Does the Power Market need more regulation?

Ross Greenwood speaks to Energy Minister Josh Frydenberg after power and gas distributors have reportedly been ripping off customers by charging an extra $400 million for tax costs.

Introduction: Does the Power Market need more regulation?

Ross Greenwood: What day is it again? It’s a Tuesday, isn’t it? Another day, another energy rip off or gouging that we actually have to confront. I mean, look, as though Australians aren’t struggling enough to find out today that potentially $400 million might have been ripped out of energy customers by energy companies that have been overclaiming tax allowances. Now, they actually got me thinking. If you’re a company, you don’t pay tax really normally until you make a profit. We understand that. That’s pretty basic maths. You’d expect that when you, I don’t know, put in your prices, you’re putting in your prices to anticipate a profit, and then from that you take your tax.

What you don’t really anticipate is before you’ve even set your prices, that somebody else is actually making an allowance for you to pay tax. That seems pretty dumb, but in this particular case, electricity networks and regulated gas pipelines receive an allowance as part of a revenue determination process to cover their tax bills.

So the tax office looked at this and worked at some companies being claiming up to three times what they should. Let’s make a way our Minister for Energy and Environment, Josh Frydenberg, whose job is to try and clean this all up. Hello, Josh.

Interview with: Josh Frydenberg, Minister for Energy and Environment

Josh Frydenberg: Nice to be with you, Ross.

Ross Greenwood: Not so nice if you’re getting your bills, and you wonder if would anybody be giving any organization, especially an energy company that makes hundreds of millions of dollars a year, any money to pay their tax bill.

Josh Frydenberg: As you know, these are regulated assets. There is monopolies, duopolies are working in an oligopoly.

Ross Greenwood: We know they’re monopolies because basically they operate like monopolies when it comes to pressing us to all sorts of things as you’re aware.

Josh Frydenberg: That’s why we need to regulate them now. The Australian Energy Regulator every five years makes a determination as to how much those energy companies can recoup from customers. This is based on an assessment of net worth expenses which includes the tax that they would pay. Now we’ve had the ATO, the Australian Tax Office, undertakes some analysis, and that is shown that these companies were saying that we’re going to pay three times more tax that they ended up actually paying, and that’s where the $400 million figure comes from, and we need to change the rules to ensure it doesn’t happen again, bearing in mind these rules were put in place by the then Federal Labor Government or under the State Labor Government in 2012.

Ross Greenwood: I presumed the tax office, like I would normally do, does an adjustment in terms of the tax that these organizations would have otherwise paid. They’ve got extra income so they’ll be paying the tax on these or giving some of the money back. Is that the way it works?

Josh Frydenberg: No, that get adjusted. What happens is that they make a determination five years out and as a result the companies are able to recoup that money. We need to look at alternative systems so that when the tax actually paid by these companies is less than what they said they would pay as is currently the case, there is an opportunity for this money to be given back to consumers.

Ross Greenwood: What you’re telling me Josh is a $400 million fund that can’t be actually clawback from these companies?

Josh Frydenberg: It was done under the rules that were established back in 2012 that was for that five-year period. The next five-year period begins next year; hence, the need to get the advice from the Australian Energy Regulator by end of this year and put in place for the next revenue determination period in 2019.

Ross Greenwood: Josh, have you ever think about energy and electricity it the last a little while. I think it’s stems down to something pretty basic and actually even goes to the Royal Commission on Banking and Finance right now and that is if the wholesaler is also a retailer there is a fundamental problem in the whole system because what you’ve got is the wholesaler is got the wholesale margin, but they also control retail margin.

I actually thought about these as I was driving to Canberra for the budget last week and on the banks of Lake George, there’s about now 120 windmills up there. The wind is blowing, not a single one of them had their turbines going. So none of them are generating any electricity. I stop and thought, why wouldn’t they generating electricity. That came to me of course. It’s pretty obvious that you don’t want the price of electricity to go down too much because the coal-fired power stations have to go all the time, and so as a result, they just don’t turn them on, and so because they don’t turn them on, the price of wholesale electricity stays higher and so as a result everybody’s happy.

This is the reason why industry and consumers in Australia pay more because you haven’t got a separation between the retailer in this country and those wholesale creators and generators of electricity.

