Summary
1. It is time to review the decision to separate the HEC into three legal entities.
2. A competitive local power market has not, and may not, be achieved.
3. Consumers cannot sustain increased residential prices.
4. The cost of water and power infrastructure upgrades should be met using a Federal Government funding model, and not factored into the retail price.
5. Transparent efficiency targets should be set at each level of the supply chain and publicly reported upon.
6. A systemic review of the Tasmanian power industry including commercial issues, corporate structures, the legal and regulatory environment is required.
7. The scope of the review should include water and sewerage corporations, catchments, and irrigation management.
Review Separate Corporate Structures
There is a strong case, both on a commercial, economic and legal basis to review the 1988 decision to disaggregate the Hydro Electric Commission. It is timely to revisit the question of whether a vertically integrated corporation would provide better outcomes for Tasmania both at an industrial and residential pricing level. It is clear that the motivation for disaggregation included a desire to implement a legal structure and regulatory framework that would, at some future date, support a transition to a fully competitive residential power market in Tasmania. It now appears unlikely that a fully competitive market can be achieved. This is due in large part to the small size of the Tasmanian power market.
Consumer Pricing
At a consumer level, Tasmanians are unhappy with a perceived high level of residential power pricing, and appear unconvinced by arguments underpinned by comparative pricing exercises with other States. It is common understanding that Tasmanian incomes are set at a relatively lower base than mainland counterparts, and that an affordable cost of living, has been the trade off. Coupled with sharp increases in water and sewerage charges and increased council rates, cost of living issues are foremost in consumers minds.
Vertical Integration
A vertically integrated power company (such as under the former HEC structure), provided Tasmania with a strategic competitive business advantage allowing our State to attract job producing companies and major projects (for example in minerals exploration and processes).
Parliamentary Standing Committee of Public Accounts
Arguments for and against disaggregation of the Hydro-Electric Corporation were clearly laid out by the Parliamentary Standing Committee of Public Accounts, in 1998. Those arguments are summarised below. A number of models for disaggregation were considered including one corporation with three divisions – a structure that is utilised well in the telecommunications industry, and which reduces administrative and operational overheads. A political imperative at the time of disaggregation, was to privatise some or part of our power industry. This policy is no longer in place. It is not a specific requirement of entry into the NEM that structural separation be implemented.
A high importance was placed on the anticipated efficiencies expected to materialise once three separate entities were in operation. Productivity gains are not made transparent to consumers nor does the consumer have individual capacity to drive change, due to the imbalance of negotiating power.
Efficiency Targets and Transparency
The disaggregation of the HEC into the Hydro, Aurora and Transend does not seem to have resulted in discernable or measurable productivity gains – certainly none that are reported publically. It is time to revisit the question of a vertically integrated power company, perhaps even including the question of structural efficiencies in water and sewerage corporations.
Monopoly Pricing – Regulator Review
At a residential or domestic level, the Regulator may take the immediate step of setting the price point at a low rate – the effect of which should be to drive efficiencies, specifically within Aurora. The Regulator should take steps to utilise the price lever, plus other means at its disposal, to promote a review of cumbersome and expensive duplication of supply chain costs.
Social Benefit in the Tasmanian Context
Lower retail pricing, from our monopoly provider will have the ongoing social benefit of keeping young families in Tasmania, some of whom are reporting mortgage stress and plans to relocate, due to cost of living pressures. The cost of overarching infrastructure upgrades should be borne by government (state or federal) and factored into consumer price setting.
Price Cap Proposal
In relation to the question of a price cap, whilst it is attractive to want to implement an immediate step – at the same time a long term structural solution should be our aim. A structural solution that strips cost out of each of the businesses, reduces overheads and brings Tasmanian power pricing back within reach of average Tasmanian households.
Recommendation
I request that the Regulator, in its considerations:
• reject submissions that an increase in the regulated price should occur and instead consider a price reduction; but
• if it accepts that the price should increase, support the setting of efficiency and productivity targets, which are then made transparent to consumers and subject to quarterly public reporting; and
• support a review of the power industry supply chain in Tasmania by an appropriate parliamentary committee, with a view to determine the success or otherwise of the policy of disaggregation, specifically in relation to loss of strategic investment advantage for Tasmania, and an unsustainable increase in reliance on consumer price increases for ongoing operations;
• include in the scope of such a review matters pertaining to water management more generally including inefficiencies inherent in managing a number of water corporations; and
• consider using the ‘price lever’ to drive efficiencies down the supply chain into generation and distribution functions.
*This is a submission I made to the public forum held by the Tasmanian Economic Regulator in relation to the Electricity Price Investigation Draft Report. The forum was an opportunity for the public to comment on price and other issues within the scope of the Regulator’s review. I argue that there are large inefficiencies in managing and maintaining multiple corporations in our power sector, which does not serve the interests of the Tasmanian public, merely driving the ultimate price to the consumer up. Further, it is time for an overarching review of cost to consumer right across the ‘water’ supply chain, including catchment management, irrigation, power production and distribution, water & sewerage and council charges.
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