Upload
lytu
View
217
Download
0
Embed Size (px)
Citation preview
TheWinnersandLosersoftheMonopolyGame
HowtheQueenslandGovernmentprofits fromQueensland’sexcessiveelectricityprices
HughGrant,ExecutiveDirector,ResponseAbilityApril2018
.
2
1 ExecutiveSummary
1.1 BackgroundQueensland’s excessive electricity prices are presenting major hardship for residential consumers anddestroyingtheinternationalcompetitivenessofQueenslandbusinesses.
Inrecentyears,theQueenslandcommunityhasbecomeincreasinglyconcernedwiththelevelsofprofitstheQueensland Government is extracting from the Queensland government-owned monopoly electricitynetworks (Energex, Ergon Energy and Powerlink Queensland) and the extent to which those profits aredrivingQueensland’sexcessiveelectricityprices.
In response to pressure from the Queensland community, Queensland’s political parties are proposingvariouspoliciesaimedatreducingtheQueenslandelectricitynetworks’excessivepricesandprofits.
ThispaperprovidesananalysisoftheprofitstheQueenslandGovernmentisextractingfromtheQueenslandnetworksandhowthoseprofitsaredrivingQueensland’sexcessiveelectricityprices,outliningthepolicyandregulatorychangesrequiredtoreducethenetworks’pricesandprofitstoefficientlevels.
1.2 Queensland’sExcessiveElectricityNetworkPricesReview after review, inquiry after inquiry, has consistently concluded that the primary driver ofQueensland’s excessive electricity prices is the excessive prices of Queensland’s monopoly electricitynetworks.
AllofthereviewsandinquirieshaveoutlinedthattheQueenslandnetworks’price increasesoverthepastdecadewereunnecessaryandhaveresultedfromthenetworksexploitingdeficienciesandloopholesinthenational regulatory framework, gaming the national regulator (the Australian Energy Regulator (AER)) tosecurerevenueallowancesofovertwicetheefficientlevels.
Over the past decade, the Queensland networks’ prices and profits have grown at the highest rates inAustralia and the Queensland Government has realised extraordinary profits from the networks’overinvestmentandinefficiencies.
1.3 TheQueenslandNetworks’ExtraordinaryProfitsOver the past five years theQueensland networks achieved annual profitmargins of up to 48%,with anaverage profit margin of 28.3%, equating to around 3-4 times the average profit margins realised bycomparableenergybusinesses.
0%
5%
10%
15%
20%
25%
30%
QueenslandNetworks CSEnergy DUETGroup
AverageAnnualPro-itMarginsOverThePast5Years
3
1.3.1 ComparisonWithTheQueenslandGovernment-OwnedGenerators’Profits
The Queensland Government’s returns from the government-owned networks contrast sharply with itsreturnsfromthegovernment-ownedgenerators.
Unlike Queensland’s monopoly networks, Queensland’s government-owned generators operate in acompetitive market that (until recently) has punished over-investment and inefficiency. As a result,Queensland’sgovernment-ownedgeneratorsincurredsignificantlossesoverthepastdecade,requiringtheQueenslandGovernmenttoinjectsignificantlevelsofequitytokeepthebusinessessolvent.
Bycontrast,Queensland’sgovernment-ownednetworkshavedeliveredveryhighprofitsineveryyearsincethey were corporatised in the 1990s. Rather than requiring equity injections, successive QueenslandGovernmentshaveactuallywithdrawnequityfromthenetworksandhavefrequentlyextractedincomefromthenetworksabovethenetworks’levelsofincomegeneration.
1.3.2 ComparisonsWithTheReturnsInOtherSectors
TheQueenslandnetworks’highprofitmarginsareresulting in theQueenslandGovernmentrealising long-termfinancialreturns(returnonequity)fromthenetworksofmanymultiplesofthereturnsbeingachievedinallothersectorsoftheAustralianeconomy.
For example, over the 15-year period to 2014, the Queensland Government’s returns from PowerlinkQueenslandamountedto:
§ 23timesthereturnsachievedbytheAustralianconstructionsector(LendLease)
§ 15.5timesthereturnsachievedbytheAustraliantelecommunicationssector(Telstra)
§ 10.5timesthereturnsachievedbytheAustralianmineralsandresourcessector(BHP)
§ 10timesthereturnsachievedbytheAustralianbankingsector(NAB)
§ 3.6timesthereturnsachievedbyAustralia’smostprofitablesupermarket(Woolworths)
NoASX100stockcameclosetoPowerlink’sreturns
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
PowerlinkQld Woolworths NAB BHP Telstra LendLease
ComparisonWithReturnsInOtherSectors
Dividends GrowthInShareholderValue
4
Basedonallof theavailable information, theprofitability levelsbeing realisedbyQueensland’smonopolyelectricitynetworksarethehighestofanyelectricitynetworksintheworld.
Importantly, thosereturnsarebeingrealiseddespiteQueensland’selectricitynetworksbeingamongst themostinefficientnetworksinAustralia:
§ PowerlinkQueenslandisthemostinefficienttransmissionnetworkinAustralia
§ ErgonEnergyisthesecondleastefficientdistributionnetworkinAustralia
1.4 The Queensland Government’s Unsustainable Income ExtractionsFromTheElectricityNetworks
TheQueenslandGovernmentextractsthreesourcesofincomefromtheQueenslandelectricitynetworks:
§ Dividendpayments–theQueenslandnetworkspaydividendstotheQueenslandGovernment§ Tax equivalent payments – the networks are corporatised and pay “tax equivalent” payments to the
Queenslandgovernmentatthecommonwealthcorporatetaxrate
§ Competitive neutrality fees – the networks source their debt from the Queensland Government atinterest rates below market rates. The Queensland Government charges the networks competitiveneutrality fees to reflect the difference between the interest rates charged by the government andmarketinterestrates
Despite the Queensland networks extraordinary profits, in every year over the past three years theQueenslandGovernmentextractedmoreincomefromthenetworksthanthenetworkscreated.
Overall,overthepastthreeyearstheQueenslandGovernmentextractedatotal incomeof$9billionfromtheQueenslandnetworks,equatingto167%ofthenetworks’totalprofitsovertheperiod.
Importantly, in2014/15theQueenslandGovernment’s total incomeextractionsamountedto270%of thenetworks’ profits (617% of Powerlink Queensland’s profits, 230% of Ergon Energy’s profits and 214% ofEnergex’sprofits).
01,000,0002,000,0003,000,0004,000,0005,000,0006,000,0007,000,0008,000,0009,000,00010,000,000
2015ProQits
QldGovtIncome
2016ProQits
QldGovtIncome
2017ProQits
QldGovtIncome
TotalProQits
TotalQldGovtIncome
QueenslandNetworksTotalsProQits Dividends TaxPayments CompetitiveNeutralityFees
5
1.5 TheQueenslandGovernment’sProfitsFromTheNetworks’ChargesOverthepastthreeyears,foreverydollarQueenslandconsumerspaidinnetworkcharges,theQueenslandGovernmentcollected47centsinprofits–i.e.theQueenslandGovernmentcollecteda47%profitmarginfromtheQueenslandnetworks.
Asillustratedinthechartsoverleaf,thismeansthat:
§ For a Queensland household electricity bill with network charges of $1,000, the QueenslandGovernment’sprofitsfromthenetworksamountedto$470
§ For a Queensland small business bill with network charges of $2,000, the Queensland Government’sprofitsfromthenetworksamountedto$940
§ Fora largebusinessuserbillwithnetworkchargesof$200,000, theQueenslandGovernment’sprofitsfromthenetworksamountedto$94,000
1.6 The Transfer To National Network Regulation Has Been ACatastrophicFailure
The decision to transfer responsibility for theQueensland electricity networks’ revenue regulation to thenationalregulatoryframeworkin2006wasbasedonpromisesthatitwoulddelivermoreefficientpricesandimprovethenetworks’productivitylevels.
However, rather than delivering those promised improvements, national regulation of the Queenslandnetworks’revenueshasbeenacatastrophicfailure,resultingin:
§ AmorethandoublingoftheQueenslandnetworks’prices
§ The Queensland networks achieving extraordinary profits of many multiples of the returns beingachievedbyASX100companiesinallotherindustrysectors
§ Extraordinarylevelsofoverinvestmentandgoldplating–resultingintheQueenslandnetworks’capitalproductivitylevelsbeingthelowestinAustralia
§ Extraordinary increases in the networks’ operational costs - resulting in the Queensland networks’operationalefficiencylevelsbeingthelowestinAustralia
Althoughthedeficiencies inthenationalregulatoryframeworkapplytobothpubliclyandprivatelyownednetworks,thestategovernmentownednetworkshaveexploitedthedeficienciesandloopholestoamuchhigherdegreethantheprivatelyownednetworks.
Inessence,thenationalregulatoryframeworkwasdesignedforprivateownershipandhasbeenunabletopreventgovernmentownednetworks(withtheiraccesstolow-costfinance)fromexploitingtheincentivesforoverinvestmentandgoldplating,andprofitingfromtheirinefficiencies.
As a result, the state government ownednetworks’ prices are over twice the efficient level,whereas theprivatelyownednetworks’pricesaretypicallyaround30-40%aboveefficientlevels.
6
0
200
400
600
800
1,000
1,200
NetworkCharges QueenslandGovernmentProQitsFromTheNetworks
AverageChargesAndPro-it
ExtractionsOverPast3Years($)
QueenslandHouseholdBill
0
500
1,000
1,500
2,000
2,500
NetworkCharges QueenslandGovernmentProQitsFromTheNetworks
AverageChargesAndPro-it
ExtractionsOverPast3Years($)
QueenslandSmallBusinessBill
0
50,000
100,000
150,000
200,000
250,000
NetworkCharges QueenslandGovernmentProQitsFromTheNetworks
AverageChargesandPro-it
ExtractionsOverPast3Years($)
QueenslandLargeUserBill
7
1.7 TheQueenslandNetworks’GamingOfTheNationalRegulatorThe Queensland networks have systemically exploited various deficiencies and loopholes in the nationalregulatory framework, securing revenue allowances from the national regulator (the AER) over twice theefficientlevels:
ProfitingFromOver-InvestmentandGoldPlating
TheQueenslandnetworksreceiveguaranteedreturnsontheirregulatoryvaluations–theirregulatoryassetbases(RABs).Thosereturnsdrivethemajorityofthenetworks’revenuesandprices.
Prior to transferring to national regulation, the regulatory rules required the regulator to optimise thenetworks’ RAB valuations to reflect the efficient value of assets needed to provide the required services.Thatmeant that if the networks invested inmore capacity than required, the regulator was required toexclude thevalueof theexcesscapacity fromthenetworks’RABs, therebyensuring thatconsumerswerenotrequiredtofundexcesscapacityorinefficientinvestments.
However,whenthenetworkstransferredtonationalregulationin2006,theQueenslandGovernment(andotherstategovernments)insistedthatmajorchangesweremadetotheregulatoryrulestopreventtheregulatorfromoptimisingthenetworks’RABsandtoensurethatthenetworksreceivedguaranteedreturnsonallinvestmentsirrespectiveoftheirprudencyorefficiency.
Theremovaloftheregulator’sRABoptimisationpowerscontrastssharplywiththeregulatoryrulesinotherjurisdictions in Australia and overseas. For example, the regulatory rules that apply to Australia’s gasnetworksandtotheWesternAustralianelectricitynetworkshavealwaysrequiredtheregulatortooptimisethenetworks’RABs.
Aspredictedbynumerousstakeholders,theremovalofRABoptimisationfromtheNationalElectricityRulesincentivised extraordinary levels of over-investment by the networks, particularly by the Queenslandgovernment-ownednetworksduetotheirlowerborrowingcostsandtheadditionalpecuniarybenefitstheQueenslandGovernmentrealisesfromthenetworks’over-investment.
The Queensland networks’ levels of overinvestment were the highest in Australia and the QueenslandGovernment is continuing to profit substantially from that over-investment, as the networks continue toreceiveguaranteedreturnsonunder-utilisedandredundantassets.
ProfitingFromOperationalInefficiencies
TheQueenslandnetworksareamongsttheleastefficientnetworksintheNationalElectricityMarket(NEM).
§ PowerlinkQueenslandisthemostinefficienttransmissionnetworkintheNEM
§ ErgonEnergyisthesecondleastefficientdistributionnetworkintheNEM
TheQueenslandnetworkshavemanaged toprevent theAER fromproperly applyingbenchmarkingwhensetting their opex allowances, resulting in the AER setting their opex allowances on the basis of theirhistoricalcosts,ratherthanefficientcosts.
Asaresult,theQueenslandnetworks’totalopexallowancesovertheircurrent5-yearregulatoryperiodsare$2.25billion($450millionperannum)abovetheefficientlevel.
ProfitingFromGamingTheAER’sIncentiveSchemes
TheQueenslandnetworkshaverealisedmajorwindfallprofitsfromgamingtheAER’sincentiveschemes,bytaking advantage of information asymmetries and negotiating incentive scheme targets well above theefficientlevels.
8
1.8 SuccessiveQueenslandGovernmentsHaveEnabledTheQueenslandNetworksToExploitTheNationalRegulatoryFramework
Since transferring to national regulation, theQueensland networks’ prices and profits have grown at thehighestratesinAustralia.
Successive Queensland Governments have consistently deflected the blame for the networks’ priceincreasestothe“independentnationalregulator”-i.e.theyhaveconvenientlyblamedtheAustralianEnergyregulator(AER)forthenetworks’priceincreases.
However,thenationalregulatoryframeworkandtheAER’sregulatorypowersareactuallycontrolledbythestateandterritorygovernmentsthroughtheCOAGEnergyCouncil.
ThetruthisthatsuccessiveQueenslandGovernmentshavedemonstrablyfailedtobalancetheirconflictingrolesofnetworkownerandregulatoryrulemaker.Theaddictiontothenetworks’extraordinaryprofitshasseverelycompromisedtheQueenslandGovernment’sapproachtonetworkregulationformanyyears.
SuccessiveQueenslandGovernmentshaveconsistentlychosenshort-termprofitsovereffectiveregulation,by:
§ Constraining the AER’s powers and ensuring that the regulatory rules have a strong bias towards thenetworks’financialinterestsattheexpenseofconsumers’interests;whilst
§ Ignoring the consequences of inflicting excessive prices on the Queensland community and theQueenslandeconomy
It is therefore not surprising that the Western Australian electricity network (Western Power) was soenthusiastic regarding recent proposals to transfer its revenue regulation to the national regulatoryframework, as the Western Australian regulator (the ERA) has much stronger powers than the nationalregulator(theAER).
ThispaperoutlineshowtheQueenslandGovernmenthasbeenthemostproactivestategovernmentoverthe past decade in constraining the AER’s powers and ensuring the retention of the deficiencies andloopholesintheregulatoryframeworkthatenabletheQueenslandnetworkstorealiseextraordinaryprofitsfromtheiroverinvestmentandinefficiencies.
Itexposes thehypocrisyof claimsby successiveQueenslandGovernments regarding their commitment toensuringefficientand fair electricityprices forQueenslandconsumers,providingexamplesofQueenslandGovernmentdecisionsoverthepastdecadethatdemonstratethathypocrisy,e.g.:
§ Supporting the 2006 rule changes that removed the requirement for the regulator to optimise thenetworks’regulatoryassetbases(RABs).Aspredictedbynumerousstakeholdersatthetime,thoserulechanges resulted in extraordinary levels of overinvestment and consequential price and profitabilityincreasesbytheQueenslandnetworks
§ Increasing theQueenslandreliability standards in2005withnoconsiderationof theprice increases toQueensland consumers and no consideration of the value that Queensland consumers place onreliability
§ AllowingtheQueenslandnetworkstosystemicallyuseoverblownloadforecaststogametheregulator(theAER)toprovidecapexallowanceswellinexcessoftherequiredlevels
9
§ Supporting Ergon Energy’s legal challenge to theAER’s benchmarking process – a legal challenge thatresultedinNSWandACTconsumerspaying$3billionabovetheAER’srevenuedeterminationsandthatwillfurtherraiseQueensland’snetworks’prices.
