Qld’s financial bonanza from networks – paid for by consumers

As Queensland Premier Campbell Newman and his senior ministers continue their campaign to vilify rooftop solar, a new report has thrown further light on the real reason behind the massive increases in electricity bills in recent years – the huge increase in money pocketed from the network providers by the state government.

A report prepared for the Queensland CaneGrowers association by Melbourne-based energy consultancy CME says receipts pocketed by the state government from its network operators has more than doubled each year – from $47 million in 2007/8 to $970 million in 2011/12 – and this has been paid for by the consumers.

The report is damming in its assessment of these returns, saying that it was sourced from a combination of $26 billion in network investment (some of which was not needed); an inflated regulated return on that investment; and from asset revaluations – an accounting exercise that has allowed the network to charge consumers more for the assets they own.

“Almost all of the increase in retail electricity prices in the period from 2007 to 2012 has been due to rising network charges,” the  CME report finds. “(And) the large increase in retail electricity prices between 2007/8 and 2011/12 has delivered an even larger increase in pecuniary benefits to the Queensland Government.”

The report comes as Newman and his cabinet are reportedly considering actions to lessen the burden of electricity network costs, including lowering the regulated return on investment – something which is within its powers.

But the CME report goes further than that, suggesting that Queensland could adopt the approach used in the US, where the costs of investment in network upgrades that are shown to be not needed are borne by the network operator, rather than the consumer.

This would lead to a potential write-down on the value of some assets – an issue raised in RenewEconomy last week, and which former Victorian premier Jeff Kennett did before his state’s privatisation of the SECV network assets to lower the cost of connection to regional users.

“On grounds of fairness … the Queensland Government, not users, should bear the costs of regulatory and utility failures,” the CME report notes, adding that the Queensland government, through its diversified income and broad spread of assets, is “better able to bear deadweight losses” that have been caused by “failures in the design and conduct of regulation.”

Over the last 10 years – the last five-year regulatory period and the current one – Queensland networks will have invested nearly $26 billion in capital expenditure, the report notes, and much of this was based on “assumptions of far higher demand growth than has occurred.”

These tables below highlight the increased returns pocketed by the government over the last five years. The first is the total financial benefits enjoyed by the Queensland government, and the second graph is these figures after deducting the consumer service obligation subsidy paid to customers of Ergon.

The CME report noted that Energex had revalued its assets upwards by $847 million during the period, lifting its return on equity from 8 per cent in 2007/8 to 15 per cent  in 2011/12. Energex’s  total return on equity actually increased almost three-fold from 8 per cent in 2007/8 to 21 per cent in 2011/12. CME says the government has taken advantage of a system that was designed for private ownership, not government ownership, where there are obvious conflicts of interest between the ability to set the rules and to reap financial rewards.

It notes that Queensland now has charges per connection that are higher than any other states, as these graphs below show. The first is the cost per connection per year (Queensland is in the green and by far the highest), and the second shows the regulated assets per connection (once again, Queensland in green is well ahead of other states).

The CME report noted that the Independent Review Panel has suggested that Queensland’s network providers could achieve efficiency improvements of $5 billion by 2019/20. And it understands that the government is working on that.

It suggests the Queensland government has a number of options. These include reducing the Weighted Average Cost of Capital to reflect lower debt costs (governments have a higher debt rating than private companies), and/or sacrificing the allowance for income taxes that is included in the calculation of regulated prices/revenues.

This, it said, could deliver a significant permanent reduction in allowed revenues and a fall in network prices of 10-20 per cent.

“In addition to over-estimating demand growth, Queensland’s (network providers) have had to meet more stringent network planning standards. The need for such higher standards has not been clear,” the report notes.

“As a result of these two factors, there is likely to be substantial excess, under-utilised, network capacity in Queensland. Under the current regulatory regime the costs of this (depreciation plus return) are nonetheless recovered from users in regulated charges.”

It notes that in the US, there is a test whether an asset is “used and useful” before it is included in the regulated asset base. Where assets are not found to be used or useful they may be permanently written down, or may be placed in a form of escrow account from which the utility obtains no financial return until the assets are found to be used and useful. That avoids the cost of un-needed investment being passed on to consumers.

“A successful regulatory regime should protect consumers from the exercise of monopoly power, provide incentives for efficiency and provide reasonable certainty to investors that they will recover necessary investments plus a reasonable return,” the report notes.

“The current regulatory regime has failed at the first two and instead, as the data shows, has provided a financial bonanza for (the networks’) owners.”

But the report goes further, suggesting that if the government fails to act, then it will perpetuate the “death spiral” that is caused by rising costs and falling demand, as consumers find cheaper ways of sourcing energy. In the case of Queensland, this will occur through the rooftop panels that the government is so keen to demonise, and other options such as diesel being contemplated by primary producers such as cane growers.

It estimates that the 60 per cent increase in electricity prices over the last six years can be expected to result in long-term demand reductions of 30 per cent to 42 per cent from what it would be otherwise. That compares to the around 10 per cent fall that has already been experienced.

It seems like it is time that the government accepted accountability for the over-investment by the networks it owns and has profited from. It is not surprising that it is seeking to demonise solar, but that is not the solution to the problem.