Consumer sting in the tail of TransGrid sale

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