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Unwise decisions made when privatising our electricity grids, permitting companies to spend excessively on the networks’ ‘poles and wires’ and pass on the cost to consumers, are the driving force behind our exorbitant power bills. By Charis Palmer.

Behind our high power prices

Billed as “New South Wales’ first six-star green star building”, Doltone House Darling Island was perhaps a fitting venue for Malcolm Turnbull to publicly excoriate the energy policy of the government he once led. Addressing the NSW Smart Energy Summit, the former prime minister lamented the “vacuum of energy policy at a national level”, although he wasn’t entirely pessimistic. “There’s never been a more exciting time,” the former PM said, speaking of making a living in the energy sector. He’s still “passionate” about energy, he added, seemingly with little irony. 

Meanwhile, Prime Minister Scott Morrison was busy trying to persuade his party room of the need to sharpen the government’s “big stick” measures to scare energy companies into cutting electricity prices.

The policy vacuum looks set to continue, after the government was forced to water down its plan to force divestment by energy companies caught gaming the market or failing to pass on cost savings. The senate is yet to debate the new plan, widely panned by business and the Opposition, which would see an energy company broken up only after a recommendation by the competition regulator. Under the original plan, this decisive power would have rested with the treasurer.

Turnbull’s latest interjection may have brought public attention back to the country’s politically toxic energy debate. But it’s the Council of Australian Governments (COAG) Energy Council meeting later this month that should be the focus of consumers’ concerns, says Tony Wood, energy program director at policy think tank the Grattan Institute. In March, Wood released a research paper showing state governments have spent $20 billion more than they needed to in “gold-plating” the grid, an investment that’s adding up to $400 to consumer’s yearly power bills in NSW, Queensland and Tasmania.

At COAG, the oft-divided state and federal energy ministers will consider the energy market operator’s plan to connect the rush of renewable energy to Australia’s power grid. The choices made at COAG could have profound implications for the reliability and cost of energy in Australia. Get it wrong and the country could end up with consumers paying more for electricity for decades to come. “Instead of gold-plating the networks, we’ll end up gold-plating the batteries,” says Wood.

Already, network costs make up more than 40 per cent of your energy bill. This is usually noted as your “supply charge” on your bill – including costs of transmission networks and distribution, the “poles and wires”. The companies that own the networks, including TransGrid and Ausgrid, are regulated monopolies.

It’s often forgotten, says Australian Competition and Consumer Commission (ACCC) chairman Rod Sims, that we’re all paying high electricity prices today because of poor decisions made about these networks years ago, both regulatory and political, after energy was privatised. “We’ve had large mistakes in poles and wires,” Sims recently told a conference in Sydney. “One mistake was we relaxed the regulation on monopolies, so it allowed excessive spending.”

The problem was compounded by political decisions in Queensland and NSW. Spooked by a series of blackouts in 2004 and 2005, politicians in both states imposed higher reliability standards on the networks. “The combination of higher [reliability] standards and inappropriate controls on monopoly spending meant that we had a blowout of network costs,” said Sims. “That is the biggest driver of why we have high electricity prices, higher than they should be.”

Some argue we’re still paying more than we should for electricity because of what the Australian Energy Regulator (AER) has agreed to allow network owners to charge consumers over the years. The AER’s role is to ensure “consumers pay no more than necessary for the safe and reliable delivery of electricity and gas services”. But Tony Wood says the regulator allowed excessively generous rates of return in the past. “Overwhelmingly, for the last decade, the businesses have known more about what’s going on than the regulator,” he explains, “so it was very hard for the regulator to push back and say ‘no’.”

Agreements between network owners and the AER are set in five-year periods. Previously these negotiations themselves have stretched out for years, though, often contested in court. For example, the AER still has not finalised its decision on the revenue Ausgrid will be allowed to recover across 2014-19, a period with just months left to run.

In the past, network owners could also take the regulator to the Australian Competition Tribunal to challenge its decisions. The Turnbull government legislated against such action in October 2017. It said if the AER’s decisions had been upheld without challenge, consumers would have saved a collective $6.5 billion on their energy bills.

