The Australia Institute has released a new report entitled Electricity costs: Preliminary results showing how privatisation went seriously wrong, which finds that electricity prices have increased at three times the rate of CPI, primarily due to companies ‘gold-plating’ financial assets and passing those costs onto consumers.
Below are some key extracts:
Two decades ago Australia embarked on an experiment with the privatising, corporatising and marketization of the electricity sector. The proponents at the time assured the nation that everything would be better. Clearly that is not the case; between December 1996 and December 2016 Australian prices increased by 64 per cent but electricity prices increased by 183 per cent—almost three times the overall increase in prices. In those figures the carbon price was barely noticeable…
Too often we assume that private and corporatised state-owned corporations are operating efficiently. In the real world such as in the Australian economy where the checks and balances are imperfect and companies exercise considerable power…
Electricity is now management heavy with a blow out in the number of managers relative to other workers. In addition electricity now employs an army of sales and marketing and other workers who do not actually make electricity.
… official figures show that productivity has in fact fallen in electricity. The latest figures for electricity, gas, water and waste and show that over the two decades to 2015-16 the gross value added per worker fell by 34.9 per cent from its peak in 2000-01 or by 19.1 per cent over the total period.8 Based on the figures in Table 1, that means that there are 14,150 more workers than would have been if productivity had remained at 1995-96 levels…
In addition the reforms seemed to encourage profit gauging on the part of companies in the industry who are able to inflate the asset base used in calculating the permitted return on assets. More than half the asset base appears to be ‘goodwill’ and retained earnings. There is a weird circular process in which high rates of return are capitalised in ‘goodwill’ and other fictitious or notional items while high profits guarantee high retained earnings which also feed into the asset base. In that way the unproductive capital base is allowed to increase and we are charged for capital that has no real function in producing electricity.
Adding up the additional labour costs of the new functions under privatisation, corporatisation and marketization and adding the costs of allowing returns on fictitious capital and retained profits we find that the additional charges are likely to be of the order of $404 to $502 per household per annum…
The examination of electricity costs and price setting suggest that Australians are paying much more than they should be if their regulators were guided by considerations of the most efficient delivery of electricity…
There is also the question of how to respond to the unnecessary functions that the electricity companies have undertaken. Nobody expected that in with corporatised and privatised electricity companies there would be a large numbers of sales people trying to sell indistinguishable commodities to consumers. The costs of ‘acquiring and retaining customers’ probably costs quite a large amount. Consider the pub test: Should you have to pay electricity companies the costs of advertising and marketing to you?
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
