Power games in the electricity industry
This story starts with a tax and the fact that power companies have been allowed to invoice you for it, even though they do not necessarily pay it. It is a story, largely untold, about why power prices are still high despite the axing of the carbon tax – certainly much higher than they were five years ago.
Energy analyst Bruce Mountain uncovered this tax issue when he realised the South Australian Power Networks (SAPN) had been allowed by the regulator to factor $414 million of company taxes into its pricing structures for 2011- 2015.
This seemed at odds with the fact that SAPN’s financial documents disclosed no tax paid, instead reportinga $4.2 million tax credit for 2011 to 2013.
For Mountain, an engineer, chartered accountant and economist with more than two decades’ experience in advising governments, regulators and companies on energy policy, this raises an intriguing question.
He posed the question in a presentation to the Australian Energy Regulator (AER): “So, how much tax has SAPN actually paid, and how does this compare to what it has been allowed to recover from electricity users?”
It’s a question that SAPN itself cannot answer. Spokesman Paul Roberts says: “As a partnership, SAPN does not have a corporate tax liability. That’s a matter for the partners.”
So, Mountain dug a little deeper. The SAPN is 51 per cent owned by two companies that both belong to the Cheung Kong Group of companies. Owned by a Hong Kong-based billionaire, these companies are conveniently incorporated in tax haven, the Bahamas.
The remaining 49 per cent is owned by Spark Infrastructure, which also has an interest in Victoria Power Networks. Due to a variety of factors, including accelerated depreciation and losses, Spark is also not currently paying tax on income from its SAPN assets.
It would seem the $414 million that SAPN is allowed by the Australian Energy Regulator to charge customers to cover its income tax bill from 2011 to 2015 may be providing a windfall gain to shareholders at consumers’ expense. “I think there has to be explanation for any sizeable difference between what consumers are paying and what the Tax Office is receiving,” says Mountain.
The tax issue is particularly interesting considering another of Mountain’s findings. His research suggests that SAPN is generating much higher profit per connection from its customers than the United Kingdom Power Networks, also part-owned by the Cheung Kong Group.
Mountain calculates, in a submission to a senate committee, that SAPN had pre-tax profits for 2012-13 of $381 per connection, compared with $102 per connection for UK Power Networks.
The SAPN does have a response to this claim. When Mountain first raised the comparison, it objected. Then it commissioned its own research from economic consultant HoustonKemp in an apparent bid to debunk Mountain’s findings.
Roberts won’t release that report but says it shows, essentially, that Mountain is comparing apples and oranges and that his findings would be “misleading to the average residential customer”.
Mountain stands by his figures, which he says apply to all connections – not just residential – and urges SAPN to release the HoustonKemp report.
The sensitivity around this shows what a hot-button issue power pricing is in Australia.
Now that the carbon tax is gone, attention is falling on other factors pushing up power prices, including the role of the AER in approving pricing regimens and whether the networks that generate and distribute power have been inflating their costs, resulting in overcharging of customers.
A spokeswoman for the regulator confirms the tax allowance it factors in to its calculation of power prices has nothing to do with the networks’ actual tax bill.
“An allowance for tax is set consistent with tax law and applies the statutory income tax rate of 30 per cent to estimate the tax allowance,” she says. “Tax consolidation laws may permit some businesses to average tax liabilities across company structures. Consistent with setting tax in accordance with the statutory rate, we do not take account of these more complex tax structures in the revenue determinations of individual businesses.”
This is part of a “benchmarking” approach taken by the AER that also applies to other costs incurred by network companies, such as operating and capital costs. Essentially, the AER works out what would be reasonable costs for a hypothetical network to incur, adapts these to the size of the actual networks and allows them to be passed on to customers. It does not reflect their actual costs.
The rationale for such an approach is that it promotes efficiency by giving networks an incentive to perform better than the benchmark.
