Yield expectation – NSW Poles and Wires – for sale.

Ok, the NSW poles and wires lease sale is now into the detail phase. Well actually that detail is reported to be already decided. What are not known are what will be said to the public, and that should be not too far away from being known. In fact the Premier has not wasted any time in encouraging ‘mums and dads’ investors to take out shares. As with all investments the price must be attractive to encourage you to buy. But there is another side of the coin. The institutional buyer must know the price to the user is higher enough to guarantee a return before they buy into the infrastructure. How is that done?

In the case of the energy utilities: It is the federal body, the Australian Energy Regulator (AER). It happens that the AER, and very shortly after the NSW Election where the mandate has been won to sell off the 99 year lease of the ‘Poles and Wires’ to highest bidder, will be setting the price for the future with an interim decision by April 2015 or very near to that date. That decision would determine network prices for the next five years.

So if you think about that you can see that the NSW Premier is technically right – no price movements will be because of the ‘sale’. You might also see why the oversea of the ‘sale’, the former ACCC chair, can say prices will not be greater than the regulator (AER as it turns out) determines. You could find it argued you will pay more, but it is not the sale process that increased the prices. That may be a slight of hand from the politics, but it is still a fact.

Then to put a balance on what an investment might be expected to return, we have a story – Is the search for yield becoming unsustainable?

By business reporter Stephen Letts, 30 March 2015. “The rotation out of investing in high-yield dividend companies into ‘growth’-focused enterprises is gaining momentum. The past month has been particularly striking. One of the key engines of the yield story – the utilities sector – has gone into reverse, falling on average 1.5 per cent this month after a solid 12 months of outperformance.

At the same time, investors exiting the yield play are piling into information technology and industrial stocks hoping for more exciting returns.”

Co2land org now considers: Is the NSW Government too late in getting the float of the poles and wires to market. We use the story above again to quote: “Manufactured yield is not sustainable.” Also quoted is: “Goldman Sachs says the low risk approach is to avoid companies that have been “manufacturing yield” by relying on debt, assets sales and underinvestment in their businesses. Interestingly many of the companies with the largest “cash shortfalls” are the utilities that have been at the forefront for the search for yield. Leading the pack is the power utility and network operator, AusNet Services. Goldman Sachs has found AusNet Services experienced at a $2.2 billion cash shortfall over the past five years, which represents about 62 per cent of its average market capitalisation over the period.

Duet and APA – who are in the same line of business – have shortfalls of $1.1 billion and $650 million respectively.”

Therefore we see an ominous gathering of indicators that suggest the NSW float might not be the good it is promoted as being.

We think the ‘real’ issue will be the pressure to reduce the price by the user. The providers for a ‘demand response’ should also be persuasive to avoid prices rising by virtue they can determine the demand needs for energy. Why the later because, they have the power to defer capital investment needs assuming the network growth need dictate investment in the failings of the system.

The ‘elephant in the room’ is there too! It is of course the remodeling of the energy networks business model and the rise of cheaper embedded energy networks with renewable energy sources.

Tis interesting times!

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The facts they say: About the poles and wires selloff.

The facts they say: About the poles and wires selloff. Revenue is a weird thing and it is all about your plan. That is short term gain verses long term revenue. What can get missed on that point is what is changing around you can be a bigger factor than the emotion around the change. That factor is technology and the transition strategy to survive – to survive you need to transform how you do your business or get pushed aside. The other issue is not only the technology challenging you it is the skill required to understanding how to take the opportunity to exploit the rise of the technology. These comments are as important for Energy Network companies as they are for banks, the financial services industry, sales, commodities traders, agribusiness and manufacturing. Dare we also say, political response, too.

One group we know of, http://www.solarcitizens.org.au has been active in seeking “to change the game”. They are referring to the practices and the behaviour of companies that run electricity networks. They are targeting those that control how we get our electricity and are encouraging concerned parties to participate, by way of a submission into the Australian Senate Inquiry, and submissions closed 18 December 2014.

