Utilities

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GUEST OBSERVER
The privatisation of urban infrastructure in Australia is an ironic story.
The vehicles of urban infrastructure – the utilities and the state-owned enterprises – were so central to the life of cities that they became perfect entities for private sell-off.
We now live with the consequences of the sell-off.
The utilities flourished in Australia as a nation-building exercise following the second world war. The Bretton Woods agreement entrenched Keynesian fiscal behaviours across the Western world. 
The utilities thrived on the willingness of governments to raise capital for public works. They were also central to the development of state capacity and the assembly of a career-based professional public service. As part of the social compact, the public accepted reasonable user pricing for the availability of water, energy, public transport and telecommunications services.
Hence, the utilities and the state-owned enterprises led the roll-out of urban infrastructure in the second half of the 20th century. This roll-out shaped the nature of Australian urban life, its format and flows.
But then fiscal crisis of the state descended in the 1970s and 1980s. The sell-off of public assets was seen worldwide as a solution to state indebtedness. Arguments that private enterprise could deliver infrastructure services more efficiently added impetus. 
<h2>A wholesale transformation</h2>
Few governments resisted the sell-off urge. Australian governments, state and federal, participated in the sell-off, though in a stuttering manner. Through time, however, the change has been substantial.
Abbott and Cohen calculate that the output of state-owned enterprises in Australia in 1989-90 accounted for 7 percent of GDP, 9 percent of total employment, and 14 percent of gross fixed capital expenditure. 
By 2011-12, the output of state-owned enterprises had fallen to 1.3 percent of GDP. Their gross fixed capital expenditure contributed only 1.8 percent of the nation’s total. The authors estimate that proceeds from privatisations in Australia since 1987 total around A$194 billion (in constant year 2000 dollars).
The sell-off commercialised and privatised a raft of assets: electricity generation and transmission, gas distribution, airports, ports and telecommunication. New assets went straight to private hands: motorways, public transport, renewable energy generation, and freight handling.
The shedding of public responsibility for infrastructure meant public investment in Australia as a share of GDP fell from more than 5 percent in the mid-1980s to well below 3 percent by the end of the 1990s.
<h2>What’s in it for investors?</h2>
There is much to understand about the sell-off. Here I focus only on why private investors are willing to pay extraordinary prices to acquire urban infrastructure assets.
The attraction of investing in an urban infrastructure asset comes from the infrastructure services being embedded in the daily flows of people, water, energy and information throughout a city. The flows of a city are remarkably ordered in terms of volume, direction and timing. 
How a city operates is dependent on the co-existence of decisions by infrastructure operators and users. The operators decide how and when services will be available. Households and firms decide what they will be doing across a 24-hour day and therefore how and when they will use the infrastructure services on offer.
Thus, the efficiency of infrastructure provision comes from the predictability of the flows of a city. These in turn come from a historical patterning and sequencing of behaviours by householders and firms as they read off and conform to each other’s movements.
An example is the relatively sympathetic structuring and sequencing of work hours and school hours. This ensures that public transport facilities are utilised more efficiently in peak hours, while the hours that parents and children spend together are made more convenient.
The embeddedness of infrastructure into city life means that revenue streams from user fees for infrastructure services are highly predictable and stable. And because transport, water and energy supply is usually monopolised, the householder has little choice but to continue as a consumer of an infrastructure service.
The books of a utility or state-owned enterprise, then, represent a discrete set of households well trained to pay their monthly bills. This is precisely the type of revenue stream that pension, insurance and sovereign wealth funds seek when faced with the peculiar problem of having surplus cash to lock away for at least the next two decades.
<h2>What did we lose in the sell-off?</h2>
Perhaps it was clever to have solved a government debt problem in Australia back in the day through a sell-off of assets to a new class of long-term investor. But as a consequence we have lost other things. 
Infrastructure as a planning tool to shape our cities is one. Revenue streams to subsidise needy customers or supply to remote locations is another.
And, critically, we have lost the opportunity for the state to revamp energy, water and transport systems to allow for innovative supply and demand formats – such as distributed electricity supply networks – that are more appropriate to a climate-threatened planet.
Long-term privatisation contracts, most of them closed to scrutiny, lock urban infrastructure provision into 20th-century formats.
The difficult task now will be their unlocking.
Phillip O'Neill is director, Centre for Western Sydney, Western Sydney University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/phillip-oneill-125643" target="_blank">here</a>.
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Stumbling into the future: living with the legacy of the great infrastructure sell-off

