Care for an insight into the real impetus behind spiralling in electricity prices?
Look no further than what the independent regulatory agencies are saying.
The Australian Energy Regulator (AER), the Australian Energy Markets Commission (AEMC) and the Independent Pricing and Regulatory Tribunal (IPART) have all suggested that rising prices are due to overspending on the part of the network providers.
It is also likely that the government will exploit this surging capital expenditure, or “gold-plating” of the networks, as it fattens up its electricity cash-cow Transgrid for privatisation.
Responding to questions over the prospects for a privatisation of the state’s electricity assets, NSW Treasurer Mike Baird declined to rule out a sale of the transmission network although he indicated that the government would only sell its distribution assets after the next election.
“The Premier (Barry O’Farrell) has stated he would seek a mandate prior to any revision to Government ownership of the distribution businesses (the ‘poles and wires’),” said the Treasurer.
The distribution assets are Essential Energy, Ausgrid and Endeavour Energy. The really big poles and wires – the giant coathangers, that is – belong to the transmission provider Transgrid. And that seems to be up for auction.
Baird and O’Farrell need to tread a fine line. On the one side they are struggling to restore the state’s finances after a decade of lost government under the previous regime. And they have to do so without the blistering revenues of the boom years.
On the other hand, power prices are escalating so rapidly, and to such levels, that they will soon come under pressure from an increasingly angry electorate. “Bill shock” will be a big political issue in the next few months – although the state, paradoxically will make a nice return from the pain of consumers.
A line item in last week’s NSW budget showed an increase of $250 million in dividends from the state’s electricity transmission and distribution businesses.
This hefty 41 per cent increase in payments to Macquarie Street – up from $639 million to $901 million in only a year – comes at a time when electricity prices for consumers are spiralling, and ironically, when consumer demand is actually falling.
This is a massive impost on households and on business, and will even act as a drag on the whole economy.
Prices in NSW have risen 70 per cent over the past five years and are forecast to jump another 18 per cent in the new financial; from Sunday week that is. The carbon price will contribute to just 8 per cent of that, according to IPART.
So we have a situation where the more the network spends – it makes a regulated return – the higher its budget and the more revenue flows to government.
For its part, Transgrid bats off claims of “gold-plating” by saying that pricing is determined by independent parties and the network needs to be constantly upgraded. Both claims are true.
But it seems there is also truth to claims of “gold-plating”.
This is what the AER had to say in a review of the state electricity market:
“Energy network investment in the current five-year regulatory cycle is running at historically high levels – over $7 billion in electricity transmission, $35 billion in electricity distribution and $3 billion in gas distribution.
These forecasts represent an increase on investment in the previous regulatory periods of around 82 per cent in electricity transmission, 62 per cent in electricity distribution and 74 per cent in gas distribution (in real terms).”
Then the review goes to say the regulatory environment is flawed (the bold text is ours).
But the regulatory framework – the national energy rules that set out how the Australian Energy Regulator (AER) must regulate electricity and gas networks – has led to some price increases that are difficult to justify.”
“… While this approach has successfully increased network investment, it restricts the regulator from making holistic assessments of how much of that investment is efficient or necessary. This restriction has led to consumers paying more than necessary for a safe and reliable energy supply.”
Further evidence of gold-plating came from John Pierce, chairman of the Australian Energy Markets Commission (AEMC), who told the SMH earlier this month that the industry’s explanations for price hikes were unconvincing:
“We don’t find particularly convincing the explanations for the price increases that have been provided by either the regulator or by the industry,” said Pierce
Then there is the independent pricing regulator, IPART.
In a letter to the AEMC’s John Pierce last December, IPART chief executive James Cox said the current regulatory arrangements were putting upward pressure on network prices.
“(These arrangements) constrain the AER’s ability to apply what it considers to be the best estimate of the efficient operating and capital costs,
“(They) provide strong incentives for network business to invest capital in the network because the prescriptive requirements of the Rules may lead to excessive returns,”
Gold-plating that is. Cox went on to say that the rules allowed the network businesses to earn a return on all capital invested “regardless of efficiency and prudency, by requiring the AER to roll all capital expenditure into the asset base”.
This is a real tickler for the government. It would dearly love to ignore this chink in the regulatory framework, and its effect on prices, until it had fetched a handsome price for the state’s electricity silverware.
It would seem, though, that fulminating voters might disrupt that process first.
To its credit, the government is doing something about the network industry structure on the cost front. From July, common Chairman, Board and CEO will replace the three Chairs,
Boards and CEOs of Ausgrid, Endeavour Energy and Essential Energy.
There is $400 million in savings there. Further, the Treasurer told the SMH yesterday that there would be no increase in dividends “above currently budgeted levels” in its first term of government.
“The NSW Government recognises the burden increasing power bills are placing on families and will continue to take action to put downward pressure on electricity prices including targeted measures such as the increase to the Low Income Household Rebate,” said the Treasurer Mike Baird in a statement.
There was a sign of things to come though this week in federal parliament when independent MP Rob Oakeshott lambasted the state government for failing to cap prices as it had said it would.
The National Electricity Market, said Oakeshott, was the greatest market failure in Australia today, sending cost of living pressures through the roof.
He has a point.
Separately, click here to see TransGrid’s detailed response to transmission questions.