Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Select Committee on Electricity Prices
27/09/2012
Electricity price increases in Australia

GREEN, Mr Brian, Chairman, Energy Users Association of Australia

MOUNTAIN, Mr Bruce, Private capacity

[11:01]

CHAIR: I welcome our next witnesses, Mr Brian Green, from the Energy Users Association of Australia, and Mr Bruce Mountain. Do either of you have an opening statement?

Mr B Green : Yes. Thank you, Chair. The position we would put forward is that the regulatory framework is not working, the existing reviews by the AEMC and the AER are not going far enough to address the issue of the high prices that we are seeing, and fundamental change is required rather than just addressing some minor rule changes, which is what is happening at the moment. Having said that, I am not trying to belittle the changes that are taking place at the moment—they are fairly extensive—but we believe that just changing some of the additional rules is not going to address the underlying problem.

Basically, we would say that the price rises that we have experienced over the last few years are down to increases in the network pricing and to excessive investment that has occurred in some of the networks across eastern Australia, and renewable energy prices have had a major impact on the overall cost increases that people are seeing. I am very conscious of the fact that this is often portrayed as being two per cent of the total. Our organisation represents the larger energy users, and for large energy users it is around 30 per cent of the energy price that we are talking about. Large energy users are spending somewhere between $10 million and $60 million per annum on energy, so that is a significant impost on the industry. Carbon pricing is obviously having an impact but that is relatively late and it is not the underlying cause. The underlying cause is the cost of the networks. As I said before, we believe that the basic framework needs to be readdressed. Our position is that what we have at the moment, the framework and the rules, were effectively established to encourage investment in the industry to ensure that we did have generation, we did have a transmission and distribution service and we had a viable network. We would say that that has been achieved, and now it is time to step back and relook at the basic framework and ensure that what we have going forward is a system that will encourage efficient operation, efficient investment and lower prices.

In 2004-05 Australia had similar electricity prices to the rest of the world, but, if we step forward to now, Australia has amongst the highest if not the highest electricity prices. The rationale underpinning all of that is the investment in the network services.

CHAIR: Mr Mountain, do you wish to make an opening statement?

Mr Mountain : I will just make a brief statement to thank you for calling me to come to the meeting. I have put a lot of effort into my submission, and I would be happy to answer any questions that you have on it.

Senator THORP: You said earlier, Mr Green, that the regulatory system is not working and that major change is needed, while you did appreciate some of what you described as the smaller changes that are occurring at the moment. What change would you specifically like to see take place? How would the regulatory regime look differently if you were able to design it?

Mr B Green : I would start off by having an equal representation of the government side, generators, network service providers and consumers. The largest element that is missing at the moment is consumers: the large energy users, which I am obviously representing, and the households. Right across the board, that element has been missing, and I think that is a crucial point that should be included, because a lot of the policy that has been made has been made without fully appreciating the impact that that policy is going to have on both households and business.

Senator THORP: Increased representation from the user end of the spectrum?

Mr B Green : Yes.

Senator THORP: You mentioned that the introduction of the carbon price has had some minor effect on cost but certainly not a significant one. Would you elaborate on that for me, please.

Mr B Green : Certainly. The carbon price came into effect on 1 July this year. What we were looking at prior to that were price increases that were in the order of 30 or 40 per cent. Carbon played no part in that. Over that same period—and I am going back over eight years—the actual cost of generation in real terms has fallen, so the cost of generation has gone down and yet the cost of electricity to both industrial users and households has gone up very significantly. It has gone up because of the expenditures in the network services.

Senator THORP: It sounds from what you are saying as if you do not believe that those investments in network services were necessarily required.

Mr B Green : That is correct. The comment that is often made is that we have had to have investment in network services because peak demand is rising and the ageing infrastructure is falling. I would point to the experience overseas, in particular in the UK. In the UK, over a similar period, the system has been augmented to meet rising demand and ageing assets, but over the same time the real cost of operating that system has fallen by 50 per cent, so we have seen that it is possible to provide a secure, reliable system and to reduce the cost of those services. That is not happening here.

Senator THORP: What are the main things that they are doing differently in the UK?

Mr B Green : I think it basically comes back to how the regulatory framework is applied and how the businesses are held to account for their expenditure, and I also believe there is greater involvement of the consumers.

Senator THORP: We see quite a range of scenarios around our different jurisdictions in terms of ownership of the electricity assets, whether they are government or private. Do you have a particular position on the role of government in the ownership of the generation, transmission or retail parts of our electricity companies state by state?

