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The crux of the problem is that Aurora / Hydro / Transend do not have cost minimisation as an objective. A fortune spent preparing reports explaining that money has been spent, but no attempt to minimise spending in the first place.

Taking the average of the past 4 financial years since Basslink became operational, average market electricity prices are as follows.

Qld = 4.30 cents per kWh

NSW = 4.58 cents per kWh

Vic = 4.49 cents per kWh

SA = 5.79 cents per kWh

Tas = 4.80 cents per kWh

They are the actual average prices over the past 4 years in the spot market and were sufficiently high in Tasmania to encourage two large scale private developers (one since bought out by Aurora) to enter (or propose to enter in the case of the Central Highlands wind farm) the market.

Given that private enterprise does things in order to make a profit, I think we can safely assume that these prices are not below the cost of EFFICIENT production.

Senior management of various privately owned energy companies have publicly put the cost of new gas-fired generation at around 3.7 cents per kWh. Allowing for gas transmission across Bass Strait (0.7 cents) and the smaller scale of a Tasmanian plant, it puts the cost, including a reasonable profit, somewhere around the average price over the past 4 years.

So there is little doubt as to the value of electricity as a bulk commodity. 4.8 cents on average. Less for off-peak consumption, more for peak consumption and slightly less for baseload consumption (ie major industry).

There’s no need for anyone to work that out, the market has clearly told us what the value is.

The next part is simply business 101. If you can produce and sell a commodity at the prevailing price whilst making a profit then it is worthwhile for you to be involved in that market as a supplier. On the other hand, if you can not operate profitably then you shouldn’t be in that business.

No rocket science there, just business 101 as it applies to everything from mining iron ore to growing apples. Either you produce at a cost below the prevailing price and thus make a profit, or lose money.

If someone grows apples with a cost that is below the market price then they will make a profit by doing so. If their costs are above the market price then either they accept the loss or they won’t be selling too many apples. Nobody’s going to bail out poor a business decision to engage in an activity that is not profitable.

If Hydro, Aurora or anyone else can not operate profitably under prevailing market conditions then that is not the fault of consumers whether they be Comalco, your local fish & chip shop or ordinary householders. Electricity has a market value that consumers, large and small alike, can reasonably expect to pay.

What it actually costs any particular business to produce a commodity is relevant only to them and their shareholders. Consumers pay the market price, not what it costs one particular business to produce.

Hydro / Aurora may indeed have a captive market in the short term. But in the long term, either they are competitive in the market or some other producer will take their place, leaving shareholders (ie Tasmanian taxpayers) owning what will then be a seriously devalued investment.

I note that a private wind farm developer plans to supply up to 8% of the total Tasmanian electricity market. I note also that another private developer (since bought out by Aurora) planned to supply around 15% of the market. Prices would thus seem to be at a level where those who produce efficiently, and that is the key - producing efficiently, can make a profit.

The real question is not what bulk electricity is worth, the market has already told us that.

The question is why off-peak electricity, worth no more than 4 cents in bulk, costs more than double that by the time it gets to my house? It’s not as though there are actually any significant transmission or distribution costs in the middle of the night when demand is low.

Now consider that if the cost of off-peak supply is exessive, for whatever reason, then it follows that the cost of supply under the other tariffs also likely isn’t right since it is unlikely that only one tariff, which represents a minority of consumption, would be priced excessively.

In short, Hydro and Aurora should be operating efficiently so as to not lose money in the first place, rather than spending their time working out how to pass those losses onto consumers regardless of size.

These observations were first made as comment, HERE

Electricity rise spurs rebate bid

Nick Clark

The state government is finalising details of its electricity rebate as households brace for a $120 a year price jump.

...

Energy Users Association of Australia executive director Roman Domanski said the price rises related to increased network charges, particularly by Transend.

“Transend is a high-cost and extremely inefficient business that employs significantly more eople [250] than when it was part of the HEC,” he said.

“Consumers are paying for that inefficiency.”

Meanwhile, several years ago ...

MARIA RAE

November 29, 2008 12:00am

TASMANIANS will be hit with at least $30 more on their annual power bills next year, and another $60 after that.

Electricity transmission company Transend is raising prices to pay for infrastructure upgrades.

Residential customers will pay an extra $32 next year, followed by increases of $12 each year until 2014.

Transend managing director Richard Bevan said the increase was because the Australian Energy Regulator had cut back on the funds allowed for equipment replacement.

“The AER also did not allow all of the requested operational expenditure, with a 7 per cent cut over the five-year period,” he said.

Mr Bevan said the extra costs were necessary to keep investing in the network.

“Everything’s getting more expensive,” he said.

And he said neglecting upgrades and renewal would result in the transmission network looking like the state’s railway system—dated and dilapidated.

One example he gave was the recent replacement of transformers in Launceston that were from 1936.

Mr Bevan said the costs related to Transend’s service comprised just 12 per cent of the household electricity bill.

The AER has handed down its draft decision on the economic regulation of the power company between 2009 and 2014.

AER chairman Steve Edwell said the draft decision provided for network investment worth $615 million during the next six years.

“While the AER has accepted the need for most of the work proposed by Transend, it has not accepted Transend’s forecasts of its costs,” Mr Edwell said.

The AER found the major drivers of Transend’s increased costs were continuing replacement of ageing assets, more expensive materials and skyrocketing labour costs.

There will be a conference on the draft decision on December 10 at the Grand Chancellor Hotel in Hobart, for the AER to receive verbal submissions.

Interested parties can make written submissions on the issues and the consultants’ reports by February 18.

A final decision is expected by April. The increased prices take effect in July.