The coming utilities crisis: huge risks for consumers and taxpayers

At last week’s Energy Networks Conference (held in Adelaide), electricity industry leaders were adamant that the future for traditional utility business models was very dim (see, for example, Electricity market smashed by technology). AGL Managing Director Andy Vesey said that business models based on the traditional technology paradigm – large-scale generation, large-scale wires and electricity distributed one-way are “dead”. He added that strategy should be forward-looking, but that this was being held back by refusal to let go of the old models despite change that is already happening. SA Power Networks CEO Rob Stobbe said: “…on the technology side, change is happening a lot quicker than we thought. Not too fat down the track, houses will come ready equipped with solar and with storage”.

I agree with these views. However, as I argued in an article in the ACCC’s Network publication last June (available here), the biggest factor holding us back is the refusal to let go of Australia’s traditional regulatory model – the so-called RAB-based model – in which network charges are set based on the “Regulatory Asset Base” (RAB). The RAB drives about 70% of network charges. As network charges account for about 50% of retail prices, RAB values matter a lot. In a free market, network charges – and the value of assets – would decline as demand for large-scale electricity generation falls (for example, due to in-home solar and storage). However, our RAB-based regulatory system prevents that. Therefore, sticking with this model will cause an even faster shift away from large-scale generation – and cause RAB-based network charges to become ridiculously high. As network assets become “stranded”, we can be sure that network companies will not volunteer to forego the value of their RABs (close to $100 billion nation-wide). The pressure will be on governments to cover the “losses” with taxpayer funds and/or levies on consumers. As governments have tied regulation to RAB values and not been clear about what happens if major changes in technologies or markets occur, they have left themselves open to claims. To avoid this outcome and facilitate the inevitable change, governments should abolish the RAB-based regulatory model asap and make it very clear that investments in network assets are undertaken at the risk of network businesses.


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