Powering Into Problems

VICTORIAN electricity prices are heading north.

Our bills essentially comprise two components:  the energy cost and the charges for transporting it over poles and wires.

Energy costs are the larger share for bigger users, while the two are split more evenly for households.

The Office of the Regulator General determines the poles-and-wires costs.

Last December, the ORG reduced these charges some 14 per cent.

For the contestable consumers -- those who are free to negotiate their own prices -- competition ensured this was passed on directly;  however, until next year, households are captive to their current retailers.

The Government, therefore, required lower prices from the distribution businesses to remove excessive revenues they would otherwise retain from poles-and-wires charges to captive customers.

In doing so, the businesses took the opportunity to rebalance their prices so that most households saw little in the way of a reduction.  Superimposed on these developments, energy costs have doubled this year.

This is a response to increased demand.  For the most part, the retailers contract well in advance for their energy, but this doubling is reflected in the prices the retailers are able to negotiate.

As a result of the increased energy prices, three retailers sought 2001 price increases for their captive customers.

Minister for Energy and Resources Candy Broad referred the applications to the ORG umpire.  The ORG rejected all three, but the minister overruled this in one case, for CitiPower -- the only retailer to have substantially reduced prices to households after the poles-and-wires decision.

To have been consistent, the minister should have either frozen all prices for 2001 or allowed cost-based increases.

Importantly though, the minister said next year, competition will be allowed to determine prices.

But she left room to override such outcomes.

Ms Broad has sought further advice from the ORG about how to handle price applications.  A new round of public meetings is in the offing, which will keep the matter in the spotlight.

Next year will provide a test for the Government.

Energy retailers face cost increases.  These will drive up prices, especially to rural users, inciting inevitable (though unfounded) claims of monopolistic price gouging.

Will the minister be able to hold her nerve in the face of these pressures?

If she resists price rises, the retailers could face financial ruin;  and new generation may face disincentives to establish itself.

This is incubating a Victorian version of the Californian electricity catastrophe.

Partly due to regulatory decisions, the distribution businesses are already looking somewhat financially fragile.

Recently, Melbourne-based gas and electricity business TXU was reported to have failed selling a share of itself to institutional investors.

Its asking price of $3.1 billion was a steep discount on the $3.62 billion TXU paid in 1995 and 1999 -- even if the price excluded the company's retail arm.

Governments that seek to suppress prices in accordance with advisers' views and to court political popularity are on the road to disaster.

Instead, they need to ensure they maintain competitive conditions in electricity supply, so prices reflect underlying costs.

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