Mr B Green : Yes. Basically, I believe that is a point of conflict. Where a jurisdiction is the owner of the poles and wires and is also receiving revenue from that, it is obviously conflicted in how it sets about passing the legislation that governs regulation. If you look at the networks in Australia, in Victoria they are privatised, and in New South Wales and Queensland, for example, they are owned by the jurisdictional governments. In those areas the expenditure per customer is around six times what it has been overseas. It is significantly higher than what we have here in Victoria, and that gap is growing almost exponentially. If you look at reliability in terms of minutes of supply, I do not believe there is any statistical difference between the reliability standards that apply in New South Wales, Queensland and Victoria. So we have a situation where the privatised networks are spending significantly less money, operating far more efficiently and yet delivering a reliable service.

That is not to say that our position is that all the networks should be privatised. That is a political decision. What we would say is that, whilst the Victorian networks are not world class, they are the best in Australia, and they should be held as a benchmark that the jurisdictional businesses should achieve as well. I do not believe there is any reasonable justification for a government owned business to be charging substantially more than a privately owned or to be investing more than a privately owned. If we had very poor reliability here in Victoria, then I believe there would be a position to state that we were not operating efficiently and reliably.

In the business that I am employed by, if we lose electricity, we have instantly lost a million dollars. It does not matter how long it is. The minute we have lost supply, we have lost a million dollars. If it goes on for a few days, it is a million dollars a day that we have lost. Reliability is essential to us. We have that reliability. I purchase energy in Victoria and in New South Wales. In New South Wales I am paying around 30 per cent more for the same energy that I am buying here in Victoria, and the difference is almost wholly the network charges.

Senator THORP: Thank you. If there were one single recommendation that you would like to see come from this committee, taking into account our terms of reference, what would that be?

Senator EDWARDS: If you were emperor for the day!

Mr B Green : I think I have already stated that it would be starting again with the framework and having equal representation from government, generators, networks and consumers.

Senator THORP: Could I ask the same question of you, Mr Mountain.

Mr Mountain : I will try and answer it but just add a little bit more detail to the context. There have been a number of reviews and attempts to improve the regulatory framework and redesign it over the last six or seven years. I think they generally have not got terribly far. There is increasing complexity, and it is not clear that those changes are leading to better decisions. I think the fundamental issue that needs to be on the table—and it is one that I think that the regulators themselves cannot put on—is one of policy, and that is choosing a regulatory framework appropriate to the ownership arrangements. So, if the ownership arrangements change, the scope of change for the regulatory framework might be smaller, but if the ownership arrangements do not change then I think there needs to be a very careful look by policymakers, not by regulators. They alone have the scope to open up these issues into the design of a regulatory framework that is suitable for the ownership.

Just to put a little bit more clarity on that: I think five-yearly price controls setting prices or revenues for five years and fixing them for that period of time are a very onerous form of contract. I think that it requires discipline on the part of shareholders and managers to be able to operate effectively under that, and I think the conflict-of-interest and other governance issues that are linked to government ownership of the networks simply have demonstrated quite clearly—the data seems to suggest—that it has not actually achieved suitable outcomes. That is the issue that I think needs to be on the table, and it is not one that the regulators have a mandate to put on the table. I think it is one that the policymakers alone can.

Senator EDWARDS: Mr Mountain, I will just continue with you and your submission. You have made a wish list. We took evidence on Tuesday where some of the witnesses effectively said, 'Wasn't it great in the good old days when electricity assets were nationalised?' Yet you are advocating divestiture and regulatory reform, which I will come to, in your submission, Mr Green, because you have been quite critical of the regulator in dealing with these things and consumer empowerment. How is divestiture going to add to what you have just talked about?

Mr Mountain : There is actually quite a lot to answer that. Firstly, to come to your contention that others have said they were the great old days when the government owned them and we could take long-term investments, the issue of regulation and ownership are intertwined. So judgements on the efficiency of an industry and the suitability of ownership arrangements need to take account of the governance arrangements of it and the way prices are actually controlled.

Where accountability rested directly with the state treasuries and the premiers and they controlled the prices, one could then have a debate on the efficiency of the industry and the outcomes that it produced. We have, in a sense, melded together governance and a regulatory arrangement of price cap regulation which was adapted to privatised industries. We have done that with government owned businesses on the assumption that the government owned businesses will behave like private ones. I think that is the core of the problem.

In match adaptation or a simple transfer of a scheme of price regulation suitable for privately owned businesses we have created mixed incentives for the governments as owners of those businesses. They have now obtained a substantial income stream through dividends, fees on debt and the income tax on the profits that was not there before when it was under the state bodies. So we moved to change the regulatory framework without changing the ownership arrangements.

