Download What is the issue? Electricity is an essential service that is needed

What is the issue?
Electricity is an essential service that is needed by households on a daily basis. We all rely
on an affordable supply of electricity for lighting, hot water, cooking, washing and cleaning,
communications, heating and cooling. Having access to these things supports
Queenslanders to participate in employment, education and social interaction. It is therefore
critical that electricity is affordable and accessible to all Queenslanders.
It is of increasing concern to QCOSS and our members that many households across the
state are increasingly struggling to pay their electricity bills. Electricity prices have increased
86 per cent over the past five years,1 and most of this increase has been driven by
spending by the network distribution businesses, Ergon Energy (Ergon) and Energex.
These are the government-owned businesses who own and run the distribution network
(‘poles and wires’) that deliver electricity to homes and businesses across the state.
How does this submission influence the issue?
The Australian Energy Regulator (AER) determines how much revenue Ergon and Energex
are allowed recover in prices. How the process works is that, every five years, Ergon and
Energex submit proposals on how much revenue they think that they need to cover their
costs to run their businesses. They outline their forecast expenditure (both capital and
operating expenditure) and what ‘rate of return’ they propose to earn on their asset base
(the ‘poles and wires’ that make up the distribution network). The AER then assesses these
proposals, taking into consideration a number of factors including any submissions from
consumer groups, and then sets the revenues for the next five years.
QCOSS has made a submission to the AER 2015-2020 process in order to provide a voice
for low-income and disadvantaged households in this process. Our interest is driven by our
vision for a Queensland free of poverty and disadvantage, and our concern about the
impact high and rising electricity prices are having on households across the state.
The proposals and the AER’s assessment is complex and very technical. While QCOSS’ full
submission is quite lengthy and technical, this three page document is intended to provide a
short summary of the key aspects of our submission, in plain English. A full copy of the
submission is available for download here.
What is the problem?
Both Energex and Ergon Energy are proposing increased revenue allowances over the next
five years. For example, Energex2 is seeking an overall increase from $7.4 billion in 20102015 to $9.8 billion over 2015-2020, which is a nominal increase of 32 per cent.
These revenue increases are disappointing and come despite Ergon and Energex both
forecasting reductions in capital expenditure (known as capex), operating expenditure
(known as opex) and even the rate of return they are seeking for the next five years (when
compared to the 2010 to 2015 period).
1
2
QCOSS (2014) Regional Cost of Living Report.
Energex 2014, Our Five Year Plan – Regulatory Proposal Summary 2015-2020, p7
These reductions are not significant enough to offset the revenue being earned by the two
capital charges, namely, the rate of return and depreciation. This revenue is driven by the
total stock of assets owned by the businesses, known as the Regulatory Asset Base (RAB).
Both Energex and Ergon’s RABs have grown significantly in recent years and are now so
large, that despite the above reductions, revenues are still increasing. The RABs will only
start to fall slowly over time, and these very large RABs mean that, going forward,
households will be locked into the current very high prices for the foreseeable future.
Overall, what Ergon Energy and Energex are proposing for the 2015-202 period will mean
electricity network prices are stabilising. This is at the current very high price level and
therefore there is no price relief for struggling households. This will be the case unless the
AER decides to significantly reduce the main ‘building block’ components of the cost build
up, including capex, opex and the rate of return.
What has QCOSS recommended?
QCOSS has put forward a case for Energex and Ergon Energy to reduce the amount of
revenue they are seeking to recover in prices over the next five years. We believe the
revenue proposed is overstated and we have recommended that the AER investigate these
proposals, on the basis of:

Falling demand: Queenslanders are using less and less electricity (perhaps in
response to the steep price increases in recent years). ‘Peak’ demand is also
showing signs of weakening into the future. This means there is a reduced need to
invest in expensive capital infrastructure than there has been in previous years.

Lowering of reliability standards: Following major review, the Queensland
Government reduced the reliability standards that Ergon and Energex have to meet
in supplying electricity to Queenslanders. This means they do not need to invest as
heavily in ‘back-up’ network infrastructure as they have done in previous years.

New and efficient network infrastructure: Because the businesses (especially
Energex) have invested so heavily in the ‘poles and wires’ in previous years, the
assets they’ve purchased are relatively new. This means they won’t need to replace
as many assets going forward, and they are less likely to spend as much to maintain
the new assets.

Opportunities for efficiencies: A number of major independent reviews have recently
identified opportunities for both Ergon and Energex to significantly improve their
operational and capital efficiency. These recommendations, once implemented,
would result in reduced expenditure in the next five years.

Performance against other network businesses: The AER has released its
benchmark analysis which shows that Energex and Ergon are performing poorly
against a number of other Australian electricity utilities against a range of capital and
asset productivity measures.
In addition to putting forward a case for reduced capex and opex, we also believe the rate of
return – or Weighted Average Cost of Capital (WACC) – that each business has proposed
is overstated. The WACCs proposed by Energex and Ergon are 7.75 per cent and 8.02 per
cent respectively. This figure represents the income Energex and Ergon Energy receive on
their investment (regulated asset base). We believe the WACC figures should be much
lower, in light of:

Benchmarking against other network businesses: The proposed WACCs are higher
than the WACC of 7.15 per cent that the AER has put forward for consultation in its
recent draft determination for the NSW distribution businesses and against some
recent overseas rates for electricity businesses.

Low financial risk outlook: Market conditions are also less risky now than they were
at the start of the previous five year period in 2010 when the Global Financial Crisis
resulted in high cost of debt and a poor economic outlook.

Departure from the Guidelines: The AER set guidelines following major consultation,
which outline how Ergon and Energex should set their rate of return. However, they
have both departed in a number of areas which have resulted in a higher WACC than
would otherwise be the case.

Consumer detriment: Their proposed WACCs do not reflect the concerns of
consumer groups, such as QCOSS, who voiced their concerns to both businesses
about departures from the AER’s Guidelines nor have they explained how these
variations are in the long term interests of consumers.
QCOSS believes there is further scope for the AER to revise the WACC parameters and
inputs. In its submission, QCOSS has proposed revised values which would result in a
lower WACC than what has been proposed, and one that is much more appropriate given
the current economic and risk outlook for Ergon Energy and Energex. We have outlined
these areas in the table below.
Conclusion
QCOSS support the AER in applying a higher level of scrutiny on the proposals provided by
Ergon and Energex. Resources for consumers to participate in this consultation process are
extremely limited when compared to the significant resources available to the distribution
businesses. Therefore, QCOSS and other consumer groups encourage the AER to
consider all consumer submissions, regardless of how big or small, as a significant and
important contribution of the consumer ‘voice’ into what is a largely inaccessible process for
the vast majority of consumers. In short, consumers are largely relying on the AER to ‘get it
right’ in assessing the distributors’ proposals in circumstances where the distributors
themselves continue to have strong incentives to ‘gold plate’ and over state their
expenditure proposals.
With prices already at peak levels, and likely to remain unaffordable for many on fixed
incomes for many years ahead, the need for real reductions in electricity prices over the
next five years is critical to ensure all Queenslanders can maintain access to this essential
service in the future. This is the fundamental purpose for QCOSS in providing this
submission for consideration by the AER.