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!

clueless, naive and dangerous in its understanding of its responsibility – what is the legacy?

The NSW and Queensland Government have a plan. If they sell off the assets they will be no longer responsible if things go wrong. This does leave a fundamental problem in terms of legacy – A number of problems actually.

Starting with: Will corporate simply view governments as irrelevant in the near future. They already do think that, and as an example when the Queensland Transport Department set traps to catch UBER drivers employed by Google and Goldman Sacks. The corporate told the drivers to continue business as usual and ignore the Department. Google even then disabled the Government ‘s capability to track the drivers. How could they do that – they are quoted nationally as saying the conglomerate has deeper pockets than the government.

Both NSW and Queensland seem to have suitors for the Energy Networks Companies they have on offer. Even the relevant Ministers’ seem confused as to what and how much is for sale.   What the public know is that it is very likely two Asian based corporations will be in the front seat for the assets purchase. Both with deep pockets, and both with a high probability on controlling the total business in both states.

Can we have confidence wise decisions will be made? Maybe time will tell. But in NSW at least a very worrying case indicates the Government is more interesting in avoiding responsibility for its choices.

If you follow this story you may feel as apprehensive as we do: Wind farm at Gullen Range a ‘mess’ as matter heads back to court , January 26, 2015. http://www.canberratimes.com.au/act-news/wind-farm-at-gullen-range-a-mess-as-matter-heads-back-to-court-20150126-12ygnn.html

“”The scene is set for a right royal mess with no one happy. It follows the protestors, the complainants, the Developers, are all challenging the Minister over who is responsible for a litany of ‘mistakes’. s clueless, naive and dangerous in its understanding of national security. Suggesting the department is clueless, naive and dangerous in its understanding of its responsibility. To quote directly from the story: the Department – and therefore Ms Goward – had taken three different positions on the wind farm, which would be difficult to defend.

Firstly, the Department recommended conditional approval of the turbine changes to the PAC. In turn, this body refused the DA but along the way, the Department had recommended that just nine turbines be moved.

“So if it all goes to court, which position will she defend?” Mr Brooks asked.

“The whole thing is a colossal mess.”

Complicating matters is the Department’s oversight role earlier in the development. The company appointed an independent environmental monitor to oversee turbine placement and report to government planners. However, the Landscape Guardians alleged he had a conflict of interest as director of a consultancy firm that worked on the wind farm.

A Department spokesman told the Goulburn Post that this person was employed by a consultant and not by the government.

“[He] was not involved with the design, construction or operation of the project, having worked as a consultant preparing the environmental assessment for the application.

“Appointing [him] as the project’s environmental representative is in line with the project’s approval conditions and the Department’s procedures at the time.

“The Department has since improved requirements further to require wind farm consultants have an even greater level of independence.”

Adding to an “invidious” position, the Department allowed turbine construction to continue for a year after residents alerted it to their “incorrect” placement, Mr Brooks said.

“My [legal] advice is that the Minister will be obliged to defend the [Land and Environment Court] action seriously because her authority is at stake,” he told the Post.

“I hope the court throws it out, but that would throw up the situation where the PAC has rejected it, and we still have a wind farm of 69 turbines that are not in their approved locations. What happens next?”

A Department spokesman said the appeal was not about the merits of the modification, such as whether any turbines should be moved, but the process the PAC followed to make its decision.

“If the appeal is successful, then the modification application will need to be re-determined: at this stage the merits will be considered again,” he said.

“It would be highly unusual for a court to require new evidence from any party regarding an appeal of this nature,” he said.

Late last year, Mr Brooks lodged a complaint with the NSW Ombudsman about the Department’s handling of the project.

The Ombudsman was currently investigating, he said.

He’s not stopping there. Mr Brooks is also writing a submission for a Senate select committee’s inquiry into governance and the economic impact of wind turbines. He is not only highlighting the Gullen Range wind farm and the Department’s “incompetence” but the fact the developer collected renewable energy certificates, despite alleged “noncompliance” with state and federal regulations, as required.””

Co2Land org therefore must conclude a captains call will be required – then confuse you even more. But in all seriousness – you will note someone will have to pay. Guess who! Hint – you because no one else will be responsible.

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.

Relatively stable – but out of control – added costs

Your real energy costs are the networks. Interesting statement and arguably true. But is more gaming going on than meets the eye? The October 2014 energy bill arrives, and despite having negotiated a better energy price for your Victorian based small to medium sized business, you see you are paying more. Why you ask? You have a new energy price, no carbon price added, do not have solar, have reduced your load through energy efficiency measures as was encouraged and expected to be better off. The concerned business sent us their bill for analysis and what stood out.

From the Energy Retailer:

The unit price of energy had = reduced 33% – good.

The Retailers ‘other charges’ introduced new fees = increase 18% – bad

The Retailers LRET liability passed to you = increase 69% – bad

Therefore after paying a lower energy price and the Retailer contract exchanged, you find increased fees and passed to you their liability for the shortfall in their obligation on environmental charges.

From the government:

Relatively stable on state government imposts = good.

Therefore there are no new imposts from government – yet.

From the Networks:

Peak consumption charges = up 16% – bad

Off Peak consumption charges = up 7% – bad

The net effect on their total billing from the changes about 14% increases and that you can clearly see it is higher than inflation estimates. When you consider the business did expect a net reduction of 13% – it is another price shock they did not see coming – so much for cheaper electricity!

From an environmental perspective the good thing is the business reduced their carbon footprint about 8% through state government offered energy efficiency measures. At least they can have a conscience vote to please!

As has been said previously, the energy industry is the only industry in Australia that can avoid the contract terms as it suits. What is not helpful is the AER Determinations of late that introduce ‘may do’ As opposed to ‘must do’ in their wordings of onus for the industry. You could say there is a lot of water in that soup!