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The NSW Electricity Price Storm

April 28, 2010

For those who missed it: well prior to the shocking electricity retail price increases that hit the press a month ago (42-64% over 3 years), there was an interesting yet somewhat oblique discussion related to the electricity market structure in NSW, and its impacts on network company costs and revenues (and therefore end-user prices).

It certainly held the attention of the NSW Chamber of Commerce, Kohler picked up on it in the Business Spectator mid-last year, and the Fairfax press picked up on it in late March this year.

A Cambridge EPRG Working Paper, in undertaking a cross-comparison between the UK and NSW, then cross-comparing the results with Vic, summarised that regulatory structure and public ownership, rather than physical grid characteristics or demand growth, were to blame for allowed higher distribution costs and revenues.

It’s hypothesis was:

“Private ownership and/or effective regulation are likely to be important determinants of allowed costs and revenues”

In fact, these factors are far more important than the reasons typically fingered for the much higher than CPI price increases – namely climate change-associated activity such as the Carbon Pollution Reduction Scheme (CPRS – the Australian as-yet unlegislated version of an Emissions Trading Scheme) and the Renewable Energy Target.

Effectively, the paper argues that the NSW network c0mpanies are able to “cherry pick” the regulated decisions they like and those they don’t like.  There is no need to make painful efficiency improvements, or innovate in business service, as costs can be passed on through charging more per customer and profit margins maintained.

What’s more, NSW companies are allowed a much higher rate of return than their UK counterparts – based largely, according to the paper, on very different cost of equity and debt assumptions.

Contrary to Kohlers summation, the paper states that one of the other important factors explaining why companies in Victoria can secure higher revenue is because of :

“Labour rigidities – these are understood to be more serious in Victoria, which is still heavily unionised (…)”.

 

POW!  As if having a go at the regulators and distribution companies wasn’t enough to stir up an argument.

Of course, the AER and distribution companies hit back pretty vocally at the analysis. 

But something here is badly broken.

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