Fairly unfair – Energy Network price setting

Gold plated networks practice stopped, and cost reflective price setting will be the market policy. Yes, prices will rise. However prices will be controlled in a fair way it is said. It is an interesting game and thinking about it you realise it is ‘business as usual’ with an appropriate spin for self fulfilling prophesies. Actually it could be prophecies as it depends on if you are using the term as a verb or noun. For instance whether you are forewarning of significant price increases with callous regard to the customer, or anticipating being able to inspire the process of one or more messages that have to be communicated on behalf of the ‘good’.

Previously Co2land org wrote that the question that is most difficult is are you pro-business or pro-market. We have found a new term for the customer as a position description ‘pro-sumer’, and the position is the customer must be the one that willingly pays. We won’t bore you with theories of elastic and inelastic demand as this is a supply side argument. However, we might suggest you develop an instinct that identifies what can be summed as – ‘The rustling of the leaves tells a story, warns of a danger, and a lot of … is going on’. Beware you might not like what you see and the problems are in the detail. So what is the story behind it all?

The story is the players displaying how they justify the costs of reliability of supply. It is not about balancing the supply and demand for more efficient and reliable source of supply. A little more explanation please we hear you say. The business and the market of the energy supply is a supply side focus. That is why the energy companies are called, in the rules, the supplier, and where the customer might curtail or offer low volume generation into the supply is called the provider. Where the customer consumes they are called the user, or more recently termed the ‘pro-sumer’ where they make smart choices. All very simple is it not!

It remains at issue is your network charges will rise regardless.

The questions are how much and why is the political term ‘gold plated’ being used to substitute for what was called redundancy in the past – In this case we explain: “Redundancy is the duplication of critical components or functions of a system with the intention of increasing reliability of the system, usually in …” Source en.wikipedia.org/wiki/Redundancy_(engineering).

The remainder of the story uses other sources as follows: http://www.canberratimes.com.au/act-news/actewagl-says-power-supply-in-canberra-at-risk-20141127-11uyv7.html

, and

http://www.goulburnpost.com.au/story/2726997/australian-energy-regulator-clamps-down-on-network-charges/?cs=12

, and

http://reneweconomy.com.au/2014/regulator-slaps-down-networks-on-more-attempted-gold-plating-22048. Also AEMC paves way for changes in network pricing for solar, air-con.

The network view:

ActewAGL: Chief executive officer Michael Costello says the draft decision from the Australian Energy Regulator does not make sense, and could lead to catastrophic failure.

“We not objecting to a reduction in price, …What we are objecting to is the degree of the reduction, and the fact it threatens reliability, stability and, if it does go far enough, the safety of the network.”

Energy Networks Association head John Bradley said the “unsustainable” spending cuts could compromise reliability, safety and efficiency outcomes for customers. “If implemented, these funding cuts put at risk key consumer outcomes relating to safety, maintenance and outage response times,…Consumers end up paying more under this kind of ‘roller-coaster’ regulation where underspending is followed by higher cost catch-up spending and political intervention.”

The Regulatory View:

Australian Energy Regulator (AER) chair Paula Conboy says under new rules the regulator’s focus is squarely on outcomes for energy consumers, for a safe and reliable network. “So we have to ask ourselves, why should customers be required to pay more?….. Our draft decisions propose lower allowed revenues for transferring electricity and gas, which, if implemented, should result in lower energy bills for end users in the ACT and NSW,… These reductions would be followed by small increases in each of the three subsequent years [in line with the yearly Consumer Price Index]…. Network charges on bills have inflated with extravagant spending – or gold-plating on poles and wires – in recent years and now account for 50 per cent of an energy bill issued to NSW users.”

RenewEconomy asked Conboy if the network revenue application were simply a case of them prosecuting “business as usual” rather than the transformation – the “prosumer revolution” – identified by new AER chief executive Michelle Groves, the chief executive of the AER.

Groves said last month:  “The electricity industry certainly is changing. In fact it is not much of a stretch to say that the next couple of decades will witness something of a revolution in the way small customers interact with the electricity industry. In the future there will be more scope for even the smallest energy users to become active participants in the energy market.”

Conboy said we would have to ask the networks if they were focused on business as usual.

In a separate announcement, the Australian Energy Market Commission (AEMC) said new pricing rules will begin on December 1.

“By having prices that reflect the costs of different patterns of consumption, we are giving consumers clearer choices as we develop a more efficient, incentive-based network regulation framework,” AEMC Chairman John Pierce said .

The Users View: Large, SME, Domestic Advocates.

