Why information and transparency about electricity matter: Fragmentation of governance and accountability under New Public Management

4 November 2019

Published on the Australian Journal of Public Administration

From 1995, Australian governments pursued efficiency benefits arising from significant structural reforms in the Electricity Supply Industry, including corporatisation and regulation of network monopolies, and introduction of competition for generators and for retailers. The restructure was motivated by the ideology of New Public Management and influenced by the field of neoliberal economics. More than two decades later, prices paid for electricity by residential and commercial customers have escalated sharply, resulting in sustained anger from all consumers. The Australian Competition and Consumer Commission Chair has admitted that ‘The National Electricity Market is largely broken’. This article documents the reduction in public access to information about electricity supply, the fragmentation in responsibility and accountability for consumer outcomes, and the consequences of these changes for transparency, industry operation, and retail electricity prices. New research enabled the creation of a database of Queensland energy production, consumption, and prices; this facilitated a fresh analysis of Queensland electricity sector performance since the restructure of electricity supply.

1 INTRODUCTION

Australia introduced significant reforms to public administration through the 1990s. A consequence of these reforms was that many state governments corporatised or privatised their government‐owned commercial (GOC) entities. One of the sectors to be restructured significantly was the electricity supply industry (ESI). Restructure involved segmentation of previously vertically integrated electricity commissions into four parts: generation, transmission, distribution, and retail. Alongside this new four part segmentation of the industry a National Electricity Market (NEM) was established in December 1998 so that generators could compete to dispatch energy at lowest cost. As the network corporations presided over natural monopolies, complex regulatory frameworks were created from 2001 to allow access, to control investment and revenue, and by implication to control prices. The introduction of Full Retail Contestability (FRC) allowed retailers to compete to supply large consumers from 1998 and household consumers from 2006.

The desired outcome of the restructure was that the price consumers paid for electricity was a consequence of competition among multiple suppliers rather than imposed by a state‐owned vertically integrated electricity commission. This nod to neoliberal economics and New Public Management (NPM) assumed that transaction costs of a fragmented governance structure and the pursuit of economic rents by corporatised or privatised monopolies would be less costly than the inherent inefficiencies of state owned entities (Ghertman, 2009; Stigler, 1971). The asymmetry of information that would arise from regulating monopolies as described by the principal–agent problem (Stiglitz, 1989) was considered to be manageable through Rate of Return Regulation (Baldwin, Cave, & Lodge, 2012) or Incentive Regulation (Joskow, 2014). The role of information in the efficient operation of restructured electricity supply, as advocated in neoliberal economics and NPM, is not discussed in the literature. This is significant because it implies that publicly available information on electricity supply and prices had no societal value. The field of economics is, however, replete with theories on the value of information and the benefit that information can provide to those engaged on each side of a trade (Birchler & Butler, 2007). Was this an oversight of neoliberal economics and NPM or an underestimation of the value of information?

After more than two decades of experience and multiple regulatory, governance, and institutional changes to encourage competitively priced electricity, the federal Treasurer directed the Australian Competition and Consumer Commission (ACCC) to hold a public inquiry into the supply, pricing, and competitiveness of retail electricity in the NEM. The ACCC concluded its public inquiry in July 2018. The first paragraph of the report states:

"Australia is facing its most challenging time in electricity markets. High prices and bills have placed enormous strain on household budgets and business viability. The current situation is unacceptable and unsustainable. The approach to policy, regulatory design and promotion of competition in this sector has not worked well for consumers (ACCC, 2018c, p. iv). "

The report attributes high prices to several factors – a loose framework for regulating network monopolies; market power of generators which increases wholesale prices; climate policies like the Commonwealth Government's Renewable Energy Target (RET) and Queensland Solar Bonus Scheme (SBS) interfering with the efficient operation of the wholesale market; high gas prices increasing cost of generation; and retailer behaviour which has sought to confuse customers to increase profits. Notwithstanding the reasons given for high prices, the report identifies transparency issues in relation to the wholesale market, the regulation of networks, and retailer behaviour (ACCC, 2018c), but the report does not mention ‘governance’ or ‘accountability’. Also, it interprets ‘responsibility’ in transactional terms, namely the AER should be responsible for network reliability standards, and avoiding concentration in the wholesale market.

As firms keep information confidential for commercial reasons, a parliamentary research report at the time of the restructure found that accountability could be compromised, and recommended systematic gathering and publication of information to maintain accountability for outcomes (Bottomley, 2000), a recommendation that we show was not seriously implemented. This article details how these transparency and accountability issues developed in Queensland and their link to NPM. In the following sections, we outline the reforms to public administration in the 1990s, including the motivations for these changes, and we show how the changes related to the electricity sector. This is followed by a detailed account of how information about electricity prices ceased to be available to the public, and how the loss of transparency posed great challenges for evaluating the effects of industry restructuring.

