Energy regulation is broken, and consumers will be paying more for electricity and gas in years to come.
In the 1990s, Victoria’s energy market was broken up into monopoly businesses, networks that own the poles and wires, and businesses that operated competitively, the generators and retailers. Other states followed suit. Price regulation was adopted in an effort to limit how much monopoly network businesses could charge, but recent legal maneouvres by those businesses mean that we will end up paying more than is fair.
In late May this year, the Australian Energy Regulator made its final determination on how much the five Victorian networks could charge Victorians between 2016 and 2020. After a detailed 13 month review process, the AER decided to reduce the amounts networks could charge, with the AER chair Paula Conboy saying that consumers could be expected to save between $50 and $120. That might not sound much per household, but the regulator reduced the amounts sought by the businesses by over $2.3 billion. By anyone’s standards, that is a lot.
On 16 June, each of the five Victorian network businesses quietly lodged appeals of the AER’s decision with the Australian Competition Tribunal. If the experience of NSW is anything to go by, Victorians will inevitably end up paying more as a result.
In February this year, the NSW network businesses succeeded in appeals of the independent regulator’s determination. The powerful networks’ success meant that savings promised to consumers through the regulatory regime disappeared.
From a consumer perspective, there are major weakness with the appeals processes in the energy sector. The ability of energy networks to engage in arduous and strenuously contested legal reviews has regularly provided them with millions of dollars of additional revenue. Questions need to be asked whether the appeals system preferences industry over the public interest.
The networks are expert at making legal challenges to energy regulatory decisions. There have been over 50 challenges since the appeals regime, known as ‘merits review’, was implemented in 2008. A 2012 report found that these challenges largely went in the networks’ favour, with consumers paying around $3.6 billion more than they would have had the initial decision stood.
Recognising that the system preferences big business, the authors of that 2012 report—an Expert Panel led by Oxford University Professor George Yarrow—recommended significant reform to the framework. In particular, the report recommended doing away with the legalistic processes of the Competition Tribunal, which operates as a division of the Federal Court. Disappointingly, the Panel’s recommendations were watered down during the legislative process.
The result, as demonstrated by the most recent Tribunal decisions, is that the energy networks continue to exert significant power by accessing appeals processes. It was reported that over 1 million pages of material were provided to the Tribunal in NSW, and the networks were represented by over 40 barristers. Consumers, on the other hand, were represented by the Public Interest Advocacy Centre, a small non-profit law and policy organisation. Despite their skills and expertise, they were significantly outgunned on resources. It will be a David and Goliath fight in Victoria as well.
There are four key reasons why we would be better off if network businesses’ ability to appeal price determinations were abolished.
First, there would be greater certainty for consumers about their energy bills. In NSW, appeals processes may mean that final prices will not be known for years. This is because the appeal itself took around 9 months, and a successful appeal means the regulator has to re-decide some aspects of the price determination, taking months more. The NSW businesses and the regulator have also initiated further appeals to the Federal Court, delaying things further.
Second, the regulator would be better empowered to promote the long-term interests of consumers. There have been suggestions that the AER is to blame for skyrocketing energy network prices over the last 10 years. This ignores, however, the fact that the AER has been limited by the rules it is empowered to implement, which are set by the Australian Energy Market Commission. The ability of networks to withhold information until late in the AER process and subsequently seek an appeal also means that the AER is easily rendered impotent.
Third, it has been recognised that merits review is not suitable for complex regulatory decisions like energy network price determinations. The Administrative Review Council, an expert body that provides advice about administrative law, has said that merits review is less appropriate for decisions “that are the product of processes that would be time-consuming and costly on review”. A review that takes almost a year, and cost millions of dollars to conduct, would seem to be the type of process the council was concerned about.
Fourth, consumers would save money. Lots of money. Any examination of the history of networks seeking merits review demonstrates that consumers do not do well out of the system. Billions of extra dollars have been paid for by consumers following networks’ successful appeals.
At its core, ‘merits review’ of government or regulator decisions is supposed to allow for the reconsideration of those decisions as they affect individuals. This is a key tenet to our democracy—that we should be protected from harsh or unreasonable decisions of government. However, we should question whether the large multi-national corporations that own our energy networks should be similarly protected from the state.
National energy markets and regulators are governed by an objective that promotes the long-term interests of consumers. If energy ministers nationally wanted to promote the consumer interest, a simple step would be to abolish the ability of networks to appeal price determinations.
Gerard Brody is the Chief Executive Officer of Consumer Action Law Centre.
