A hidden super-profit being levied by network providers is costing Australians a billion dollars a year. Callum Foote reveals new research on the “gold-plating” rip-off which has made this country a haven for foreign billionaires and has enticed financial engineers from Brookfield into splashing $30bn in network takeovers.
When you don’t pay tax, you can afford to pay more in a corporate takeover. That’s Brookfield’s magic. Not a cent in income tax paid by Brookfield’s BPIH on $16bn in total income over 8 years.
The tax haven specialists are now pouncing on Origin Energy in a binding $18.7 billion takeover just a year after snapping up Victorian energy transmitter Ausnet for just shy of $10bn. They had a crack at AGL too. Like Hong Kong billionaires Michael Kadoorie (EnergyAustralia) and Li-ka-Shing (Spark and CKI) they know Australia’s regulators are ripe for gaming. They know super-profits are on the corporate menu for over-charging Australian consumers.
New research from Simon Orme at IEEFA (below) identifies the profiteers, but first, will the Brookfield and EIG takeover for Origin succeed, will it diminish competition?
Possibly not, according to the experts.
Bruce Mountain, Director of Victoria Energy Policy Centre at Victoria University says that “I presume that the ACCC will require strict legal separation of Ausnet from Bookfield’s retail and generation businesses.”
Nod and a wink?
Regarding whether the deal is likely to go ahead, Mountain says that “I presume they have been given the nod on this by the ACCC or they would not have progressed to this point.”
Mountain points to state governments that own generation, retail and network businesses as a model for Brookfield’s planned endeavour. “There is a precedent for this” Mountain says “the Tasmania and Queensland governments own generation, retail and networks.”
Mountain believes that even if it were inclined to do so, the ACCC will have a tough time deciding against the takeover: “I imagine with the precedent, it would have been hard for ACCC to push back.”
Over the last 8 years Brookfield, under its Australian subsidiary BPIH Pty Ltd, has produced $15.8 billion in revenue and not paid a single cent in corporate income tax.
The deal is yet to get its stamp of approval from the ACCC as well as the Foreign Investment Review Board, which is something of a rubber stamp. However, other energy experts say that monopolistic network providers are already levying over a billion dollars in super profits from Australian customers annually.
Prices to rise anyway
Many may not realise it, but east coast governments set a ceiling on energy prices. Called the default market offer in NSW, South East Queensland and South Australia, and the Victoria Default Offer in Victoria, these offers are made to ensure competition underneath the set price.
Energy market expert, Simon Orme says that “Both the Australian Energy Regulator and the Victorian regulator have price comparison sites. Customers can go to this price comparison site and determine whether their current provider is offering lower than the default price.”
Power bills for households in Queensland, NSW and South Australia will rise as much as 23.7% from 1 July if the Australian Energy Regulator’s draft determination, announced on Wednesday, is confirmed. Prices in Victoria may rise by almost a third.
While the majority of the increase in the default offer is a result of rising energy costs resulting from Russia’s invasion of Ukraine, excessive network costs charged by providers account for up to a third of the increase.
A report from the Institute for Energy Economics and Financial Analysis finds that 15–33% of energy bill rises could be avoided if private monopoly electricity networks were no longer allowed to extract supernormal profits.
How the super profits are gassed up
Energy network providers are natural monopolies because it is not efficient to build multiple electricity networks alongside one another.
To ensure that the networks do not exert monopoly pricing power, the AER regulates the prices that these networks charge consumers.
The total cost that networks can recover from consumers is the “regulated revenue”.
The AER sets the “regulated revenue” based on forecasts of the cost of transmitting energy to customers provided by the companies themselves.
Regulated revenue is expected to “to cover the costs of investing in, building, maintaining and operating the networks, plus a reasonable profit to ensure compensation for investors,” says report author Simon Orme.
Gold plating the networks
However, Orme has found that these companies have consistently misrepresented how expensive these factors are by up to a third in some cases.
“AER and the network businesses overestimated the costs that network businesses would require to build, operate and maintain the network. Networks charged those overestimated costs to consumers, and shareholders retained the differences between revenues and costs” Orme says.
The most costly overestimation is financing costs, which Orme says account for half of the super-profits being earned by network businesses.
“Most network businesses are charging consumers significantly more than required to achieve their normal return and pocketing the difference in the form of additional returns” says Orme “However, the AER has decided to let this practice continue for another five years.”
Worst offenders: Ausgrid, Endeavour, Origin
In NSW, which has a new incoming government, supernormal network profits are being extracted in privately owned Endeavour and Ausgrid network areas. This contrasts with publicly owned Essential Energy serving regional NSW where returns are adequate but no more than adequate.
IEEFA’s analysis found that Origin Energy’s subsidiary Endeavour Energy, which services Greater Western Sydney, the Blue Mountains, the Southern Highlands and the Illawarra region charges a 21.1% super-profit on its customers.
Endeavour Energy was formed when the NSW government sold its network to Origin in 2011.
Source: IEEFA No relief from electricity network supernormal profits
By contrast, Essential Energy, an NSW Government-owned corporation that services rural NSW and parts of southern Queensland, charges no super-profits whatsoever actually taking a 1% haircut on return on investment according to Orme’s analysis.
Another offender is Ausgrid, again formed in 2011 when the NSW sold off its network assets.
Ausgrid, owned in a joint venture between the NSW government and AustralianSuper and IMF investors charges a 9.1% super-profit on the power bills of 1.8 million customers.
Super profits for Hong Kong billionaires too
SAPN, or South Australian Power Networks, sold by the South Australian government to controlling shareholder Hong Kong-based Cheung Kong Infrastructure Holdings, and Australian investment fund Spark Infrastructure charges a 15.5% super-profit to its customers.
On average, excluding publicly owned Essential Energy, network providers are earning a 13-14% super-profit across the east coast and South Australia.
With NSW Labor in power, Orme says that “This is the perfect time for state governments to make changes that families will appreciate by reducing power price rises. Since our report was published last October, no action has been taken to stem supernormal monopoly network profits.
They’re not shivering in Honkers: Australians’ electricity pain is two billionaires’ gain
Callum Foote was a reporter for Michael West Media for four years.