Power cost to surge in three years

Sydney Morning Herald
Saturday 20/3/2010 Page: 3

POWER retailers, including three state-owned companies up for sale, could pocket higher profits from the price rises handed down this week. Electricity prices will jump by up to 60% over the three years to 2012-13, costing some households up to $918 more a year, the Independent Pricing and Regulatory Tribunal said on Thursday. Although most of the rise will be driven by higher network costs and a possible emissions trading scheme, the increase allows for higher retail margins among EnergyAustralia, Integral Energy and Country Energy.

The tribunal's ruling included a 2 to 3% increase in these retailers' margins over three years, and private sector operators AGL Energy and Origin Energy are also likely to see margins rise. AGL Energy stands to gain the most because it has 250,000 customers in NSW, compared with Origin Energy's estimated 110,000 customers. UBS analyst David Leitch estimated AGL Energy's earnings before interest, tax and depreciation could increase by $40 million over the three-year period, and upgraded AGL Energy's after-tax profit forecasts by $5 million in 2011 and $8 million in 2012.

The timing of the tribunal's increase was not lost on some observers, who said they were not surprised to see prices and margins going up before privatisation of the sector. The government last month delayed the troubled asset sale until later this year, amid criticism of the complexity of the process. Analysts said the government dominated electricity industry in NSW had kept retailing margins too low to attract the necessary investment. A utilities analyst at Macquarie, Gavin Matter, said NSW margins were disproportionately low compared with other states and needed to rise to attract new competition into the state's retail electricity market.

"Margins are creeping up to more appropriately reflect the risks that these non-government businesses are taking in an extremely volatile electricity market," he said. Mr Maher said the most important outcome from the tribunal's decision was that it allowed power retailers to pass on to consumers the extra costs from the proposed emissions trading scheme and the Renewable Energy Target. The risk with having tariffs set by the states is that sometimes you get political interference in setting an appropriate tariff level. This has in the past led to the likes of AGL Energy and Origin Energy having earnings squeezed for the sake of political point scoring. The IPART decision hopefully sets a precedent for other state regulators to follow."