Future Consumer Advocacy Arrangements for the Energy Sector

A Submission to the Ministerial Council on Energy Review

A REVIEW OF THE ADVOCACY PANEL IS TIMELY

The Advocacy Panel of NECA provides grants from hypothecated taxation funds to those who make a satisfactory case for support.  The review by the MCE is timely in view the experience we have now obtained of its activities.

Some 70 grants have been given to date.  No review of the quality of the material produced from these grants has been published.  In assessing future arrangements for the Panel, it would appear incumbent upon the review process to examine the outcome of its funding disbursements.  The starting hypothesis, however, should be that not one of these has added an iota of knowledge or new insights that were not previously present and that would allow better decisions on market management to be made.  If that is the case -- and we anticipate the hypothesis would be sustained by a rigorous review -- the funding has, at best, been a waste of money.

However, it is optimistic to consider that the Panel's funding output has merely comprised anodyne reports that have done no harm.  What has been created by the funding is a body of reports and associated publicity which places pressure on politicians to regulate the industry, thereby adding costs.

The outcome of the Panel's funding has, therefore, very likely brought cost increases that will impact adversely on the price and reliability of electricity.  This is, perhaps inevitable, since many people who are influential within the bodies claiming to represent consumers often adopt an anti-market perspective that sees suppliers as having interests inimical to users.

In such a win-lose framework lower prices are a clear gain for energy users.  In fact, however, market situations do not take place in a win-lose framework (though this may be present in the monopolistic structures that the current supply system replaced).  Those retailers subject to the disciplines of a competitive market are heavily constrained in their management options.  Any retailer which is overenthusiastic in its efforts to improve its profits by stinting on service or over-charging will lose business to other retailers who achieve a more appropriate market mix.

Some evidence of the (unintended) anti-consumer outcomes of the Advocacy Panel can be illustrated by examining three kinds of reports they have funded.  These are:

• Reports like those undertaken or commissioned by the Energy Users Association that have sought to characterise the wholesale energy market as exhibiting monopoly features that have driven up the wholesale prices.  That such concerns are based on fact is absurd, as is amply demonstrated by the following price data ($ per MWH).

  Year	NSW	QLD	SA	SNOWY	VIC
  1998-1999	33.13	51.65	156.02	32.34	36.33
  1999-2000	28.27	44.11	59.27	27.96	26.35
  2000-2001	37.69	41.33	56.39	37.06	44.57
  2001-2002	34.76	35.34	31.61	31.59	30.97
  2002-2003	32.91	37.79	30.11	29.83	27.56
  2003-2004	32.37	28.18	34.86	30.80	25.38

  Source:  NEMMCO

  Oblivious to these data, many user activists examine energy prices at five minute or half hourly intervals and claim to detect evidence of "gaming" to boost the price.  The poor analysis on which those efforts are based has, fortunately, not been translated into damaging changes to the market rules.  To the degree that they had done so, they would have forced modifications in supplier behaviour that would have locked-in prices for some time prior to despatch.  This may have brought lower prices initially, especially for needle peaks.  But in the process it would have reduced the incentive for new plant in this market segment thereby degrading reliability and increasing prices over the longer term.  Consumers would have been clear losers.

• Seeking to depress line usage prices.  Governments have charged independent regulatory bodies like IPART and the ACCC to set prices for those facilities that have considerable market power.  Such bodies are impartial and professional, and the outcomes of their investigations should not be influenced by advocacy groups.  Advocacy groups do not have superior knowledge about matters like beta coefficients on which the Panel has funded them to proffer their advice.  To the degree advocacy groups are influential in reducing prices below the appropriate level, this will impact adversely upon the incentives (and perhaps funding) of the suppliers, thereby bringing diminishhed benefits to consumers in real terms.

• Opposing actions by retailers to ensure timely and adequate payment for the energy they supply.  Various consumerist organisations have opposed the credit policy of retailers, a policy which is designed to ensure timely payment by penalising those who do not pay their bills.  The penalty may involve disconnection and associated subsequent charges.