Wood argues that given there is some risk faced by businesses in the energy sector, the AER’s current regulated rate of return is getting “far closer to where it should be”. Others strongly disagree. “It’s absurd that such assets should be in the private sector enjoying private rates of return,” says public policy expert Ian McAuley. “They are risk-free natural monopolies, and it can be argued that any rate of return higher than the government long-term bond rate is too high.”

Having been a member of the consumer reference group with which the AER consults when undertaking its rate-of-return review, McAuley is close to its regulatory process. He says consumers are being shortchanged to the tune of at least $740 million in higher electricity bills, because networks are being allowed a premium for risk that’s based on a flawed mathematical formula.

McAuley says the average consumer electricity bill would fall by 15 per cent if the AER set the return for network owners on the long-term bond rate of 2.7 per cent. But this scenario would be unthinkable for the network owners. Already the Electrical Trades Union says the AER’s draft decision on Ausgrid’s potential revenues would cut 400 to 500 jobs if it goes ahead.

Energy economist Bruce Mountain agrees that the regulator has set a generous rate of return and continues to do so. Particularly if you look at the rate at which network owners are actually able to borrow money. “That gap used to be higher in the past – it’s narrowed a bit,” Mountain concedes, “but by international comparison it’s still generous.”

Mountain believes that in order to bring down electricity prices, some states will need to write down the value of electricity assets that are still publicly owned. For the ones that have been privatised, though, the horse has already bolted. “Part of the problem is when the government privatised the networks back in the 1990s, they revalued the assets before they sold them,” he explains. These assets, with their values inflated by governments, play into the issue of how much network owners are able to charge.

“The government basically took the money when they sold it and now they’re claiming it back. I think the shareholders would rightly say, ‘You were quite happy to take it’,” says Mountain. “Of course, all of this was hidden, no one spoke or wrote about the asset write-up. This was not in the public domain, it was all well and truly hidden in the regulatory detail.”

The ACCC has recommended the NSW, Queensland and Tasmanian governments voluntarily write down the paper value of their assets to account for overinvestment in networks. It estimates this would save electricity customers in those states at least $100 a year. It also recommended the privatised networks in NSW be forced to pay a rebate to consumers to offset the impact of overinvestment.

Wood says federal Labor’s new energy policy to provide subsidies for network infrastructure, such as interconnectors, could prove the next regulatory challenge. “They’re concerned the regulated asset test may not work in all cases so they’re still puzzling on that,” he says. “But we will need more transmission to deal with a lot of the additional generation we’re talking about.”

Similar challenges are afoot for the proposed $4.5 billion government-owned Snowy Hydro 2.0 project. In NSW, where the project will be built, TransGrid owns the transmission lines. Its estimates put the cost of upgrades needed for Snowy 2.0’s power to be sent to Victoria and NSW at about $2 billion. TransGrid will need to persuade the AER of the benefits of the project, in order to charge consumers a higher rate and cover the cost of this investment.

But Wood says Snowy Hydro, which is owned by the government, is now arguing that TransGrid shouldn’t have to go through this process. “You could argue this [$2 billion upgrade] shouldn’t be a regulated monopoly asset at all. It should just be directly part of the business case and paid for by Snowy Hydro, not by the consumers of NSW though the transmission regulator structure,” Wood says.

“What we don’t want is regulated monopolies building additional transmission lines which turn out to be unnecessary … If it’s a regulated asset then the consumers pay for it forever, but if it’s done as a commercial decision then the shareholders end up taking the risk. The consumers still pay for it, but only if they use it.”

 

This is the third in a series of articles explaining Australia’s energy policy mess. 

This article was first published in the print edition of The Saturday Paper on Dec 8, 2018 as "Pole dunces". Subscribe here.

Charis Palmer
is the editor of Australian Energy Daily and the publisher of Schwartz Media’s new business publishing arm, Schwartz Pro.