The Senate has agreed to launch a far ranging inquiry into the effectiveness of regulation over monopoly power network businesses to assess the extent to which consumers may be paying too much for poles and wires.
In addition, it will also examine whether the arrangements for the connection and pricing of network services discriminates against households and businesses that generate their own electricity – for example, via solar PV systems. (The full terms of reference are provided at bottom.)
This inquiry comes on top of countless other reviews and inquiries, with timeline below, including a Senate inquiry looking into electricity price rises just two years earlier. This naturally draws the question, what will yet another inquiry possibly achieve?
Source: Energy Networks Association
One reason provided is that an Energex employee recently blew the whistle that she had been instructed to find examples in the debt market of high-cost debt that Energex could use to justify a high cost of capital allowance to the Australian Energy Regulator. The cost of capital allowance is a critical component of regulation because it determines how much profit margin a network business can charge consumers for its installed base of assets.
Yet this case of whistleblowing seems to have drawn yawns from the AER themselves, and also a range of people close to the network regulatory process that Climate Spectator has spoken to. The universal response to the idea that Energex deliberately manufactures an artificially high cost of capital has been, 'Duh, of course they do! Every network business does – that’s their job'.
There is a general acceptance that all the network businesses try to fool the regulator that their costs are higher than they really are, and that the demand for new assets is higher than it really is, and the regulators job is to not be fooled.
Given this pragmatic reality there are some serious issues that haven’t and really couldn’t be addressed by the prior, more constrained inquiries:
1) When the national regulatory regime was established back in 2007 it was incredibly naïve in assuming it could create commercial incentives that would discourage network businesses from overbuilding assets. We now have assets in place beyond what electricity demand requires. This is now generally well accepted by all. Indeed the federal and Queensland energy ministers have acknowledged gold-plating has occurred. While there have been reforms put in place to reduce the potential for overbuilding in the future, what do we do about past mistakes that will ensure they don’t continue to perversely infect future resource allocation?
2) How can we better utilise competition from demand-reducing technologies, in addition to regulator supervision, to discipline network providers (instead of a naïve idea that somehow we can create incentives that will mean monopoly providers will behave in the best interests of consumers all by themselves).
Point 1 is incredibly important right now, given the fact that the Queensland and NSW governments are about to privatise their network businesses. Once these networks are sold to the private sector, the new owners will understandably have an expectation that they will be able to recover a level of revenue consistent with the price they paid the NSW and Queensland governments for these assets.
Unless we want to earn a reputation akin to Chavez’s Venezuela, we can’t abruptly change the rules in a way that destroys their investment. Partly related to this is that the WA Government is facing some serious budgetary problems related to its largely state-owned electricity system. In addition, it is looking at privatising its power retailing and generating business which have incurred significant fixed costs and are also hurting from a drop-off in electricity demand growth.
Point 2 is also incredibly important right now, because – if investment analysts, Silicon Valley venture capitalists and some utilities are to be believed – we are on the cusp of a technological revolution in customers’ ability to cost-effectively generate, store and manage their consumption of electricity. Citi analysts concluded in a recent research note:
We expect battery storage to have a meaningful penetration in the global electricity market within the next 15 years, which should intercept the utility’s asset replacement lifecycle of 30-35 years and cause some very significant – and in cases terminal – challenges.
Superimposed over the top of these two issues is that over the last five years it has become apparent that electricity demand has essentially stopped growing and has significantly decoupled from economic growth. This is far clearer now than just two years ago, when it was thought it might just be a cyclical rather than permanent structural change. If it’s structural it has big implications, because the fixed costs of overbuilt assets now look like they’ll be redundant to requirements for a long time.
Unfortunately, because those involved in making energy policy have been a party to many of the past mistakes – and state governments, in particular, have a rather large stake in decisions regarding points 1 and 2 – it is important that someone external to this process have a deep look at these issues.
If not there is a risk that a cosy club of industry and government officials decide to establish a structure for charging consumers for power which forces us to pay for capacity that we don’t need. A system of fixed charges that we can't avoid, even if we reduce electricity demand, could destroy incentives for us to improve productivity and lower carbon emissions through utilising emerging customer energy management technologies.
Senate Inquiry: terms of reference
The following matter be referred to the Environment and Communications References Committee for inquiry and report by the first sitting day of March:
1. The manner in which electricity network companies have presented information to the Australian Energy Regulator (AER) and whether they have misled the AER in relation to:
a. Their weighted average costs of capital
b. The necessity for the infrastructure proposed
c. Their regulated asset valuations
d. Actual interests rates claimed against actual borrowing costs
2. How electricity companies including State Government owned electricity companies such as Energex have calculated the weighted average cost of capital and how this measure has changed over time
3. Where anomalies are identified in relation to price structuring or allegations of price rorting by electricity companies including State Government owned electricity companies such as Energex are raised, that these matters are investigated by a national independent body created by the Federal Government with the required powers and reach to investigate and prosecute where necessary
4. To ascertain whether state-owned network companies have prioritised their focus on future privatisation proceeds above the interests of energy users
5. Whether the arrangements for the regulation of the cost of capital are delivering allowed rates of return above the actual cost of capital
6. Whether the AER has actively pursued lowest-cost outcomes for energy consumers
7. For the Committee to consider the following matters:
a. Whether network monopolies should have the right to recover historic overspending that has delivered unwanted and unused infrastructure.
b. How the regulatory structure and system could be improved
c. Whether the arrangements for the connection and pricing of network services is discriminating against households and businesses that are involved in their own electricity production.
d. Whether the current system provides adequate oversight of electricity network companies.
8. And any other related matter.