Another Failed Economic Experiment

Kevin Cox
3 min readJan 29, 2024
https://www.abc.net.au/news/2018-07-18/electricity-price-rises-chart-of-the-day/9985300

The Hilmer Report 1993 led to the creation of the Australian Energy Market Commission and the Australian Energy Regulator. The implementation of the report has led to the capture of much of the electricity market by private corporations. The result has been an increase in electricity prices, which was the opposite of what was intended.

Governments sold distribution, transmission, generation, and retail businesses that consumers had paid for. The concept was to coordinate the state networks and make a single market in electricity across Eastern Australia. The idea was for “the market” to set prices and achieve greater efficiencies.

The market has been created but at a significant cost to Australian consumers and to the detriment of the Australian economy. The market has failed.

The accounting mechanism for the extraordinary price increase shown above is straightforward; the solution is simple and likely with a new approach to infrastructure ownership.

The cost of Capital largely determines the changes in the price of electricity, the accounting of Capital and the cost of energy on world markets. The cost of operating the system increases about the same as inflation. Capital Markets determine the cost of Capital.

The agreements with transmission and distribution businesses account for about half the direct electricity costs; in those businesses, the Capital costs dominate. The regulator assumes transmission and distribution businesses buy money from international capital markets. To encourage investors, they get a guaranteed return on investment. At the moment, it is about 6% of the regulated asset base.

The profit of each business is unknown to consumers because it is treated as commercially confidential. However, we know it must be high because the price of electricity has gone up far above the actual costs, and every time there is a sale, the price is much higher than the price of the regulated asset base. We also know that multinationals would want a higher return than the 6% regulated asset base, so the profit must be greater than 6%.

These capital costs are imposed on us because we do not own the infrastructure. If consumers owned it, the capital costs could be eliminated as we do not need to monetise the infrastructure and pay to use the money to trade.

What can we do?

The ownership of Australian infrastructure could be in the hands of the infrastructure consumers as the money is available in Australia. Australian superannuation funds now have as much invested overseas as in Australia. They have been forced to do this because many (most) of the electricity and other infrastructure assets are in the hands of private equity and multinationals, including our own. The superfunds have difficulty investing in Australian infrastructure. Banks find home loans more profitable and safer, and consumers have no hope of investing. Banks and individuals are over-invested in housing.

The electricity infrastructure is vital to Australia, and we cannot let private interests, particularly non-local, own it.

Instead of changing the current system, we can encourage the establishment of Local Permanent Electricity Markets to bring competition to the Capital marketplace. Doing so will increase electricity resilience and lower costs in local areas that wish to participate as energy production and consumption will become more localised. A community that decides to participate will see their electricity prices stabilise and the profits reinvested in the local community to increase reliability and resilience. The existing electricity market and infrastructure remain unchanged, and it can work out how to adapt to the new competition.

The funds to set up these markets can come from Community Banks, super funds, existing home panels and batteries. It can use a similar model to Permanent Home Markets.

What will be the result?

Assuming local is defined as a low-voltage distribution line. The members of the Permanent Electricity Market on the line will find their electricity costs will stabilise at less than 50% of their current costs. They will have a more reliable and resilient service. They will use the existing distribution services and transmission businesses but use them less. They will still use retailers, but they will own the retailers. All their energy will be renewable electricity.

Summary

It has taken 20 years for problems with privatisation to become so obvious they cannot be ignored. Renationalising is not the answer, but an evolution of the existing system made possible with today’s communication technology allows local ownership and the removal of unnecessary financial costs.

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Kevin Cox

Kevin works on empowering individuals within local communities to rid the economy of unearned income.