Energy companies are spending excessively on infrastructure. Photo: Paul Jones
It was media management at its slickest.
The press release lobbed on Monday January 7. It was holidays. No one cared. It was hot. Warnie had got in an argument and Sam Stosur had crashed out in the first round of the Sydney International.
Few eyes were peeled for media releases from the office of the Honourable Chris Hartcher, NSW Minister for Resources and Energy.
Even then, the release managed to ramble on for an entire page without actually saying anything. PR at its finest, crafted to induce an instant drooping of the eyelids.
Anyway, it was a press release about a report, a report headlined by the eye-catching title, "Interim Report Mid North Coast Review".
Got you in yet?
As it turns out, in the wake of all that kerfuffle last year about "gold plating" by energy companies – arising partly from the hue and cry by the farmer Bruce Robertson and the Manning Alliance – the government must have commissioned a report.
Authored by engineer Robert Rollinson, this review is remarkably forthright, and does the government no favours.
'Gold plating' rife
Extrapolating from the findings of this report, it would not require the drawing of too long a bow to deduce that "gold plating" is rife.
For those who missed it, gold plating is the excessive expenditure by electricity networks on poles and wires to increase their revenue (under the National Electricity Market regulatory framework, the more the power companies spend, the more they get paid – and this spending constitutes the single biggest component of the rise in our power bills).
In the Rollinson Report, the words "gold plating" are not used once. There is no mistaking the findings, however.
Here is an experienced engineer and financier from Macquarie Bank who simply fails to understand why the NSW network providers want to spend the millions they do – or at least the millions they plan to spend.
The big question, which we will get to soon, concerns the message about electricity companies around the country. If this gold plating is rife in one part of NSW, how many billions are being wasted, indeed added, to our power bills, Australia-wide?
The Rollinson Report
Firstly to the specifics in the Rollinson Report, which vindicate such a joining of the dots.
"Based on (reports by the transmission provider) the Review has found it difficult to gain a complete understanding of the reasons for the promotion of a 330kV solution that was originally proposed by TransGrid," writes Rollinson.
Rollinson is talking about a Transgrid proposal to build a line of those big coat-hangers between Stroud and Taree on the mid-north coast, a plan which brought trenchant opposition from the Manning Alliance group of locals who argued, in the end successfully, that the demand for electricity was simply not there to support the project.
In the appendix to the report, Rollinson details the two options for Stroud to Taree: Option 1, which cost $278.8 million and Option 2 at $349 million.
"At the time, TransGrid proposed to proceed with Option 1, the lower overall capital cost option, even though a Present Value assessment of Option 1 at $143.1 million versus Option 2 at $ 129.6 million might have suggested Option 2 was the better option."
Among Rollinson's recommendations, of which the first included suspending the project, was for a better consultation process.
"The public consultation process used by Transgrid for this project should be independently reviewed to identify improvements that can be made." Nationally, the concern is not simply about Transgrid. It just happens to be the subject of this report. All the state network providers have been accused (and in some cases pinged by the regulators) for unnecessary spending.
Rollinson is saying there should be independent reviews, generally, not just of the NSW project. And he doesn't spell this out, but as the entire industry is prone to overspending thanks to its structure of regulated returns, surely it is not this project alone which bears scrutiny.
Do they all need to be independently reviewed? What would be the cost and benefit of such an immense task? Shouldn't this be up to the regulators? Are the regulators up to it? Are they captured, underfunded?
These are all things to be considered. Whatever the case, we are talking about big bucks here.
If one network provider were about to spend almost $300 million on an unnecessary project, how much gold plating is really going on out there?
Mark Byrne of the Total Environment Centre says residents on the far-north coast have been fighting a proposal by Transgrid and Country Energy to spend $227 million on new power lines.
"It was based on dubious demand forecasts for the entire north coast region," says Byrne. Residents claimed a win last year when the project was put on ice for a year – delayed, not abandoned.
Similar allegations of gold plating have been levelled at SP Ausnet and the distributors in Victoria, and of Powerlink, Ergon Energy and Energex in Queensland (though they are said to have have made more progress in demand management than their southern peers).
Since the matter of gold plating achieved prominence last year – and in response to the public backlash over energy prices – there have been savings and deferment of projects announced of some $2.85 billion over the next 18 months in NSW alone (that's from the earmarked $16.6 billion in spending for the five year regulatory period to June 2014).
Arousing further suspicions over the basis for industry spending are Rollinson's observations about electricity consumption.
"The Review has not been able to obtain details of consumption by customer type. The bulk of consumption would appear to be domestic and small-to-medium commercial and industrial. Rural consumption includes the pumping of water for both irrigation and domestic needs.
"A number of significant load points were identified but have yet to be quantified. These include: UGL Rail (manufactures rail wheels and axles near Lansdowne) Ardagh Group (manufactures metal packaging containers in Taree – stated to be a major energy user) [and] Nippon Abattoir, a largely export-oriented beef plant near Wingham."
Vindication – and a warning
Bruce Robertson told Business Day the report vindicated everything the Manning Alliance had been saying.
"You would think they (the networks) would have identified major customers who were going to use the stuff (electricity). This isn't small biccies."
Sadly, the mid-north coast is one of the poorer regions of Australia. Some 25 per cent of the rate base of the city of Taree is on benefits. Population is tipped to grow at little over one per cent.
Against this backdrop of energy poverty, demand is just not there, says Robertson. According to IPART (the Independent Pricing Tribunal), the average annual electricity bill for Country Energy customers is $2520, which is 39 per cent higher than in the city.
"People simply can't afford the product," says Robertson. "The industry isn't doing the basic demographic data."
Indeed, electricity can well be considered more than a product. It is an essential service, a commodity everyone needs, one whose cost can promote or drag down the entire economy.
And it is the sheer rise in the price of this commodity over the past few years – now running at a 17 per cent annual increase – which has dampened demand. Industry has been its worst enemy. The price rises have killed demand and now the spectre of overcapacity looms.
"There is a lack of reliable data on customers and energy usage in the area," says the Rollinson report. "It was expected at the outset that such data could be used to identify growth opportunities, potential for fuel switching/substitution, the impact of photo-voltaic installations and the potential for large and small management of peak electricity demand ... Without such information it is very difficult to be definitive on future demand."
The report also has a bit to say about regulated returns.
"In its determinations, the AER (Australian Energy Regulator) does not approve specific projects but rather it approves the financial amount required to carry out works included in the revenue submissions from the various network businesses. It is understood that AER does seek advice on projects within the submissions."
It takes the industry word for it, in other words.
And something to say about forecasting too, something which has been contentious because it is the key input in spending decisions, though industry demand forecasts have been consistently far too high.
"It is worth noting that the 2012 forecasts suggested a winter peak demand in 2021 that was only marginally (approx 6 per cent) above the 2008 forecast for 2008. This contrasts with the original 2008 forecasts that suggested a peak demand in 2017 that was almost 50 per cent above the 2008 value."
Now, down to the weather. This summer with its record temperatures should confirm whether summer peak demand – the impact of air-conditioners mostly – is a problem or whether lower consumption driven by high prices has had its effect.
Bruce Robertson believes the sector is bound for a "death spiral".
"The price per unit will go up even if they stop spending. So we are in this terrible situation where because of the regulated return, they have to get their fixed cost base over less megawatts.
"So what happens is they sell less megawatts so they have to recover that fixed cost base somehow. It's a death spiral. The only solution can be that they (the companies) will have to take write-downs (on the value of their assets)".
That is not an appetising prospect for governments planning to get top dollar for privatising their assets.