The big hit to consumers' electricity bills has come from energy sector overspending on poles and wires

The treasurer, Joe Hockey, used the September quarter inflation figures, released last week by the Australian Bureau of Statistics, to have a (most likely not final) slap at the ALP government.

He noted that “inflation was above expectations in the last quarter, at 1.2%”. Rather astonishingly though, in his press conference he did not once mention that annual inflation was growing at a mere 2.2%. Neither did he see fit to mention that underlying inflation was running at 2.3% – in the bottom half of the RBA’s 2% to 3% target band – although both did at least get noted in his media release.

But even his media release was more about slapping the ALP for its “cost of living” increases. I noted the Liberal party’s fairly distorted view of cost of living during the election campaign, and once again Hockey used the seven categories most advantageous to his narrative.

In his press conference, electricity was the big focus. He noted that “the main drivers” of the increase in inflation “were the things that people have to pay for every day. In particular, electricity prices increased significantly in the last quarter, by 4.4%.”

Given electricity is one item which we don’t actually pay for every day, it was a bit of an odd link. We might use electricity every day, but most people pay for it in quarterly amounts. But that aside, he is right about the 4.4% increase.

However, the September quarter is the quarter which traditionally sees the biggest jump each year. In the past 10 years, only in 2008 was the September quarter not the quarter with the biggest increase in prices. And while Hockey was at pains to link it to the carbon price, the 4.4% increase is well in line with the increases observed in the September quarters of 2007 and 2008:

The difference compared with last year, when the carbon price introduction did have an impact, is quite stark. But even looking at the September quarter increases only highlights Hockey’s other point that electricity prices increased substantially during the period of the Rudd-Gillard governments. As the treasurer correctly notes, “electricity prices doubled from the time Labor was first elected in 2007.”

If we look back over the past 20 years, it is pretty clear that, prior to 2007, electricity prices increased pretty much in line with overall inflation:

But this is a case where one can easily fall into the error of thinking that correlation equals causation – and certainly Hockey and Tony Abbott have been very good at persuading people to commit that error.

Despite what federal politicians may say (including Kevin Rudd back in 2007 and during this year’s election), the federal government doesn’t have much control over electricity prices. And the massive increase in electricity prices since 2007 – well above that observed anytime in the past 20 years – had nothing to do with the change of the federal government in November 2007.

A look at the level of spending on electricity infrastructure over the past 20 years, however, quickly displays why electricity prices have exploded in the past six years:

In 2004, the value of engineering construction work done (by the private sector and state governments) was about 0.4% of GDP; by 2009 it was more than double – up to 0.9%. This massive increase at a time when demand for electricity was actually falling has justifiably led to claims of “gold plating” of the electricity networks – excessive spending on poles and wires which contributes marginal benefit to the network performance.

Someone has to pay for the cost of that increased construction – and alas, it was we the electricity consumers.

The Productivity Commission looked into the national electricity market and noted, of the increase in the price of electricity, that “spiraling network costs in most states are the main contributor to these increases, partly driven by inefficiencies in the industry and flaws in the regulatory environment”.

At the Council of Australian Governments meeting in December 2012, Julia Gillard announced a change to regulations, which will make a small difference, but as the Productivity Commission suggested, “have only partly addressed these flaws”.

During the election, the Liberal party had only one solution for electricity prices – getting rid of the carbon tax. And yet, while the price on carbon did increase electricity prices, it had no impact on the increase in this past quarter.

But, in a case of it being better to be lucky than good, electricity price rises are set to return to the average inflation level. As the Independent Pricing and Regulatory Tribunal noted, in its decision on prices from July 2013, the price increase was “substantially lower than those in the past years … due to much lower changes to network costs in this year, following four years of large network price increases”.

The increase in electricity prices over the past 12 months is the lowest since September 2007, and taking away the fourth quarter, affected by the introduction of the carbon price, the trend is clearly towards lower rises in the future:

The Liberal party, by virtue of being in opposition from 2007 to 2013, dodged the big bullet of electricity prices. Regardless of what happens to the carbon tax, and purely because the boom in electricity sector construction has ended, we should observe smaller price increases than in the past six years.

Just remember though, when you hear politicians claim responsibility, correlation isn’t causation.