How privatisation pushed-up Australia’s electricity costs

By Leith van Onselen

The Australia Institute has released a new report entitled Electricity costs: Preliminary results showing how privatisation went seriously wrong, which finds that electricity prices have increased at three times the rate of CPI, primarily due to companies ‘gold-plating’ financial assets and passing those costs onto consumers.

Below are some key extracts:

Two decades ago Australia embarked on an experiment with the privatising, corporatising and marketization of the electricity sector. The proponents at the time assured the nation that everything would be better. Clearly that is not the case; between December 1996 and December 2016 Australian prices increased by 64 per cent but electricity prices increased by 183 per cent—almost three times the overall increase in prices. In those figures the carbon price was barely noticeable…

Too often we assume that private and corporatised state-owned corporations are operating efficiently. In the real world such as in the Australian economy where the checks and balances are imperfect and companies exercise considerable power…

Electricity is now management heavy with a blow out in the number of managers relative to other workers. In addition electricity now employs an army of sales and marketing and other workers who do not actually make electricity.

… official figures show that productivity has in fact fallen in electricity. The latest figures for electricity, gas, water and waste and show that over the two decades to 2015-16 the gross value added per worker fell by 34.9 per cent from its peak in 2000-01 or by 19.1 per cent over the total period.8 Based on the figures in Table 1, that means that there are 14,150 more workers than would have been if productivity had remained at 1995-96 levels…

In addition the reforms seemed to encourage profit gauging on the part of companies in the industry who are able to inflate the asset base used in calculating the permitted return on assets. More than half the asset base appears to be ‘goodwill’ and retained earnings. There is a weird circular process in which high rates of return are capitalised in ‘goodwill’ and other fictitious or notional items while high profits guarantee high retained earnings which also feed into the asset base. In that way the unproductive capital base is allowed to increase and we are charged for capital that has no real function in producing electricity.

Adding up the additional labour costs of the new functions under privatisation, corporatisation and marketization and adding the costs of allowing returns on fictitious capital and retained profits we find that the additional charges are likely to be of the order of $404 to $502 per household per annum…

The examination of electricity costs and price setting suggest that Australians are paying much more than they should be if their regulators were guided by considerations of the most efficient delivery of electricity…

There is also the question of how to respond to the unnecessary functions that the electricity companies have undertaken. Nobody expected that in with corporatised and privatised electricity companies there would be a large numbers of sales people trying to sell indistinguishable commodities to consumers. The costs of ‘acquiring and retaining customers’ probably costs quite a large amount. Consider the pub test: Should you have to pay electricity companies the costs of advertising and marketing to you?

Full report here.

Comments

  1. haroldusMEMBER

    Hang on I’m confused

    Upper House Liberal MP Scot MacDonald said it’s proof privatisation is needed in New South Wales.

    “It doesn’t matter who owns the network services,” he said.

    “It certainly matters who regulates them and how they’re regulated and the factors that we keep in mind, such as affordability and the reliability of the network.

    “But there’s no doubt that publicly owned assets such as we see in Queensland and currently have in New South Wales have had higher costs to the consumer.”

    Mr MacDonald said previous attempts to privatise the networks have been undone by misinformation, and the new report reinforces the growing push for privatisation.

    “We’ve got some pretty clear facts that the networks can be run by the private groups, such as we’ve seen in Victoria, without disadvantaging the consumer,” he said.

    “The argument has taken a long time; the debate has taken a long time.

    “But, I’m pretty confident that the public is aware of these issues a lot more clearly than they have been in the past.”

    http://www.abc.net.au/news/2014-10-29/electricity-pricing-report-shows-benefits-of-privatisation/5849672

    • Agreed … private sector is way more efficient at everything therefore sell everything. That minister knows what he is talking about … and because he shouts and repeats his arguement it has reached a point where it becomes true

  2. “How privatisation pushed-up Australia’s electricity costs” and is making rooftop solar more and more attractive.

    • Only if you are at home to use it. That’s the current state of play. Even further now you have to put in a relay of some sort to stop feed-in to the grid!!!
      Note Jason – not arguing with you. These b…rds are just screwing us every way they can.

