Networks cry foul as AER cracks down on poles and wire returns

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Networks say Regulator draft decision will result in largest single cut to the amount the sector can recover on its investments. Consumer group says it could have been bigger.

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The Australian Energy Regulator has drawn fire from the nation’s poles and wires businesses over a draft decision the networks say would result in the largest single cut to the amount the sector could recover on their investments in electricity and gas infrastructure.

In a draft Rate of Return Guideline, released on Tuesday, the AER says it had decided to reduce the return on debt energy network businesses could claim for the build out of more poles and wires and other network infrastructure.

The AER says it estimates that its draft guideline would result in a 45 basis point reduction in the overall rate of return for network businesses, compared to its previous determination in 2013.

The decision has been made, the regulator says, to better foster efficient investment in electricity and gas services, and to ensure the businesses acted in the consumers’ best interests, by keeping costs passed on through energy bills to a minimum.

“We acknowledge that this review is being undertaken in an environment of heightened consumer concern about increasing energy costs and relatively large (and sometimes underutilised) investment in regulated assets bases over recent years,” the AER report says.
“While the rate of return is an important contributor to network prices, there are other network and non-network costs that also contribute to overall energy prices.
“Nonetheless, we are cognisant of the effect that higher energy prices may have on the willingness of consumers to pay for further improvements in network reliability.”

As we have reported on RE, for a typical electricity customer, network service charges represent about half – 48 per cent – of a total electricity bill, with generation costs, transmission charges and retailer’s charges making up most of the remainder.

The AER has tried previously to reign in network costs, but has repeatedly been forced to allow for a compromise after its decisions were appealed or taken to the courts.

In theory, any cuts to the costs networks can try to recoup, should result in a reduction to consumer bills – although not a very significant one.

According to RE columnist and ITK analyst, David Leitch, the bottom line is that this AER decision would would lower network revenues by about 2-2.5 per cent a year. For a household customer it might add up to a 1 per cent cut in prices, eventually, per year.

But Energy Networks Australia says the draft determination has gone too far, and will strip about 13 per cent – or $2 billion – from network revenues over five years.

And it even argues that this latest cut to network revenues will not be in the best interests of consumers.

“Network prices and rates of return have been falling consistently for the past five years” said ENA acting CEO Tamatha Smith said in a statement on Tuesday.

“This latest proposal follows the significant cuts already imposed in 2013 and 2009 and does not deliver the predictable framework the energy network sector needs to ensure investment security – which is in the long-term interests of customers.”

Smith said network businesses had already responded to the need for lower costs to customers, by delivering efficiencies in their operations while also ensuring a reliable and safe energy supply.

“We have to achieve a balance that meets the need for business to attract lowest-cost finance for essential power infrastructure investment and to keep prices down.

“This proposed sharp reduction in the rate of return will … (make) it harder to attract capital for investments that will support strong wholesale market competition and the rapid connection of growing sources of generation throughout the grid,” Smith claimed.

“The energy sector is undergoing the most significant transformation in a century.

“We are working to modernise networks to ensure greater connectivity across the whole National Energy Market, integrating increasing household renewable systems and new large-scale generation, so customers pay less and continue to enjoy the secure, reliable energy they expect.

“We can’t do this without achieving the right balance for consumers and industry.”

Not surprisingly, the energy consumers lobby has a different view.

“Energy prices, especially electricity prices, are too high in Australia and network costs make up nearly half of a consumer’s bill. The allowed rate of return has a very big impact on those costs,” said Energy Consumers Australia acting CEO Lynne Gallagher, on Tuesday.

“Allowing gas and electricity network businesses to earn excessive returns on their investment in the poles and wires not only costs consumers too much today, but it gives these businesses an incentive to over-invest, further adding to the cost for consumers in future years.

“Existing and future investment in the power system must be optimised based on consumers’ demands that not one more dollar is spent than required, and new investments are not made one day earlier than is necessary,” she said.

“Given that the rate of return on capital makes up half of the revenue of these network businesses, consumers could expect to see significant benefits flowing through into their bills.”

According to Gallagher, the AER’s draft decision would potentially save consumers around $30-$40 a year on their power bills – but she noted that “expert evidence” presented to the Regulator could have justified an even lower allowed rate of return.

“There is no doubt that there could be some disappointment from some consumer groups with this decision, but it is a much better outcome than we’ve seen in previous years on this issue.

“At the start of this review Energy Networks Australia called upon the regulator to set an allowed rate of return that was ‘capable of acceptance,’” Ms Gallagher said. “The Regulator has done that and we look forward to the networks accepting this draft decision.”

