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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