2 CHANGES TO PUBLIC ADMINISTRATION IN THE 1990s

Prior to the 1980s, public management was characterised by routine processes through which government policies were formulated, resources allocated, and programs implemented. However, Margaret Thatcher's U.K. government initiated strategies to cut state expenditures, privatise government business functions, and promote an agenda of public management reform (Barzelay, 2001; Hood, 1991). The key ideas in this ‘New Public Management’ were taken up in New Zealand, Australia, and beyond. The Labour government in New Zealand, facing huge structural economic problems in the 1980s, believed it had to ‘bite the bullet and impose severe neo‐liberal economic measures’ (Reardon & Gray, 2007, p. 448). Sweeping reforms included deregulation of financial markets and privatisation or corporatisation of state assets (Boston, Martin, Pallot, & Walsh, 1996; Reardon & Gray, 2007). In Australia, the Hawke–Keating federal Labour government embraced reform that sought economic efficiencies through financial deregulation, reducing tariffs and subsidies, privatisation of business assets, and a strong emphasis on promoting competition (Head, 1988). Pusey (1991) controversially suggested there was a common ideology of economic rationalism prevalent in the public service in Canberra (and Wellington) which sought to reduce state involvement in the economy.

The forces behind NPM reforms were a complex mixture of international pressure, domestic politics, and institutional responses to economic recession in many countries (Christensen & Lægreid, 2011). International organisations like the Organisation of Economic Cooperation and Development (OECD) and the International Monetary Fund (IMF) offered a simple message – the cure for economic recession required that governments should do less and markets should do more (Boston, 2011). From this viewpoint, NPM reforms, privatisation, and the introduction of competition and market‐oriented service provision were considered in neoliberal economics to be an optimal suite of solutions to national economic woes. Adoption of business practices from the private sector and greater competition and contracting would lead to greater efficiency and reduced costs in the public sector (Barzelay, 2001; Boston, 2011; Lane, 2000).

There were few systematic and reliable studies that showed that cost reductions would follow from the restructuring reforms (Christensen & Lægreid, 2011; Lane, 2000). Without empirical evidence, the rationale for introducing much of the NPM reform package was based on strategies, plans, selective success stories, and hard liberal ideology (Christensen & Lægreid, 2011). Those who questioned the theory predicted that protecting commercial confidentiality would lead to inadequate disclosure and a loss of control (Argy, 2001). Others expressed concern that Australian regulatory oversight was incapable of managing problems arising from serious information asymmetry (Kolsen, 1996). More than two decades later there is still little reliable evidence of long‐term efficiencies, cost reductions, or improved service provision (Bushnell, Mansur, & Novan, 2017; Chester, 2015; Christensen & Lægreid, 2011) and mixed findings on the benefits of privatisations in Australia (Abbott, 2011; Chester, 2015; Quiggin, 2014).

Although it was understood that the capacity to monitor the behaviour of restructured entities was crucial for ensuring desired outcomes (Boston, 2011; Lane, 2000), in practice the flow of information reduced. This has seriously hampered attempts to analyse the validity of the projected benefits of NPM and ESI restructuring in Australia. As the ACCC report on electricity prices implicitly acknowledges, the interests of consumers – especially residential and small commercial consumers – were relegated a lower priority than protection of ESI corporate commercial interests.

3 ELECTRICITY SUPPLY AND NPM REFORM AGENDA IN AUSTRALIA

The Industry Commission was established in 1989 to conduct expert inquiries into matters relating to trade and industry, with a view to promoting productivity and efficiency as the basis for income and employment growth. One of its first inquiries considered Energy Generation and Distribution (Industry Commission, 1991). Its report concluded that inefficiencies and poor investment decisions had led to excess supply, gross overstaffing, and higher electricity prices than necessary. The recommendations can be condensed into:

  • separation of vertically integrated state‐based utilities into multiple generation corporations, a transmission corporation, and multiple distributors;
  • creation of a pool for competitive electricity dispatch by all generators at system marginal cost;
  • consolidation of all transmission entities in New South Wales (NSW), Victoria (VIC), South Australia (SA), Queensland (QLD), and Tasmania (TAS) to form a single independent transmission corporation jointly owned by the state and commonwealth governments;
  • regulation of transmission corporations and distributors to ensure open access to network monopolies; and
  • the corporatisation, with the ultimate objective of privatisation, of all public electricity utilities (Industry Commission, 1991).

 

The Hilmer Report later recommended implementation of a National Competition Policy (NCP), including restructuring of public energy utilities to facilitate competition (Hilmer, 1993). By April 1995, the Council of Australian Governments (COAG) agreed to NCP reforms including commitments to reform electricity. By the end of 1995, the Governments of NSW, VIC, SA, and QLD had all unbundled and corporatised their ESIs. By 1998, the VIC ESI, and by the end of 1999 SA's ESI, had been privatised. Payments were made to state governments in 1998, 2000, and 2002 once reform commitments were met (NCC, 2019).

The National Electricity Code (NEC) came into existence in 1996 to administer the ESI, set market rules, promote system security, manage network connections, and monitor network pricing. The NEC sought to pursue a ‘light‐handed’ regulatory regime focused on market‐oriented rules (Industry Commission, 1991). (The term ‘light handed’ regulation refers to the options for a regulatory environment as discussed in the Industry Commission report into electricity generation in 1991. The report notes a continuum of options ‐ from detailed regulations to circumscribe industry behaviour (a ‘heavy handed’ approach) through to relying on an over‐sighting agency to monitor actual market outcomes (a ‘light handed’ approach)). The primary responsibilities of the NEC Administrator (NECA) included: compliance monitoring, reporting and enforcement; dispute resolution procedures; and rule changes. The guiding principles for the NECA were to maximise reliance on market mechanisms and minimise complexity.