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20 Comments
  1. Joe 3 months ago

    Consumers have been in a world of pain with high energy bills thanks in a big part to The Networks creaming it with their ‘Gold Plating’. Now they’re squealing like stuck pigs as their super profits are primed for a trim….squeal, squeal, squeal.

  2. DevMac 3 months ago

    “The decision has been made, the regulator says, to better foster efficient investment in electricity and gas services, and to ensure the businesses acted in the consumers’ best interests, by keeping costs passed on through energy bills to a minimum.”

    So, why did the situation exist in the first place? It sounds as if it may have been to foster inefficient investment in electricity and gas services, ensuring the business acted in their own interests and maximise costs that are passed on through energy bills.

  3. john 3 months ago

    Selling the Network and then giving them a 10% return on expansion what a stupid idea.

    Supplying Electricity and Roads and all the other services to the citizens of a country is an obligation. Once we used to do this roads ports water electricity now we sell it.

    What we wind up with is a ever increasing cost of electricity and where has it expanded most??? NO not because of the RET not because of Solar No not because of what every you Shock Jocks told you or the Murdock Spuews not papers it was mainly Network costs.

    In fact you know all those people you see with Solar Panels on their roofs they have actually put downward pressure on you price of electricity.

    • Joe 2 months ago

      They won’t give it back because they know that us consumers have nowhere else to go for an essential item, they’ve got us by the short and curlies. The ACCC has said many times that Network Costs are some 40-50% of energy bills, and that the ‘Green’ component of said bills is around 10%. But never let all The Coal Huggers acknowledge these facts. They happily continue to lie about Renewables being the primary cause of escalating power bills…the Abbott & Kelly should be jailed for their continued lying on this.

      • Greg Hudson 2 months ago

        Ah but we DO have somewhere else to go, leaving the short & curlies intact… and that is with solar. Simple, effective, and profitable if you have enough roof space (or land if you live in the country).

        • Joe 2 months ago

          Hi Greg, yes that is true. I have my solar and like most of us Solar homes we are still connected to the Grid. We get the FiT for our exports which is good but we can’t all go completely off grid. Roofspace and shading are limiting factors in going completely off grid and so we are partially hostage…those short & curlies are under threat!

  4. MaxG 3 months ago

    Simply ask these network clowns to hand back the grid to the public if they have a problem; I mean elsewhere it would be called blackmail if you’d imply potential problems maintaining the grid.
    And as for price reductions flowing to consumers… I believe it when I see it.

  5. Mike Dill 2 months ago

    Put more solar on your roof. Don’t pay the network any more than necessary.

    • Joe 2 months ago

      The retailers will be upping the Daily Supply Charges to try and stem their lost revenues as a result of the punters producing more of their own electricity.

    • Greg Hudson 2 months ago

      Exactly what I’ll be doing TODAY… Oversizing from the 3kW I need, to 6.6kW so I can pay for the service charges & GST etc.

  6. Nathan Hand 2 months ago

    In the past three months I’ve had 21 power outages. Results collected from my UPS and outage times up to 40 minutes. I’m less than 5km from the CBD in a major capital city, in an expensive dense suburb. Combined with the exorbitant network costs and consumption charges, I’ve made the decision to go off grid, saving now to buy the powerwall and solar panels.

    In Australia, in a capital city, 5km from the CBD, I’m better off not using the grid. That’s the sad state of affairs for Australia’s electrical grid. What a joke.

    • solarguy 2 months ago

      “Going off grid with a Powerwall” good luck with that Nathan.

      • Nathan Hand 2 months ago

        thanks for your best wishes Guy

        • solarguy 2 months ago

          With such a response, you clearly don’t understand that Powerwall and off grid are mutually exclusive.

          • Nathan Hand 2 months ago

            you are clearly an expert, perhaps you can offer your opinion to somebody else who asked for it

          • solarguy 2 months ago

            Charming, just trying to help, but an expert I am.

          • Biff 2 months ago

            No, you weren’t really trying to help, you offered up a sarcastic comment that makes you sound like a bit of a nasty person. Australian comments at their finest.

      • Ren Stimpy 2 months ago

        powerwall is the generic term for a home battery these days isn’t it, as opposed to Powerwall which is the specific Tesla model?

        • solarguy 2 months ago

          Sort of, I get punters asking for Tesla specifically.

  7. Robert Comerford 2 months ago

    Oh my heart bleeds for them…. bloody thieves!

Comments are closed.