Electricity prices damage rural and regional industry, ACCC report shows

Politicians on both sides of the fence are acutely aware that peoples’ hip pocket pain will be transferred to a sting at the ballot box if steps are not taken to reign in escalating electricity and gas bills.

The Australian Consumer and Competition Commission (ACCC) interim report into competition in the retail electricity market on Monday highlighted a litany of failures which had lead to power bill hikes.

Prices rose on average 63pc in the past ten years. Residential and especially industrial have seen prices double, or even triple where there is limited competition for tenders.

But this is no fresh argument. For years processors and primary producers have railed against the regulations that lead to the current predicament.

The report identified four key regulatory problems which had contributed to a “severe electricity affordability problem”: Gold plating, lack of competition among ‘gentailers’ that generate and retail more than 60pc of in most states, a complex electricity market which lacks transparency, and a merits review system which allows networks to challenge price rulings from the Australian Energy Regulator (AER) in court.

The ACCC found a whopping 48pc of the average power bill is made up of network charges and it reckons gold plating of network assets will burden electricity customers “for decades to come”.

Network operators run the ‘poles and wires’ across the country. Their building and maintenance costs are charged to to consumers.

The AER approved investment in vast infrastructure upgrades, which were often predicated on questionable forecast of growing electricity demands, which has since failed to materialise.

Network operator’s asset base had grown 400pc in the past 15 years, while forecasts for future demand were wildly inflated.

Between 2007 and 2012 Queensland projected almost 1200 megawatts more in peak demand than was actually required, while NSW forecast about 700mW more than it needed, and Victoria 300mW more. The result? Asset value for each network connection in Australia is nine times that of the U.K.

An unfortunate quirk of regulation let the network operators borrow cheaply from government, typically at 4pc to 5pc interest, and claim capital costs of up to 10pc.

The cost was passed through electricity retailers and onto consumers’ bills. The difference between the interest payment and capital costs was pocketed as profit.

Industry profits rose 67pc between 2007 and 2011 bills rose about 40pc over the same period.

Now the price pain will be extended from inflated infrastructure costs to generation. Policy mismanagement of the rise of renewable power, the decline of coal plants and gas exports is a driving factor behind the ACCC’s finding wholesale electricity costs drove bills up by $167 in 2016-17.

Queensland Farmers Federation says power prices are the number one concern for its members. With a state election due by March 2018 the state will be a litmus test for policy makers.

“The viability of farming and other regional businesses is being challenged, solely due to the cost of electricity. It has reached crisis point in many rural and regional areas of Queensland, and will have implications at the ballot box,” QFF president Stuart Armitage.

The impost on regional Queensland businesses is alarming. According to the AER, between 2012-13 and 2015-16 an average of 462 small business disconnected each year from regional retailer Ergon.

In the first three quarters of 2016-17 there have already been 556 already disconnections. Across the state, there has been an average of more than 1900 small business disconnections across the same period.

Queensland producers are currently on transitional tariff structures, following market deregulation in 2016. Government plans to introduce new tariffs from 2019 that charge electricity users based on peak rate of usage, rather than overall take or what is often a consumption tariff.

Horticulture, irrigation and dairy, already hit particularly hard, are in the firing line.

Producers’ pumping is at the mercy of water markers and a variable climate, animal welfare not off-peak periods dictate milking regimes and crops need to be refrigerated or packed as soon as they are harvested.

Mr Armitage wants comprehensive price reduction reform, and for state government to direct network consortium Energy Queensland to set prices at “efficient levels” at least 40pc below current rates.

Representing rural and regional Australia’s largest manufacturing supply chain is the peak meat processor, exporter and retailer body the Australian Meat Industry Council.

Chief executive Patrick Hutchinson serves 35000 full-time employees at the top of the processing chain which flows down 5500 retail jobs.

Power prices are the biggest issue for his constituents who are largely “rural and regional, and I think that we’ve been forgotten”.

“We had a great opportunity to underpin the industry on the back of record livestock prices,” Mr Hutchinson said.

“If we had more stable input prices for processing that could have sent a message to industry that prices are good and you should reinvest.

“Now we have such an unstable scenario and a large number of processors wondering how they’ll manage.

“People are wondering how can there be 100pc price increases in the space of a year - what’s changed?”

Mr Hutchinson highlighted Victorian sheep processing capacity, which has some plants operating at 30pc.

“It’s not just the massive price increases that are hitting us, it’s gas supply and the cost of gas is just as important.”

Competition was crucial to improving the lot of regional buyers tendering for power supply, according to Mr Hutchinson.

“Energy providers are gaming the system, playing on rural industries. They rarely have the ability to negotiate contracts, there’s usually only one or two providers and they’ll offer the same price.”

Federal government has flagged measures to address the energy impost. On the agenda is supply reliability for gas a electricity, affordable pricing and a replacement to the clean energy target, which was recommended by chief scientist Alan Finkel but the Coalition has walked away from the concept.

The ACCC report endorsed measures which the Coalition has recently required of retailers, to notify people on standing contracts of better offers and to make it easier to switch retailers.