§ Strongly resisting the abolition of the Limited Merits Review (LMR) process – the one-sided appealprocessthatenablesthenetworkstocontesttheAER’srevenuedeterminations.Since2008,Australianelectricity networks’ appeals through the LMR process have resulted in over $12 billion in additionalrevenuebeingpassedontoAustralianconsumers
1.9 AssessmentOfEfficientPricesForTheQueenslandNetworksThispaperprovidesdetailedestimatesofefficientrevenuesandpricesforeachQueenslandnetwork,basedon the conclusions of various independent analysts – i.e. revenues that reflect reasonable returns onefficientinvestmentsandtherecoveryofefficientcosts.
It demonstrates that the Queensland networks’ current revenues and prices are over twice the efficientlevels.
1.10 PotentialPriceReductionsFromTheQueenslandPolitical Parties’Policies
In response to pressure from the Queensland community, Queensland’s political parties are currentlyproposing various policies aimed at reducing the Queensland networks’ prices and profits. This paperprovides an assessment of those policies and the extent to which they would drive the Queenslandnetworks’pricestowardsefficientlevels.
The chart overleaf illustrates that the Queensland political parties’ proposed policies would potentiallydelivernetworkpricereductionsofupto60%.
0
500
1000
1500
2000
2500
3000
3500
4000
CurrentAllowances EfQicientAllowances(ForProQit)
EfQicientAllowances(NonProQit)
RevenueAllowances($m)
QueenslandNetworksTotalReturnonCapital Depreciation Opex Tax
10
1.11 BusinessAsUsualisUnsustainableIt is clear fromthevariouspoliciesproposedbyQueensland’spoliticalparties that there isbroadpoliticalawarenessthatbusinessasusualisunsustainable.
TheQueenslandnetworks’excessivepricesareinflictingmajordamageontheQueenslandcommunityandtheQueenslandeconomy.
ThispaperdemonstratesthattheQueenslandnetworks’excessivepricesaredrivinganindustrydeathspiralthatwillultimatelybemuchmoredestructivetothevalueandfutureviabilityofQueensland’sgovernment-ownedenergycompaniesthantheshort-termimpactsofimplementingmoresustainableprices.
It demonstrates the irresponsibility of continuing to allow Queensland’s state budget to be so heavilydependentupontheextractionofunsustainableprofitsfromQueensland’smonopolyelectricitynetworks.
TheQueenslandcommunity isbecoming increasinglyawareof the real reason forQueensland’sexcessiveelectricitypricesandisbecomingincreasinglyvocalinlettingQueensland’spoliticalleadersknowthattheywillnolongerbeplayedasfools.
The new delicately balanced Queensland parliament provides an opportunity for the new QueenslandGovernmenttoseriouslyaddressthekeydriverofQueensland’sexcessiveelectricitypricesandreducetheQueensland state budget’s dependence on unsustainable profits from Queensland’s monopoly electricitynetworks.
0
20
40
60
80
100
120
CurrentPrices QldGovernment
LiberalNationalParty
OneNationParty
KatterParty QldGreens
PotentialPriceReductionsArisingFromTheQueenslandPoliticalParties'Policies
11
1.12 Recommendations
Recommendation1. SetTheQueenslandNetworks’PricesAtEfficientLevels
AsowneroftheQueenslandnetworks,theQueenslandgovernmenthasahighdegreeofcontrolovertheirprices.
RatherthancontinuingtoenabletheQueenslandnetworkstogamethenationalregulatorandchargepricesovertwicetheefficientlevels,theQueenslandGovernmentneedstoexercisethatcontrolandensurethatthenetworks’pricesaresetatefficientlevels.
TheAustralianEnergyRegulator(AER)setsalimitonthemaximumrevenuestheQueenslandnetworksareallowed to collect from their customers. The networks have complete autonomy regarding the actualrevenuetheycollect,aslongastheirtotalrevenuedoesnotexceedtheirmaximumrevenuecaps.
Decisionstocollectrevenuesbelowthenetworks’maximumrevenuecapsarenotunusualandhavebeenmadebyvariousnetworkowners(includingpreviousQueenslandgovernments)inrecentyears.
For example, the NSW government recently directed Essential Energy (the NSW government-owneddistributionnetwork)toset itspricesat34%belowthe levelthatEssentialEnergymanagedtogamefromthenationalregulatoryframework.
Importantly, this paper outlines that the NSW government made that direction in response to the NSWcommunity’soutragefollowingtheleakingofadocumentthatconfirmedthatEssentialEnergyhadcynicallyexploiteditsconsumers,theregulatorandtheAustralianlegalsysteminitspursuitofexcessiveprofits.
TheQueenslandcommunity isbecoming increasinglyawareof the real reason forQueensland’sexcessiveelectricitypricesandincreasinglyvocalinlettingQueensland’spoliticalleadersknowthattheywillnolongerbeplayedasfools.
The new delicately balanced Queensland parliament provides an opportunity for the new QueenslandGovernmenttoseriouslyaddressthekeydriverofQueensland’sexcessiveelectricitypricesandreducethestatebudget’sdependenceonunsustainableprofitsfromQueensland’smonopolyelectricitynetworks.
Importantly,settingtheQueenslandnetworks’revenuesatlevelsbelowtheirmaximumrevenuecapscanbeimplementedimmediatelyanddoesnotrequireanychangestothenationalregulatoryframework.
Criticsofcalls toset theQueenslandnetworks’pricesatefficient levels tendtomakeshort-sightedclaimsregardingtheimpactontheQueenslandstatebudget.Suchresponsesreflectaverynarrowandshort-termviewoftheissuesandignorethemajordamagethatQueensland’sexcessiveelectricitypricesareinflictingontheQueenslandcommunityandthestateeconomy.
SettingQueensland’selectricitypricesatefficientlevelswill:
§ Minimisefurtherhardshipforresidentialconsumers
§ RestoretheinternationalcompetitivenessandviabilityofQueenslandindustry
§ Improvethelong-termviabilityoftheQueenslandelectricitysupplychain
§ Protect the Queensland Government owned energy companies from the value destruction that willinevitablyarisefromthecontinuationofthenetworkdeathspiral
12
Recommendation2. Revert ToQueenslandGovernment Controlled Regulation For TheQueenslandNetworks
AscurrentlybeingproposedbysomeQueenslandpoliticalparties, thereisaneedtoreverttoQueenslandGovernmentcontrolledrevenueregulationfortheQueenslandnetworks-asappliedpriorto2006,andascurrentlyappliestostate–ownedelectricitynetworks incomparablefederalcountries includingtheUnitedStates,CanadaandGermany.
AlthoughQueenslandGovernmentcontrollednetworkrevenueregulationwillnotbeimmunefrompoliticalinterference,thepracticalrealityisthatprovidingsinglepointaccountabilitytotheQueenslandGovernmentforthenetworks’pricesandprofitsismuchmorelikelytodeliverefficientnetworkpricesthancontinuingtoplace false hope that future state governments will progress the numerous long-overdue reforms to thedeeplyflawednationalregulatoryframework.
Queensland controlled regulation should be designed to avoid the deficiencies in the existing nationalregulatoryframeworkoutlinedwithinthisreport.
Recommendation3. ImplementFiscalControlsThatRestrictTheQueensland Government’sIncomeExtractionstoSustainableLevelsTheQueenslandGovernmentisextractingincomefromtheQueenslandnetworksatunsustainablelevels.
There is a need for stronger fiscal controls that make it more difficult for Queensland Governments toextractunsustainablelevelsofincomefromtheQueenslandnetworks.
Furthermore, the Queensland Government should cease the practice of extracting competitive neutralityfeesfromthenetworks.ThispaperdemonstratesthattheQueenslandGovernment’srationaleforextractingcompetitiveneutralityfeesfromthenetworksisbasedonaflawedapplicationoftheCompetitionPrinciplesAgreement (CPA) and that it serves no purpose, imposing unnecessary costs on Queensland consumerswhilstdeliveringnobenefits.
Recommendation4.ImplementStrengthenedOversightOfTheQueenslandNetworks
SuccessiveQueenslandGovernmentshavehada“hands-off’approachtothegovernanceoftheQueenslandgovernmentownednetworks, enabling thenetworks to exploit loopholes anddeficiencies in the nationalregulatoryframework,pursuingoutcomesthatarenotinQueenslandconsumers’long-terminterests.
TheQueenslandGovernmentneedstoimplementimprovedgovernancearrangementsfortheQueenslandnetworks toensure that theybetter reflect theQueenslandcommunities’ long-term interests.This shouldinclude:
§ Preventingthenetworksfromcollectingwindfallprofitsfromover-forecastingtheirneeds
§ MuchstrongeroversightoftheQueenslandnetworks’advocacyandlobbyingactivities–ensuringthattheyceaseopposingordelayingreformsaimedatimprovingtheirperformanceandproductivity
§ IncreasedscrutinyandtransparencyoftheQueenslandnetworks’performance
§ Settingandoverseeingcapitalandoperationalefficiency improvementprograms,withtheobjectiveofimproving the Queensland networks’ productivity from bottom-quartile to top-quartile performancewithintheshortestpossibletimeframe
§ Segregatedfinancialreportingofthenetworks’regulatedandnon-regulatedbusinessactivities
§ ImprovedtransparencyofthedirectionsbeingprovidedtotheQueenslandnetworksbytheQueenslandEnergyMinisterandQueenslandTreasury
13
2 BackgroundAndPurpose
2.1 BackgroundInrecentyears,theQueenslandcommunityhasbecomeincreasinglyconcernedwiththelevelsofprofitstheQueensland government is extracting from the Queensland government-owned monopoly electricitynetworks (Energex, Ergon Energy and Powerlink Queensland) and the extent to which those profits aredrivingQueensland’sexcessiveelectricityprices.
In response to pressure from the Queensland community, Queensland’s political parties are proposingvarious policies aimed at reducing the Queensland electricity networks’ excessive prices and profits,including:
§ TheQueenslandGovernment isproposing toprovidea$50electricityownershipdividendpayment foreachQueenslandhousehold
§ The Queensland Liberal National Party (LNP) is proposing to write down the Queensland networks’regulatory asset bases (RABs) and has publicly supported the findings and recommendations of therecentGrattanInstitutestudy,whichoutlinedtheneedforRABwrite-downsofupto38%.1
§ The One Nation Party has proposed to reduce Queensland’s electricity prices by 20%, by ceasingdividendpaymentsfromtheQueenslandenergycompaniestotheQueenslandGovernment
§ The Katter’s Australian Party has proposed to revert the networks’ pricing to “recovery only” and toabolish the application of the depreciated optimised replacement cost (DORC) asset valuationmethodology (the methodology used to determine the networks’ regulatory valuations (RABs) and‘returnoncapital’allowances
§ TheQueenslandGreensPartyhasproposedtorevertthenetworksbacktonon-profitpublicauthorities,therebyremovingthenetworks’profitsfromQueenslanders’electricitybills
In addition, the Katter’s Australian Party and the Queensland Greens have proposed to deliver furthersignificant price reductions by moving from the deeply flawed national regulation to QueenslandGovernment controlled regulation, bringing back the responsibility for setting the Queensland networks’revenuestotheQueenslandGovernment.
2.2 ReportPurposeThispaperprovidesananalysisoftheprofitstheQueenslandGovernmentisextractingfromtheQueenslandnetworksandhowthoseprofitsaredrivingQueensland’sexcessiveelectricityprices.
ItoutlinesthepolicyandregulatoryimplicationsofthefindingsandprovidesrecommendationsonthepolicyandregulatorychangesrequiredtoreducetheQueenslandnetworks’pricestoefficientlevels.
1Downtothewire:AsustainableelectricitynetworkforAustralia,TechnicalSupplement,GrattanInstitute,March2018TheGrattanInstitutecalculatedarangeofRABwritedownsfortheQueenslandelectricitynetworksbasedonvariousassumptions–identifyingrequiredRABwrite-downsoffupto$2.5bn(38%)forPowerlinkQueensland,$3.9bn(33%)forEnergexand$2.8bn(26.3%)forErgonEnergy
14
3 Queensland’sExcessiveElectricityPricesThe National Electricity Market (NEM) is failing to deliver efficient Queensland electricity prices due tovariousmarketandregulatoryfailures.
Queensland’s excessive electricity prices are presenting major hardship for residential consumers anddestroyingtheinternationalcompetitivenessofQueenslandbusinesses.
3.1 RecentTrendsInQueensland’sElectricityPricesThechartbelowillustratesrecenttrendsinthebreakdownofQueensland’selectricityprices.2
Figure1AverageQueenslandAnnualTariff11CostBreakdown(c/kWh)
Theabovechartillustratesthat:
§ Queensland’selectricitypricesdoubledfrom2007/08to2013/14
§ Thepricerisesoverthepastdecadehavebeenpredominantlydrivenbyincreasesinnetworkcharges,whichincreasedsix-foldfrom2004/05to2014/15,accountingforover95%ofthetotalelectricitypriceincreasesduringtheperiod
§ As a result, network charges now account for over half ofQueensland’s electricity prices,whereas in2004/05theyaccountedforaround20%
§ Bycontrast,generationandretailcostsremainedrelativelystableovertheperiod
2QueenslandProductivityCommission,ElectricityPricingIssuesPaper,October2015,Page8
15
3.2 Queensland’sExcessiveNetworkPricesItiswellunderstoodthatthekeydriverofQueensland’sexcessiveelectricitypricesistheexcessivepricesofQueensland’smonopolyelectricitynetworks(Energex,ErgonEnergyandPowerlinkQueensland).
Reviewafter review, inquiryafter inquiry,hasconsistently concluded that themajorityof theQueenslandnetworks’ price increases over the past decade were unnecessary and are the result of the Queenslandnetworks exploiting deficiencies and loopholes in the National Electricity Market (NEM) regulatoryframework, gaming the national regulator (the Australian Energy Regulator (AER)) to secure revenueallowanceswellabovetheefficientlevels.3
Importantly,allofthereviewsandinquirieshaveoutlinedthattheQueenslandnetworks’pricesandprofitshave grown at the highest rates in Australia, with their owner (the Queensland Government) realisingextraordinaryprofitsfromthenetworks’overinvestmentandinefficiencies.
