Network value write downs a risk for consumers

New research indicates electricity consumers would face higher, not lower, network charges under proposals to write down the regulatory value of network assets.

The Energy Network Association (ENA) released the paper Written-Down Value? – Assessing Proposals for Electricity Network Asset Write Downs by executive director economic regulation Garth Crawford in August, the first economic analysis assessing recent calls to expose network owners to large retrospective regulatory asset write-downs.

ENA chief executive officer John Bradley said the analysis shows consumers could pay more than $320 million more per year if network investors faced new risks of write-downs.

“Calls for asset write-downs may seem appealing but this analysis shows it would increase networks financing costs substantially offsetting any other savings for consumers,“ Mr Bradley said.

Mr Bradley said the analysis of multiple scenarios found even extremely large asset write downs would not achieve price reductions for consumers, who would pay higher bills in all scenarios.

“Asset write downs could drive the cost of financing to levels not seen since the GFC. This cost increase would outweigh any savings to consumers intended from a lower asset base and lower depreciation charges,” he said.

“Over the past two decades, regulators and policy-makers have sought to provide certainty for investors and a low-risk environment because it lowers costs to consumers.

“If this low-risk environment is lost, Australia could ruin its hard-won reputation with investors for regulatory predictability without delivering lower electricity bill outcomes for customers.”

Mr Bradley said the analysis was conservative and did not factor in the potential for investors requiring a sovereign risk premium if the current regulatory regime is retrospectively abandoned.

“The research paper conservatively estimates that electricity network charges could increase by up to 7 per cent based on current network investments. The cost of future network investment could represent an additional cost of up to $1.8 billion over the next decade,” he said.

Other key outcomes of the analysis included: write-downs would reverse existing downward pressures on the cost of capital and network prices; by increasing prices to customers, write-downs would be likely to increase, not lower, any risk of a utility death-spiral’; and a relatively small increase of 0.5 per cent in financing costs is enough to completely offset any benefits of lower asset values after a write-down.

Mr Bradley said Australia’s regulatory framework already provides strong incentives for network businesses to apply the best possible forecasting and avoid over investment.

“If network businesses are overspending against capital expenditure forecasts they already face the risk of write-downs and independent reviews have previously found no evidence of deliberate over-forecasting,” he said.

While there is likely to be a need for the regulatory system to evolve in time to embrace new technologies and challenges, Mr Bradley said it was important for both policy-makers and stakeholders to assess evidence of the consequences of making of making poor choices.

“This work shows that consumers have a direct interest in maintaining investor confidence in an independent regulatory regime which supports efficient investment in significant infrastructure,” he said.