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Why consumers are paying twice what they should for grid connection

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A new analysis from energy expert and consumer expert Hugh Grant suggests that some Australian network operators are being given a leave pass by the regulators to recoup more than twice as much money from consumers as they should.

Grant, executive director of ResponseAbility and a member of the Australian Energy Regulator’s Consumer Challenge Panel made a presentation to an AER hearing on the Queensland government owned transmission group PowerLink which has some damming graphs.

The first confirms how the state government has been using Powerlink – and other state-owned networks – as a form of taxation or revenue earner from the consumer for much of the past decade.

For an investment of just $401 million, the government has accrued total returns of $9.4 billion – that is more than 23 times the equity investment.

powerlink returns

To put this in context, here is a comparison with Powerlink’s returns with some of the top 50 companies on the Australian Stock Exchange.

“No other ASX50 stock comes close to Powerlink’s returns,” Grant says. And this is despite the fact that Powerlink is the “most inefficient transmission network” in Australia.

powerlink returns vs asx

How is this happening? Grant has several reasons.

Firtly, the AER is setting returns based on a “theoretical” level of equity investment that is four times Powerlink’s actual investment. That grossly inflates the amount of money it is allowed to claw back from consumers.

Grant says the resulting network asset bases, and the huge costs to consumers, is a result of an industry engineering culture biased toward making grids bigger for the sake of it, knowing that the consumer has to pay.

He notes an independent review for the Queensland government found that this culture had helped expand the network infrastructure and enlarge the capital base of the network providers.

It was “a deficient commercial model in that there was no rigorous capital rationing by the Government, as shareholder and provider of capital, to guide investment decisions” and the regulatory model does not allow the AER to drive the networks to deliver efficient capital and operating programs.”

When the AER did try and cut down on return on equity allowances, it led to a series of assertions from the networks, including that it would make them unattractive to equity investors and significantly increase their financing risks.

But the $10.3 billion sale of Powerlink’s equivalent in NSW, Transgrid – at a hefty price of 1.65 times the regulated asset base “makes a mockery of those claims”, Grant says.

Indeed, the networks feel protected by the regulators that are supposed to be policing them.

A presentation by Spark Infrastructure this week, during an international investor roadshow, underlines how networks believe they have the regulators on their side, particularly the Australian Energy Markets Commission, which sets the rules that AER then interprets.

Spark says “regulatory policy in Australia continues to protect efficient sunk investments”, and goes on to add that the AEMC “has consistently rejected proposed optimisation of RAB.” In other words, the AEMC – with the support of the networks lobby – will resist any proposals to write down the value of their assets.

Grant’s submission illustrates how the networks have been allowed to grow their asset base, and their network capacity, well beyond what was needed.

This graph illustrates a sudden burst in “replacement capex” in 2007 – justified by Powerlink at the time by a “once in a lifetime” need to boost investment. Yet, when it came round to doing the subsequent rulings, the increased expenditure was allowed to be considered “business as usual.”

powerlink repex

Indeed, it is the six of the regulated asset base that causes most problems. The networks, focusing entirely on short term outcomes, have been allowed to grow the RAB virtually unchecked, Grant argues.

He uses this graph below to show that Powerlink’s RAB has been allowed to grow four-fold, compared to around 1.7 times for the now privately owned SP Ausnet. Even though this RAB was allowed to grow based on demand forecasts that have proved to be dramatically wrong, returns on “past investments” will continue to provide 71 per cent of revenues in the next regulatory period.

powerlink vs sp ausnet

On top of this, Powerlink is proposing a 68 per cent increase in depreciation allowance, compared to the current period, apparently on the basis that its assets will be “shorter lived”. In effect, it is seeking to accelerate its returns now for fear that alternative technologies will price it out of the business.

Grant says Powerlink will achieve a total of around $300 million in ‘windfall gains’ over the current period, due to its revenue allowances being based on capex that it did not require.”

Grant provides numerous other illustrations of how the AER, using the rules set by the AEMC, has allowed much more spending than allowed – the lack of benchmarking, uncontrolled spending on IT and “opex” – operational expenditure – and hardware and software.

Grant is also critical of the AER’s allowance of $590 million “contingency” spending, which  he says will lift “capex” by 60 per cent.