As I said, my core view is that you need to design a regulatory arrangement that is appropriate to the ownership. You cannot just imagine that the privately owned businesses will behave like the government owned businesses and just ignore the fact that the treasuries have a very considerable income interest in these businesses that is likely to affect their governance of those businesses.

Senator EDWARDS: You are saying that divestiture is key. Perhaps I am missing something here. You would like to see everything privatised across the country and let them behave like businesses and have a regulatory environment which is far different to this one. So it is the behaviour of the regulator, really, and the message that it sends that you are advocating, rather than who owns it?

Mr Mountain : As I stated earlier, I think if the networks were privatised, the scope of the regulatory changes that would be needed would be smaller. I think price cap regulatory controls, five-yearly controls, which is a very onerous regulatory arrangement, are pretty unusual by business standards. Very few businesses come to their customers every five years and fix revenues and prices and forecast demand. It is an onerous requirement for the businesses that spend billions over five years and have incomes of many, billions over five years.

I think that arrangement and the incentives and the pressures on the shareholders once they know that their income has been set and the way they maximise their rate of return to control their costs is reasonably well suited to private ownership. I think the scope of the regulatory change if you privatise is less. But if privatisation is not achievable, if that is not what the politicians wish to achieve, then I think the issue is regulatory change, and the scope of the regulatory change needs to be more substantial.

Having said that, I do believe that the evidence seems to suggest in Britain and in Victoria and elsewhere that there is no particular reason for government to own these businesses. It brings nothing to the governance and the management of these businesses that the private sector cannot achieve and evidently has managed to achieve at a lower cost. If one of your objectives is the long-term interest of consumers, the evidence seems to suggest that under private ownership with a suitable regulatory arrangement—

Senator EDWARDS: Good. I will move on. Just before I do, let us go back to the carbon tax discussion. You made a contribution earlier about the fact that it had not had an impact and that it was networks that were the villains in the whole thing. Do not worry: I called them villains when they were here before you came. Have you done any modelling for your members to indicate what will be the real cost of the carbon tax when they are using energy?

Mr B Green : Yes. The carbon tax will be a significant cost. The point I was making is that we are looking at the significant increases that have occurred in electricity costs over the last few years.

Senator EDWARDS: We get that. I am specifically interested in what you believe will be the cost impost on your members because of the introduction of the carbon tax.

Mr B Green : The introduction of the carbon tax will have a significant impact upon costs. For the company that employs me, around 15 per cent of our energy costs will be attributable to the carbon tax. It is a very significant impost to us. We are a very heavy energy user, and the impact the carbon tax is going to have is an increase of around $16 million to $17 million per annum on our energy costs.

Senator EDWARDS: That is just you.

Mr B Green : That is just me. For large energy users, those percentage increases would be equivalent across the board.

Senator EDWARDS: Consistent?

Mr B Green : Yes.

Senator EDWARDS: Fifteen to 18 per cent, I am hearing?

Mr B Green : Yes. With a household bill, a household is paying around $200 to $250 per megawatt hour but consuming small amounts. When you come down to large industrial users, they are going to be paying between $40 and $50 per megawatt hour but consuming vast volumes. Then the carbon impost becomes a much larger percentage of that energy price.

Senator EDWARDS: So how are you going to recoup that 15 per cent impost on your business?

Mr B Green : We cannot; we have to rely on incentives under the energy-intensive trade-exposed industry system to try and mitigate that cost.

Senator EDWARDS: So you are seeking a subsidy?

Mr B Green : We are seeking a subsidy.

Senator MILNE: It has been allocated.

Mr B Green : It has been allocated, yes. What we are doing is looking at how we can best utilise that allocation of free issue permits to defray the costs of carbon.

Senator EDWARDS: What are those allocated funds intended to cover? Will you fully recoup it? You cannot pass on the cost.

Mr B Green : We will fully recoup it in parts of the business; in other parts of the business we will not.

Senator EDWARDS: And you will not be able to recapture that from passing it on to your customers.

Mr B Green : We cannot pass any price rises on to the customers because the industry I am representing as an employee is the pulp and paper industry, and the prices of paper in this country are set by imports. So we cannot raise our prices; we have to match the imports.

Senator EDWARDS: So you are subject to a trade market restriction because you will not be able to compete if you try and apply that to your business.

Mr B Green : That is correct. We are operating in an international market, and international forces set the prices. So we have to absorb those costs or use the subsidies we get under the free carbon permits to defray some of them.

Senator EDWARDS: Will this marginalise your business to a point where you have to reconsider what you are doing?

