Consumer sting in the tail of TransGrid sale

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The “bonanza” obtained for the sale of electricity transmission network TransGrid will come back to haunt NSW consumers for decades to come.

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SYDNEY PROPERTY

The “bonanza” obtained for the sale of electricity transmission network TransGrid will come back to haunt NSW consumers for decades to come.

The new owners can more than recover their bonanza payment because Australia’s system of energy regulation means that consumers pay much more than they should.

The companies that bought TransGrid paid more than one and a half times the value of Trans Grid’s asset. They know that the energy regulator will allow them to earn dividends in excess of the value of the assets over the average thirty year lifespan of those assets – poles, wires and substations.

And guess who will be paying for those dividends to the new owners’ shareholders? Everyone in NSW who pays electricity bills.

So why would the new owners be prepared to pay a premium of 60 per cent above TransGrid’s theoretical book value? Energy market analyst and consumer advocate Hugh Grant explains:

“In my view, this sale price provides compelling evidence of the weaknesses in the current regulatory framework. If it was working effectively,TransGrid would have traded at around its regulated value of $6.2 billion.

“The new owners have obviously worked out that they will realise returns on their equity invest- ment well above the regulator’s theoretical returns. In my view, they will achieve this due to a combination of the regulator providing very generous cost of capital allowances (WACCs), and in- correctly applying those excessive WACCs to an artificially inflated asset base.”


We can expect the same problem to arise with the imminent sale of Endeavour Energy and Ausgrid. According to research commissioned for TEC last year, this over-valuation of networks has allowed the NSW networks to pocket over $10 billion extra in revenue between 2000 and 2013 – the same amount the government is now claiming as a revenue bonanza.

But the bigger question is what will happen in future as more people install batteries as well as solar energy. With demand likely to continue to decrease, because networks are set a guaranteed revenue stream for five years there are only two options.

One is that those consumers still reliant on the grid for all their energy will face a new round of price increases. The other is that governments and regulators will finally bite the bullet and look at how to write down the value of net- works in view of their increasingly stranded assets.

Mark Byrne is Energy Market Advocate at the Total Environment Centre

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16 Comments
  1. Beat Odermatt 4 years ago

    Look at SA! When you have companies like SA Power Networks trying to introduce an anti-environment levy on residents with solar panels, then the people of NSW have a lot to worry about. A private monopoly needs very strong legislations and supervision to ensure that it does not abuse its power.

    • MaxG 4 years ago

      A private monopoly should never exist in the first place!
      I wonder why people vote for a government that sells their assets. It is plain stupid.

      • Beat Odermatt 4 years ago

        South Australia was broke at the time and the Government did believe that privatisation would be the “out of jail card”. I fail to understand why the Government of NSW is repeating others mistakes.

  2. Chris Fraser 4 years ago

    The debate then centres on whether or not self generation and self storage will be tolerated by private equity and state governments, which may lead to write downs in transmission assets.

    • Andrew Thaler 4 years ago

      Whether or not it will be ‘tolerated’.. it IS going to happen. When there are blokes like me (not particularly smart or rich) out there developing MW scale opportunities for SolarPV it is going to be a real fight for the networks to preserve the earnings environment they have enjoyed these last 20 years or so.
      I also reckon the 49% *lease* of what is essentially Networks NSW is going to be one serious debacle… from which we will not easily unscramble.
      I also hold an opinion that the govt has secretly agreed to the private owners of our networks that they (NSW Govt) will levy an ‘electricity access fee’ onto land rates in the short-term future as a pushback against the loss of customers who choose to be self-sufficient with PV and batteries such that they disconnect from the grid.
      If ever there was one community social instrument that should have remained in government ownership… electricity was likey it.

