Des Pensable, Global Warming, electricity power prices, Gold Plated power assets, privatization,hidden taxation.
By Des Pensable © 2014.
Over the last several years in NSW we’ve seen the price of electricity increase much faster than inflation around Australia and it will continue to rise faster than inflation but neither the government nor the electricity distributors are telling the whole truth as to why this is the case. In this article I propose to explain how and why the prices have risen. It seems that it’s caused primarily by State government profiteering, neo liberal ideology and the reality of Global Warming.
To understand what has happened we need to understand some basic economics.
Profit = Income – Costs
If Income is 100 and Costs are 90 then Profit = 100-90 =10 and you make a profit of 10%.
If Income is 100 and Costs are 110 the Profit =100-110= -10 and you make a loss of 10%.
So you can make more profit by raising Income or by lowering Costs.
For you and me
Cost of electricity = Costs + Profit / number of users.
More users mean lower price and less users means higher prices for a fixed cost of production.
Normally, with power generation, to raise your income you can increase the number of customers or increase the price of electricity. Lowering costs is difficult owing to inflation that generally goes up rather than down and of course the Carbon Tax has had a small affect as well. Since the number of customers is relatively static as most people already have an electricity supply and the costs are slowly going up then the natural trend is for a SLOW increase in prices.
This is important! A government owned power supply does NOT have to make a profit. It can be run at zero profit as it is run for the benefit of the people. If it loses money, it can be simply transferred from other parts of the government’s income and run at a loss to keep the price of power down. In many states the railways and other government services are run at zero profit or a small a loss.
However, in the last few years the Queensland and NSW state governments have decided that they could make LARGE profits from the state power generation system using a cunning accounting scam. They can do this because they make the rules. That scam has been passed on to the consumers who are you and me, through higher power bills.
Why would the state governments want to promulgate a scam on its own people?
The best guess would be that it wants to privatize the power system and the scam adds an extra cost to the system allowing the state governments to argue for privatization which they are currently doing. Since privatization is a neo liberal policy that is known to move wealth from the community to the corporations owned by the rich then we can assume that both Liberal / National party Coalition and Labor governments are fully in favor of selling out the country.
The problem is that the states are putting profit before people and this comes down to accountants within the state Treasury. All the accountants have been trained to save and or make a profit as efficiently as possible (Pareto efficiency) wherever possible and not be concerned about social issues as that is the province of the politicians. Pareto efficiency does not take into account public good.
The Treasury’s culture is to worry about profit not people. So what about the politicians? Do they worry about the public? Apparently not, as actions speak louder than words. The NSW ICAC has found that corruption is endemic in our state governments whichever political party is in power.
So Why do the State Governments want to sell our Power Generation System to Private Enterprise?
While false information and denial about Global Warming might have caused confusion, disbelief and skepticism among the more conservative in the community the scientific consensus is accepted among the professionals in the State Treasuries and their accountants. The Treasuries see Global Warming as a major risk to a public owned asset, the state owned coal fired power system which supplied some of the cheapest power in the world.
It was cheap because the power generators were located close to the coal mines and the coal mines being under government control could get very cheap coal at below market value over a long period.
If renewables were to become popular the Aussie people would want LESS power from the coal and MORE from the renewables. A survey in 2007 found that 80% of the population thought Australia was too dependent on fossil fuels and 89% thought that we should have at least 25% of our power generated by renewables.
That meant a large capital outlay for the government which would lead to higher taxes or more government debt which is unpopular among both the public and the politicians.
It would also mean the coal fired generators would become stranded assets losing much of their value. So the bureaucrats in Treasury suggested that a possible solution was to sell the power grid off. The government would have less worries and the risks and costs associated with Global Warming would be paid by the public rather than the government. The user pays principle.
In 2004 Queensland had some massive brown outs in their power supply system owing to storms. The problem was blamed on the state government not adequately maintaining the power system and consequently the state government fearing trouble at the elections reacted by spending $12 billion over 7 years to upgrade the system.
