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Select Committee on Electricity Prices
25/09/2012
Electricity price increases in Australia

ANGEL, Mr Jeff, Executive Director, Total Environment Centre

BYRNE, Dr Mark, Energy Market Advocate, Total Environment Centre

CHAIR: The committee welcomes representatives from the Total Environment Centre. We have received your submission. Are there any amendments or alterations you wish to make to it?

Mr Angel : No, just an opening statement.

CHAIR: Go ahead.

Mr Angel : The Total Environment Centre has been engaged with the National Electricity Market for about eight years. Essentially the engagement has developed to be broadly described as redefining the accepted version of the long-term interest of consumers. That has required and requires cultural change in the National Electricity Market and the industry utilities.

The redefinition of the long-term interest of consumers has been a preoccupation for us in two ways. The first is energy efficiency—that is, access of consumers, both households and business, to energy efficiency. Certainly that access has been quite small and it has not been on a level playing field with other energy supply options. Our position for some time, since we put in a major rule change a few years ago, was that in fact energy efficiency should be the first priority of the market, not the sale and generation of power. The second aspect of the long-term interest of consumers is the environmental impact, which has clearly been dramatised in the climate change debate.

The response of governments to those two challenges—and they have recognised them as substantial, real challenges—has been either to externally impose new behaviours or rules on the electricity industry, such as the energy efficiency target schemes in various states, or through the various rules change processes in the NEM to achieve some type of internal change in the operation of the NEM and its participants. We do not believe that at a national level either of those two mechanisms, external or internal, have reached their full potential. There is a lot more work to do. You will find a range of recommendations in our submission that drive towards that.

CHAIR: Do you have anything to add, Dr Byrne?

Dr Byrne : No.

CHAIR: A lot of the submissions have called for the rollout of smart meters across the country and time-of-day pricing as a means of driving change in consumer behaviour and increasing efficiency. One of the concerns that has been expressed by organisations is how you protect vulnerable consumers if you expose them to such market-based measures. I am wondering if your organisation has a view on how governments achieve the necessary level of protection for vulnerable consumers but at the same time try to achieve those efficiency outcomes through pricing mechanisms?

Dr Byrne : We have always supported the continuation of a kind of safety net in the electricity market in the form of regulated tariffs, which should be available to people who might be overly exposed to time-of-use pricing, and we continue to support that. At the same time, we think it is really important that more people who can afford to do so do go onto time-of-use pricing. We agree with the AEMC in its Power of choice draft report that more should be done with time-of-use pricing. I am sure that some of the other consumer advocates that are on after us will be more specific about how to protect vulnerable consumers.

CHAIR: The issue that has been canvassed widely today is that of, colloquially, gold plating—that is, network and distribution companies having incentives to overinvest. What is your view on that claim?

Dr Byrne : Don't get us started!

Senator EDWARDS: That was a Dorothy Dixer!

CHAIR: It wasn't meant to be!

Mr Angel : It is no longer a suspicion or an illusion; it has been admitted as a reality in senior political levels on both sides down to the regulators and participants in the industry. You will find in our submission a brief excursion into the Powerlink experience in Queensland. We understand Powerlink are one of the worst offenders in gold plating and exaggerating demand projections. Quite clearly that should be a high priority for government regulation or NEM rule changes to fix.

CHAIR: Do you have a position on how we achieve that?

Mr Angel : Yes, I can go through that. The AER requires greater flexibility by which to drive down gold plating; it does not have capacity to defend its decisions when the appeal is limited.

Dr Byrne : There are two aspects that have been clarified as we have gone on today. One is the five-yearly revenue resets and the other one is what happens when a network wants to do a new project. So, with the five-yearly revenue reset, the main things are how they determine the weighted average cost of capital, and there is a rule change that is related to that which will help. The second thing is whether they choose revenue or price caps. The AER found that the distribution networks in Victoria gamed the market to the extent of about $600 million over the last regulatory period by manipulating the price caps. So their preference is for revenue caps, and we have tentatively supported that although it is just the least worst outcome because there are so many things involved in that choice.

