Electricity prices are a major contributor to cost of living pressures and a major cause of concern for Australian consumers. While the carbon tax has recently been depicted as the main culprit in electricity price increases, electricity prices have been increasing rapidly for the past two decades. The cost of electricity increased by 170 per cent from 1995 to 2012, an increase four times higher than the rise in the consumer price index (CPI).
This increase has occurred despite the industry being subjected to privatisation and corporatisation for the past two decades, a process that promised to increase efficiency and lower prices. The agenda of the electricity, gas and water industries continues to push towards privatisation, a direction supported by people on both sides of state politics.
In the context of continued support for privatisation it is important to ask why, despite the promise of lower prices, electricity costs have risen since the reforms began. This paper examines this question and explains some of the factors behind the apparent contradiction between price increases and the promises of privatisation. It reveals that far from privatisation reducing costs it is likely it has contributed to price increases.
A major factor that appears to be involved in the increase in electricity prices is the productivity slump that has occurred in the sector since privatisation. Output per worker has fallen markedly in electricity while it has increased in the rest of the economy. Over the period June 1995 to the present, productivity across all workers increased by 33.6 per cent, while in the electricity sector it declined by 24.9 per cent.
One explanation for this dramatic fall in output per worker is the rapid increase in staff numbers in occupations that do not have a direct role in actually generating electricity. For example, the number of managers in the sector has grown from 6,000 to 19,000 from 1997 to 2012, a rise of 217 per cent. This has seen the ratio of managers to workers change from one manager to every 13 workers in 1997 to one manager for every nine workers in 2012.
In contrast to this, there was a much smaller increase in the group of people who are directly involved in producing electricity. It is likely that this change in the sector’s employment structure is a consequence of privatisation and the split of electricity entities into much smaller units, each requiring its own management and administration team. The cost of this investment in individual teams has likely been recovered from consumers through higher electricity prices.
This paper also examines the increased capital costs associated with privatisation. Private buyers tend to pay more than the value of an electricity plant is worth because of the potential for profits. In order to achieve profitability these businesses are required to increase prices to achieve a competitive return. In this way further costs are passed onto consumers.