Gabrielle Kuiper, senior policy officer at the Public Interest Advocacy Centre, said the AER’s draft decisions were welcome news to the increasing number of NSW families struggling to stay on top of soaring energy costs. Dr Kuiper also said there was room for improvement in regards to the allowed rate of return – the forecast of the cost of funds a network business requires to attract investment in the network.

Oliver Derum, another senior policy officer at the advocacy centre, said energy prices could drop even further if the NSW government before the proposed lease of the networks writes down previous over-investment by the networks. “That could cut bills further by hundreds of dollars a year. We would urge the NSW government to consider this option as part of the sale process,” he said.

The Parkinson Report says (Giles Parkinson that is), “The draft rulings are part of a big game between the networks and the regulators over how much they can spend on upgrades, charge for maintenance, and for the cost of capital. The networks have a history of asking too much, and while the AER has sought to cut them down in the past, they have often been over-ruled, or forced to compromise on appeal.

(The AER decides how big the revenue pie will be for the networks. In an associated decision, the Australian Energy Market Operator has confirmed new rules that will require networks to introduce “cost reflective” tariffs, which will likely mean higher fixed and/or demand charges, which could affect households with solar arrays)… Hence the focus on this new round, particularly in light of the incursion of solar and battery storage into the grid, and the emergence of a new decentralised energy model. The AER, in its draft decisions, said that its estimate should result in a lowering of electricity costs, rather than a rise if the networks were allowed to have their way”.

Co2Land org review:

It all looks too much like they want your energy supply to be viewed as a commodity attached to a financial service. You see a commodity price can be manipulated as a means of control. If you lose control the networks cannot keep the growth numbers where they want them – ‘business as usual’.

Look further at the network lobby group, the Energy Networks Association, which has never conceded gold plating in the past, wants solar incentives reduced, higher fixed charges to consumers, and argued that it would be too expensive to quit the grid, said the AER ruling threatened the reliability of the network – an old favourite of those arguing against carbon prices, renewable energy, or any much change at all.

Reneweconomy says solar households face inevitable changes to the way their bills are packaged after the Australian Energy Market Commission delivered new rules which will require networks to impose “cost reflective” pricing on networks.

According to the AEMC, the changes will not only cater better to different patterns of consumption, they will benefit all consumers in the longer term as lower peak demand reduces the need for spending on infrastructure, and they will likely result in changes in tariffs to encourage households to avoid switching everything on at peak times, or at least pay for the privilege, and also for solar households. It could, for instance, encourage more homes to install west-facing panels rather than north-facing panels, but the final tariffs will be up to the networks to decide.

Reneweconomy goes on the say: In effect, while the Australian Energy Regulator decides how big a revenue pie the networks can eat – and based on today’s decision it is a lot smaller than last time – the AEMC is proving rules that decide how the networks can slice and dice that pie.

The new rules also affect households with air conditioning units, as the main targets of new tariffs aimed at recovering network revenue.

The arguments all centre on fears of the networks are losing market share, and are keen to get as much “network pricing” out of the pro-sumer as they can. The pricing set and recovered from different consumers, says the AEMC, with the key factor to determine how much consumers pay being their individual usage pattern or load profile.

The bit we love sic most “This rule change will not actually set new network prices – that is a role for the networks themselves and the AER. It does create a new requirement that reveals the cost of people’s energy choices,” AEMC’s Pierce said. Other AEMC quotes “Under these changes, we estimate around 70-80 per cent of consumers would have lower network charges in the medium term…Research undertaken since the draft rules were released for public consultation in August shows network prices are likely to be lower in the long run with cost-reflective prices,…

Research shows average residential charges could reduce by $28 to $145 per year. Households which use power at a steady rate through the day will receive the biggest benefits…Based on Victorian trials, we also found a small business could save up to $2,118 or 34% of its total annual electricity network charges by using less electricity at peak times for just 20 hours per year when networks are congested,…

Once the new rule commences on 1 December 2014 network businesses need to start consulting on their new tariffs and submit draft proposals to the AER in late 2015 for new prices that will start no later than 2017.”

Head spinning – it should be!

Our final word: We suggest it is because the term gold plated is different to redundancy in that the former highlights the risk of stranded assets.

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3 thoughts on “Fairly unfair – Energy Network price setting

  1. Nowhere in this do we see “Free Market” in operation or even allowance for it, you know the natural efficient way for the market to operate that our leaders keep spouting but not actually enabling. No it is all about capturing or maintaining market share via regulation, and maintaining profit margins by, you guessed it, regulation. Wonder what would happen to Australias productivity if its energy markets were both free and fair?

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