The Senate is looking to spotlight whether it is fair that power prices have surged across the board in Australia. Whether it is because of the unnecessary upgrades to the electricity network, known as ‘gold-plating’ of the grid. What is being investigated, and you can see the full terms of reference for the Senate Inquiry here:

  • Whether energy companies have misrepresented information to the energy regulator for their benefit
  • Allegations of price rorting by companies
  • Whether current network arrangements discriminate against homes and businesses who generate their own power, and
  • The possibility of establishing an independent body to investigate and prosecute poor behaviour.

Those that say the plan to sell off the poles and wires claim privatization leads to higher prices, reliability of supply declines, maintenance is avoided with disastrous consequences, and what could the most persuasive of all: Once it is sold that revenue source is gone!

Then we read ABC News 21 December 2014 the story headed New Tas energy plan will drive down power prices: Government.

“A new energy plan for Tasmania will result in lower power prices, the state’s Energy Minister says.

The Government is inviting Tasmanians to have their say on its new draft energy strategy.” Public submissions are open until mid-February.

This is said to be an opportunity to attract new business to Tasmania and for better ways to utilise the state’s existing energy assets.

They also moot the possibility of a second Bass Strait to the mainland interconnector and expanding their hydro generation output by 10 per cent.

They also quote the Energy Minister Matthew Groom:

“This is about a mindset shift, this is about recognising that the energy businesses are primarily there to deliver energy advantage to Tasmanians, and central to that will be the lowest possible power prices that are genuinely sustainable……………..We saw power prices increase by more than 65 per cent over seven years……..That’s unacceptable and under this new strategic direction, it cannot happen again.”

The strategy includes more work on encouraging competition, with the Government still open to selling Aurora Energy’s customer book.

We should say the truly progressive part is the commitment to investigate the potential of using forest residue for biofuel.

CO2Land org has empathy with the cause. That said we should realize the poles and wires (Electricity Networks), historically are a 130 plus years old system. Some did not have the network system for some times after that, and some still do not have access. It also follows that regulators and those consulting to the companies were constantly expecting continuous load growth on the network. The evidence is that is not now happening and predictions are it is now a very different market. In our opinion anything that can be gamed is a market and will be treated as a commodity by the players. The selloff of the networks is evidence also that the predominately state owned utility companies want to divest themselves of ‘services’ and the new owners will have the reign to treat all as a commodity. If you do not believe us – think of the new rules coming into play referring to ‘Cost reflective’ for network charges.

Are the rules setters correct? One argument that has gone for some time – at least since 1996 that we are aware of, is the fairness of cross subsidies within the networks charges being to transfer cost burdens from the sparse population region to the concentrated population region (country and city users). If you think of what the Australian Energy Regulator (AER) is saying and the Australian Energy Market Commission (AEMC) is saying it now it is enough it must change. Where it gets ugly is when you ask is the issue a question of to whom is the favour for – Business as usual and the rent seekers, or those that are bold and go forth with the transition to change.

Again, that all leads to the need to develop new business models and that need will be regardless for the reasons we started in para 1 of this discussion – the factor of technology.

A very likely model is that energy networks will adapt and change, and part of our believe of this is there will still be a need for some form of infrastructure to deliver the power. It will not matter is it is micro grid or long runs of poles and wires. The infrastructure will have new build, maintenance and upgrade needs. And, who pays? You do no matter what is the model.

Fairly unfair – Energy Network price setting

Gold plated networks practice stopped, and cost reflective price setting will be the market policy. Yes, prices will rise. However prices will be controlled in a fair way it is said. It is an interesting game and thinking about it you realise it is ‘business as usual’ with an appropriate spin for self fulfilling prophesies. Actually it could be prophecies as it depends on if you are using the term as a verb or noun. For instance whether you are forewarning of significant price increases with callous regard to the customer, or anticipating being able to inspire the process of one or more messages that have to be communicated on behalf of the ‘good’.

Previously Co2land org wrote that the question that is most difficult is are you pro-business or pro-market. We have found a new term for the customer as a position description ‘pro-sumer’, and the position is the customer must be the one that willingly pays. We won’t bore you with theories of elastic and inelastic demand as this is a supply side argument. However, we might suggest you develop an instinct that identifies what can be summed as – ‘The rustling of the leaves tells a story, warns of a danger, and a lot of … is going on’. Beware you might not like what you see and the problems are in the detail. So what is the story behind it all?

