Ausgrid sale great for everyone, except consumers

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The sale of Ausgrid has been hailed in many quarters, but consumers have little to celebrate. The price locks in “gold plating” and may lead to higher fixed charges as more consumers turn to solar and storage and the networks look to protect their revenue streams.

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The sale of a 50 per cent stake in Australia’s biggest network operator, Ausgrid, to two Australian super fund managers has been hailed in just about all media quarters as a really good deal: Great for the government, great for the taxpayer, great for the investors, and great for the investment bankers and advisers who will pocket massive fees.

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Great for everyone, that is, except for the consumer, who in coming years can expect to see huge increases in fixed network charges, and resistance from network and government shareholders towards solar energy and battery storage and the shift away from centralised power to distributed energy.

Why is this so? The biggest clue is in the price paid for the network.

Ausgrid, which serves 1.7 million customers in Sydney, the Hunter Valley and the Central Coast regions of NSW, has a regulated asset base of $15 billion, and it seems that Industry Funds Management and Australian Super have paid 1.4 times that asset base in their deal that values the business at just over $20 billion.

The problem here is that not only are the buyers locking what many analysts consider to be an inflated price for the asset, the premium paid for those assets suggests that they will continue to get that investment back and more – possibly not a bad bet considering that the government remains a half shareholder and the weakness of the regulators.

Hugh Grant, an economist who sits on the consumer challenge panel for the Australian Energy Regulator, earlier this year released a detailed analysis that suggested Ausgrid was possibly the least efficient network in Australia, with a regulated asset base (RAB) possibly worth twice what it should be.

Ausgrid basically admitted its asset were over-valued in a submission last year.
augrid network RAB
Ausgrid is the worst of a bad lot in NSW, and across Australia. Those high regulated asset bases allow the networks to pass those costs on to consumers, which is the primary reason Australia has transformed from a country with some of the world’s lowest electricity prices, to one of the most expensive.

This graph below illustrates how Australia has led the world in price increases in recent years – almost all of it from network costs. Other studies suggest that Australia’s cost of delivery per megawatt – compared to other countries – is up to eight times more expensive than other countries.autralian network price
This, of course, provides a tremendous economic incentive for consumers – both households and business customers – to turn to rooftop solar and battery storage to reduce their bills.

That is why Australia, along with its excellent solar resources, is considered to be the prime market for battery storage, although as David Leitch points out, many in policy (and presumably business too) don’t realise this because they are relying on out of date advice about the costs and value of battery storage.

But as demand from the grid falls, the networks are allowed to protect their revenues by increasing charges elsewhere, or by making a larger share of network costs fixed and compulsory for all.

Already, many consumers in NSW pay $500 a year for network charges even before they switch any lights on. There is already a push in some quarters for these network charges to be increased further, and for further taxes to be imposed on households with rooftop solar.

Energy analysts say this is pushing the industry towards a train crash of massive proportions as the cost of solar and storage falls, and the cost of the network is protected by the regulations.

Grant is not the only analyst to suggest that network values are over-inflated. Numerous other studies, including from the Institute for Sustainable Futures, Carbon Market Economics, and Bruce Robertson at the IEEFA, come to the same conclusion, raising similar questions about the impact of distributed energy.

Many of these analysts are arguing for write downs of the network assets. But these seem unlikely given the NSW asset sales, the fierce resistance from the network lobby and the fact that the NSW government still has its hand in the till by retaining half shares in the networks it is leasing.

That means that the political environment will remain favourable. As for the regulatory environment, Australia’s policy makers and regulators have shown little or no interest in paving the way for new technology alternatives.

And when they do, they are attacked by state governments such as NSW, who are willing to spend millions of dollars taking the regulator to court.

“This is about the worst of all worlds for consumers,” said one analyst, who declined to be named for this interview. “Expect the networks to continue to do all they can to extract rents, raise fixed charges and oppose decentralisation with the regulator’s assistance.”

Bruce Robertson, from IEEFA and a long time critic of network spending, says gold plating of the networks started 2009, and had its genesis in the introduction of the profit motive into a service business.

“Networks are paid based on their assets,” he says. “The more they build the more they get paid.  They went on a spending spree between 2009-15,  and boosted profits, and dividends to the state governments that owned them.

“Privatising Ausgrid further embeds the profit motive and does not discourage gold plating that has led to massive increases in prices for consumers.

“Its sale, without an audit of the asset base and reasonable writedowns of useless, unused and under utilised assets, embeds these inefficiencies in the system.

“Electricity lies at the base of the economy. Without an efficient energy sector the whole economy struggles to compete. Australia has an inefficient and bloated electricity sector.”

Of more particular note is what happens as solar and battery storage uptake leads to falls in demand for grid services, as more and more electricity is produced and consumed on the same premises, or shared with neighbours.

This change in model will lead to reduced need for the grid, at least in the form that we now know it.  But the over inflated grid assets will still exist and will need to be written down.