    • MediocritasMEMBER

      Unless you’re a renter with no say over whether or not there are solar panels on the roof, then you’re just screwed.

  3. ‘Electricity is now management heavy with a blow out in the number of managers relative to other workers. In addition electricity now employs an army of sales and marketing and other workers who do not actually make electricity.”

    It’s a familiar story. The NHS, UK water, trains all have higher paid and more managers. 20 years of management consultants, BS economics and the executive stratum is elevated to a high priesthood.

    • Jumping jack flash

      The debt doesn’t repay itself you know.
      And to afford a mountain-sized mortgage you need a mountain-sized wage.

      And to justify mountain-sized wages, you call someone a manager.

      Most importantly, to pay mountain-sized wages, you put your prices up. Note, this last step only works if you’re part of an oligopoly providing an essential service or resource.

    • DominicMEMBER

      This is all true but the comparison between the performance of privatised assets vs publicly run assets is rather deceitful in its premise. The fault lies squarely with the way (or the terms on which) the asset is privatised. In other words, the government officials ‘managing’ (or f#cking up, to put it frankly) the sale of the asset/s have no skin in the game whatsoever and will often find their way onto the boardroom of the acquiring company several years after their cosy tenure in the public sector has come to an end (entirely coincidentally, of course). The reality is this: the terms on which a privatisation deal is done are always stacked heavily in favour of the acquirer — in most instances its a deal that has no risk for them, the flip side of which is that the tax-payer gets shafted.

    • ErmingtonPlumbingMEMBER

      “electricity now employs an army of sales and marketing and other workers who do not actually make electricity.”

      The pain in the arse that I endure, installing new gas services, and helping to organise new Gas Meter and service connections to the mains, gets worse by the year.
      They variation in procedure, between all the different privatised Gas Retailers and the seperate infrastructure contractors is as convoluted and confusing as fuck!
      Sometimes I’ve got to met an inspector,…sometimes I don’t, sometimes I can pick up the meter, other times It has to be brought out to me.
      Other times they install it (the meter) but not on the CNR of the house where the customer wants it, but only at the front of the property line.
      The Number of people you have to speak to on the phone, quoting different “job numbers” and customer numbers is ridiculous, and usually involves speaking to someone with only the most rudementry English.

      I had a customer a couple of years ago, were I was doing about 12 thousand dollars worth of plumbing and gas work at a quite expensive 1930s built house in Hunters Hill.
      The corner of the house was 60meters from the front wall, near the street and it was made quite clear over several phone calls that the meter could only be placed at the property boundary,… I had allowed $3000 to run a 40 – 50 mm gas pipe from the meter to the house.

      While running an outside gas pipe for a BBQ, at the front of the house, this contractor rocks up a asks “where do you want the meter”,…”right at that corner of the house” I point out,…”right here” he says “Yep” I say and then he sticks this blue Cross sticker there and tell me It’ll get done within 2 weeks,… after a lengthy chat (my fault) he leaves.
      They didn’t even fully dig up my customers yard,…using a side borer to do the job, and being on the high pressure side, only 20mm pipe.

      My custumer was very happy with the $1500 saving I was able to give her.

      But the dozen or so new services and Connections I have done since then, just seem to be increasingly difficult and bureaucratic.
      It was sooo much easier when the whole thing was run by AGL alone.

  4. Tassie TomMEMBER

    Wow – I didn’t know about the “goodwill” trick.

    Just add “goodwill” to the asset base and then demand a continuous % ROR on your expanded asset base.

    Brilliant!

    • Mother …..!!! The guy who managed to sell the inclusion of Goodwill in the Asset Base calculation needs to come and work for me.
      I’d be able to sell bottled fresh air @ $10 a litre and have everyone mandated by law to buy at least a thousand bottles per year!!
      Regarding the Goodwill, I’m sure the value increases each year to compensate for the stupidity of the system. Each year that prices rise the consumers show more “Goodwill” by swallowing more of this nonsense and paying the higher prices.

  5. In Engineering world efficient means “Lower costs” , but hey… we are living in the lawyers world. We have to pay lots of parasites and MBA (Managers by Accident) in the hierarchy. The very definition of “inefficiency”, and we then use lawyers logic and call it efficient. Neo-Liberalism is awesome if you are a parasite (a lawyer, politician…etc)

    • Jumping jack flash

      not so much a lie, as carefully manipulated to achieve a pre-set outcome. ie, inflation officially reported between 2 and 3%.
      Every time.
      They simply change the weightings so this is the result.

