This begs the question: why did the ACCC not recognise the widely known flaw in the AEMC’s analysis?

The real problem is overbuilt network infrastructure

The report estimates that rising network charges account for more of the price increase than all other factors put together. There is no doubt that network charges are a real problem at least in parts of Australia, although their significance relative to retailers’ costs is contested territory.

But why would distributors build far more network infrastructure than they need? And why have government-owned distributors built far more infrastructure than private ones, despite having no more demand?

The answer to this perplexing question is to be found in part in Australia’s “competitive neutrality” policy. This is Orwellian doublespeak for an approach that is neither neutral nor competitive.


Read more: Government Inc: time to revisit competitive neutrality


Under this policy, government-owned distributors are regulated as if they are privately financed. This means that when setting regulated prices, the Australian Energy Regulator (AER) allows government distributors to charge their captive consumers for a return on their regulated assets, at the same level as if they were privately financed. That is despite the fact that private financing is much more expensive than government funding.

It’s no surprise that when offered a rate of return that far exceeds the actual cost of finance, government distributors have a powerful incentive to expand their infrastructure for a profit. This “gold-plating” incentive is a well-known in regulatory economics.

Regulators, the industry and their associations have explained higher spending on networks in a variety of ways: higher reliability standards; flawed rules; flawed forecasting of demand growth; and the need to make up for historic underinvestment.

But was there ever historic underinvestment? A 1995 article co-authored by the current AEMC chair concluded that distribution networks had been significantly overbuilt. That was more than two decades ago, government distributor regulated assets are at least three times bigger per customer now.

The chart below – based on data from the AER’s website – examines how the 12 large distributors that cover New South Wales, Victoria, Queensland and South Australia spent their money on infrastructure between 2006 and 2013. This period covers the last five-year price controls established by the state regulators, and the first control established by the AER. It was during this time that expenditure ballooned. The monetary amounts in this chart are normalised by the number of customers per distributor.

Distributor spending on infrastructure between 2006 and 2013.
Author provided

The first five distributors from left to right (and Aurora) were owned by state governments and the others are privately owned. A clear pattern emerges: the government distributors typically built much more infrastructure than the private distributors. And the government distributors focused their spending on substations, which are much easier to build (or expand or replace) than new distribution lines or cables.

We also know that the distributors’ spending on substations far outstripped the increases in the peak demand on their networks. The figure below compares the change in the government and private distributors’ substation capacity (the blue bars) with demand (the red bars) over the period that most of the expenditure occurred. Again, the amounts have been normalised by number of customers.

Substation capacity versus peak demand between 2006 and 2013.
Author provided

The gap in spending between government and private distributors is stark. It is also obvious that in all cases, but particularly for the government distributors, the expansion of substation capacity greatly exceeded demand growth – which hardly changed over this period (and is even lower now, per connection).

To put it in more tangible terms, as an average across the industry, peak demand between 2006 to 2013 increased by the equivalent of the power used by one old-fashioned incandescent light bulb, per customer. But government distributors expanded their substation capacity by more than one 100 light bulbs, per customer. The private distributors did relatively better, but still increased the capacity of their substations by the equivalent of about 30 light bulbs per customer.

My PhD thesis included econometric analysis that shows government ownership in Australia is associated with regulated asset values that are 56% higher than private distributors, and regulated revenues that are 24% higher, leaving all other factors the same.

To some, this evidence supports a “government bad, private good” conclusion. Indeed it was this line of argument that the Baird government in New South Wales used to justify its partial privatisation of two network service providers.

But in international comparisons of government and private distributors in the United States, Europe and New Zealand, no such stark differences are to be found. The huge disparity between government and private distributors is a peculiarly Australian phenomenon.

How we got here

This Australian exception originates in chronic policy and regulatory failure. As far back as 2011, the Australian Energy Market Commission (AEMC) heard a proposal that government distributors should earn a return closer to their actual cost of financing – a suggestion that would have reduced prices significantly and removed the incentive to gold plate.

In response, the AEMC said the regulations were consistent with the “competitive neutrality” policy. But this is not true: in the policy’s own words, it was designed to stop government businesses from crowding out competitors. Distributors are protected monopolies; they do not have competitors.

The AEMC also argued, somewhat bizarrely, that it was good economics for a regulator to assume that government distributors are privately financed.

This represents the triumph of an idealistic “normative” regulatory model in which regulators act on the basis of how the regulated entity should behave rather than how they actually behave.

But it would wrong to blame the AEMC alone for this failure. All of Australia’s key institutions and governments have agreed that government distributors should be regulated as if they are privately financed. For governments that own their distributors, this has been a wonderfully profitable fiction.

Therein lies much of the explanation for what is effectively, if I may call a spade a spade, a racket.

It is an indictment of Australia’s polity and so many of its economists that the 2011 Garnaut Climate Change Review stands alone, in a library of reviews, as stating this problem clearly. In fact, if you review last week’s report from the ACCC, you will not find a single distinction between the impact of government and private distributors.

And if you thought this was yesterday’s war, you would be wrong. Despite the mass of evidence, our regulators persist in the fiction that ownership and regulation should be independent of one another.

It is difficult not to lapse into despair about Australia’s energy policy morass. Despite the valiant attempts by many, a deeply entrenched culture of half-truths, vested interests, ideology and wishful thinking still characterises all too much of what emanates from the political and administrative leadership of this industry.

Some energy consumers – Prime Minister Malcolm Turnbull among them – will buy their way out of this problem through solar panels and batteries. But the poorest households and many business customers will increasingly be left carrying the can.

