The electricity regulator's delicate balancing act

The national electricity regulator faces community pressure over rising power prices, while networks are seeking approval for higher budgets. Ensuring reliable supply will be no easy feat.

The energy price merry-go-round on the east coast is momentarily playing carbon tunes, but it is about to spin to the louder music of network charges.

The Australian Energy Regulator has launched its first major review for the five years from now to mid-2019. It considers what the three electricity distribution businesses can spend and what they can recoup from almost 40 per cent of eastern Australia’s power consumers who are residents of New South Wales.

Inconveniently for the Baird Coalition government, facing a state election on the last Saturday of next March, the draft determination for Ausgrid, Endeavour Energy and Essential Energy will be produced in November with a final verdict next April.

If the networks get what they want, their charges will rise by an average two per cent annually from now until 2018-19 -- accounting for about half the final power bill -- at a time when gas prices also will be soaring.

The trio wants to outlay $9.6 billion on capital works, which is $6bn lower than the allowed level of $15.6bn for 2009-14, but not a small sum.

Ausgrid, the largest power network operator in the country, wants to spend $4.9bn in capex. It has pointed to its need to replace and upgrade assets at risk of failure and requirements to provide more capacity in metro areas of residential growth along rail corridors and in business parks, where 180,000 new homes are to be built.

The three businesses also want to be allowed to run higher operational budgets, adding up to $7.9bn (versus $6.7bn in 2009-14).

As a result, they are seeking the right to garner $24.6bn in revenue, $4bn more than regulator allowed for 2009-14.

Andrew Reeves, chairman of the Australian Energy Regulator, is under no illusion about how the community feels about this.

During the launch of a new round of consumer consultation, he said: "What we are hearing is that electricity prices are too high and need to come down."

However, he added that the regulator’s job is also about ensuring a reliable power supply.

“It’s all about getting the balance right, so a critical part of the process will be the views of consumers, whether pricing proposals are justified, and whether the bids are in the long-term interests of customers.”

The revelation of the networks’ goals is a salutary reminder to federal and state politicians that the shenanigans over the carbon price and the renewable energy target may be capturing the headlines right now, but voters will judge them on the overall pain of energy bills in an environment. The cost of living is still a high-profile issue for households.

The real world for New South Wales residential electricity consumers is that, on average, bills have gone up from $1,013 in 2007-08 to $2,073 in the past financial year. The extra costs  have come from networks ($580), the carbon tax ($172), other green charges including the RET ($87), wholesale energy prices ($53) and retail charges ($166).

The real world for the electricity providers is that such prices make consumers as mad as hell -- until supply fails. Nothing makes them madder than no power.

Equally real for suppliers is the devilish issue of customers reducing their requirements for power as prices rise. Householders do this often, but so do commercial and industrial users, which creates a smaller base from which to draw revenue to meet their capex and opex costs.

At the start of the decade, the NSW trio were delivering 57,500 gigawatt hours of electricity to urban, regional and rural customers. They are telling the AER that they expect demand to be 52,000 GWh at the decade’s end and this with a larger population.

The regulator’s juggling act has to take in softening demand, a marked drop (it says) in the cost of finance for networks and an easing of the network reliability standards by the Coalition state government.

Lurking in the political woodwork, meanwhile, is the increasing pressure on federal and state governments to make substantial changes to the tariff structure for electricity supply.

This requires retail deregulation, the roll-out of smart meters and a shift from a flat-rate tariff system to a ‘dynamic’ one that encourages households to use less power at peak but also delivers winners and losers as the cost of delivery is shared differently.

As the Grattan Institute put it in a recent paper, "governments, businesses and regulators will need to be clear that the total amount of revenue collected by networks will not change but higher bills for some customers will be offset by lower ones for others".

Another political storm signal from the AER in its 50-page 'issues paper' launching public consultation on the NSW network bids is well buried, but is unlikely to be missed by the state government, the opposition, the trade unions and the DBs themselves.

Reading between the lines of the networks’ bids, says the regulator, one gets the impression that the overall size of their workforce isn’t going to change. Instead, it will just get shifted from capex to opex work.

Is this efficient, it asks? Who should bear the costs if it isn’t: consumers or owners?

With the Baird government seeking voter approval to part-privatise Ausgrid and Endeavour Energy, this is not a trivial point.

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