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The Infrastructure Partnerships Australia’s national energy reform series began last month, Allens is a sponsor of the four part series and the second event was held on Friday last week, the 12th of December, and this one brought together some of the industry leading experts together in a panel discussion.  Panellists included Anna Brakey from IPART, John Pearce from the Australian Energy Market Commission and Andrew Reeves, the outgoing chairman of Australian Energy Regulator.  Allens Partner Grant Anderson was on the ground and joins us now to talk about some of the key insights from the event.  Grant thanks so much for joining us.

That’s a pleasure Kate.

Grant firstly was there a major theme emerging from a panel discussion?

Yes indeed there was Kate and that theme was that it was necessary for both governments and consumers to be able to understand the drivers of electricity prices.  Governments need to under this so that they are aware of the impact that their policies can have on their prices, and consumers need to understand this so that they can better manage their electricity usage and costs.  And in fact it was quite a timely discussion because just the previous day the Australian Energy Market Commission had released its fifth annual report on residential electricity pricing trends in 2014.  And this report suggests that residential electricity prices are actually going to decline or at least remain stable for the next three years.

There are a number of reasons for this, obviously the removal of the carbon tax is one, but also they’ve been quite subdued wholesale energy costs because the demand for electricity has fallen in a situation where there’s excess supply and that has been in fact exacerbated by the Renewable Energy Target Scheme.  Network prices are also expected to be lower and that’s partly due to market circumstances, so reduced financing costs, declining growth in peak demand, but also due to some fairly significantly regulatory changes that have recently occurred and it’s these changes that have enabled the Australian Energy Regulator to focus more heavily on ensuring that the expenditure allowances that it allows to the network operators reflect benchmark efficient operating expenditure.

And Grant did the panel have any insights as to what the regulatory priorities may be over the next few years?

I think it’s fair to say there’s a clear regulatory focus on giving consumers the information and the tools that they need to best manage their electricity costs.  It has been demonstrated that consumers do respond to price signals and that they are prepared to switch retailers as they chase the best deal and this is particularly the case amongst the lower income consumers which is the demographic that governments and consumer groups tend to worry about most, particularly where there’s market reform going on.  So in other words what this means that the lower income consumers are actually benefiting very much from the deregulation that’s occurred.  There are also other tools that are being made available to consumers to manage the electricity consumption and these include things like smart metres which measure half our electricity usage and they can be used as the basis for time of use tariffs.  There are products on the market that enable consumers to for example pre-program their air conditioning equipment so that that’s switched off when electricity prices are high.  And there’s also been recent reforms to the use of metering data so that third parties can now be given access to consumers metering data and that should allow the development of products to enable consumers to be smarter I guess in the way that they consume electricity and the time at which they consume their electricity.  I think the other thing to mention is that there have recently been reforms that are going to require network tariffs to be primarily based on long run marginal cost and that should reduce the subsidies that currently exist between different classes of consumers. 

So for example where as we currently have the case network charges are primarily based on electricity usage then solar consumers or people with solar panels on their roofs actually benefit from that, they only need to access the grid at times of peak times, but they actually pay proportionally lower charges that access than people who are not solar panel or people with solar panels on their roofs.  And so this move to long run marginal cost pricing or most cost reflective pricing should mean that solar panel users actually pay a greater cost than they currently pay and that will remove the cross subsidiary they currently enjoy from other electricity consumers.

And Grant just finally given the electricity network privatisation plans of the current NSW and Queensland governments, did the panel have any comments on the regulatory challenges facing those businesses?

Yeah the panel did and it’s particularly topical because both the NSW network businesses and the Queensland distribution businesses are currently going through their five year regulatory reset which is run by the Australian energy regulator.  Andrew Reeves who as you’ve said is the outgoing chairman of the Australian Energy Regulator made it very clear that the regulatory framework should be applied neutrally to all electricity networks and it should not be influenced by the ownership structure of any of those network businesses.  Now he did acknowledge that this could be very challenging for government owned businesses because as recent benchmarking studies have shown their expenditure tends to be less efficient than that of privately owned businesses.

The panel drew out two factors that contribute to this inefficiency, the first was the fact that government owned businesses tend to have a number of sometimes conflicting objectives that they are required to meet and that’s compared to the sole objective of the privately owned networks which is the maximised profits.  The second factor is that government owned businesses tend to lack focus when they’re managing their capital expenditure.  If you’re a privately owned business then you tend to be acutely conscious of the cost of capital and these businesses are much better at managing their operating expenditure, capital expenditure trade off.  Say for example they will tend to spend more on maintaining their assets so as to extend the life of those assets and thereby avoid the need to spend capital expenditure on asset replacement.  The privately owned businesses tend to be much better at that than the government owned businesses.

Well obviously a number of points made and thanks so much for joining us for the wrap up.

No that’s a pleasure Kate.

That was Grant Anderson who is a Partner at Allens. And listeners if you have any questions you can send them through either using the panel on your screen or via email to law@brrmedia.com.