It’s hard to see, though, why this reasoning should apply to the calculation of tax expenses, unless tax minimisation is viewed as a mark of efficiency, which would be a peculiar argument from a public policy perspective.
Even more bizarre is that the state government-owned networks, which are not required to pay income tax to the Commonwealth government, are still able to factor the tax allowance, calculated at the 30 per cent rate, into their pricing structures.
The taxation anomaly that has been identified by Mountain has also been raised by agricultural groups, which are heavy energy users, in a submission to the senate inquiry. After campaigning for the removal of the carbon tax, these groups, led by the National Irrigators’ Council, now acknowledge that other factors have had an even bigger influence on rising power prices.
The steep growth in electricity prices in recent years played right into the Coalition’s political narrative about the carbon tax. Remember it was going to push the price of a Sunday roast to $100 and leave pensioners struggling to pay their bills?
That latter claim was aired in parliament in October 2012, when Tony Abbott brandishing a bill from an 82-year-old pensioner, claimed the $800 increase in one bill was 70 per cent due to the carbon tax.
In fact, the carbon tax was only ever responsible for an increase of about 9 per cent in power prices, so its removal has not reversed recent price rises, with electricity bills almost doubling in some states in the past five years.
The bigger story is one that was well charted by journalist Jess Hill in The Monthly in July 2014. “Since 2009, the electricity networks that own and manage our ‘poles and wires’ have quietly spent $45 billion on the most expensive project this country has ever seen,” she wrote.
“Allowed to run virtually unchecked, they’ve spent vast sums on infrastructure we don’t need, and have charged it all to us, with an additional fee attached. The spending was approved by a federal regulator, and yet the federal government didn’t even note it until it was well under way.”
Essentially, growth in demand forecast by the power companies to justify charging consumers for spending on new poles and wires has never materialised.
The “gold-plating” argument goes that power networks had incentives to build extensive new infrastructure because the regulator allowed them to charge consumers for a much higher cost of capital than they actually incurred.
Even the state-owned network companies, in New South Wales and Queensland, were allowed to factor in to their pricing an interest rate on debt that would have been high in a commercial context and was well above the discounted rate that they were able to secure on their borrowings from state treasuries.
Privatisation is now off the table in Queensland, following the Liberal National Party’s shock election loss, but as the NSW government prepares to sell its networks, it is worth noting that, through higher power prices, consumers have subsidised the expansion of their asset base.
State governments have overseen the rises in power prices through their control of the Australian Energy Market Commission, which writes the rules the Australian Energy Regulator enforces.
The Energy Users Association of Australia, in its submission to the senate committee, recommends a regulatory overhaul to make the network companies accountable for their investment in assets that may never be needed.
“In essence, the key question being asked by the committee is – who should bear the costs of poor investment decisions?” the submission says.
“The current regulatory rules require consumers to bear those costs through excessive electricity prices. Consumers and other stakeholders believe that the costs should be borne by the businesses who made those decisions – as applies to all other sectors of the Australian economy.”
Yet there is little political will to tackle the factors that have been most significant in driving up power bills. And anyway, the government is preoccupied with another sort of power right now, as Abbott fights to keep his job. The Greens-instigated senate inquiry, which starts hearings this month, will air the arguments, but the Abbott government has shown no interest in changing its narrative that it has vanquished the carbon tax, relieving pressure on electricity prices.
Treasurer Joe Hockey once more invoked the spectre of the carbon tax as he responded this week to the Reserve Bank’s decision to cut interest rates by 25 basis points, to a record low of 2.25 per cent.
“By removing the price on carbon – by getting rid of the carbon tax, we have got electricity prices to come down, we’ve taken upward pressure on inflation out of the equation and we are actually now giving people real relief in their household bills,” Hockey said on Tuesday.
If the government were genuine about reducing power prices, it would turn its attention to the regulatory anomalies that have really pushed them higher.
This article was first published in the print edition of The Saturday Paper on Feb 7, 2015 as "Power games". Subscribe here.