Power prices would be lower than otherwise, but may not fall, under privatisation

I’m pleased to see some analysis finally published on the potential benefits of the privatisation of electricity businesses from a Queensland perspective: Network Pricing Trends in Queensland prepared by EY. The Courier-Mail has covered this report with the headline, on its website at least, Electricity prices to fall under privatisation, says audit. While the report is certainly supportive of privatisation, I don’t think it can be read as saying prices will fall under privatisation, only that the growth rate of prices under privatisation would be lower than the growth rate of prices if the businesses weren’t privatised – that is, prices would be lower under privatisation than they otherwise would be.

The reported estimated electricity bill saving of $570 p.a. is from an historical simulation of power prices, covering 1997 to 2013, assuming Queensland experienced Victorian growth rates in network costs (see p.13 of the EY report). Unfortunately, consumers won’t get this $570 p.a. back if the businesses are privatised (technically, if their assets are leased out). The inefficiency is already largely baked in, due to network investments that have already occurred (i.e. gold plating). That said, under privatisation, I expect bills will be lower than they otherwise would be, as private operators would more ruthlessly control costs, running “lean and mean”, as I noted in my 7.30 Report Queensland interview last year:

7.30 Queensland interview on asset leases and power prices

I’ll talk more about the potential benefits of privatisation at the upcoming EPAP-ESA Qld panel discussion on economic policy issues in the 2015 election.

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6 Responses to Power prices would be lower than otherwise, but may not fall, under privatisation

  1. I was on the QCA at the time of the blackouts and subsequent investment program. I can’t recall anyone complaining about gold-plating at the time. A stronger case would be that Energex cut spending too much (overcorrected perceived gold-plating) and then had to correct the overcorrection.

    • Gene Tunny says:

      John, thanks for the comment. Yes, I do recall there was a concern about under-investment in the late 90s/early 2000s. Regarding the investment program post-blackout, people may not have complained at the time because they hadn’t perceived yet what the cost of it would be, but they liked the idea of stopping the blackouts.

  2. Jim says:

    Gene

    Great post. Your reading on what the report says is more reasonable than the reporting in the press.

    The EY analysis looks like it was put together very quickly. It simply describes what has happened to the network charges over the period, but does not actually analyse the underlying reasons (of which there may be several – who knows). Rather it simply infers the differences are due to privatisation.

    It is good to see a bit more information out there, but this is far from comprehensive. I’d still like to see something more comprehensive and cohesive.

  3. Katrina drake says:

    Gene, I have taken to scratching every power pole I pass, in the hope of locating one of these gold plated poles you speak of. My search has been unsuccessful so far, and I’m pretty sure the pole outside my house is the same one that was there when we moved in many years ago.

    If by ‘gold plating’ commentators actually mean reliability – then reliability comes at a cost. Given businesses and householders reliance on reliable power supply, I expect if people were given the choice of cheaper power or a more expensive reliable supply – they would choose reliability every time.

    • Gene Tunny says:

      Haha, yes Katrina, by gold plating they mean investing in a more reliable network. My feeling is that the political pressure that a GOC would feel would mean it’s more likely to over-invest in the pursuit of a more reliable supply. Thanks for your comment.

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