The story is the players displaying how they justify the costs of reliability of supply. It is not about balancing the supply and demand for more efficient and reliable source of supply. A little more explanation please we hear you say. The business and the market of the energy supply is a supply side focus. That is why the energy companies are called, in the rules, the supplier, and where the customer might curtail or offer low volume generation into the supply is called the provider. Where the customer consumes they are called the user, or more recently termed the ‘pro-sumer’ where they make smart choices. All very simple is it not!

It remains at issue is your network charges will rise regardless.

The questions are how much and why is the political term ‘gold plated’ being used to substitute for what was called redundancy in the past – In this case we explain: “Redundancy is the duplication of critical components or functions of a system with the intention of increasing reliability of the system, usually in …” Source en.wikipedia.org/wiki/Redundancy_(engineering).

The remainder of the story uses other sources as follows: http://www.canberratimes.com.au/act-news/actewagl-says-power-supply-in-canberra-at-risk-20141127-11uyv7.html

, and

http://www.goulburnpost.com.au/story/2726997/australian-energy-regulator-clamps-down-on-network-charges/?cs=12

, and

http://reneweconomy.com.au/2014/regulator-slaps-down-networks-on-more-attempted-gold-plating-22048. Also AEMC paves way for changes in network pricing for solar, air-con.

The network view:

ActewAGL: Chief executive officer Michael Costello says the draft decision from the Australian Energy Regulator does not make sense, and could lead to catastrophic failure.

“We not objecting to a reduction in price, …What we are objecting to is the degree of the reduction, and the fact it threatens reliability, stability and, if it does go far enough, the safety of the network.”

Energy Networks Association head John Bradley said the “unsustainable” spending cuts could compromise reliability, safety and efficiency outcomes for customers. “If implemented, these funding cuts put at risk key consumer outcomes relating to safety, maintenance and outage response times,…Consumers end up paying more under this kind of ‘roller-coaster’ regulation where underspending is followed by higher cost catch-up spending and political intervention.”

The Regulatory View:

Australian Energy Regulator (AER) chair Paula Conboy says under new rules the regulator’s focus is squarely on outcomes for energy consumers, for a safe and reliable network. “So we have to ask ourselves, why should customers be required to pay more?….. Our draft decisions propose lower allowed revenues for transferring electricity and gas, which, if implemented, should result in lower energy bills for end users in the ACT and NSW,… These reductions would be followed by small increases in each of the three subsequent years [in line with the yearly Consumer Price Index]…. Network charges on bills have inflated with extravagant spending – or gold-plating on poles and wires – in recent years and now account for 50 per cent of an energy bill issued to NSW users.”

RenewEconomy asked Conboy if the network revenue application were simply a case of them prosecuting “business as usual” rather than the transformation – the “prosumer revolution” – identified by new AER chief executive Michelle Groves, the chief executive of the AER.

Groves said last month:  “The electricity industry certainly is changing. In fact it is not much of a stretch to say that the next couple of decades will witness something of a revolution in the way small customers interact with the electricity industry. In the future there will be more scope for even the smallest energy users to become active participants in the energy market.”

Conboy said we would have to ask the networks if they were focused on business as usual.

In a separate announcement, the Australian Energy Market Commission (AEMC) said new pricing rules will begin on December 1.

“By having prices that reflect the costs of different patterns of consumption, we are giving consumers clearer choices as we develop a more efficient, incentive-based network regulation framework,” AEMC Chairman John Pierce said .

The Users View: Large, SME, Domestic Advocates.

Gabrielle Kuiper, senior policy officer at the Public Interest Advocacy Centre, said the AER’s draft decisions were welcome news to the increasing number of NSW families struggling to stay on top of soaring energy costs. Dr Kuiper also said there was room for improvement in regards to the allowed rate of return – the forecast of the cost of funds a network business requires to attract investment in the network.