      They’re not going to make the same mistake as what happened in 2007, even though they have effectively, and finally, decoupled interest rates governance from inflation now.

  6. Jumping jack flash

    This is brilliant. Thanks for sharing.

    It is a pity that this will either fall on deaf ears, or be deemed as being too broken to properly fix (ie, too expensive to fix).

  7. If you intend to privatise anything, you need the skills to manage the sale and ongoing management. This is especially critical for large complex systems like energy supply. Clearly Govt lacks the skills required, and until it does, it should privatise nothing. Simple, but low IQ politicians seem incapable of grasping this fact. I interact with a range of politicians and it is clear their competence peaks out at school tuckshop level.

    • There is no point in privatisation as it creates false markets from what are ‘public goods’. You end up paying out massive subsidies, experience rising rent extraction and lose all community stakeholder responsibilities as the only stakeholders are the ‘C’ level and shareholders. Thatcher in the UK thought that revenues lost from public bodies would be made up by corporate tax but that proved a delusion as the privatised companies created off shore structures and minimsed their tax – the community loses both ways. Having to pay through the nose for assets they have collectively paid for through tax and the loss of tax revenues. The current system will collapse when they run out of other peoples assets to steal.

  8. What we have seen since the breakdown of the SEC in Victoria is the movement of funds and profitability.

    In the ‘old world’ most of the funds were allocated to the boots on the ground, maintenance and new poles and wires. There was one billing system, one call centre, and one management structure to support the whole thing.

    In the ‘new world’ we have a whole host of retail companies. These companies all have there own call centres, sales staff, management staff, marketing staff, and marketing budgets.

    Therefore, a much bigger % of the ‘value’ charged as part of the power bill goes to fund the ‘parasite’ industries as opposed to pay for the infrastructure maintanence and ‘boots on the ground’.

    Same issue with the high tension wiring. Instead of reinvesting in maintaining the high tension wires, we are offshoring all the profits to Singapore.

    Power supply isn’t about profitability – it should be a break even industry.

  9. turncoatMEMBER

    One little problem.

    Long Privatised Victoria has the lowest network charges and lowest increases. It was the publicly owned NSW and QLD grids where the damage was done.

  10. Years ago Kenneth Davidson in Domainfax used to write about this stuff, pity he’s not there any more. It was all so predictable.

  11. The governments privatising (selling) the assets want to maximise the sale price to given themselves a good headline and short term cash bounty – so they whack in enough conditions to ensure all that is really happening is the conversion of a public monopoly into a private monopoly, or at best a private oligopoly.

    In the end it’s the public that gets screwed as the rent seekers go to town thereafter….

  12. SweeperMEMBER

    Ah yes the invisible hand of regulated rates of return. The process could work in reverse though. As in cut the regulated rate of return, then they’d be forced to write down their assets reducing profits and prices they could charge even further.

  13. Sometimes I don’t know what you MB guys want.
    You scream tirelessly for a price on carbon so that we’ll reduce our consumption of polluting substances like Coal, but in the same breath you complain when some enterprising individual / organization increases the price on the main product of that very commodity that you wanted to tax. Surely if a slightly higher price resulting from a Carbon tax is good for the environment than a huge increase resulting from profiteering must have be even better
    Morality in our modern world quite naturally depends on the virtue and virtue signaling of those that benefit from change.

      • I agree those making obscene profits from this essential service (Electricity) have failed to give sufficient thought to the whole endeavor, they desperately need a good story, it’s the story that makes the game worth playing.
        If they we’re just a little more skilled in the presentation of these same facts we’d could be considering them for Environmentalist of the year award. Today’s morality is 100% about virtue signaling, their failure to recognize our social need for a do-good-story is the root cause of all this negativity. Same facts viewed through a different optic and these guys are heros…..Actually F#ck the facts it’s all about the story.

    • SweeperMEMBER

      Enterprising? They’re guaranteed an (excessive) rate of return. It’s about as enterprising as buying a Treasury.