Mr B Green : Hopefully not, but it is a very real concern and we have seen elements of the manufacturing industry that have ceased business. It is very difficult to put a direct reason to that. There are a range of possible reasons. There is the exchange rate at the moment, the international competitiveness and the energy prices. But, for energy intensive industries, the rapid increase in prices is a major factor in the demise of some industries, or in their lack of profitability.

CHAIR: Last question, Senator Edwards.

Senator EDWARDS: Last question? Don't we have plenty of time?

CHAIR: Senator Milne has to ask a question, and I have not asked any in a while.

Senator EDWARDS: Obviously you did not like the way that was going!

CHAIR: Your have asked about eight questions.

Senator EDWARDS: It is a very important issue, Chair. Mr Green, you have been quite critical of the Australian Energy Regulator in relation to being able to deal with—I think these were your words—ambit claims of network operators and the excessive expenditure and demand growth predictions by network service providers. Everybody has been advocating for more skills and resources for the Australian Energy Regulator, and I suspect that, given your critique of their operations, you would argue that that is a correct assessment. They do not have the skills and resources to adequately do their job?

Mr B Green : I am not qualified to comment on that. My understanding is that they are a very well equipped organisation. The point I would make is that they do not prosecute the existing rules to the fullest extent that they are able to, and that, as a consequence, claims which we would regard as ambit claims by the network service providers do get accepted. The other real issue here is the fact that the network service providers can cherry-pick elements of the regulator's decision that they do not like and tackle them and take them to the ATT. If the network service providers were controlled such that they could only challenge the entire decision, and the entire decision was then reviewed, I think we would have different outcomes.

Senator EDWARDS: I will go to my last question, but if we have time I will come back to you.

CHAIR: One more.

Senator EDWARDS: How do you empower consumers in the regulatory process, which was on your wish list in your submission?

Mr B Green : By having consumer representative bodies that do have the skillset to address the issues being involved in policy framework discussions on the drafting of the framework—not necessarily setting it but being involved in discussions around the drafting of the policies before they become set out in drafts. When you are trying to respond to a draft, it is very difficult to get any changes across; but, if you can be involved in the preparation of that draft, I think it is a different outcome altogether—and a more balanced outcome.

Senator EDWARDS: And that does not happen now?

Mr B Green : It certainly does not happen at the moment.

Senator EDWARDS: That was part of your issue, too, Mr Mountain, I think.

Mr Mountain : Yes—both in the formation of the regulation and—perhaps even more—in its implementation. This is an area that has enormous potential to bring about positive reform. As I set out in my paper, commonly adopted both federally in the United States and at a state level is a process of regulatory settlement where network service providers and energy utilities—sometimes it is not just the network service providers—sit on one side of the table and make a proposal on changes to prices or revenues or investments, and consumers and their spokespeople sit on the other side and there is a process of settlement between the two where the role of the regulator is to bring the parties together, to help them to understand each other's views and to bring counterproposals together and, after a period of time, to see if they can settle. This settlement process has a long history in the US and has been shown to be an enduring mechanism.

It would be quite a sizeable change in economic regulation where the regulator would go from a regulator of first resort to a regulator of last resort and step in if the parties could not agree. The effort then would need to be made to ensure that there was adequate representation of users and of their views and that there was a fair settlement process. But there is strong evidence to suggest—and I have cited the research on my paper—that this arrangement has brought substantial benefits and been stable and has brought innovation, quicker settlement of differences and less adversarial outcomes. I think there is enormous scope for us to move down that path. It will be a sizeable change from our current arrangements, and we cannot go straight to it from where we are now—we would need to develop the institutions and we would need to develop the mechanisms—but I think that, as a policy direction, there is fantastic opportunity in that, and I would love to see that get somewhere.

Senator EDWARDS: Chair, I will acquiesce, but I would love to speak to them again if there is time.

Senator MILNE: I would like to go to this proposed rule change that you made to limit the exercise of market power. Clearly that is something that needs to be looked at in terms of the wholesale price of electricity. Do you want to elaborate on that?

Mr B Green : Which proposal was this?

Senator MILNE: I may have mixed yours up with another submission, but I thought you had proposed that there be rule changes in relation to market power.

Mr B Green : I believe that is the major energy users association, which is a different group.

Senator MILNE: Okay. Mr Mountain, I want to come to your submission particularly. You question in your submission the claim that rising peak demand levels can be attributed as a cause of rising electricity prices for end users, and you highlight the differences between New South Wales, Tasmania, Queensland and, of course, Victoria. I spoke earlier with the regulator about demand projections and the power of the regulator to interrogate those projections and then take some action in relation to them. Would you like to elaborate a bit more on that, because it is a commonly used excuse?

