A sour reaction to power price medicine

Julia Gillard put 'gold plating' firmly on the media agenda and new medicine has already been proposed to cure pricing pains. And electricity suppliers are none too pleased.

The backbone of Australia’s electricity supply has reacted sharply to the new medicine proposed for addressing pricing pains.

The populist view of what is going on is that the Australian Energy Market Commission is setting new rules to better equip the Australian Energy Regulator. According to this view, the AER will then be better positioned to deliver power network charges that will ensure consumers aren’t ripped off.

As AAP sees it: “Electricity companies won’t be able to profit from over-investing under tough new rules” – “so-called gold-plating will become a thing of the past.”

Media reaction has tended towards judging the changes as giving weight to Julia Gillard’s recent claims that inefficient over-investment by networks has pushed up power bills.

The AEMC has been set up by federal, state and territory governments to oversee the rules under which the AER decides opex and capex outlays by the networks – with the current $40 billion worth of capital works between 2009 and 2014 being the largest single driver of highly unpopular power price rises.

The commission’s proposed rule changes will be finalised in November in time for the AER to get to work in the new year on the next tranche of network spending – designated for 2014 to 2019.

Energy ministers and first ministers, meeting under the Council of Australian Governments banner, will get a chance to review the changes in December – by which time a Senate inquiry into power prices, launched last week by the Gillard government, will also have reported.

AER chairman Andrew Reeves has welcomed the new rules, saying they will give him “greater scope to reject excessive proposals and to scrutinise investment.”

The Energy Networks Association, lobby group for all the gas and electricity delivery systems, has reacted cautiously to the proposals.

CEO Malcolm Roberts says: “Network regulation is a delicate balancing act between offering the right incentives for long-term investment and minimising costs today for customers. ENA will carefully review the proposed rule changes to see how well they meet this test.”

Grid Australia, on the other hand, is not going to pussyfoot about.

The association represents the six businesses that operate $12 billion worth of high voltage assets on the east coast and in Western Australia, four of them owned by state governments.

Together they are spending $2.2 billion a year on capital works.

The bulk of their interests lie in eastern Australia.

“We form the backbone of the national electricity market,” Grid Australia declares, pointing to $10 billion worth of assets and 40,000 kilometres of lines in South Australia, Tasmania, Victoria, New South Wales and Queensland.

In a statement, Grid Australia’s chairman, Peter McIntyre, chief executive of NSW’s TransGrid, warns the long-term development of the grid could be at risk under the AEMC proposals.

Part of the association’s beef is that the commission has caught up transmission in its efforts to curb the "poles and wires” – distribution system – charges that are the focus of political and consumer angst about power prices.

“Our role,” says McIntyre, “is quite different to companies that connect directly to households. The integrity of the grid depends on our services.”

He argues that there is a risk the AER is going to over-react to current concerns about “poles and wires” charges and, in doing so, starve the high voltage networks of “vital investment funding.”

Over time, says McIntyre, this will lead to an increased risk of power blackouts.

He adds: “Reduced transmission investment can also increase energy prices as the grid links consumers to the nation’s cheapest and cleanest sources of power generation.”

People need to understand, he says, that it was the watchdog that approved the $35 billion worth of distribution capex for 2009-14 in the first place.

“We have argued that the AER has always had the power but not necessarily the skills to undertake its important task.”

McIntyre says the new arrangements proposed by the AEMC can work if the AER has adequate skills and funding to be an effective regulator of transmission networks – but it also needs to be held accountable for its decisions.

In a report prepared by PricewaterhouseCoopers for Grid Australia as a contribution to a different inquiry by the AEMC – this one looking at how transmission should be regulated – the consultants flesh out the high voltage engineers’ concerns.

“Regulation has the potential to alter investment flows,” says PwC, “either encouraging too much investment or, more likely, discouraging efficient investment, with projects either not undertaken, deferred or installed with sub-optimal levels of capacity.

“Regulated businesses are encouraged to see the regulator as their key stakeholder with consequential dimunition of concern for their true customers.”

ENA’s Roberts says the rule changes proposed won’t alter the fact that networks will still need the capacity to meet consumer demands in extreme weather.

“Assets past their working lives will still need to be replaced,” he says. “Businesses will still need to borrow capital at market rates.”

Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of 'Powering Australia' yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.

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