CHARIS PALMER

Un­wise de­ci­sions made when pri­vatis­ing our elec­tric­ity grids, per­mit­ting com­pa­nies to spend ex­ces­sively on the net­works’ ‘poles and wires’ and pass on the cost to con­sumers, are the driv­ing force be­hind our ex­or­bi­tant power bills.

The Saturday Paper - - Front Page - Charis Palmer re­ports.

Billed as “New South Wales’ first six-star green star build­ing”, Doltone House Dar­ling Is­land was per­haps a fit­ting venue for Mal­colm Turn­bull to pub­licly ex­co­ri­ate the en­ergy pol­icy of the gov­ern­ment he once led. Ad­dress­ing the NSW Smart En­ergy Sum­mit, the for­mer prime minister lamented the “vac­uum of en­ergy pol­icy at a na­tional level”, al­though he wasn’t en­tirely pes­simistic. “There’s never been a more ex­cit­ing time,” the for­mer PM said, speak­ing of mak­ing a liv­ing in the en­ergy sec­tor. He’s still “pas­sion­ate” about en­ergy, he added, seem­ingly with lit­tle irony.

Mean­while, Prime Minister Scott Mor­ri­son was busy try­ing to per­suade his party room of the need to sharpen the gov­ern­ment’s “big stick” mea­sures to scare en­ergy com­pa­nies into cut­ting elec­tric­ity prices.

The pol­icy vac­uum looks set to con­tinue, af­ter the gov­ern­ment was forced to wa­ter down its plan to force di­vest­ment by en­ergy com­pa­nies caught gam­ing the mar­ket or fail­ing to pass on cost sav­ings. The se­nate is yet to de­bate the new plan, widely panned by busi­ness and the Op­po­si­tion, which would see an en­ergy com­pany bro­ken up only af­ter a rec­om­men­da­tion by the com­pe­ti­tion reg­u­la­tor. Un­der the orig­i­nal plan, this de­ci­sive power would have rested with the trea­surer.

Turn­bull’s lat­est in­ter­jec­tion may have brought pub­lic at­ten­tion back to the coun­try’s po­lit­i­cally toxic en­ergy de­bate. But it’s the Coun­cil of Aus­tralian Gov­ern­ments (COAG) En­ergy Coun­cil meet­ing later this month that should be the fo­cus of con­sumers’ con­cerns, says Tony Wood, en­ergy pro­gram di­rec­tor at pol­icy think tank the Grat­tan In­sti­tute. In March, Wood re­leased a re­search pa­per show­ing state gov­ern­ments have spent $20 bil­lion more than they needed to in “gold-plat­ing” the grid, an in­vest­ment that’s adding up to $400 to con­sumer’s yearly power bills in NSW, Queens­land and Tas­ma­nia.

At COAG, the oft-di­vided state and fed­eral en­ergy min­is­ters will con­sider the en­ergy mar­ket oper­a­tor’s plan to con­nect the rush of re­new­able en­ergy to Aus­tralia’s power grid. The choices made at COAG could have pro­found im­pli­ca­tions for the re­li­a­bil­ity and cost of en­ergy in Aus­tralia. Get it wrong and the coun­try could end up with con­sumers pay­ing more for elec­tric­ity for decades to come. “In­stead of gold-plat­ing the net­works, we’ll end up gold-plat­ing the bat­ter­ies,” says Wood.

Al­ready, net­work costs make up more than 40 per cent of your en­ergy bill. This is usu­ally noted as your “sup­ply charge” on your bill – in­clud­ing costs of trans­mis­sion net­works and dis­tri­bu­tion, the “poles and wires”. The com­pa­nies that own the net­works, in­clud­ing Tran­sGrid and Aus­grid, are reg­u­lated mo­nop­o­lies.

It’s of­ten for­got­ten, says Aus­tralian Com­pe­ti­tion and Con­sumer Com­mis­sion (ACCC) chair­man Rod Sims, that we’re all pay­ing high elec­tric­ity prices to­day be­cause of poor de­ci­sions made about these net­works years ago, both reg­u­la­tory and po­lit­i­cal, af­ter en­ergy was pri­va­tised. “We’ve had large mis­takes in poles and wires,” Sims re­cently told a con­fer­ence in Syd­ney. “One mis­take was we re­laxed the reg­u­la­tion on mo­nop­o­lies, so it al­lowed ex­ces­sive spend­ing.”