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<img src="https://counter.theconversation.edu.au/content/75310/count.gif?distributor=republish-lightbox-advanced" alt="The Conversation" width="1" height="1">GUEST OBSERVER
Australia’s residential electricity prices are amongst the highest in the world so it’s not hard to see why customers have been up in arms about high prices.
Comparing the charges for electricity retail services in Australia and in other countries, we find Australia’s charges are much higher. The difference is particularly stark when comparing retailer charges in New South Wales with those in Denmark, Germany, Italy and Britain which have the highest electricity prices in Europe.
<a href="https://www.propertyobserver.com.au/images/2017/04/4/energy.jpg" target="_blank">Click to enlarge</a>
<img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2017/04/4/energy.jpg" width="600" height="513">
 
Residential electricity prices in Canada and the United States are typically less than half those in Australia and so the situation in Australia is even more damning in that comparison.
The prime minister’s recent request to the ACCC to review the retail end of the electricity market will put this part of the industry under the spotlight. This request follows the Victorian government’s appointment of a panel to review the Victorian retail energy market.
But rising concern about retail markets is not unique to Australia. In Britain, retail energy markets have received prime ministerial attention for many years. In what the British government described as the most significant review of its industry in the 30 years since privatisation, their Competition and Markets Authority concluded that significant changes needed to be made, although some ex-regulators disputed their estimates of the problem.
These reviews indicate changing attitudes in government. The Australian Energy Markets Commission reviews Australia’s retail energy markets every year and has consistently concluded that they are working well. Similarly, the Independent Pricing and Administrative Tribunal advised the New South Wales government last year that their retail energy market is working well. Evidently the Commonwealth and Victorian government are now seeking a second opinion.
<h2 class="caption">How Australia’s electricity retail market is set up</h2>
The business of retailing electricity is really finding out what customers want and then offering deals that meet those requirements. More specifically, it’s the business of procuring electricity and network services, acquiring retail customers, selling to those customers and then metering, billing and collecting revenue.
Analysis of regulatory filings shows that around 6.5 million of Australia’s 10 million households and small business customers (those in New South Wales, South Australia, South East Queensland and Victoria) can choose their retailer. These four deregulated markets are dominated by three retailers that also own sufficient generation to supply those customers.
After more than a decade of retail competition, the three big retailers typically still supply at least 80% of all customers in each regional market. While in some of the regional markets, customers can choose amongst 24 retailers, the new entrant retailers have invariably grown their customer base slowly, if at all, despite powerful incentives to the contrary.
Social services organisations, customer advocates and some independent energy economists have long voiced concerns about retail energy markets. Their concerns centre on the amount that the retailers’ charge, that customers are not happy and that electricity is becoming increasingly unaffordable.
The Grattan Institute recently published a blunt critique that went one step further. It suggested that not only are retailers charging a great deal, but that this is explained not by high costs but by excessive profits.
<h2 class="caption">Competition and consumer choice</h2>
The official reviews in Australia hitherto have taken the line that if customers don’t engage in the market they can’t complain. But electricity is complex and customers need skill and a great deal of effort to reliably evaluate the market.
Since it’s a repeat purchase, active engagement means ongoing effort. Even customers with the necessary skills seem to often conclude they have better things to do with their time, as evidenced in switching rates. Pervasive advertising and the profitability of the commercial switching websites provides additional evidence of the challenge new entrant retailers face in acquiring customers.
Why would it be so hard and expensive for new entrant retailers to attract customers if they were not loyal? Therein lies an explanation for Australia’s incumbent retailers’ apparently extraordinary profits.
Andy Vesey, the chief executive of Australia’s largest electricity retailer AGL described the retail market as one that penalises customer loyalty. While such candour is admirable, even hardcore market economists question the effectiveness of a market in which retailers profit most from their most loyal customers.
The issue is non-trivial: in its cost of living surveys, customer advocate Choice has found that electricity prices are consistently the top cost of living concern for households. Electricity poverty payments to deal with affordability problems, are understood to now be costing state governments several hundreds of millions of dollars each year.
<h2 class="caption">Next steps</h2>
While it has been a long time coming, the ACCC’s review in addition to the Victorian government’s review, is to be welcomed.
A great deal of effort will need to be made to get to the heart of the matter. Retail energy markets are complex and the amount that a retailer charges a customer for its services is not known for certain – it has to be estimated by subtracting the charges for network services, wholesale production, metering and environmental charges from the customer’s actual bill.
Not only do customers’ bills differ greatly but the components of the bill differ greatly for different customers and so obtaining reasonable estimates of retailers’ charges across the industry requires effort and care.
Fairly evaluating retailers’ offers and how much of their offers are explained by the retailers’ charge, is the place to start. Then finding out what customers are actually paying, and what retailers’ costs and profit margins are, is essential in assessing the nature and extent of market failure.
The reviews will need to cover tricky ground in assessing the economies of scale in retailing, and the value to electricity retailers of also owning electricity generation businesses that supply them. The extent to which high customer acquisition costs provide an advantage to the dominant incumbent retailers who don’t incur those costs unless they are seeking to expand their market share must also feature in the analysis.
There is reason to be hopeful about the ACCC and Victorian government reviews. Done well, they can allow sunlight into this part of the industry. As they say in regulatory circles, sunlight is the best disinfectant. 
Bruce Mountain is the director of Carbon and Energy Markets, Victoria University and author for The Conversation. He can be contacted <a href="https://theconversation.com/profiles/bruce-mountain-141253" target="_blank">here</a>.
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Comparing Australia’s electricity charges to other countries shows why competition isn’t working: Bruce Mountain