The other thing about those five-yearly resets is obviously the AER needs much stronger powers during the review process. The network only has to prove its claims, which we would say are mostly ambit claims given the number of appeals that have been successful, and the extent of the revenue increases that have been earned by both transmission and distribution networks over the last, the current and the forthcoming revenue determination periods show that it is very difficult for the AER to substantially correct these ambit claims. They only have to prove that the expenses that they are claiming are reasonable. It is very hard for the AER to say that they are not reasonable. Reasonableness is a very different criterion to accuracy.

Just on the AER, we have heard some criticism about their expertise. While we are not engineers or economists either, I think we have found the AER staff to be highly capable and professional. The problem is that there just are not enough of them and that they do not have enough power. So more resources to the AER would be a good thing. That is the five-yearly recess.

In terms of what happens when a network wants to do a new project the ball is definitely in the network's court, because they are the default providers of a new service, like a transmission line or a substation. They go out and they do this process, the regulatory test—now called RIT-T or the RIT-D—which the head of Grid Australia said was quite robust, but in our experience has been anything but. The AER does not actually review these processes. It is a bit like a judicial review where they say, 'Yes, you have gone through the process,' but they do not have the resources to go into the merits of each of these projects in detail. They have admitted that to me. There could be 100 of these a year, or whatever, and they just do not have the power or the resources to do that. So it is pretty much a tick-the-box exercise.

We found the inadequacy of that with regard to the TransGrid proposal for the Far North Coast of New South Wales: Dumaresq to Lismore line. The AER did a review of that and was highly critical of the way TransGrid had gone about that process. As a result, TransGrid has agreed to go back and do a RIT-T—which they did not have to do initially—if they get New South Wales planning approval for it.

So we think that with the projects proposals, as well, it is heavily geared in the network's favour and that it would be much better if the AER had the power to be like the arbitrator of a tender process, where either they or the networks on an annual or a five-yearly basis say, 'This is what we think we are going to need in terms of new projects over the next year,' or five years, and the AER says, 'Okay, we'll put that out to tender.' Demand side participants and the networks can put in and the AER can decide who should provide that service, whereas at the moment the networks are the default providers.

CHAIR: Does the system provide enough incentive, in your view, for transmission distribution companies to participate in demand side participation in the schemes?

Dr Byrne : No.

CHAIR: If not, how can that be improved?

Dr Byrne : They are very small. The demand management incentive schemes are tiny little schemes. They do not change the fundamental business case, which is that the more you build the more gets entered into your asset base for the next regulatory period. So there is a kind of incentive over a 30-year period to build more stuff because it guarantees your income in the future. Everything that has been proposed so far is just a tweaking of that, to whittle it away a little, but the fundamental business case remains. That is how they make a profit. Fundamentally, all these businesses throughout the supply chain are companies which are there to make a profit. In this scenario, they also want to grow. They cannot grow and make more profit without that somehow flowing through to consumers.

So there is a fundamental problem with the business model, especially with the networks, where we need to decouple the volume of energy they sell from the amount of revenue that they earn. So we think they should be energy service providers that can guarantee the power supply on the existing basis and then, if there is anything else they need to do, that is contestable.

Senator EDWARDS: Are you proposing we nationalise it?

Dr Byrne : No, not really. There is a problem with the fact that they are there to make a profit and to grow. If you have a solution please tell me.

Senator EDWARDS: No, but it seems to be implicit in your assertion.

Mr Angel : I am not sure that talking about a tender process and making profit is equivalent to nationalisation. I hope you are not interpreting what we are saying as they should not make a profit and that it should not be competitive. In fact, that is one of the fundamental problems with the national electricity market: it entrenches dominance by a few utilities. I particularly say that in terms of competition and energy efficiency. In some cynical way you could define the national electricity market as just a massive profit-making exercise. That is all right if they are providing a service that is in the long-term interests of the consumer, but once we have got through this price ceiling—and clearly that has reached a level of unacceptability—and once people do not have easy access to energy efficiency—unless it is regulated as in New South Wales and Victoria, where the utilities have to offer those services—there is a divorce between the financial interests of utilities and the long-term interests of the consumers. That is what I think the policy debate is about at its very fundamentals, and we have to solve it.