Each state established an expert and independent body to regulate electricity industries and promote and safeguard competition and fair and efficient markets. The NEM commenced in December 1998, operated by the National Electricity Market Management Company (NEMMCO) with generators in NSW, VIC, SA, and ACT competing to dispatch electricity. QLD generators participated in the NEM but could only compete interstate once the QLD‐NSW interconnection was commissioned in 2001.

Concerns about excessive regulation and overlapping responsibilities (Parer, 2002) resulted in governance arrangements for the distribution network monopolies shifting in 2010 to an element within the ACCC, the Australian Energy Regulator (AER), to monitor, investigate, and enforce compliance with national energy legislation and rules (AER, 2019c). The National Electricity Rules (NER) replaced the NEC to ensure that market participants understand their rights and responsibilities (AEMC, 2019a) and the Australian Energy Market Commission (AEMC) replaced NECA. The AEMC is responsible for electricity rules and ‘to promote efficient investment in, and efficient operation and use of, electricity services for the long‐term interests of consumers of electricity with respect to: price, quality, safety, and reliability and security of supply of electricity; and the reliability, safety, and security of the national electricity system’ (AEMC, 2019b). On July 1, 2009, the Australian Energy Market Operator (AEMO) assumed responsibility for the operation of the NEM from NEMMCO (AEMO, 2019).

Independent retail businesses were spun off from distribution assets. VIC and SA retailers were established from assets acquired during privatisation. New South Wales, Queensland, and Tasmania established Government Owned Corporation retailers which were sold to private owners: in Queensland in 2007; and 2011 in New South Wales. Consumers’ ability to choose a retailer, under the FRC principle, started in Victoria and New South Wales in 2002, South Australia in 2003, Queensland in 2007, and Tasmania in 2012. Electricity prices were deregulated in Victoria in 2009, South Australia in 2013, and New South Wales in 2014 (Karmel, 2018). Deregulation of prices in Queensland in 2016 marked the final shift in institutional transformation envisioned in the early 1990s, starting with the unbundling of the state‐owned electricity commissions in 1995, and culminating in a multitude of governance and operational structures, that collectively purport to promote efficient provision of electricity services, despite limited access to information for consumers and fragmented responsibility and accountability for consumer prices.

4 QUEENSLAND ELECTRICITY SUPPLY CASE STUDY

4.1 The QESI restructure

In January 1995, the Queensland Electricity Commission (QEC) was disbanded. The vertically integrated utility was replaced by the Queensland Generation Corporation (which traded as AUSTA Electric and included all major power stations) and the Queensland Transmission and Supply Corporation (QTSC). QTSC was responsible for the transmission of electricity, by a subsidiary corporation called Powerlink, and the distribution of electricity to consumers, through seven subsidiary distributors. Although all the entities were still GOCs, public access to data was limited to corporate Annual Reports which focused on financial performance rather than operational data. In July 1997, AUSTA Electric was separated into three competing generating corporations. Retailing functions were separated within distribution corporations and organised into three new retailer corporations. In 1999, six distributors were amalgamated into one regional distributor, called Ergon Energy.

Governance of the QESI was arranged and periodically revised according to the unfolding national horizontal restructure. From 1999, the NECA and NEMMCO were responsible for the operation and performance of the wholesale generation market, whereas the Queensland Treasurer was responsible for Powerlink and the Queensland Competition Authority (QCA) was responsible for regulating distributors’ investment and revenue, and for determining annual regulated retail electricity tariffs. In 2002, regulatory oversight of Powerlink was transferred to the ACCC and in 2005 to the AER, whereas regulatory oversight of the distributors Energex and Ergon was transferred to the AER in 2010.

4.2 Electricity industry reporting

The Electricity Supply Association of Australia (ESAA), established in 1918 to promote exchange of technical and administrative information between Electricity Supply Authorities in Australia, continued to publish annual data on the Australian and state ESIs. Generally, information on generation, capacity, transmission, and consumption is reported at an aggregated state level. Although electricity price by sector by state was detailed in ESAA reports from 1955, this ceased in 1994. ESAA continued to report income from residential and total sales, which allowed calculation of average residential and total prices, until 1998. After this, no income or price information has been reported by ESAA.

4.3 Framework for analysis

4.3.1 Data discovery method

The description of the restructure above shows that there were multiple governance changes at state and federal levels, corporate reorganisations, privatisations, and consolidations or partial sales. Each change resulted in data loss or data withheld for commercial reasons. The first author developed a method for data recovery to reconstitute the sources of each data series, assisted by discussions with officials within the Queensland Government, GOCs, industry bodies, and industry specialists. This allowed comparison of data sources to establish the consistency of the information. Data sources were loosely classified as published reliable sources, published unreliable sources, unpublished Queensland Government or GOC sources, or unpublished and unofficial industry specialist sources. If data series that were published by more than one source showed discrepancies, cross‐checking was undertaken with unpublished Queensland Government or GOC sources. If a clear indication of consistent information was not available, unpublished and unofficial industry specialist sources were considered. Through this process, a picture emerged of the information that was most consistent and verifiable.

