Fact check: Does privatisation increase electricity bills?

Updated

The NSW election is shaping up as a referendum on electricity privatisation.

The Coalition Government is pushing to sell off the "poles and wires" if it wins the election, and the Labor Opposition running an anti-privatisation campaign.

The claim: NSW Opposition Leader Luke Foley says electricity privatisation pushes up power prices and households in privatised South Australia have the highest bills.

NSW Opposition Leader Luke Foley says electricity privatisation pushes up power prices and households in privatised South Australia have the highest bills. The verdict: While one report did find SA had the highest bills, others don't back that up. Whether comparing electricity bills, prices or the relative price index of electricity in each state, there is no consistent link between privatisation and what consumers pay for their electricity. Mr Foley's claim is spin.

"Will prices go up? Of course they will. The only reason someone buys an asset is to make money on it," Opposition Leader Luke Foley said at Labor's campaign launch on March 1.

"In South Australia, following privatisation, families pay the highest electricity bills in Australia."

Does South Australia have the highest electricity bills in Australia and is it a result of privatisation? ABC Fact Check investigates.

Australia's electricity market

The national electricity market has four components:

Generation - power stations make electricity from fossil fuels, wind and the sun

Transmission - high voltage power lines carry electricity from power stations via large transmission towers, to substations in towns and cities

Distribution - low voltage electricity is carried into homes via power lines and poles

Retail - Metering and sale of electricity to consumers

If it wins the NSW election, Mike Baird's Coalition Government plans a 99-year lease of 49 per cent of the transmission and distribution businesses. These two components are commonly referred to together as "the network" or "poles and wires".

Before the 1990s, all state governments owned and ran all four components, but ownership is now in a mix of government and private hands around the country:

Majority ownership of electricity market components in Australia Component Generation Transmission Distribution Retail SA Private Private Private Private VIC Private Private Private Private Qld Public Public Public Private NSW Private Public Public Private WA Public Public Public Public TAS Public Public Public Public NT Public Public Public Public ACT Private* Private* Private* Private* *ACT Government and AGL joint venture Sources: Australian Energy Regulator; WA Department of Finance; NT Department of Treasury and Finance

Electricity was privatised in South Australia in 1999 and in Victoria in the second half of the 1990s.

The Snowy Hydro, which is jointly owned by the NSW, Victorian and Australian Governments, also generates electricity for Victoria, South Australia and NSW.

The ACT Government set up a joint venture with a private company in 2000 to run its electricity businesses.

The National Energy Market

The National Energy Market (NEM) was established in 1996 to allow electricity to be traded among NSW, Victoria, Queensland and the ACT. The agreement allowed each state to introduce competition among electricity generators, and over time, the retailers.

However, the transmission and distribution components are a natural monopoly - there's only one set of high voltage transmission and low voltage distribution lines, the "poles and wires" in any one place. Several joint government agencies manage, operate and regulate the NEM.

Comparing electricity bills around Australia

Mr Foley's office told Fact Check the source of his claim about electricity bills was a 2013-14 report on the performance of the retail energy market by the Australian Energy Regulator. The AER was established under the NEM to set network prices, monitor markets and assist the federal government's Australian Competition and Consumer Commission.

The AER estimated annual electricity bills by taking into account energy retailer discounts and seasonal pricing.

Its chart, which only covers the NEM states, represents the median market and "standing offers" in each state.

The AER says using the median, rather than a simple average, "ensures the analysis is not skewed by a small number of very cheap or very expensive offers".

It defines standing offers as "basic electricity and gas contracts with terms and conditions that are prescribed by law and designed to protect [consumer] rights".

These contracts must be offered by a designated retailer in each area.

The AER notes that the two main components of energy bills are the price of energy and how much energy is consumed.

"To directly compare how energy charges vary across jurisdictions, we have applied the same consumption levels to all jurisdictions," its report says.

"This shows that electricity charges are highest in South Australia (annual bill of $2388) followed by Tasmania ($2090). Electricity charges for Queensland, New South Wales and Victoria were all around $2000. Electricity charges were lowest in the ACT ($1511)."

South Australia, with privatised electricity, does have the highest bills according to the AER data. But the ACT, also mostly privatised, has the lowest bills and Victoria, fully privatised, has slightly lower annual bills than NSW, Queensland and Tasmania, all of which have their electricity networks in government hands.

A report on residential electricity prices around Australia prepared for a meeting of federal, state and territory leaders in December 2014 by the Australian Energy Market Commission took a different approach.

The AEMC makes national electricity retail rules and conducts independent reviews for the Council of Australian Governments.

The AEMC report, unlike the report cited by Mr Foley's office, took into account different levels of electricity usage in different states.