Oliver Derum, another senior policy officer at the advocacy centre, said energy prices could drop even further if the NSW government before the proposed lease of the networks writes down previous over-investment by the networks. “That could cut bills further by hundreds of dollars a year. We would urge the NSW government to consider this option as part of the sale process,” he said.

The Parkinson Report says (Giles Parkinson that is), “The draft rulings are part of a big game between the networks and the regulators over how much they can spend on upgrades, charge for maintenance, and for the cost of capital. The networks have a history of asking too much, and while the AER has sought to cut them down in the past, they have often been over-ruled, or forced to compromise on appeal.

(The AER decides how big the revenue pie will be for the networks. In an associated decision, the Australian Energy Market Operator has confirmed new rules that will require networks to introduce “cost reflective” tariffs, which will likely mean higher fixed and/or demand charges, which could affect households with solar arrays)… Hence the focus on this new round, particularly in light of the incursion of solar and battery storage into the grid, and the emergence of a new decentralised energy model. The AER, in its draft decisions, said that its estimate should result in a lowering of electricity costs, rather than a rise if the networks were allowed to have their way”.

Co2Land org review:

It all looks too much like they want your energy supply to be viewed as a commodity attached to a financial service. You see a commodity price can be manipulated as a means of control. If you lose control the networks cannot keep the growth numbers where they want them – ‘business as usual’.

Look further at the network lobby group, the Energy Networks Association, which has never conceded gold plating in the past, wants solar incentives reduced, higher fixed charges to consumers, and argued that it would be too expensive to quit the grid, said the AER ruling threatened the reliability of the network – an old favourite of those arguing against carbon prices, renewable energy, or any much change at all.

Reneweconomy says solar households face inevitable changes to the way their bills are packaged after the Australian Energy Market Commission delivered new rules which will require networks to impose “cost reflective” pricing on networks.

According to the AEMC, the changes will not only cater better to different patterns of consumption, they will benefit all consumers in the longer term as lower peak demand reduces the need for spending on infrastructure, and they will likely result in changes in tariffs to encourage households to avoid switching everything on at peak times, or at least pay for the privilege, and also for solar households. It could, for instance, encourage more homes to install west-facing panels rather than north-facing panels, but the final tariffs will be up to the networks to decide.

Reneweconomy goes on the say: In effect, while the Australian Energy Regulator decides how big a revenue pie the networks can eat – and based on today’s decision it is a lot smaller than last time – the AEMC is proving rules that decide how the networks can slice and dice that pie.

The new rules also affect households with air conditioning units, as the main targets of new tariffs aimed at recovering network revenue.

The arguments all centre on fears of the networks are losing market share, and are keen to get as much “network pricing” out of the pro-sumer as they can. The pricing set and recovered from different consumers, says the AEMC, with the key factor to determine how much consumers pay being their individual usage pattern or load profile.

The bit we love sic most “This rule change will not actually set new network prices – that is a role for the networks themselves and the AER. It does create a new requirement that reveals the cost of people’s energy choices,” AEMC’s Pierce said. Other AEMC quotes “Under these changes, we estimate around 70-80 per cent of consumers would have lower network charges in the medium term…Research undertaken since the draft rules were released for public consultation in August shows network prices are likely to be lower in the long run with cost-reflective prices,…

Research shows average residential charges could reduce by $28 to $145 per year. Households which use power at a steady rate through the day will receive the biggest benefits…Based on Victorian trials, we also found a small business could save up to $2,118 or 34% of its total annual electricity network charges by using less electricity at peak times for just 20 hours per year when networks are congested,…

Once the new rule commences on 1 December 2014 network businesses need to start consulting on their new tariffs and submit draft proposals to the AER in late 2015 for new prices that will start no later than 2017.”

Head spinning – it should be!

Our final word: We suggest it is because the term gold plated is different to redundancy in that the former highlights the risk of stranded assets.

