‘Super normal profits’ from network largesse sends energy bills soaring

Millions of Australian households face huge increases to their electricity bills as regulators move to approve double-digit increases in default market offers.

The bill hikes are needlessly high, according to new research, which found that as much as one-third of the 20 to 30 per cent increases could be avoided if governments halted network largesse.

A report published by the Institute for Energy Economics and Financial Analysis on Thursday found “super-normal profits” from the companies that own Australia’s electricity networks are to blame for between 15 to 33 per cent of the planned default market offer increases.

The default market offer (DMO) is a regulated price paid by households that don’t negotiate electricity deals with a retailer – it’s set based on a variety of factors, including wholesale power costs and network charges.

Simon Orme, author of the report, said the upcoming default offer that will come into effect from July 1 is between $67 and $166 too expensive per customer because of excessive network costs from grid operators.

Regulators have approved about $10 billion in excess costs between 2014 and 2022 by approving network prices that will allow companies to obtain revenues higher than their total cost bases, he said.

This ultimately feeds through to families, because aside from higher wholesale costs, the prices networks charge for moving energy around the grid is the second largest factor feeding into household power bills.

Mr Orme said the current default offer proposals allowed networks to charge prices about 11 per cent higher than the costs they faced.

“Regulators have been unable to contain network prices,” he told The New Daily.

“The prices are based on forecasts that are always systemically wrong.”

‘Too generous’

The Australian Energy Regulator – which sets the annual DMO for more than a million households in NSW, south-east Queensland and South Australia – has argued networks should be able to earn a return large enough to incentivise more network investment into the future.

A three-year review of network charges completed earlier this year found the methodology used to determine network costs didn’t actually require any major changes over the next five years.

But Mr Orme disagreed, saying the forecasting used to estimate debt financing and other costs faced by network operators was fundamentally flawed, allowing them to book large excess profits.

“They’re always too generous in favour of the networks,” he said.

In a draft decision published earlier this year, the AER suggested default market offers would rise by as much as 22 per cent for NSW, 19.8 per cent in south-east Queensland, and 21.8 per cent in South Australia.

In a separate decision, Victoria’s essential services commission proposed a 30 per cent hike in default offer prices.

Of these increases, Mr Orme estimated that 13.2 per cent of the Victorian default offer increase stemmed from super-normal network profits, while up to 21 per cent of the NSW default offer did.

In South Australia, as much as 13.9 per cent of the default offer rise was excess profit, he found.

Federal crackdown

Mr Orme urged the federal government to step in and crack down on network pricing to spare households from the worst of the bill hikes.

He said it wouldn’t be the first time governments had stepped into protect households, following interventions earlier this year to cap soaring wholesale coal and gas prices.

In the case of networks, governments could overwrite the AER’s recent rate of return decisions to “correct errors” in estimates of debt financing costs, which are driving more than half of network profits, Mr Orme said.

“There is no sound case for allowing certain networks to continue to extract super-normal profits simply because they were able to do this between 2014 and 2021,” he said.

“In the longer run, changes are required to the laws and rules governing the economic regulation of monopoly networks, alongside the introduction of greater transparency and independent monitoring of regulator performance by the Australian government.

“These changes could be made by the end of 2023 and could come into effect from July 1, 2024.”

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