  3. Reality Bites 4 years ago

    This does not add up. Articles in this forum and commentators have been saying that the utilities have inflated book values and inflated WACC’s and therefore customers are being ripped off! Calls have been made to write down the value. However the market has spoken and TransGrid has been sold for 160% of its approved AER book value. Did the buyers overlook the wasteful gold plating?! Maybe this supports the argument that the AER has undervalued the assets. Then there is the WACC. The current AER approved TransGrid WACC is 6.75%. According to my searches the CBA WACC is currently 8.36%, which I appreciate is a bank and of course they are riskier than TransGrid?!. A better comparison maybe is Telstra at 6.72%, being a tech entity that is subject to disruption etc. You could not say that 6.75% is inflated and what is more, now that the real value has been determined by the market, then if you apply the revenue cap to the market value, the real return on assets will by something around 4.2%. As for scaremongering about consumers to get a sting, not really true as the AER determines what the approved book value is and the WACC, all of which are now looking a lot underdone, however, in the current political environment, they are hardly likely to budge to allow increased revenues.

    • Andrew Thaler 4 years ago

      The value of Transgrid is predominantly in the physical assets. Massive powerlines, switchyards, landholdings in prime real-estate areas.. if the private owners wanted to rebuild the High voltage switchyards in Sydney using the much more space-dense GIS they could now possibly sell-off acres of land to recoup value. Transgrid 330kV switchyards are immense in size, over-engineered from 1960’s thinking (of which i hold no criticism)
      There is more to this that we see, but the value would be more to do with the relative youth of a LOT of TransGrids assets. All of the Air-Blast circuit breakers were replaced, most of the large 330kV Oil CT’s and VT’s were replaced, huge amounts of surge diverters replaced, Wallgrove & South Sydney had ALL of the Transformers replaced, North Sydney had huge capital works, Yass switchyard was 100% rebuilt, as was Queanbeyan. Tamworth and Armidale, Coffs, Port Macquarie.. I worked in nearly every Transgrid switchyard where stuff was being replaced over the last 10 years.
      I reckon we sold this utility off for about 50% of its real value.. when you also factor in that nobody else will be allowed to build private powerlines to compete against TransGrid.

      • Jim Young 4 years ago

        I’m not an expert at all, but I am interested in the sunk costs in the existing grids, how they can still be used for utility level generation and distribution, especially from RE sites or the WAMSER type nuclear waste consuming new reactors (see http://www.itheo.org/articles/transatomic-power-tap-%E2%80%93-white-paper), while still making room for ever smaller and even individual home or business solar installations.

        Where do you see the proper balance between the bleeding edge homeowner investors and the most advantageous to homeowners tied to a grid receiving their solar power from bigger solar suppliers to the grid? (A friend, for example, bought his system 7 years ago, but can’t get any replacement or added panels like what he bought).

        To me, we either get a fair shake on the cost advantages, cleaner and ever more cost effective upgrades I think possible with reasonably sized grid suppliers (also more resilient, convenient and reliable), or we choose to move as fast as possible away from the actions like those of the Nevada PUC and go as totally off grid as we can. The Nevada PUC actions that screw the homeowners I think at the very least should be grandfathered, are described at http://www.greentechmedia.com/articles/read/nevadas-solar-exodus-continues-driven-by-retroactive-net-metering-cuts

        • Andrew Thaler 4 years ago

          I disagree with going totally off-grid. That would be akin to everyone making their own tracks and roads to drive their cars on because they thought they could save on car registration fees. It would be chaos. Also, if most people leave the grid we create a have/have-not society again.
          The grid works forwards and backwards quite well. we can consume the spill generation from sunny day solar production into storage systems (hydro pump, batts, compressed air etc) and we can bring cheap large-scale wind/hydro, etc into the end users. We built the grid, so we might as well use it.
          Yes, I believe there is great room for Nuclear energy systems, due to their inherent stability. Solar can offset the natural daytime load rises from human activity while nuclear replaces coal for base-load profile.
          Electric transport- more electric trains, short-haul trucks, metro-busses, private cars etc will require the grid to provide the quick delivery of bulk-energy into battery charging systems… I think this will be one of the most important roles of the grid into the future.
          People are mad to leave the grid.. it is the ultimate fall-back safety system in the event of solar/battery failure.

          • Jim Young 4 years ago

            Thanks for your reply. I would feel more comfortable if the grid were a public utility owned by the users, and many small investors as a secure retirement source of income, progressively taxed to limit excess concentration of ownership.