“The AER needs to demonstrate that it is in consumers’ long-term interests for such a high level of contingent projects to be determined outside of the revenue determination process,” he says.

Overall, Grant estimates that consumers in Powerlink’s area – Queensland – are probably paying two to three times the transmission costs that they need to.

And this gets to the heart of the issue. The networks lobby is pushing hard – not just to cut payments to solar households and scrap the renewable energy target – but to protect the revenues of its state and privately owned members.

But if Grant’s observations are right, the whole system is a massive rort to boost the coffers of state revenues and the returns to private investors. Consumers pay, and as battery storage and solar technology costs fall, they will have very real alternatives, even to by-pass the grid.

The networks, however, argue that the grid is paramount. It should be, but not at any price. It should be the cheapest battery of all, but as we will see in our story on One Step Off The Grid tomorrow, they are rapidly pricing themselves out of the market. And they will have no-one to blame but themselves.

  

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  • suthnsun

    On it goes.. keep it up Giles!!

  • Jon

    This is exactly why Governments shouldn’t run businesses. Its effectively self regulation!

    • Jonathan Prendergast

      But then, the ACT has the cheapest electricity in the nation, with 50% government owned distribution and retail.

      At least in the State Gov owned situation, over charging sees the money kept by the citizens and customers

    • nakedChimp

      No, this is why monopolies need scrutiny and a legal framework with a sharp independent body that overlooks it and the revenue out of the monopoly not going into anything but the establishing and maintenance of said monopoly service, with no profits to be won out of it for anyone (not even the social needy).
      Then you get a reasonable outcome.

    • Barri Mundee

      Private monopolies are often worse than public monopolies in their record in gouging consumers.
      .

    • JeffJL

      Or perhaps a reason for businesses not to be in the essential services game.

      Essential services should be just that, services not profit making enterprises.

  • Reality Bites

    Bit slow on the uptake here, it is now 2016 and this has been going on since the establishment of the AER in 2005. Now I wonder what side of politics has been in charge in QLD for most of that period?! The successive Rudd/Gillard/Rudd governments were also asleep at the power wheel from 2007 to 2013.

    • Jonathan Prendergast

      Kevin Rudd actually said publically that States were using the networks as a form of additonal taxation. But agree they could have done more. Martin Ferguson was energy minister at the time and he seemed very cosy with industry.

      I don’t think Hugh, Giles or this article are slow on the uptake, as this article shows very new analysis and insights

  • phred01

    the only reason is profit…….what the market will bear

    • trackdaze

      I thinks they’ve overshot profit and gone straight to unbearable. Hence the talk of exit.

      I regard it as a productivity tax. One that ensures qld businesses are at a disadvantage to other states or; international competitors.

  • Math Geurts

    “why consumers are paying twice what they should for grid connection”
    – As far as I understand the issue is supposed to be about “some operators” but in fact specially Powerlink.

    “the state government has been using Powerlink – and other state-owned networks – as a form of taxation or revenue earner from the consumer for much of the past decade”
    – So, as long as this network is state-owned, for the consumer most propably the result of lower grid rates will be higher taxes, or less schools.

  • Trev from the Bush

    its a class action waiting to happen, not only for Powerlink but for all network owners, it is so complicated no one (except Hugh Grant) can understand the whole process. If the public were billed each month like their credit cards and saw these charges, they would be marching in the streets.
    Look what happened a couple of years ago when the NSW community stopped the expansion of the HV grid which was said to be be “essential” for the stability of the grid. Its a blatent rip off, the government likes it and the privately owned companies like it even better.
    Many companies that deal with network owners don’t want to say anything as they must keep working with the monopoly owner. What happens when you upset a monopoly, you get killed.

