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What we have achieved and where the parties will lead us with energy policy

By Alan Moran - posted Monday, 2 August 2004


Though the notion of energy policy can be very broad, its commonly understood framework comprises first the policies governing the gas and electricity industries and secondly the interface of energy and environmental policy, in particular greenhouse gas emissions and energy conservation. This assessment compares and contrasts the major parties' approaches to achieving an efficient energy industry while pursuing social objectives and meeting environmental goals.

Policies Covering Electricity and Natural Gas Supply

It is only over the past decade or so that electricity, and to a considerable degree gas, was anything other than a state based industry totally under state government control and, for the most part, ownership. The present arrangements, which still do not fully apply in Western Australia and the Northern Territory, have replaced state monopolies with a market-based supply industry. The industry now comprises a mixture of government firms (in NSW, Tasmania, and most of Queensland, WA and the NT) and privately owned businesses. In the generation and retailing sectors all these firms compete with each other. The natural monopoly areas of local distribution and most long distance transmission are controlled at arms length from government by regulatory agencies like IPART in NSW and Victoria's ESC.

Overwhelmingly, the changes to the market structures have been bipartisan. They have been undertaken within the framework of National Competition Policy. The most recent modification has led to the creation of the Australian Energy Regulator as a semi-autonomous part of the ACCC and the Australian Energy Market Commission in place of the National Electricity Code Administrator. These changes bring the national gas and electricity regulations under a single agency structure and are intended to expedite decision making procedures. Significantly, they include some commitment to ensure a more harmonised national set of regulatory procedures and a steady abandonment of the administrative roles conducted by the 13 state regulators, which presently control pricing and network access conditions.

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The Commonwealth Minister has been a major force in pushing through these measures but has enjoyed the general support of his Shadow counterpart, as well as from the State Ministers, particularly Victoria's. This unusual degree of cooperation offers greater confidence that the agreement can be put into operation.

Much will rest on continuing cooperation if we, in the event, achieve the foreshadowed faster resolution of specific market rules issues as they arise, the elimination of the state based regulators and the greater consistency in trading rules (especially those governing electricity retailers).

Some of the matters involved in States wishing to retain controls go beyond the simple issues of ministerial empires. Governments have been keen to ensure that cross subsidies are in place in electricity and gas to offer benefits to regions and to the less well off. There is little sign that these concerns are diminishing, though the greater openness of markets, with implications of incumbent suppliers having their more profitable customers cherry-picked automatically puts pressure on governments to release pricing strangleholds.

Of course such cross-subsidisation is alien to efficiency and contrary to the competition reforms to which all governments have acceded. The National Competition Council has sought to pressure the states on the matter, including recommending suspension of some payments to Queensland, the most blatant offender. Contrary to its obligations, Queensland has no plans to fully open its markets to retail competition and lift price caps and, along with NSW, has a system of mandatory insurance that benefits state based retailers.

Similarly, the public ownership of the generating industry in NSW, Tasmania and Queensland gives governments in those states a different set of interests. In Queensland, there is evidence of the government using its planning powers to hamper investment from new non-State owned generators. Tasmania has used its monopoly generator to finance the Basslink transmission link to the mainland, a link that few consider could have been viable at the present time without such a subsidy. NSW has used its own planning powers to attempt to thwart the construction of a new power station committed to, perhaps unwisely, by one of its state owned retailers.

Regulatory arrangements for gas pipelines have been highly contentious. These largely stem from misguided bureaucratic attempts to lower prices so that they reflect marginal costs not competitive market outcomes. They also represent the aspirations of the ACCC to retain its regulatory control powers even when there is commercial rivalry. State governments, in particular Queensland, and the Commonwealth Minister have sought to limit the ability of the ACCC set competing pipelines' prices rather than leaving them to market forces. The main focus of attention has been the rival Moomba and Bass Strait pipelines to Sydney. A more difficult issue concerns the Dampier to Bunbury pipeline which has been bankrupted by the determinations of the WA regulator.

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Greenhouse Issues

While industry policies, consistent with National Competition Policy, have sought to reduce energy prices, environmental impositions are driving them up. 

It is the intersection of energy and the environment that nowadays provides most political fuel. The Mandatory Renewable Energy Target (MRET) is the centrepoint of current government policy. This is an obligation on energy retailers and other users to source specific quantities of energy from designated low carbon dioxide emission sources. Wind power is the dominant eligible source. The obligation is tradeable and there is a fall back tax of $40 per MWh for businesses failing to secure their required allocations (existing trades are a little under the $40 penalty). The current cost per year can be estimated at some $360 to $380 million in increased energy bills by 2010.

On the face of things there are major differences between the Government and Opposition, differences that reflect their positionings between courting the green vote and avoiding excessive costs:

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Alan Moran is the principle of Regulatory Economics.

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