Crisis & reform
After nearly half a century under public ownership and control, the electricity industry in Australia is now subject to the influence of market principles and private interests. Over the last ten years most attempts to privatise electricity assets have failed. As a consequence, only two states in Australia have managed to sell or lease electricity assets - Victoria and South Australia. There is no immediate prospect of other states and territories doing the same. Strong community opposition and the inability to get a parliamentary majority are ensuring this for the time being. However, the struggle over the ownership and control of the industry will continue. Power Politics chronicles the history of one such struggle in South Australia.
Few debates have stimulated as intense community and political interest in recent times in South Australia as the privatisation of the state's electricity industry. The Liberal government's policy backflip on privatisation was deeply unpopular in the South Australian community, with the vast majority of South Australians wanting the industry to remain publicly owned and managed. Furthermore, they were skeptical about the claimed benefits of privatisation. Community dissatisfaction with the privatisation of the Electricity Trust of South Australia (ETSA) undoubtedly contributed to the erosion of the Liberal Party's slim majority at the 9 February 2002 state election. Ultimately a Labor government was formed with the support of the independent member for Hammond, Peter Lewis, a disgruntled former Liberal Party member.
The seeds of the electricity crisis in South Australia were sewn in the early 1990s with the establishment of the National Electricity Market (NEM). The NEM offered the prospect of a more efficient electricity industry with, as a consequence, cheaper power prices. The NEM is unlikely to deliver on these promises. Indeed it is now clear that the new market-based system has failed so far to deliver on the promises made by the former Liberal government.
While the sale of publicly owned electricity assets was not a requirement of the NEM, the market principles upon which the NEM was based have been used as a pretext for privatisation by a number of governments. In the face of strong community opposition, bold promises were made about the benefits of privatisation. Consumers around Australia were promised lower electricity prices and greater reliability by the architects of the National Electricity Market. South Australian households and small businesses are now bracing themselves for a very different outcome as they enter the NEM in 2003. They know that they face similar price hikes to those recently experienced by large businesses in the state. Some estimates suggest the likely initial increase facing households will be around 20 per cent or $178 on the average power bill. Households also remember summer power blackouts in 2000 and they remain alert to the possibility that these are likely to recur. With sections of the electricity industry advocating the introduction of new power meters at a cost of $600 to each consumer, South Australian consumers were left with little doubt who the beneficiaries of the NEM and the ETSA privatisation process might be. The NEM is not working well for South Australian consumers and the ETSA privatisation has reduced the state government's influence over the NEM.
South Australians are not alone in grappling with the price crisis in the NEM. Both Queensland and New South Wales sought to delay the entry of domestic and small business consumers into the national market. Fearful of large increases in domestic power prices, they considered the introduction of price caps. However, the same options may not be available to the South Australian government because of the ETSA privatisation. One of the perverse consequences of the privatisation of ETSA is that the contracts with new private power operators may prevent the government from introducing price caps. The only strategy for price control being seriously canvassed in South Australia has been 'price justification', a process whereby industry is asked to justify to regulators whether price increases are fair and reasonable. This is 'paper tiger' public policy, reflecting just how impotent the state government has become in the NEM.
The NEM experiment has failed the price test set by its designers, and states like South Australia which have privatised their electricity assets are relatively 'powerless' to deal with the price crisis unless fundamental reforms to the NEM are introduced. The NEM currently operates too much like a highly speculative stockmarket. This is not an appropriate model for the future development and management of the electricity industry as it is likely to perpetuate wild price fluctuations and under-investment in the development of sustainable energy-generation technologies. The Californian electricity crisis and the recent collapse of the US energy trading giant, Enron, demonstrate the inherent risks associated with over-reliance on market-based electricity systems like the NEM. The collapse of the US energy company giant, NRG Inc, in December 2002 brought this problem closer to home. NRG is the parent company of NRG Flinders which had acquired electricity generation assets in South Australia and Victoria. When NRG Inc collapsed in the US, the South Australian subsidiary was put into voluntary administration, exposing the South Australian government to a potential liability of up to $140 million due to a government guarantee built into the contract which NRG Flinders signed with the former Liberal government. Not surprisingly, the new state Labor government feared the crisis might have wider implications, so it immediately established an inquiry into all the electricity privatisation contracts struck by the previous administration.
More rather than less public accountability and engagement in the industry will be necessary to avoid such problems. The NEM will fail the fair and reasonable power price and public accountability test while market ideologues and energy speculators determine the rules governing the industry.
The threat of substantial electricity price increases and the NRG crisis are early warning signs to the government that major reform of the South Australian electricity industry will be required if wider public interest and environmental objectives are to be met. South Australia needs a strategy which integrates social, economic and environmental objectives into a comprehensive sustainable energy strategy for the state. By integrating the need for affordable energy with energy demand management and the development of renewable energy, South Australia could lead the nation in the development of a sustainable energy industry. Moreover, this industry of the future has the potential to be a major generator of new jobs and exports. The challenge for the state government is to provide the leadership to develop a policy which adopts a 'triple bottom line' approach to energy industry policy, one which focusses on affordability, energy efficiency and the need for renewable energy. An 'authority for environmentally sustainable energy' should be established to drive such reform.