Mr Mountain : Indeed, maybe it would be useful if I clarified it. Rising demand—all things being equal—does require additional investment to meet that demand, assuming your existing capacity is exhausted. The issue is, yes there may well be—and there may well have been; I would say perhaps more 'has been'—an issue of rising demand as a factor that could have justified rising expenditure. However, the issue is that rising demand does not lead to an automatic increment in the network expenditure to meet that demand. There is a lot that network service providers can do to meet that demand at lower cost through better design of installations, through better operations of their network, through the design and the choice of the technologies that they use.

What I mentioned in my paper, and the detailed research that is cited to back it up, was studies that I had done of distribution and high-voltage networks, which compared the dollar value of the investment made to meet a megawatt of rising demand in the different jurisdictions. That data found a very sizeable difference in New South Wales, Queensland and Tasmania, on the one hand, and South Australia and Victoria in the case of the distribution networks; and, in the case of the transmission, Victoria mainly, against all the others. That indicated to me the Victorian network service providers generally were able to meet rising demand at lower cost—much lower cost. There was not a slight difference; there was a factor of three to six times difference. The blanket statement 'rising demand leads to higher cost' might be right as a general contextual statement, but inside of the contextual statement is the much greater issue, which is the expenditure incurred to meet that rising demand. There the evidence is very clear. As I say, with both the high-voltage and the low-voltage networks there is a very sizeable difference in the performance of the network businesses, and there are many, many billions of dollars worth of expenditure in that.

Senator MILNE: Also, in your submission, you dispute the other frequently cited reason for cost increases, and that is the length per connection. Do you just want to elaborate on that a bit?

Mr Mountain : This issue comes up the first time people talk about costs in Australia versus cost in other countries or costs in Queensland versus costs in Victoria; they say it is due to customer density. It is absolutely right—we are a big country, our states are large—but you have to dig into the data in a bit more detail to understand what is really going on. We are an urbanised country—72 per cent of our population in the south and eastern states lives in our cities. By international standards, our city density is comparable to that of other First World countries. The added network length that we have per number of customers—the single wire earth return network or lower voltage networks which extend to the rural customers in South Australia and Queensland and elsewhere—are inexpensive, relatively low-service quality networks elements. They add up to the total network length, but they do not affect underlying costs, either for construction or maintenance, in a meaningful way. Of far greater import to network costs is how much is underground versus how much is overground. We have a substantially overground network. Again, this is different to many other first world countries, which have substantially underground networks. All things being equal, we ought to be considerably lower cost on a comparable basis, as a broad general statement. These things vary from inner city to suburbs to outer metropolitan areas.

Senator MILNE: So how would you make it substantially lower cost? Who do we have to interrogate to prove the claims and change the rules so that we get a more realistic outcome?

Mr Mountain : I think it comes back to the regulatory framework and the regulatory design. I think the five-yearly price control process—I have seen it in operation and I have been actively involved in regulatory reviews at a number of levels in Australia and elsewhere—has turned into a 'discovery of needs you never thought you had' process where over a period of time the network businesses aggregate the information. They have an incentive to make a higher claim to the regulator than may necessarily be the case. It creates breathing room for them as management and shareholders while there is a difference in their rate of return and their underlying costs and they obtain a greater benefit through the expansion of the asset base. So there is that fundamental regulatory design issue.

There are also issues of asset valuation and issues of rates of return, which are linked to the regulatory design in some sense but they merit an investigation of their own. Per length of cable per customer installed, the valuation of our electricity distribution and transmission networks is very high by international standards. It is not to do with the exchange rates. Why? We do not have an underground network.

Senator MILNE: You make a suggestion in your submission in relation to the points you just made that there should be a benchmarking exercise so there is some greater clarity and so on. The Productivity Commission is doing some work in this area. Can you just give me a sense of whether you are hopeful that the Productivity Commission will actually interrogate this in the way that you have suggested. How do you feel about that process that is going on at the moment?

Mr Mountain : I obviously cannot speak for them. I have had frequent interaction at various levels with staff working on it, understanding their research and testing claims that they have made in their research. Personally, I think their overall thinking process on this is sound. I think that they conceive of a much greater role for regulatory comparison to be used as a tool when setting the expenditure allowances. I have to say that this issue of benchmarking is very powerful on many levels. It can be used not just in setting expenditure allowances but in setting the incentives by saying, 'Here is the benchmark, not just on expenditure but on asset valuations, prices and levels. If you are on the wrong side of that benchmark, you will obtain a lower rate of return.' Under that phrase, 'benchmarking', there is a wide scope of options available. It comes down to regulatory discretion and the courage to use those options.