Senator EDWARDS: I feel your pain. As far as I can see we have all these different businesses that are looking to drive profits. With some there is a dividend to government, as some of the states are still owned by the government. You have businesses that own the assets looking to make their businesses bigger in their insatiable pursuit of corporate greatness, and the only way they can do that is to make their balance sheet bigger and their return on investment much greater. Then you have these artificial barriers where you get little price manipulations like what happens in South Australia, which has the world's biggest electricity price per kilowatt—or the second at the moment. Certainly, you have a blockage there which you can use to manipulate peak markets. You can entrench profiteering. So I feel your pain. If you think coalition senators are here to offer some foil to what we are looking to do, we want efficient delivery of electricity for all states equitably. That is what we are looking to do. I know there was some concern expressed earlier about that.

I look at your submission and I think: 'Great! It's a very aspirational submission, but you don't supply any solutions.' You talk about the Australian Energy Regulator as needing more resources, but the last thing this government needs with the budget pressure that it has is a bigger bureaucracy. I am batting for you here, Senator McEwen—

Senator McEWEN: I am just wondering if you actually have a question.

CHAIR: You might want to get to your question.

Senator EDWARDS: How are you going to convince me that you have the answers to all these things rather than just providing a bigger bureaucracy? The Australian energy retailer has been bowled over 22 times out of 33. What resources do you think they are lacking that they need in order to become the force that you want them to be?

Mr Angel : Mark will tell you the figure, but given the financial size of the electricity market the capacity to levy—and I do not want that misinterpreted, as they are minute levies on electricity pricing—to provide those resources is easy. You have to get a sense of proportion as opposed to labelling particular solutions. We have provided a whole range of more or less regulatory solutions in here and, as you say, part of that will require additional resources. But compared with the amount of money these guys are making, compared with what consumers are not getting in terms of service, I am pretty sure consumers will say, 'If improving the AER's resources are going to protect me better as a consumer, why would I object to it?'

Dr Byrne : To take an example, if Powerlink Queensland went for a doubling of their revenue over the current regulatory period and the AER cut that back by 50 per cent, if there was a case for them cutting that back by even another 20 per cent that would have made a couple of hundred million dollars worth of difference that would flow through to consumers. If it costs us another couple of million dollars to resource the AER adequately I would have thought it would be a pretty good investment.

Senator McEWEN: I would like to ask your views on the patchy introduction of the National Energy Customer Framework. You make some comments about that in your submission and we have heard that the take-up by state governments has been variable. Could you address that and also what you think consumers are missing out on because of the failure of some state governments to implement that.

Dr Byrne : I came along after the NECF, as it is known, had been developed but I know as one of the consumer advocates that there was a huge amount of disappointment amongst all the consumer groups that there was such a limited response from the states from 1 July. Our experience—being New South Wales based, although we work nationally—was in particular in relation to the New South Wales government, which appeared ready to go with introducing these added consumer protections but did not do so just so that it could put that red text on the retailers' bills. We think that is a pretty tragic and poor outcome for consumers.

Senator McEWEN: That was the reason they did not proceed with the NECF, because they did not want to put information on bills from providers?

Dr Byrne : Yes. The missing link that I did not explain is that the NECF would have prevented them from having control over the retailers' licences; that would have gone to the NEM. They could only get that red text put on the bills by retaining control over the retailers' licences, so that is what they have done, for another two years. They pretty much admitted that.

Senator McEWEN: In the meantime the consumers miss out on that information?

Dr Byrne : Yes, and protections as well. Other people will tell you later a bit more about what those protections are.

Senator McEWEN: All right. You also mention in your submission that governments who are shareholders in energy companies make decisions about what they do with the profits that they earn from those companies. Do you think the average consumer is aware that state governments make those choices?

Dr Byrne : Not until about three months ago, but there have been a spate of articles in the media here, and to a much lesser extent in the national media, about where that money is going. That is just because it is so obvious in the case of New South Wales because there was the debate about whether it was more or less under Labor, with Labor saying about the government, 'You have increased the dividends,' and the government saying, 'Yes, but we have increased it less than you are going to increase it and we are scaling back.' Those are the two sides of it, but definitely there are very large dividends.