To begin to meet this challenge it will be necessary to rethink the 'economics' of the electricity industry. Over-reliance on market-based economics will undermine the capacity of the government to ensure that this triple bottom line approach is realised. As noted earlier, the privatisation of the electricity industry in South Australia and its parallel participation in the National Electricity Market have raised concerns in the community about electricity pricing and system reliability. It now appears that the government has less capacity to meet social objectives like affordability and reliability, and environmental objectives such as reducing pollution and greenhouse gas emissions.
Privatisation of the electricity industry in South Australia has increased the potential for price shocks. In order to maximise proceeds from the sale of electricity assets, new generation initiatives, with the exception of Pelican Point, were not pursued vigorously by the previous state government. Since privatisation the focus of policy has been upon increasing supply through gas- and coal-fired generation capacity and interconnectors. Inadequate attention has been paid to alternative methods of matching supply and demand such as demand-side management measures designed to reduce consumption. The development of renewable sources of energy such as solar and wind power also requires much more attention.
A more rational solution which serves the public interest is needed for the development of the Australian electricity industry, one that is consumer- and environment-focussed rather than focussed on short-term speculative gains for the benefit of the energy-trading industry. 1n 1945 South Australian Premier Tom Playford took an important step down this road by establishing a royal commission into the privately run Adelaide Electric Supply Company. He was concerned that the company was too focussed on shareholders' interests: that it was seeking higher dividends while resisting the need to increase South Australia's fuel self-sufficiency and promote industrialisation. At that time the royal commission found that the public interest would be best served by nationalising the Adelaide Electric Supply Company and creating what is now known as the Electricity Trust of South Australia - ETSA. Today we are faced with similar questions about the appropriate role of government in the future development of the industry. The logic of Playford's response to this challenge in 1945 is just as compelling now - a royal commission would be both a timely and appropriate response.
A royal commission has the power and independence to help ensure a fearless and comprehensive inquiry into the Australian electricity industry and the NEM. The foremost objective of the commission would be a review of the structure and operation of the NEM and the provision of advice on the appropriate role of government to ensure fair and reasonable prices, effective demand management and sustainable generation strategies from the industry. Future generations will thank those who have the courage and vision to confront the energy policy problems and challenges this state and nation faces.
The new book, Power Politics, aims to stimulate debate on the need for fundamental reform of the electricity industry in Australia and South Australia. Understanding the origins of the public electricity industry is vital to the creation of a context where industry is more committed and open to the public interest. It is also crucial that the debate on ownership and control of the industry in the twenty-first century is not dominated by those interested in prices and profits but focussed on the many social and environmental imperatives which must be faced if we are to develop a sustainable and socially responsible energy industry for the future.
Power Politics is divided into three parts. The first part provides an overview of the origins of the public electricity industry in South Australia, the emergence of a market-based electricity system and the privatisation of the industry in South Australia. Part two attempts to demystify the NEM and offer a number of critical perspectives on its rationale and operation. Part three outlines a range of ideas for change and reform, including some lessons from overseas and locally on energy efficiency, renewable energy, low-income consumers and reform of the NEM. Importantly, this includes ideas to assist households, industry and government to use energy more efficiently, with the dual aim of reducing demand for energy and meeting environmental objectives.
The privatisation of the South Australian electricity industry is likely to remain one of the most unpopular decisions ever made by a government in South Australia. For this reason the momentum for fundamental reform is likely to grow. It may eventually prove to be as overwhelming as it was in 1945 when the premier of the day, Tom Playford, called a royal commission which led to the nationalisation of the industry in 1946. It is highly likely that the eventual privatisation by the Liberal government in 1998 (despite their 1997 election promise not to do so) contributed to their defeat in 2002. It is also highly likely that the current Labor government will continue to suffer the repercussions of electricity privatisation in South Australia for a long time to come. It faces the challenge of developing an energy policy which integrates social, economic and environmental objectives in order to reassert the public interest in the face of influential private interests. This is the essence of Power Politics.
This is an edited version of chapter 1 of a new book Power Politics: The electricity crisis and you, edited by John Spoehr and published by Wakefield Press with the Don Dunstan Foundation at the University of Adelaide. Power Politics is the first comprehensive account of why the privatisation of South Australia's electricity supply has been a disaster. For further information, extract enquiries, to arrange a review copy and/or an author interview, please contact Angela Tolley or Stephanie Johnston, phone (08) 8362 8800. To order the book ($19.95), contact Wakeﬁeld Press (Aust) Pty Ltd (ABN 21 057 216 645 1), The Parade West (Box 2266) Kent Town SA 5067, telephone (08) 8362 8800, facsimile (08) 8362 7592, email email@example.com, or visit the Wakfield Press website.