Electricity sector “gold plating” behind sky-high prices – not renewables

Another major new report has confirmed that the “gold-plating” by Australia’s privatised electricity networks has been a key driver of an almost 200 per cent rise in electricity prices, that has been costing the nation’s households up to $500 a year.

The report, published by The Australia Institute on Thursday, is just the latest in a raft of papers and studies trying to peel back the layers of the nation’s soaring power prices. It is also the latest to say that the effect of the renewable energy target – and Australia’s short-lived carbon price – has been negligible.

The report reveals that the cost of electricity in Australia has increased by a whopping 183 per cent over the past 20 years, pushing up power prices at almost three times the rate of the national consumer price index, as you can see in the chart below.

“In those figures,” it adds, “the carbon price was barely noticeable.”

As the TAI notes, this 1996 – 2016 period happens to coincide with the time during which the “privatisation, corporatisation and marketisation” of Australia’s electricity sector was taking place – a shift that has led to a “blow-out” in management and salespeople.

“Electricity now employs an army of sales and marketing and other workers who do not actually make electricity,” the report says.

“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.”

This rather oblique statement seems to touch on the kind of strategic discounting practices being used by powerful incumbent “gen-tailers”, that have frustrated smaller retail players like Energy Locals founder Adrain Merrick.

“The fact that an essential service in Australia can carry a discount between bugger all and approaching half price – given the ‘secret cupboard’ offers that retailers offer customers when they look like leaving – would be laughable if it wasn’t hurting customers so much,” Merrick told RE just this week.

David Richardson, a senior research fellow at TAI and author of the Electric Costs report, echoes Merrick’s concerns.

“Electricity sells itself. People think it’s bizarre that electricity companies hire a sales staff and marketing people which then adds to the costs they charge us for buying something we have to buy,” he said.

“Then they pad their costs with returns on notional capital.”

As the report explains, this idea of “notional capital” is a sort of “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 report continues, “the unproductive capital base is allowed to increase and we are charged for capital that has no real function in producing electricity.”

It is confusing, particularly for the average consumer, who TAI says, when surveyed, tend to blame the electricity providers themselves for power price hikes.

Others, of course, might put the blame on the rise of renewable energy generation in Australia, if they believe the relentless campaigning of various prominent members of the Coalition government, not least its previous leader, Tony Abbott.

“A host of factors have been blamed for the increase in electricity prices relative to other prices,” the TAI report acknowledges. “But we would point out that the main departure from the rest of the price
index (pictured in the chart above) happened post privatisation and corporatisation.

“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,” it says.

“The report The Australia Institute has released today shows that a major factor (driving up electricity prices) is the gold-plating of financial services by private electricity companies are being paid for by consumers to the tune of four-to-five hundred dollars a year per household,” said TAI’s Ben Oquist.

“(The) process in which high rates of profits are used to ‘gold plate’ the financial asset base – without even improving the ability to generate electricity – is leading to higher prices for consumers,” he said.