One Australian expert suggests radical reforms are needed in Australia’s energy regulatory system to cut electricity and gas bills for consumers.

Professor Paul Kerin form the University of Adleaide’s School of Economics has identified major problems in Australia’s power regulatory systems in an article for the Australian Competition and Consumer Commission’s (ACCC’s) journal Network.

“The issue of why electricity and gas prices are too high is always of critical importance to the general public, especially to those doing it tough on a tight budget,” Professor Kerin says.

“People often wonder why the costs keep spiralling upwards year on year. This article identifies the most important reason for overly high costs – regulators use something called ‘Regulated Asset Bases’ to set their prices.

“A Regulated Asset Base is the value assigned to the assets of a regulated business. Regulators use this value to set maximum revenue allowances.

“About 70 per cent of the ‘costs’ that regulators use to set maximum revenue allowances are directly driven by this value,” Professor Kerin said.

“In competitive markets, prices are determined by demand and supply; past investments made by suppliers are irrelevant to price determination. Yet the Regulated Asset Base approach makes past investments the central driver of prices. In competitive markets, if suppliers invest on the expectation of high demand that does not eventuate, they bear the cost – not consumers. In regulated industries, consumers bear the entire cost of demand shortfalls.”

Professor Kerin recommends four major reforms, including the elimination of Regulated Asset Bases and the introduction of market-based mechanisms to set network capacity and usage prices.

“Market-based mechanisms will ultimately lead to more efficient outcomes for the community. By using a market-based approach to regulation, we will see resources properly allocated, costs minimised, and productivity growth maximised.

“The kinds of market-based mechanisms being proposed here would include using energy capacity auctions and secondary markets to enable capacity rights to be traded. These mechanisms are used widely overseas. In energy markets, the prices at which these rights are traded would provide hard evidence on the need for further capacity, and result in much more efficient investment,” Professor Kerin says.