For example, the charts overleaf, from the current ACCC review into the drivers of Australia’s electricityprices,highlightthat increases innetworkpriceswasthedominantdriverofQueensland’selectricitypriceincreasesoverthepastdecade,andthattheincreasesintheQueenslandnetworks’priceswerethehighestinAustralia.4
TheACCCreviewalsooutlinedthatQueenslandnetworkchargesarethehighestinAustralia.5
3Forexample:ACCCRetailElectricityPricingInquiry:PreliminaryReport,16October2017AssetsorLiabilities?TheNeedtoApplyFairRegulatoryValuestoAustralia’sElectricityNetworks,HughGrant,5thMay2016SenateInquiryIntoThePerformanceandManagementofElectricityNetworkCompanies,June2015Downtothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,25March2018VictorianElectricityDistributionBusinessesSubmissiontotheSenateSelectCommitteeInquiryintotheperformanceandmanagementofelectricitynetworkcompanies:,18thDecember2014QueenslandGovernmentIndependentReviewPanel(IRP)onNetworkCosts,FinalReport,2013ElectricityNetworkRegulatoryFrameworks:ProductivityCommissionInquiryReport,9April2013SenateSelectCommitteeonElectricityPrices:ReducingEnergyBillsandImprovingEfficiencyWrite-downstoaddressthestrandedassetsofelectricitynetworksintheNationalElectricityMarket:evidenceandargument,CME,April2015AcomparisonofoutcomesdeliveredbyelectricitytransmissionnetworkserviceprovidersintheNEM,EUAA,2012Australia’srisingpricesanddecliningproductivity:thecontributionofitselectricitydistributors,EUAA,2011Shocktothesystem:Dealingwithfallingelectricitydemand,GrattanInstitute,December2013Puttingthecustomerbackinfront:Howtomakeelectricitycheaper.GrattanInstitute,December2012TheGarnautClimateChangeReviewUpdate,Paper8:TransformingtheElectricitySector,2011TheEnergyMarketDeathSpiral-RethinkingCustomerHardship,PaulSimshauserandTimNelson,2012AMPSubmissiontotheProductivityCommission-TheCapitalEfficiencyofAustralianElectricityDistributors,ResultsofaBenchmarkingStudy,November2012UtilitiesPolicy:IndependentRegulationofGovernment–OwnedMonopolies:AnOxymoron?,December20144ACCCRetailElectricityPricingInquiry:PreliminaryReport,16October2017,Page62AERBenchmarkingReportsandAERStateOfTheEnergyMarket2017Report5ACCCRetailElectricityPricingInquiry:PreliminaryReport,16October2017
16
17
4 TheQueenslandNetworks’ExtraordinaryProfits4.1 TheQueenslandNetworks’AnnualProfitMarginsOverthepastfiveyearstheQueenslandnetworkshaveachievedannualpre-taxprofitmarginsofupto48%,withanoverallaverageannualpre-taxprofitmarginof28.3%.6
Thenetworks’averageannualprofitmarginequatestoaround3-4timestheaverageannualprofitmarginsbeingrealisedbycomparableenergybusinesses,includingtheQueenslandgovernmentownedgenerators.
Forexample,as illustrated in thechartbelow,over thepast fiveyears theDUETGroup (ownerofvariousAustralianelectricityandgasnetworks)achievedanaveragepre-taxprofitmarginof6.7%-i.e.lessthanonequarteroftheaverageprofitmarginsrealisedbytheQueenslandelectricitynetworks.7
The Queensland Government’s returns from the government-owned networks contrast sharply with itsreturnsfromthegovernment-ownedgenerators.
For example, an analysis of the profit margins being achieved by the Queensland government-ownedgenerator,CSEnergy,overthepastfiveyears,identifiesthat:8
§ CSEnergymadelossesinthreeoutofthepastfiveyears
§ CSEnergy’saveragepre-taxprofitmarginamountedto10.8%
Unlike Queensland’s monopoly networks, Queensland’s government owned generators operate in acompetitivemarketthat(untilrecently)haspunishedCSEnergyforover-investmentandinefficiency.
Consequently,Queensland’sgovernment-ownedgeneratorsincurredsignificantlossesoverthepastdecade(e.g. CS Energy’s accumulated losses in 2017 amounted to $566 million), requiring the QueenslandGovernmenttoinjectsignificantlevelsofequitytokeepthebusinesssolvent.
By contrast, as outlined in Appendix 1 of this report, theQueensland networks have delivered very highprofits in every year since they were corporatised in the 1990s. Rather than requiring equity injections,successiveQueenslandgovernmentshaveactuallywithdrawnequityfromthenetworksandhavefrequentlyextractedincomefromthenetworksabovethenetworks’levelsofincomegeneration.6QueenslandElectricityNetworks’AnnualFinancialReports7DUETGroupAnnualReports8CSEnergyAnnualReports
0%
5%
10%
15%
20%
25%
30%
QueenslandNetworks CSEnergy DUETGroup
AverageAnnualPro-itMarginsOverThePast5Years
18
*EnergexandErgonEnergyweremergedtoformEnergyQueenslandin2016(2015figurescombinedforconsistency)
0500,000
1,000,0001,500,0002,000,0002,500,0003,000,0003,500,0004,000,000
2014/15 2015/16 2016/17 2015-17Total
PowerlinkQueenslandPreTaxProQit Expenses
02,000,0004,000,0006,000,0008,000,00010,000,00012,000,00014,000,00016,000,00018,000,000
2014/15 2015/16 2016/17 2015-17Total
EnergexandErgonEnergy*PreTaxProQit Expenses
0
5,000,000
10,000,000
15,000,000
20,000,000
2014/15 2015/16 2016/17 2015-17Total
QueenslandNetworksTotalsPreTaxProQit Expenses
19
4.2 ComparisonWithTheReturnsInOtherSectorsAppendix1ofthisreportprovidesadetailed15-yearanalysisoftheactualfinancialreturnsbeingrealisedbytheQueenslandmonopolynetworks,comparedtothereturnsrealisedinothersectors.
It outlines that the Queensland government is realising returns (return on equity) from the Queenslandnetworksofmanymultiplesofthereturnsbeingachievedbyblue-chipcompaniesinallothersectorsoftheAustralianeconomy.
Forexample,theQueenslandGovernment’sreturnsfromPowerlinkQueenslandamountedto:9
§ 23timesthereturnsachievedbytheAustralianconstructionsector(LendLease)
§ 15.5timesthereturnsachievedbytheAustraliantelecommunicationssector(Telstra)
§ 10.5timesthereturnsachievedbytheAustralianmineralsandresourcessector(BHP)
§ 10timesthereturnsachievedbytheAustralianbankingsector(NAB)
§ 3.6timesthereturnsachievedbyAustralia’smostprofitablesupermarket(Woolworths)
NoASX100stockcameclosetoPowerlink’sreturns
Note–theabovechartactuallyunderstatestheQueenslandgovernment’sreturnsfromPowerlink,asitonlyincludesdividend income and does not include the other pecuniary benefits extracted by the Queensland Government -i.e.taxpaymentsandcompetitiveneutralityfees
9AssetsorLiabilities?TheNeedtoApplyFairRegulatoryValuestoAustralia’sElectricityNetworks,HughGrant,5thMay2016
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
PowerlinkQld Woolworths NAB BHP Telstra LendLease
ComparisonWithReturnsInOtherSectors
Dividends GrowthInShareholderValue
20
Basedonallof theavailable information, theprofitability levelsbeing realisedbyQueensland’selectricitynetworksarethehighestofanyelectricitynetworksintheworld.
Importantly, thosereturnsarebeingrealiseddespiteQueensland’selectricitynetworksbeingamongst themostinefficientnetworksinAustralia:
§ PowerlinkQueenslandisthemostinefficienttransmissionnetworkinAustralia10§ ErgonEnergyisthesecondleastefficientdistributionnetworksinAustralia11
ClearlytheQueenslandnetworks’profitsaregrosslyexcessiveandarenot inQueenslandconsumers’long-terminterest.
10Powerlink’MultilateralTotalFactorProductivity(MTFP)is5thoutofthe5NEMtransmissionnetworks-seeAER2017TransmissionBenchmarkingReport,3December201711ErgonEnergy’sMultilateralTotalFactorProductivity(MTFP)is12thoutofthe13NEMdistributionnetworks–seeAER2017DistributionBenchmarkingReport,3December2017
21
5 TheQueenslandGovernment’sIncomeFromTheNetworksThechartsbelowhighlighttheQueenslandnetworks’annualrevenuesandprofits;andtheincomeextractedfromthenetworksbytheQueenslandGovernmentoverthepastthreefinancialyears.
*EnergexandErgonEnergyweremergedtoformEnergyQueenslandin2016(2015figurescombinedforconsistency)
0
1,000,000
2,000,000
3,000,000
4,000,000
2015 2016 2017 2015-17Total
PowerlinkQueensland
Revenue ProQits QueenslandGovernmentIncomeExtractions
0
5,000,000
10,000,000
15,000,000
20,000,000
2015 2016 2017 2015-17Total
EnergexandErgonEnergy*
Revenue ProQits QueenslandGovernmentIncomeExtractions
0
5,000,000
10,000,000
15,000,000
20,000,000
2015 2016 2017 2015-17Total
QueenslandNetworksTotals
Revenue ProQits QueenslandGovernmentIncomeExtractions
22
5.1 TheQueenslandGovernment’sUnsustainableIncomeExtractionsFromTheElectricityNetworks
TheQueenslandgovernmentextractsthreesourcesofincomefromtheQueenslandelectricitynetworks:
§ Dividendpayments–theQueenslandnetworkspaydividendstotheQueenslandGovernment
§ Tax equivalent payments – the networks are corporatised and pay “tax equivalent” payments to theQueenslandgovernmentatthecommonwealthcorporatetaxrate
§ Competitive neutrality fees – the networks source their debt from the Queensland government atinterest rates below market rates. The Queensland Government charges the networks competitiveneutrality fees to reflect the difference between the interest rates charged by the government andmarketinterestrates12
ThechartsoverleafprovideabreakdownoftheincometheQueenslandGovernmentextractedfromtheQueenslandelectricitynetworksfromtheabovesourcesoverthepastthreeyears.13
5.2 IncomeExtractionsAsAProportionOfTheNetworks’RevenuesAs illustrated intheabovecharts,overthepastthreeyearstheQueenslandGovernmentextractedatotalincomeof$9billionfromtheQueenslandnetworks.Thisequates toanaverageof47%of thenetworks’totalrevenueof$19billionoverthethree-yearperiod.
Thehighestannualincomeextractionsoccurredinthe2014/15financialyear,withextractionsequatingto:
§ 139%ofPowerlinkQueensland’srevenue
§ 87%ofErgonEnergy’srevenue
§ 61%ofEnergex’srevenue
5.3 IncomeExtractionsAsAProportionOfTheNetworks’ProfitsDespite the Queensland networks’ extraordinary profits, in every year over the past three years theQueenslandGovernmentextractedmoreincomefromthenetworksthanthenetworkscreated.
As outlined in the charts overleaf, theQueenslandGovernment’s income extractions over the past threeyearsamountedto167%ofthenetworks’pre-taxprofits.
Importantly,in2014/15,theQueenslandgovernment’sincomeextractionsamountedto:
§ 617%ofPowerlinkQueensland’spre-taxprofits
§ 230%ofErgonEnergy’spre-taxprofits
§ 214%ofEnergex’spre-taxprofits12AsoutlinedinChapter10ofthisreporttheQueenslandGovernment’srationaleforchargingcompetitiveneutralityfeestothemonopolynetworksisbasedonaflawedapplicationoftheCompetitionPrinciplesAgreement(CPA).ItservesnopurposeandsimplyimposesanunnecessarycostonQueenslandconsumerswhilstdeliveringnobenefits13AlldatawassourcedfromtheQueenslandNetworks’AnnualFinancialReportsandQueenslandGovernmentBudgetOutlookPapers.WheretheQueenslandBudgetOutlookfiguresdonotalignwiththenetworks’annualreportfigures,thenetworks’annualreportfigureshavebeenusedEnergexandErgonEnergyweremergedtoformEnergyQueenslandin2016(2015figureshavebeencombinedforconsistency)
23
*EnergexandErgonEnergyweremergedtoformEnergyQueenslandin2016(2015figurescombinedforconsistency)
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
2015ProQits
QldGovtIncome
2016ProQits
QldGovtIncome
2017ProQits
QldGovIncome
TotalProQits
TotalQldGovtIncome
PowerlinkQueenslandProQits Dividends TaxPayments CompetitiveNeutralityFees
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
2015ProQits
QldGovtIncome
2016ProQits
QldGovtIncome
2017ProQits
QldGovtIncome
TotalProQits
TotalQldGovtIncome
EnergexandErgonEnergy*ProQits Dividends TaxPayments CompetitiveNeutralityFees
24
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
2015ProQits
QldGovtIncome
2016ProQits
QldGovtIncome
2017ProQits
QldGovtIncome
TotalProQits
TotalQldGovtIncome
QueenslandNetworksTotalsProQits Dividends TaxPayments CompetitiveNeutralityFees
25
6 The Impact Of The Queensland Government’s ProfitExtractionsOnQueenslanders’ElectricityBills
6.1 TheNetworkBusinesses’RegulatedAndNonRegulatedProfitsThe Queensland Government’s profit extractions are ultimately recovered by the network businessesthroughtheirprices.
The majority of the network businesses’ revenues are derived from the provision of regulated networkservices – i.e. revenue that is recovered from Queensland consumers as “network charges” within theirelectricitybills.
Theremainderofthenetworkbusinesses’revenuesisderivedfromtheprovisionofnon-regulatedservices.14
As the Queensland networks do not provide segregated accounts for their regulated and non-regulatedactivities, it isnotpossibletopreciselydeterminetheproportionsoftheQueenslandGovernment’sprofitsthatareextractedfromthenetworks’regulatedandnon-regulatedbusinessactivities.
However, it is well understood that the profit margins the networks are realising from their regulatedactivitiesaremuchhigherthantheprofitmarginstheyareachievingfromtheirnon-regulatedactivities.
For example, the recent audit of the Queensland energy companies’ finances by the Queensland AuditOffice, outlined that ErgonEnergy’s annual post tax profitmargins from its energy retail activities rangedfrom5.6%to10%overthepast3years,comparedtoposttaxprofitsfromthenetworksof24-28%.15
Asoutlinedthroughoutthisreport,theQueenslandnetworks’regulatedrevenuesaredeterminedwithinadeeply flawed national regulatory framework, fromwhich the networks are securing revenue allowanceswell above the efficient levels, enabling them to realise extraordinary profits of many multiples of thereturnsbeingrealisedbybusinessesinallotherindustrysectors.
It is clear that it is the extraordinary profits from the networks’ regulated activities that are enabling theQueenslandGovernmenttoextractsuchhighlevelsofprofitsfromthenetworkbusinesses.
However, in theabsenceof segregated reportingof thenetworkbusinesses’ regulatedandnon-regulatedprofits, this analysis has adopted the highly conservative assumption that the Queensland Government’sprofit extractions arebeingderived inequalproportions from thenetworks’ regulatedandnon-regulatedactivities.
Basedon the information containedwithin the aboveQueenslandAuditOffice report, it is clear that thisconservative assumption significantly understates the level of profits that are being collected fromQueenslandconsumersthroughtheirelectricitybills.
14Powerlink,EnergexandErgonEnergyprovidenon-regulatednetworkandtechnicalconsultingservices.ErgonEnergyalsoprovideselectricityretailingservicesinregionalQueensland15Energy:2016-17resultsoffinancialaudits,Report9(2017-18),QueenslandAuditOffice,February2018
26
6.2 TheQueenslandGovernment’sProfitsFromTheNetworks’Charges
Asoutlined inthepreviouschapter, foreverydollar thatQueenslandconsumerspaid fornetworkchargesover thepast threeyears, theQueenslandgovernmentcollected47cents inprofits– i.e. theQueenslandGovernmentcollecteda47%profitmarginfromtheQueenslandnetworks.
ThechartsoverleafillustratetheprofitsthattheQueenslandGovernmentcollectedfromthenetworksasaproportion of typical network charges for Queensland household, small business and large businesselectricitybills.