The first opposition to benchmarking is always, 'But we are different.' The endogenous and exogenous factors—that is always the starting point. Everyone recognises that people will play games on those. It is not in those early stages that benchmarking is actualised. It is in the grind of the regulatory debate over a period of time. There is an asymmetry of parties to that debate. So there is always a tendency to try to carve out and explain reasons for those differences. It really requires courage to implement.

Senator MILNE: We will have to wait and see what the Productivity Commission does with it. I just wanted to ask your response to the AEMC Power of choice recommendations. Do you think that they go far enough? I have heard you say that you think the system is broken and needs fixing as opposed to just modification. But it seems to me the Power of choice recommendations may facilitate some significant change. I am just interested in whether you think that will occur or whether you think further reforms are required in a more explicit way.

Mr Mountain : No, I absolutely think far deeper change is needed. But the idea of the participation of energy users, both in the wholesale market and bringing in their preferences to affect investment decisions at all points in the value chain, is an aspiration. It is like world peace: everyone is going to vote for it. But in its implementation it is an altogether different story. I think the AEMC has made positive progress in seeking to actively bring large users into the wholesale market. The idea of aggregating their demand so they can offer that into the market is very positive, and there is great benefit in that. But there is even more benefit in ensuring that consumers' network costs are monetised at their level. That is just a terrifically difficult thing to do. You are effectively trying to encourage businesses, who make money by selling more, to make money by selling less. Those regulatory questions are not even on the table yet. That is going to be an aspiration for years to come. Bigger reform and bigger change could be made in the regulatory design for the price control arrangements as a stand-alone area and by keeping the pressure on for better cost pass-throughs, better user involvement, at all levels. But certainly for the vast bulk of consumers I do not see a great hope of bringing about change in the short term on that.

Senator MILNE: So that is basically what you meant in the beginning when you were saying that these are really policy changes, that the institutional structures that exist at the moment are going to grind along relatively slowly and it is going to require a policy change that says you will only be profitable if you use less.

Mr Mountain : Yes, I think it is that. Certainly some states in the US have done that and there is evidence to draw on.

Senator MILNE: Where is a very good example?

Mr Mountain : Most notably the western states of the US, where they have implemented a number of programs over a period of time. I can point you to the evidence of those programs. However, I should add that, in the US system, it is for vertically integrated companies by and large. Many of the companies that are affected own generation, retail electricity and operate the networks. They have an ability to respond to whole-of-system incentives, which is far more difficult than we have with our vertical disaggregation. From a regulatory design point of view this is a very difficult area and it is a stand-alone area. My point is the far more fundamental one of the regulatory controls, revenues and prices that we have in Australia. Going back 15 years ago, we adopted the British system lock, stock and barrel without too much thinking about its application to the differences of ownership. If there is one thing I would like to leave you with, it is to say that that is the critical issue. That was never critically examined. It was never properly studied. We now have the evidence to suggest that it has gone badly wrong. That is the issue that needs to be on the table. The regulators do not have a mandate to put it on the table, or to alter it, so the AEMC's rule change reviews have been working on smaller issues—elements of change of the current regime, not a fundamental questioning of the regime.

Senator MILNE: That is something we can certainly take on board. I happen to agree with you. I think we are only going to bring about the change if we implement it from a political policy perspective. I want to come back to you, Mr Green. You spoke about carbon pricing. Isn't it also true that the pulp and paper industry is highly cyclical in terms of its profitability globally and that exchange rates are going to have a much more significant impact on the business than carbon pricing will?

Mr B Green : Certainly it is a cyclical industry. If you look at the pulp and paper industry over the last 10 or 15 years, you will see that the real price of paper has fallen at a rate of CPI minus three to four per cent. Over the same period the quality of the product has improved significantly. It is certainly a high-cost, low-return business. It is a business that struggles to survive. What we have seen in Europe and North America is that quite a number of businesses have failed or been closed over the last few years because of some of these cyclical conditions.

What I would say is that we are very energy intensive. Although I agree with the business parameters that you are putting forward, the price of energy is a crucial cost. Our biggest input costs are wood, chemicals and energy. When we see prices rising by 30 or 40 per cent, we just cannot sustain that.

Senator MILNE: But the point I am making is that, relative to the exchange rate and the cyclical nature of the business, carbon pricing is the least of the three.

Mr B Green : I would agree. Certainly the exchange rate is more critical.

