The Grattan Institute has just released a report blaming high electricity network costs on public ownership and excessive reliability standards. I commented on a draft of the report, but there wasn’t much change in relation to my comments.
My comments are over the fold. Let me offer the following, slightly ad hominem argument. Grattan has backed the National Energy Guarantee, a radical change in Australia’s energy policy, which was justified mainly by the occurrence of a single blackout in Adelaide. Yet it asserts (without any evidence I can see) that the responses to earlier blackouts in Queensland and NSW represent unjustified “gold plating”.
My comments to Grattan
I should mention that I was involved in the Queensland case as a Member of the Queensland Competition Authority. The sequence of events as I recall it is as follows
1. During the 1990s, there was (as now) a general consensus that the network was gold-plated for excessive reliability
2. In the early years after corporatisation, Energex consistently underspent the investment allowed as recoverable by the QCA, imputing the difference to efficiency gains
3. Following the storms and blackouts in 2004, Energex reversed course, tried to blame the QCA for its previous underspending, and demanded large increases in expenditure, supported by increased reliability standards imposed by the state government
That background informs some of my response to the report
4. The report claims that publicly owned enterprises had special incentives for overinvestment, I see no evidence of this in the record.
5. The point that reliability standards before 2004 were set by networks rather than state governments is a distinction without a difference. These standards were inherited from the period of public ownership.
6. The absence of similar problems in Victoria and SA is primarily a matter of climatic luck – Queensland is much more prone to damaging storms
7. The response to the SA blackout in 2016 inlcuding substantial emergency investment and the Snowy 2.0 suggests that there is nothing special about Queensland and NSW.
8. Based on recent events in Victoria, it seems likely that further distribution failures in extreme weather conditions will produce similar responses. The discussion of bushfires in the report strengthens this view
9. Summing up, the reliability of essential services is always and everywhere seen as the responsibility of governments. In the Australian context, this means state governments.
In this context, I disagree with crucial recommendations of the report
10. The report recommends further privatisation, but no case is made for this
11. Since reliability standards are a matter of political choice, it’s necessary to make the case that standards are excessively high
12. The key problem isn’t the regulated asset base but the fact that the WACC exceeds the cost of capital. That’s why, when privatised, these assets command a substantial premium over the WACC
13. The correct policy response is
(a) to reduce the WACC substantially
(b) to return the entire transmission and distribution to public (preferably national, or joint national-state as with Snowy Hydro) ownership on a statutory authority modle and to abandon the fiction that investment decisions of this kind can be made by profit-driven monopolies (including corporatised GBEs)