GUEST OBSERVATION

Electricity demand in Australia has barely budged since COVID-19 took hold. Many may be wondering: after months spent largely at home, are huge household power bills on the way?

The answer, largely, is no. But as the pandemic forces hundreds of thousands of Australians into unemployment, some will still struggle to pay their electricity bills.

A mass failure to pay would threaten the viability of electricity retailers. If some folded, this would reduce market competition and drive up energy costs for everyone.

So let’s take a look at how stay-at-home measures are affecting energy demand, and what the coronavirus pandemic means for electricity consumers in Australia.

<img alt="" data-entity-type="" data-entity-uuid="" src="https://images.theconversation.com/files/329907/original/file-20200422-47820-1ttkzt1.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" />

The unemployed may struggle to pay their electricity bills this winter. Julian Smith/AAP

A mixed bag

We’ve assessed how social distancing restrictions have affected both demand for electricity and “mobility” (the movement of people) in Australia, New Zealand, the US and the UK.

Interestingly, changes in electricity demand and mobility go together and were significantly different across the countries after strict stay-at-home rules were imposed in late March.

Grid-based electricity demand in both the UK and New Zealand has declined significantly (20 per cent and 15 per cent respectively). Demand is largely unchanged in Australia and has declined about 5 per cent in the US overall, relative to the baseline.

Among Australian states, electricity demand has declined in New South Wales by around 5 per cent, and increased slightly in Western Australia and Tasmania. Demand is largely unchanged in Victoria, South Australia and Queensland compared to the baseline.

