Will They Deliver? Assessing the Proposed Reforms of the Western Australian Electricity Industry

Abstract

The Electricity Reform Task Force (ERTF) has recently released its blueprint for the future of the electricity industry in Western Australia. In general, the market structure proposed is appropriate, but with some caveats. Perhaps the most important issue affecting the future success of reforms to the industry is the Government imposed requirement that retail prices should not rise for smaller customers, which has lead the ERTF to incorporate Western Power's current uniform tariff into a price cap for retail services. If this price cap transpires to be 'too low' (below the competitive market price of electricity in at least some temporal and locational markets), then resource constraints are likely to ensue, jeopardising the future success of reforms. Importantly, as the paper shows, attempts by the ERTF to mitigate such resource constraints are unlikely to be successful, as are measures intended to mitigate residual market price volatility. This leaves WA without a safety net in the event that the price cap is too low. The ERTF believes that its price caps are not too low, but has provided little evidence to support this contention. More importantly perhaps, as the paper shows, price caps are neither necessary, nor the most efficient way to maintain low prices for residential consumers. There are also some concerns as to the likely effects of measures to mitigate market power, although auctions of capacity (with some caveats) should be sufficient to address any concerns which cannot be addressed with extant competition laws, some doubts about the validity of the ERTF's assertions that State Generation and State Retail must be separated to generate competition, and some questions about the appropriateness of the Government's proposals for enhancing the production of energy from sustainable sources.