Regulator slaps down networks on more attempted gold-plating

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NSW networks want to charge 50% per cent more over the next 5 years than the regulator thinks is reasonable. The networks, it says, are still not taking into account lower peak demand, lower cost of capital, and potential efficiencies.

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NSW network operators want to charge 50% per cent more over the next 5 years than the regulator thinks is reasonable. The networks, it says, are still not taking into account lower peak demand, lower cost of capital, and potential efficiencies.

The Australian Energy Regulator has rejected the spending plans of several major electricity network providers, saying they didn’t take into account lower peak demand, the lower cost of capital, and the potential for more efficiencies.

death spiralThe AER has told each of the three distributors in NSW – which the state government wants to privatise – that their spending proposals for the next 5-year regulatory period were about 50 per cent higher than they need to be – even though they were a considerable cut from the previous period.

Ausgrid, for instance, asked to be able to recoup $10.1 billion from its 1.6 million customers in the Sydney to Hunter region over the next five years, and was permitted just $6.5 billion.

Endeavor Energy, which operates in western Sydney and the Illawarra, asked for $4.3 billion and got just $3.0 billion, while Essential Energy – which operates in the rest of the state – asked for $5.6 billion and was allowed just $3.7 billion.

In the ACT, Actew AGL wanted to spend $892 million, but the AER allowed just $555 million.

The draft rulings are part of a big game between the networks and the regulators over how much they can spend on upgrades, charge for maintenance, and for the cost of capital. The networks have a history of asking too much, and while the AER has sought to cut them down in the past, they have often been over-ruled, or forced to compromise on appeal.

(The AER decides how big the revenue pie will be for the networks. In an associated decision, the Australian Energy Market Operator has confirmed new rules that will require networks to introduce “cost reflective” tariffs, which will likely mean higher fixed and/or demand charges, which could affect households with solar arrays).

Those appeal rules have now been toughened, thanks to the massive fallout over soaring electricity bills which have been driven mostly by network costs, which account for half of most bills, and more than half of recent increases.

The most recent investment – $45 billion over the last five years – has been slammed by critics. Some say one third of that was to meet peak demand that never occurred, others say Australia now has a bigger but dumber grid, when what it really needed was a smaller and smarter one.

Hence the focus on this new round, particularly in light of the incursion of solar and battery storage into the grid, and the emergence of a new decentralised energy model. The AER, in its draft decisions, said that its estimate should result in a lowering of electricity costs, rather than a rise if the networks were allowed to have their way.

“We estimate that our draft decisions, if implemented, would reduce annual electricity bills for a typical residential household living in NSW, on average, by $219 (10 per cent) in 2015–16,” AER chair Ms Paula Conboy said in a statement.

“Similarly, annual electricity bills for small business customers, such as shop owners, would reduce by an average of $360 (10 per cent) in 2015–16.” She said these reductions would be followed by small increases in each of the three subsequent years.”

If the networks had their way, then the average bill would have risen by $56 (Ausgrid), $86 (Endeavour)  and $157 (Essential) a year.

aer draft

The AER says it is clear to them that the networks could find more efficiencies, and because demand had fallen, and would continue to fall, they were under less pressure to expand their network.

Yet this did not seem to have registered with the network management. The AER accused Ausgrid, for instance, of “giving little weight” to these key drivers.

“While the key drivers of efficient revenue indicate a revenue reduction is appropriate, Ausgrid proposed increases to overall revenue. Ausgrid seems to give relatively little weight to these key drivers

The AER noted that Ausgrid had yet to update its demand forecasts for the 2015-19 period. It said it could lead to even more downward revisions to expenditure forecasts.

While the key drivers of efficient revenue indicate a revenue reduction is appropriate, Ausgrid proposed increases to overall revenue. Ausgrid seems to give relatively little weight to these key drivers.

It also complained that the cost of capital estimates from the government-owned businesses were also inappropriate, and did not reflect the fact that interest rates and risk premiums are now materially lower than in 2009.

Ausgrid wanted to incorporate in its bills to customers a rate of return of 8.83 per cent, the AER said it could have 7.15 per cent. Ausgrid wanted operating expenditure of $2.88 billion, the AER said $1.78 billion was better. And Ausgrid wanted $4.42 billion in new capital expenditure, and the AER allowed it just $2.55 billion.

The network lobby group, the Energy Networks Association, which has never conceded gold plating in the past, wants solar incentives reduced, higher fixed charges to consumers, and argued that it would be too expensive to quit the grid, said the AER ruling threatened the reliability of the network – an old favourite of those arguing against carbon prices, renewable energy, or any much change at all.

It said the cuts were unsustainable and the lobby group would seek an urgent meeting with the AER. “Australian energy consumers rely on future investment to ensure new customers can be connected and assets can be replaced to maintain security and reliability,” ENA chief John Bradley said in a statement.

He said consumers would ultimately pay more if networks were prevented by the AER from “prudent funding” of operations, maintenance and reinvestment.