            I’m not up on Australian energy companies to see how much they are prevented from becoming like our ENRON private profit nightmare that played such a large part in destroying California’s economy, so I may seem to lean further away from too powerful concentrations than you think necessary.

            After seeing remote lodges, and homes away from the existing grids and far too expensive to connect. I do think going off grid is becoming far more practical, though we would have to pay more for a while.

            If, like the Nevada PUC, they use the grid connectivity to the extreme advantage of grid suppliers selling us solar electricity at too great a mark up (or as Nevada is doing, charging increasingly exorbitant fees for the connection), then we need to start getting away from them as fast as possible.

            Until then, I would consider schemes that guarantee the energy I purchase comes from solar or whatever other cleaner source possible, but I wouldn’t want the investors to think they can keep selling it to me, when it makes more sense to generate it myself. What should we do about those that somehow want to outlaw as much individual solar power as they can get away with?

      • Jim Young 4 years ago

        Upon reflection, the opposite(?) was done in a case I recall having been more easily explained in a story other than http://www.westword.com/news/a-dry-hole-5057854 Basically used and salvaged equipment was substituted for the new equipment John Gable’s Empire Oil and Gas Company was supposed to surrender in bankruptcy. The new equipment with serial numbers removed was found ready for shipment to Saudi Arabia (I think).

        Or we could look at the Transgrid as being the recipient of the new equipment in anticipation of the bargain prices false valuation would enable. I think that is what you have essentially said.

        Not directly related,but far more personal, my dad had worked for John R. Stanley for a while back around 1968 or 1969, in the early days of his “Gastown” schemes. See http://law.justia.com/cases/federal/district-courts/FSupp/331/626/1400806/ The station he started in Granby, MA, was the first I’d encountered that also doubled as a convenience store, base for a limousine company, and whatever other side business could be fit in. My dad worked there more as a favor, since he was retired and was just trying to help him get started. My dad said John would do things like stay open to 4 in the morning if that is what it took to bring in enough money to make the check good that he had written for the gas he’d had delivered.

        When an old man knocked a pump over on my dad, injuring him enough to discourage working too much (but covered by his military health benefits), he told John he wanted to reduce his hours. John, trying to keep him on since he wasn’t paying him anyway,offered to make him a partner. My dad said he couldn’t really work even as much as he had been, and declined.

        He later complained bitterly about his failure to seize the opportunity when he found out John’s net worth was something like $300,000,000. Of course that was before the 1971 case John lost, and subsequent financial “adventures.”

        My dad passed away after a decade+ of less dramatic, but more comfortable, retirement on 6 acres of land and a new house in Arkansas.

  4. Andrew Thaler 4 years ago

    If someone (smarter than me) was able to find the figures, and add them up, I would be confident in saying that the NSW Govt, though TransGrid has spent MORE than 10 Billion on replacement and upgrade works over just the last 10 years.. so we have realistically sold the TransGrid network at an actual LOSS.
    I challenge the artificial ‘book-value’ and I reckon we have just sold our ‘gold-plated’ asset for about 50% of its real value..

    • Chris Fraser 4 years ago

      Which possibly means (a rather dreadful thought) that between them the Government and the Transmitters are looking forward to Even More Gold Plating ! They’ve invented gold mining without a shovel. Makes you feel confident in our small “L” liberal democracy …

  5. Aerial Fencer 4 years ago

    It is worth remembering the AER is showing an increasing willingness to cut revenues. See resent QLD and NSW determinations

  6. Robert Comerford 4 years ago

    Isn’t democracy wonderful! Once again our elected leaders sell off OUR assets to private and often foreign entities. Always happens to pork barrel for the next election cycle.

    • Jim Young 4 years ago

      I’m reminded of a rather crude African “leader” responding to critics of his hard to deny extra-marital sex activities. He said something like, “Democracy is like sex, when it’s good, it’s very good, when it’s bad, it’s still pretty good.

      Though disgusting, it still has a thought provoking effect on the reality of the imperfect situations we find ourselves in.

      I wouldn’t want to throw out the good with the bad.

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