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GRC Professional : GRC Summer 2013
IN DEPTH 22 GRC Professional • Summer 2013 Down to the wire A regulator without the power to do its job and a regime that forgot its purpose -- is it any wonder Australian electricity prices have risen in five years by 50 per cent. So how did it come to this? BY CHRIS SHEEDY FOR THE RAPIDLY RISING ELECTRICITY prices Prime Minister Julia Gillard blames state governments. The opposition blames carbon tax. Industry insiders variously blame the ageing network infrastructure, the energy market reform process and/or prescriptive reliability standards (standards that achieve high levels of service through spending on capital and systems operating and maintenance expenses). Just about ever ybody agrees that the Australia n Energy Regulator (AER) was hobbled when it was not given enough power to do its job effectively. There is no simple explanation for why electricity prices have blown out in the past fiveyears. "It was more likely a mix of two or three things," says Tony Wood, Gratta n Institute energy program director. "The journey started with the energy market reform process in the late nineties, which included what they called 'vertical disaggregation', separating the energy businesses into those that are natural monopolies and those in which competition could deliver better results. You've got the businesses that generate the power, the businesses that manage the wires and poles, and the businesses that retail the power into homes and businesses. "Generators and retailers can exist in a competitive environ ment, but there is only one If this was a non-regulated, competitive market you might say, bad luck, you spent too much money and your customers aren't going to buy your products any more. set of wires and poles, or networks. In the case of the businesses managing the networks, you can't depend on competition to keep prices down. The only way to do this is through regulation. Wood said that in the middle of the last decade instead of having individual, state-based regulators for the monopoly businesses, it was agreed that they would be transferred to a single national body, the AER. "That's when things started to go w rong. Some of the states were very uncomfortable about this because they didn't think they would have enough control over the regulator," he said. Some state governments began to impose high reliability requirements. "I have no data to support this, but many claim the state government owners had been bleeding their network businesses and had not been spending where they should have in the area of infrastructure. There was some catching up to do as a result of historic under-expenditure on poles and wires." The increased budget required for work to ensure stricter reliability standards meant the regulator had to allow for prices to rise to cover these costs. It did not have the power to take on the businesses, or the state governments making those reliability demands, in order to stop these costs being passed on to end users. "Some of these costs were almost certainly
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