Networks bite back at claims of ‘supernormal’ profiteering

transmission towers against pretty evening sky (supernormal profit)
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Energy Networks Australia CEO Dominique van den Berg has rejected the claims made in an IEEFA report that accuses networks of generating billions of dollars in ‘supernormal’ profits, calling the analysis “flawed”.

The report—Power prices can be fairer and more affordableby consultant Simon Orme and the Institute for Energy Economics and Financial Analysis (IEEFA) once again accuses energy networks of exploiting flaws in the regulatory system to generate extra profits.

It follows a report made in 2022 with the same claims of ‘supernormal’ profiteering.

The 2023 report says networks have extracted more than $11 billion a year in supernormal profits since 2014, peaking in 2022 at $2 billion. In 2022 profits reached two-and-a-half times the “normal” profit the Australian Energy Regulator (AER) considers necessary to compensate network shareholders for their investment.

Related article: Energy networks accused of pocketing ‘supernormal’ profits

“Families and businesses are already experiencing power bill shock from higher retail prices, and the persistent and large extra network profits are making this worse than necessary,” Orme says.

“The extra profits are reducing energy affordability and adding to economy-wide inflation.”

The report finds consumer retail bills could be reduced by preventing these unnecessary wealth transfers from consumers to network shareholders. Depending on the network area, up to 70% of the retail price rises from 1 July 2023 could have been avoided.

The report accepts that some extra network profits (up to 1.3 times normal profits) are fair under a high-performance regulatory system. However, it says of the 162 profit outcomes examined, 64% exceeded 1.3 times the normal profit and therefore can be deemed as excessive supernormal profits.

Over the nine-year period from FY14-FY22, IEEFA estimates supernormal profits totalled $11 billion, on top of normal profits of $16 billion—meaning overall profits were on average 1.7 times the normal profit.

The IEEFA report claims the AER has so far not provided evidence that persistent extra profits of around 70% above the normal or “allowed” profits are necessary under the relevant laws and the AER’s corporate objective of ensuring that consumers pay no more than necessary for safe and reliable energy.

The report says, according to the AER’s profitability and productivity data, the extra profits are not caused by unexpected improvements in network performance, inflation, changes in interest rates, “gold plating” by networks, or higher than expected payments to debtholders.

Instead, the report says the extra profits mainly come from forecast network costs that are higher than actual costs—including financing costs, operational costs to keep the networks running and other costs. When there is a difference between the forecast and actual cost it is eventually pocketed by network shareholders.

“There has been a failure to correct these differences in forecast and actual costs once they become evident, leading to supernormal profits for network shareholders,” Orme says.

“Two major reviews published by the AER so far this year do not acknowledge the persistent and large extra profits and their implications.

“The AER has so far not provided evidence to show that the multi-billion-dollar extra network profits accumulated over nine years are a necessary outcome,” Orme says.

Energy Networks Australia CEO Dominique van den Berg has rejected the claims, saying, “Transparency on the performance of networks is good for the community, but claims have to be based in facts—and the flawed analysis presented in this report falls short in this regard.

“The report repeats many of the same errors highlighted in earlier version of the same analysis last year.

“Customers benefit under incentive-based regulation because networks are rewarded for delivering the same services for less, or by delivering more value through enhanced reliability. Consumers receive around 70-80% of the benefits of these gains, passed on through lower prices and higher service levels into the future.

“Australian energy consumers have already locked in benefits of over $13.4 billion—the equivalent of more than $1200 per customer—through the operation of the incentive regulation since 2006.

“For the past two years Australian electricity customers on average have paid less in real terms for distribution network portion of the bill, than in any other year since 2010, while reliability has improved.”

Van den Berg said that by using a flawed methodology, which counts every variation from regulator approved forecasts as potential ‘super profits’, the IEEFA report fundamentally missed the core feature of incentive frameworks.

Related article: AER reports lower quarterly energy prices due to mild winter

“This results in an incomplete picture of record of incentive regulation, a system which is a commonly applied approach globally. By contrast, profit-based ‘rate of return’ regulation has been shown to have led to poor price and service outcomes for consumers, leading to its abandonment across many developed economies,” she said.

“As the Australian Energy Regulator recently found in its review of the incentive framework, the actual outcome of applying incentive-based regulation has been significant ongoing benefits to customers.

“Energy networks are committed to making the investments to enhance reliability, integrate renewable energy sources and deliver the energy transition for the community.”

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