Theyillustratethat:
§ For a Queensland household electricity bill with network charges of $1,000, the QueenslandGovernment’sprofitsfromtheQueenslandnetworksamountedto$470
§ For a Queensland small business bill with network charges of $2,000, the Queensland Government’sprofitsfromtheQueenslandnetworksamountedto$940
§ Fora largebusinessuserbillwithnetworkchargesof$200,000, theQueenslandGovernment’sprofitsfromtheQueenslandnetworksamountedto$94,000
27
0
200
400
600
800
1,000
1,200
NetworkCharges QueenslandGovernmentProQitsFromTheNetworks
AverageChargesAndPro-it
ExtractionsOverPast3Years($)
QueenslandHouseholdBill
0
500
1,000
1,500
2,000
2,500
NetworkCharges QueenslandGovernmentProQitsFromTheNetworks
AverageChargesAndPro-it
ExtractionsOverPast3Years($)
QueenslandSmallBusinessBill
0
50,000
100,000
150,000
200,000
250,000
NetworkCharges QueenslandGovernmentProQitsFromTheNetworks
AverageChargesandPro-it
ExtractionsOverPast3Years($)
QueenslandLargeUserBill
28
7 TheAddictionOfSuccessiveQueenslandGovernmentsToTheNetworks’ExtraordinaryProfits
SuccessiveQueenslandgovernment’shavedemonstrablyfailedtobalancetheirconflictingrolesofnetworkowner and regulatory rulemaker. The addiction of Queensland governments to the electricity networks’extraordinaryprofitshasseverelycompromisedtheirapproachtoenergypolicyandnetworkregulationformanyyears.
SuccessiveQueenslandGovernmentshave consistently chosen short-termprofits over effective long-termenergypolicy,by:
§ Ensuring (through COAG) the retention of deficiencies and loopholes in the national regulatoryframeworkthatenabletheQueenslandnetworkstoachieveextraordinaryprofits;whilst
§ NotfullyconsideringtheconsequencesofinflictingexcessiveelectricitypricesonQueenslandconsumersandthestateeconomy
Having Queensland’s electricity prices driven by such extraordinary profits contradicts the claims ofsuccessiveQueenslandGovernments regarding their commitment to ensuring efficient and fair electricitypricesforQueenslandconsumers.
Examples of decisions by Queensland Governments over the past decade that demonstrate thisinconsistencyinclude:
§ Supporting the 2006 rule changes that removed the requirement for the regulator to optimise thenetworks’regulatoryassetbases(RABs).Aspredictedbynumerousstakeholdersatthetime,thoserulechanges resulted in extraordinary levels of overinvestment and consequential price and profitabilityincreasesbytheQueenslandnetworks16
§ Increasing the Queensland’s network reliability standards in 2005 with no consideration of the priceincreasestoQueenslandconsumersandnoconsiderationofthevaluethatQueenslandconsumersplaceonreliability
§ AllowingtheQueenslandnetworkstosystemicallyuseoverblownloadforecaststogametheregulator(theAER)toprovidecapexallowanceswellinexcessoftherequiredlevels
§ SupportingErgonEnergy’slegalchallengetotheAER’sbenchmarkingprocess.Thatlegalchallengewasamajor factor in the recent Australian Competition Tribunal decision that resulted in NSW and ACTconsumerspaying$3billionabovetheAER’srevenuedeterminations–adecisionthatwillhavefurtherflowoneffectsinraisingtheQueensland’snetworks’prices.17
§ Supporting the LimitedMerits Review (LMR) process – theone-sided appeal process that enables thenetworks to contest the AER’s revenue determinations. Since 2008, Australian electricity networks’appealsthroughtheLMRprocesshaveresultedinover$12billioninadditionalrevenuebeingpassedontoAustralianconsumers18
16SeeChapter8ofthisreportforanoverviewofthoserulechanges17ErgonEnergyInterventiontotheAusgrid,EndeavourEnergyandEssentialEnergyLimitedMeritsReview(LMR)AppealontheAER’s2014-19revenuedeterminationfortheNSWdistributors18TheLMRwasrecentlyabolished,despiteitsabolishmentbeingstronglyopposedbytheQueenslandGovernment
29
8 TheKeyDeficienciesInTheNationalRegulatoryFramework
8.1 TheFailureOfTheNationalRegulatoryFrameworkPrior to transferring responsibility for the settingof theQueenslandnetworks’ revenues to theAustralianEnergy Regulator (AER), the networks’ revenueswere determined byQueenslandGovernment regulatoryauthorities.19
The decision to transfer responsibility for the Queensland networks’ revenue regulation to nationalregulation in 2006 was based on promises that it would deliver more efficient prices and improve thenetworks’productivitylevels.
However, rather than delivering those promised improvements, national regulation of the Queenslandnetworks’revenuesbytheAERhasbeenacatastrophicfailure,resultingin:
§ AmorethandoublingoftheQueenslandnetworks’prices
§ The Queensland networks achieving extraordinary profits of many multiples of the returns beingachievedbyASX100companiesinallotherindustrysectors
§ Extraordinarylevelsofoverinvestmentandgoldplating–resultingintheQueenslandnetworks’capitalproductivitylevelsbeingthelowestinAustralia20
§ Extraordinary increases in the networks’ operational costs - resulting in the Queensland networks’operationalefficiencylevelsbeingthelowestinAustralia21
Inessence,thenationalregulatoryframeworkwasdesignedforprivateownershipandhasbeenunabletopreventgovernmentownednetworks(withtheiraccesstolow-costfinance)fromexploitingtheincentivesforoverinvestmentandgoldplating,andprofitingfromtheirinefficiencies.
8.2 TheQueenslandNetworks’GamingOfTheNationalRegulatorTheQueenslandnetworks’excessivepricesandprofitsare the resultof thenetworks’ systemicgamingofthedeeplyflawednationalregulatoryframework.
The Queensland networks have systemically exploited various deficiencies and loopholes in the nationalregulatoryframework,securingrevenueallowancesfromtheAERwellabovetheefficientlevels.
ThekeyregulatoryframeworkdeficienciesexploitedbytheQueenslandnetworksarehighlightedoverleaf.
19EnergexandErgonEnergy’srevenuesweredeterminedbytheQueenslandCompetitionAuthority(QCA)PowerlinkQueensland’srevenuewaspreviouslydeterminedbytheQueenslandEnergyReformUnit(QERU)andbytheACCC20Powerlink’MultilateralTotalFactorProductivity(MTFP)Scoreis5thoutofthe5NEMtransmissionnetworks-AER2017TransmissionBenchmarkingReport,3December2017ErgonEnergy’sMultilateralTotalFactorProductivity(MTFP)Scoreis12thoutofthe13NEMdistributionnetworks–AER2017DistributionBenchmarkingReport,3December201721AERBenchmarkingReports
30
8.2.1 TheGamingOfExcessive‘ReturnOnCapital’Allowances
Australia’smonopolyelectricitynetworksreceiveguaranteedreturnsontheirregulatoryvaluations–theirregulatoryassetbases(RABs).
Ashighlightedinthediagrambelow,thosereturnsdrivethemajorityofthenetworks’revenuesandprices.
Since moving to the national regulatory framework, the Queensland networks have managed to secure‘returnoncapital’allowancesfromtheAustralianEnergyRegulator(AER)wellabovetheefficientlevels.
ThenetworkshavesecuredthoseexcessiveallowancesbyexploitingvariousdeficienciesintheAER’s‘returnoncapital’determinationprocessoutlinedbelow.
8.2.1.1 TheApplicationOfAnInappropriateAssetValuationMethodology
The networks’ RABs are effectively valued at replacement cost, using the Depreciated OptimisedReplacement Cost (DORC) valuation methodology - an asset valuation methodology that results in thehighestpossiblevaluations(andthereforeprices)ofallofthemethodologiesthatcouldbeapplied.
By contrast, theUKnetworks’ regulatory valuationswereestablishedon thebasisof theirhistorical costsresultingintheirRABsperconnectionbeinglessthanathirdoftheQueenslandnetworks’DORCvaluations.22
22Write-downstoaddressthestrandedassetsofelectricitynetworksintheNationalElectricityMarket:evidenceandissues,CME,April2015Determiningtheregulatoryassetbaseforutilitypriceregulation,DavidMNewbery,1997
31
The decision to apply a replacement valuation methodology, rather than a cost-based valuationmethodology,wasnotjustifiedandisnotinAustralianconsumers’long-terminterests.23
8.2.1.2 TheIncentivisationOfInefficientExpenditure
The proper implementation of the DORC valuation methodology requires the regulator to optimise thenetworks’RABvaluationstoreflecttheefficientvalueofassetsneededtoprovidetherequiredservices.
Thismeans that if the networks invest inmore capacity than required, the regulator should exclude thevalueoftheexcesscapacityfromtheirRABs,therebyensuringthatconsumersarenotrequiredtofundtheexcesscapacityorinefficientinvestments.
However, when responsibility for the networks’ revenue regulation was transferred to the nationalregulatory framework in 2006, major changes to the National Electricity Rules (NER) were implemented,including:24
§ Theremovaloftherequirementfortheregulatortooptimisethenetworks’RABs,and
§ NewrulesthatensuredthatallfuturecapexincurredbythenetworkswasautomaticallyrolledintotheirRABswithoutanyprudencyorefficiencyreviews
The removalof theoptimisationandcapexprudency reviewprovisions fromtheNationalElectricityRules(NER) contrasts sharplywith the provisions containedwithin the regulatory rules in other jurisdictions inAustraliaandoverseas.
For example, the regulatory rules that apply to Australia’s gas networks and to the Western Australianelectricitynetworkshavealways required the regulator toapplyabroad rangeofoptimisationand capexprudencyreviewteststothedeterminationofthenetworks’regulatoryvaluations.25
As predicted by numerous stakeholders, the 2006 rule changes incentivised extraordinary levels of over-investment by the networks - particularly by the Queensland government-owned networks due to theirlowerborrowingcostsandtheadditionalpecuniarybenefitsthattheyrealisefromover-investment.
Importantly,theQueenslandnetworks’levelsofoverinvestmentwerethehighestinAustralia.26
23UtilityAssetValuation–AUser’sPerspective,R.Booth,16June200ReplacementCostAssetValuationandRegulationofEnergyInfrastructureTariffs,D.J.Johnstone,2003TheDORCvaluationmodelofregulatedinfrastructureassets,Johnstone,D.J.andLonergan,W,2006SubmissiontotheSenateinquiryintothePerformanceandManagementofElectricityNetworkCompanies,DJohnstone,December201424SeeforexampletheAEMCRuleChangeDetermination,NationalElectricityAmendment(EconomicRegulationofTransmissionServices),November2006TheRABsforthedistributionnetworkarespecifiedinSchedule6.2oftheNER27TheRABsforthetransmissionnetworksarespecifiedinSchedule6.2AoftheNationalElectricityRules(NER)25WesternAustraliaElectricityNetworksAccessCode2004,Clauses6.44to6.63NationalGasRulesVersion36,Clause77,Pages54-5826AssetsorLiabilities?TheNeedtoApplyFairRegulatoryValuestoAustralia’sElectricityNetworks,HughGrant,5thMay2016SenateInquiryIntoThePerformanceandManagementofElectricityNetworkCompanies,June2015VictorianElectricityDistributionBusinessesSubmissiontotheSenateSelectCommitteeInquiryintotheperformanceandmanagementofelectricitynetworkcompanies:,18thDecember2014Downtothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,25March2018QueenslandGovernmentIndependentReviewPanel(IRP)onNetworkCosts,FinalReport,2013ElectricityNetworkRegulatoryFrameworks:ProductivityCommissionInquiryReport,9April2013SenateSelectCommitteeonElectricityPrices:ReducingEnergyBillsandImprovingEfficiencyWrite-downstoaddressthestrandedassetsofelectricitynetworksintheNationalElectricityMarket:evidenceandargumentCME,April2015AcomparisonofoutcomesdeliveredbyelectricitytransmissionnetworkserviceprovidersintheNEM,EUAA,2012
32
As outlined in Appendix 2 of this report, a key factor that enabled the Queensland networks’ over-investment was their systemic over-forecasting of demand, with the networks using overblown loadforecaststogametheAERtoprovidecapexallowanceswellinexcessoftherequiredlevels.
Appendix2outlinesthattheQueenslandnetworks’demandforecastshavebeenconsistentlyoverblowntoamuchhigherdegreethanalloftheotherAustralianelectricitynetworks.
As a result, the Queensland networks expended substantially more capital than the privately ownednetworks, both in absolute terms and after normalisation for changes in network outputs such as peakdemandandenergydelivered.
Forexample,whennormalisedforchangesindemand:27
§ EnergexandErgoninvestedingrowthrelatedcapexat7timestheleveloftheVictoriandistributors
§ Powerlink Queensland invested in growth related capex at 15-20 times the rate of the Victoriantransmissionnetwork
TheQueensland networks’ over-investment has resulted in a large degree of excess system capacity andsignificant declines in their asset utilisation levels, with the networks having the lowest capital efficiencylevelsintheNationalElectricityMarket(NEM)28
Italso resulted in theQueenslandnetworks’RABsgrowingatmuchhigher rates than thenetworks in theother states. For example, theQueensland distributors’ ‘RABs per connection’ are 250%higher than theVictoriandistributors,havingincreasedfrombeing60%higherin2001.29
Anexplanationofwhytheprivatelyownednetworksrestricttheirinvestmentsandcontroltheircostsmuchmoreeffectivelythangovernment-ownednetworkswasoutlinedbytheVictorianelectricitynetworksinthesubmissions andevidence theyprovided to theSenate inquiry Into ThePerformanceandManagementofElectricityNetworkCompanies.30
AsstatedbyAlistairParkerofAusNetServiceswhenpresentingevidencetotheSenateInquiry:
“Itisjustfundamentallybecauseoftheownershipstructure.Wespendlesstogetthesameoutcomes”
“Wedobetteroverthelongrunbyspendingless,byfindingcheaperalternativestodelivergoodoutcomes”
“This is not our view: it is theAustralian Competition and Consumer Commission's (ACCC’s) view, it is theAER'sview,itistheProductivityCommission'sview,itistheEnergyUsersAssociationofAustralia'sview”
“Person after person looks at this objectively and looks at the data that is before them and findswe arecheaperandmorereliable.Iputthatdowntoourownershipstructure”
Australia’srisingpricesanddecliningproductivity:thecontributionofitselectricitydistributors,EUAA,2011Shocktothesystem:Dealingwithfallingelectricitydemand,GrattanInstitute,December2013Puttingthecustomerbackinfront:Howtomakeelectricitycheaper.GrattanInstitute,December2012TheGarnautClimateChangeReviewUpdate,Paper8:TransformingtheElectricitySector,2011TheEnergyMarketDeathSpiral-RethinkingCustomerHardship,PaulSimshauserandTimNelson,2012AMPSubmissiontotheProductivityCommission-TheCapitalEfficiencyofAustralianElectricityDistributors,ResultsofaBenchmarkingStudy,November2012UtilitiesPolicy:IndependentRegulationofGovernment–OwnedMonopolies:AnOxymoron?,December201427EUAA:AcomparisonofoutcomesdeliveredbyelectricitytransmissionnetworkserviceprovidersintheNEM,Oct2012EUAA:Australia’srisingpricesanddecliningproductivity:thecontributionofitselectricitydistributors28AERTransmissionandDistributionBenchmarkingReports,3December201729EUAA:AcomparisonofoutcomesdeliveredbyelectricitytransmissionnetworkserviceprovidersintheNEM,Oct2012EUAA:Australia’srisingpricesanddecliningproductivity:thecontributionofitselectricitydistributors30SubmissionandEvidencetotheSenateSelectCommitteeInquiryintotheperformanceandmanagementofelectricitynetworkcompanies:VictorianElectricityDistributionBusinesses,18thDecember2014
33
Asaresult,theQueenslandnetworks’returnsontheirregulatoryassetbases(RABs)drivetheirpricestoamuchhigherdegreethanalloftheotherAustralianelectricitynetworks.