About the same time the state governments opted for a new more efficient country wide power distribution system administered by a body that would set the rules called the Australian Energy Market Commission and a regulatory body that would enforce the rules called the Australian Energy Regulator.
NSW also decided to upgrade its power system at a huge cost leading to various claims that both NSW and Queensland governments were “gold plating” their power distribution network. In fact an independent report of what was happening was carried out for the NSW senate.
What it revealed was that yes there was excessive spending on the networks but carefully avoided stating why. The report pointed to a NSW and Queensland state government scam but didn’t go all the way to state outright that the scam was causing excessively high consumer costs. That was left to the reader.
So Why Would Private Enterprise Want to Buy our Power Generation System?
Private enterprise businessmen are not worried by the Global Warming denial, in fact denial and the possibility of Global Warming chaos is perfect for business as it induces fear which in turn means people will behave irrationally. Fear creates the possibility for profit as long as the risks are properly managed.
So an astute private enterprise businessman can go into negotiations with a government knowing that the Government and Treasury are fearful of problems associated with Global Warming. Knowing also, that the state government wants to sell, and will be prepared to make all sorts of compromises to sweeten the sale.
Indeed NSW sold three power generating assets to private enterprise for much less than their value. The NSW Auditor General reported: “The significant loss incurred by the electricity generation businesses was primarily due to write-downs in the values of the power stations to reflect their sale price”. And, “The sale proceeds achieved were less than half the carrying value of the assets sold”
It’s a buyer’s market. It’s a beautiful opportunity for any wealthy person with cash to spare or ability to borrow large amounts to buy a valuable resource owned by the people for a fire sale price.
But they are taking a big risk you might say. Not necessarily, if the terms of the deal are hidden from the public; if the risk remains with government and the returns are high, it can be a good deal.
Why are the prices of power rising much faster than inflation?
The price of electricity is increasing much faster than inflation because of an accounting scam by the state governments to raise the capital value of the distribution network and the price of electricity to make it more attractive to the private investor.
Private enterprise has been prepared to buy the power system if the government is prepared to sell it at a discount price AND the government is prepared to give them a guaranteed profit of about 10% on the value of the investment.
This could and has been done by the state governments by creating a power price authority that is told to allow the power companies to ALWAYS raise the price of electricity to ensure the government owned or private company can make the agreed 10% on their investment.
“The pricing of electricity transmission and distribution network services is regulated due to the natural monopoly that exists in most cases. The Australian Energy Regulator (AER) makes determinations on the value of regulated asset bases and the rate of return allowed, based on the demand and investment forecasts provided to them by network businesses.”
Professor Ross Garnaut stated “In my view, there was no good public policy reason for this large increase in prices. It happened because of the way we chose to regulate prices.”
In one single step market economics has been thrown out the window and a variety of accounting tricks can be pulled.
So Let’s look at the simple economics again.
Profit = Income – Costs
Or by rearrangement the equation..
Income = Costs + Profit
By simple maths,
If Costs =100 and 10% Profit is guaranteed then Income must be 100+10 =110.
If profit IS FIXED at a guaranteed 10% (for example) and costs increased then the Income MUST increase to cover Costs and this can only be done by increasing the price to the consumer.
Here’s what happens:
If I own assets worth $1 billion and get a guaranteed return of 10% then I make $100 million profit no matter what the production costs are. If I borrow money (at 4% interest) to increase the value of my investment to $1.5 billion then at 10 % return I make $150 million profit. A nice neat EXTRA $50 million profit. This gives an incentive to invest in new poles and wires. You can’t lose money.
“Federal Treasury estimates that 51 per cent of an average household bill is spent on network costs. Most of that is going towards paying off the $45 billion network companies have spent on updating our poles and wires over the last five years.”
Here’s the scam. I also make a profit on the $500 million that I borrowed at 4% but received 10% each year until the loan is repaid. This money is called a “competitive neutrality” fee.
“The state governments extract much of the surplus attributable to the difference between the allowed return on debt and the cost of debt through what are euphemistically called “competitive neutrality” or “debt guarantee” fees”.