Where there were no sources of data – in particular, average prices and consumption of electricity – assumptions were made about proxies or estimation methods for sectoral consumption and prices, and refined and verified as appropriate through consultation with a combination of Queensland Government officials and industry specialists.

Completed data series were presented to a combination of relevant Commonwealth and Queensland Government officials and industry specialists to confirm the reliability of the full datasets produced.

4.3.2 Case study analysis method

The method employed for this case study details the availability of data pre‐restructure and post‐restructure. The high‐level analysis also considers the consequences of each loss in transparency and the fragmentation of responsibility and accountability for poor outcomes. As this analysis seeks primarily to document the reduced flow of information rather than apply the data to analysis per se, this is proposed as an adequate framework for review.

4.4 Data available before the restructure

4.4.1 Reporting by QEC and its precursors

Published comprehensive data on QESI performance as part of their Annual Report, including:

  1. installed generation by power station;

  2. energy generated and sent out by power station;

  3. fuel consumed by power station;

  4. circuit kilometres of networks and transformer capacity;

  5. capital and operating finances;

  6. customer numbers by sector by regional distribution board;

  7. retail sales and prices by customer sector by regional distribution board; and

  8. persons employed by QEC and each regional distribution board.

 

4.4.2 Outcome for small consumers

Full disclosure of information about the QESI allowed the public annual access to investment decisions and average prices paid. These decisions and their consequences could be considered by the public such that the Queensland Minister responsible for Energy (and by association the QEC Commissioner) was held directly responsible by Queensland voters for electricity outcomes.

4.5 Data available post‐restructure

Most post‐restructure data (equivalent to items 1–6 and 8 in the list of data available before the restructure) were discovered through the process outlined in the data discovery method. However, average prices paid by different consumer sectors, item 7, were not available from any source. The lack of pricing data is thus the primary evidence of the loss of information as a result of the restructure. For this reason, the information about each element that contributed to estimated price for small consumers is discussed in terms of its availability, the responsible entity, and the impact on small electricity customers arising from lack of transparency.

4.5.1 Wholesale prices

Reporting by NEMMCO/AEMO

From December 1998, NEMMCO and from July 2009, AEMO have made available wholesale price and demand data by month for each state which allows calculation of average QLD annual wholesale price paid. AEMO does not report aggregated annual generator activities but does make available very large data files with detailed generator dispatch data.

Reporting by the generators

Since 1997, the generator GOCs have published Annual Reports, but information on generators’ energy generated and wholesale revenue was withheld by some generators. Participators in the NEM, like large industrial customers and retailers, established bilateral contracts with generators to hedge against price volatility in the wholesale market. This Over‐the‐Counter (OTC) market is not monitored so there is no information on actual aggregated wholesale prices paid by direct customers and retailers. Electricity futures and options are traded through the ASX but they represent a small proportion of the market.

Outcome for small consumers from lack of information

Responsibility for wholesale cost outcomes lies with generators’ bidding strategies and contractual negotiations with retailers and large consumers. The AER has little visibility of bidding strategies except when it suspects use of market power to influence the wholesale price and may seek to analyse bidding behaviour from AEMO. The AER has no access to OTC contract data.

The aggregate spot price as reported by AEMO is the primary source of wholesale price data from 1999 to 2018. According to the aggregate spot price, wholesale price declined after 1998 but has shown considerable volatility since 2006. Serious drought in 2007 reduced QLD and Snowy Hydro available capacity which resulted in a large escalation in wholesale prices across the NEM (AER, 2007a). Retail tariff increases caused a decline in demand which sent wholesale prices down from 2009 to 2012 (Select Committee on Electricity Prices, 2012), but the introduction of the Carbon Price caused average wholesale prices to rise for 2013–2014 (Nazifi, 2016; Nazifi, Truck, & Zhu, 2017). Increased demand to transport gas for export and strategic bidding behaviour by a QLD generator resulted in high QLD wholesale prices from 2015 (AER, 2015b), followed in 2017 by the unexpected shutdown of a large aged generator in Victoria, which resulted in elevated wholesale prices across the NEM (AER, 2018a). After the QLD Government directed the generator GOC to change bidding strategies and investment in renewable energy increased, wholesale prices returned to the long‐term average wholesale trend price (The Honourable Curtis Pitt, 2017). Figure 1 shows the detail.

image

Queensland average wholesale prices

Source: Queensland Electricity Commission Annual Reports; Australian Energy Market Operator, Aggregated Data Files [Color figure can be viewed at wileyonlinelibrary.com]

Due to the data collected and available from AEMO, the AER and ACCC have been able to monitor prices as traded in the wholesale market but have not had access to actual wholesale costs paid by large consumers and retailers. The lack of visibility on actual wholesale energy costs has resulted in higher retail tariffs as detailed in the sub‐section on retail prices. In recognition of this information asymmetry, the ACCC has recommended that the AER gain access to OTC data to determine actual wholesale cost (ACCC, 2018c). As information about bilateral contracts is valuable to both retailers and generators alike, they are likely to seek to keep this information confidential.

