Electricity consumers have paid substantially higher bills than necessary for ‘poles and wires’, providing a hefty $10 billion in supernormal profits for energy network providers in the eastern states of Australia over an eight-year period due to flaws in network regulation, according to a new report by the Institute for Energy Economics and Financial Analysis (IEEFA).
The report, Regulated Electricity Network Prices Are Higher than Necessary, found the actual profit that energy network providers received from electricity consumers over 2014 to 2021 was 67% higher than the normal level of profit.
‘Poles and wires’ distribution and transmission network service businesses have consistently been charging electricity consumers too much—around 11% more than total costs. Of the 18 network service providers analysed, 14 extracted profit above IEEFA’s expected profit multiple range.
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This has imposed an unnecessary additional average cost of 6.8% onto people’s electricity bills in 2020, or between $800 to $1200 per energy customer over the eight-year period, depending on the state they live in, with no additional reliability benefits because the supernormal profits are after all network reinvestment.
The report finds the complex regulatory system designed to prevent sustained excessive network monopoly profits has failed due to weak laws and rules regulating networks and a lack of transparency over the extent of monopoly profits. In IEEFA’s view, the supernormal profits of $10 billion over 2014-2021 appear inconsistent with the National Electricity Objective.
Author of the report Simon Orme said regulatory change must occur immediately.
“People’s electricity bills are forecast to increase even further over the next six to 18 months as high coal and gas prices globally impact Australia’s domestic prices,” Orme said.
“Australia’s energy customers have been spinning golden silk for network providers for nearly a decade. They can’t be expected to fund super profits any longer. The extra burden must be removed.
“The inefficiencies from excessive network prices, and wealth transfers created by persistent sector-wide supernormal profits, are also delaying decarbonisation of the electricity system.”
Orme said energy consumers in the national electricity market have paid around $1.2 billion more than necessary each year over the last eight years to have a stable electricity supply.
“The Australian Energy Regulator is responsible for making sure networks charge consumers only what is required to cover the costs of investing in, building, maintaining and operating the networks, plus a reasonable profit to ensure compensation for investors.
“That network providers in Queensland, New South Wales, Victoria, South Australia and Tasmania have gained super profits by persistently charging too much, resulting in overall retail electricity prices being higher than necessary, is a fact Energy Ministers championing lower electricity prices may have been unaware of.
“Now that they are aware, the Federal Government should establish an independent commission of inquiry into the economic regulation of networks, working together with participating NEM jurisdictions.”
The report finds the supernormal profits occurred because the current regulatory system, which is managed by energy market bodies including the Australian Energy Regulator, the Australian Energy Market Commission, the Council of Australian Governments Energy Council and the Australian Competition Tribunal, consistently overestimated the actual costs that network businesses would require to build, operate and maintain the network. Networks charged those overestimated costs to consumers (via retailers), and shareholders retained the differences between the networks’ revenue and cost.
The persistent and large sector-wide supernormal profits have contributed to increased investment in and use of substitutes for network services by consumers, resulting in underutilisation of network assets.
“This is another fail that has adversely affected the overall productivity of the sector,” Orme said.
“And any assumption that those supernormal profits are being reinvested in higher levels of regulated capital investment is wrong. Instead, they go to shareholders.
“This means that crucial financial resources that could fund investment in the energy transition are being diverted by wealth transfers from consumers to network shareholders, many of whom are overseas. This delays and raises the cost of the energy transformation.”
Energy Networks Australia CEO Andrew Dillon said the report was “misguided” and “misunderstood Australia’s regulatory framework”.
“Many reputable studies around the world have shown that customers are better off when governments use incentive-based regulation. Revenues are lower when regulators regulate revenues, not profits,” he said.
“Incentive-based regulation encourages networks to innovate and deliver value-for-money service, with these savings passed onto customers.
“If networks meet and beat performance benchmarks, this means they are delivering better services at lower cost. Networks do earn incentive payments on this outperformance, but these benefits are then returned to customers in the form of lower prices.
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“As a result of this approach, the independent Australian Energy Regulator’s recent network performance report highlighted that in 2021 electricity networks charged customers less for network services than they have at any time since 2010, while maintaining excellent reliability and service quality.
“The IEEFA document ignores another key point—that network returns have halved since 2014 (see graph) and that Australian regulatory return allowances are lower than those in all but one other comparable country, and in many cases are the lowest they have ever been.”
