Network lobby says asset write-downs would cost consumers even more

A proposal to write down the regulatory value of energy network assets would have the opposite of its intended effect, new research has found, potentially costing Australian electricity consumers more than $300 million a year, rather than cutting power bills, while also increasing the risk of a utility death-spiral.

In a paper released on Wednesday, Australia’s Energy Network Association (ENA)  “conservatively estimates” that recent calls to expose network owners to large retrospective regulatory asset write-downs could increase network charges by up to 7 per cent – boosting the cost of future investment by an additional $1.8 billion over the next decade.

Networks have been under pressure for write downs – from RenewEconomy and think tanks such as the Grattan Institute – because of the large amounts of sunk capital, and because it could be the only way that incumbent networks could compete on costs.

The ENA report’s findings coincide with a speech by the acting chairman of the Australian Energy Regulator, Andrew Reeves, discussing the major transformations underway in the energy sector and how they will impact the services delivered by the electricity network over the next 10 years.

The speech, delivered on Wednesday to the Energy Networks Association’s 2014 Regulation Seminar in Brisbane, noted that growth in renewables, electric vehicles and smart appliances would change the way both the industry and consumers thought about electricity usage, and stressed the importance of regulators and networks working to deliver better outcomes for consumers.

“It is no longer just a one-way flow of electricity from large generators to end-users,” Reeves said.

“In an era of rapidly changing technology and customer preferences, competition, where possible, will deliver the best outcomes for consumers. The current regulatory framework is based on the principles that competition and real choice produces better outcomes for customers it is important that these principles continue to drive developments in the regulatory framework,” Reeves said.

However, the report commissioned by the ENA says that this further blowout in network charges – from the increased cost of capital caused by the write downs – could see consumers could pay over $320 million more per year if network investors faced new risks of write-downs.

Ironically, the networks have been criticised because many of the costs passed on to consumers have been struck at a cost of capital far beyond that needed by government-owned networks.

Still, “calls for asset write-downs may seem appealing but this analysis shows it would increase networks financing costs substantially offsetting any other savings for consumers,“ said ENA chief John Bradley in a statement today.

“Asset write downs could drive the cost of financing to levels not seen since the GFC. This cost increase would outweigh any savings to consumers intended from a lower asset base and lower depreciation charges.

The paper –“Written-Down Value? Assessing Proposals for Electricity Network Asset Write Downs,” by ENA’s executive director of economic regulation, Garth Crawford – is the first to economically assess the various proposed scenarios, and has concluded that even extremely large asset write downs would not achieve price reductions for consumers, while a relatively small increase of 0.5 per cent in financing costs was enough to completely offset any benefits of lower asset values after a write-down.

“Over the past two decades, regulators and policy makers have sought to provide certainty for investors and a low risk environment because it lowers costs to consumers,” said Bradley.

“If this low-risk environment is lost, Australia could ruin its hard-won reputation with investors for regulatory predictability without delivering lower electricity bill outcomes for customers.”

Bradley said the analysis was conservative and did not factor in the potential for investors requiring a sovereign risk premium if the current regulatory regime is retrospectively abandoned.

Other key outcomes of the analysis were that by increasing prices to customers, write-downs would also likely increase, not lower, any risk of a utility death-spiral.

“If network businesses are overspending against capital expenditure forecasts they already face the risk of write-downs and independent reviews have previously found no evidence of deliberate over-forecasting,” said Bradley.

Bradley also acknowledged a need for the network regulatory system to evolve over time and embrace new technologies and challenges, but added that it was important for both policy makers and stakeholders to consider the consequences of making of making poor choices.

“This work shows that consumers have a direct interest in maintaining investor confidence in an independent regulatory regime which supports efficient investment in significant infrastructure,” Bradley said.