Power play

Adelaide Advertiser
1 September 2011, Page: 25

An odd coalition of welfare groups, state energy ministers and business consumers of gas and electricity have succeeded in winning a federal review of how some utility companies are allowed to pass on costs to customers. In a highly complex process-and unlike the market forces that govern revenue in other business sectors-the essential nature of gas and electricity supply to householders and businesses means that revenue is tightly controlled by government regulation.

The rules in South Australia date back to the privatisation of electricity assets in the late 1990s and the formation of the deregulated National Electricity Market Management Company, which broke down former monopolies in each state. The most significant reason given for the sale of the state's electricity assets was the fear that publicly owned companies may struggle to remain profitable in a highly competitive market. In order to make sure private operators did not suffer the same fate, with potentially catastrophic effects for the state's economy, safeguards were built into the system.

Companies are allowed to recoup reasonable costs such as infrastructure works via increased bills, the most hotly contested of which are upgrading or replacing essential infrastructure. According to consumer groups, these rules cannot prevent infrastructure works that are not needed but which are pushed by the companies so they can recoup the costs via utility bills.

It is an argument that has won favour with the nation's energy ministers, particularly SA's Michael O'Brien who The Advertiser last week revealed believed companies had been "manipulating the system" with legions of lawyers and accountants. His comments were a reflection of similar complaints by the Australian Energy Regulator which first called for reform.

The companies involved angrily dispute this and are resisting any changes to rules that would allow the independent umpire, the Australian Energy Regulator, extra powers to reject infrastructure works that they claim are essential to maintain reliable gas and electricity networks. Independent expert, UBS utilities analyst David Leitch says it is prudent for industry rules to err on the side of allowing companies to make reasonable returns on investment on networks.

Mr Leitch said the AER argued that companies were valued at 20% more than they were worth because of in-built profitability, but this was to attract investment in ageing infrastructure. "Before these recent price increases, there was a lot of discussion that there had been under-investment in the networks for a number of years", he said. "I would rather have a little bit of over-investment than under-investment, be a little generous to the shareholders rather than have underinvestment and have the lights go out. These networks were built, often in the 1960s and 1970s".

Mr Leitch said one of the problems with electricity and gas networks was the need to cater for peak demand, which only happened on a few days each year. Gas distributor Envestra has strenuously defended the company's reputation and rejected Mr O'Brien's claims of manipulation of the rules. "This debate tends to ignore the main factors driving recent increases in energy prices, being the accepted need to replace ageing infrastructure, to address increases in the cost of capital faced by all businesses post the GFC and to pay for various government impositions", managing director Ian Little says.

"I believe it is in the South Australian community's interest that the State Government is supportive of sound investment. "The Government should be pleased that companies like Envestra have been spending over $50 million each year on extending and modernising its assets, improving services to our gas consumers, and employing a large number of people in what at times over recent years, has been an uncertain economy.

MRLittle said Mr O'Brien was wrong to suggest that Envestra ever inflated the cost of projects to claim more from customers, or that the company overstated the cost of finance for the projects, or that it overstated the urgency of the works in question. Mr Little says the need for considerable investment was temporary and was expected to ease. "The AER and its preceding state regulatory bodies have developed a reputation over the years of taking a forensic and highly intrusive approach to the review of infrastructure spending proposals and have set high standards for companies to justify their spending pro-grams", he said.

"I see no evidence of gas companies exploiting the system; rather I see, in Envestra's case, the need for extensive documentary evidence to support five-year spending programs. Some 10,000 pages of material was submitted to the AER in our most recent regulatory process. "It hardly seems that the AER needs more information gathering, or indeed, other powers to fulfil its role". ETSA Utilities spokesman Paul Roberts said there were checks and balances in the system. He said the factors driving the need to invest in infrastructure were changing. There were increasing demand patterns such as urban infill, ongoing maintenance of assets and replacement of ageing assets.

He said Mr O'Brien was wrong to suggest there was over costing of projects because they were independently tested and the AER demanded cost effectiveness. "We absolutely reject any suggestion of us bending the law or undertaking unauthorised works. This is not how we operate", Mr Roberts said.