Josh Frydenberg: You’re absolutely right that the so-called gentailers, which are generators and retailers, and obviously the big three are AGL, Origin and EnergyAustralia, do trade between their own generation and their retailers. What we need to do is ensure more transparency so that those pricing arrangements are open to the rest of the market.

Ross Greenwood: To assure that the government split them up. That’s the thing that’s happening. You can see it happening with the banks with the Royal Commission, they splitting off their advice, they splitting off all of their wholesale generation of investments. They’re doing this because they’re trying to get it separated from their banking. You’re the government. You could step in and simply say you cannot buy a generator and a retailer signs on, and it won’t put some competitive pressure in the whole marketplace, and it would mean that basically people would end up getting a better deal.

Josh Frydenberg: Ross, two points tonight. The first is I am concerned about the concentration in the energy market. We’ve seen the three largest suppliers in any particular region or any particular state have up to 70% control of the market, and that is why we need the ACCC to provide the advice to the government in independent, nonpartisan way as to the best way forward to bring more competition to market. We’re getting Robinson’s report at the end of June, and I know he shares our concerns with the amount of concentration in the energy markets. Let’s just wait and see.

Ross Greenwood: Okay, we got that coming because the ACCC reports coming there might be option off the back of it, and you know for example of AGL is doing. I was doing nobody really any favors. It wants to close the Liddell power station because ultimately that takes electricity out of the grid. It means that you’ve actually got the wholesale process remaining relatively high.

You can control electricity that’s coming out of the wind generators, out of the solar generators, but of course, with the coal-fired power stations, they’re going to stay all the time. So while it has bought the Liddell power station for one dollar from the New South Wales Government, they have now grabbed an offer of $250 million that they’ve rejected and simply said, “It’s not good enough because we need it for our own strategic purposes.” Everybody can see what the game is, everybody understands it, and yet ultimately somebody is going to stand up to them and really push some legislation through to stop this by ever taking place.

Josh Frydenberg: It’s no surprise to your listeners that we do feel that AGL need to properly consider this offer from a lender because it’s not just the $250 million upfront that they’re providing but also the entitlements to the workers, also the remediation at the site, and also the upgrades that will be necessary to keep this plant going beyond 2022. It’s no surprise too that some of Australia’s largest manufacturers and employers, the BlueScope’s, the CSR’s, the Aurora’s, the Brickworks, the Cement Australia. All those companies have sided with Alinta and supported them in acquiring Liddell because they’re concerned about the price and the reliability of the power system in New South Wales post 2022 if Liddell was to close.

Ross Greenwood: I want to get to one last thing before I let you go, Josh, if that’s okay, and that is on now you put out a statement and I think it’s really important as well, and that is often we hear about big electricity discounts. You got 16% off these, you got 30% off that, whatever it might be. The problem is, it’s of what, and that’s what you’re trying to get to with a change in the law, isn’t it? We say that even though you might be offered a big 16% discount, you might end up worse off because you don’t know what the 16% is off. So you’re trying to change those rules as well.

Josh Frydenberg: Absolutely. As I’ve said in the past, if you get 30% discount on 30 cents of kilowatt-hour, that’s not as attractive as getting a 20% discount on 20 cents of kilowatt-hour. The way energy bills today are so confusing that the public don’t change energy retailers or contracts as often as they should in order to get a better deal. 50% of households and families listening to your show tonight, Ross, wouldn’t have changed their energy contract or retailer in the last five years.

I would implore them to go on to the government website, www.energymadeeasy.gov.au, and to compare their offer to the other offers that are available in the market, to then ring the retailer and seek a better deal. Already over 100,000 customers have done that since the government has put a focus on it, and as a result, people are saving hundreds of dollars a year.

Ross Greenwood: Good to have you on the program, Josh Frydenberg, but do that and makes you know how much you’re paying per kilowatt-hour. That is the absolute key to all of these. Josh Frydenberg is the Minister for Energy and Environment. Josh, keep that in mind, you’ve got some good around this and I do notice that the energy markets indicate that they could be a fall in the wholesale electricity price next year. Josh, good to have you on the program.

Josh Frydenberg: Good to speak, and let’s keep talking about this important issue.

 

 

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