Senator McEWEN: How large?

Dr Byrne : We have a figure of around $1 billion a year. I can check that but it is in the budget estimates for New South Wales for this year.

Senator EDWARDS: But it is the system with previous years and previous governments, percentage-wise.

Dr Byrne : It has increased. In the current financial year it is a substantial increase.

Senator EDWARDS: How much?

Dr Byrne : Over $100 million.

Senator EDWARDS: Yes, but what is that as a percentage—10 per cent?

Dr Byrne : Yes, eight or 10 per cent.

Senator EDWARDS: There has never been an increase like that in previous times?

Dr Byrne : I do not know the entire history of the dividends over previous years.

Senator EDWARDS: Could you get that for us?

Dr Byrne : Sure.

Senator McEWEN: So the state government here could make a decision about what to do with that billion dollars, and presumably they are not putting it into health and education and certainly not returning it to energy consumers, so you have to wonder—

Senator EDWARDS: Cheap shot!

Senator McEWEN: You're pretty good at that too!

Dr Byrne : They would obviously say in response to the implied criticism we make that, if they put $500 million back into consumers' pockets, that has to come out of the state budget, and they would always say from health, education and police. It is obviously a trade-off. But, at the very least, consumers ought to be aware that that is part of the mix. It is not just all about the carbon price and renewable energy. It is not even all about the network charges. It is about what governments decide to do with that revenue.

Senator McEWEN: The Energy Retailers Association of Australia earlier today were strong advocates for the Victorian model. They say there no longer are regulated retail prices in Victoria. Do you agree with that? Also, do you agree with the view of the ERAA that that is something that other states should pursue?

Mr Angel : To the extent that the market can work to send signals to people to be more energy efficient by responding to prices, particularly at peak time, we support that. Obviously, as part of a broader consumer advocacy movement, or set of groups, we try to make that as socially compassionate as possible. There are ways of alleviating the pressures that may result from such a market driven exercise. That is where the national consumer protections were supposed to drive at. But in principle it is not our view that electricity prices need to be artificially dampened. To the extent that there is now a reduction in demand—at least in household demand; manufacturing has its own closure problems reducing demand—that is very good. But the deal on that is that when your prices go up you have incredibly easy access to energy efficiency. So you can actually deal with it in your own household. That is one of the things that is missing.

Senator McEWEN: Are you talking there of things like smart meters and the ability to negotiate better arrangements with your retailer?

Mr Angel : There are a whole range of things: the type of energy efficiency assistance that we have seen in New South Wales, firstly through the GGAS, the Greenhouse Gas Abatement Scheme, and the new Energy Efficiency Target scheme. The advertisements are now coming on TV, with energy utility officials sitting in people's bathrooms or in their backyards saying, 'We are here to help you reduce your electricity usage.' Well, that is what should be happening everywhere. I do think that the electricity utilities are the appropriate messengers, just because of their relationship with their customer base.

Senator XENOPHON: For the benefit of Senator Edwards I think I should point out that the only government that nationalised electricity assets was the Playford Liberal government, in 1946!

Senator EDWARDS: And we put money into it and became a very big stakeholder—

Senator McEWEN: Who undid that?

Senator XENOPHON: It was undone by the Olsen Liberal government—

Senator EDWARDS: And why was that? Because the cupboard was bare when we got to government. We had a state bank disaster.

Senator XENOPHON: Okay. I voted against privatisation, but let's leave that be!

Senator EDWARDS: We voted against the debt, but we still had it!

Senator XENOPHON: The member for Lyne, Rob Oakeshott, has put up a private member's bill that seeks to take over the regulation of the electricity industry at a federal level rather than have the state and territory approach we have now. Mr Angel, you just held your head and I am not sure if that was spontaneous or if it was because of the question! Does the Total Environment Centre have a view, firstly, as to the constitutionality of that and, secondly, as to the public policy efficacy, if it was constitutional. Do you have a view on that? I am happy for you to take it on notice.