For example, over the previous regulatory period, the Queensland networks’ returns on their RABsaccountedfor:31
§ 77%ofPowerlinkQueensland’srevenueallowances§ 75%ofErgonEnergy’srevenueallowances§ 74%ofEnergex’srevenueallowances
8.2.2 TheAER’sFlawed‘ReturnOnCapital’DeterminationMethodology
Toretainthenetworks’RABvaluationsatreplacementvalue,thenetworks’RABsareartificiallyinflatedeachyear(byCPI).
However, the AER’s methodology for determining the networks’ ‘return on capital’ allowances does notappropriatelydealwiththeimpactsofartificiallyinflatingthenetworks’capitalbases:
Inessence:
§ TheAER'smethodology for determining the requiredpercentage returns is basedon the returns thatinvestorsrequireontheiractualcapitalinvestments
§ However,theAERcalculatesits'returnoncapital'allowancesbymultiplyingthosepercentagereturnstoartificiallyinflatedcapitalbases
Furthermore,theAER’spercentagereturnsarebasedonthereturnsrequiredbybusinessesthatfaceassetwrite-downrisks,whereasAustralia’smonopolynetworksarespecificallyprotectedfromsuchrisks.
Those inconsistencies are resulting in the AER providing ‘return on equity’ allowances to theQueenslandnetworksof3-4timestheefficientlevels.32
8.2.3 EstimationsOfEfficientRegulatoryAssetBases(RABs)ForTheQueensland Networks
In recent years there have been numerous calls from various stakeholders for theQueensland networks’RABstoberevaluedtoefficientlevels.
ItisimportanttounderstandthatmostestimatesoftherequiredwritedownsfortheQueenslandnetworks’RABs,includingtherecentlyreleasedGrattanInstitutepaper,haveonlyactuallyestimatedthewrite-downsrequiredtoaddressthenetworks’inefficientinvestments.33
31‘Returnoncapital’plus‘returnofcapital’(depreciation)allowances32ConsumerChallengePanel(CCP2)SubmissionstotheAERonTheAER’sDraft2015-20RevenueDeterminationsforEnergexandErgonEnergy-BruceMountainandHughGrantsubmissionsConsumerChallengePanelCCP4(HughGrant)SubmissiontotheAERonTheAER’sRevenueDeterminationforPowerlinkQueensland33Seeforexample:VictorianElectricityDistributionBusinessesSubmissiontotheSenateSelectCommitteeInquiryintotheperformanceandmanagementofelectricitynetworkcompanies:,18thDecember2014Downtothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,25March2018Puttingthecustomerbackinfront:Howtomakeelectricitycheaper.GrattanInstitute,December2012TheGarnautClimateChangeReviewUpdate,Paper8:TransformingtheElectricitySector,2011SenateInquiryIntoThePerformanceandManagementofElectricityNetworkCompanies,June2015
34
However,asoutlinedinsection8.2.1.1above,acomprehensiveassessmentofefficientRABvaluationsalsoneedstoassesstheappropriatenessofthenetworks’initial(DORC)valuations.
InMarch 2016, the author of this report performed themost comprehensive analysis and assessment ofefficient RABs for Australia’s electricity monopoly networks, quantifying the required adjustments to thenetworks’ initial (DORC based) valuations and the required adjustments to address the networks’subsequentinefficientinvestments.34
That 150-page report demonstrated that, based of highly conservative assumptions, the Queenslandnetworks’RABvaluationsareatleasttwicetheefficientlevels.
Over thepast6months, theQueenslandLiberalNationalParty (LNP)hasbeencalling for theQueenslandgovernmenttowritedowntheQueenslandnetworks’regulatoryassetbases(RABs).Forexample,theLNPhas publicly supported the findings and recommendations of the recent Grattan Institute study, whichcalculated(onthebasisofinefficientinvestmentalone)theneedforRABwrite-downsofupto38%fortheQueenslandnetworks.35
It is important to note that, as acknowledged by theGrattan Institute throughout its report, theGrattanInstitute’scalculationsoftherequiredRABwrite-downswerebasedonhighlyconservativeassumptionsthatresultedintheirrecommendedRABwrite-downsfortheQueenslandnetworksbeingmuchlowerthantheestimationsofotherindependentanalysts.36
However,itisimportanttoacknowledgethattheQueenslandLiberalNationalParty(LNP)proposaltowritedownthenetworks’RABsisthefirstsuchproposalfromadominantQueenslandpoliticalparty.
It reflectsa longoverdueacknowledgementof theunsustainabilityof continuing toallowtheQueenslandnetworks’excessiveRABstodrivetheirexcessivepricesandprofits.
Excessive‘returnoncapital’allowancesaretheprimarydriveroftheQueenslandnetworks’excessivepricesandprofitsandwillcontinuetodosountiltheabovedeficienciesareaddressed.
Australia’srisingpricesanddecliningproductivity:thecontributionofitselectricitydistributors,EUAA,2011AcomparisonofoutcomesdeliveredbyelectricitytransmissionnetworkserviceprovidersintheNEM,EUAA,2012SenateSelectCommitteeonElectricityPrices:ReducingEnergyBillsandImprovingEfficiencyShocktothesystem:Dealingwithfallingelectricitydemand,GrattanInstitute,December2013Write-downstoaddressthestrandedassetsofelectricitynetworksintheNationalElectricityMarket:evidenceandissues,CME,April201534AssetsorLiabilities?:TheNeedtoApplyFairRegulatoryValuestoAustralia’sElectricityNetworks,HughGrant,5thMay201635Downtothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,March2018TheGrattanInstitutepaperoutlinedarangeofRABwritedownsfortheQueenslandelectricitynetworksbasedonvariousassumptions.ThepapercalculatedrequiredRABwrite-downsofupto$2.5bn(38%)forPowerlinkQueensland,$3.9bn(33%)forEnergexand$2.8bn(26.3%)forErgonEnergy36TheGrattaninstitutepaperdidnotchallengethenetworks’initialDORCvaluations.Asoutlinedwithinthispaper,otherindustryanalystshaveconcludedthattheQueenslandnetworks’initialDORCvaluationswerearoundthreetimestheiractual‘historiccost’valuationsTheGrattanInstitute’smethodologyforcalculatingthenetwork’sinefficientinvestmentlevelsadoptsthesimple(contentious)assumptionthatthenetworks’RABsaredrivenbytwovariables-customernumbersandpeakdemand.TheGrattanInstitute’smethodologyappearstodoublecounttheneedforincreaseddemandpresentedbynewcustomersanddoesnotappeartoreflecttheeconomiesofscaleofnetworkinfrastructureTheGrattanInstitute’scalculatedrangeofRABwritedownsarehighlysensitivetothestudyperiodstartandenddates(moresothanotherstudies)
35
8.3 TheGamingOfExcessiveOperationalExpenditure(Opex)AllowancesTheQueenslandnetworksareamongsttheleastefficientnetworksintheNationalElectricityMarket(NEM):
§ PowerlinkQueenslandisthemostinefficienttransmissionnetworkintheNEM37
§ ErgonEnergyisthesecondleastefficientdistributionnetworksintheNEM38
TheQueenslandnetworks’ poor operational efficiency andproductivity has been the subject of extensivecriticisminnumerousreportsandreviews.39
Over the past decade, the Queensland networks have managed to prevent the AER from applyingbenchmarking when setting their opex allowances, resulting in the AER setting the networks’ opexallowancesonthebasisoftheirhistoricalcosts,ratherthanefficientcosts.40
Thisresultedinthefollowingoutcomesinthenetworks’mostrecentrevenuedeterminations:
§ The AER fully accepted Energex’s proposed opex, despite the AER’s benchmarking identifying thatEnergex’sopexis35-40%abovethebenchmarkefficientlevel
§ TheAERonlyapplieda5%reductiontoErgonEnergy’sproposedopex,despitetheAER’sbenchmarkingidentifyingtheneedforreductionsof55-60%
§ The AER fully accepted Powerlink’s proposed opex, despite the AER’s benchmarking identifying thatPowerlink’sopexisaroundtwicetheefficientlevel
Asaresult,theQueenslandelectricitynetworks’totalopexallowancesovertheircurrent5-yearregulatoryperiodsare$2.25billion($450millionperannum)abovetheefficientlevel.
37Powerlink’sMTFPisranked5thoutofthe5NEMtransmissionnetworks–seeAER2017TransmissionBenchmarkingReport,2ndDecember201738ErgonEnergyMTFPisranked12thoutofthe13NEMdistributionnetworks–seeAER2017DistributionBenchmarkingReport,2ndDecember201739Forexample:AssetsorLiabilities?TheNeedtoApplyFairRegulatoryValuestoAustralia’sElectricityNetworks,HughGrant,5thMay2016SenateInquiryIntoThePerformanceandManagementofElectricityNetworkCompanies,June2015VictorianElectricityDistributionBusinessesSubmissiontotheSenateSelectCommitteeInquiryintotheperformanceandmanagementofelectricitynetworkcompanies:,18thDecember2014QueenslandGovernmentIndependentReviewPanel(IRP)onNetworkCosts,FinalReport,2013ElectricityNetworkRegulatoryFrameworks:ProductivityCommissionInquiryReport,9April2013SenateSelectCommitteeonElectricityPrices:ReducingEnergyBillsandImprovingEfficiencyDowntothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,25March2018AcomparisonofoutcomesdeliveredbyelectricitytransmissionnetworkserviceprovidersintheNEM,EUAA,2012Australia’srisingpricesanddecliningproductivity:thecontributionofitselectricitydistributors,EUAA,2011Shocktothesystem:Dealingwithfallingelectricitydemand,GrattanInstitute,December2013Puttingthecustomerbackinfront:Howtomakeelectricitycheaper.GrattanInstitute,December2012TheGarnautClimateChangeReviewUpdate,Paper8:TransformingtheElectricitySector,2011TheEnergyMarketDeathSpiral-RethinkingCustomerHardship,PaulSimshauserandTimNelson,2012Write-downstoaddressthestrandedassetsofelectricitynetworksintheNationalElectricityMarket:evidenceandargumentCME,April2015AMPSubmissiontotheProductivityCommission-TheCapitalEfficiencyofAustralianElectricityDistributors,ResultsofaBenchmarkingStudy,November2012UtilitiesPolicy:IndependentRegulationofGovernment–OwnedMonopolies:AnOxymoron?,December201440Seeforexample,ErgonEnergyInterventiontotheAusgrid,EndeavourEnergyandEssentialEnergyLimitedMeritsReview(LMR)AppealontheAER’s2014-19revenuedeterminationfortheNSWdistributors
36
8.4 TheQueenslandNetworks’GamingOfTheAER’sIncentiveSchemesOver the past decade, the AER has implemented various incentive schemes aimed at incentivising thenetworkstoimprovetheirperformanceandefficiency.
Allofthoseschemeshavedemonstrablyfailedtomeettheirobjectives.
Rather, the Queensland networks have realised extraordinary windfall profits from gaming the variousschemes, by taking advantage of information asymmetries and negotiating incentive scheme targetswellabovetheefficientlevels.
Forexample, the chartbelowoutlines theasymmetricoutcomesof theAER’sServiceTargetPerformanceIncentiveScheme (STPIS)–underwhichPowerlinkhasachievedmajorbonuses ineveryyear,andhasnotincurredanypenaltiessincetheschemewasimplemented.41
0.00#
5.00#
10.00#
15.00#
20.00#
25.00#
2007# 2008# 2009# 2010# 2011# 2012# 2013# 2014# 2015#
Powerlink*+*STPIS*Bonuses*($M)*
37
9 BusinessAsUsualisUnsustainableQueensland’sexcessiveelectricitypricesareinflictingmajordamageontheQueenslandcommunityandtheQueenslandeconomy.
In response to the dramatic increases in electricity prices, Queensland consumers are exhausting allopportunitiestoreducetheirelectricitycosts.
In addition to reducing consumption,Queensland consumers are increasingly investing in self-generation,therebyfurtherreducingtheenergybeingdeliveredbytheQueenslandnetworks.
For example, residential consumers are increasingly investing in solar PV and battery storage systems toreduceorremovetheirrelianceongridsuppliedelectricity.
Similarly, Queensland’s industrial consumers are increasinglymoving to self-generation andQueensland’sirrigatorsarepursuinginefficienttechnologysubstitutionssuchasmovingtotheuseofdieselpumpsratherthanelectricalpumps.
Whilst these decisions are justified on the basis of current electricity prices, many of the decisions areactuallyeconomically inefficientastheyarebasedonpursuingalternativestoartificially inflatedelectricityprices.
The Queensland networks are responding by further increasing their prices to recover their guaranteedrevenuesoverareducedlevelofconsumption.
Consequently, Queensland’s excessive network prices are driving ongoing demand reductions andaccelerating the industry death spiral - i.e. as themove towards self generation increases, the burden ofpaying for the networks’ costs is being progressively placed on a reducing consumer base until thoseconsumerscannolongeraffordtostayconnectedtothenetwork.
Continuationofthe industrydeathspiralwillultimatelybemuchmoredestructivetothevalueandfutureviability of Queensland’s government-owned energy companies than the short-term impacts ofimplementingmoresustainableprices.
It is clearly irresponsible and foolhardy to continue to allow Queensland’s state budget to be so heavilydependentupontheextractionofunsustainableprofitsfromQueensland’smonopolyelectricitynetworks.
It is clear fromthevariouspoliciesproposedbyQueensland’spoliticalparties that there isbroadpoliticalawarenessthatbusinessasusualisunsustainable.
TheQueenslandcommunity isbecoming increasinglyawareof the real reason forQueensland’sexcessiveelectricitypricesandisbecomingincreasinglyvocalinlettingQueensland’spoliticalleadersknowthattheywillnolongerbeplayedasfools.
The new delicately balanced Queensland parliament provides an opportunity for the new QueenslandGovernmenttoseriouslyaddressthekeydriverofQueensland’sexcessiveelectricitypricesandreducetheQueensland state budget’s dependence on unsustainable profits from Queensland’s monopoly electricitynetworks.
38
10 PolicyAndRegulatoryImplications
10.1 TheNeedtoSetTheQueenslandNetworks’PricesAtEfficientLevelsAsowneroftheQueenslandnetworks,theQueenslandgovernmenthasahighdegreeofcontrolovertheirprices.
RatherthancontinuingtoallowtheQueenslandnetworkstogamethenationalregulatorandchargepricesovertwicetheefficientlevels,theQueenslandGovernmentneedstoexercisethatcontrolandensurethatthenetworks’pricesaresetatefficientlevels.
AsoutlinedintherecentGrattaninstitutereport,theQueenslandgovernmentneedstotakeresponsibilityandaddresstheQueenslandnetworks’excessiveprices.42
“Wefindthatfaultliespredominantlywithsuccessivestategovernments”
“Stategovernment’scan’tturnbacktheclockbuttheycanfixthemistakesofthepast.Andtheyshould,becauseiftheydon’t,consumerswillbepayingfordecadestocome”.
TheAustralianEnergyRegulator(AER)setsalimitonthemaximumrevenuestheQueenslandnetworksareallowed to collect from their customers. The networks have complete autonomy regarding the actualrevenuetheycollect,aslongastheirtotalrevenuedoesnotexceedtheirmaximumrevenuecaps.
