Tuesday, June 21, 2011

"You rigged 'da what?" Why electricity charges are climbing

Rigged rules

The Australian energy regulator has taken aim at what it says is the real reason for rising power prices, saying it has nothing to do with the carbon tax and everything to do with “gold plating” by firms that know they’ll be able to pass on higher costs.

Pleading for change and speaking out for the first time since becoming AER chairman Andrew Reeves told a conference in Melbourne his hands were often tied when it came to approving the electricity price increases.

He was only allowed to knock back those that did not “reasonably reflect” the cost of planned investment.

“There is a clear incentive for the business to submit proposals that are either at or beyond the upper end of the range of reasonable estimates,” he said.

“Businesses routinely submit proposals that contain substantial engineering detail in support of the ‘reasonable’ estimate. We are then required to undertake a granular assessment of the proposal within a tightly-defined time frame. The inevitable consequence is an outcome that is not a central estimate of efficient costs, but one which is biased in favour of the service provider"...

Asked by the Herald how much higher power prices were now than if the AER had been able to make decisions using its own cost and pricing formulas Mr Reeves did not give an estimate but pointed to forecasts showing electricity distribution revenues in NSW and Queensland would roughly double over the next 4 years because of approvals the AER already given, sometimes reluctantly.

In Victoria where there not been overinvestment, revenues would be little changed.

Transmission and distribution charges made up about half of each electricity bill.

“If we decide against proposed increases the firms appeal to the Australian Competition Tribunal and usually win,” Mr Reeves told the Herald.

“We have had something like 22 issues before the Tribunal in the last three years and in 14 of those the the Tribunal has ruled in favour of the firms - and those were for big increases.”

Transmission and distribution firms were also able to spend more on capital equipment than had been approved, knowing that under tits rules the AER would be forced to approve price increases that would give them a reasonable rate of return on that capital at the next review.

“Ross Garnaut has called it gold plating,” Mr Reeves said. “NSW and Queensland are getting more infrastructure than we think they need and we are required to approve price increases to pay for it.”

The AER was also required to calculate the cost of capital for electricity firms using a formula that often overstated actual costs. Where it understated actual costs the firms could apply for a reassessment, but not the other way around.

“We are speaking out about this now because electricity prices are a concern to the community,” said Mr Reeves. “For years there wasn’t much interest. A lot of public servants working for the AER have been dedicated and frustrated.”

The AER has asked the Australian Energy Market Commission to review its rules to make them more like other regulators. The incoming head of the Australian Competition and Consumer Commission Rod Sims is understood to strongly support a change.

“We want to use best practice as our benchmark, not existing practice. The best-run power companies are the privately-owned ones in Victoria, we want to use them to benchmark the costs and spending in NSW and Queensland," Mr Reeves said.

Published in today's SMH and Age


Why Power prices are really rising:

Peter Martin Energy Prices NightLife March 9 by 1petermartin


NSW's AusGrid hits back

NSW electricity distributor AusGrid - formerly known as Energy Australia - has accused the prices regulator of putting power supplies at risk by attempting to take control of its investment program.

Angrily rejecting claims AusGrid was helping force up NSW power prices by “gold plating” its network with unnecessary spending, managing director George Maltabarow said the state had to spend more than other states in order to replace substations and poles and wires erected in the 1960s and 1970s.

“We have 700,000 more electricity customers than Victoria, one million more poles and 120,000 km of wires. Our network is older than Victoria’s and the replacement costs are coming earlier,” he said.

Australian Energy Regulator chairman Andrew Reeves claimed Monday NSW distributors were submitting grander than needed investment proposals in order to pass on the costs in higher prices. NSW distribution charges were set to double in the next four years while those in Victoria remained little changed.

Mr Maltabarow told the Herald the Mr Reeves appeared to want “take more power to control electricity networks without any of the accountability”.

“The AER is not accountable when a major substation fails and customers lose power. It is not accountable if our workers are put at risk of serious injury,” he said.

“Suggestions that we call the tune and the regulator’s hands are tied are from from true. It cut $460 million in capital funding from our most recent proposal and $170 million in operating costs. Its decisions were upheld by the Australian Competition Tribunal.”

“About half of our large electricity substations were built in the 1950s and 1960s. Electrical equipment generally has a life of 40 to 50 years and so we have reached the stage now where much has to be replaced.”



Related Posts

. Easy listening. Why power prices are really climbing

. Get set for higher power prices, with or without a carbon price

. Could baseload power demand be a myth?


2 comments:

Anonymous said...

Hi Peter.

That's not a very useful graph. You need to account for the different sizes of the states, e.g. by dividing by population.

Regards
SJ

Peter Martin said...

It's not my graph, but I like it SJ.

Even if you did divide each line by different denominators (say, different populations) it would still show revenues roughly doubling in NSW and Queensland while remaining little changed in Victoria.

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