Energy Market Needs Certainty

Government indecision and inaction is creating on-going uncertainty in the energy market.  This is threatening investment.

The Productivity Commission has already produced a report demonstrating the "chilling" effect of the current approach to regulatory price setting and approvals.  It argued that the National Competition Commission and the ACCC had created a straightjacket that deterred efficient investment.  The Parer Report, Towards a Truly National and Efficient Energy Market, endorsed an important Productivity Commission proposal for regulatory holidays for new "greenfield" proposals.  Now the Productivity Commission is in the process of examining gas in greater detail.  Doubtless it will again emphasise the need for prices and service levels to be the determined by competition, and not the regulatory agencies.

On top of this, the fallout continues from the shambles of last month's CoAG meeting.  The State Premiers managed to remain around the table long enough to solemnise some vital agreements on water.  However, they did their health funding dummy-spit before they had put the seal on energy policy reforms.

The energy reforms were intended to unify the gas and electricity regulatory regimes.  They were also to amend market rules so that ministers would have a formal role in the action which is currently exclusively in the hands of regulators.

The changes were to address governance issues revolving around three key areas of the industry:

• how the wholesale market should operate
• how to ensure efficient investment in the natural monopoly elements of the gas and electricity grids
• how the process of full retail competition should be progressed.

It appears that there was a rare near-consensus for two new regulatory bodies to be formed to replace two existing ones at the federal level and six at the state level.  On the basis of material that leaked out from preliminary meetings of ministers and officials, one of the two proposed regulatory bodies is to make the rules for the market and the other is to apply them.

Subsequent reports suggest some lingering uncertainty about the on-going role for state regulators.  If these were to remain, the lofty sentiments about rationalising a number of regulatory bodies would be eroded.  However, in the present environment, even a standstill on the number of bodies has to be chalked up as a win!

One long-standing area of debate has been the role of the ACCC and whether a regulatory body should be separate from it (the Parer view and that of the states) or be semi-autonomously housed within it (Industry Minister Macfarlane's view).  The Commonwealth had largely given ground on this issue.

The tentative agreements appear to foreshadow no marked change in the current careful processes for vetting investment proposals that rely on government regulations for their income.  These processes provide a bulwark to over-ambitious investment being undertaken.  Even so, without a public document, investors are in the dark and must react with caution.

The agreements were supposed to be bedded down and set out in legislation by July of next year.  This timetable is no longer possible.

The vacuum that is now in place means uncertainty about what the new governance structures will entail.  This is compounded by continued sniping by ministers since the failed CoAG meeting, with ministers' suggestions that the present arrangements are not delivering enough new investment, and claims that generators are unfairly forcing up prices.

Some ministerial statements appear to nostalgically hark back to the days when investment decisions were in the hands of politicians.  In fact the changes proposed appear to include no provision for ministerial direction vis-à-vis specific proposals.

The problem with ministerial histrionics where there is no formal public statement clarifying the more responsible agreed position is that they bring additional investment uncertainties.  These can mean delays or even cancellation of projects as investors wait to see whether government action might offer assistance or might reduce the value of any expenditures they might be contemplating.

Maintaining the present arrangements in place will not do irreparable damage, but it does, at least, delay the timing of a much needed relaxation in regulatory control over new "greenfield" gas pipelines.  Moreover, the lack of public information on the new proposals is giving rise to considerable speculation on whether we are facing a new era of ministerial intervention.  It also risks unravelling the tentative agreements that have reportedly been reached.

Market confidence needs to be reassured.  One means of doing this would be to publish the agreements presently reached between the energy ministers.  This at least will offer some assurances to investors that ministerial rhetoric on the issue does not foreshadow a harmful backsliding to the previous regime of political direction over new investment.

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