Decisionstocollectrevenuesbelowthenetworks’maximumrevenuecapsarenotunusualandhavebeenmadebyvariousnetworkowners(includingpreviousQueenslandgovernments)inrecentyears.
For example, the NSW government recently directed Essential Energy (the NSW government-owneddistributionnetwork)toset itspricesat34%belowthe levelthatEssentialEnergymanagedtogamefromthenationalregulatoryframework.
Importantly, theNSWgovernmentmade thatdirection in response toNSWcommunityoutrage followingthe leaking of a document that confirmed that Essential Energy cynically exploited its consumers, theregulatorandtheAustralianlegalsysteminitspursuitofexcessiveprofits.
Overthepasttwoyears,EssentialEnergyspentmillionsinlegalfees(fundedbyconsumers)securinghigherrevenuethrough legalappeals to theAustralianCompetitionTribunalandtheFederalCourt.During thoselegal battles, Essential Energy made numerous non-credible claims that lower revenues would result incatastrophicconsequencesandcompromisethesafety,securityandreliabilityofthenetwork.
However,inOctober2017,theNSWoppositionuncoveredabriefingdocumentfromEssentialEnergytotheNSWGovernmentthatstronglycontradictedthoseclaims.Inthatdocument,EssentialEnergyacknowledgedthattheextrarevenueithadrepeatedlyinsistedwasnecessarywasactuallyunnecessary,andwouldsimplyresultinsignificantadditionalprofitsforthecompany.
Asoutlinedwithinthispaper,successiveQueenslandgovernmentshavealsobeencomplicitinenablingtheQueenslandnetworkstoexploitQueenslandconsumersintheirpursuitofexcessiveprofits.
TheQueenslandcommunity isbecoming increasinglyawareof the real reason forQueensland’sexcessiveelectricitypricesandincreasinglyvocalinlettingQueensland’spoliticalleadersknowthattheywillnolongerbeplayedasfools.
42Downtothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,25March2018
39
10.1.1 AssessmentofEfficientNetworkPrices
Efficientpricescanbedefinedas:
Pricesbasedonrevenuesthatprovidefor:
§ Reasonablereturnsonefficientinvestments;and
§ Therecoveryofefficientcosts
The charts overleaf provide an indication of the differences between the Queensland networks’ currentrevenuesandefficientrevenues.
The estimations of efficient revenues are based on the conclusions of various independent analyses andreviewsoftheQueenslandnetworks’revenuesandcosts.43
The chartsoutline thedifferent revenues thatwouldapply if thenetworkswere to remainas “forprofit”entitiesandtherevenuesthatwouldapplyifthenetworksweretoberevertedto“non-profit”entities(ascurrentlybeingproposedbysomeQueenslandpoliticalparties).
43AssetsorLiabilities?TheNeedtoApplyFairRegulatoryValuestoAustralia’sElectricityNetworks,HughGrant,5thMay2016SenateInquiryIntoThePerformanceandManagementofElectricityNetworkCompanies,June2015VictorianElectricityDistributionBusinessesSubmissiontotheSenateSelectCommitteeInquiryintotheperformanceandmanagementofelectricitynetworkcompanies:,18thDecember2014AcomparisonofoutcomesdeliveredbyelectricitytransmissionnetworkserviceprovidersintheNEM,EUAA,2012Australia’srisingpricesanddecliningproductivity:thecontributionofitselectricitydistributors,EUAA,2011Downtothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,25March2018Shocktothesystem:Dealingwithfallingelectricitydemand,GrattanInstitute,December2013Puttingthecustomerbackinfront:Howtomakeelectricitycheaper.GrattanInstitute,December2012TheGarnautClimateChangeReviewUpdate,Paper8:TransformingtheElectricitySector,2011TheEnergyMarketDeathSpiral-RethinkingCustomerHardship,PaulSimshauserandTimNelson,2012Write-downstoaddressthestrandedassetsofelectricitynetworksintheNationalElectricityMarket:evidenceandargumentCME,April2015AMPSubmissiontotheProductivityCommission-TheCapitalEfficiencyofAustralianElectricityDistributors,ResultsofaBenchmarkingStudy,November2012UtilitiesPolicy:IndependentRegulationofGovernment–OwnedMonopolies:AnOxymoron?,December2014ElectricityNetworkRegulatoryFrameworks:ProductivityCommissionInquiryReport,9April2013SenateSelectCommitteeonElectricityPrices:ReducingEnergyBillsandImprovingEfficiencyQueenslandGovernmentIndependentReviewPanel(IRP)onNetworkCosts,FinalReport
40
Thekeyassumptionsunderlyingtheestimatesinclude:
CurrentRevenueAllowances
The“currentrevenueallowances”reflecttheAER’saverageannualrevenueallowancesoverthenextthreefinancialyears(2017/18-2019/20)44
EfficientRevenueAllowances(ForProfitScenario)
Keyassumptionsinclude:
§ TheongoingapplicationoftheCapitalAssetPricingModel(CAPM)approach
§ Theongoingassumptionof60%/40%debt/equitygearingratios
§ AcceptanceoftheAER’s‘riskfreerate’calculations
§ Anequityriskpremium(ERP)of2%basedonamarketriskpremiumof5%andanequitybetaof0.4
§ Debtriskpremiums(DRPs)of1%belowtheAER’sapplieddebtriskpremiums
§ The estimations of efficient regulated asset bases (RABs) are based on the conclusions of variousindependentanalyststhatthenetworks’currentRABsareatleasttwicetheefficientlevels
§ The estimations of efficient opex allowances are based on the “benchmark efficient costs” as per theAER’sbenchmarkingreports45
EfficientRevenueAllowances(NotForProfitScenario)
Thekeyassumptionsareasperthe“forprofit”scenario,except:
§ Thenetworksareassumedtobe100%debtfunded
§ A debt risk premium (DRP) of 1.25% has been provided to provide an allowance for the networks’specificnon-diversifiablefinancialrisks46
§ Notaxallowancesareprovided
Thechartshighlightthat:
§ Ifthenetworksaretoremainas“forprofit“entities,theQueenslandnetworks’currentrevenuesare2.3-2.4timestheefficientlevel
§ If thenetworks are tobe reverted to “nonprofit“ entities (asproposedby someQueenslandpoliticalparties),theQueenslandnetworks’currentrevenuesarearound2.4-2.5timestheefficientlevel
44AllrevenueallowancesexcludetheAER’scalculated“additionalamountsinDUOS”-themajorityofthosecostshavebeenremovedfromtheQueenslanddistributors’revenuesaspertheQueenslandGovernment’sJune2017statebudgetannouncement–availableathttps://budget.qld.gov.au/budget-highlights/powering-queensland/45AERTransmissionsandDistributionBenchmarkingReports46Thisapproachiscommoninthedeterminationofreturnsforgovernmentownedbusinesses.Seeforexample:“EconomicRegulationinAustralia:theCaseoftheNewSouthWalesGas”.Abbot,MandXiaoyongEconomicPapers,Vol36,No.3“TheregulationofgovernmentownedelectricitydistributorsinAustralia”,BruceMountain,JournalofRegulatoryEconomics,December2017
41
0
100
200
300
400
500
600
700
800
900
CurrentAllowances EfQicientAllowances(ForProQit)
EfQicientAllowances(NonProQit)
RevenueAllowances($m)
PowerlinkQueenslandReturnonCapital Depreciation Opex Tax
0
200
400
600
800
1000
1200
1400
CurrentAllowances EfQicientAllowances(ForProQit)
EfQicientAllowances(NonProQit)
RevenueAllowances($m)
EnergexReturnonCapital Depreciation Opex Tax
42
0
200
400
600
800
1000
1200
1400
CurrentAllowances EfQicientAllowances(ForProQit)
EfQicientAllowances(NonProQit)
RevenueAllowances($m)
ErgonEnergyReturnonCapital Depreciation Opex Tax
0
500
1000
1500
2000
2500
3000
3500
4000
CurrentAllowances EfQicientAllowances(ForProQit)
EfQicientAllowances(NonProQit)
RevenueAllowances($m)
QueenslandNetworksTotalReturnonCapital Depreciation Opex Tax
43
10.1.2 TheQueenslandPoliticalParties’PoliciesToReduceTheNetworks’Prices
Queensland’s political parties are currently proposing various policies aimed at reducing the Queenslandnetworks’pricesandprofits.
Appendix3ofthisreportprovidesanassessmentofthosepoliciesandtheextenttowhichtheywoulddrivetheQueenslandnetworks’pricestowardsefficientlevels.
ThetablebelowhighlightstheQueenslandpoliticalparties’keypoliciesandtheestimatedpotentialnetworkpricereductionsthatwouldarisefromtheirimplementation.
PoliticalParty
PoliciesToAddressExcessiveProfits
PoliciesToDriveEfficientCosts
PotentialPriceReductions
Labor$50“electricityassetownershipdividendpayment”forQueenslandhouseholds
-
3%
LiberalNationalParty(LNP)
Write-downsofthenetworks’regulatoryassetbases(RABs)47
Appointconsumerrepresentativestothenetworks’boards
Tieexecutivebonusestopricereductions
20%
OneNationParty
20%reductionfromremovalofdividendpayments
- 20%
Katter’sAustralianParty
Implementationof“recoveryonly”pricing
AbolishmentofDORCvaluationmethodology
Reversiontostatebasedregulation
60%
QueenslandGreens
Reversiontononprofitentities
Reversion to state basedregulation 60%
47On3April2018,theLNPLeader(DebFrecklington)endorsedthefindingsandrecommendationsoftheGrattanInstitutePaper–“Downtothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,March2018”TheGrattanInstitutepapercalculatedarangeofRABwritedownsfortheQueenslandelectricitynetworksbasedonvariousassumptions.TheestimatedpricereductionsarebasedontheGrattanInstitute’scalculatedRABwrite-downsof$2.5bn(38%)forPowerlinkQueensland,$3.9bn(33%)forEnergexand$2.8bn(26.3%)forErgonEnergy
44
Itisclearfromthevariouspoliciesproposedthatthereisabroadpoliticalawarenessthatbusinessasusualisunsustainable.
ThenewdelicatelybalancedQueenslandparliamentprovides anopportunity to seriously address the keydriverofQueensland’sexcessiveelectricitypricesandreducetheQueenslandstatebudget’sdependenceonunsustainableprofitsfromQueensland’smonopolyelectricitynetworks.
10.2 TheImpactsOfImplementingEfficientPricesOnTheQueenslandBudgetCriticsof calls to set theQueenslandnetworks’pricesatefficient levels tend tomake shortsighted claimsregardingtheimpactontheQueenslandstatebudget.
Suchresponsesreflectaverynarrowandshort-termviewofthe issuesandignorethemajordamagethatQueensland’s excessive electricity prices are inflicting on the Queensland community and the stateeconomy.
Furthermore, by acknowledging the difficulty of addressing the problem, such responses are actuallyconfirming the unsustainability of the Queensland budget’s dependence on the monopoly networks’excessiveprofits,highlightingthatthat‘businessasusual’isunsustainable.
Clearlywecannotundo themistakesof thepast,butwecanprevent them frombeing repeated in thefuture.
10.3 IsThe‘ProfitMotive’NecessaryToDeliverEfficientPrices?CriticsoftheQueenslandpoliticalparties’proposalstoreverttheQueenslandmonopolynetworksto“non-profit”entitiesarelikelytoclaimthatthe‘profitmotive’isessentialtodeliverefficientprices.
Suchcriticismsneedtobeevaluatedinlightoftheextensivecounterfactualevidence.
SinceresponsibilityfortheregulationoftheQueenslandnetworks’revenueswastransferredtothenationalregulatory framework in 2006, theQueenslandnetworks’ efficiency levels havedeclineddramatically andtheirproductivitylevelsarethelowestintheNationalElectricityMarket(NEM).
Duringthatperiod,thenetworksprofitabilitylevelsincreaseddramatically.
It is clear from the evidence that the effectiveness of the regulatory framework is a much strongerdeterminantofthenetworks’efficiencylevelsthanwhetherornottheyhaveaprofitmotive.
10.4 TheNeedForGovernment-OwnedNetworksToBeRegulated ByTheirGovernmentOwners
As demonstrated throughout this report, the transfer of the Australian networks’ revenue regulation tonationalregulation(bytheAustralianEnergyRegulator(AER))hasbeenacatastrophicfailure.
Althoughthedeficienciesinthenationalregulatoryframeworkapplytobothpubliclyandprivatelyownednetworks,itiswellunderstoodthatthepubliclyownednetworkshaveexploitedthedeficienciestoamuchhigherdegreethantheprivatelyownednetworks.
Asaresult,thestategovernment-ownednetworks’pricesareovertwicetheefficientlevel,whereastheprivatelyownednetworks’pricesarearound30-40%aboveefficientlevels.
45
Inessence,thenationalregulatoryframeworkwasdesignedforprivateownershipandhasbeenunabletopreventgovernmentownednetworks(withtheiraccesstolow-costfinance)fromexploitingtheincentivesforoverinvestmentandgoldplating,andprofitingfromtheirinefficiencies.
Asoutlinedabove,theQueenslandGovernmenthasbeenthemostproactivestategovernmentinconstrainingtheAER’spowersandensuringtheretentionofthedeficienciesinthenationalregulatoryframework.
Over the past decade, successive Queensland governments have worked with other state governments(throughCOAG)tocreateahighlydeficientregulatoryframeworkthatinvolves:
§ Aregulatoryrulemaker(theAustralianEnergyMarketCommission(AEMC))withastrongbiastowardsthenetworkbusinesses’interestsattheexpenseofconsumers’interests,and
§ Atoothless regulator (theAustralianEnergyRegulator (AER))withanarrowlydefinedandconstrainedroleandlimitedpowers
These arrangements are unique to Australia, and have conveniently enabled successive QueenslandGovernmentstodeflecttheblameforthenetworks’priceincreasestoan“independentnationalregulator”.
It is therefore not surprising that the Western Australian electricity network, Western Power, was soenthusiastic regarding recent proposals to transfer its revenue regulation to the national regulatoryframework,astheWesternAustralianregulator(theERA)hasmuchstrongerpowersthantheAER.
As outlined within this report, some Queensland political parties are proposing to revert to QueenslandGovernmentcontrolled revenue regulation for theQueenslandnetworks,asappliedprior to2006,andascurrentlyappliestostate–ownedelectricitynetworks incomparablefederalcountries includingtheUnitedStates,CanadaandGermany.
AlthoughQueenslandGovernmentcontrollednetworkrevenueregulationwillnotbeimmunefrompoliticalinterference,thepracticalrealityisthatprovidingsinglepointaccountabilitytotheQueenslandgovernmentforthenetworks’pricesandprofitsismuchmorelikelytodeliverefficientnetworkpricesthancontinuingtoplace false hope that future state governments will progress the numerous long-overdue reforms to thedeeplyflawednationalregulatoryframework.
10.5 The Need To Restrict The Queensland Government’s IncomeExtractionsToSustainableLevels
As outlined throughout this report, successiveQueensland governments have extracted income from theQueenslandnetworksatunsustainablelevels.ThereisaneedforstrongerfiscalcontrolsthatmakeitmoredifficultforfutureQueenslandGovernmentstoextractunsustainablelevelsofincomefromtheQueenslandnetworks.
