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Government Regulation and Price Reviews

Question:

Discuss about the NSW Electricity Price Rises.

Electricity is a major source of power in Australia. Many households rely on it for their daily operations including lighting their residential places during night time. Many industries use it to rum small machineries. It can therefore be said to have an influence on economic productivity being the fact that it’s a raw input for some production; businesses are feeling an addition to production costs.[1] Since electricity is a utility good, and its demand is price inelastic to prices, the suppliers has market power to influence its price. This raises the concern of the government to regulate the prices charged on the market. In most economies, most of electricity supplying firms are natural monopolies with government regulations. This helps in ensuring that the consumers are not exploited through high prices. For some past years, the electric prices were going up whereas in some the price went down. This paper will help in identifying some the factors responsible for influencing the electricity prices. Various theories will be used in explaining this behavior. The theories include supply and demand theories. When the prices of electricity is going down holding all other factors constant, it demand must be very high and a deficiency in supply. Contrary, when the price is going down, the demand is lower and the supply is high. Otherwise costs of production may also explain the price variations. High costs of production forces the suppliers to raise the price of output; lower prices are charged when costs are lower. The paper will define the best policies to ensure that future sustainability is ensured.

For the companies supplying utility goods such as electricity, the prices charged are government regulated. In order to identify non-competitive behavior, the government watchdogs are given instructions to continuously conduct an electric price review.[2] They do this by checking the behaviors of the retail suppliers, their profit margins and whether they are offering the consumers the best deals. A high profit margin is an example of high prices charged on electricity and thus the ACCC intervenes.  Mr. Kerin noted that even with the government regulating the Australian utilities, the prices has continued rising. [3]The proper operation of the power market is ensured by the government through securing of national electric grid. [4] Lane noted that this is the latest government’s move. The following graph shows how the electricity bills has changed over time.

It can be observed that there has been a rise in electricity bills for the past eight years. The bill has been constantly increasing year after the other. This graph is a representation of Western Australia and it was noted that the percentage change in this graph from 2009 to 2016 is 85 %. [5] This increase in price has also resulted in increased costs for Australian firms.

Until 2013, the electricity cost for firms has been rising owing to the hiking prices. The factors argued to be responsible for the rising electricity prices are the environmental costs (carbon emissions) and the network costs.

Rising Electricity Prices in Australia

From 2013 to the current period (2017), the graph shows a stable prices for electricity and gas prices. However, the future projections show that the stability will be lost and price will continue rising.  The price for gas has not stabilized and it’s rising. This is raising concern on the ability of the energy sector to supply sufficient quantity at an affordable price.

The latest figure of increment in carbon taxes are very high. This increment has resulted in prices for electricity going up as shown in the graph.[6] The tax is meant to lower the emission of carbon gases as a strategy to improve climate risk management.

One of the factors that Lane noted to be responsible for the price variations is the privatization of this energy sector. SCOTT MORRISON argued that the areas that require some working for the economy to achieve, energy security, sustainability and affordability are many. Pressure has to be applied on every process of the power system to ensure that a sustainable energy that is more secure and more affordable is achieved. The power companies may be compelled by the ACCC to provide their consumers’ information. Lane quoted that “The ACCC can actually compel power companies to hand over information about consumers”. Although this may seem like there is no trust in the prices offered by the retail companies, this is the primary role of the ACCC and thus should not mind of what the company under analysis might think.

The suppliers may employ pricing strategies that would be exploiting the consumers simply because the demand is inelastic and sometimes there are factors that limits the quantity supplied by the companies. This is the strategy Lane referred to as price gouging when he asked “So you're worried about gouging?” It means that the suppliers raise their prices for utility goods when the demand exceeds supply. What led to this questioning it the fact that some companies were noted to have had very great profit margin. Electricity providers are gouging prices on electric bills.[7] This has led to many states fixing some anti-price gouging laws. This determines the maximum percentage that the price for utility goods may be raised in case there is a shortage. Suppliers are expected to observe this and charge no other price above the anti-gouging price.

At price P* and quantity Q*, the equilibrium is achieved. During a disaster that causes shortage such as the close of coal plants, supply would be lower than demand and thus suppliers would gouge their price to P1. However, the government fixes price Plaw above P* but below P1. The shortage is created as observed in the graph.

The Australian economy is falling into an energy crisis owing to the closure of aging coal plants Port Augusta last year in South Australia and Hazelwood in Victoria on this month;[8] it has pressured the power supply.[9] Harmsen noted that there will be a shortage in the electricity supply in the new summer hot days. He argued that prices are going to spike up. His quote “In South Australia, wholesale prices are regularly spiking to the market-allowed maximum of $14,000 per megawatt hour” is an indicator that the Australian government has imposed a cap on the electricity prices. This means that even with a supply shortage, the price will never go above the limit. This is similar to the anti-price gouging laws.

Environmental and Network Costs

The supply of power in Australia comes from various sources in additional to electricity; these includes solar, batteries and coal. Coal has offered a significant supply of power for long. However, the policies of the government on reducing the levels of carbon emissions has greatly raised its cost of production. Heavy taxes have been imposed on carbon emitting industries.  High cost have negatively impacted the coal producers’ profit margins forcing some of them out of the market. Exit from the market will result in low supply of power from this sector and thus there will be a shortage in power supply.

