Fiddling with the DMO is not the solution. The fundamental flaws in the design of retail markets needs to be addressed.
The biggest myth of energy reform in Australia is that 'retail competition' was introduced in Australia. In a system with retail competition purchase decisions made by consumers have an influence over the price and quantity of electricity dispatched.
The choices consumers make of their retailer has no impact on wholesale prices. These are entirely determined by the amount of energy that AEMO decides it needs to purchase in any five-minute interval. This price is virtually independent of any willingness to pay by consumers.
Residential, and most business, consumers can be divided into two groups. The first and smaller group is those consumers who have some capacity to adjust their consumption based on wholesale market prices. These consumers, working individually or through aggregators, have the ability to influence wholesale prices.
The remaining consumers have no impact on wholesale prices. Allowing these consumers to have a choice of retailer achieves absolutely no positive economic benefit. Indeed, the impact is entirely negative as it generates retailer costs in competition. Increases in these costs are a major contributor to the most recent increase in the DMO. That this aspect of retail competition has no benefit is reflected in the Minister's plan for 'stripping out the DMO’s competition allowance.'
There is a better way that utlises the concept of competition for the market rather than competition in the market. I outlined this in more detail in my NEM Review submission under the heading 'Making retail markets work for consumers'. The position is simply that rather than requiring all retailers to offer a standing offer for when they are the default provider for a connection point there should be only one default retailer. Anyone who chooses not to choose a market offer from a retailer is placed on the standing offer of the default retailer.
The default retailer is chosen by competitive auction every three or five years where the bid price is the retail margin the bidder requires to be the default provider. Rather than a regulator deciding what is an appropriate retail margin, the market bids for this to be the lowest margin. As this margin applies to the default operator only, there is no competition cost included in the margin.
This not only reduces prices for the consumers who 'choose not to choose', it also focuses retailers who compete for customers to compete on the basis of how they help those customers to use the tools available to them to reduce the wholesale cost of energy they consume.
An additional reform can and should occur in the way distribution network costs are recovered. The distribution networks were initially constructed to provide public lighting. The use of the networks to provide residential services is a marginal use and households should only face this marginal cost.
This means that the cost of operating a distribution network to only deliver public use services (street lights, traffic lights, powering NBN cabinets) should be estimated and billed as a lump sum to the relevant Local Council. The Council should recover these costs in land rates. The idea of recovering the fixed costs of utilities through taxation goes back to a paper by Hotelling in an article that suggests utility rates should be set equal to marginal costs which are always less than average costs, and so the residual cost should be recovered from taxation.
This concept sparked what is known as the Marginal Cost Controversy. Ronald Coase argued that the 'correct' solution to the problem was two part tariffs, which is what we see in electricity today. However, in doing so Coase ignored some important issues of equity. Recovering fixed costs through land taxes levies the cost dispropprtionately on the well off, it is a progressive tax. More importantly, if one property is worth more than another it is possibly because of a wider steet frontage which reflects more network cost being incurred.
Recovering fixed costs through rates has the other desirable effect of eliminating bad debt, as all unpaid rates are recovered when a property is transferred. From the perspective of retail electricity prices it simplifies the approach to only charging for the marginal cost due to consumption.
I have elsewhere written that the idea of an essential link between networks charging a 'cost-reflective' tariff (time of use or demand based) and retailers pricing should be broken. The retailer should always face a 'cost reflective' tariff, even when there is only an accumulation meter. The retailer should be charged the cost-reflective price on the profile of the residual demand at the zone sub-station (i.e. the demand less the aggregate profiles of the connections woith interval meters). But the retailer should not be allowed to charge a cost reflective price unless (a) there is an interval meter and (b) the consumer has chosen to be charged a cost reflective price.
*********************************
Life is what happens while you are busy making other plans JWL
Life is what happens while you are busy making other plans JWL
