Saturday, June 21, 2008

How to set electricity prices

In the ACT, an independent regulator sets the maximum price that the dominant supplier ActewAGL can charge. ActewAGL stands for ACT electricity and Water - Australian Gaslight Company, and is a distribution operation jointly owned by the ACT government and AGL.

It's report, out Friday, makes excellent, and a times funny reading. I summarise some highlights in this morning's Canberra Times:

Ever wondered how much you are worth to ActewAGL as an electricity customer?

Exactly $20.84 per year, according to the company itself. It has told the Independent Competition and Regulatory Commission that that’s how much it would be prepared to pay in marketing and other costs to keep you.

In an odd piece of circular logic it had asked the Commission to let it increase electricity prices by an extra $20.84 per year in order to allow it recover that cost.

The Commission said “no”, and in yesterday’s pricing decision went out of its way to encourage ActewAGL’s customers to make it fight to for them...

It said that to a new entrant, such as TRUenergy an ActewAGL customer was
worth $35 per annum, meaning that firms such as TRUenergy would be prepared
to discount more than would ActweAGL in order to get and retain business.

As the Commission put it, “all consumers, large and small, need to be active
in the marketplace. If there are tariffs on offer at a lower overall expense
than the tariff a consumer is currently receiving, the consumer should
exercise their right of choice and opt for the lower competitive tariff
through a decision to change supplier, or to change to a discounted tariff
with their incumbent retail supplier”.

In other words – get active and shop around, because “ultimately, the
benefits of competition will not eventuate if most consumers do not become
active participants in the market”.

The Commission believes that its job in setting the maximum price that can
be charged by ActewAGL is only the beginning.

We need to take it further by making ActewAGL fight for us and being
prepared to leave it. That will force it and its competitors to find extra
savings and cut their prices further.

The Commission didn’t want to enforce those further cuts itself because of
the risk of creating what it called “California type problems” where earlier
this decade electricity prices ended up below costs, forcing retailers and
generators to fail.

ActewAGL is worried enough about that prospect as it is. The Commission has
fixed the maximum price it can charge for 12 months. ACTEW has asked for
the right to go back and apply for a further increase within the 12-month
period if costs turn against it.

It is particularly worried about the effect of the ACT’s proposed feed in
tariff legislation which will require ActewAGL to pay a high price for
electricity that households generate and sell to it.

The Commission has agreed, but says it will only reopen its pricing decision
if ActewAGL incurs “actual financial costs” which are “non-trivial”. As a
guide it says it would regard any cost below $250,000 as trivial.

The extra costs that ActewAGL and other retailers are facing relate less to
rising worldwide energy prices than to drought.

Wholesale electricity prices soared in mid 2007 because the hydro plants in
the Snowy, Victoria and Tasmania were barely turning over. Even the Tarong
coal-fired plant in Queensland’s Darling Downs was operating at a mere 30
per cent.

It needs water from dams and rivers in order to keep cool and to create
steam. At full capacity it goes through 600 litres of water per second.

With the worst of the drought over for the time-being the Commission was
able to wind back the size of the price increase it proposed in April draft
report from 10.38 per cent to 7.1 per cent.