Dr Byrne : Jeff was horrified, so I am happy to take it! We have not actually discussed this, but I was very surprised to see that bill. I wondered what the constitutional basis for it was, given that I thought the reason we have the NEM regulated through a COAG agreement was that energy was traditionally a state responsibility. If it can be done through the corporations power, then in theory I would think—Jeff may demur—that it is a good thing, because a lot of the problems we are encountering with the NEM are due to the fact that it is a kind of half-pregnant beast. There are still different regulations in different states, especially around the retail sector. We are not getting a lot of cooperation, say, around the National Energy Consumer Framework. So to have it regulated nationally, given that it is an almost national market, would in theory be a good thing.

Mr Angel : There is another dimension. If it was a purely national body, compared to the federal system, would it be easier to change or be more flexible in response to problems? I could argue that, if it were a national arrangement, one could not guarantee that the then minister for energy would be a flexible person in terms of some of these newer problems. On the other hand, one could argue that there is a degree of paralysis that could enter the decision-making process with all the energy ministers sitting around the table. In a sense, if we got the rules right in the National Electricity Market, you would not have to depend so much on that political decision making. In a general accountability and transparency sense, you do not necessarily want government setting electricity prices. As long as you have the right arbitration and public assessment processes accessible to consumers, as well as utilities, you could have a reasonably well-operating system. In one sense, Rob Oakeshott's legislation does not actually solve the problem necessarily, and there are deeper things that, if it were the national minister, they would still have to solve. I understood that the legislation was, more or less, a bit of an attack on state-owned networks and to get them out of the picture so that they would stop raising prices because they wanted dividends, but I am not too sure that that is the core of the issue that we are trying to solve here.

Senator XENOPHON: It really depends on the rules, but there is something to be said for having a one-stop shop to do with these issues.

Mr Angel : There is, as long as the access by consumer advocates is augmented and improved. One of the problems, both for TEC as a green consumer advocate and for our other colleagues in the more social welfare fields, is that they are completely outclassed in the process.

Senator XENOPHON: That goes to the next issue, of the limited merits review and the interim stage 2 report by Professor Yarrow, the Hon. Michael Egan and Dr John Tamblyn, released on 31 August this year. It made some findings, in part, that consumer bodies and network user associations were the justifications for their exclusion from the appeals process. It talked about the regime lacking legitimacy and stakeholders' interests not being considered appropriately. Do you engage in that limited merits review process or not, at this stage? Do you find, as the Australian Industry Group did, that it was simply too overwhelming or difficult to engage in?

Mr Angel : TEC has not been intimately involved—we have observed. What happens with the consumer advocates is that there are jurisdictional advocacy groups, like the councils of social services, there are national bodies, like Choice, and there are specialist groups, like TEC, that all get together and talk about these issues. When we get an issue like the limited merits review review, we say, 'Who is going to deal with this one?' and that has been dealt with by other consumer groups apart from TEC. But we would agree with that conclusion, and that is why we are now part of a group that is developing a new national energy consumers advocacy body under the direction of SCER—the Standing Committee on Energy and Resources—and that is a process that I think will go COAG in December. It is going quite well. The only issue is that, although we have government support for it, Minister Ferguson does seem to be keen for this new body to replace the funding under the consumer advocacy panel for existing consumer advocate groups, which only amounts to $1.5 million a year, and we think that it will probably take about $2 million to set up this new body and to fund it annually. That is about 10c per Australian person per year for a national energy consumers body. In view of the annual revenue earned in the NEM being about $8 billion a year, we think that it is not too much to ask for another $2 million to make the playing field more level.

Senator XENOPHON: Two million dollars is only three months of Mr Fraser's salary from AGL.

Mr Angel : We will take that to him, then.

Senator XENOPHON: I am worried about time constraints. I will put some questions on notice to you about the impact of residential solar panels and peak demand. I want to ask you a final question in relation to renewable energy sources, the distinction between the lack of reliability of wind power and the greater reliability of, say, some emerging technologies such as geothermal. For a whole range of reasons they have not got a leg up and got to that critical mass. Do you have a view on that? Is the long-term aim to replace baseload coal with baseload renewables? Wind energy, by definition, cannot do that because of the nature of its intermittent supply.

