Due to weaknesses in network regulation, electricity users in Australia’s eastern states have paid much higher than required rates for “poles and wires,” generating $10 billion in supernormal profits for energy network operators over an eight-year period.
According to the Institute for Energy Economics and Financial Analysis report on regulated networks, “pole and wires” suppliers, including United Energy, AusNet, and Endeavour, charged customers 11 per cent more than their expenses until 2021. The study on 18 suppliers found that the profit was 67 per cent more than what would be deemed “average” earnings between 2014 and 2021. Most of the abnormally high earnings, meanwhile, have probably gone to offshore owners
This added an unnecessary 6.8 per cent average cost to people’s electricity bills in 2020, or between $800 and $1200 per energy customer over the eight-year period, with no added reliability benefits since the supernormal profits are ultimately used for network reinvestment.
A complicated regulatory framework
According to the report, the excessive profits occurred because of the current regulatory system, which is managed by energy market bodies such as the Australian Energy Regulator, the Australian Energy Market Commission, the Council of Australian Governments Energy Council, and the Australian Competition Tribunal consistently underestimated the actual costs that network businesses would require to build, operate, and maintain the network.
“Networks passed on inflated expenses to customers (through merchants), and stockholders pocketed the difference between revenue and cost,” the report said. Furthermore, the report noted that the complicated regulatory framework intended to prevent excessive network monopoly profits has failed due to inadequate network-regulating laws and procedures and a lack of transparency regarding the level of monopoly profits.
The massive supernormal earnings have also hampered Australia’s needed transition to a low-carbon power grid by diverting monies that could have been utilised to support the energy reform. To be sure, the IEEFA report’s research and results are consistent with the new data and comments in the network portion of the 2022 State of the Energy Market study, which was released in late September.
They emphasise the importance of considerable government action to correct flaws in the present mechanisms that manage power network prices. According to the report’s author, Simon Orme, regulations must change quickly. “People’s electricity bills are forecast to increase even further over the next 6-18 months as high coal and gas prices globally impact Australia’s domestic prices,” says Orme.
“Australia’s energy customers have been spinning golden silk for network providers for nearly a decade. They can’t be expected to fund superprofits any longer. The extra burden must be removed. The inefficiencies from excessive network prices, and wealth transfers created by persistent sector-wide supernormal profits, are also delaying the decarbonisation of the electricity system.
“The $10 billion in super profits extracted by electricity networks over 2014-2021 is approaching the capital cost of AEMO-identified regulated transmission projects necessary to support the closure of most coal-fired power generation.”
Orme added that energy consumers in the national electricity market had paid around $1.2 billion more than necessary each year over the last eight years to have a stable electricity supply.
“The Australian Energy Regulator is responsible for making sure networks charge consumers only what is required to cover the costs of investing in, building, maintaining and operating the networks, plus a reasonable profit to ensure compensation for investors.
“That network providers in Queensland, New South Wales, Victoria, South Australia and Tasmania have gained super profits by persistently charging too much, resulting in overall retail electricity prices being higher than necessary, is a fact Energy Ministers championing lower electricity prices may have been unaware of.
“Now that they are aware, the Federal Government should establish an independent commission of inquiry into the economic regulation of networks, working together with participating NEM jurisdictions.
“The commission of inquiry should work to increase the reporting and monitoring of network business’ profits, make changes to the rules and laws to improve economic regulation of networks, remove barriers to consumer representation in economic regulation processes and ensure frameworks for future investment are efficient.”
“Improving the regulations governing monopoly electricity networks in Australia will help constrain supernormal network profits and reduce the strong upward pressure on consumer bills.
Read the report: Regulated Electricity Network Prices Are Higher than Necessary — An Assessment of the Economic Regulation of Australia’s Electricity Networks.
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