By Alan Mitchell
The energy sector may be among the jewels in the crown of competition policy reform. And electricity prices may have fallen by 25 to 30 per cent for businesses in NSW and Victoria, while gas prices have fallen by a similar proportion in Western Australia.
But there is still something seriously wrong with the electricity and gas industries in Australia.
That something, according to a persuasive new report, is the number of serious new report, is the number of serious barriers still in the way of competition.
The report has been written for the Business Council of Australia by Rob Sims and Phillip Stern of the consultants Port Jackson Pertners. Sims is a former senior official in the Department of the Prime Minister and Cabinet.
The key conclusions about the electricity industry are the structures of the electricity generation industries in NSW, Queensland and South Australia are ‘unable to sustain competitive outcomes’; that the interconnection between the eastern States and South Australia is inadequate, and that investment in new interconnection capacity is subjected to too much uncertainly; that transmission and distribution prices are giving wrong signals, and that regulatory arrangements are too cumbersome.
Finally Sims and Stern warn that progress toward competition at the retail end of both the electricity and gas market ‘may be stalling’.
One of the most important deficiencies highlighted by the consultants is the structure of the NSW generation industry. There are three generating corporations, Pacific Power, Macquarie and Delta, and all are owned by the NSW Government.
While the three corporations compete, the price of electricity in NSW, at around $25 per megawatt hour, is about twice the short-run marginal cost of production.
The short-run marginal coast of production includes only the variable cost fuel, labour, maintenance etc of producing an additional unit of electricity. A price based on the short-run marginal cost would not give producers a reasonable return on their assets.
However, given the large amount of excess capacity in the SNW generating industry, the current price is arguably too high.
One possible explanation is that three is not a sufficient number of producers to make a genuinely competitive market, see common ownership as the more serious problem.
‘As a shareholder, governments [like any other shareholder] set profit objectives and approve strategic direction. This is done through approval of annual plans, and through day-to-day liaison.’
Would a breakup of the ownership of NSW’s three large power generations be sufficient to make the NSW market competitive? I’m not so sure. But I’d readily concede that the problem of the NSW electricity oligopoly is almost certainly made worse there should be in NSW should be settled before there is a change of ownership. However, there definitely must be a change of ownership.
Australian Financial Review
19 April 2000
Question
1. How would you define and classify the market for electrical power to large business?
2. Explain why the introduction of energy sector reforms permitting large-scale business users of electricity to choose suppliers has brought cost saving of 25 to 31 per cent.
3. Why do you think there are still barriers to competition in the provision of power to large business in New South Wales? What effect has this had on the price of electricity? Who are the winners and who are the losers from the lack of competition?
4. If the NSW government decided to regulate the price of electricity in that state, what would be the appropriate pricing policy to attain allocative efficiency in the short run? What impact would this pricing policy has on government revenues?
5. What is the ‘danger’ (in revenue terms) of simply covering short-run marginal costs?
6. What are the serial costs of large-scale gas and electricity production?
7. Does our market theory really tell us that three is not enough for competition, but that, say, six is?
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