4.5.2 Network prices

Reporting by QCA/ACCC/AER

Initially governance of electricity transmission fell to the QLD Government but no network pricing information was retained or published for the period 1998–2001. From 2002, the ACCC, and from 2005, the AER assumed oversight of Powerlink, concentrating reporting on annual total revenue and supply of electricity (AER, 2018b). This facilitated the estimation of overall average transmission costs for each unit of energy supplied to all consumers, but did not allow calculation of network costs for residential, commercial, or industrial consumers. Transmission prices are calculated and published annually by Powerlink based on a regulated methodology which reflects location, capacity, energy usage, and shared service components (Powerlink, 2019). In effect, these prices provide too little information to analyse average prices for different customer classes.

From 2001, the QCA and from 2010, the AER assumed responsibility for oversight of Energex and Ergon. Distributors made annual pricing proposals to the QCA which are not available. The AER has published approved distributor pricing proposals since 2010–2011 (AER 2019d). The QCA and AER published total distribution revenue and total customer numbers (QCA, 2009) (AER, 2015a), but they did not publish any detail on aggregated energy supplied to, revenue from, or average network prices for, residential and small commercial customers until 2013.

Regulatory Reviews of each network corporation have been conducted and published every 5 years since 2001 (AER, 2002, 2007b, 2012, 2019a; QCA, 2005). Increasingly, the reviews entail a forest of reports on proposals, analysis, reviews, and submissions, many of the reports hundreds of pages long. Determination Decisions use impenetrable jargon, often do not include summarised relevant data, instead referring to other reports or documentation submitted by the network corporations, consultancies and submissions from interested parties. Analysis of the 2015–2020 Distribution Determination outcome involves reading 17,483 pages. The Distribution Determinations do not detail any historic or forecast data on average network prices for residential and commercial consumers.

As network costs drove increased retail tariffs from 2005 to 2012, concerns about network performance elevated (IRPoNC, 2014). This led the AER to request increased information gathering powers from the network corporations to better evaluate proposals (AEMC, 2012). A review of Electricity Network Regulatory Frameworks followed which found that greater and more effective use of benchmarking could better inform the Regulator's decisions with respect to efficient network performance (PC, 2013). It was only after the publication of the first sets of Regulatory Information Notices (RIN) in 2014 that operational information about average network costs paid by small consumers became publicly available from 2006 (Energex, 2019; Ergon, 2019).

Reporting by the networks

Since 1997, the network GOCs have published Annual Reports, but information on energy consumption and revenue from network sales for residential and small commercial consumers was patchy. More detailed information may have been provided to the QLD Government but these data were neither published nor stored. Since 2013, network GOCs supply detailed operational data to the AER, which the AER makes publicly available.

Outcome for small consumers

The AER is responsible for authorising investment and regulated revenue for networks with an eye to meeting competitive neutrality requirements. Decisions on the detail of network tariffs for small consumers are made by the network GOCs and approved by the Regulator.

Although the network corporations have been regulated, the regulatory process has failed to constrain investment at efficient levels, leading to escalating average prices. This is as a result of poor forecasting of future demand by distributors, experts, and consultants and accepted by the QCA/AER, coupled with the imposition of onerous minimum reliability standards by the QLD Government after supply disruption in January–February 2004.

The large increase in capital expenditure is often attributed primarily to the onerous reliability N‐1 planning and minimum service standards that were imposed on the distributors by the QLD Government in response to the Somerville report (2004) (IRPoNC, 2014, p. 47). Figure 2 shows the detail.

image

Distribution corporation capital expenditure by expenditure driver

Sources: QCA/AER Distribution Determinations, QCA/AER Distribution Financial and Service Quality Reports, and AER Distribution Regulatory Information Notices [Color figure can be viewed at wileyonlinelibrary.com]

Forecasts for Regulatory Proposals were premised on historic high annual consumption growth rates which had mitigated against rising tariffs from capital investment but also on real concerns that demand would increase from air‐conditioning use. Both Ergon and Energex detailed concerns about increased demand from air‐conditioning as a major driver of investment in their 2005–10 and 2010–2015 Regulatory Proposals.

‘Peak electricity demand continues to grow, driven by economic and population growth in regional Queensland and sustained high levels of air conditioning use’. (Ergon, 2009, p. 4)

 

‘Residential air‐conditioning penetration for a single air‐conditioning unit has risen to approximately 69 per cent in suburban Brisbane, 70 per cent on the Gold Coast, 54 per cent on the Sunshine Coast and 63 per cent in western regions. Despite these increases, air‐conditioning load in SEQ is unlikely to reach saturation point before 2017. Despite the mild summer seasons of recent years, air‐conditioning sales continue unabated. ENERGEX believes that this has created a significant amount of latent air‐conditioning load on the network that is likely to be realised in future summer seasons. When this happens, the peak demand growth rate could be significantly higher as occurred in summer 2003–04’ (Energex, 2009, p. 14).