      • You have no idea how many meetings these managers had to sit through before they could all agree that the public needed to be shafted. well to be honest there was never any disagreement about what needed to happen, the primary source of disagreement related to the managers position in the conga line of shafties, you’ve gotta be careful in this day of incurable STD’s

    • AEMC contends:

      “There is currently increasing upward pressure on retail energy prices. This is largely driven by factors outside the retail energy sector.

      “In recent years, retail pricing outcomes have become increasingly dependent on outcomes in the wholesale energy market. The AEMC’s price trends reports show that nationally for electricity, the wholesale component’s share of residential prices increased from an estimated 19.6 per cent in 2014-15 to an estimated 28.6 per cent in 2016-17.

      “The increases in electricity wholesale costs have been due to a combination of (a) generator retirement, combined with increases in gas prices and (b) the distortionary impact of having an emissions reduction policy mechanism not properly integrated with energy policy, in the form of the large scale renewable energy target.”

      “Since the announcement of the retirement of Hazelwood there have been large increases in forward contract prices for electricity across the NEM. This has been due to the expectation that electricity supplied by Hazelwood is replaced by more expensive black coal and mid-merit gas generation in New South Wales and Queensland. The cost of gas-fired power generation has recently been affected by higher gas prices and concerns about the availability of future gas supply.”

      “The RET has resulted in an increasing penetration of renewable energy generation in the wholesale market. Due to (its design), the new generators do not have the same incentives to enter into firm capacity hedge contracts as a means for financing their investment. They can instead finance investment through the separate source of revenue derived from generating certificates.

      “The result is that the new generation adds to the physical capacity in the system, but, due to the design of the RET scheme, results in no corresponding increase in the supply of firm capacity hedge contracts.

      “Further, the new generation incentivized by the RET contributes to the retirement of the older generation plants that were supplying the firm-capacity hedge contracts.

      “Consequently, the supply of firm capacity contracts is diminished, increasing the cost of contracts, which affects retail competition.”

      • There you go again confusing the issue with the inclusion of facts. Who cares how much they pay for wholesale electricity?
        Who cares that the foreseeable follow-on effects of Renewables merit order are killing our the cheapest source of power at the wholesale level…this is everything that proponents of Carbon pricing wished for ( forget that dreamt of), it’s stupidity writ large.
        Fortunately individuals have a choice and by exercising this choice they’ll guarantee that this death-spiral continues…Positive feedback is truly a wounder to behold.

      • AEMC touching on BlackFellas remarks:

        “Any emission reduction policy that is introduced must consider the enduring effects it may have on the energy market. In particular, how it affects not only the level of investment in physical capacity, but also how that investment in generation is financed.

        “Emission reduction policy mechanisms that incentivise investment in electricity generation capacity without incentivising the ongoing supply of hedge contracts risk adversely distorting wholesale and retail market outcomes. They will inadvertently lessen the emerging competition from innovative new retail energy businesses and place upward pressure on consumer prices.

        “Conversely, where an emissions reduction policy is effectively integrated and aligned with the design of the NEM, it is likely to lead to a higher degree of investment certainty in the energy market and more availability of contracts. This will reduce pressure on the wholesale electricity market and result in lower retail prices for consumers.”

    • You scream tirelessly for a price on carbon so that we’ll reduce our consumption of polluting substances like Coal

      and shift the consumption towards non-polluting sources like renewables.

      A lot of people forget the second part. Not surprising when even our country’s deputy prime minister does the same. But what do we expect? Accountants pass for intellectuals in most of Australia.

  14. Just reading around a few different fora, and it looks like electricity price rises are increasing quite dramatically. It will be interesting to see how this factors into the next lot of inflation figures. You’d think that if inflation remains low despite rising power costs, it will go some way to underestimating an already poor economic state.

  15. ceteris paribus

    Privatisation of public essentials is highly efficient for investors and top executives. Always has been. Thanks a million Paul.

      • ceteris paribus

        Indeed Chriso- but it was a mutual admiration society and Keating was sketching the broader and higher level framework. Don’t just go after the street level pushers.

