State governments should axe more than $11 billion from the value of their electricity networks assets, which would prevent consumers paying up to $380 a year too much in their power bills that covers the earlier “gold-plating” of the grid, the Grattan Institute said.
The recommendation looks set to add fire to the controversial debate about potential impairments of “poles and wires” assets, a move that TransGrid chief executive Paul Italiano warns could have “catastrophic” unintended consequences that would resound across the broader economy.
Grattan estimates that as much as $20 billion has been over-invested in transmission and distribution assets since 2005, mostly in NSW and Queensland, with little evidence of a similar problem in Victoria and South Australia, where the networks were already in private hands.
The set-up of the regulatory system for monopoly assets, where businesses are able to make certain returns on their assets, means that doing nothing on the problem “would lock in higher power bills and inefficient grid incentives,” Grattan said.
It calculates the annual hit to consumers ranges from $120 for those on the Endeavour Energy network in NSW, to about $300 for an Ergon network customer in Queensland, and $380 for a household on the Essential Energy network in rural NSW. Network costs are the biggest share of the power bill for most households, with about 42 per cent of a bill in NSW going to transmission and distribution companies.
“Governments should resolve historic over-investment and then move to full privatisation of network businesses, to lower costs and prices,” the think-tank said in a report released late Sunday.
It noted the regulated value of transmission and distribution assets ballooned from about $50 billion in 2005 to about $90 billion today, far outstripping increases in capacity and actual use in a market where the amount of energy delivered through the grid has stalled or even softened.
Grattan blames governments in NSW, Queensland and Tasmania for the over-investment from 2005 until 2014, saying they assumed too high demand growth and adopted excessive reliability standards. Their public ownership also involved a greater incentive to spend, in order to raise government revenue, protect against even minor outages and use cheap capital to help boost economic growth.
The report points to a 2015 study that calculates that had the three governments spent on their networks in line with Victorian and South Australian distributors, the regulatory asset base of their distributors would have been a collective $14.7 billion lower by 2013.
To help fix the problem, it recommends that the NSW government writes down the regulatory value of the state-owned Essential Energy distribution business by up to $3.3 billion, while Queensland should impair its state-owned assets Energex, Ergon Energy and Powerlink by $7.3 billion in total, and Tasmania its networks by $750 million.
But the problem in NSW is complicated by the privatisation of most of the “poles and wires” assets in 2016-17, meaning that the over-investment by grid-owners Ausgrid, Endeavour and TransGrid has been incorporated into the hefty prices paid for those assets by buyers including Australian Super, Macquarie Group and Hastings Funds Management.
Grattan said the assets of those three should have been impaired before the privatisation. But given that did not occur, it recommends the NSW government uses up to $7.9 billion of the proceeds to subsidise electricity for customers on those networks.
Ahead of the release of the latest report, TransGrid’s Mr Italiano said that any retrospective changes to rules would tarnish the reputation of Australia’s regulatory framework in important financial markets overseas, pushing up the cost of capital for the wider infrastructure sector.
The consequences of that “would dwarf any savings from retrospective changes in the asset base of a company,” Mr Italiano said. “The unintended consequences could be catastrophic, not minor.”
The issue of potential asset write-downs is a sore one for the transmission and distribution sector, with the peak body describing a similar suggestion from Grattan in late 2013 as “reckless”, saying the increased risk such a move would introduce would only lead to a hike in power bills.
Federal Energy Minister Josh Frydenberg earlier this month underlined the “problem” of the inflated value of network assets but stopped short of saying write-downs would be required.
TransGrid, the NSW high-voltage grid owner, was sold to a Hastings-led group under a 99-year lease for $10.3 billion in 2015.
Mr Italiano said the value of transmission infrastructure could not just be judged on the amount of demand on the grid, but needed to take into account the role interconnectors play in “keeping the wholesale market honest” on either side of a state border, and other technical roles such as helping with maintaining inertia and providing fast frequency response to keep the grid in balance.