 

 

The problem with increased air‐conditioning installations and rising tariffs was that consumers were reducing general consumption to minimise bills (thereby reducing distribution revenue), but switching on air‐conditioners when temperatures soared (for which distributors were having to invest to retain reliability). Energex highlighted this problem in their Regulatory Proposal:

‘However, retail tariffs, particularly for domestic customers, are applied on an energy use basis. When demand growth outstrips energy consumption growth, which is the forecast trend, additional pressure will be placed on the energy‐based tariff rate to increase’ (Energex, 2009, p. 7).

 

 

Although there has been a shift to ‘peakier’ loads, which does have an impact on investment efficiency, Figure 3 shows that predictions for elevated demand and energy consumption have not been accurate and thus inaccuracy has been a driver of over‐investment. Greater transparency about the prices that would be the consequence of very high levels of investment may not have altered inaccurate demand and consumption forecasts, but publication of the consequences of investment for consumers prior to approval of investment plans may well have initiated public debate and greater critical scrutiny of the level of investment proposed.

image

Accuracy of distributor energy consumption and maximum demand prediction

Sources: QCA/AER Distribution Determinations 2005, 2010, 2015, QCA Financial and Service Quality Reports 2002–2005, and AER D‐RINs 2006–2018 [Color figure can be viewed at wileyonlinelibrary.com]

The contractual nature of regulated investment plans makes adaptation to fast changing market conditions near impossible. Thus, high levels of investment continued even as actual consumption declined, so consumers were burdened not only with the cost of new investment but also higher costs associated with lower consumption. Analyses in Determination Decisions and consultant reports were more focussed on estimating commercial weighted average cost of capital (WACC) than on building flexibility in investment plans. However, paradoxically, the construct of legalised contractual arrangements – the key instrument in agency theory's toolbox for inducing agents to maximise the welfare of principals (Boston, 2011; Eisenhardt, 1989) – reduced flexibility and increased prices for consumers.

Figure 4 details the very large regulated asset value that resulted from investment by QLD distributors and the consequential average network costs that were paid by residential and commercial customers. (Note the large adjustment in 2015, as the new regulatory contract came into effect (AEMC, 2012). Also, note that SBS costs are not included in the network costs reported in Figure 4.)

image

Queensland distribution regulated asset value and network prices to residential & commercial customers

Sources: QCA Financial and Service Quality Reports 2002–2005, AER D‐RINS 2006–2018, and AER SBS Determinations 2011–2017 [Color figure can be viewed at wileyonlinelibrary.com]

Thus average network costs for consumers increased from a combination of:

  • high levels of investment predicated on incorrect forecasts;
  • an apparent lack of recognition of the consequences (e.g. reduced consumption) of high regulated revenue and associated tariffs;
  • a lack of flexibility in the regulatory investment‐revenue contract to adapt to changing circumstances;
  • stringent reliability standards; and
  • the application of commercial principles in the form of elevated return on equity and cost of debt.

 

As increased network costs started driving up end‐user tariffs, policies that sought to increase investment in renewable energy or reduce carbon emissions were blamed (BCA, 2014; Jacques, 2013; Wardill, 2013). Although environmental costs from the SBS (Queensland Government, 2019), Carbon Price (CER, 2019a), and RET (CER, 2019b) have contributed to electricity price increases as can be seen in Figure 6, increased costs for distribution have been the major cause.

Queensland's corporatised networks have responsibility for returns on equity to their shareholders which implies a focus on increasing revenue. Knowing more about commercial matters than the regulator facilitates negotiations to increase regulated revenue, so there is intrinsic incentive to reduce information available to the regulator and the public. The RINs have reinstated access to valuable information to the public, but the period 1996–2013, when there was no RIN information available, was when network prices increased most dramatically.

4.5.3 Retail prices

Reporting by the QCA/AER

The QCA and then the AER have never reported average retail tariffs. From 2007, QCA published the allowances for energy cost, network costs, and retail costs used to estimate regulated tariffs but not what consumers were actually paying. From July 2016, prices for the South East of Queensland were deregulated but prices for the rest of Queensland remained regulated by the QCA based on the same estimation methodology as used previously.

After 15 years, in 2010, the AEMC started publishing estimated prices paid by residential customers in the Future Retail Electricity Price Movements reports (AEMC, 2010), but the data for these reports were based on determinations of allowances by regulatory bodies and/or estimated, rather than actual, costs. It has also provided no information for small commercial customers.

From 2012, the AER has administered the Energy Made Easy website (AER, 2019b) which seeks to provide a price comparison website for customers. Retailers submit their energy plan offers to the website and customers can compare offers before committing to any retailer or plan. Although Energy Made Easy improves transparency for consumers, the offers are complicated and confusing (ACCC, 2018c). Also, the website provides no detail on what was historically on offer or what was contracted, which has not resolved the transparency problem of average prices paid by small consumers.

Reporting by the retailers

The retailers are not required to report average prices.

Reporting by other entities

For the period 1995–1998, average price information for residential customers continued to be reported by ESAA, but from 1999 no average prices were reported for any sector. The Australian Bureau of Statistics (ABS) published indices of retail household electricity prices by state (ABS, 2019) but data sources are not published and it is understood that these are based on regulated tariffs.

Outcome for small consumers

Retailers are responsible for pricing strategies to win and retain customers, and energy purchasing strategies to keep costs down, with an eye to profit maximisation.