  Similarly there has been opposition to pre-paid metering, so much so that the Victorian Government has announced its intention to legislate against this.  Pre-payment meters have proven popular in the UK for a variety of reasons.  One of these is that they allow chronic non-payers of bills to address their problems without disconnection.

  Electricity is not a product for which payment should be optional.  Many of those promoting more indulgent approaches to payment enforcement consider consumers have a right to electricity and that suppliers' privileges carry barely qualified obligations to supply all users.  This is false.  Opposition to businesses taking energetic actions to collect debts is also often motivated by reasoning that regards the supplier as bearing the costs of non-payment.  In the first instance this may be so.  But, to the degree that debtors and delinquent users are not penalised, suppliers have to load the costs onto the prices of other users.  The honest and conscientious consumer is therefore disadvantaged by strictures preventing expeditious debt collection.  In other words, the action in the name of consumer interests rebound against those interests.

IS SUPPORT FOR ADVOCACY GROUPS WARRANTED?

FUNDING AND THE ISSUES

Energy advocacy groups largely fall within one of two sorts of bodies:  those claiming to represent household consumers and those speaking on behalf of industry users.  According to the Advocacy Panel's latest annual report, of the $1 million or so allocated by December 2003, about $470,000 had been allocated to consumerist organisations and a little less to business organisations, with about $90,000 allocated to two green groups.

Opening the door to any form of government funding creates constant pressures for its expansion.  Somewhat incestuously, the funding itself will often be used to promote greater funding.  Using taxpayer funds to promote the allocation of additional taxpayer funding is similar to governments using taxpayer funds to promote their own re-election, activities that are illegal in democratic societies.

One example of Advocacy Panel funding used to promote additional such funding even outraged the Chairman of the Advocacy Panel.  He felt obliged to provide a lengthy and scathing rebuttal of the findings of a report by Allen Consulting into the Future of Consumer Advocacy that user groups had commissioned.  Financed by a grant of $34,000 from the Advocacy Panel, that report recommended that the user groups decide for themselves which of them should obtain funding from the industry levy and how much should be so obtained.  The Advocacy Panel's Chairman called the report illogical and said it was "unprofessional and unsophisticated" and "alarmist in alleging market failure".  He pointed out that it offered no support for its claims.

Yet, in August this year, the Ministerial Council on Energy made the astounding finding that the Allen Consulting report "provides a useful starting point for considering the options for a new advocacy structure".  The Allen report was also noted by the present review, which, surely inadvertently, was thereby conferring some endorsement of its assertions.

Clearly some recipients of these funds consider themselves to have a right to them.  The EUGA has frequently and energetically made the claim that the funds actually belong to those judging themselves to be the user representatives.  It is important that such arrogation of government powers be rejected by this review.

BUSINESS USER GROUPS

It is highly unusual for governments to give support for business groups as a means of lobbying government agencies to make decisions in their favour.  It would be inconceivable for the government to give funds for advocacy to business groups using the products or services of Microsoft, Telstra or airports even though these are businesses with a great deal of market power.

Nor do governments give funding to other industry suppliers that are highly reliant on a major customer, a situation that might be said to prevail in motor vehicle assembly.  Governments do not even provide funding to the dependent franchises of major businesses like the oil companies, MacDonald's or of shopping centres.

Governments avoid such actions because it considers, with good reason, that business relations are best left to mutual interactions.  Government involvement in support of one set of parties will engender unnecessary costs.

The closest parallel to electricity is telecommunications, where an advocacy panel also operates but no funding (except perhaps sitting fees) is given to business groups.

RECOMMENDATION:  Funding should not be given to business representative groups.

CONSUMERIST ORGANISATIONS AND OTHER FUNDING RECIPIENTS

Unlike business organisations, those purporting to represent consumers have a problem proving their legitimacy.  It is not difficult to promote oneself as a champion of a group of people but in the absence of some means of validating this through being appointed via a democratic process or through the willing payment of fees the credentials are slight.  We know of no consumerist organisation that purports to speak on behalf of a broad group of people that has any democratic process in place.

