ENA warns consumers to beware of Grattan Institute report

A call by the Grattan Institute for retrospective network asset write downs would significantly increase electricity costs to Australian energy users, according to the Energy Networks Association (ENA).

The ENA’s chief executive officer John Bradley said the Grattan Institute report asks the right questions about electricity demand, but offers the wrong answers.

“It’s not logical to claim network returns are currently too high, while effectively calling for them to be increased in a riskier environment of asset write-downs. The report admits this would ‘greatly increase the price that would have to be paid to attract investors’,” Mr Bradley said.

“The report’s other proposal is for Australian taxpayers to fund lower energy prices to themselves by paying for asset write-downs.”

Mr Bradley said the report is misleading, in that it compares stable network revenues to those in the generation sector, which has the capacity to make unrestricted profits or losses in a competitive market.

“Network businesses receive very low rates of return from independent regulators on the basis that they are funding long-life infrastructure in a low-risk environment,” he said.

“Electricity costs will go up, not down, if networks are treated like generators as the Grattan Institute suggests. If network investors require the same risk premium as the electricity generation sector, the cost of finance would be at least $2.8 billion higher over a five year regulatory period – a hit of at least $60 per year to household electricity bills.”

Australia has recently seen the most intense period of review of network regulation in its history, with research and recommendations by the Productivity Commission, Australian Energy Regulator, the Australian Energy Market Commission and independent panels.

“The Grattan Institute report calls for changes that have already been made. If businesses are overspending against capital expenditure forecasts they already face the risk of write-downs,” Mr Bradley said.

“Detailed analysis by the Australian Energy Market Commission concluded National Electricity Rules do not provide incentives for NSPs (network services provider) to spend more than their capital expenditure allowance and there was no evidence of over-forecasting by network businesses.”

The call for asset write-downs was irresponsible, according to Mr Bradley, in a sector that relies on capital markets to finance $100 billion in investment supporting Australia’s economy and quality of life.

“No networks expect asset write-downs due to regulatory risk and reckless calls to create that kind of sovereign risk only threaten customer electricity prices in future,” he said.

Mr Bradley said investor perceptions of regulatory risk were a genuine threat to the long-term cost of capital in a networks sector which relies on a stable investment environment.

“During recent regulatory policy reviews, independent rating agency Moody’s placed the network sector on a negative outlook and Standard & Poors expressed concern about the potential for regulatory changes to impact the sector,” he said.

“Recent analysis by the CSIRO’s Future Grid Forum estimated that Australia needs network investment at least three times the size of the current asset base between now and 2050, even where there are high levels of disconnection and onsite generation.

“Even in the most decentralised future, the CSIRO modelling indicates over $300 billion in investment will need to be funded and consumers have a direct interest in ensuring Australia can source that capital by providing a stable, low risk environment.”

Contrary to the Grattan Institute report, ENA has acknowledged network businesses were already reducing expenditure in a falling demand environment.

“The Grattan report claims network businesses have incentives to maximise their asset base and invest regardless of demand,” Mr Bradley said.

“In fact, Queensland and New South Wales businesses have cut spending by billions of dollars and total capital expenditure by Australian electricity networks was significantly lower than regulatory allowances in 2010/11 and 2011/12.

“The reality is network businesses must invest to meet projected demand and there are significant economic and social costs if the lights go out.”

Mr Bradley also said the Grattan Institute had correctly identified tariff reform as crucial to ensure fairness in cost recovery as technology and consumer preferences change.

“Frontier Economics has previously estimated the cost savings of peak demand reduction in the NEM could be up to $12 billion over the next 140 years, or 9 per cent of expenditure in network and generation infrastructure,” he said.