It is tempting to believe that because tariffs were determined by the QCA, the QLD Government was ultimately in control of prices. However, the process of setting tariffs involved estimating future energy and retail costs which was an intricate process of predicting demand, investment cost, costs of capital, hedging costs, customer acquisition costs, retail operating costs, and acceptable levels of profit without any access to actual data.

Figure 5 shows limits to successful prediction of energy cost trends as revealed by the wholesale market and a tendency by the QCA to allow higher energy costs. In 2008, the QCA was required to increase prices after the two largest retailers sought judicial review of the QCA's decision on energy cost allowances. Subsequent to 2008, submissions by retailers to the QCA in Retail Tariff Determinations emphasise increasing allowances. Retailers also faced difficulty in predicting energy costs, but were able to negotiate confidential bilateral contracts with generators, and even acquire generators, to hedge against uncertainty. Although these are rational business responses to uncertainty, there was no reporting of the actual energy price paid by retailers (not even the QLD aggregate) and thus no ability to establish whether regulated tariffs accurately reflected wholesale costs. Consumers, however, paid higher costs as determined by the QCA as a result of which retailers may well have profited.

image

Queensland energy costs for tariff setting

Sources: AEMO and QCA Retail Tariff Determinations [Color figure can be viewed at wileyonlinelibrary.com]

Figure 6 details the ‘cost stack’ for residential prices to reach the regulated tariff as determined by the QCA. Combining actual information from multiple available sources provides an actual cost profile for retailers. As there is no data on discounts offered by retailers to regulated tariffs, it is not possible to know exactly what retailers have charged customers. Publication by the ACCC of average prices paid by residential customers in 2016 and 2018 shows little evidence of discounting for residential customers (ACCC, 2018c). Using the regulated tariff as the expected price suggests periods of significant surplus value for retailers over individual cost elements from 2008 to 2012 and 2014 to 2016.

image

Queensland residential tariff cost‐stack

Sources: AEMO, AER T‐RINs, AER D‐RINs, AER SBS Determinations, and QCA Retail Tariff Determinations [Color figure can be viewed at wileyonlinelibrary.com]

There is evidence that retailers experienced reduced margins in 2013 when the QLD Government allowed only the effects of the Carbon Price to be passed through to the regulated tariff. The QLD Government provided a subsidy of $40 million to Energex so that retailers would not be penalised (QCA, 2013). The subsidy effectively reduced network costs by 0.5 c/kWh, so retailers may well have had to absorb costs if they were unable to re‐negotiate contracts with customers to cover the increased network costs for that year. In 2017, retailers again may have experienced reduced margins as a result of the surge in wholesale spot prices unless they had pre‐existing OTC contracts or owned large generators to manage wholesale costs. Notwithstanding 2013 and 2017, the restructure of the QESI has resulted in a transfer of funds from consumers to retailers be it for profit margins, customer acquisition, or a variety of risk reduction measures which private firms pursue to protect against an unpredictable and volatile wholesale market.

A simple regulated retail process of meter reading, billing, and revenue collection has transformed into a lightly regulated but complex system of: bilateral and forward contracts, hedging, and power station acquisition to reduce risk; lobbying of regulators to increase annual allowances for operating, customer acquisition, and energy costs; legal action against regulators when regulatory decisions were unfavourable; marketing to new customers; billing a complex array of market and standing offer contracts; and attempting to stop existing customers from defecting to competitors. It is intriguing how such a complex system might be considered to be more efficient and effective than the simple retailing function that prevailed before restructure. This seemingly paradoxical outcome has been separately identified as ‘Regulatory Capitalism’ (Levi‐Faur, 2017) and is evidence of the regulatory entanglements and ‘regulatory governance’ that have eventuated from NPM reforms, where private consultants and experts provide regulatory support for governance of corporatised entities (Raco, 2013).

Figure 7 shows the trajectory of QLD small customer and wholesale prices from 1970 to 1998 and estimations of pricing since 1999. After the restructuring of the industry in 1995, the commercial sector initially experienced a decline in prices, but since 2007 both the residential and commercial sectors have experienced large real price increases.

image

Queensland residential, commercial and wholesale average prices

Source: Molyneaux (2019) Queensland energy database [Color figure can be viewed at wileyonlinelibrary.com]

5 THE CONSEQUENCES OF A LACK OF TRANSPARENCY

The sustained period of increasing electricity prices since 2007 has resulted in reports and inquiries seeking answers.

In 2012, the Independent Review Panel on Network Costs (IRPoNC) reported a trend towards higher levels of involvement by Government in the operations of GOCs which resulted in increased capital programs and operational expenditure by GOCs. The report recommended: reducing reliability standards, capital expenditure, overhead, and operational expenditure; merging the boards of Energex and Ergon; and the privatisation of network companies. No details on average cost of network services for consumers were provided (IRPoNC, 2014).

In 2016, the Queensland Productivity Commission (QPC) found that the national market was working effectively despite concerns about generator concentration. Recommendations included deferring network investment, providing comparative retail pricing offer information to customers and deregulation of prices. It did not report on average current prices being paid by consumers (QPC, 2016).