The prob­lem was com­pounded by po­lit­i­cal de­ci­sions in Queens­land and NSW. Spooked by a se­ries of black­outs in 2004 and 2005, politi­cians in both states im­posed higher re­li­a­bil­ity stan­dards on the net­works. “The com­bi­na­tion of higher [re­li­a­bil­ity] stan­dards and in­ap­pro­pri­ate con­trols on mo­nop­oly spend­ing meant that we had a blowout of net­work costs,” said Sims. “That is the big­gest driver of why we have high elec­tric­ity prices, higher than they should be.”

Some ar­gue we’re still pay­ing more than we should for elec­tric­ity be­cause of what the Aus­tralian En­ergy Reg­u­la­tor (AER) has agreed to al­low net­work owners to charge con­sumers over the years. The AER’s role is to en­sure “con­sumers pay no more than nec­es­sary for the safe and re­li­able de­liv­ery of elec­tric­ity and gas ser­vices”. But Tony Wood says the reg­u­la­tor al­lowed ex­ces­sively gen­er­ous rates of re­turn in the past. “Over­whelm­ingly, for the last decade, the busi­nesses have known more about what’s go­ing on than the reg­u­la­tor,” he ex­plains, “so it was very hard for the reg­u­la­tor to push back and say ‘no’.”

Agree­ments be­tween net­work owners and the AER are set in five-year pe­ri­ods. Pre­vi­ously these ne­go­ti­a­tions them­selves have stretched out for years, though, of­ten con­tested in court. For ex­am­ple, the AER still has not fi­nalised its de­ci­sion on the revenue Aus­grid will be al­lowed to re­cover across 2014-19, a pe­riod with just months left to run.

In the past, net­work owners could also take the reg­u­la­tor to the Aus­tralian Com­pe­ti­tion Tri­bunal to chal­lenge its de­ci­sions. The Turn­bull gov­ern­ment leg­is­lated against such ac­tion in Oc­to­ber 2017. It said if the AER’s de­ci­sions had been up­held with­out chal­lenge, con­sumers would have saved a col­lec­tive $6.5 bil­lion on their en­ergy bills.

Wood ar­gues that given there is some risk faced by busi­nesses in the en­ergy sec­tor, the AER’s cur­rent reg­u­lated rate of re­turn is get­ting “far closer to where it should be”. Oth­ers strongly dis­agree.

“It’s ab­surd that such as­sets should be in the pri­vate sec­tor en­joy­ing pri­vate rates of re­turn,” says pub­lic pol­icy ex­pert Ian McAu­ley. “They are risk-free nat­u­ral mo­nop­o­lies, and it can be ar­gued that any rate of re­turn higher than the gov­ern­ment long-term bond rate is too high.”

Hav­ing been a mem­ber of the con­sumer ref­er­ence group with which the AER con­sults when un­der­tak­ing its rate-of-re­turn re­view, McAu­ley is close to its reg­u­la­tory process. He says con­sumers are be­ing short­changed to the tune of at least $740 mil­lion in higher elec­tric­ity bills, be­cause net­works are be­ing al­lowed a pre­mium for risk that’s based on a flawed math­e­mat­i­cal for­mula.

McAu­ley says the av­er­age con­sumer elec­tric­ity bill would fall by 15 per cent if the AER set the re­turn for net­work owners on the long-term bond rate of 2.7 per cent. But this sce­nario would be un­think­able for the net­work owners. Al­ready the Elec­tri­cal Trades Union says the AER’s draft de­ci­sion on Aus­grid’s po­ten­tial rev­enues would cut 400 to 500 jobs if it goes ahead.

En­ergy economist Bruce Moun­tain agrees that the reg­u­la­tor has set a gen­er­ous rate of re­turn and con­tin­ues to do so. Par­tic­u­larly if you look at the rate at which net­work owners are ac­tu­ally able to bor­row money. “That gap used to be higher in the past – it’s nar­rowed a bit,” Moun­tain con­cedes, “but by in­ter­na­tional com­par­i­son it’s still gen­er­ous.”

