“Should be denied:” Energy retailer slams network bid to recover transmission cost blowouts

AGL Energy has weighed in on deliberations over whether or not consumers should foot the bill for a blow-out in the cost of a major New South Wales transmission project, arguing the claim by network company Transgrid relies on “an artificial framing of events that misapplies the rules.”

In a scorching submission to the Australian Anergy Regulator, AGL says the AER should deny Transgrid’s application to reopen its 2023-28 revenue determination and factor in a doubling of the cost of Project EnergyConnect the network company claims was “out of its control.”

Project EnergyConnect is a 900 km transmission link connecting South Australia and NSW and Victoria that is considered “nation-critical” for its role unlocking up to 3.5 gigawatts (GW) of new renewables capacity in south-west NSW, and to help South Australia get to 100 per cent net renewables by 2027.

The 206 km portion of the project in South Australia was completed in December 2023, by ElectraNet, on time and on budget.

But, the Transgrid-led NSW side – a 700 km line from the border to Wagga Wagga and two new substations at Buronga and Dinawan – has faced a series of issues that have sent total costs soaring, from $1.8 billion to $3.6 billion, and delayed delivery.

To try to claw some of this money back, Transgrid last month applied to the AER for a re-do of its 2023-28 revenue determination, seeking to recover an extra $1.1 billion of $1.5 billion in new costs for Project EnergyConnect (PEC).

Transgrid CEO Bret Redman said in March the added costs have been caused by “significant external factors outside Transgrid’s control” which affected the contractor’s ability to deliver the project “in accordance with the competitively determined contractual terms and conditions.”

“These factors included floods in New South Wales, labour shortages, project delays and hyper-inflation, all of which combined to severely impact the contractor,” Redman said.

AGL, however, begs to differ, saying that the blowout in costs comes down to Transgrid’s failure to exercise effective oversight following the contractor Clough’s insolvency, and failure to act as a prudent operator or to enforce its fixed-priced contract.

“While on its face this reopener appears to concern cost recovery for flooding and economic conditions, in substance it is about whether Transgrid should be permitted to recover costs after choosing not to enforce a fixed-price construction contract for the completion of PEC, thereby avoiding potential litigation, while potentially adding up to $1.14 billion to its RAB [regulated asset base],” the AGL submission says.

“This reflects a failure to translate emerging risk into timely control, not a loss of control itself,” it continues. “In these circumstances, the subsequent contract failure cannot reasonably be characterised as beyond Transgrid’s reasonable control for the purposes of the reopener rules.

“Accepting Transgrid’s artificial framing of events risks establishing a precedent in which the event is defined by its outcome rather than by an external occurrence,” it adds. 

“This would allow [transmission network service providers] to determine when a reopener event occurs and thereby give them effective control over both the definition and timing of the event. This cannot be the intention of the rules.

“AGL suggests that Transgrid’s reopener application should be denied,” the submission concludes.

AGL’s deep concern about which costs should and should not be sheeted back to consumers – coming, as it does, from a big-three gentailer – could look a bit like lobbing stones in glass houses, but AGL is not alone in calling for Transgrid’s bid to be rejected.

The Justice and Equity Centre – a leading, independent law and policy centre – is also critical of Transgrid’s actions, describing the reopener application as “fundamentally misconceived,” and saying that it “must be rejected.”

“The Reopener Rule is engaged only where a Transmission Network Service Provider ‘proposes to undertake capital expenditure’: cl 6A.7.1(a)(3),” the submission says.

“It does not apply where expenditure has already been undertaken.

JEC says the right avenue for Transgrid to request additional costs is through the ex post review process developed by the AER in the Capital Expenditure Incentive Guidelines.

“The reopener mechanism is not contemplated by the National Electricity Rules (NER) for the purpose of assessing and allocating overspend on capital expenditure,” it says.

In a further submission, Stephanie Bashir, the CEO and principal of Nexa Advisory, says that the whole affair offers a reminder that project “delivery capability and accountability matter” – and so do governance settings and frameworks.

“Nexa does not seek in this submission to relitigate the detailed contractual history of PEC or to take a position on each legal limb of Transgrid’s re-opener claim,” the submission says.

“However, we do consider this application to be further evidence that the current framework remains too weakly oriented toward the outcome consumers actually need: major transmission projects delivered on time and on budget.

“PEC remains an important project for the National Electricity Market (NEM), and Transgrid’s application continues to frame it as a critical interconnector for reliability, security, renewable energy integration and lower wholesale electricity costs,” Bashir says.

“Nexa urges the AER to use this opportunity not only to rigorously assess the PEC application, but also to reinforce the need for broader reform of the actionable ISP and transmission delivery framework.

“We consider these cost blowouts and delays reflect the weaknesses of the current regulatory framework – which has failed to hold Transgrid to account for timely and on-budget delivery.”

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