Summary
Australians are paying too much for electricity because the regulation of distribution networks is broken. Fixing it will deliver savings to consumers of around $2.2 billion per year, representing an annual saving to the average domestic customer of $100 per year. This report explains how it should be done.
To give power back to consumers, governments need to reduce the outsized profits made by monopoly distribution businesses, empower the Australian Electricity Regulator to subject expenditure to a rigorous cost-benefit analysis, and transfer responsibility for reliability standards from governments to the Australian Energy Market Commission and the Australian Energy Regulator, the bodies that make and enforce the rules.
These monopoly businesses are allowed to make unduly high profits, given the relatively low risks they face. Governments have also intervened to ensure they deliver power at levels of reliability that no serious cost-benefit analysis can justify. The New South Wales, Queensland and Tasmanian governments have imposed extra costs on companies to address perceived reliability problems. Shifting responsibility for reliability standards to the AEMC and AER would minimise unnecessary political interference. Developing a national, consumer-centred approach to setting these standards is also vital.
Beyond these issues, flaws in the regulatory process have almost certainly led companies to over-invest in the network. The more they invest, the greater their potential return, yet the regulator has neither the resources to scrutinize these investments before they are made, nor the power to penalize companies that over-invest. Governments should give the regulator these resources and power.
Finally, the system of five-year reviews of network prices cannot respond to changing electricity demand and finance costs. The regulator sets the revenue a company can collect from consumers over five years in order to fund its investment and costs. But real conditions change more quickly. For example, only a few years ago, the regulator allowed companies to spend to meet forecasts of rising energy demand and rising peak demand. For the first time in 40 years, both are falling, yet companies are receiving revenue based on the five-year forecasts. In other words, they are being funded for investments they no longer need to make.
Similarly, the regulator allows companies to set prices based on the projected cost of finance over five years. But when that cost falls, as it has done in recent years, the benefit is not passed on to consumers in lower prices. Governments should give the regulator more direction, resources and powers to review network expenditure forecasts and to adjust the allowed cost of company borrowing on an annual basis.
Electricity distribution networks are natural monopolies, so the laws of the pure market cannot apply. Although regulation is needed to ensure that companies have incentives to invest, recent changes to the way they operate have unduly disadvantaged the public. It is time to restore the balance.