Australia’s great electricity price swindle: How the networks got away with billions in overinvestment

Last year, Jess Hill of the Monthly published an enlightening but damning report, called Power Corrupts, on the state of the electricity industry in Australia. Her main topic of investigation is whether the sharp electricity price increases of recent years have been due to the carbon tax, Renewable Energy Target and other ‘green schemes’, as their opponents contend. Ms Hill’s findings offer an emphatic and resounding ‘no’: She concludes that erroneous projections that electricity demand would continue to grow – and the billions in needless infrastructure investment that happened as a result – ‘may be one of the greatest rorts in Australian history’.

Below are some excerpts from her article, published with permission. You can read the full article here.

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Since 2009, the electricity networks that own and manage our “poles and wires” have quietly spent $45 billion on the most expensive project this country has ever seen. Allowed to run virtually unchecked, they’ve spent vast sums on infrastructure we don’t need, and have charged it all to us, with an additional fee attached. The spending was approved by a federal regulator, and yet the federal government didn’t even note it until it was well underway.

Let’s be clear: this is the single biggest reason power prices have skyrocketed. According to the federal treasury, 51% of your electricity bill goes towards “network charges”. The carbon tax, despite relentless propaganda to the contrary, is small beer, comprising just 9%. The rest of your bill is carved up between those companies that actually generate your electricity (20%) and the retailers who package it up and sell it to you (20%). The Renewable Energy Target is such a small cost impost, the treasury’s analysis doesn’t even include it; the Australian Energy Market Commission says it makes up around 5%.

Thanks to the networks’ infrastructure binge, we now pay some of the highest prices in the developed world. The impact has been felt most keenly in New South Wales and Queensland, where the networks are government owned and network charges have accounted for two thirds of the price increases.

For a Coalition intent on destroying the carbon tax, the price hikes have been a gift – “proof” that the carbon tax is as ruinous as they predicted. Chris Dunstan, from the Institute for Sustainable Futures, thinks that what the networks have done over the past five years may actually be the secret to Tony Abbott’s success. “If electricity prices hadn’t doubled,” he says, “the carbon tax would not have been anything like the issue it was.”

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Every five years, the federal energy regulator grants the distribution and transmission network companies an allowance to spend on capital and operating costs. All the networks have to do is produce a spending proposal that looks “reasonable” – it’s up to the regulator to prove that it isn’t.

In 2009, it was generally agreed that the poles and wires were in a parlous state, especially in NSW and Queensland, and needed significant upgrades. The networks also claimed to need billions to build new infrastructure, to meet soaring demand. The trouble is, the networks’ data was wildly exaggerated, and the demand they predicted has not materialised; it probably never will. The regulator approved a staggering $45 billion of spending.

Why would networks exaggerate demand? Because the system rewards them for spending as much as possible. The more they build, the more they get paid.

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“Every year from 2009, I said emphatically that you, the regulator, and the businesses, have way overegged your assumptions about the rate of growth … And indeed, the networks have an incentive to do it,” says energy consultant Bruce Mountain.

That incentive was a system that rewarded the networks for spending as much as possible. The networks borrow money to build the new infrastructure, and the Australian Electricity Regulator (AER) lets them pass on the estimated cost of repaying the loan (the “cost of capital”) to consumers. In 2009, the AER ruled that the NSW distribution networks could claim an astonishingly high cost of capital of 8.78% per annum, which it said was equal to the borrowing costs of a private company at that time. The catch is, NSW network companies don’t borrow from banks, says Mountain; they borrow from a triple A–rated state treasury at rates of around 4–5%.

The regulator’s rate already guaranteed enormous profits to the NSW distribution networks, but it wasn’t enough for them. So they appealed the decision at the Australian Competition Tribunal, enlisting the finest QCs and international experts to argue their case.

They could afford to. The states had slipped in a rule declaring that the costs of network appeals were to be counted as “running costs” and charged to customers through electricity bills.

Anyone who tried to speak up for consumers in this process was essentially locked out. Gerard Brody, an advocate from the Consumer Action Law Centre, says that when he tried to intervene in a 2010 network appeal, his senior counsel advised him to withdraw. If he lost, he was warned, he could be forced to pay the networks’ costs. But that wasn’t the only obstacle. “A lot of the information put to the tribunal by the electricity distributors was marked commercial-in-confidence, so we couldn’t effectively assess or challenge their claims,” says Brody.

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Here’s the real tragedy of this story. Thanks to the actions of the electricity industry, a growing number of Australians are struggling to pay for a basic necessity. In every state, disconnection rates are rising – in NSW, for example, the number of disconnections rose by 25% in 2012. The Australian Council of Social Service says some of Australia’s 2.2 million low-income earners are struggling to pay their power bills. These consequences were entirely predictable.

One entirely unforeseen consequence of the industry’s profligacy has been the revolution it has triggered in the way we consume power. Not only has it made Australians use less energy but it has also helped to make solar power an economical choice. By stopping their use of the grid during the day, solar-powered households can save up to 60% on their electricity bills. That’s why more than 1.2 million households have installed solar panels over the past six years.

The electricity industry calls this situation “the death spiral”. As more people switch to solar energy and use less from the grid, the networks have to recover their costs from a smaller base. So prices rise, which drives more people towards solar, which makes prices rise again, and so it goes. When feasible home battery storage becomes commercially available in the next few years, this death spiral will only accelerate.

It already has the networks in a panic. In NSW and Queensland, electricity networks are campaigning vigorously to lift their fixed charges; if they succeed, even people who use less electricity from the grid won’t be able to avoid high network costs.

In the meantime, there’s no talk of penalising the networks for the billions they’ve wasted, or even of reducing their grossly inflated rates of return. On the contrary: if the NSW and Queensland governments are to sell their poles and wires, they need to convince investors that the industry’s profits are safe despite diving demand. To do that, they’ll need to keep misleading the media, so the public remain in the dark.

© 2015 Solar Choice Pty Ltd