The Guardian 23 March, 2005

Mysteries of corporate electricity

Bob Briton

Last week in South Australia, a failure at NRG's Port Augusta power station shut the plant down and caused an overloading of the interconnector to Victoria's power grid operated by ElectraNet SA. The series of malfunctions resulted in a blackout affecting about half the state including many Adelaide suburbs. Hopes that South Australia's expensive private electricity would at least be reliable as a result of recent upgrades were dashed. Shortcomings appear to have been masked by a cooler summer than expected.

A report by the National Electricity Marketing Management Company (NEMMCO) last year identified the settings on protection equipment on turbo generators as a problem at the Port Augusta plant and recommended that they be changed. NRG had not adjusted the settings that had caused a similar outage last year.

SA Energy Minister Pat Conlon said that he did not care that NRG might find itself the subject of legal action for losses from the many businesses affected. "They frankly appear to have brought this on themselves by ignoring the requirements of the market operator for system security", he told The Advertiser.

While the South Australian incident appears to be due to a management failure at NRG, it has been pounced upon by the energy industry and its many friends in the media to suggest a national crisis brought about by lack of investment.

According to a piece in The Australian Financial Review last week, distributors claim that $15 billion will have to be invested by 2010 to avert a crunch brought about by a combination of population growth, economic growth and an increase in the number of households using air conditioners.

So, in the face of a looming disaster, why would the regulators be damping down this enthusiasm for investment? The main reason is that the national electricity market works in such a way that the investors can recoup their outlays with increased charges to consumers - as long as increases in these outlays are within set limits (benchmarks).

NSW, SA, Queensland and ACT regulators have set limits totalling $10 billion for capital (power poles, wires) expenditure and $6.6 billion for operating expenditure for the different distributors in the electricity caper until 2010. More "investment" will flow on automatically in increased charges to consumers.

When they spend beyond those limits, no additional flow-on in increased charges to the public is permitted. But if they spend less then they can charge higher prices based on a regulated return. Without going into all the details, the less they outlay the higher the rate of return. Spending over and above the set limits reduces their return.

The public has already had a gutful of expensive, corporate electricity, and the government, fearing the political backlash, is not eager to see prices rise even higher.

Victoria's Essential Services Commissioner (ESC) chairman John Tamblyn says that distributors have failed to justify their latest application for a rise in benchmarks of 21 percent for operating expenditure and a whopping 57 percent increase for capital expenditure.

Tamblyn points out that the monopolies involved spent a fifth less than they were permitted to between 2001 and 2003. South Australia's Emergency Services Commissioner Lew Owens is quite frank about the games the corporations play: "We have to be wary of giving them a large sum of money… and they just pocket it." It seems that the companies involved use their projected investments to "justify" increased charges - which currently account for between 30 and 50 per cent of an electricity bill - and then decide not to proceed with the infrastructure upgrades.

Graham Samuel of the Australian Competition and Consumer Commission (ACCC) also urged caution about the clamour for increased investment. He noted that Moody's Investors Service and Fitch Ratings both view current arrangements as "relatively supportive" for transmission services. Returns on the "Utilities Accumulation Index" since 1996 have averaged 17.4 per cent per annum compare to the ASX 200 accumulation index of just 11.1 per cent. In other words, the ACCC doesn't see a need for them to make even larger returns, and errs in favour of corporate consumers.

Samuel also pointed to research from ACIL Tasman that warns that failure to restrain monopoly electricity (and gas) prices could reduce Australia's GDP by about $11 billion over the next 15 years.

However, there is sympathy in high places for the cause of the electricity corporations. Federal Treasurer Peter Costello recently said that he would implement the Productivity Commission's recommendations from 2001 on the National Access Regime which will encourage investment. In Queensland, Energy Minister John Mickel has foreshadowed great opportunities in the near future for private companies to invest in generating and transmission infrastructure to operate alongside the state owned Energex and Ergon companies.

In the meantime householders struggle to pay their power bills. In SA, despite election-time pledges to wrestle energy companies into submission, power bills have gone up 25 per cent since Mike Rann became Premier in 2002. A 2003 welfare report showed that a fifth of the people approaching charities for help did so primarily because of increased power costs.

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