Australian news, and some related international items

Whistleblower exposes the rorting in electricity charges

Conflicts of interest abound in the way energy companies charge

scrutiny-on-businessRorting in the power industry about to be laid bare, SMH,  October 13, 2014   Business columnist The government privatisation train is on course for a head-on collision with the parliamentary inquiry into “gold-plating” in the power industry.

At the very time the states are sprucing up their energy companies for sale, further revelations of regulatory rorting will be flowing thick and fast. Gold-plating, or excessive spending on poles and wires, has been shoring up industry returns for the past six years – and driving power bills higher, although demand for electricity actually has been falling.

Now a treasury analyst from Queensland electricity retailer Energex threatens to blow the lid on how the power industry “games the regulator” in unprecedented and gory detail. Cally Wilson walked out of her job at Energex three weeks ago and turned whistleblower, telling the press how her bosses had conspired to push up power prices.She says she was instructed to find a debt rate which would meet management’s targets — in other words, a high rate. “Unusually high” were her words.

The higher the WACC (weighted average cost of capital), the higher the return Energex could claim from the Australian Energy Regulator (AER) — and therefore the higher it would charge its customers.

Her allegations of data manipulation are the catalyst for the announcement of the parliamentary inquiry into “gold-plating”.

Gold-plating had been exposed in these pages two years ago as the main culprit behind rising energy bills. However, having an insider such as Cally Wilson report in detail – and she has put a swathe of irregular practices before regulators – will lend a new potency to the case for reform.

Data manipulation is by no means confined to Queensland………..

unlike the last inquiry in 2012, the terms of reference are more precise this time and suggest that some in Canberra really are fair dinkum about bringing down energy costs.

In delving into how power companies calculate their costs, the terms of reference reflect the concerns of Sydney University professor of finance David Johnstone aired in Fairfax newspapers last month.

Johnstone revealed how the industry players ran rings around the regulators when it came to seeking approval for their high returns. Specifically, he exposed the DORC (depreciated optimised replacement cost) formula for valuing assets. DORC allows energy companies to value assets at “replacement cost” rather than at their actual cost. The upshot for customers is that they are effectively, in many cases, being billed again for something the public has paid for.

Thanks to DORC, a company is entitled to claim for assets whose costs already have been sunk. A gas pipeline for instance, decades old and already paid for, can be valued at the cost it might take to replace it – a cost David Johnstone says is “imaginary”. Further, the number is arrived at with the help of consultants in whose interests it is to come up with a high figure.

Conflicts of interest abound in the way energy companies charge and the DORC formula is one which needs to be overhauled urgently. Such a spectre must haunt state governments though as they try to get the highest sale price for their assets – and energy executives for that matter, anticipating their salaries to multiply post-privatisation.


October 13, 2014 - Posted by | AUSTRALIA - NATIONAL, energy

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