The wax lyrical, but fact – bad behaviours in the Energy Industry

The Checkout in its wax lyrical style ran a story on Energy contracts including exit fees.  Had we not seen it we may have felt we were alone in our concern for the behaviours in the industry. Obviously, this media version was directed for the public appetite, but the story is based on fact! Consumer laws are very weak and the National Electricity Laws strongly favour the Energy Companies.

The Checkout story was run on the ABC (Australian) on 26 June 2014, 8PM. It is also interesting that it did not highlight a single company practicing or should we say taking advantage of ‘trust me’ then doing the screw you turn on you the user – it highlighted a common practice among many retailers in the industry. We appreciate residential customers have some protections, but that in NSW is set to change or should we say leave many people further exposed to the behaviours. Whilst the market will be fully deregulate, it would seem the Laws and rules of the industry will not be amended soon.

Those with legal training, or savvy enough will avoid the pitfalls and probity issues of the simple thing and essential commodity – energy needs. However, in a conversation with the other side (a energy retailer) recently they admitted that they too found it difficult to follow the rules. Why, consider this: You want to change the wording on your contract – a simple word change on a clause. You have a dispute and that word is found to ‘not flow’ with the rest of the contract. Therefore the wording of the National Electricity Law is to be relied on. It overrides what is written in your contract. Ok that is the scary part. The practical is that mum and dad’s are told ‘we care, we will look after you, you will save, that’s good is it not ‘– you say yes, and Call Centre then declares you are now under contract. So simple – but, you don’t save. That issue is covered off so well in The Checkout Story.

Business customers have a little more exposure in that depending on their size, according to the market, as opposed to Corporations Law, they will need to be careful of the Energy Service Agreement (ESA), the Contract, they have presented to them. For instance, most have terms and conditions in the standard form that will penalize for exceeding consumption caps. The penalty can result in the price offered being withdrawn and you being placed on a default tariff that can be hundreds of percent higher than what you negotiated. Another trap is that you need to be mindful that the network charges are not negotiated in most standard form agreements. You might say, the rules say a network tariff review must be conducted – but beware it is not binding on the retailer that they be negotiated unless stipulated on the contract.

That last paragraph also highlights what you need to know. Your consumption caps are not binding on the network company. The ESA is a contract for supply from the retailer – it protects the retailers from its risk in the market. The transport and distribution networks will rely on what is the constraints of the system and set limits as it sees affects its asset. An example: Your retailer ESA says 20% variation allowed. Your network company – generally a default and deemed contract according to law, say we will impose a demand tariff on you when you exceed 160MWh per annum load. It may be good it may be bad depending on your circumstance. But, what is does not do is connect your circumstance to your ESA. You should also be aware the majority of business is distribution connected and prices set for the transport are determined by an approved formula. If you are large enough to be classified for a transmission connection you can have sway in contracting and negotiating what you take from the system. For the very large customer you also need a team of lawyers to complete the deal.

Now, all above is about import power, what if you want to export power – small scale generation – well what was called a power purchase arrangement (PPA) is now a Energy Supply Agreement (ESA) as described by the Australian Energy Regulator (AER). Before we go any further did you notice the near same term and the same acronym meaning something similar but very different in what it does. To use the words of our good friends Solar Professionals: “Can I start by saying that the creation of an ESA template is both very expensive and lengthy in duration. Multiple legal aspects have to be considered when drafting these contracts, from property law, banking institution requirements, GST impacts, numerous funding and system requirements not the mention standard consumer law principals and all the requirements from the AER.” We include this to let you know what is needed is complex and has a very detailed need.

So what started off as a wax lyrical presentation, now shaped the focus on what (watt) can really hurt you – electricity! We guess once the carbon tax is gone, another way to tax will follow! Lets us be a little devil – they might impose a transport tax on delivering you energy? Well it makes sense – they make the electrons cheaper but now the transport cost is fairer?

On that matter of the Carbon Price our politicians are saying they will force the ‘energy companies to pass on the savings’. Did you know the majority of your Carbon Price is blended into your network charges? It is not transparent. The energy retailers cannot unbundle what the network companies levy you. Maybe the politicians need an education too! Yeah, that has appeal – Politicians ESA 101. Or more correctly they might prefer: The tax is dead, long live the tax!