The ConversationAustralians are angry about electricity. Not unreasonably.

Bruce Mountain, Director, Carbon and Energy Markets., Victoria University

This article was originally published on The Conversation. Read the original article.

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Decline of traditional media


Should the threat to traditional media from the internet really be a cause for concern?

The new social media — blogging, Facebook, MySpace, Twitter, and YouTube are current faves — revolutionising the publishing world, for better and worse. Let’s look at both the better and the worse in perspective.

The current tsunami of personal choices in communication is slowly draining the profit from mainstream media. These media traditionally depend on huge audiences who all live in one region and mostly want the same things (the football scores, the crossword, the TV Guide, etc.). But that is all available now on the Internet, all around the world, all the time.

One outcome is a death watch on many newspapers, including famous ones like the Boston Globe. As journalist Paul Gillin noted recently: “The newspaper model scales up very well, but it scales down very badly. It costs a newspaper nearly as much to deliver 25,000 copies as it does to deliver 50,000 copies. Readership has been in decline for 30 years and the decline shows no signs of abating. Meanwhile, new competition has sprung up online with a vastly superior cost structure and an interactive format that appeals to the new generation of readers.”

Traditional electronic media are not doing any better. As James Lewin observes in “Television audience plummeting as viewers move online” (May 19, 2008), mainstream broadcasters “will have to come to terms with YouTube, video podcasts and other Internet media or they’ll face the same fate as newspapers.”

Radio audiences have likewise tanked. Overall, the recent decline of traditional media is remarkable.

Some conservative writers insist that mainstream media’s failure is due to its liberal bias. But conservatives have charged that for decades — to no effect. Another charge is that TV is declining because it is increasingly gross or trivial. True enough, but TV’s popularity was unaffected for decades by its experiments with edgy taste.

Let’s look more closely at the structure of the system to better understand current steep declines. Due to the low cost of modern media technology, no clear distinction now exists between a mainstream medium and a non-mainstream one, based on either number of viewers or production cost. Today, anyone can put up a video at YouTube at virtually no cost. Popular videos get hundreds of thousands of views. Podcasting and videocasting are also cheap. A blog can be started for free, within minutes, at Blogger. It may get 10 viewers or 10,000, depending on the level of popular interest. But the viewers control that, not the providers.

The key change is that the traditional media professional is no longer a gatekeeper who can systematically admit or deny information. Consumers program their own print, TV, or radio, and download what they want to their personal devices. They are their own editors, their own filmmakers, their own disc jockeys.

Does that mean more bias or less? It’s hard to say, given that consumers now manage their own level of bias. So they can hear much more biased news — or much less. And, as Podcasting News observes, “Social media is a global phenomenon happening in all markets regardless of wider economic, social and cultural development.”

Understandably, traditional media professionals, alarmed by these developments, have constructed a doctrine of “localism” and, in some cases, called for government to bail them out. That probably won’t help, just as it wouldn’t have helped if the media professionals had called for a government “bailed out” of newspapers when they were threatened by radio, or of radio when it was threatened by TV. Video really did (sort of) kill the radio star, but the radio star certainly won’t be revived by government grants.

Still, the news is not all bad. Yes, new media do sometimes kill old media. For example, no one seriously uses pigeon post to send messages today. But few ever thought birdmail was a great system, just the only one available at the time. However, radio did not kill print, and TV did not kill radio. Nor will the Internet kill older media; it will simply change news delivery. Sometimes in a minor way, but sometimes radically.

Media that work, whether radio, TV, newspapers, books, blogs, or any other, thrive when there is a true need. Today’s challenge is to persuade the consumer to look at alternatives to their own programming decisions.

Denyse O’Leary is co-author of The Spiritual Brain.

The original news article can be viewed at:
http://www.mercatornet.com/articles/view/decline_of_traditional_media/

Article from MercatorNet.com

ELECTRIC CARS COMING SOONER RATHER THAN LATER


In great news for the environment and consumers it seems that ‘green cars’ will be arriving in Australia sooner rather than later, with infrastructure for electric cars to be set up in Brisbane, Sydney and Melbourne within four years. The project is a joint venture between AGL, Macquarie Capital and Better Place.

The project aims to set up recharge stations for electric cars at workplaces, homes and shopping centres. It is thought that some 250 000 recharge stations will be built in the project. Such projects have already been set up in Israel and Denmark.

Macquarie Capital is to raise $1 billion to build the recharging network, with AGL to supply renewable energy for the project. Better Place will actually build the network.

Should the project go ahead and the infrastructure be built, motorists will be able to dump petrol and diesel vehicles and move to electric ones. This will of course be a great relief from rising fuel costs and help protect the environment from further greenhouse gas emissions.

Sausages


What is it with sausages? You go to the butcher and you buy a kilo of sausages for a BBQ. You then take them home for the BBQ and start to cook them on the BBQ, only to find them loose half their weight from fat that leaches out. Now that of course is a good thing – loosing the fat. What I want to introduce into society is an international standard for sausage weight that states a sausage cannot be any less than such a weight when cooked for it to be a legal and compliant sausage.

Why do I say that? Because consumers are being ripped off all over the country by purchasing sausages that are less in weight after they are cooked than what they weighed prior to cooking. Some sausages shrink to half their size or more. Consumers everywhere should rise up against such injustice and demand change. Only when sausage eaters everywhere do so can we expect a fair go for the average sausage eater, the little bloke of sausage eating who just can’t get a good banger on the BBQ anymore.

Now don’t get me started about the quality of meat in a sausage!