If, as seems likely, Anthony Albanese and his government lose seats at next year’s federal election, one thing we can be certain of is that the nation’s economists and econocrats won’t be admitting to their not insignificant contribution to Labor’s setback.
Economists have such a limited understanding of how the behaviour of the real-world economy differs from the economy described in their textbooks and measured in their econometric models, and are so woefully bad at predicting where the economy is headed, that their profession has become hugely defensive. And so, like Peter Dutton, they never ever admit to getting anything wrong.
It seems a safe bet that, should Labor’s vote be down, it will be for one overwhelming reason: the voters’ ire at what they call the “cost-of-living crisis” – the sudden surge in retail prices in the aftermath of the pandemic.
Many factors have contributed to that surge, but the Reserve Bank attributes much of the responsibility to the authorities’ excessive stimulus of the economy during the lockdowns. This, by causing the demand for goods and services to outstrip the economy’s ability to supply them, allowed businesses everywhere to get away with whacking up their prices.
Economists regard such price rises as completely normal and unexceptional, part of the God-ordained mechanism by which market forces return the economy to equilibrium. The public, however, sees such rises as utterly opportunistic and illegitimate, condemning them as “price gouging”.
But while the Reserve has frequently offered this “demand-pull” explanation as justification for its protracted increase in interest rates, it’s been much less willing to acknowledge that it was among the “authorities” who stuffed up.
Of course, the retail prices of some goods and services have made a much bigger contribution to the higher inflation rate than others have. And a prominent role has been played by the prices of electricity and gas. Over the three years to June this year, electricity prices rose by 20 per cent and gas prices by more than 30 per cent.
We’ve been told the leap in energy prices has been caused by Russia’s invasion of Ukraine in February 2022. But as new research by the Australia Institute’s David Richardson reveals, that’s just a tiny part of the story.
The truth is that electricity and gas prices have been rising much faster than the overall consumer price index since at least the end of 2007, with prices really shooting up over the past four years.
Richardson has used the latest annual reports of AGL and Origin Energy to derive some astonishing figures for what consumers are paying for electricity and gas. On average, he calculates, AGL’s electricity costs households $377 a megawatt hour, while Origin households pay $343 a MWh.
So what are the costs that cause those electricity prices to be so high? He says the total retail price consists of five components. First is the cost of the generation of electricity by power stations, including the cost of the coal and a bit of gas used to power the generators.
Second are the “network costs” of moving the electricity from the power stations to homes, businesses and offices, first transmitted across the countryside by high-voltage power lines, then distributed by “poles and wires” at the local level.
The third component is an annual allowance for the depreciation of all the equipment, which must eventually be replaced. Fourth is “other costs” incurred by the electricity retail companies – most of it being the cost of advertising – and fifth is the retailers’ profit before interest payments and tax.
Now get this. Richardson calculates that, for every $100 paid by a retail customer of AGL, a mere $12 goes on generating the electricity. So much for the evil Russian invaders being the cause of the problem.
Next come network transmission and distribution costs of $34, $4 for depreciation and $15 for advertising and other retailing costs. Which leaves AGL’s retail company with a profit before interest and tax of a measly $35.
What! About 35 per cent of our bill goes on profit to the retailer? Woolies and Coles eat your heart out. Qantas – you’re not really trying.
According to Richardson’s calculations, Origin’s retail profit share is a bit lower at 29 per cent. Turning from electricity to gas, he puts AGL’s retail profit margin at 36 per cent, and Origin’s probably a bit higher.
Richardson’s conclusion that consumers are being gouged in the electricity market is consistent with the findings of Professor Allan Fels in his report for the ACTU earlier this year. Fels made the economists’ point that every company’s electricity is identical. It’s also something that every home must have.
So why do retailers need to spend so much on advertising, “inappropriate door-to-door marketing activities” and other forms of “obfuscation”, Fels asked.
And Richardson’s figuring reveals something else. The overcharging of household customers of electricity and gas involves requiring them to cross-subsidise AGL and Origin’s business customers. They pay prices for electricity and gas that are about half what household customers pay. And the profit margins extracted from business customers are tiny.
But why should economists and econocrats share the blame for all the inflationary price gouging that’s helped make the Albanese government so unpopular? Because all the malfunctioning we’re seeing has occurred under the National Electricity Market that the econocrats designed and still regulate, and assured us would be a great reform.
The wonder-working NEM has turned five state-government-owned monopolies into a national oligopoly dominated by just three huge operators – AGL, Origin Energy and the foreign-owned and tight-lipped EnergyAustralia. The three are highly “vertically integrated”, meaning they each own big slabs of the market’s three levels: generation, transmission network and retail provision.
The NEM is owned by the five state governments plus the feds – that is, by everyone and no one – and regulated by two separate government authorities using a rule book running to thousands of pages. But it seems to have been captured by the oligopolists.
The economists have done little to stop consumers across the nation from being grossly overcharged for electricity and gas. But not to worry. It’s only some politician that will be left carrying the can.
