Regulator draft determination could risk jobs and bushfires

The Australian Energy Regulator (AER) has released a draft revenue determination for New South Wales electricity distributors, Ausgrid, Endeavour Energy and Essential Energy, for a five-year period through to June 2019.

If implemented, the draft determinations would mean immediate job reductions of up to 4600 employees (38 per cent) across NSW, with Ausgrid taking the brunt of the losses. It could also lead to difficulties placing 750 apprentices, currently in training, upon graduation in the next four years.

A likely reduction of $460 million in vegetation management programs was also suggested moving forwards, along with deterioration in the time taken for electricity networks to restore electricity supply to communities after major storm events.

The draft is a preliminary step to allow the network businesses and the community make further submissions to the AER before a final regulatory determination is made by May 1, 2015.

In its draft determination, the AER proposed retrospectively reducing revenue allowances by $6.5 billion or 27 per cent in the five-year period to 2019, based on reduced cost of capital, reduced operating expenditure and more than a 60 per cent real reduction in the capital investment program compared to the previous five years.

Vince Graham, chief executive officer of Networks NSW – which comprises Ausgrid, Endeavour Energy and Essential Energy – said the distributors would carefully consider the AER’s draft proposals and continue to give priority to the provision of a safe, reliable and affordable electricity network.

“The NSW Government’s Reform Program started more than two years ago, is already delivering $2.8 billion of capital and operating savings, with a total of $5.4 billion to be removed from capital and operating budgets through to June 2016,” Mr Graham said.

“Employment reductions of more than 2300 have been achieved since July 2012 across the state through a recruitment freeze, natural attrition and targeted voluntary redundancy programs.

“These reforms mean the double digit annual increases in network charges evident from July 2009 to July 2012 have been contained at less than CPI for both July 2013 and July 2014.”

Networks NSW’s proposals reflected its priorities of affordable, safe and reliable electricity, with a 40 per cent cut in capital expenditure suggested in the next five years, which Mr Graham said would filter down to families and businesses.

“The AER is placing significant emphasis on a new econometric model, which it has adopted to benchmark the operating performance of the 13 Australian distributors in Queensland, New South Wales, Victoria, Tasmania and South Australia,” he said.

“The AER was subject to a legal requirement to publish the first benchmarking report by September 30, 2014. It did not meet this obligation, preventing proper public examination of the AER’s processes and conclusions that underlie a major regulatory initiative. This fails both the public interest and procedural fairness tests.

“Surprisingly, in a new regulatory initiative, the AER is proposing to reduce network maintenance costs and argues customers should accept more local blackouts and be later compensated. These local blackouts would inevitably occur on the hottest summer days of the year.”

Mr Graham noted in November’s draft determinations, the AER had not provided for any transitionary period to implement the job reductions driven by the cuts to operating and capital expenditure.

“There is a compelling case the NSW publicly-owned networks must continue with the reform already underway. We share the AER’s objective to meet consumers’ long-term interests by improving our capital and operating efficiency to contain increases in network charges. However, the AER’s draft retrospective proposals are not practical, possible or legal,” Mr Graham said. Essential Energy said it will have sent a revised proposal to the AER by the end of January.