A lawyers' picnic looms over power networks

The Australian Energy Regulator's proposed slashing of power distributors' budgets has left it between a rock and a hard place.

It may seem from the torrent of coverage of the electricity networks over the past 4-5 years that, in the court of public opinion, nothing is more important than the charges they levy. But appearances are deceptive. Above and beyond this is the safety issue; industry insiders know the community has zero tolerance for failures here.

Close reading of the hundreds of pages of responses to the latest round of Australian Energy Regulator budget reviews for four distribution service providers shows they are throwing the spotlight on safety in protesting against the decisions.

The watchdog has dismayed and angered ActewAGL (which serves the capital territory) and the three New South Wales government-owned distributors (Ausgrid, Endeavour Energy and Essential Energy) with draft proposals to make deep cuts across their capex and opex allowances from now to 2019 -- and nowhere more so than in expenditure affecting safety management.

Ausgrid, in its response, tells AER: “(Your) proposal to accept the safety consequences of higher rates of network asset failure and an increase in blackouts is neither consistent with the national electricity objective nor the objectives of the (state’s) Work Health & Safety Act.”

The distributor says its own assessment, using consultants, of the impact of proposed cuts is that safety risks for Ausgrid workers and members of the public will increase. It warns that the AER, if it persists with the draft budget it has set, may itself be in breach of the federal WHS Act.

It is also waving letters it has elicited from the NSW fire services at the watchdog, expressing concern over the impact on vegetation management in bushfire-prone areas that it says will flow from the AER’s plan to cut an aggregate 39 per cent from its operating expenditure.

Endeavour Energy, which with Ausgrid provides services to 2.5 million electricity account holders in 46,775 square kilometres stretching from the Illawarra up to the Blue Mountains and across to Newcastle, including Greater Sydney, has used almost the exact same words in its response. That's no surprise, as the Baird government has shifted all three distributors under the umbrella of Networks NSW since winning office in 2011.

Endeavour’s opex budget has been cut by 23 per cent under the AER proposals. Ditto for Essential Energy, which covers the rest of New South Wales and faces a 38 per cent opex cut.

Vince Graham, who is chief executive of all three businesses under the umbrella set-up, has said in a media statement that the distributors “will not compromise on the safety of the public and our employees”.

ActewAGL is just as ropeable, telling the AER in a 730-page riposte to its draft determination that its approach is “reckless” and that it is evident from the decision that the regulator “has not  conducted any risk assessment of the proposed cuts on safety, security and reliability” of its service.

All four of the distributors are deeply unhappy with the benchmarking the AER has taken to assessing their budgets, the first time benchmarking has been used in network regulation following the 2013-14 rewriting of the rulebook by the Australian Energy Market Commission. They complain that the benchmarking by consultants wasn’t discussed or tested with the electricity industry before it was applied to them.

ActewAGL’s chief executive, Michael Costello, a former Australian ambassador to the UN and former head of federal departments, is anything but diplomatic in a foreword to the distributor’s revised budget bid. Relying exclusively on unreliable (benchmarking) techniques to set “unprecedented” (low) expenditures is “alarming,” he declares.

Costello writes: “There is nothing wrong with attempting to deliver price reductions based on well-founded rationale and analysis – but, by law, the AER (must also) consider reliability, quality and safety.”

The possibility that the networks may take to the courts to challenge the AER’s handiwork is threaded through all their latest submissions. Costello has been explicit about it in talking to the media in Canberra, saying that, if the regulatory decision stands, it could have “dire consequences” for reliability, security and safety. Massive cutbacks in maintenance will make the ACT power grid “much more dangerous,” he asserts.

The next step in this imbroglio is the regulator’s. The AER is due to produce its supposed final word on distributor budgets in April.

It is hard to see how the agency can backtrack without losing face and inciting a fresh backlash from industrial power users, who are thrilled by the draft decision. If it rejects the networks’ arguments, the Federal Court may be asked by the distributors to judge its judgement and behavior.

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