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 Australian Energy Regulator (an arm of the ACCC) is proposing a package of new rules to curb inflated network spending. Key elements include repaying unspent funds to consumers, passing on part of any cost savings when upgrades come in cheaper than forecast, forcing networks to pursue non-spending options before seeking approval for big upgrades, averaging interest costs over several years to reflect refinancing, and using benchmarking to drive operating efficiencies across distributors.
Gold plating refers to electricity networks seeking approval for excessive or overly costly upgrades and investments. According to the article, this practice — combined with inflated borrowing costs and similar tactics — has been a major reason for steep increases in power prices over the past five years.
'Double dipping' describes situations where networks effectively win approval to get paid for the same upgrade more than once. Previously, if regulators challenged spending plans, companies often appealed to the Australian Competition Tribunal and typically succeeded. Under the new approach, unspent funds will be repaid to consumers and savings from cheaper-than-expected projects will be shared with consumers, removing incentives to claim the same spending twice.
Consumers should benefit in a few ways: unspent budgeted money will be returned to consumers, part of any savings from completing upgrades more cheaply will flow through to consumers, and benchmarking and tougher scrutiny should reduce unnecessary spending that drives up electricity bills.
The new framework assumes networks regularly refinance a portion of their debt as cheaper options become available. Instead of taking the cost of borrowings at the start of a multi-year regulatory period, interest charges would be averaged over several years so that declines in interest rates are better reflected and not locked into higher charges.
Benchmarking compares the operating efficiencies of electricity distributors across the industry. By measuring performance industry-wide, regulators can identify higher-cost operators and push them to adopt lower-cost approaches, which should reduce overall network spending and put downward pressure on prices.
Yes. Companies can still seek approval for upgrades, but the new rules are designed to make it harder to automatically win large spending approvals. Networks will be expected to explore non-spending alternatives first, provide incentives to limit spending, and face closer scrutiny on costs and borrowing treatment.
Investors should watch for tighter scrutiny of capital spending plans, greater emphasis on operating efficiency through benchmarking, changes to how interest costs are recovered, and mechanisms that return unspent funds or savings to consumers. These measures could moderate future revenue growth tied to big capital programs and increase pressure on networks to operate more efficiently.
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