Senator MILNE: I think it was important to establish that in the context of the discussion that we had earlier. You put a dollar value on the cost of carbon pricing. Would it not be fair to say that that is the subsidy the community offered to your industry ad infinitum previously? What I am saying is you externalised the cost of the energy that you produced to the atmosphere ad infinitum previously. Now that cost is being internalised; previously it was a subsidy the community paid to you and that we are paying for in terms of climate change. Isn't that one interpretation of what is going on?

Mr B Green : I am not sure I follow your argument.

Senator MILNE: I did not expect you would, but I just put that on the table about internalising costs.

Senator EDWARDS: That is a bit rough.

Senator MILNE: Let's get straight—

CHAIR: Let's not have a debate about it. He has tried to answer the question. I would like to ask a couple of follow-up questions. It is true, isn't it, that most large energy consumers and big businesses are able to negotiate better terms in their energy contracts than the average household consumer in terms of the unit price for electricity, if you look at historical comparisons in Australia over recent years?

Mr B Green : Along with many other commodities, the price is related to volume. If you have an industry that is taking a high volume, it gets a relatively lower price. That applies to the unit cost for energy—the electrons. You can negotiate the price. You can go into the marketplace and seek tenders. You can negotiate with a supplier. What we cannot negotiate on are the network pass-through costs. Those costs are regulated and industry pay a significantly greater proportion of those costs than households do. It is the network costs that are rising uncontrollably. We can argue about the energy price. We can negotiate on that. We cannot negotiate on the pass-through of network service provision.

CHAIR: In that respect, do you support the recommendations that are being made by the AEMC in the power of choice review to variable pricing, smart meters and the implementation of those programs?

Mr B Green : I think variable pricing is aimed more at households and small to medium businesses. If you look at large businesses, large businesses have been on variable pricing for many, many years. Our large energy user contracts have a price for peak and off-peak, which is effectively what you would get through interval pricing. So large industry has been on interval pricing for many years and those recommendations would not change that, in my view.

Mr Mountain : This is not an area that I have studied at length, but my view is we should have as active competition as we can in the market and allow service providers to bring together interesting propositions for users. In my role as a household consumer, I would certainly be very sensitive to great price differentials and I would change my pattern of consumption. Properly marketed, metering technology is an element in that. That is a very suitable outcome. It is a secondary question as to whether that is mandated, who bears the costs for that and how it is rolled out. I think the focus has to be on maximising competition in the market and allowing the innovation to occur.

CHAIR: Going back to your point earlier, Mr Green, about the costs for your business in terms of the carbon price, you mentioned that you are in an internationally competitive marketplace and you are a large consumer of energy. Hasn't that been recognised by the government through the Jobs and Competitiveness Program and the fact that your industry will get 94.5 per cent coverage for your liability through that program?

Mr B Green : Fundamentally I think the answer to that is yes. As you say, the program is 94.5 per cent. That will reduce at 1.3 per cent per annum over the next three years at least. It is against a framework of the average energy intensity for that industrial sector. I think the premise there is correct. It is not seeking to give 100 per cent recovery and it is still incentivising businesses to strive to improve their efficiency and reduce their energy use. I would say that, without that subsidy, I very much doubt that we would be able to continue in business in Australia.

CHAIR: I am just looking at the main countries that are in the pulp and paper game, in terms of volumes. If you look at the top 10 of those nations, five of them are covered by emissions trading schemes and three of them will be in the exact same emissions trading scheme that we will be in when we link internationally to Europe after the fixed-price period ends. So there is a levelling of the playing field, if you like, in terms of where we are headed internationally.

Mr B Green : There is an ultimate levelling. The challenge for us is to survive to get to that point where it is a level playing field. It certainly is not at the moment. If you look at the price that we are playing paying for carbon, there is a $23 price on carbon but then the RET in its various forms is a de facto carbon price. You add that to it and the carbon price effectively to the company I work for is around $34 a megawatt hour. That is significantly greater than for any of our competitors. Our challenge is to survive over the next few years till we get to that level playing field. I accept that the EITE subsidy is helping us to meet that challenge.

CHAIR: Do either of you have any points to make about increasing demand-side participation as a means of taking some pressure off on peak loads and incentives that could be introduced into the system to increase demand-side participation, particularly in the distribution sector?

Mr Mountain : I will mention a study I did for a company called EnerNOC, Paul Troughton of which, I understand, is going to be speaking later today. I will leave him to speak to that. What my study found was that decreasing demand—actually avoiding 3,000 megawatts of demand—would have saved, by my estimate, roughly $15 billion in present value terms. So there is a sizeable saving to the extent that that demand can be avoided permanently. I think any mechanism to involve the demand side of the market is essential to the market's health. That statement is as true in the energy markets, wholesale and retail, as it is for the networks. So I think time and effort spent finding ways to empower consumers through the regulatory framework and through the market design is time and effort well spent. But these issues are extraordinarily difficult, most notably bringing users into the peak demand markets, because it is not just about them; it is also about how you actually control the networks.

