Consumers face rising bills in S.A. after regulator compromises on network spending

Consumers face rising electricity bills in South Australia after the pricing regulator compromised on its initial ruling, allowing increased spending and a higher return of capital.

A preliminary ruling by the Australian Energy Regulator in April rejected an application by South Australian Power Networks to collect $4.74 billion from its network in the 2015-20 period.

But after an appeal by SAPN – and a revised proposal of $4.53 billion, the AER has decided to amend its original ruling. Instead of capping revenue at $3.2 billion, it will now allow $3.8 billion.

AER says that this translates to a 15.4 per cent cut from the network operator’s revised proposal, compared to a 32.3 per cent reduction from its original offer.

This graph shows the difference between what the network proposed (red dotted line), what the AER initially decided (blue triangles) and what it agreed on (purple spots).

The result means that SA consumers face rising bills from 2015/16 to 2020/21, rather than the “stable” prices promised by the AER in its first decision.

“We expect average annual electricity bills for residential customers that fell by $203 (or –10.1 per cent) in 2015–16 will rise by $45 (2.5 per cent) in 2016-17,” it said.

“Modest increases in bills of around 1 per cent are expected over the rest of the period covered by this decision.”

The AER has been taking an axe to proposed spending from networks across the country, but it has faced stiff challenges. In NSW, the state owned network operators are taking their appeal to the courts.

The NSW government, of course, is trying to lease the networks and is keen to secure higher revenue allowances that would then allow higher lease agreements.

The AER says the two principal reasons for its change of heart on SAPN were its decision for the network to secure higher depreciation costs, and to allow a higher cost of capital.

The high depreciation allowance effectively allows a quicker payback on the network than otherwise. This is important for the network operators, particularly in light of the changing technologies and the risks that they have for their business models and revenue streams.

SAPN, controversially, is proposing new “demand” tariffs that seeks to extract higher revenues from households with rooftop solar. The solar industry says these tariffs are arbitrary and unfair, and do not reflect network usage.

The AER also allowed a higher cost of capital – known as WACC. Initially, SAPN sought a return of 7.62 per cent, but the AER said this should be 5.45 per cent.

SAPN came back with a proposal of 7.09 per cent, while the AER settled on 6.17 per cent.

The rate of return on capital has been one of the most controversial parts of network expenditure, and bills, in the last five years. Many critics say that the networks have been allowed returns well beyond the market average. But the networks are fighting a court battle over these returns.

Morgan Stanley analyst Rob Koh said he was “surprised” by the upward revisions, particularly for the higher debt cost allowance and higher regulatory depreciation. He said it was “positive” for the share price of the network owner.

Chairwoman Paula Conboy said the AER’s goal was to create incentives for the monopoly network businesses to spend efficiently and to share the benefits of efficiency gains with consumers.

“SA Power Networks, which contributes around 38 per cent of an average South Australian household’s electricity bill, has been a relatively efficient distributor, compared to some of its interstate peers.

However, SA Power Networks proposed significant increases in expenditure compared to the 2010-15 period to undertake additional activities, which would have meant higher prices for consumers.”

“We do not consider that this additional expenditure is efficient nor justified, so these additional expenditures have not been accepted. However, our decision means that SA Power Networks will have more funding than in the previous period for existing programs such as reducing bushfire risk.”

Meanwhile, the AER has also made preliminary rulings on Victorian networks. It says that if its rulings hold then consumers can expect a small reduction in their bills over the next five years – from around $27 to $75.

If the ruling holds. The pattern for these rulings is that the networks go back withs strong arguments and the AER relinquishes. It is like any negotiation – the bidder (the regulator) starts low and moves up, the seller (the networks) starts high and moves down. And the consumer hopes it doesn’t lose out too much.