When the NSW government announced its intention to partially privatise the electricity transmission and distribution networks, it promised ‘electricity network prices will be discounted by 1% off forecast regulated prices until 2019.’[1]

It was unclear how this would work as network businesses’ revenues are regulated under the National Electricity Law. Now that the Electricity Network Assets (Authorised Transactions) Act 2015 (Electricity Assets Act) has been passed, the situation is a little clearer. But not a lot.

TransGrid is first cab off the rank for privatisation. So, what are the implications of the electricity price guarantee for TransGrid investors?

HOW DOES THE PRICE GUARANTEE WORK?

The Electricity Assets Act requires the successful bidder to guarantee that:

  1. its total network charges for the financial year ending 30 June 2019 will be lower than for the financial year ending 30 June 2014; and
  2. it will promote efficient investment in operation and use of, electricity services for the long term interests of consumers of electricity; and
  3. it will comply with the AER’s Efficiency Benefit Sharing Scheme.[2]

Only (a) matters as (b) and (c) merely restate parts of the National Electricity Law.

So does it work? And what should bidders think about? These four issues are a start:

  1. It is not a like for like comparison. It compares 30 June 2014 dollars with 30 June 2019 dollars without any adjustment for inflation. This may be a material issue: using the most recent CPI figures from the ABS, cumulative inflation over the past five years was about 12%.
  2. It is a single year comparison. But the AER’s revenue determinations are typically for five-year periods, where allowed revenue is smoothed over the period.[3] In this way, the revenue constraint on one year may indirectly affect others. And network businesses have limited flexibility in determining pricing for a year based on the allowed revenue for that year set by the AER.
  3. There are no exceptions even where the AER approves an increase in allowable revenue (eg for terrorism events[4] or where conditions for a contingent project are triggered[5]). And what if the rules change?
  4. How will it be enforced? In the Treasurer’s second reading speech, she said:

This guarantee is to be overseen and enforced by the price commissioner, who will report to the Government to confirm that the long-term leases will not put upward pressure on prices.

But the price commissioner has no enforcement powers under the Electricity Assets Act, only an advisory and reporting role.[6]

IMPLICATIONS FOR TRANSGRID

For TransGrid, the year ending 30 June 2019 will be the first year of its next regulatory control period.

TransGrid’s maximum allowed revenue for the year ending 30 June 2014 was about $934 million. Its maximum allowed revenue for the year ending 30 June 2018 is about $725 million.

On first impressions, this doesn’t seem to be a problem. But it may well be for two reasons. First, TransGrid is likely to have a RAB (ie asset base) in 2018–19 that is about 10% higher than 2013–14. Secondly, the allowed rate of return in the next regulatory control period may well be higher.

Using the AER’s forecast RAB at 1 July 2018, assuming a rate of return (nominal vanilla WACC) of 8.9%,[7] and keeping all other building blocks the same, TransGrid’s revenue requirement for 2018–19 will be about $930 million in nominal dollars.

CONCLUSION

Potential bidders should consider the operation of the electricity price guarantee carefully. If the issues cannot be satisfactorily addressed in the terms of the lease, bidders may need to: ask for amendments to the legislation, or accept that the ‘true’ allowable revenue may be less than that determined by the AER (or what the AER may accept). This is unlikely to lead to an economically efficient outcome.