The Grattan Institute, an independent think tank, released a report in 2017 which accused retailers of elevating profits by misleading and/or confusing consumers (Wood & Blowers, 2017). In the same year, the ACCC inquiry concluded that electricity tariffs had been negatively impacted by concentrated wholesale and retail markets; pricing offers by retailers were confusing for consumers; and that a lack of information limited the ability of customers to make informed decisions when negotiating with retailers. The report stated that information asymmetry had exacerbated market and regulatory weaknesses in electricity supply (ACCC, 2018c). In August 2018, the Treasurer directed the ACCC to hold another inquiry to monitor the prices, profits, and margins in the supply of electricity in the NEM and provide reports every 6 months from March 2019 until 2025 (ACCC, 2018b).

The International Energy Agency (IEA), part of the OECD of which Australia is a member, has also reviewed Australia's energy policies and stated that coherent collection, monitoring, and reporting of data would enhance transparency on, and performance of, energy price and market data (IEA, 2018).

There are obviously multiple reasons for energy price increases, but a lack of transparency will always compromise competition, produce inferior outcomes, and anger consumers. The asymmetry of information faced by regulators has been mitigated in the United States by a long history of regulating utilities by the Public Utility Commissions (PUC) which has built up a significant information base of utility performance (U.S. Department of Energy, 2017) and commissioner expertise (Fremeth & Holburn, 2009). By comparison the United Kingdom's privatisation of public utilities in 1990 was characterised by under‐priced shares and lax regulation which led to a Windfall Tax in 1997 to claw back excess profits (Chennells, 1997). Introduced in the United Kingdom in 2002, the information and incentives project (IIP) sought information from utilities to increase transparency and enable benchmarking by comparing utility performance (Chau, 2009), similar to processes developed by the PUCs in the United States over many decades of rate reviews. The lack of a robust reporting process for the NEM has led to multiple inquiries into the ESI which have done little to resolve the problems. The extent of these reviews suggests a need, predicted by Gerritsen (1992), for educating the policy community about adjusting the ‘light handed’ regulatory regime.

6 CONCLUSION: IMPACT OF REDUCING ACCESS TO INFORMATION AND FRAGMENTING RESPONSIBILITY AND ACCOUNTABILITY FOR PRICES

NPM and electricity restructure literature is silent on the role that information plays in restructured institutions, except for incidental remarks about the benefits of competition and about monitoring monopolies to offset the known problems of asymmetric information in the principal–agent relationship. This oversight implies that NPM proponents assumed that information about electricity supply had no value to consumers. However, this case study shows that asymmetric information has value for competing generators, competing retailers, and regulated network companies, which has led to elevated prices for consumers in the absence of public access to information. There were early warnings of transparency problems (Argy, 2001; Bottomley, 2000; Chennells, 1997; Hooks, Coy, & Davey, 2002; Kolsen, 1996), but as the case study shows, the governance structure of the NEM has been slow to address the asymmetric information problems. Research into financial regulation has similarly concluded that deficiencies concerning data, information, and knowledge contributed to the regulatory failures that sparked the global financial crisis (Becker, 2016).

The NPM literature is equally silent on the importance of accountability. Prior to reform, Queensland energy commissioners and ministers made decisions with an eye to the tariffs that consumers would pay. Consumers had full access to the data, the reasons for investment decisions, and tariff levels. The case study shows that NECA and the AEMC instead have focussed on rule‐making and advice to governments on improvements to regulatory and energy market arrangements, with little attention to monitoring and reporting of prices. Indeed, international research has found that governments are less likely to punish non‐compliance by public agencies than private firms (Konisky & Teodoro, 2016), which has implications for effective oversight and monitoring of the AER, the AEMC, and AEMO.

The objectives of ‘light‐handed regulation’ – maximise reliance on market mechanisms and minimise complexity – have in practice delivered a convoluted system. In the words of the ACCC Chairman, ‘The National Electricity Market is largely broken’ (ACCC, 2018a). Generators are competing with each other to maximise their profits for shareholders. Networks are investing to meet demand forecasts, reliability standards, and maximise revenues for shareholders, all of which are approved by an energy regulator that has no responsibility or accountability to consumers in each state. Retailers are competing with each other to maximise their profits for shareholders, but have to absorb the costs of wholesale price volatility and network operations. Retailers have access to most of the relevant information which gives them advantages over regulators and customers. No one bears responsibility for the average prices that consumers pay. The fragmentation of responsibility created by the NEC/NER and the undervaluing of electricity system information has led to insufficient knowledge: for the public to be aware of the consequences of regulated investment and revenue; for regulators to regulate in the interests of consumers; for consumers to find the most affordable supply contract; and for researchers and analysts to prove or disprove the wisdom of this restructured system motivated by NPM. The implications for neoliberal economics and NPM are that policy design and implementation must address information asymmetry and fragmented accountability to become more effective in service provision.

ACKNOWLEDGMENTS

The compilation of a Queensland Energy Database and detailed analysis of information concerning the Queensland Electricity Supply Industry since 1995 was made possible by an Advance Queensland fellowship. The authors would also like to thank the anonymous reviewers for helpful comments and suggestions.

    CONFLICT OF INTEREST

    The authors declare no conflict of interest.

    Latest