Basslink and bungled power policy

Bacchus H Barren

As shown above that lack of a legitimate cost-based argument for an increase in consumer electricity prices raises the question as to why the Tasmanian Electricity Regulator feels that there is a case for a 4.11% price hike, nor why the Regulator should advocate for this.

The answer to this has little to do with the CPI and more to do with the growing costs of a bungled state energy policy. As it becomes obvious that Tasmania is unable to compete on the National Electricity Market and the costs of Basslink begin to bite, the State Government’s desire to pass these costs onto household consumers is growing. The government’s desire to transfer part of Hydro Tasmania’s 1 billion debt to Aurora can only be reflected in higher household costs. Once again citizen cash-cow is being made to pay for the incompetence of our political leaders and bureaucracy.

BURIED in the small print of the tiny article on page 15 of the Mercury (Saturday 4 Nov) was a reference to Andrew Reeves’ (Tasmanian Electricity Regulator) recommendation that Aurora should be allowed to increase electricity prices to domestic customers (you and me) by 4.11% in 2007.

Only 8 days earlier Mr Llewellyn (Minister for Energy) had been trumpeting the arrival of a new gas-fired power station to be run by Alinta as a fantastic opportunity to provide competition to Hydro Tasmania — the winners being Tasmanian consumers who supposedly benefit from declining electricity prices. But as reported on Tasmanian Times (Basslink backfires: buying dirty power), this is only just the beginning of a sorry tale of bungled electricity policy — from which we consumers will be footing the bill.

Not as cheap as you may think
Tasmanians live in a small world — we like to think our household electricity is cheap and bountiful (because we have hydro power). In 2002, Tasmania had ranked 4th highest in terms of average domestic electricity tariff compared to the other 8 states and territories around Australia (Office of the Tasmanian Electricity Regulator). Victoria noticeably had the highest electricity prices in the nation. However by 2006 the tables had turned.

In 2006 Aurora was charging Tasmanian domestic customers a range of tariffs from 8.7 to 15.3 cents per kilo watt hour (kWh). When service charges are taken into account the average domestic (single) rate is about 10.7 cents/kWh. In contrast, PowerCo, the largest electricity supplier in Melbourne has Single Residential Rate tariffs of 6.1 to 8.3 cents/kWh (for the first 6000 kW) followed by a maximum rate of 9.2 cents/kWh (all GST inclusive). The highest rate charged by PowerCo is 12.6 cents/kWh for high-usage sites in the Docklands only. Consequently, it would appear that in a short period of 4 years (in which Tasmania joined the National Electricity Market via Basslink), Tasmanian domestic power prices have surpassed that of Victoria.

Paying $54 per week in electricity bills
Whilst a 4.11% increase in electricity prices doesn’t sound like much, this will in fact have the effect of raising the average domestic rate in Tasmania from about 10.7 to 11.1 cents/kWh (including service charges). Aurora sells about 10,100 million kWh every year. The average household power consumption is highly variable, but in Tasmania a family may expect to consume between 20,000 and 30,000 kW h per annum with a peak in winter to account for heating. In a generalised model of family household power consumption (conservative) over a year (kWh), the difference in annual electricity costs from the average 2006 rate (10.7 cents/kWh) to the proposed 2007 rate (about 11.1 cents/kWh) will manifest itself as an annual average family increase of about $112, or an extra $2 per week. This model suggests that Tasmanian families generally pay about $52 per week (2006) in electricity costs (service charges included) and this may increase to $54 per week if the 4.11% increase is approved for 2007. This means that Tasmanians are paying slightly more per week in household electricity than they are in petrol costs to run the family car. How sustainable is this?

Grasping at straws
The Tasmanian Energy Regulator justified the 4.11% increase recommendation for 2007 Aurora prices based on both an alleged 13.6% increase in “transmission costs” and a Consumer Price Index (CPI) of 3.99%.