CHAIR: Does that paper that you prepared go into specifics about actual plans and how you do it?

Mr Mountain : No. It was purely a costing paper using information on historic expenditure and historic changes in peak demand. By drawing trends of the two in different parts of the NEM, I was able to produce a costing, also taking account the cost of building peak generation, which is a fairly straightforward element of the cost. The far more contentious one is the network. Using that data, I was able to come up with a costing which I felt was adequate for the purposes.

CHAIR: Can you point us to any papers or studies that do look at policy initiatives from a government perspective?

Mr Mountain : Yes, I can.

CHAIR: Perhaps you can take that on notice and provide us with that in due course.

Mr Mountain : Yes.

CHAIR: Do you have anything to add, Mr Green?

Mr B Green : Not really; I just echo the sentiments that Mr Mountain has expressed there that demand-side management is an important element and it is one that should be pursued further.

CHAIR: We talked earlier about variable pricing. I also mentioned about smart meters. Do any of you have a view on smart meters? If governments were to push the rollout of smart meters, how should it be done in an effective manner and get better community support than it has had in Victoria?

Mr Mountain : I am happy to make some comments on that. I think it is around the issue of a mandate and obligations. Once again, I think the goal of regulation should be to allow competing service providers to compete where possible, to create scope for them to provide those services. To the extent that you actually mandate it and regulate it, I think it is something to be avoided. The technology is so fast moving. The issue should be around ensuring that the market is competitive, that retailers are incentivised to offer products in the same way that they do with telephone services—that bind in the cost of a handset is part of the service. Create the market environment for those ideas and those market opportunities to flourish; that would be where I would put my effort, not in mandating rollouts.

Senator EDWARDS: In the closing minutes, I will come back to a report which Carbon Market Economics commissioned, which you conducted some research into, Mr Green. Before I do, just how many people are employed in your sector in Australia who are under pressure now in this marginalised business, for whatever reason you are now marginalised?

Mr B Green : I have no idea.

Senator EDWARDS: How many in your business—who obviously would read the transcript of what you are saying here? Yours is a pretty tough business.

Mr B Green : Our business employs directly around 1,500 people and indirectly the multiple of businesses that are supplying us—about four times. Largely we are regional businesses and supporting regional communities. So the loss of the business would have a major impact on regional Victoria.

Senator EDWARDS: If you went out of business, where would you be replaced from overseas?

Mr B Green : By increased imports into this country, probably from Asia.

Senator EDWARDS: So is your association screaming to whatever relevant government about your now marginal status as a business? You are talking about 5,000 or 6,000 people looking down the barrel of not getting another job in in Australia.

Mr B Green : I think we need to differentiate the fact that the Energy Users Association is primarily an association for large energy users. We are advocating on behalf of those energy users. Within the pulp and paper sector, which is where I am employed, we are making representation at the relevant positions to push our cases.

Senator EDWARDS: For fear of folding—excuse the pun—with the paper business?

Mr B Green : Yes, that is a very real possibility.

Senator EDWARDS: The power premium in Canada is to rise to 250 per cent once the carbon tax and locked-in price increases take effect. Have you drilled into those increases from 130 per cent? This is in comparison to the American average. This is what the research from Carbon Market Economics found and what you put in your submission. Where do we go from 130 per cent to 250 per cent once the carbon tax and locked-in price increases take effect?

Mr Mountain : Perhaps I should just clarify that that is my firm. I have not put in a submission in the name of my firm because I am here in a personal capacity. I authored that study. It is dated March of this year. I obtained data from government sources in all countries and compared prices in those—

Senator EDWARDS: That is terrific, but I am interested in how we go from 130 per cent to 250 per cent. That is your assertion. I thought it was a good thing to do, but how do we get from 130 to 250 and when?

Mr Mountain : It is almost entirely network costs. Carbon costs are part of it, but it is a change over time. I cannot actually recall the period but it would have been around five to seven years, and in aggregations over that period of time network costs would have been the greatest reason for that increase. We are roughly at that level now. We are not far from that difference in average electricity prices paid by households in Australia versus those—

Senator EDWARDS: Was that predicted in March this year?

Mr Mountain : No. That difference to March this year was using figures up to 2012-13, which is a year's time.

CHAIR: Thank you both for your evidence today.

Proceedings suspended from 12:01 to 12:59