The Australian: PM's arguments on electricity costs will haunt her with the NBN

JULIA Gillard's speech to the Energy Policy Institute last week sought to blame increasing electricity prices on greedy state governments and hence shift blame away from the carbon tax. It was an odd argument for her to make. For one thing, the carbon tax is specifically designed to increase electricity prices, by making carbon-intensive activities (such as producing electricity from coal-fired generators) relatively more expensive.

She tried to conceal this logical flaw by making an implausible distinction between good electricity price rises and bad electricity price rises. Good price rises, apparently, are ones that occur because of the carbon tax: "When the government priced carbon, we forecast an electricity price impact on consumers of around 10 per cent. So yes, Australia did need this 10 per cent increase in retail prices."

After explaining these "good' price increases, Gillard then complains that while she and the Greens were cooking up the carbon tax, "something else was happening at the same time". Those naughty electricity companies were putting up prices for their own reasons. These, we infer, are the bad electricity price rises. Gillard can't have it both ways. If price rises are bad for consumers, they are bad for consumers. That one is for a purpose she deems worthwhile and another is not makes no difference to the consumer who has to pay more. But even odder is that her speech was a direct attack on her own government's broadband policy. The criticism she levels at state-owned electricity companies (that their regulatory arrangements have driven price rises) will apply with equal force to the National Broadband Network. Gillard complains the stateowned electricity companies in NSW and Queensland have increased prices more than the privately owned companies in other states such as Victoria.

Curiously, the PM makes no mention of the fact it was Labor governments in NSW and Queensland that presided over most of the steady series of price rises which she is now complaining about, leaving the recently installed
conservative governments in both states to tidy up the mess. Nor does she mention the fact that while a Liberal government in Victoria took a wise decision to sell the electricity networks, Labor governments in NSW and Queensland did not. Ms Gillard says electricity prices rose for two reasons. First, she says that in some states the government is both the owner of the electricity company and the regulator of parts of the electricity market. It faces a conflict of interest. "Some state governments have been increasing their revenue at the expense of the family electricity bill," she says. Second, the electricity companies are overinvesting in their network to "meet the cost of peak events that last for less than two days each year in total". In regulatory economics, this is known as "gold plating".

This occurs when regulated companies invest more in their networks than they really need to because the regulator sets theirprices at a level which allows themto achieve a specified rate of returnm on their invested capital. So
the more capital they spend on the network, the higher the prices they are allowed to charge. The parallels with the NBN are obvious. The NBN will be owned by government and government will face a conflict of interest in regulating it It was precisely to end this conflict of interest that the Howard government transferred Telstra into private ownership, in the face of resistance from the opposition.

As for the gold plating problem, that will apply in spades to the NBN. Its capital cost, already more than $50 billion and likely to be much higher, reflects a decision to engineer the network to provide vastly more capacity, far quickerthan most Australians will need in the near future. The consequence will be prices to users being higher than they need to be because they will be set by the regulator to allow NBN Co to earn a specified rate of return on the excessive amount of capital invested in the network. Gillard is so desperate to head off the political damage from the carbon tax that she is clutching wildly at any argument. She has not made a good case but she has inadvertently proved another
proposition: the regulatory arrangements for the NBN will be bad news for consumers.

Paul Fletcher is a Liberal MP