  16. Here we go again, laying the boot into private enterprise. Privatisation didn’t “cause” electricity prices to rise, it simply allowed the real price of electricity to be discovered. The “price” is determined not just by profit/loss equations at the generators, but a host of things including uncertainty around continual government interference and what preceded the “privatisation” (namely under-investment by the state in electricity generation). One has to ask “is this truly what privatisation looks like”? Not at all. The “privatisation” of the electricity industry is in name only and what we actually have is a government franchise, because government bureaucracy and policy remains so convoluted, restrictive and uncertain that the new owners operate like a quasi-monopoly. Gross under-investment by previous (state) owners means supply is sub-optimal. Continuing uncertainty in areas like carbon-emissions, and so-called “climate policy” prevents new private operators from entering the space (seeking to capitalise on – and eventually correcting – the high prices).

    • SweeperMEMBER

      The “real price of electricity” **

      ** under conditions where effective private monopolies who have a higher cost of capital than the government, are guaranteed an excessive rate of return and face no market exposure.

      • Only the state can create a situation where an “effective private monopoly” can exist. It sure can’t be created by the private firms themselves. So there’s your culprit. And the fact the situation can be described as “an effective private monopoly” also tells you it’s not actually a “privatisation”. If it were, prices would very likely be lower.

      • SweeperMEMBER

        “Only the state can create a situation where an “effective private monopoly” can exist. It sure can’t be created by the private firms themselves.”

        Most people who actually look at the evidence would say that the tendency of the private sector in many industries is to move towards monopoly (all by itself). The only break on this process has been State regulation. And where natural monopolies exist, as in electricity, the only solution to avoid higher prices has been public ownership or regulation of pricing.

  17. The price of electricity began to accelerate with the introduction of the 20% 2020 RET in 2009. Then the introduction of the LRET and SRET in 2011 kept piling on the incentives that were gradually reflected in power prices.
    http://www.cleanenergyregulator.gov.au/RET/About-the-Renewable-Energy-Target/History-of-the-scheme

    The price increases will stop when the NEM no longer exists and everyone is responsible for their own power supply. With current component cost that equates to 70c/kWh for average householder, business or community group. Intermittents do not make economic sense operating in a grid designed for centralised generation.

    Basically the industry went from a few coal fired power plants to a whole mix of renewables with different certificates and array of FITs. This forced up requirement for more gas plant. So the current situation is intermittents with a nameplate capacity equivalent to Victoria’s load that can range on a daily basis from zero output up to as much as 3500MW and most of the old coal and gas plants with the high cost gas plants required to run harder and longer to cater for the ups and downs of the intermittents.

    Essentially the system has gone from mostly coal fired with a little gas to the same coal fired plant but considerably more reliance on gas as the intermittents have replaced coal generation. Australia is heading for three power supply systems. The capital has to be paid for by someone – the suckers unable to ride the gravy train that the RET fuels!

  18. Economics lesson 1: never privatise a defacto monopoly (~ e.g. power networks) as any private commercial owner will naturally abuse that monopoly by price gouging.

    However, you can still combine publicly owned assets with privately (~efficient) run services to that those assets by just outsourcing (using public tenders for e.g. maintenance) certain jobs.

    Quite simple really, but it seems some AU policy makers never bothered to look into these concepts; it almost looks like these new private monopolies have been created on purpose just to extract more profit from the uneducated masses.

  19. And yet people keep voting for governments that privatise.

    What is it called when someone keeps repeating an action that doesn’t work?

  20. Haven’t read every comment but as illustrated by my UK friend who, although an engineer with experience in many countries, insists on comparing electricity supply “choice” in the UK to that in WA. FFS – der, Fred – market size?? Australia, with 30% of the consumers spread over 31 times the land area?!

    The response of privatised utility suppliers charged with delivering a service to our non profitable (outlying) market segments is to apply the “user pays” excuse or in the case of Telstra – just not service them at all.

    For those proponents it wasn’t the privatised market model that was going to work but the PROFITS – and their “commercial in confidence” fee schedules. The same guys that now make up the ridiculous numbers of new management/marketing staff. The same guys who now who are grabbing at piles of cash lying around on the ground in the form of coal – so that has to be a good idea as well.

    Can we please recall those “two decades ago proponents” and lop off 183% of their wealth?