Customers suffer as electricity regulation falls apart

by Tony Wood and David Blowers

Published by the Australian Financial Review, Friday 26 May

This week the Australian Federal Court announced a decision that will boost the coffers of electricity networks in New South Wales by around $3 billion. Electricity bills will rise, future increases will be higher than they would otherwise have been and the decision will flow on to other states. The result is a monument to process over outcome.

In 2015, the Australian Energy Regulator (AER) rejected around $7 billion of the more than $30 billion revenue that the businesses had sought to make in the 2014-19 period.

The businesses successfully appealed about half of this amount through the Australian Competition Tribunal, and that decision has now been largely upheld by the Federal Court after a further appeal by the AER.

Applying the full $3 billion to the remainder of the five-year regulatory period would have been a truly bad outcome. The businesses and the government have therefore agreed to smooth the increases over future years, but the full amount will still be charged, probably with interest.

These increases will follow rises in electricity bills since 2009 of more than 50 per cent in real terms, driven largely by poor regulatory decisions and over-investment in the networks. Even worse, consumers are now seeing the price impact of the shift away from low-cost coal power to a mix of renewable energy and expensive gas-fired power as Australia embarks on the necessary transition to a low-emissions energy future.

The review process is a debacle. The AER follows a lengthy and exhaustive process before making its determinations, with considerable opportunity for the businesses to propose and defend their future prices and for consumer groups and others to make and support submissions.

On many issues, such as determining the appropriate profit margins, there is no technically correct answer – the regulator is charged with making judgements based on the best information and advice available. It is expected to balance the interests of investors and consumers, but always in the best long-term interest of consumers.

Any decision that a network business dislikes can be challenged, and usually is with no downside risk. The Federal Court’s decisions are largely a matter of whether the Australian Competition Tribunal was procedurally correct, rather than any further assessment of the merits of the outcome.

So the focus is on correct procedure rather than on whether consumers are paying appropriate prices for efficiently delivered services and the businesses are earning profits in line with the very low risks they face as regulated monopolies.

What has happened here is that a well-executed bad process has delivered a bad result. So the process needs to be changed.

A couple of specific examples highlight the problem. Determining the rate of return the businesses should receive requires the subjective advice of experts, albeit based on highly detailed analysis. The considered decision of the AER can then be overturned by an alternative body based on the views of another set of experts. The fact that the Australian Competition Tribunal found against the AER on elements of the rate of return when challenged by NSW businesses, but in favour of the AER when challenged by the SA businesses, exposes the process as a farce.

The AER also took issue with allowing the networks to pass through the full costs of what they found to be inefficient enterprise bargaining agreements. The network businesses didn’t disagree that the agreements were not efficient, but successfully challenged that they should be allowed to pass through the full costs.

This appears to go against the long-term interest of energy consumers. Network businesses are just that. Businesses. In no other sector are businesses’ arses covered by their consumers every time they stuff-up.

There has to be a better way. The current review process should be scrapped. The AER should have the expertise and resources to make its regulatory decisions based on all the evidence and best advice available. Any stakeholder, including the network businesses, could still challenge the AER through a judicial review.

Indeed, at last December’s COAG Energy Council meeting the federal Energy Minister, Josh Frydenberg, tried to scrap the current review process. But it appears he met resistance from some states. The Council settled for limiting the decisions that could go through the review process.

Reform of the review process seems to have stalled. States such as Queensland and NSW still own all or part of network businesses and have a vested interest in maximising those businesses’ revenue. In the corporate world, such parties would be required to declare their conflict and recuse themselves from key decisions.

Most Australians are members of superannuation funds. Yet these same funds, such as Australian Super, which holds 50.4 per cent of Ausgrid, appear to have a conflict of interest between maximising returns to members and price pain to the customers of the companies they own.

The latest court decision should galvanise the COAG Energy Council to take action in the long-term interest of consumers. We can debate esoteric theory, but a process that delivers to businesses with little commercial risks higher profits than those earned by business with real market exposure is just plain wrong.