I have a suggestion to make to governments across the eastern seaboard and in Western Australia.
Get a staffer to collect a copy of George Maltabarow’s talk to an Australian Energy Market Commission forum in Brisbane last Wednesday (23 November). And read it – then read it again slowly.
The message it contains is important and goes well beyond the summary most politicians may have seen in their newspapers in the past week, ecapsulated by the Fairfax broadsheets as: “Electricity distributors are fighting moves to limit further their spending plans, arguing it may result in rising power disruptions.”
Maltabarow is the chief executive of the New South Wales government-owned distribution business Ausgrid (formerly Energy Australia until that name and its energy retail activity were sold to the private sector).
Ausgrid is the largest distribution network service provider in the country.
It has been on the front line of accusations from the media and from Ross Garnaut, Rod Sims and others about network gold-plating and price gouging over the flow-through of end-user costs from its record current capital outlay program.
It and the other network businesses on the eastern seaboard and out West are engaged in one of the biggest non-export-oriented infrastructure activities in modern Australian history.
Their outlays between 2009 and 2014 are of the order of $35 billion.
The Australian Energy Regulator, which oversees the east coast activities, is in the process of asking the AEMC to approve a series of rule changes in response to the “gold plating” complaints.
The AER argues that the changes to the rules governments agreed in the middle of the past decade shifted the balance too far in favour of regulated businesses.
Even with rule changes, it is impossible to see how the capex to be approved for the next determination period (2014-19) can be cut to a huge extent and the flow-through stemmed of higher network charges, which make up half of the end-user bill.
Maltabarow took the opportunity of the AEMC forum in Brisbane to come back at the barrackers with all guns firing.
Having been the chief executive of the Electricity Supply Association from 1991 to 2003, I have a particular empathy with the key points he made. Through the late 1990s the networks sector struggled to deliver the current Maltabarow message to politicians and their watchdogs.
The present mood, Maltabarow says, in essence is that, if more power is now given to the regulator, network charges will go down and the bill shock problem will be solved.
His retort begins by pointing out that the previous regulatory arrangements enabled the earlier State agencies to make decisions that were focused on providing low consumer prices at the expense of “prudent, gradual and timely investment” – and, as a result, delivered “significant under-investment.”
Ausgrid pointed out in 2008 when the current capex was under consideration that keeping prices artificially low through the 1990s and the first half of the past decade meant its charges had to go up 20 per cent in 2009 to make them cost-reflective.
A “rude shock,” as Maltabarow says.
Even though the regulatory approvals for the current five-year program have not yet run their course, he adds, there is evidence that they are working.
In the case of Ausgrid, this includes a four per cent cut in maintenance costs, a 12 per cent reduction in equipment failure, a halving of blackouts on rural power lines and a reduction in the number of 11 kilovolt feeder lines overloaded in Sydney and the Central Coast from 108 in 2005 to 44 now.
Maltabarow has delivered a stern warning to the NSW government.
Ausgrid, he says, still needs to invest heavily in the replacement of oil-filled and gas-filled cables feeding the Sydney CBD, the country’s most important urban economic hub.
The cables serving this area are 40 to 50 years old.
He says the program to replace them will not be completed until 2024.
“If we are forced to put off decisions to replace the cables that feed Sydney,” he claims, “we are at risk of creating another Auckland.”
Now 1998 is a relatively long time ago, especially for those of a political mindset and most in the media, but few in the electricity supply business have forgotten the Auckland crisis.
Its business district was served then by 40-year-old, oil-filled power cables.
They failed and the CBD lost power for five weeks.
The economic cost was of the order of $NZ6 billion, some businesses went bankrupt and 6,000 residents had to leave their homes.
It was a story that went around the world.
“Today,” says Maltabarow, “the cables that feed Sydney are oil-filled and 40 years old.”
His AEMC talk dissects in some detail the challenge facing the AER in terms of changing the network rules.
It is very much worth reading in full.
But his core message is short and to the point: “The current price shocks are the cruel result of poor past regulatory regimes which resulted in under-investment.
“Under the previous regimes, the pendulum swung too far in one direction – it didn’t allow for gradual, efficient investment.
“It was a false economy, but no doubt politically convenient.”
Maltabarow’s question for the policymakers is equally straightforward: “Are we going back to the previous framework where we allow the regulator to step in to the shoes of management – effectively becoming the asset manager and deferring expenditure once again?
“Will this change favor the long-term interests of customers?”
He argues that, while there are opportunities for fine-tuning the regulatory arrangements, the case for wholesale change has not been made.
In this context, it will be interesting to hear what Somerville redux has to say.
Consultant Darryl Somerville, who chaired a seminal review of network expenditure for the Beattie government in Queensland seven years ago, has been recommissioned to exam the capital infrastructure programs of ENERGEX, Ergon Energy and Powerlink Queensland.
He is due to report again in the near future.
The Queensland network businesses came under heavy fire in the early part of the past decade because of service failures, especially in the State’s south-east.
As Energy Minister Stephen Robertson points out, the original Somerville review advice has led to $12 billion being spent on upgrading and expanding the networks in seven years.