The increase in population and the industrialization of the Australian economy has caused a rise in the demand for electricity. Improvements in technology has also resulted in the development of many equipment that use electricity. The closure of coal plants has left electricity to be the main substitute for power supply. The government is trying to improve the coverage of the area supplied by electricity, this has led to increased costs of transmission. The poles, lines and the labor spent for networking are at high prices in the current period. Firms have to charge higher prices in order to cover this costs without posing risks to their profit margins.  Stephanie Smail Quote “He blames growing costs for the price increase” proves that the production costs are responsible for rising electricity prices

 The government is planning on transferring ownership of the sole power provider for sole provider. Though there are some arguments that this would help in lowering the electricity prices, this idea is faced with very many critics. The government has a primary role of ensuring maximum social welfare. Thus, when the power company is in its ownership, the prices charged are fair and affordable. The private sector is always interested in maximizing the returns from business operations and are less concerned with the social welfare. Thus there is a possibility that they will charge higher prices. Mr. Mark Mcgowan argued against privatization on the based that utilities sold in Western Australia ends up falling in foreign ownership. He also argued against the private sector maintaining lower electricity prices. The noted that before Alinta Gas and Westrail Freight were sold to private investors, there was a promise that this would help in pushing down the price but this never happened after it selling took place.[11] Mcgowan quoted that “…the experience of privatized utilities is that prices go up” which is a clear explanation that there is no way a private supplier of utilities may help push prices down.

The government should impose anti-price gouging laws on electricity prices; but should also supplement the law by encouraging production of electricity from other resources such as wind and solar. The government should also ensure that tax charged on utilities is very low; electricity has an inelastic demand to price changes and thus higher tax burden are easily transferred to the consumers. The government should also ensure that the production costs for utilities producers are low. Privatization of utilities is not a good idea and thus the government should avoid the thought that privatizing the industry would result in lowering of prices. The government should maintain the full ownership of utilities companies for social welfare to be improved. In addition, it should encourage any innovation that would improve the supply of power. I.e. it should support the solar and wind energy producers

Conclusion

Compelling the retail companies to provide consumers’ information would prevent the companies from overcharging them since the ACCC will use the information to discover that. The government should not be worried on wheat the companies think when it summons the ACCC to do an analysis on a company. Furthermore, if a company is applying the right processes, there is nothing to hide. Those not following the competition regulation rule are the ones that are the victims of worry for this may soon be discovered. Anti-price gouging law are important in ensuring that the utilities are affordable even when a shortage persists. Without this law, the supplier would charge the highest price possible by limiting their supply.

References

Energysmartstrata.com.au. "NSW Electricity Price Rises - Energy Smart Strata". Energy Smart Strata. Accessed 21 April 2017. https://www.energysmartstrata.com.au/fact-sheets/nsw-electricity-price-rises/.

Gartrell, Adam. "PM Orders National Review of Electricity Prices". Newcastle Herald, 2017. https://www.theherald.com.au/story/4555510/pm-orders-national-review-of-electricity-prices/?cs=12.

Harmsen, Nick. "South Australia's Power Woes Expose Deeper National Problems". ABC News, 2017. https://www.abc.net.au/news/2017-03-09/political-leadership-needed-to-secure-future-of-energy-supply/8339116.

Lane, Sabra. "Electricity Prices: 'We Have A Plan', Says Treasurer Scott Morrison". Abc.Net.Au, 2017. https://www.abc.net.au/am/content/2016/s4642870.htm.

Lane, Sabra. "With Privatized Utilities, Prices Go Up: WA Opposition Leader Mark Mcgowan". Abc.Net.Au, 2017. https://www.abc.net.au/am/content/2016/s4632890.htm.

Poweronwa.com.au. "Lower Electricity Prices". Poweronwa.Com.Au, 2017. gutf8t.html.https://www.poweronwa.com.au/benefits/lower-electricity-prices.

Preiss, Benjamin, and Adam Morton. "COAG Agrees To Tackle Power Bill Price Gouging, But Not On How". The Sydney Morning Herald, 2016. https://www.smh.com.au/federal-politics/political-news/coag-agrees-to-tackle-power-bill-price-gouging-but-not-on-how-20161214-gtb7yb.html.

Morton, Adam. "Wholesale Power Prices Have Doubled Since The Carbon Tax Was Axed". The Sydney Morning Herald, 2017. https://www.smh.com.au/federal-politics/political-news/energy-crisis-wholesale-power-prices-have-doubled-since-the-carbon-tax-was-axed-20170308-

Smail, Stephanie. "PM - Huge Hike in Queensland Electricity Prices 31/05/2013". Abc.Net.Au, 2015. https://www.abc.net.au/pm/content/2013/s3772189.htm.

Whiting, Natalie. "SA Utility Watchdog: 'Not Prepared To Waste 4 Years Of My Life' Working Under Labor". Abc.Net.Au, 2017. https://www.abc.net.au/worldtoday/content/2014/s4116101.htm.

Winter, Caroline. "South Australia's Biggest Electricity Intervention in Two Decades". Abc.Net.Au, 2017. https://www.abc.net.au/pm/content/2016/s4635947.htm.

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