The Great Energy Rip Off and What to Do About It

The Great Energy Rip Off and What to Do About It
by Michael Blockey

The rich have myriad ways of extracting money from the poor and middle class. The most common method is to defraud us. The Big Four banks have become experts in doing so. Interestingly, there are another Big Four that have been quietly fleecing us. I refer here to the electricity retailing industry. This rort earned the Big Four energy retailers, AGL, GDF Suez, Energy Australia and Origin, $7.7 billion in profit and cost us $85 billion?

This scam is called gold plating. The Australia Institute, and then a Senate Inquiry initiated by the Australian Greens, thoroughly investigated it and judged it to be a rort. What follows is my understanding of their findings.

Our power bill is in two parts: the cost of the electricity we use and the network costs, namely the cost of the 'poles and wires' in the distribution system. The Big Four energy retailers are required by law to ensure the network is expanded in response to the future demand for electricity. From 1980 to 2007, power bills increased at the same rate as the cost of living. Over that time, the retailers slowly expanded the network and, as a result, the network cost of our power bills gradually rose (Figure 1).

From 2007 to 2012, however, there was a doubling of our power bills. Why? Simply, because the Big Four made it far larger than it needed to be. In short, they ‘gold plated’ it.

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The retailers used the ‘system’ to pull off the rort.  What is the 'system'? The Australian Energy Regulator decides if expansion of the network is needed, and by how much. The Regulator also guarantees that the retailers will receive a 10% profit on their investment. Up until 2007, the Big Four had been gradually upgrading the network, spending about $4 billion every 5 years and earning about $400 million in profits

Other organisations were making big profits in the 2010s. It’s time, the Big Four figured, we made some serious money.  And they did by upgrading the network with an input of $70/80 billion over 5 years.

This began with each of the four retailers engaging consultants to provide an estimate of the future demand for electricity. The consultants knew demand was dropping (Figure 2). Yet they provided estimates that were wildly exaggerated. For example, in 2012 they forecast a large rise in demand when in 2012 it was already crashing.

They gave the Big Four exaggerated estimates because that’s what the retailers wanted!

Figure 2 for Michael Blockey energy article.jpg

The retailers then took their estimates to the Regulator pointing out that the network needed a very large expansion to cope with the high future demand. The Regulator then made an astounding decision. Like everyone in the industry, the Regulator knew that demand for power was falling, yet he approved the expansion. Retailers were given permission to spend $77 billion on the upgrade with an interest rate of 10% on their investment, namely $7.7 billion. 

Who are the villains in this story? Obviously the Big Fourwho concocted the scheme and the consultants who proffered overblown estimates. And the Regulator? Has he ever been brought to account? No!

And the losers?  The electricity consumers. We footed the bill for the $77 billion upgrade and the $7.7 billion profit the Regulator gave the retailers.

An energy analyst, Bruce Robertson, who lives near Taree in the Manning Valley, NSW, wondered why new poles and wires were crossing his valley. His enquiries showed that the Big Four were gold plating the network. He ‘blew the whistle’ on them.

We know from the Big Four banks that when a fraudulent practice is exposed they simply replace it with another. Their arrogance is breathtaking. The Big Four energy retailers are the same. After Robertson exposed the rort, they approached the Regulator with a proposal for another large upgrade to the network. They knew that the previous upgrade to the network was scarcely being used. But they had made such a huge profit from that they figured they would try it on again. The Regulator, knowing that Robertson had exposed the gold plating, said no!

I believe this gold plating will keep our power bills high for another 20 years. Just look at Figure 1. Gold plating doubled our power bills, from $350 in 2006 to $750 in 2012. Then the carbon tax saw power bills plateau from 2012 to 2014. From 2015, our power bills have continued their upward trajectory. 

The present high cost of electricity is not due to renewable or gas prices as the Coalition claims. It is due to massive gold plating, a rort that the 2007 Labor government allowed!

What should we do? Make the Big Four pay for their $84 billion sting on us. By their deeds they show they are thieves!  So no longer buy electricity from them.

Instead, explore the world of energy democracy! Members of local communities have established energy democracy co-operatives that help their members access clean, renewable energy they haven’t the capacity to generate themselves, and at the lowest possible cost. Funds are also provided for community projects, and above all, they strive to minimise emissions

If that sounds familiar to many of you, it is. In the Byron Shire, the first community-owned power company in Australia, Enova Energy, based at Byron Bay, is showing the way. Enova does all of the above. 

Enovans are people who are committed to the way we think about and use power by reducing our reliance on fossil fuels. The more people who choose green energy options, the more it sends a message to our politicians that we want a greener balance to energy generation.