TheunsustainabilityoftheQueenslandgovernment’sincomeextractionswashighlightedintheQueenslandAuditOffice’s(QAO)recentauditoftheQueenslandenergycompanies’2015-17finances.AsstatedbytheQueenslandAuditOffice:48
TheQueenslandGovernmentcontinuestorequireadividendof100percentofenergynetprofitsaftertaxfor all entities except CS Energy. During the last two years, a mixture of net profit after tax and specialdividendshavebeenpaid to the stategovernmentusing cashandadditionalborrowings, through realisedaccumulated earnings and unrealised asset revaluation reserves. While this continues, there is a risk ofdepletingcashandreserves,resultinginalimitedabilitytofundfuturedividendswithincreaseddebt.”
48Energy:2016-17resultsoffinancialaudits,Report9(2017-18),QueenslandAuditOffice,February2018
46
Furthermore,futureQueenslandGovernmentsshouldceasethepracticeofextractingcompetitiveneutralityfeesfromthenetworks.
The Queensland Government’s rationale for extracting competitive neutrality fees from the networks isbasedonaflawedapplicationoftheCompetitionPrinciplesAgreement(CPA).
TheCPAisintendedtoapplytogovernment-ownedentitiesthatoperateincompetitiveindustries.However,the Queensland networks are monopoly businesses that have no competitors. Consequently, extractingcompetitive neutrality fees from the Queensland networks serves no purpose and simply imposesunnecessarycostsonQueenslandconsumerswhilstdeliveringnobenefits.
10.6 TheNeedForImprovedOversightOfTheQueenslandNetworksSuccessiveQueenslandGovernmentshavehada“hands-off’approachtothegovernanceoftheQueenslandnetworks.
This lackofoversighthasresultedintheQueenslandnetworksexploiting loopholesanddeficiencies inthenational regulatory framework, pursuing outcomes that are not in Queensland consumers’ long-terminterests.
There is a need formuch stronger oversight of theQueensland network businesses, to ensure that theiractionsbetterreflectQueenslandconsumers’long-terminterests.
In May 2016, the Queensland Productivity Commission (QPC) made a number of recommendations forimprovementstotheGOCshareholderoversightrole,aimedatensuringthattheQueenslandnetworksareheldmoreaccountablefortheirperformanceandefficiency.
DespitetheQueenslandGovernmentstatingthat itacceptedmostof thoserecommendations, there isnoevidencethatanyimprovementstothegovernanceoftheQueenslandnetworkshavebeenprogressedoverthepast2years.
47
11 RecommendationsRecommendation1. SetTheQueenslandNetworks’PricesAtEfficientLevels
AsowneroftheQueenslandnetworks,theQueenslandgovernmenthasahighdegreeofcontrolovertheirprices.
RatherthancontinuingtoenabletheQueenslandnetworkstogamethenationalregulatorandchargepricesovertwicetheefficientlevels,theQueenslandGovernmentneedstoexercisethatcontrolandensurethatthenetworks’pricesaresetatefficientlevels.
TheAustralianEnergyRegulator(AER)setsalimitonthemaximumrevenuestheQueenslandnetworksareallowed to collect from their customers. The networks have complete autonomy regarding the actualrevenuetheycollect,aslongastheirtotalrevenuedoesnotexceedtheirmaximumrevenuecaps.
Decisionstocollectrevenuesbelowthenetworks’maximumrevenuecapsarenotunusualandhavebeenmadebyvariousnetworkowners(includingpreviousQueenslandgovernments)inrecentyears.
For example, the NSW government recently directed Essential Energy (the NSW government-owneddistributionnetwork)toset itspricesat34%belowthe levelthatEssentialEnergymanagedtogamefromthenationalregulatoryframework.
Importantly, this paper outlines that the NSW government made that direction in response to the NSWcommunity’soutragefollowingtheleakingofadocumentthatconfirmedthatEssentialEnergyhadcynicallyexploiteditsconsumers,theregulatorandtheAustralianlegalsysteminitspursuitofexcessiveprofits.
TheQueenslandcommunity isbecoming increasinglyawareof the real reason forQueensland’sexcessiveelectricitypricesandincreasinglyvocalinlettingQueensland’spoliticalleadersknowthattheywillnolongerbeplayedasfools.
The new delicately balanced Queensland parliament provides an opportunity for the new QueenslandGovernmenttoseriouslyaddressthekeydriverofQueensland’sexcessiveelectricitypricesandreducethestatebudget’sdependenceonunsustainableprofitsfromQueensland’smonopolyelectricitynetworks.
Importantly,settingtheQueenslandnetworks’revenuesatlevelsbelowtheirmaximumrevenuecapscanbeimplementedimmediatelyanddoesnotrequireanychangestothenationalregulatoryframework.
Criticsofcalls toset theQueenslandnetworks’pricesatefficient levels tendtomakeshort-sightedclaimsregardingtheimpactontheQueenslandstatebudget.Suchresponsesreflectaverynarrowandshort-termviewoftheissuesandignorethemajordamagethatQueensland’sexcessiveelectricitypricesareinflictingontheQueenslandcommunityandthestateeconomy.
SettingQueensland’selectricitypricesatefficientlevelswill:
§ Minimisefurtherhardshipforresidentialconsumers
§ RestoretheinternationalcompetitivenessandviabilityofQueenslandindustry
§ Improvethelong-termviabilityoftheQueenslandelectricitysupplychain
§ Protect the Queensland Government owned energy companies from the value destruction that willinevitablyarisefromthecontinuationofthenetworkdeathspiral
48
Recommendation2. Revert ToQueenslandGovernment Controlled Regulation For TheQueenslandNetworks
AscurrentlybeingproposedbysomeQueenslandpoliticalparties, thereisaneedtoreverttoQueenslandGovernmentcontrolledrevenueregulationfortheQueenslandnetworks-asappliedpriorto2006,andascurrentlyappliestostate–ownedelectricitynetworksincomparablefederalcountries.
AlthoughQueenslandGovernmentcontrollednetworkrevenueregulationwillnotbeimmunefrompoliticalinterference,thepracticalrealityisthatprovidingsinglepointaccountabilitytotheQueenslandGovernmentforthenetworks’pricesandprofitsismuchmorelikelytodeliverefficientnetworkpricesthancontinuingtoplace false hope that future state governments will progress the numerous long-overdue reforms to thedeeplyflawednationalregulatoryframework.
Queensland controlled regulation should be designed to avoid the deficiencies in the existing nationalregulatoryframeworkoutlinedwithinthisreport.
Recommendation3. ImplementFiscalControlsThatRestrictTheQueensland Government’sIncomeExtractionstoSustainableLevelsTheQueenslandGovernmentisextractingincomefromtheQueenslandnetworksatunsustainablelevels.
ThereisaneedforstrongerfiscalcontrolsthatmakeitmoredifficultforfutureQueenslandGovernmentstoextractunsustainablelevelsofincomefromtheQueenslandnetworks.
Furthermore, the Queensland Government should cease the practice of extracting competitive neutralityfeesfromthenetworks.ThispaperdemonstratesthattheQueenslandGovernment’srationaleforextractingcompetitiveneutralityfeesfromthenetworksisbasedonaflawedapplicationoftheCompetitionPrinciplesAgreement (CPA) and that it serves no purpose, imposing unnecessary costs on Queensland consumerswhilstdeliveringnobenefits.
Recommendation4.ImplementStrengthenedOversightOfTheQueenslandNetworks
SuccessiveQueenslandGovernmentshavehada“hands-off’approachtothegovernanceoftheQueenslandgovernmentownednetworks, enabling thenetworks to exploit loopholes anddeficiencies in the nationalregulatoryframework,pursuingoutcomesthatarenotinQueenslandconsumers’long-terminterests.
TheQueenslandGovernmentneedstoimplementimprovedgovernancearrangementsfortheQueenslandnetworks toensure that theybetter reflect theQueenslandcommunities’ long-term interests.This shouldinclude:
§ Preventingthenetworksfromcollectingwindfallprofitsfromover-forecastingtheirneeds
§ MuchstrongeroversightoftheQueenslandnetworks’advocacyandlobbyingactivities–ensuringthattheyceaseopposingordelayingreformsaimedatimprovingtheirperformanceandproductivity
§ IncreasedscrutinyandtransparencyoftheQueenslandnetworks’performance
§ Settingandoverseeingcapitalandoperationalefficiency improvementprograms,withtheobjectiveofimproving the Queensland networks’ productivity from bottom-quartile to top-quartile performancewithintheshortestpossibletimeframe
§ Segregatedfinancialreportingofthenetworks’regulatedandnon-regulatedbusinessactivities
§ ImprovedtransparencyofthedirectionsbeingprovidedtotheQueenslandnetworksbytheQueenslandEnergyMinisterandQueenslandTreasury
49
Appendix1 AnalysisOfTheQueenslandNetworks’Profitability
This appendix provides a detailed analysis of the actual financial returns realised by two Queenslandnetworks(PowerlinkQueenslandandEnergex)overthe15-yearperiod1999/00-2013/14.
11.1 Definitions,DataSourcesAndCalculationsThe profitability analysis involved the calculation of the two key returns that investors realise from theirequityinvestments:
§ AnnualIncome–calculatedastheannual%returnonshareholderequity
§ GrowthinShareholderEquity–calculatedasthegrowthinshareholderequityoverthe15yearperiod
Therearetworecognisedmethodsforexpressingshareholderequity:
BookValue-calculatedasthesumofshareholdercontributionsplusretainedearning;and
Marketvalue–calculatedassharemarketvaluationlessdebt
Bothofthosedefinitionsareappropriate,dependentuponthecontextoftheiruse.
Thisprofitabilityanalysisusesbothofthosemethodsasfollows:
AnnualReturnOnEquityCalculations
The Annual Return on Equity is the ratio (expressed in % terms) of the annual profit achieved by thebusiness,dividedbytheequityinvestment,i.e.:
ReturnonEquity=NetProfitAfterTax(NPAT) ShareholderEquity
Theprofitabilityanalysisuses the“bookvalue”definitionofequitywhencalculating theannual returnonequitylevels–i.e.thedefinitionusedbyallAustralianbusinessesoutsideoftheenergynetworksectorwhencalculatingtheirannualreturnonequitylevels.
Note-the“bookvalue”ofequityissometimesreferredtoas"shareholdercontribution”.49
Usingthebookvalue(orshareholdercontribution)definitionensuresthattheannualreturnsontheactualequityinvestedbythebusinessesarecomparedonan"applesforapples"basis.
Importantly, the return on equity calculations do not include the other pecuniary benefits that theQueenslandGovernment realises from its investment in the networks (i.e. tax payments and competitiveneutralityfees)
GrowthInShareholderEquityCalculations
The growth in shareholder equity is calculated using the "market value” definition ofequity (i.e. businessvalue less debt) – i.e. the definition commonly used by all Australian businesses outside of the energynetworksectorwhencalculatingtheirchangesinshareholdervalue.
49IntheQueenslandnetworks’financialreportsthisisthesumofthenetworks’“sharecapital”and“retainedearnings”
50
Again, using that definition ensures that changes in shareholder value are compared on an “apples forapples”basis.
All data (e.g.NPAT, share capital and retainedearnings)was takendirectly fromPowerlink andEnergex’sauditedannualfinancialreportsovertheanalysisperiod.
11.2 TheNetworks’ActualReturnOnEquityThechartsoverleafillustratethetrendsintheQueensland’selectricitynetworks’profits,shareholderequityandactual‘returnonequity’levelsoverthe2000-2014period.
Theyhighlightthat:
§ Powerlink Queensland achieved actual ‘return on equity’ levels of 18% to 75%, which amounted to1.5-8.1timestheAER’stheoreticalreturnonequitylevels
§ Energexachievedactual‘returnonequity’levelsof10.5%to148%,whichamountedtoupto13.5timestheAER’stheoreticalreturnonequitylevels
§ Bycomparison,mostASX50companiesstruggledtoachieveannual‘returnonequity’levelsof5%overthatperiod
§ Overthepast15yearstheQueenslandnetworks’annualprofitshavegrownstronglywithmajorspikesinsomeyears
§ Atnotimeoverthepast15yearshavethenetworksexperiencedlowprofitsorlosses(unlikeallotherbusinessesoftheirsize)
§ The networks consistently extracted very high dividend levels, with dividend payout ratios averagingaround90%-i.e.theyhavereinvestedminimalamountsofretainedearningsintothebusiness
§ Bycontrast,ASX50businessestypicallyreinvestover50%oftheirearnings
§ Thenetworks’extraordinarygrowthlevelshavebeenpredominantlyfundedbydebt,e.g.:
o PowerlinkQueensland’sRABgrewfourfoldwithnochangetoitssharecapitalof$401million
o Energex’s RAB grew fourfold whilst Energex reduced its invested equity’ by $175 million (from$921millionto$746million)
§ FundingsuchlevelsofgrowththroughdebtwouldbeimpossibleforbusinessesthatoperateinanyothersectoroftheAustralianeconomy
§ Thecommercialconstraintsthatapplytoallotherbusinesseswouldrequiresignificant levelsofequityinjectiontofundsuchgrowthlevels
§ ThisdemonstratestheuniquenessofthenationalregulatoryframeworkandhowitisdisconnectedfromthecommercialrealitiesfacedbybusinessesinallothersectorsoftheAustralianeconomy
51
0
100
200
300
400
500
600
200020012002200320042005200620072008200920102011201220132014
PowerlinkNetProfitTrends
NetProQitAfterTax(NPAT) Dividends
0100200300400500600700800900
20012002200320042005200620072008200920102011201220132014
PowerlinkShareholderEquityTrendsShareCapital RetainedEarnings
0%10%20%30%40%50%60%70%80%
20012002200320042005200620072008200920102011201220132014
PowerlinkReturnonEquity
ActualReturnonEquity AERTheoreticalReturnonEquity
52
020040060080010001200140016001800
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EnergexNetPro-itTrends
NetProQitAfterTax Dividends
0
500
1000
1500
2000
2500
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EnergexShareholderEquityTrends
ShareCapital RetainedEarnings
0%20%40%60%80%100%120%140%160%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EnergexReturnOnEquity
ActualReturnOnEquity AERTheoreticalReturnOnEquity
53
11.3 GrowthInShareholderEquityWithAustralia’selectricitynetworksachievingsuchextraordinaryreturns, it isnotsurprisingthat investorsare queuing up to purchase them when they come up for sale, paying well in excess of the networks’regulatoryvaluations.
11.3.1 RecentElectricityNetworkSaleValuationsInrecentyears,theNSWGovernmentsolditselectricitynetworksatsalepriceswellabovetheirregulatoryvaluations.
Forexample, inNovember2015,theNSWtransmissionnetwork(TransGrid),wassoldfor$10.3billion–asale price that amounted to 165% of TransGrid’s regulatory asset base (RAB) value. Similarly, the NSWgovernmentsoldEndeavourEnergyinMay2017for169%ofitsRABvalue.
Importantly,duringtheirrecentrevenuedeterminations,theNSWnetworksmademanyassertionsthattheAER’s approach to determining their ‘return on equity’ allowances would not enable them to recoverefficientfinancingcostsortoattractequityinvestors–claimingthatitwouldresult inlowerinvestmentinthenetworksandsignificantincreasesintheirfinancingrisks.
TheextraordinarysalespricesachievedbytheNSWnetworksmakeamockeryofthoseclaims.
As all informed investors and industry analysts are aware, the statements that Australia’s electricitynetworks make to regulators, policy makers and consumers are very different to their statements toinvestors.
Forexample,areviewoftheSparkInfrastructureequityinvestmentprospectusfortheTransGridpurchaseoutlineswhyinvestorsarequeuinguptopaysuchlargepremiumsabovethenetworks’regulatoryvalues.50
InformedinvestorsandindustryanalystswerenotintheleastsurprisedthatTransGridsoldfor165%ofitsregulatory valuation, as they know that the AER is currently providing investors with ‘return on equity’allowancesofaround3-4timesthelevelthattheyactuallyrequiretoinvestinthenetworks.51
ThesalepricesoftheNSWnetworksprovideaverystrongindicationofthemarketvalueoftheQueenslandelectricity networks. A RAB multiple of 165% was used in the estimates of the Queensland networks’businessvalues.