Moun­tain be­lieves that in or­der to bring down elec­tric­ity prices, some states will need to write down the value of elec­tric­ity as­sets that are still pub­licly owned. For the ones that have been pri­va­tised, though, the horse has al­ready bolted. “Part of the prob­lem is when the gov­ern­ment pri­va­tised the net­works back in the 1990s, they reval­ued the as­sets be­fore they sold them,” he ex­plains.

These as­sets, with their val­ues in­flated by gov­ern­ments, play into the is­sue of how much net­work owners are able to charge.

“The gov­ern­ment ba­si­cally took the money when they sold it and now they’re claim­ing it back. I think the share­hold­ers would rightly say, ‘You were quite happy to take it’,” says Moun­tain. “Of course, all of this was hid­den, no one spoke or wrote about the as­set write-up. This was not in the pub­lic do­main, it was all well and truly hid­den in the reg­u­la­tory de­tail.”

The ACCC has rec­om­mended the NSW, Queens­land and Tas­ma­nian gov­ern­ments vol­un­tar­ily write down the pa­per value of their as­sets to ac­count for over­in­vest­ment in net­works. It es­ti­mates this would save elec­tric­ity cus­tomers in those states at least $100 a year. It also rec­om­mended the pri­va­tised net­works in NSW be forced to pay a re­bate to con­sumers to off­set the im­pact of over­in­vest­ment.

Wood says fed­eral La­bor’s new en­ergy pol­icy to pro­vide sub­si­dies for net­work in­fra­struc­ture, such as in­ter­con­nec­tors, could prove the next reg­u­la­tory chal­lenge. “They’re con­cerned the reg­u­lated as­set test may not work in all cases so they’re still puz­zling on that,” he says. “But we will need more trans­mis­sion to deal with a lot of the ad­di­tional gen­er­a­tion we’re talk­ing about.”

Sim­i­lar chal­lenges are afoot for the pro­posed $4.5 bil­lion gov­ern­ment-owned Snowy Hy­dro 2.0 pro­ject. In NSW, where the pro­ject will be built, Tran­sGrid owns the trans­mis­sion lines. Its es­ti­mates put the cost of up­grades needed for

Snowy 2.0’s power to be sent to Vic­to­ria and NSW at about $2 bil­lion. Tran­sGrid will need to per­suade the AER of the ben­e­fits of the pro­ject, in or­der to charge con­sumers a higher rate and cover the cost of this in­vest­ment.

But Wood says Snowy Hy­dro, which is owned by the gov­ern­ment, is now ar­gu­ing that Tran­sGrid shouldn’t have to go through this process. “You could ar­gue this [$2 bil­lion up­grade] shouldn’t be a reg­u­lated mo­nop­oly as­set at all. It should just be di­rectly part of the busi­ness case and paid for by Snowy Hy­dro, not by the con­sumers of NSW though the trans­mis­sion reg­u­la­tor struc­ture,” Wood says.

“What we don’t want is reg­u­lated mo­nop­o­lies build­ing ad­di­tional trans­mis­sion lines which turn out to be un­nec­es­sary … If it’s a reg­u­lated as­set then the con­sumers pay for it for­ever, but if it’s done as a com­mer­cial de­ci­sion then the share­hold­ers end up tak­ing the risk. The con­sumers still pay for it, but only if

• they use it.”

“OVER­WHELM­INGLY, FOR THE LAST DECADE, THE BUSI­NESSES HAVE KNOWN MORE ABOUT WHAT’S GO­ING ON THAN THE REG­U­LA­TOR, SO IT WAS VERY HARD FOR THE REG­U­LA­TOR TO PUSH BACK AND SAY ‘NO’.”

This is the third in a se­ries of ar­ti­cles ex­plain­ing Aus­tralia’s en­ergy pol­icy mess.

CHARIS PALMER is the ed­i­tor of Aus­tralian En­ergy Daily and the pub­lisher of Schwartz Me­dia’s new busi­ness pub­lish­ing arm, Schwartz Pro.

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