The problem is that the multiple of RAB paid by IFM and AustralianSuper indicates that Ausgrid is making unreasonable returns. Ausgrid is paid too much for the services to the consumer that it provides. It earns super profits.

Grant last week make a detailed presentation at an AER forum where he accused the regulators of failing consumers, because they had allowed the networks to make “super profits” at the expense of their customers, and focused on narrow, theoretical valuations for the assets.

Grant says the multiple paid by IFM and Australian Super indicates they are expecting the tame regulatory regime to remain, and the deficiencies will remain.

It also, potentially, puts them on a collision course with electricity retailers, who want to lock the utilities out of the “behind the meter” market. But the multiple being paid by the investors show that they are expecting not only to protect their existing regulatory asset base, but also expect to grow their deregulated business.

“The existing owners have made huge profits – and the new owners are assuming that will continue. But that can’t happen,” says IEEFA’s Robertson. “If anything it will accelerate the death spiral (encouraging more people to leave the grid altogether and for remaining customers to be hit with increased charges).

“There is an inherent bias against distributed generation,” Robertson says. “Even though they say that the consumer is important, as AGL Energy’s Andrew Vesey has said, the consumer has been the last factor to consider.”

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13 Comments
  1. trackdaze 2 years ago

    The good news is super funds are well regarded for making astute free investment decisions.

  2. john 2 years ago

    How about this for instance.
    From a grid worker.
    Delete those notices of upgrades needed.
    Why?
    We are selling it so we have to make sure there are no costs they have to take into consideration.
    Oh dear such is life business as usual.

  3. solarguy 2 years ago

    My hybrid/off grid system is coming together and will be ready to switch on late December. If Ausgrid gets too greedy I will give them back their meter and tell em where to punch it.

  4. bedlam bay 2 years ago

    The Federal Energy Regulator has for quite a few years in collusion with the State governments waived through plus 5% price increases including gold plating poles and wires. A huge scam indeed.

  5. brucelee 2 years ago

    Funds have invested and gambled that regulations will not change. They should be made to lose when the inevitable spiral starts swirling

  6. Adam Smith 2 years ago

    Just a tip Giles, the RAB has little to do with the price, it is all about the future EBITDA and the multiple that would apply. For the multiple, in the case of the Alinta float, the investment bankers are seeking around 10x, which is based on other Utilities multiples that range from around 9x to 14x. IEEFA is also totally wrong. I would believe the long term plans and investment advise where the entities are paying out billions of dollars over some analysts opinion.

    • Giles 2 years ago

      Yep, and the RAB multiple suggests that the buyers expect to reap in huge rewards, which is exactly the point that Hugh Grant was making, and me too. Just a tip Adam, just because a company spend billions of dollars of dollars doesn’t make its decision right. Nor does the advice of bankers who will pocket tens of millions in fees if the transaction goes through. i believe there are some well documented studies showing less than half of big purchases actually turn out to be good ideas.

      • Adam Smith 2 years ago

        Ah yes, but the buyers also have a bunch of investment bankers who get paid whether it goes ahead on not. The horizon for these transactions is also over 10 years, in this case possibly 15 to 20. This is smart money and yes you are then correct in that the consumer should expect to pay. The death spiral is a mirage and the grid and its owners will continue to prosper for a long time yet.

        • Giles 2 years ago

          So, it’s great you agree with me. The consumer pays. Guess that was point of story. Have you seen the difference between the fees received by investment banker when a deal goes through and when it doesn’t?

          • Adam Smith 2 years ago

            I don’t disagree, the blame should all be placed at the feet of the federal government body the AER. Established in 2005, with a mandated requirement that a large part of the revenue should go to network expenditure. You talk about gold plating, however the Utilities were told how much they could charge and how they could spend it, by a Federal body. Is it right, no but Labor were elected in 07 and apparently nobody reviewed the AER for the 6 years, until the Coalition were elected and they then called a stop to the spending. And yes, the sell side bankers get a bigger commission, but the buy side also get well remunerated. These entities are not dumb, they are smart and well advised, they make cautious decisions, plus the market continues to have a positive outlook for Utilities, on a long term basis.

          • Giles 2 years ago

            Yes, and the people that invested billions of dollars in toll roads (another fail-safe infrastructure investment), based on the best advice from consultants on traffic numbers, and then went broke, are a lesson to us all. At least they had smart lawyers, or the government had dumb ones, so it was the taxpayer that coughed up in the end.

          • Adam Smith 2 years ago

            Toll roads are not comparable as they are a new venture, with no prior history. Airports would be comparable infrastructure. In Brisbane, Campbell Newman was criticised for the Clem etc, but, though a few people lost money, Brisbane now has a great tunnel network. Usually the initial toll road venture from State Governments will always have overly optimistic forecasts, I wonder why that is?!

          • Adam Smith 2 years ago

            Hey Giles, Western Power estimated Eneterprise value by PWC $16billion, RAB around $10billion. FYE16 EBITDA around $1.14b, so multiple around 14x. See a recurring theme? But probably wont happen as Barnett LNP not so popular.

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