The true consumer champion, in a competitive market, is the retailer.  In competitive markets, it is the retailer who searches out the products that consumers want and packages these in ways that represent good value for money.  The retailer does so conscious that rivals are keen to take the business for themselves, and in a free market can only do so by offering better value.

This market process is, of course, not so readily seen where there is monopoly.  This applies to areas of retailing in those states (Queensland notably and possibly also NSW) where full retail contestability is not permitted.  Even in those jurisdictions, the decision protecting incumbent retailers has been made by well-informed governments and it should be left to those governments to decide whether they should fund outside bodies to offer advice on the repercussions, if any.

The danger from consumerist organisations stems from their capture by radical anti-business elements who would promote a departure from the market allocation processes that have served us well as a community.  Some of the perverse outcomes emanting from such group captures have already been adverted to.

Disturbingly, most of the funding for consumer groups provided by the Advocacy Panel has been allocated to "capacity building".  Across a range of issues, capacity building has become code for seeking to promote radical policies to an otherwise unconcerned body of people.  It smacks of agitprop in seeking to manufacture a constituency rather than in representing people who are in need of a voice.

The above comments may give rise to additional concerns given the relative ease that consumerists are able to obtain funding.  The consumer representative on the Panel has said that he now tutors consumerist organisations in how best to meet the requirements of the Panel so that 85-95 per cent of current submissions from that group are now successful.  Irrespective of whether the factoids resulting from their expenditures are useful, the review might care to consider whether such a high "success" rate is indicative of efficiency.

Green groups have been the only other significant recipient of funds from the Advocacy Panel.  It is invidious that they should receive such funding from a program designed to promote the interests of consumers of electricity (and gas if the program were to be extended to cover all reticulated energy).

Generally the material prepared by green groups, irrespective of its merits to more general elements of government policy, will promote measures that would increase the costs of energy.

RECOMMENDATION:  that no funding be provided to bodies other than those which can make strong claims to represent consumer groupings that might be disadvantaged by the existing market arrangements.

A POSSIBLE TEMPLATE FOR FUTURE FUNDING CRITERIA

Several threshold questions need to be answered in this review.  In line with policy towards all government expenditures, a sunset should be in place for the program.

Our won appraisal would see little to recommend the on-going funding of energy advocacy.  Given the unhappy experience with its outputs over the past two years, we would prefer to see the program discontinued.

Should some funding be maintained, it might best carried forward using the approach used for telecommunications.  Like electricity and gas, telecommunications has large numbers of sometimes vocal household and business consumers and has elements of monopoly.  Although there is some funding to vocal anti-business zealots, including the Communications Law Centre, most telecommunications user funding is directed at niche groups like those representing people with disabilities.  Much of the funding is also allocated for sitting fees on advisory bodies.  The sums involved have been pared back in recent years and totalled $700,000 for 2004-05.

We would see a case for only a fraction of that level of funding for electricity (and gas).  The only justification for funding of consumer bodies concerns the monopoly features of the supply.  Although electricity has core elements of natural monopoly broadly comparable to telecommunications, most of these are state based in the case of electricity.  State Governments already provide funding for consumer advocacy (e.g. Victoria's Consumer Utilities Advocacy Centre) and this is the appropriate jurisdictional level for such funding if any is to be extended at all.

For telecommunications, the grant recipients are determined by the Commonwealth Minister on advice from officials.  Although the NECA's Advocacy Panel is chaired by a person of the highest integrity and other members are also conscientious in fulfilling their duties, if it is to remain in place its activities and remit should be circumscribed.  The poor standard of the activities funded by the Panel to date doubtless owes much to them effectively having a quota of funds to allocate each year.  As a minimum, grants should be budget limited rather than budget determined and given only to projects with a clear consumer benefit focus and subject to an annual cap.  The objectives would include spending only on high quality worthy projects.

RECOMMENDATION:  That funding be either eliminated or considerably reduced and be granted as sitting fees/conference attendance for consumer representatives who can demonstrate some bona fides.  Other funding should be extended to studies that provide insights into consumer needs that are not readily determined by retailers.  Advisors within designated government departments may be sufficient to service this funding level.