Oligopolists gouge power and gas prices, Albanese cops the blame

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.

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Economists have a glaring problem: themselves

By MILLIE MUROI, Economics Writer

Economists don’t often get the chance to look at themselves. They spend their lives keeping a close eye on the actions, behaviours and motivations of others: people like you and me. But the self-reflection they have done recently points to a glaring issue.

When I was first getting my bearings in economics nearly 10 years ago, there were four giant posters at the front of my classroom. The heads of four economists, including Adam Smith, Milton Friedman and John Maynard Keynes, stared smugly down at me as I took notes on all the important things: demand, supply and how to pass my economics exams.

The profession looks a little different now, although maybe not as different as we would like to think. It remains disproportionately pursued by one gender – and those who are relatively well-off.

It’s a sentiment shared by Treasurer Jim Chalmers who said in a speech to high school students last week that we still need to strike a better gender balance, starting with school and university enrolments.

“The economics profession will need to reflect the diversity of our country – I’m thinking especially of attracting more women into these roles,” he said.

Why does this matter? Because the people who study economics are the ones who go on to make some of our most important economic decisions: the governor of the Reserve Bank, the chair of the Productivity Commission, and the head of the Department of Finance to name a few.

All three of these positions are now occupied by women for the first time: Michele Bullock, Danielle Wood and Jenny Wilkinson.

Gender is just one of the diversity metrics we need to monitor. But it has a big impact.

A survey of professional economists in the US showed that while there wasn’t much difference in the perspective of women and men when it came to economic methodology, there were notable ones on policy. Women, for example, were 32 percentage points more likely to agree that income should be distributed more equally.

As Wood wrote in 2018, teams of people who are too similar – in terms of gender, race, age and class – perform poorly because of their narrow range of perspectives and because they are more likely to lapse into “group think” where bad ideas go unchallenged.

“Study after study has demonstrated that more diverse teams make better decisions,” she wrote.

So, what is the state of the economics profession? It’s a question that Jacqui Dwyer, head of the Reserve Bank’s information department, has probed – and it starts at high school.

First, there has been a dramatic fall in the size of the economics student population. Over the past decade, year 12 economics enrolments have been sitting about 70 per cent lower than in the early 1990s.

“Most of the fall occurred during the mid-1990s, with enrolments then drifting down before persisting at relatively low levels for the past decade,” Dwyer said. Part of this is because of the introduction of business studies in the early 1990s, which has become a substitute for economics that students see as easier to learn with clearer career prospects – and which teachers see as easier to teach.

This has, in turn, led to fewer schools offering economics as a discipline. Government schools in particular have dropped off. While almost every school in NSW across the government and non-government sectors offered economics in the 1990s, only about 30 per cent of government schools now offer the subject.

This has led to less uptake of economics by students from less advantaged backgrounds, while the share of advantaged students picking up the subject has grown.

There’s also been a stark fall in female participation. Male and female students accounted for roughly equal shares of year 12 economics enrolments in the early 1990s. Since then, female participation has fallen off: males now outnumber females, two to one.

These numbers are crucial because they feed into the economics student populations at universities. While enrolments have grown in fields such as management and commerce, STEM and banking and finance since the 1990s, the number of economics students has flat lined.

Another factor weighing on economics enrolments at university is the perception that economics is a “riskier” subject to study with a less well-defined career path than other disciplines.

That’s despite economics graduates having among the highest average earnings (only beaten by engineering graduates) and one of the widest array of employment options, in terms of industry and occupation.

Economics students do, however, face some challenges in landing their first job out of uni. The unemployment rate of economics graduates is higher than disciplines such as health, education and business, especially just after graduation (although, as Dwyer notes, it’s a similar rate to those in science and information technology).

The fall in the number of economics students also impacts economic literacy in the broader population. This is important because those who are economically literate make more informed economic choices, better understand the world around them and can influence public discussions and government action.

They can also make public policy more effective by aligning their expectations or behaviour with its intended purpose.

Unfortunately, diversity issues continue into university. Unlike at high school, the gap between female and male participation has always existed, recently sitting at a similar ratio to what we see in high schools.

Even worse, there’s been a sharp worsening of diversity in socioeconomic status. “Economics has become a socially exclusive subject, with a higher share of students from advantaged backgrounds than is the case for most other disciplines,” Dwyer said.

More than half of university economics students are from high socioeconomic backgrounds, whereas only about 7 out of 100 were from the bottom 25 per cent.

The economics discipline is often criticised for its shortcomings: flawed predictions, incorrect assumptions and policy blunders.

While it will always be an imprecise science, If we want to improve public policy and the questions and discussions shaping them, the state of the economics discipline must change, reflecting the diversity of the people it studies.

As Chalmers has pointed out: “numbers are very important. But the main reason we study economics is not numbers, it’s people.”

If we want economics to serve people, we need the faces at the front of that classroom, and in the classroom, to reflect a wider set of perspectives that better mirror how our economy – and its people – work. That’s step one of improving the state of the discipline.

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