"The representative consumer is different for each jurisdiction and is determined using a representative annual consumption level provided to us by state and territory government officials," its report said.

In contrast to the AER's comparison of standing offers, it considered "market offers" set by retailers.

It compared household bills in the four jurisdictions where market offers are generally available - South East Queensland, NSW, Victoria and South Australia - and used low consumption, high consumption and "jurisdiction-specific representative consumption" figures for each.

The data shows no clear link between electricity bills and privatisation.

Household bills ($) State Low consumption State-specific representative consumption High consumption South East Queensland 800 1302 2528 New South Wales 903 1869 2638 Victoria 889 1339 2389 South Australia 917 1633 3025 Source: AEMC

South Australia has the highest bills for consumers who use low and high levels of electricity, but not for representative consumers.

NSW has the second highest annual bills for low and high consumers, and the highest for representative consumers.

A third comparison of electricity bills was carried out by accounting firm Ernst & Young for NSW Treasury in 2013, under the Baird Government. The firm only looked at NSW, Queensland, Victoria and South Australia.

It found NSW has the highest "electricity bill for the typical residential customer" of $1,925, followed by Queensland at $1,547, Victoria at $1,495 and South Australia at $1,481.

This report takes a longer term view than the AER or the AEMC, examining South Australia from 1998-99 to 2010-11 and the other three states from 1996-97 to 2012-13.

It found that since privatisation, electricity bills have increased less in the privatised states of Victoria (99 per cent) and South Australia (80 per cent) than over the same period in the non-privatised states of NSW (158 per cent) and Queensland (152 per cent).



Electricity bills v retail prices

Lynne Chester, an energy researcher at the University of Sydney, says it's wrong to conflate higher bills with higher electricity prices because of the influence of household characteristics, including family composition, construction materials and habits such as use of clothes dryers, air conditioners and swimming pools. There are also significant regional variations.

"Households in Victoria for instance will use more gas for heating, whereas South Australian households will use more electricity for air-conditioning," she said.

The AER report shows wide variations in energy use, with annual electricity consumption ranges of 4700 kilowatt hours (kWh) in Victoria to 9400 kWh in Tasmania, and gas consumption ranges from 10,000 megajoules (MJ) in Queensland to 63,000 MJ in Victoria.

Dr Chester says looking at the change in electricity prices over time is more informative than comparing electricity bills in each state.

She has conducted an analysis of electricity price changes, rather than electricity bills, between 2007 and 2014 using AER data.

In a paper published in March, she found that prices have increased more in the non-privatised states of NSW and Queensland, compared with the privatised states of Victoria and South Australia.

State Average increases in household electricity prices 2007-08 to 2013-14 (%) NSW 115 VIC 103 Qld 126 SA 91 WA 85 TAS 100 NT 78 ACT 77 Source: Lynne Chester

The Australian Bureau of Statistics publishes an electricity price index across Australia as part of its calculations for the consumer price index. The electricity price index measures the change each quarter in the price of electricity in capital cities.

The data shows that electricity prices were relatively flat through the 1990s, but escalated in all capital cities from 2007.

Adelaide, Melbourne and Sydney have experienced higher price increases than other cities since 1990. The highest point was recorded in Adelaide in March 2014 and the most recent numbers for December 2014 show it is slightly higher than Brisbane, Sydney and Melbourne.

Perth and Darwin had the lowest electricity price increases over the 25 year period.

Privatisation and retail prices

So what has been pushing up electricity prices?

The AEMC report breaks down electricity price into three components:

"Competitive" costs in wholesale generation and retail

"Network" costs in transmission and distribution

Government environmental policies

It provides figures for each state for 2013-14, as shown in the chart:

South Australians are paying more for their electricity because of high network costs, as well as high competitive costs. Victorians pay less because of lower network costs, although they pay high competitive costs. In NSW, network costs are similar to South Australia, but competitive costs are lower.

A Productivity Commission report in 2013 said: "Average electricity prices have risen by 70 per cent in real terms from June 2007 to December 2012.

"Spiralling 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."

It found that some network businesses were inefficient, reliability standards were too high and management of peak demand was weak.

The electricity network (the poles and wires) is regulated by the AER. The AER sets maximum prices the network owners can charge and the maximum amount of revenue they can earn. Its decisions apply for five years.

The AER explains that all networks need to invest to meet demand and to replace ageing assets. The report said its regulatory determinations from 2009 to 2011 reflected increasing capital needs to replace ageing assets, meet higher reliability standards and respond to forecasts made at the time of rising peak demand.

"The determinations provided for real investment to increase on average by 46 per cent, compared with the previous regulatory period," the report said.

What the experts say

Tony Wood, energy director at the Grattan Institute, said the AER sets network prices regardless of whether they are publicly or privately owned, and doesn't take into consideration how much a company paid for the business.

