The National Irrigator’s Council (NIC), on behalf of the Agricultural Industries Energy Taskforce, has released an independent report indicating that profits made by electricity networks are more than $2.6 billion higher than necessary, making electricity bills higher than is justified. The report has been met with a mixed response, with Energy Networks Australia CEO, Andrew Dillon, claiming that the report is a ‘misrepresentation of facts’.
The independent report by Sapere Research Group compared profit data recently released by the Australian Energy Regulator (AER) with the profit ‘allowed’ under the AER’s Rate of Return guidelines.
NIC CEO, Steve Whan, said, “Australian agriculture is struggling to remain competitive under the burden of massive increases in energy prices. Frankly, if this problem isn’t fixed, we can forget about being the ‘food bowl’ for Asia, and we can forget about the tens of thousands of jobs that would generate.
“The Ag Energy Taskforce is a group of peak agricultural groups who want to see more than just talk and tinkering from the electricity regulators. Taking action on network profits is the next important step – and is consistent with – the Government’s announcements on market operation earlier this week.
“We funded this study because bizarrely the AER is proposing to issue a new ‘Rate of Return’ guideline which does not include analysis of actual profits being made by the electricity networks.
“Our groups believe that the Rate of Return the regulator allows the networks to earn, should reflect an economically efficient return based on real world data from Australia and other comparable countries. It should not be based on a theoretical model that overstates the risk and cost of finance that monopoly owners actually enjoy in Australia.
“Sapere’s research uses AER published profit data for 18 companies covering the four years up to 2016-17. The report concludes that network financing costs are significantly lower than allowed for in the Weighted Average Cost of Capital.”
Sapere has made a conservative estimate that ‘based only on the AER’s rate of return data, along with AER data on the regulatory asset bases (RABs) of the networks, allowed returns exceeded efficient returns over the four year period by more than $2.6 billion or 14.6 per cent above allowed returns of $18.1 billion’.
Steve Whan said, “We call on the AER to introduce a Rate of Return method that uses actual data on network returns and which will significantly reduce the unjustified gold plated profits being raked from Australian electricity consumers.
Energy Networks Australia CEO, Andrew Dillon, said when network businesses earned profits above the allowed return set by the Australian Energy Regulator, it reflected efficiencies made in their operations, not more money out of customer pockets.
He said that under the incentive-based regulatory model, efficiency gains (reflected in higher than forecast profits) are returned to customers by way of reductions in prices.
“The regulator sets the allowed return and expenditures for most networks every five years,” Mr Dillon said.
“If a business is able to make savings by reducing operating costs, of course they will make more profit than forecast. But the regulator then in the next five-year period will return those profits to customers by setting lower benchmarks – which means lower network prices.
“This is a good thing for consumers as it serves as an incentive for businesses to become more and more efficient, which in turn keeps prices down.”
Mr Dillon said the poorly-understood nature of incentive based regulation and the frameworks that governed energy networks made it easy for facts and figures to be misrepresented.
“The worst thing that could happen from this type of fact-twisting is the introduction of rate of return regulation that has been tried and comprehensively failed overseas.”
Lauren Butler is the assistant editor for Utility Magazine. She’s based in Melbourne, Australia.