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Why regulating energy prices is stupid

Why regulating energy prices is stupid
24 Oct
4:03
by Danny Price

If anything is likely to represent a tombstone for the process of microeconomic reform in this country, it is the latest iteration of federal government energy policy: this week’s reimposition of retail electricity price caps across the National Electricity market (NEM).

Treasurer Josh Frydenberg and Energy Minister Angus Taylor instructed the Australian Energy Regulator (AER) to develop a mechanism to determine a “default market offer”, that is, a price cap.

To be clear, these regulatory interventions come from asking two regulators – the Australian Competition and Consumer Commission and the AER – how to fix a market. Who among us is surprised that a regulator has advocated more regulation?

But here’s the problem. More regulation will play out well with consumers who have been misled into believing that privatisation has failed them and is the cause of the price rises.

David Rowe

Politically expedient policy

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The government knows consumers are attracted to the notion that regulation will save them – and in a desperate bid for votes in what is expected to be a nightmare election, is prepared to sacrifice the energy market for political expediency.

The reality is that more regulation will not address the root cause of our power problems, which is the lack of investment in new generation. More regulation will simply deepen our energy woes because more regulation deters more investors.

But our regulatory tsar, Rod Sims, has a cunning, Baldrick-like plan to address this regulatory-induced investment drought.

The taxpayer will fund the new investments deterred by bad government policy and his regulatory interventions. With this move the government will drive the final nail into the NEM coffin.

Policy will have gone full circle from centralised planning to a vibrant market to moribund market to central planning. And the winner? The regulators, of course. Certainly not the consumer.

The truth is that the government wants more price regulation because it knows that more price rises are likely, given that it has nothing to address the lack of investment and the inevitable exit of even more base-load generation in the near future.

More price regulation amounts to a confession by the government that it has lost control of the power system.

The government is in a desperate bid to scapegoat the businesses that have to send customers the bill for poor government policy. While scapegoating AGL, Origin and Energy Australia may be good retail politics, it does not represent good policy.

In a sign of the government’s desperation, this new price regulation has no regard to recovery of the efficient costs of the businesses supplying customers.

It is obvious to every right thinking person that this imperils the very businesses that our country needs to correct the policy failures that have led to the under-supply of generation.

Regulating energy prices in a supply-constrained market is as stupid as capping rising vegetables prices caused by a drought, and then expecting farmers to grow more crops.

State government response

This latest panic move by the government needs the support of the states in the COAG Energy Council meeting. The states should think back to a time when federal government policies last yielded any positive and lasting outcomes.

They would have to think very hard because there is no example of good energy policy by federal government in the past 10 years.

Fittingly, Peter Costello asked earlier this month: “If the International Monetary Fund was to turn to Australia and ask it to share a successful case of reform in the last decade, what story would we tell?”

While the response to this challenge would be an awkward silence, at least we can take solace in our ability to offer the international community a number of recent examples of what not to do.

If the states agree to these new regulations, they will own this policy and the electorate will rightly make the states accountable for the outcomes.

Obviously, the federal government will be delighted if the states give the government the political breathing space in the COAG Energy Council meeting, but ultimately these regulations will suffocate the market and the states will pay the price for supporting this wretched policy.

So what should the states do instead? The states should mount a NEMexit. They should walk away from the NEM and go back to the drawing board and develop a new market that addresses the limitations of the current market design.

It can be done and it can make use of a lot of the existing arrangements, but there are important elements of the existing arrangements that must be discarded. The Commonwealth has no constitutional role in the power system.

The states are and will be held responsible for the failings of the federal government’s policy takeover of the NEM and this week’s energy policy will simply make matters worse.

Putting even more lipstick on this NEM pig is just wrong and it won’t work.

Danny Price is managing director of Frontier Economics.

Source: https://www.afr.com/opinion/columnists/why-regulating-energy-prices-is-stupid-20181024-h171pq

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