The relative strictness of social distancing policies seems to be the main driver of changes in electricity demand. For example, unlike New Zealand, Australia’s construction industry was not subject to lockdown restrictions, which meant electricity use in that sector has continued.

Of course, many factors affect electricity demand, and further analysis is required to isolate the precise impact of social distancing policies.

<img alt="" data-entity-type="" data-entity-uuid="" src="https://images.theconversation.com/files/329908/original/file-20200422-47832-1l6fjv6.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" />

Electricity demand in Australia has changed little since stay-at-home regulations were introduced. Scott Barbour/AAP

Out and about

To crosscheck changes in electricity demand, we examined the change in the movement of people to retail, recreation and workplace locations as measured in Google’s COVID-19 Community Mobility Reports. These reports use location history data from users to create a picture of how people are moving around the community.

Mobility changes are consistent with the change in electricity demand: since stay-at-home restrictions were imposed, falls in mobility have been about twice as large in New Zealand and the UK as in Australia.

Mobility in the US states of New York and California has declined more than in Australia, but less than in the UK and New Zealand.

<img alt="" data-entity-type="" data-entity-uuid="" src="https://images.theconversation.com/files/329909/original/file-20200422-47841-wu09r8.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" />

An empty London street. Electricity demand and mobility in the UK has fallen since social distancing was enforced. SOPA Images

What to expect this winter

In Australia, electricity demand from households has increased slightly as millions of people stay at home, prompting warnings of bill shock. But activities such as boiling the kettle and cooking more often, and keeping lights on all day, do not make a big difference to consumption.

This will change in winter, when we need to keep our houses warm. Households using split-system air conditioners for heating can expect seasonally adjusted electricity bills to be around 10-20 per cent higher if they’re heating the house 24 hours a day, rather than just briefly in the morning and again in the late afternoon and evening.

But demand will vary greatly depending on weather and a home’s size, insulation, efficiency of heater and so on.

Averaged across all Australian households (and assuming social distancing regulations continue to apply in winter), we expect total residential electricity consumption to be a little higher this winter than in previous years.

Differences will be more pronounced in the colder states: Victoria, Tasmania, South Australia and to a lesser extent New South Wales. The warmer states of Queensland, Western Australia and the Northern Territory will see little change.

Overall, slightly higher demand for electricity in Australian households over winter will probably offset lower commercial and retail demand.

<img alt="" data-entity-type="" data-entity-uuid="" src="https://images.theconversation.com/files/329910/original/file-20200422-47784-pzh8de.jpg?ixlib=rb-1.1.0&amp;q=45&amp;auto=format&amp;w=754&amp;fit=clip" />

Many Australians are worried about bill shock this winter. Dan Peled/AAP

Threat to competition

​ 
While overall electricity demand might not shift much in Australia, skyrocketing unemployment may create a surge in the number of households struggling to pay their energy bills, even with Jobkeeper payments.

Long before the pandemic, regulators, governments, retailers and customer groups had worked to improve consumer protections such as hardship policies. These measures are now likely to be put to the test.

There are signs that electricity retailers are already anxious about looming non-payment. For example, some retailers have offered incentives for customers to take up direct debit, or cash-back for bills paid in advance.

Retailers pay for both the electricity produced, and its transport. If many thousands of customers can’t pay their bills, some retailers may become financially unviable. The smaller retailers have the weakest balance sheets and are most at risk.

But these small companies are the lifeblood of competition in Australia’s retail electricity markets. Losing them would, in time, translate into higher prices.

In Queensland, the government has announced assistance to electricty consumers in response to COVID-19.

If utility non-payment spirals and retailer viability is seriously threatened, governments and regulators might consider ways to share the risks more broadly, to protect competition and consumers. 
Bruce Mountain, Director, Victoria Energy Policy Centre, Victoria University; Kelly Burns, Senior Research Fellow, Victoria University, and Steven Percy, Senior research fellow, Victoria University

This article is republished from The Conversation under a Creative Commons license

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