Unions went even further, saying that the cost allowance by the AER would cause blackouts and thousands to lose their jobs.  “Blackouts will be more likely on the hottest and coldest days, as power demand surges, reconnections will be slower following natural disasters, bushfire risks are likely to increase, and the safety of workers and the public will be put at risk,” the main electrical union said.

But Conboy told RenewEconomy that the AER stood by its decision. It also released new analysis that showed the networks in ACT and NSW were far less efficient than the privatised networks in Victoria and South Australia. “We stand by our analysis. We should ask ourselves why customers in NSW and the ACT should pay more for the same service.”

The networks will be able to submit another application before a final ruling by the AER next April. If still not satisfied, the networks can appeal to a tribunal, but now only if they can show there is a “materially preferable outcome” from a review.

RenewEconomy asked Conboy if the network revenue application were simply a case of them prosecuting “business as usual” rather than the transformation – the “prosumer revolution” – identified by new AER chief executive Michelle Groves, the chief executive of the AER.

Groves said last month:  “The electricity industry certainly is changing. In fact it is not much of a stretch to say that the next couple of decades will witness something of a revolution in the way small customers interact with the electricity industry. In the future there will be more scope for even the smallest energy users to become active participants in the energy market.”

Conboy said we would have to ask the networks if they were focused on business as usual.

 

 

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12 Comments
  1. Horst 5 years ago

    It’d be interesting to find out if these were ambit claims by the network providers or a reflection of their desire for business as usual and /or profound ignorance of recent history.

    • Giles 5 years ago

      I’nm about to ask AER boss. will update story.

    • Alan Baird 5 years ago

      I quite agree! That was the first thing that occurred to me: an ambit claim. Ask for the ridiculous and then get what you really were prepared to cop. Either way it’s the same old same old… a rip off. But, back to the trough! How can you lose?

  2. john 5 years ago

    The further from the base load generator the user is the more transmission loss there is and these costs are born by all.
    This really underlines the need for using RE and storage in these areas to reduce cost of transmission upgrades and more importantly the overall cost to all users.

  3. John P 5 years ago

    When we went ‘off grid’ some 22 years ago it was mainly to avoid the surge in costs when the industry finally got around to dealing with the underfunding of the grid dating back to the eighties.
    Never in my wildest dreams did I allow for this level of parasitic behaviour.

  4. Engineer Malcolm 5 years ago

    The networks have been their own worst enemy over recent years with not only barriers to renewables but total disregard and distain for customers and community groups.
    Good work AER – hold firm on this one.

  5. Chris Fraser 5 years ago

    Ausgrid made their submission to AER before knowing their consumption forecast ? That sounds a bit odd. A bit like putting out an empty garbage bin out for collection and letting the garbage bags build up around the back door.

  6. Chris Fraser 5 years ago

    Why not have non-industry paid experts, rather than Network Operators, decide the demand forecast over the long term ? Then apply a reasonable, or even variableinterest rate dependent on CPI figures to be used in all submissions ? Don’t need Dracula in charge of the blood bank !

  7. JohnD 5 years ago

    I think that the AER should be asking the network providers to outline what maintenance and what upgrades they are wanting to do in a business plan and if it cannot be justified refuse the submission. Where new network connections are proposed in locations that are remote from existing lines and poles or small in number what alternatives were investigated ie off grid solutions or local generation and storage. Electricity consumption has fallen for the last 3 years so there is very little scope for network upgrades especially to manage peak demand.

  8. john 5 years ago

    Let us put your self into a companies position if you can derive 10% return on expenditure and it only costs you 5% you would have to be stupid not to take advantage of this free gift.
    As to if the expenditure is needed one has to take it with a grain of salt.
    I very much fear that the regulator has found in the negative for these figures as one would expect.
    I expect very shortly that the regulator will be done away with we do not need any top down regulation in this country it hurts business.
    So move on people expect to see a new body set up shortly called the Industry Regularity Authority with personal from Industry after all they know best.

  9. Johnny 5 years ago

    I have seen the wastage at Ausgrid first hand. Large sections of the IT department are nothing but a self-serving “friends and family” affair, with decision making hampered by a severe case of Dunning Kruger Effect. http://en.wikipedia.org/wiki/Dunning%E2%80%93Kruger_effect

    Tens of millions of dollars are thrown at large IT Vendors to deliver what should cost tens of thousands, and they still can’t deliver.

    Whilst I don’t agree in principle to privatising key public infrastructure, I can’t think of any other way to stop the delusional management from continuing to believe that they’re doing a great job and offering “world’s best practice”.

  10. Vic 5 years ago

    As with most state owned corporations in NSW, they have been allowed to grow and be inefficient with a Labour government giving in to the demands of the union movement. The unions continue to argue about job security and how under paid there lot are. But this is NSW tax payers money, it is my money; and I feel like they are stealing from me to support their overpaid, looking after the boys club. It is like an episode of the Hunger games, except I am in District 12.

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