Electricity network providers raked in $2bn from customers in “superprofits” in just one year, or 2.5 times the level needed to compensate shareholders for risk, the Institute for Energy Economics and Financial Analysis (Ieefa) claims in a new report.
Building on an assessment published a year ago, Ieefa found network firms had extracted about $11.1bn since 2014, including $2bn in the 2022 fiscal year alone. That sum was in addition to permitted “normal” profits of $16bn over those years.
Depending on the area, the excess profit amounted to between $80 and $400 for each customer, the author of the report, Simon Orme, a former treasury official in New South Wales and New Zealand, said.
“Families and businesses are already experiencing power bill shock from higher retail prices, and the persistent and large extra network profits are making this worse than necessary,” Orme said. “The extra profits are reducing energy affordability and adding to economy-wide inflation.”
The ability of monopoly network providers such as Endeavour Energy in NSW, Queensland’s Ergon and Victoria’s Citipower to continue to extract such bumper profits reflected poor governance by the Australian Energy Regulator (AER), he said. The AER said firms outperforming the “regulated rate of return is the incentive-based framework”, and outperformance was “not having a material impact on customer bills”.
Orme said “super profits are always there; they’re structural; they’re permanent”, adding inflation would boost excess earnings further. “There’s a possibility that network prices get increased quite a bit because there’s a catching up with inflation.”
Victoria’s network results had been moderated by a delay in adjusting to higher inflation that will soon be made up. The ACT, by contrast, had been shielded from the profit jump, the report noted.
Network profit gains will counter at least some of the recent falls in wholesale electricity prices, meaning consumer power bills are unlikely to shrink much in the near term.
Electricity prices were already 4.2% higher in the September quarter, an increase that would have been 18.6% without government rebates, the Australian Bureau of Statistics said last month.
For its part, the AER estimated the “outperformance based on a return on equity measure” over the 2014-22 period as $9.7bn on total revenue of $122bn.
“The ability of business to outperform the regulated rate of return is the incentive-based framework working as intended under the legislation,” an AER spokesperson said. “The outperformance is not an indicator of “supernormal profits”, nor having a material impact on customer bills.
“The incentive schemes in place under the regulatory framework reward networks for improving productivity and service performance beyond benchmarks,” the spokesperson said. “This ultimately provides benefits to customers in the form of lower prices and superior service levels.”
Orme said networks earning 1.7 times normal profits over the period – and 2.5 times in the past year – was indefensible since even “middling” performers earned fat returns and productivity gains since 2014 had been minimal.
The urgency of reforming the network costs was even greater given the need for much more transmission to assist the decarbonisation of the power grid as large wind and solar farms get built, he said. Higher capital costs would only make it worse.
“You’ve got this sort of double whammy effect coming through, that makes the whole transformation more challenging,” Orme said.
The chief executive of the industry group Energy Networks Australia, Dominique van den Berg, rejected the report, saying it had used a “flawed methodology” that counted every variation from regulator approved forecasts as potential “super-profits”.
“Customers benefit under incentive-based regulation because networks are rewarded for delivering the same services for less, or by delivering more value through enhanced reliability,” Van den Berg said. “Consumers receive around 70 to 80% of the benefits of these gains, passed on through lower prices and higher service levels into the future.
“For the past two years Australian electricity customers on average have paid less in real terms for distribution network portion of the bill than in any other year since 2010, while reliability has improved.”
