Dim view of price cuts

Moody’s warning on ACCC electricity reforms

ELECTRICITY market recommendations by the competition watchdog are likely to result in lower earnings for the sector, in the absence of countermeasures, Moody’s Investors Service has warned.

It follows 56 recommendations for reform by the Australian Competition and Consumer Commission (ACCC) in a major report last week which described the current state of the electricity market as “unacceptable and unsustainable”.

The ACCC said its suggested changes could lower average household electricity bills by between 20 per cent and 25 per cent.

Moody’s yesterday warned lower sector earnings could be a credit negative for unregulated utilities AGL and Origin Energy.

“The adoption of these recommendations could increase the financial leverage of rated unregulated utilities,” Moody’s said.

“On the very conservative hypothetical of the full adoption and full effect of the recommendations as envisaged by the ACCC, and a utility taking no countermeasures, financial leverage, as measured by the ratio of funds from operations to net adjusted debt, could fall by 250 to 400 basis points.”

Still, in the cases of AGL and Origin, their credit metrics would still be consistent with existing rating levels, which signals a degree of resilience, the analysts said.

The ACCC report called for government assistance for the entry of new generation projects, and called on the government to set prices by introducing a lower-priced default offer determined by the energy regulator.

“The ACCC’s emphasis on eligible new generation being despatchable and capable of meeting the demands of commercial and industrial customers would require the use of renewable energy generation supplemented by gas, battery storage or hydro-generation capacity as an alternative to conventional fossil-fuel-powered baseload generation,” Moody’s said.

It said lower prices would lower retail electricity margins, particularly for less aware consumers who have not sought discounts on standing offers.

Some of the recommendations would have a credit positive effect, such as the support for the National Energy Guarantee. “(This) aligns with the diversified generation portfolios of the unregulated utilities,” Moody’s said.