Time to finish Hilmer project and reform power sector
by Tony Wood
Published by The Australian Financial Review, Page 47, Monday 26 August 2013
After September 7, the incoming federal energy minister has an opportunity to revitalise the energy reform agenda that has languished under governments of both main parties. A small number of initiatives could deliver big benefits to consumers and investors.
This month marks the 20th anniversary of the Hilmer report on National Competition Policy. The report, delivered to prime minister Paul Keating and the premiers and territory chief ministers, unleashed a 10-year wave of economic reform that produced big productivity gains and lower prices. Yet a combination of reform fatigue, the end of payments from the Commonwealth to the states for implementing reforms, and resistance from vested interests stalled the reform process. A new commitment is needed.
In 2005, the Productivity Commission reported that the National Competition Policy had contributed to a permanent increase of around $20 billion in gross domestic product. A significant share of the gains had come through the partial achievement of a competitive energy sector. Between 1989-1990 and 1997-1998, while charging prices 28 per cent lower, the electricity sector provided 15 per cent more power to 18 per cent more customers with almost 40 per cent less labour. By 2010-2011, the volume of electricity was 57 per cent higher than in 1989-1990 and was being delivered to 44 per cent more customers. But prices had risen by 30 per cent and productivity had declined significantly.
In 2005, the Productivity Commission reported that the National Competition Policy had contributed to a permanent increase of around $20 billion in GDP across six key infrastructure sectors. A significant share of the gains had come through the partial achievement of a competitive national energy market.
However, having risen steadily from the mid-1970s to the late 90s, electricity sector productivity has steadily declined. The reform agenda of the Council of Australian Governments has become fixed on process instead of outcomes. The 2012 energy white paper is long on issues and possibilities but short on action.
PROFITS UNJUSTIFIABLY HIGH
So, where are the problems? Competition in electricity generation and retail was identified in 1993 as a key reform. Retail and generation were separated from transmission and distribution, and competition in generation has delivered reliability and generally low wholesale prices. But state governments have resisted meeting their commitment to retail deregulation.
Grattan Institute’s 2012 report, Putting the customer back in front: How to make electricity prices cheaper, showed that the regulatory structure and processes governing network businesses allow profits that are bigger than is justified. They are too inflexible to address changing circumstances, including ongoing falls in demand. Government-owned businesses spend much more than privatised businesses, through inefficiency and through government intervention, to keep reliability standards unduly high.
Climate change has tested the energy sector. Poorly crafted and inconsistent policies across the federal-state landscape have created a difficult environment for investors, activists and customers. Falling demand has produced most of the reduction in greenhouse gas emissions achieved so far. The policies themselves have delivered neither low-cost emissions reductions nor investment certainty.
The most important failure of competition policy is in the governance of the energy sector. In 2001 the National Competition Council recommended greater accountability in regulation, market performance and market development, regulatory certainty and efficiency. The council is almost invisible today and accountability is diffused across multiple agencies.
Reform at the front line of business operation and regulation is always hard. The beneficiaries of reform are many and diffuse, while the losers are few and represent powerful vested interests. But it must be done.
STEPS TO REFORM
A revitalised reform agenda from a new energy minister could galvanise both industry and government, but only if the benefits are clear and measurable and if vested interests are contained. The new minister should:
• Address network regulation, drive privatisation of the remaining government-owned corporations, and either refocus the regulatory process or return to the concept of a national monopoly regulator across all industry sectors.
•Complete the journey to retail deregulation.
•Improve transparency and liquidity in the domestic gas market.
•Rationalise climate change policies with a carbon price, rising steadily and credibly over time, as the centrepiece. Other policies should only address market failures and barriers.
•Reform energy sector governance, put accountability for effective and efficient outcomes at the centre, and recommit to National Competition Policy and market reform.
Looking back to 2000, if continued reforms had slowed the electricity sector productivity decline by 50 per cent less each year, Australia would have saved nearly $17 billion by today.
Grattan Institute has previously estimated that reforming network regulation alone could save customers more than $2 billion a year.
The reforms of the 1990s delivered big gains and seemed easier with hindsight. Yet future gains remain very substantial and almost certainly greater than those listed above.
Australians should demand that an incoming government return national competition policy, a proven winner, to the centre of energy and economic policy.