"When people say electricity prices went up, they went up everywhere, regardless of ownership, and that was driven by what I would think is a very poor regulatory process," Mr Wood said.

AER reports from 2013 and 2014 show that NSW and Queensland have invested more in their network businesses than the privatised states.

Mr Wood told Fact Check the previous AER cycle erred too much on the side of the investor, particularly with regard to meeting peak demand as a result of increasing air-conditioner usage.

"But now we've got a situation where we've almost certainly built more to meet these very short peaks, and so a lot of the assets which we've built and are therefore paying for, through these regulated prices, are not being utilised as much as we might have hoped," he said.

When people say electricity prices went up, they went up everywhere, regardless of ownership. Tony Wood, Grattan Institute

Liam Wagner, a lecturer in economics at Griffith University, said it's difficult for the AER to assess whether the veracity of the claims made by businesses who own the network are valid.

"They have to rely on the technical advice of the distribution network operator but that largely seems to be a fair bit of overspend by some distribution operators," he said.

Dr Wagner said the increased expenditure is partly a result of the AER setting a higher reliability standard, and that NSW and Queensland, the states where network businesses are in government hands, have spent more on their facilities to meet these standards.

"That change in reliability standard meant they were overbuilding, or overfortifying, their distribution network," he said.

"So while the reliability standards are the same across all states, and the privatised networks have been able to meet them, in the long run, [the privatised networks are] likely to age a lot quicker...and there's probably going to need to be more investment in privatised networks."

Dr Chester made a similar point in her recent paper. She wrote that the primary driver of the significant increases in electricity prices had been the return on capital invested by network businesses.

"Those returns are set by an independent regulator not an individual network company, are irrespective of ownership and are driven, in turn, by investment programmes," she wrote.

She said investment needs varied by state. Some governments set higher reliability standards than others, and states with a larger land mass required networks that cover longer distances and some states had ageing assets in need of replacement.

These and other factors "have sharply influenced the scale of investment by each network, irrespective of ownership, and thus the increase in network charges which has ensued," she said.

"Overall, the evidence does not support the claim of either higher or lower prices following privatisation."

Other factors affecting price

The other components of price - wholesale and retail costs and government environmental policies - can also affect electricity prices in each state.

For example, South Australia has one of the highest penetrations of wind energy in Australia.

Mr Wood says the generator's fuel source can affect wholesale prices.

Sorry, this video has expired Video: Watch John Barron present the facts (ABC News)

"Victoria's electricity comes from brown coal, which generally speaking is the cheapest, whereas South Australia has a lot more of its electricity coming from gas and wind, so South Australia has always had slightly higher prices on that basis."

Similarly, government environmental policies can also have an unequal impact on electricity prices across the states.

The carbon price made up about eight percent of consumer electricity bills in 2013-14. States that use more coal-powered electricity, like NSW, paid a higher price than states using wind power, like South Australia.

AEMC data shows that NSW consumers were paying about $160 per year for the carbon tax, while those in South Australia paid around $100.

Future NSW prices

Mr Wood says the AER will now benchmark network businesses against each other, and a NSW draft determination for the next regulatory period proposes lower revenues for network businesses, which are expected to result in lower electricity bills.

NSW Premier Mike Baird announced that former Australian Competition and Consumer Commission chair Allan Fels would be appointed Electricity Price Commissioner if privatisation went ahead and his job would be to guarantee electricity prices don't go up.

Professor Fels says the AER's NSW draft decision provides for network prices to fall by 20 to 30 per cent.

"You would be very surprised if prices went up when the regulator has made a pretty serious decision," he told Fact Check.

The verdict

While the AER report Mr Foley's office cited found bills in South Australia were the highest among the eastern states, a report by the Australian Energy Market Commission and another commissioned by the Baird Government found NSW households paid the highest bills.

The AER report contains no consistent correlation between higher bills and privatisation.

It found South Australia, with privatised electricity, does have the highest bills. But Victoria, fully privatised, has slightly lower bills than NSW, Queensland and Tasmania, all of which have their electricity networks in government hands.

Comparing bills is problematic because of large variations in consumption, household composition and how people use electricity in different states.

The ABS index of electricity prices across Australia, showing movement of electricity prices over time, also doesn't demonstrate a link between privatisation and price rises.

Whether comparing electricity bills, prices or the relative price index of electricity in each state, there is no consistent link between privatisation and what consumers pay for their electricity.

Experts say the biggest influences on what people pay for electricity are costs of transmission and distribution. They say these costs have risen in recent years irrespective of whether the owners of the transmission and distribution networks are privatised.

Mr Foley's claim is spin.

Sources

Topics: government-and-politics, elections, privatisation-and-deregulation, alp, nsw

First posted