11.4 TheQueenslandNetworks’TotalReturns The charts overleaf illustrate the total returns (income plus growth in shareholder equity) that theQueenslandgovernmenthasaccrued from its investments inPowerlinkQueenslandandEnergexover the15-yearperiod.
Theyillustratethat:
§ TheQueenslandGovernment’s $401million equity investment in PowerlinkQueensland accrued totalreturnsofaround$9.4billion–i.e.23timestheequityinvestment
§ TheQueenslandGovernment’s average equity investment of $814million in Energex over the periodaccruedtotalreturnsof$17.8billion-i.e.22timestheequityinvestment
It is important tonote that theQueenslandnetworksareunlikely tohaveactually investedtheir reported“sharecapital”.Consequently,thenetworks’actual‘returnonequity’ratiosarelikelytobehigherthantheaboveratios.52
50SparkInfrastructure-EquityInvestmentinTransGridandEquityRaising,25November201551AssetsorLiabilities–TheNeedToApplyFairRegulatoryValuesToAustralia’sElectricityNetworks,HughGrant,5May201652Asabove
54
§ ShareholderEquityiscalculatedasCurrentBusinessValuelessCurrentDebt§ CurrentBusinessValuehasbeencalculatedas165%ofRAB,aspertherecentTransGridsale
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
EquityInvestment Returns
PowerlinkQueenslandReturnonInvestmentOverThePast15Years
ShareholderEquity
Dividends
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
EquityInvestment Returns
EnergexReturnonInvestmentOverThePast15Years
ShareholderEquity
Dividends
55
11.5 ComparingTheQueenslandNetworks’ReturnsWithRealWorldReturns
TheseareclearlyextraordinaryreturnsandrepresentmanymultiplesofthereturnsthatwereachievedbyAustralia’sbestperformingASX100entitiesovertheperiod.
For example, the chart below compares the returns that theQueenslandgovernment is realising from itsequityinvestmentinPowerlinkwiththereturnsthatitwouldhavebeenachievedifithadinvestedthesameequityinbluechipstocksinothersectorsoftheAustralianeconomy.
It illustrates that over the past 15 years, the Queensland government’s equity investment in PowerlinkQueenslandaccruedtotalreturnsof:
§ 23timesthereturnsachievedbytheAustralianconstructionsector(LendLease)
§ 15.5timesthereturnsachievedbytheAustraliantelecommunicationssector(Telstra)
§ 10.5timesthereturnsachievedbytheAustralianmineralsandresourcessector(BHP)
§ 10timesthereturnsachievedbytheAustralianbankingsector(NAB)
§ 3.6timesthereturnsachievedbyAustralia’smostprofitablesupermarket(Woolworths)
NoASX100stockcameclosetoPowerlink’sreturns.
Note–theabovechartactuallyunderstatesPowerlink’sreturns,as:§ ItdoesnotincludetheotherpecuniarybenefitsthattheQueenslandGovernmenthasrealisedfromitsinvestment
inPowerlink(taxpaymentsandcompetitiveneutralityfees)§ TheQueenslandgovernmentisunlikelytohaveactuallyinvestedthereported“sharecapital”levels.53Importantly, those returns are being realised despite Powerlink being the most inefficient transmissionnetworkintheNationalElectricityMarket(NEM).ClearlythosereturnsaregrosslyexcessiveandarenotinQueenslandconsumers’long-terminterest.53AssetsorLiabilities–TheNeedToApplyFairRegulatoryValuesToAustralia’sElectricityNetworks,HughGrant,5May2016
01,0002,0003,0004,0005,0006,0007,0008,0009,00010,000
PowerlinkQld Woolworths NAB BHP Telstra LendLease
ComparisonWithReturnsInOtherSectors
Dividends GrowthInShareholderValue
56
Appendix2 TheQueenslandNetworks’SystemicOver-Estimationof LoadGrowthAkeydriveroftheQueenslandnetworks’over-investmenthasbeenthenetworks’systemicover-forecastingofdemand.
Overthepastdecade,theQueenslandnetworks’demandforecastshavebeensignificantlyoverblown.
Importantly, theQueenslandnetworks’haveconsistentlyover-forecasted their systemdemand toamuchhigherdegreethanthenetworksinallotherstates.
Thiswas highlighted by theQueensland Government Independent Review Panel on Network Costs, whichstatedthat:54
§ “Another factor contributing to the escalation in capital programs has been the consistent over-estimationofdemandbytheNSPs
§ “The Panel also notes that the current revenue cap control mechanism places volume risk oncustomers”
§ “Wheredemandisover-estimated,capitalprogramswillbeexcesstorequirementsandnetworktariffstocustomerswillincreaseduringtheregulatorycontrolperiodtoensuretheNSPsareabletorecovertheallowablerevenue”
Powerlink’sOver-ForecastingRecordThe chart below, from the EUAA study into the demand forecasting records of Australia’s transmissionnetworks, highlights that over the 2006-2012 period, Powerlink’s level of over-forecastingwas four timeshigherthantheVictorianover-forecastinglevel.55
54QueenslandGovernmentIndependentReviewPanel(IRP)onNetworkCosts,FinalReport55AcomparisonofoutcomesdeliveredbyelectricitytransmissionnetworkserviceprovidersintheNationalElectricityMarket,EUAA2012
57
The table below outlines the differences between Powerlink’s 2013/14 peak demand forecasts and theactualpeakdemandthateventuated(justtwoyearsaftertheforecasts).56
2013/14MediumForecast(MW)
2013/14Actual PeakDemand(MW)
Difference
RevenueProposal
10%POE
50%POE
10,907
10,500
7,500
7,500
45%overestimate
40%overestimate
Powerlinkwasrewardedwith‘windfallprofits’ofaround$300millionduringthe2012-17regulatoryperiodforits“forecastingerrors”,asitsrevenueallowancesincludedreturnsoncapitalforforecastcapexthatitdidnotincur.57
EnergexandErgonEnergy’sOver-ForecastingRecordSimilarly, the demand forecasts used by the Queensland distributors to justify their record-high capexallowances for the 2010-15 regulatory period were also dramatically overblown. Rather than increasingsignificantly,aspredictedby thedistributors,peakdemandandenergydeliveredbothreducedduring theperiod.
Asoutlined inthetableoverleaf, theQueenslanddistributorsover-estimatedtheirpeakdemandforecastsby33.2-41.4%,andover-estimatedtheirenergydeliveredforecastsby14.2-25.2%.58
2015 Forecasts 2015 Actuals Difference
Energex - Peak Demand
- Energy Delivered
5,940 MW
24,042 GWhrs
4,200 MW
21,055 GWhrs
41.4 % over-estimation
14.2% over-estimation
Ergon - Peak Demand
- Energy Delivered
3,330 MW
16,874 GWhrs
2,500 MW
13,496 GWhrs
33.2% over-estimation
25.2 % over-estimation
Asaresult,theQueenslanddistributorswererewardedwith‘windfallprofits’ofaround$1billionforthoseforecasting errors, as their 2010-15 revenue allowances included returns and depreciation on capex thattheydidnotincur.59
56AERConsumerChallengePanelCCP6(HughGrant)submissiontotheAERonPowerlinkQueensland’s2017-22RevenueProposal57AERConsumerChallengePanelCCP6(HughGrant)submissiontotheAERonPowerlinkQueensland’s2017-22RevenueProposal“ElectricitybillsupinQueenslandbecauseofPowerlinkoverspend”,CourierMailArticle,5thDec,201158AERConsumerChallengePanelCCP2(HughGrant)SubmissiontotheAERonEnergexandErgon2015-20RevenueProposals,P1859AERConsumerChallengePanelCCP2(HughGrant)SubmissiontotheAERonEnergexandErgon2015-20RevenueProposals,P19
58
Appendix3 AssessmentOfPotentialPriceReductionsArising FromTheQueenslandPoliticalParties’PoliciesOver the past year Queensland’s political parties have proposed various policies aimed at reducing theQueenslandnetworks’pricesandprofits.
ThisappendixprovidesacritiqueoftheQueenslandpoliticalparties’currentpoliciesandtheextenttowhichtheywoulddrivetheQueenslandnetworks’pricestowardsefficientlevels.
The table below summarises the Queensland political parties’ key policies and the estimated potentialnetworkpricereductionsthatwouldarisefromtheirimplementation.
PoliticalParty
PoliciesToAddressExcessiveProfits
PoliciesToDriveEfficientCosts
PotentialPriceReductions
QldGovernment$50“electricityassetownershipdividendpayment”forQueenslandhouseholds
-
3%
LiberalNationalParty(LNP)
Write-downoftheQueenslandnetworks’regulatoryassetbases(RABs)60
Appointconsumerrepresentativestothenetworks’boards
Tieexecutivebonusestopricereductions
20%
OneNationParty
20%reductionfromremovalofdividendpayments
- 20%
Katter’sAustralianParty
Implementationof“recoveryonly”pricing
AbolishmentofDORCvaluationmethodology
Reversiontostatebasedregulation
60%
QueenslandGreens
Reversiontononprofitentities
Reversion to statebasedregulation 60%
60
On3April2018,theLNPLeader(DebFrecklington)endorsedthefindingsandrecommendationsoftheGrattanInstitutePaper–“Downtothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,March2018”TheGrattanInstitutepapercalculatedarangeofRABwritedownsfortheQueenslandelectricitynetworksbasedonvariousassumptions.TheestimatedpricereductionsarebasedontheGrattanInstitute’scalculatedRABwrite-downsof$2.5bn(38%)forPowerlinkQueensland,$3.9bn(33%)forEnergexand$2.8bn(26.3%)forErgonEnergy
59
Theassumptionsunderlyingtheestimatedpriceimpactsareasfollows:
QueenslandGovernmentPolicies
In relation to addressing the networks’ excessive profits, the Queensland Government is proposing toprovide a $50 “electricity asset ownership dividend rebate” for each Queensland household. Thatcommitmentisrestrictedtohouseholdelectricitybillsandtothenexttwoyearsonly.
TheQueenslandgovernmenthascostedtheinitiativeat$100millionperannum.
Anassessmentoftheoverallimpactoftheinitiativeonthenetworks’averageprices(acrossallconsumers)identifiesthatitwouldresultinoverallaveragenetworkpricereductionofaround3%.
The Queensland Government has not outlined any specific policies that would drive the networks’ coststowardsefficientlevels.
Consequently,overall theQueenslandGovernment’spolicieswillpotentiallyreducethenetworks’averagepricesbyaround3%.
QueenslandLiberalNationalParty(LNP)Policies
Inrelationtoaddressingthenetworks’excessiveprofits,theLNPisproposingtowritedowntheQueenslandnetworks’regulatedassetbases(RABs).
On 3 April 2018, the LNP Leader (Deb Frecklington) endorsed the findings and recommendations of theGrattan Institute paper, which called for the Queensland government to write-down the Queenslandnetworks’regulatoryassetbases(RABs).61
TheGrattan InstitutepapercalculatedarangeofrequiredRABwrite-downsfortheQueenslandelectricitynetworksbasedonvariousassumptions.TheestimatedpricereductionsarebasedontheGrattanInstitute’scalculated RAB write-downs of $2.5bn (38%) for Powerlink Queensland, $3.9bn (33%) for Energex and$2.8bn(26.3%)forErgonEnergy.
Implementation of those write-downs would amount to a total reduction in the Queensland networks’chargesofaround19%.
Asoutlinedinchapter8ofthisreport,theGrattanInstituteadoptedhighlyconservativeassumptionsinitsassessment of the required RAB write-downs for the Queensland networks. Most other independentanalystshaveconcludedthattheQueenslandnetworks’RABsareovertwicetheefficientlevel.
However,itisimportanttoacknowledgethattheQueenslandLiberalNationalParty(LNP)proposaltowritedownthenetworks’RABsisthefirstsuchproposalfromadominantQueenslandpoliticalparty,reflectingalong overdue acknowledgement of the unsustainability of continuing to allow the Queensland networks’excessiveRABstodrivetheirexcessivepricesandprofits.
In relation todriving thenetworks’ costs towards efficient levels, the LNPhas proposed toput consumerrepresentativesonthenetworks’boardsandtotiethenetworkexecutives’bonusestopricedecreases.
Thereisaveryhighlikelihoodthatthoseinitiativeswouldbetokenisticandineffective.Tobeeffectivetheywouldneedtobeaccompaniedbymuchstrongergovernancearrangements that transformthecultureoftheorganisationsfromacultureofprofligacyandinefficiencytoacultureofefficiencyandcustomerfocus
61Downtothewire:AsustainableelectricitynetworkforAustralia,GrattanInstitute,March2018y
60
However,thisanalysishasassumedthattheLNP’sinitiativeswouldmakeasmallcontributiontofacilitatingthe required cultural transformations and has assumed that they would result in a 1% reduction in thenetworks’prices.
Overall,theLNP’spolicieswouldthereforepotentiallyreducethenetworks’pricesbyaround20%.
OneNationParty
The One Nation Party promised to reduce Queensland’s electricity prices by 20%, by ceasing dividendpaymentsfromtheQueenslandGovernmentownedenergycompanies.AlthoughtheOneNationPartydidnot outline the calculations and mechanisms for achieving the 20% price reduction, this analysis simplyacceptsthattheintentofOneNation’spolicyistoreducethenetworks’pricesby20%.
Katter’sAustralianParty
TheKatter’sAustralianPartyproposedtorevertthenetworks’pricingto“recoveryonly”,andtoabolishtheapplicationofthedepreciatedoptimisedreplacementcost(DORC)assetvaluationmethodology.
The Katter’s Australian Party did not define what it means by “recovery only” pricing. This analysis hasassumedthatitmeanstheremovalofprofitsfromthenetworks’charges.62
The Katter’s Australian Party also proposed to revert to Queensland Government controlled networkrevenueregulation.Ifimplementedeffectively,robustQueenslandGovernmentcontrollednetworkrevenueregulationwould deliver further substantial reductions by restricting the networks revenue allowances toefficientcostsonly.
Subject to clarification of the Katter’s Australian Party’s definition of “recovery only” pricing, it has beenassumed that their policies would potentially deliver the efficient prices outlined in Chapter 10 of thisreport–i.e.pricereductionsofupto60%.
QueenslandGreens
The Queensland Greens proposed to revert the networks back to non-profit public authorities, therebyremovingprofitsfromthenetworks’prices.
TheQueensland Greens also proposed to revert to Queensland Government controlled network revenueregulation.
Consequently,theQueenslandGreens’policieswouldalsopotentiallydelivertheefficientpricesoutlinedinchapter10ofthisreport–i.e.pricereductionsofupto60%.
ItisclearfromthevariouspoliciesproposedbyQueensland’spoliticalpartiesthatthereisabroadpoliticalawarenessthatbusinessasusualisunsustainable.
The new delicately balanced Queensland parliament provides an opportunity for the new QueenslandGovernmenttoseriouslyaddressthekeydriverofQueensland’sexcessiveelectricitypricesandreducetheQueensland state budget’s dependence on unsustainable profits from Queensland’s monopoly electricitynetworks.
62AsoutlinedinSection10.1.1ofthisreport,adebtriskpremium(DRP)of1.25%hasbeenprovidedtoprovideanallowanceforthenetworks’specificnon-diversifiablefinancialrisks