In the first instance transmission costs, as passed to the consumer, are minor. Electricity transmission companies such as Transend Tasmania are allowed to charge transmission fees to suppliers such as Aurora and in return they maintain the transmission infrastructure. However, as transmission companies hold a monopoly position, their price flow-ons to the consumer are tightly controlled by the Australian Electricity Regulator. The Australian Energy Market Commission (AEMC) stated that “Transmission costs in the National Electricity Market account for a relatively small part of consumer power bills (around five to 10 per cent)” — Review of Electricity Transmission Revenue and Pricing Rules 2005/06 July 2006. Consequently Mr Reeves first justification seems to be a bit of a furphy, and at worst transmission cost flow-on to the consumer would only account for a maximum price increase of about 1.3%.

The fallacy of CPI-driven corporate cost
In the not-too-distant past, before deregulation, utility price increases would typically be approved by the Government, where the utility operator could prove that the cost of service delivery had increased. In some cases this would entail a Ministerial Determination under the relevant Act of Parliament. In the brave-new world of privatised and deregulated electricity, the new whipping-horse for justifying annual price hikes is the Consumer Price Index (CPI). The only problem with this is that there is almost no relationship between consumer-based inflationary measures and the costs imposed on utility companies.

The CPI has traditionally been viewed as the average cost of a “basket of goods and services” purchased by household consumers (including electricity costs) and has been used as a de-facto measure of general inflation. However in terms of costs imposed on most corporations, particularly utilities, there is almost no relationship with the CPI. The major costs imposed on electricity suppliers are a) salary costs, b) transmission fees and c) capital maintenance and depreciation.

Transmission costs are minor, as discussed above. Salary costs have remained largely flat, particularly in Tasmania — hence the state government budget 2006 largely disregards salary creep for the next 4 years. In addition to this, Aurora’s contribution to state payroll tax has only increased from $3 to 3.9 million over 6 years. Finally, most capital and maintenance costs are borne by the generator and transmission companies, not the supplier. The amount spent on infrastructure maintenance is tiny — of the billions of dollars in assets held by Hydro Tasmania, in 2005 only $90 million was spent on maintenance. In addition to this depreciation of assets is also tax write-down.

In summary, there is very little justification for an electricity price increase to Tasmania consumers. On the contrary, one may expect that there is a good argument for price reductions given the comparative prices offered by Victorian suppliers. In 2005 Aurora posted an after-tax profit of $31 million and contributed another $30.5 million to state government coffers. There has been a small but steady increase in profits over the past 5 years which suggests that costs have not significantly impacted on profit growth.

A fairer system of electricity price control
As utility price increases based only on the CPI are clearly flawed, there is scope for consideration of a more equitable system of pricing for consumers. In Victoria the Office of the Electricity Regulator was abolished in 2001 and replaced by the Essential Services Commission (ESC) who have the legislative authority to approve price increases or decreases. Whilst the ESC also use the CPI as the bases for price changes, electricity rates are set against a formula of CPI-X, where X is a factor determined by the supply company’s ability to meet efficiency targets. Hence any price increase to the consumer is tempered by the company’s ability to control costs. No such system exists in Tasmania.

Clearly a fairer system of electricity price regulation may be based on the supply company’s annual profit and loss statement. This will document, as verified by external audit, any costs incurred by the company over the financial year — hence any real increase in costs, such as salaries, can be easily identified as used as a basis of arguing for a price increase. As companies have natural corporate mechanisms to control costs and increase returns to investors, it makes some sense that an actual cost-based measure of productivity or efficiency should be built into the pricing structure. Any system of electricity pricing which is based only on the CPI (which already includes electricity costs to the consumer) is somewhat self-perpetuating and forms a vicious and inflationary circle.

The real reason for slugging the consumer
As shown above that lack of a legitimate cost-based argument for an increase in consumer electricity prices raises the question as to why the Tasmanian Electricity Regulator feels that there is a case for a 4.11% price hike, nor why the Regulator should advocate for this.

The answer to this has little to do with the CPI and more to do with the growing costs of a bungled state energy policy. As it becomes obvious that Tasmania is unable to compete on the National Electricity Market and the costs of Basslink begin to bite, the State Government’s desire to pass these costs onto household consumers is growing. The government’s desire to transfer part of Hydro Tasmania’s 1 billion debt to Aurora can only be reflected in higher household costs. Once again citizen cash-cow is being made to pay for the incompetence of our political leaders and bureaucracy.

Tasmanians have until 24 November to make a representation to the Tasmanian Electricity Regulator about the forecast price hikes for 2007 and the fairness of this system.