Oversupply is rife, just don't call it gold plating

IT WAS media management at its slickest. The press release lobbed on Monday, January 7. It was holidays. No one cared. It was hot. The third Test was in the news. Warnie had got in an argument about something.

Few eyes were peeled for media releases from the office of Chris Hartcher, the NSW Minister for Resources and Energy.

Even then, the release managed to ramble on for an entire page without actually saying anything. PR at its finest, crafted to induce an instant drooping of the eyelids.

Anyway, it was a press release about a report, a report headlined by the eye-catching title, "Interim Report Mid North Coast Review".

Riveting stuff.

As it turns out, after all that kerfuffle last year about "gold plating" by energy companies - arising partly from the hue and cry by farmer Bruce Robertson and the Manning Alliance - the government must have commissioned a report.

Written by engineer Robert Rollinson, it is remarkably forthright, and does the government no favours.

Extrapolating from the findings, it would not require the drawing of too long a bow to deduce that "gold plating" is rife.

Gold plating is the excessive expenditure by electricity networks on poles and wires to increase their revenue (under the National Electricity Market regulatory framework, the more the power companies spend, the more they get paid - and this spending is the single biggest component of the rise in our power bills).

In the Rollinson Report, the words "gold plating" are not mentioned once. But there is no mistaking the findings.

Here is an experienced engineer and financier from Macquarie Bank who simply fails to understand why the network providers plan to spend the millions they do.

The big question, which we will get to soon, concerns the message about electricity companies around the country. If this gold plating is rife in one part of NSW, how many billions are being wasted, indeed added to our power bills, Australia-wide?

First, to the specifics in the report that vindicate such a joining of the dots.

"Based on [reports by the transmission provider] the review has found it difficult to gain a complete understanding of the reasons for the promotion of a 330kV solution that was originally proposed by TransGrid," writes Rollinson.

He is talking about a TransGrid proposal to build a line of those big coathangers between Stroud and Taree on NSW's mid-north coast, a plan that brought trenchant opposition from the Manning Alliance group of locals who argued, in the end successfully, that demand for electricity was simply not there to support the project.

Among Rollinson's recommendations, of which the first included suspending the project, was for a better consultation process.

"The public consultation process used by TransGrid for this project should be independently reviewed to identify improvements that can be made."

Nationally, the concern is not simply about TransGrid. It just happens to be the subject of this report. All the state network providers have been accused (and in some cases pinged by the regulators) for unnecessary spending.

Rollinson is saying there should be independent reviews, generally, not just of the NSW project. And he doesn't spell this out, but as the entire industry is prone to overspending, thanks to its structure of regulated returns, surely it is not this project alone that bears scrutiny.

If one network provider were about to spend almost $300 million on an unnecessary project, how much gold plating is really going on out there?

Mark Byrne, of the Total Environment Centre, says residents on the far-north coast of NSW have been fighting a proposal by TransGrid and Country Energy to spend $227 million on new power lines.

"It was based on dubious demand forecasts for the entire north coast region," says Byrne. Residents claimed a win last year when the project was put on ice for a year - delayed, not abandoned.

Similar allegations of gold plating have been levelled at SP AusNet and the distributors in Victoria, and of Powerlink, Ergon Energy and Energex in Queensland (though it is said to have made more progress in demand management than its southern peers).

Since the matter of gold plating achieved prominence last year - and in response to the public backlash over energy prices - there have been savings and deferment of projects announced of some $2.85 billion over the next 18 months in NSW alone (that's from the earmarked $16.6 billion in spending for the five-year regulatory period to June 2014).

Arousing further suspicions over the basis for industry spending are Rollinson's observations about electricity consumption.

Bruce Robertson told BusinessDay the report vindicated everything the Manning Alliance had been saying. "You would think they [the networks] would have identified major customers who were going to use the stuff [electricity]," he said.

Sadly, the mid-north coast is one of the poorer regions of Australia. Some 25 per cent of the rate base of the city of Taree is on benefits. Population is tipped to grow at a little over 1 per cent. Against this backdrop of energy poverty, demand is just not there, says Robertson.

According to the Independent Pricing and Regulatory Tribunal, the average annual electricity bill for Country Energy customers is $2520, which is 39 per cent higher than in the city.

"People simply can't afford the product," says Robertson. "The industry isn't doing the basic demographic data."

Indeed, electricity can be considered more than a product. It is an essential service, one whose cost can promote or drag down the entire economy.

And it is the rise in the price of this commodity over the past few years - now running at a 17 per cent annual increase - that has dampened demand.

Industry has been its worst enemy.

The price rises have killed demand and now the spectre of overcapacity looms.