    • Tony Ellem

      My Opinion about Powerlink. – Want to talk about wastage, ask Powerlink about the approx $1,000,000 spent on concrete for one (1) Tower (yes that is right one (1) tower on the Southpine – Sandgate 275kV upgrade around 2007 -2009. Also it is interesting to note about the replacement Capex in 2007, It is my opinion that I believe the current Powerlink CEO was in charge of the AER reset around that time, Powerlink Board and Management cringe at the site of my name as I have been trying to get the Chairperson and CEO of Powerlink to investigate criminal activity with regards to 1. The Secretary of Powerlink (he was the manager of the legal team at the time) misleading the CMC in 2012 in a Public Interest Disclosure, 2. Powerlink HR managers manufacturing evidence to give a final warning to yours truly in late 2012, 3. A Livingstones Australia investigation Report (FEb 2012) in relation to a Project Management position advertised in 2011 was a Fraudulent Cover up of which the Content of the investigation report was never and I mean never looked at despite to this day being made aware of it on at least 15 occasions. The icing on the cake though is that Powerlink management have conspired with the managing partner of a Top Tier Law Firm and he has sent me a Fraudulent letter (July 2014) stating Powerlink have thoroughly investigated your complaints. It is also my opinion that Fraud is involved in the Projects that Powerlink were involved in in the Surat basin regarding the Coal Seam Gas industry. Several noisy/vocal land holders got paid well above what they should have in compensation and the money was hidden in the Capital Projects under various headings.

  • Chris Baker

    Wow, what a stunning exposure of incompetence of AER and AEMC. What can we do about this? Who is it that’s on the board of these organisations? Are they stacked with industry representatives who have vested interest, or perhaps just encultured to a way of doing things that does not represent the interest of consumers. Is there any consumer representation in AEMC management?
    When I first joined The Institution of Engineers back in the 70’s the key tenet of the code of ethics was that a professional engineer’s first allegiance was to the community — not to employer or industry group. Such an intention is now nowhere to be seen the code of ethics, and clearly in practise is all but extinct.
    For such blatant misuse of public funds to go on so extensively suggests any sense of ethical behaviour is broadly absent in the leadership of the many organisations involved.

    Thanks Giles and Hugh for explaining the key issues so well.

    • Jonathan Prendergast

      I concur with your comments Chris. I too remember being told as an engineering graduate how Doctors must work to serve their patients, lawyers their clients and engineers the community.

      Well said.

    • Phil

      Chris , l can relate to your comments well.

      I am living in the 70’s where ethics , principles and professionalism are the priority still.

      People tell me i am a fossil from yesteryear who has no place in the modern MBA business model . All that matters is “THE DEAL” and the “EXIT STRATEGY” if it fails.

      Take just one example …….what percentage of toll roads in Australia have gone into receivership based on totally inaccurate useage figures as the business model.

      The deal is building it , that’s where the money is made , who cares if it’s a success or not. This is the new normal.

      What is happening however is that due the costs of essential services rising far beyond inflation that communities are now pushing back and looking at shared resources and divesting of the government and private sector entirely.

  • Math Geurts

    As long as this network is state-owned, for the consumer most propably the result of lower grid rates will be higher taxes or p.e. less schools. What do you prefer?

    • Chris Baker

      I doubt it is as simple as lower power charges equals less schools. I suggest that the portion that ends up in the state coffers is just a small proportion of the profligate waste of community assets that is demonstrated here. If the electricity charges were legitimate, and therefore lower, that saving would be available for businesses and individuals to spend on education or whatever is important. If these electricity businesses remained community owned, as they once were, and tasked with providing a good service, I think we would be far better served than how it is now, corporatised with a key objective being to make a profit.

  • Phil

    Scenario 1 – A typical existing NSW (Australia) regional street within a village , and with the power lines stopping halfway along the road (essential energy the supplier) .

    The cost to provide a new build connection is over $30,000 to extend this feeder by 120 meters , without including the pole to home cost if applicable ( another 20 meters ) .

    Considering that’s just 2 additional poles and the cable and labour you have to wonder where the value for money is as that much money can buy you a better than on grid off grid solar setup.

    I have to assume they are divesting some of the existing infrastructure and transformer costs to come to that figure . And they would extend the entire 3 phase and not just a single phase to allow for expansion.

    So one has to wonder is the pole and wires cost of the daily access charge of $1.60 inc gst just for maintenance and not new infrastructure?

    The end result is that there are 4 new builds so far and no one has connected. They are all 100% off grid

    They (essential energy) had also recently upgraded the transformer to a brand new one of 200kva capacity feeding the existing 10 houses. I assume they expected the new builds to connect !

    I think the whole on grid model in Regional NSW Australia is a poor value proposition. It’s way overpriced and shockingly unreliable in many areas , no wonder they are wanting to depreciate or offload the assets.