In practice, if the state governments deducted the 6% “competitive neutrality” fee gain off the Costs of Production of electricity then a large proportion of the increased consumer costs would have been nullified. Instead the Queensland and NSW state governments moved the “competitive neutrality” fee into consolidated revenue forcing the cost of electricity to increase considerably higher than needed. This can be considered to be a hidden tax imposed on all electricity consumers.
In 2010 this “competitive neutrality” fee in NSW was $596 million. If that money was subtracted from our power bills as it should have been, it would have saved each member of the public hundreds of dollars on their power bills.
In an independent report to a Senate Select committee the scam was recognized and it was suggested that in order to bring down prices the scam should be taken into account in the overall profitability of the power generator company.
…”in setting the allowed rates of return for state-government owned service providers, their receipt of income taxes and “competitive neutrality” fees, in addition to their claim on attributable profits, must be recognised. This will reduce electricity prices while ensuring the government owned service providers continue to deliver a reasonable, rather than extra-ordinary, return on capital.”
There are also less customers to justify the extra production costs owing to the fact that 10% in NSW and 22% in Queensland home owners and many businesses have invested in roof top solar photovoltaic household power generation. Consequently, each customer without solar, has to pay more, so that the fossil fuel power distributor can keep getting their fixed 10% profit.
One generally unmentioned effects of the higher electricity price is that the majority of the burden of higher electricity price has been shifted to the renters and the poor. Most renters pay for their own electricity and don’t have the option to install solar power to reduce the cost of their power bills.
On the other hand, most land lords are not interested in installing solar power as it benefits the renters not the landlord. So renters cannot reduce their power bills while home owners can, hence the poor who are most likely renters end up paying more.
Hidden Effects of the Neutrality Tax scam.
The Neutrality tax scam raised the cost of electrical power much more than necessary but also has a hidden effect. The inflated income of the state power generators creates a good argument to privatize the system. The new private owner will have new equipment, can reduce maintenance and labour costs and make a happy 10% which is way above the bond market.
It’s not hard to see that as the price of power increases more people will opt for solar and force the price higher for those that remain. This is called a power death spiral. Eventually, the fossil fuel power company will have to close as all its customers will desert it leaving its assets stranded but until then it will happily rip off as much profit as it can.
It is not surprising that the fossil fuel power generator owners, whether they are state or privately owned are trying to delay the inevitable death spiral by taking action to either stop people switching to solar power or remove all incentives to do so.
They are even blaming people for using cheaper solar power and try to get the government to tax solar power units on the pretext of it being unfair to the remaining people on the fossil fuel power grid who are paying higher prices.
Government and Treasury fear of Global Warming and stranded coal fired power station assets together with the neo liberal ideological belief that ALL assets should be in private hands has prompted them into selling off our power generating assets in a fire sale.
Even worse, by creating an power authority that sets a fixed profit to fossil fuel power companies, it has set up a system that favors keeping fossil fuel power plants and reducing incentives for the public to switch to renewables.
With the threat of Global Warming increasing every day, this is IMMORAL, BAD PLANNING and against ALL COMMON SENSE. WE need to have the power regulators force the states to use the Neutrality tax to lower the power bills and refund to the people all the funds it has scammed over the last few years. This could be done by reducing the fixed profit paid to the Power Generator owners to zero for a few years. It would also help create a true ‘people before profit’ culture into the government.
watch – Your Power bill is not real– video 7 min 27 secs- excellent
read – Power Corrupts
So what can YOU do about it?
- Complain…loudly about the scam and hidden taxation.
- Block attempts at privatisation of public assets and call for an inquiry into the regulation body and mechanism.
- If you’re a home owner install 3-5 kW Solar photovoltaic power panel ASAP both to save money and force the death spiral to happen.
- Fight any industry sponsored plans to restrict, stop or tax installation of solar power units and feed in Tariffs.
- If you’re a renter, try to negotiate a plan to share costs for putting solar on your rented accommodation so that both you and the landlord benefit.