Dr Byrne : There are a number of issues there. I am not an engineer but I will do my best. At the moment, the five per cent figure you quoted this morning apparently has recently been updated. So in South Australia even at peak times AEMO is saying you can guarantee around eight per cent of supply.

Senator XENOPHON: It is between five per cent and 10 per cent?

Dr Byrne : Yes, but it is increasing as the amount of wind increases and we can expect that, if you get a network of wind farms in Queensland where there is not so much wind right through to Port Lincoln, you are going to increase that availability factor. The availability for each wind farm is usually about 30 per cent. It is just that match at peak demand gets down to about eight per cent. So that is changing and that will improve. The emergence of a number of different sorts of battery technologies will also help to increase the availability of wind and solar overnight, especially throughout the daily cycle, so that it will be more able to replace baseload coal. That is happening quite quickly on a small scale and on a large scale with things like molten salts and graphite storage. In other countries some wind and solar farms already have those and are therefore able to provide baseload power.

The other part of your question was about geothermal. My understanding is that there are not regulatory issues with geothermal at this point except that with geodynamics we would have to pay for a bloody long transmission line up to the Cooper basin.

Senator XENOPHON: Which makes it uneconomic.

Dr Byrne : The main problem at the moment with geothermal is technical. They have not proven the technology at this point.

CHAIR: On page 9 of your submission, towards the bottom where you are talking about the national Energy Savings Initiative, you are quite scathing about the AEMC, saying:

… the AEMC, which appears to have an ideological opposition to targets and obligations, is critical of the proposed National Energy Savings Initiative …

Why have you reached that conclusion?

Dr Byrne : They seem to be critical of anything that involves any sort of obligation on any market participant. They are all for incentives. They are all for carrots and against any kind of stick, but the networks and retailers have not been doing much heavy lifting on energy efficiency to date, so we think that some kind of light stick might pump them into more action.

Mr Angel : In a very fundamental way, this is a reflection of the defensiveness of the NEM regulators, particularly the AEMC. Whenever you talk to them about doing what would appear to us to be simple and dramatic, or at least make a difference, they get into this defensive mode, 'No, we're running a market. We do not prefer any particular option or technology. That is based on the belief that the market will produce the right decisions.' A properly operated market might, where things like energy efficiency had an equal go, but they have structured the market in a way that supports and enhances established technologies. That is exactly the reason there have been external policy influences or regulations such as energy efficiency targets put on the NEM. I remember saying eight years ago at a meeting about the national electricity and the law, at Melbourne airport just before Christmas—which was a reflection of their interest in public consultation, at the right time when people have access to it—that the NEM is not porous. It resists change to a far more greater degree than it should. It just does not tolerate those sorts of questions such as: 'Why don't you do more on energy efficiency? Why don't you do more on greenhouse gas intensity?' They say, 'That's not our business.' Yes, they are starting to change, but consistently you have this theme coming through that they more or less think the National Electricity Market is perfect and needs only marginal changes. That is the debate we are having with them. People do not think it is perfect anymore. It is not doing its job.

CHAIR: Thank you. Senator Xenophon, do you have any questions?

Senator XENOPHON: Yes, I do, Chair. I think I might put it in writing. It relates to using demand management as a market tool, similar to New Zealand's EnerNOC. Perhaps you could take that on notice as an innovative tool to use demand management almost like an instrument within the market.

Dr Byrne : We have supported the AEMC's proposal to allow demand aggregators like EnerNOC to be market participants in the power of choice.

Senator XENOPHON: Good.

Dr Byrne : Do you want to us to do something more than that?

Senator XENOPHON: If you have any other views on that that you think might help the committee, please provide them. Otherwise, if you want to let your answer stand as it is, that is fine.

Dr Byrne : Can I just clarify: on the issue of the constitutionality of Senator Oakeshott's bill—

Senator XENOPHON: Mr Oakeshott's bill—he's not in the Senate yet!

Dr Byrne : Sorry; Mr Oakeshott's bill. If it would be useful to the committee, we could obtain formal legal advice on that from the Environmental Defender's Office.

Senator XENOPHON: I would find that useful.

Dr Byrne : Okay.

CHAIR: Thank you, Mr Angel and Dr Byrne.