Bloated power sector needs a regulatory jolt

Both Julia Gillard and Tony Abbott are holding out in the face of calls from the Greens leader Senator Christine Milne for an inquiry into energy prices.

Granted, we live in a world of too many inquiries – but this is why there should be a senate inquiry into the cost of power:

A week ago, buried in a newspaper article in the finance press, was an admission from the Australian Energy Market Operator (AEMO) that Ausgrid was probably overspending by $1 billion.

That admission is stonkering. If just one utility in one state is “gold-plating” to the tune of $1 billion in a two-year period, what is the sum of the overspending by the 13-odd network providers nationally?

With a touch of intrigue, AEMO only cited the example of “a $34 million substation in Charlestown in the NSW Hunter Valley”. It was an upgrade that just didn’t need to be done, conceded the market operator.

Readers new to this topic of “gold-plating” should be aware that, since electricity transmission and distribution companies get paid according to the size of their assets, they have a natural incentive to spend for the sake of spending. And that they do, at an enormous cost to consumers who face 18 per cent increases on their power bills again this year.

But what about the other $966 million in unnecessary spending? The Charlestown’s substation accounted for only $34 million of the $1 billion in “unnecessary spending”.

AEMO identified another project, a $40 million substation at Warringah in Sydney. But that was it.

These were examples, it told BusinessDay, “of typical indicative augmentations currently under consultation. We found that if you defer those projects until the next price reset period in two years’ time, then the revenue collected by the network business will be lower and the resulting charges for consumers will be lower. This analysis was then extrapolated over Ausgrid’s total augmentation program for the next two years which is worth around $1 billion.”

Extrapolation

Since it was indulging in a spot of extrapolation, might AEMO be willing to extrapolate nationally to come up with a figure for gold-plating Australia-wide?

The answer came back:

“To extrapolate across the whole national electricity market or Australia would mean you would need to seek detailed information from each business. The Regulatory Asset Base (RAB) of each business is different and the value of each business’ investment program is different. Without this detail the analysis won’t make a lot of sense.”

Over to the government and the opposition it is then; over to the Senate quite clearly.

Plating problem

AEMO says it, IPART (the independent pricing tribunal) says it, the AER (Australia Energy Regulator) says it. Gold-plating is a problem.

Network spending is the single biggest factor in bill rises and such rising prices in such a basic commodity are not only pushing low-income families and small businesses to the brink, they act as a drag on the entire economy.

With the Prime Minister blaming the states, the opposition blaming the carbon tax, the states blaming their Labor predecessors, and the Murdoch press and the two leading commercial TV networks engaged in some kind of business opportunity spruiking “One Big Switch” (for the Hong Kong power giant TRUenergy), the political will has not quite coalesced into concerted action – yet.

But it will. This matter is too big an issue to let pass.

According to AEMO, establishing with any precision the extent of waste and overspending is hard because there are differences in network reliability standards in each state. But it suggests that Victorians are better served than NSW and Queensland:

“For example Victoria already takes a probabilistic planning approach to network investment. Queensland and NSW use more of an engineering standards approach with fixed reliability criteria.”

Of course the problem is, under the industry structure of regulated returns on assets, that there is a flaw in the system which rewards overspending.

The solution must lie in the hands of the policy wonks but the problem has now been well and truly diagnosed.

A BusinessDay investigation into the NSW transmission provider Transgrid earlier this week showed clearly how the industry has confected forecasts of consumption to suit its network overspending.

Transgrid sent a detailed response to the piece, as published fully on this website. Its rebuttal it continually criticised the “misleading” figures from the lobby group, Manning Alliance, and its analysts Bruce Robertson.

BusinessDay has gone back to the claims and counterclaims, and found, beyond any doubt that it is Trangrid’s figures which are misleading.

It is these industry forecasts which have justified the excessive capital expenditure. They are not only wrong, but they are profusely and extravagantly wrong.

For example, in February 2012 Transgrid published its Stroud to Lansdowne Transmission line project options selection report in which it, along with Essential Energy, quoted a figure for summer maximum demand growth of 19 per cent over the next ten years on the mid north coast of NSW.

In its last update for the Tomago to Stroud line however, in May 2012, it published a figure of 35 per cent growth on the mid north coast in peak demand over the next 10 years.

But there is more, those figures compared with a number of 25 per cent on the website for Stroud to Landsdowne line.

Finally, the numbers contained in the July 2012 Annual Planning Report were for a 42 per cent increase. Four sets of numbers in a year, all vastly differing.

Surely they have set a new industry benchmark for misleading numbers.

O’Farrell’s dilemma

For its part, the NSW government of Barry O’Farrell can point the bone at its disgraceful and incompetent predecessors with full credibility. But it is now in a bind.

If it wants to privatise some of these utilities to patch up the state’s higgledy-piggledy finances and its neglected infrastructure it needs the problem fixed.

It needs an inquiry and it needs energy markets reform before it can get a decent price for its assets. Just look at TRUenergy, which just announced it had shelved its plans for a billion-dollar public float. It’s reason? An uncertain regulatory environment.