Bruce Mountain Director Rising electricity prices: causes and solutions CEDA Energy Options Project Sydney, 14 November 2012

Australian electricity prices in global context 2

Outline 3 Where is the Problem ? What is the nature of the problem? Solutions

Where is the problem? 1.Wholesale electricity market ? 2.Small scale renewables subsidies ? 3.Carbon ? 4.Retail competition ? 5.Capacity utilisation ? 6.Networks ? 4 Expansion of the RAB + Higher allowed returns on regulated assets by AER than ACCC or state regulators Regulated assets of distribution service providers

Why has this occurred ? Possible explanations: Rising peak demand; ageing assets; historic underinvestment; customer density; planning standards ? Some other possible explanations: Bigger asset base = higher profits. “Turbo-charged” asset base expansion incentive for government-owned service providers (because returns = profits + income tax + debt fees). Underlying assumption that government-owned monopolies should be treated as if they are privately owned (but regulators turn a blind eye to state governments’ receipt of income tax and debt fee income) 5 With lucrative returns on offer, why should we expect that governments that own NSPs and collect their profits will put the long term interest of consumers first?

Solutions Privatisation 1.Resolves conflict of interest 2.Privately-owned firms more interested in maximising rate of return and so more receptive to regulatory incentives that reward reductions in opex and capex. Changes to design and conduct of regulation 1.In absence of privatisation, state governments, not national/federal agencies should be responsible for trading-off the pleasure of the profits against the consequential pain at the ballot box. 2.Need to fundamentally re-think the use of five year price controls for government-owned service providers. Consumer empowerment –Healthy markets rely on consumer-focused enterprises. Monopolies are no different. –Consumer empowerment is hard: Its always tempting to rely only on the advice of insiders. –But some encouraging evidence in North America. We should build on that. 6