New rules to rein in price gouging by electricity operators
"Double dipping", inflated borrowing costs and the like have all been used to win approval for multibillion-dollar outlays by the networks, which have pushed electricity prices up steeply over the past few years, leading to a consumer-led backlash.
In the wake of mounting public criticism of the price gouging, the Australian Energy Regulator, an arm of the competition watchdog the Australian Competition and Consumer Commission, is putting forward a raft of new rules aimed at winding back inflated spending demands.
Previously, if electricity companies disagreed with the regulator challenging their spending plans, they took their complaint to the Australian Competition Tribunal and typically got their way. In the process, some companies have been able to "double dip" by winning approval to undertake the same upgrades twice, for example. In the future, unspent funds will be "repaid" to consumers and, if planned upgrades are completed more cheaply than flagged, then part of those savings will also flow through to consumers.
The new approach is also intended to force electricity companies to pursue non-spending options before seeking approval for spending to upgrade capacity by, for example, providing incentives to limit spending.
Following the financial crisis of 2007, interest rates rose worldwide, although subsequent rate declines have not been reflected in the spending approvals, which has helped to inflate electricity prices.
The new framework assumes the electricity networks refinance a portion of their borrowings regularly as they access cheaper debt options, with interest charges to be averaged over several years rather than taking the cost of borrowings at the start of the multi-year regulatory period for new spending.
A key change is to use so-called benchmarking, with the operating efficiencies of electricity distributors compared industry-wide to force lower cost approaches to be implemented.
Frequently Asked Questions about this Article…
The AER is proposing a package of changes to curb inflated network spending — including repaying unspent funds to consumers, passing on part of any cost savings when upgrades come in cheaper than forecast, averaging interest charges over several years (to reflect refinancing), using industry benchmarking to drive efficiencies, and encouraging non‑spending options before approving major upgrades.
The changes respond to mounting public criticism and a consumer‑led backlash after a surge in power prices over recent years. Regulators want to stop practices like ‘gold plating’ and other tactics that have pushed network spending and prices higher.
The reforms are designed to reduce upward pressure on prices by winding back inflated spending approvals. Unspent funds would be returned to consumers and a share of savings from cheaper‑than‑expected projects would flow through to bills, which should help limit future price increases.
‘Double dipping’ refers to networks getting approval to charge consumers for the same upgrades more than once. Under the new approach, unspent allowances will be repaid to consumers and the incentive to win duplicate approvals should be reduced, making double dipping less likely.
Instead of taking the full cost of borrowings at the start of a multi‑year regulatory period (which locked in higher post‑2007 interest costs), the framework assumes networks will refinance over time and averages interest charges across several years. That should better reflect cheaper debt options as they become available.
Benchmarking means comparing operating efficiencies across the industry. By measuring distributors against peers, the regulator can push slower or higher‑cost operators to adopt lower‑cost practices, helping to reduce overall network spending.
Yes. The new approach is intended to force companies to pursue non‑spending solutions (for example, incentives to limit demand) before asking regulators for approval to spend on capacity upgrades, reducing unnecessary capital outlays.
For investors, the reforms mean increased regulatory scrutiny of network spending and a greater focus on efficiency. That could constrain future allowed spending and growth in regulated revenues, while also reducing the risk of consumer backlash and reputational hits. The net impact on any specific company will depend on how much its past returns relied on the practices the AER aims to curb.
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