Clear and Present Danger in energy - Governments must intervene when markets fail.

November 23, 2018

 

 

Recent commentary advanced by the extreme end of laissez-faire economics and the investment community about the risks associated with Government intervention in the national electricity market misses the point. Governments have a duty to the Australian public to intervene in markets where there is a clear case of market failure and associated consumer detriment. This is the case for both the national electricity market and Australia’s banking market.

 

We note the comments made by big business and the investment community about the risks associated with the Government’s plan to force large energy companies to divest electricity assets where a strong public-good case exists to do so.

 

The proposal has brought criticisms from the same old laissez-faire economists who argue that governments should not intervene in the operation of markets as it risks future investment in electricity supply.

 

These commentators argue that allowing markets to operate freely brings strong returns for all of us in terms of our superannuation.

 

Peter Strong, CEO of COSBOA, stated, "these old school economists will sprout ‘let the market decide’ when they should be saying ‘how do we make sure the market can decide’".

“But what is the point of getting more money from super if we have to pay more than we should for electricity in the many years leading up to our retirement”, said COSBOA CEO Peter Strong.

 

“It is astonishing that Australians, who are living in a country with the most abundant energy resources in the world, are now paying the highest prices in the world for electricity – and small business is bearing the brunt of this cost, which also impacts on their employees and their customers. Clearly the market has failed”, said Mr Strong. 

 

Recent comprehensive work by the ACCC suggests that much of this failure can be put down to undue concentration of market power.

 

As a result, Australia is now at risk from decisions made by a small number of energy executives who can unilaterally make decisions to decommission energy generation assets to maximise profits, thereby throttling electricity supply and increasing prices to all consumers (big business, small business and households).

 

This is a familiar scenario for small business people.

 

The problems that have been uncovered by the Hayne Royal Commission show what happens when the leaders of a small number of businesses with substantial market power fail to balance shareholder interests with consumer interests – and indeed the interests of all Australians.

“The current failure in the electricity market represents a clear and present danger to all Australians and the Australian Government therefore has an absolute obligation to intervene”, said Mr Strong.

 

Sure, it will create some risks for shareholder returns and these risks should be minimised by the Government making careful and considered decisions about the nature of the intervention.

But to not intervene in a crucial market with such an obvious market failure represents a far greater risk to all Australians.

 

“Given that electricity is a major input cost for Australian households and businesses, any failure by the Australian Government to intervene represents a far greater risk to the future economic well-being of all Australians than a possible small decrease in superannuation returns for a few years”, concluded Mr Strong.

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