You would think that, given the media headlines and the politics of the cost of energy, Australia’s energy utilities might start to show some restraint when it came to proposed upgrades of their distribution networks.
Well, according to the Australian Energy Regulator, they haven’t. A series of draft determinations over the last two weeks from applications from gas network operators show that they wanted to spend more than twice as much as what the AER deems appropriate.
Gas is the sleeper in the current energy debate. Almost all the media and political focus has been on electricity prices – hence the opening of the Senate hearings in Sydney today. But gas will be punching above its weight when it comes to making a hole in household budgets.
The cost of gas infrastructure – mostly in the form of spending on pipelines, but also in rates of return and operational budgets – is one thing, but the cost of the fuel itself is expected to at least double, and possibly triple, once the giant LNG projects in Queensland begin production and export, and the domestic price surges to international parity – as it has done in Western Australia.
This week, however, the AER knocked back an application by Envestra to spend $765 million over the next five years on capital expenditure upgrading and expanding its network. The AER said only $315.4 million was necessary, the extra amount was neither “prudent” nor “efficient”.
It also took 20 per cent out of Envestra’s proposed operating expenditure, and took issue with the utility’s proposed rate of return, bumping it down to 7.16 per cent, compared with Envestra’s proposed 9.06 per cent. Its issue here was Envestra’s calculation of the “risk free” component.”
Another company, MultiNet, this week was told that its proposed capital expenditure was also more than double what the AER deemed appropriate – $375.3 million to $179.5 million.
Two weeks ago, the AER took a similarly tough line against APA GasNet, which wanted approval to spend $766 million on upgrades and extensions and an increase in the operational budget in the next five-year period (2013-17), and pass this cost on to consumers. That was 65 per cent above the $464 million that the AER deemed fair. The capex proposal of $394 million was also more than double what the AER deemed appropriate – $394 million versus $167 million.
A separate proposal from SP Ausnet was deemed not so outlandish, and only 22 per cent was subtracted from its capex and overall spending proposals.
The good news is that under the AER draft rulings, the bill for Multinet residential customers (who pay an average $1000 a year on gas) would likely fall $8 a year over the next five years, rather than rising $18 a year under Multinet’s proposals – remember, this is just the distribution component of the bill, which typically accounts for just over a third of residential bills, and about one-quarter of commercial bids.
Under the AER’s draft rulings, Envestra’s Victoria residential customers will rise $7 a year instead of the $57 annual rise proposed by Envestra. In the case of APA Gasnet, it will result in a fall of $6 rather than a rise of $4, and in the case of SP Ausnet it will fall by $9 per year on average, compared to SP AusNet’s proposed $13 per annum increase.
These graphs give some indication of the changes in bill trajectory.
Of course, gas consumers face even more significant rises from fuel costs – and the bad news is that the gas utilities will likely get their way in any case.
Like their electricity counterparts – they can simply regroup, shout very loudly before an appeal to the Australian Competition Authority, seek permission to take the AER around the back of the building and beat it up, and end up with only a minor compromise to what Professor Ross Garnaut and many others since have regarded as the “gold plating” of networks – be they electricity or gas.
Which is why the AER is so desperate for a change of rules. And why, hopefully, the Senate inquiry will achieve something useful.