If you’re like most Australians, the biggest chunk of your energy bill – about 40% – goes to a network service company that owns and operates transmission lines or pipes that deliver electricity or gas to your home. does.
But evidence from Australia’s takeover bids for two publicly listed electricity network service companies shows you may be paying more than you expected.
These prices are set by the Australian energy regulator, as network services are monopolistic: you can choose your own energy retailer, but not the lines or pipes through which electricity or gas flows.
It is the regulator’s job to set a fair price for these services – one that doesn’t degrade the service provider or the consumers.
But the Australian energy regulator is not getting these pricing decisions right, according to calculations, which could be done using bids by foreign investors for Oceannet Services Ltd, the largest energy network provider in Victoria and Spark Infrastructure Group, whose The property comprises of South Australia. electricity distribution network.
Being listed on a stock exchange, they have to disclose financial information. This information enables analysts to calculate how much investors value them compared to the Australian energy regulator.
This calculation – known as the regulated asset base (RAB) multiple – shows that the regulator is allowing energy network companies to charge more than they need to.
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give importance to osnet
Oceannet owns and operates almost all electricity transmission systems in Victoria, and also large gas and electricity distribution networks. It is the subject of a takeover battle between Canadian infrastructure fund Brookfield Asset Management and APA Group, Australia’s largest natural gas infrastructure business.
On September 20, it was revealed that Brookfield had offered to acquire AusNet for A$2.50 per share. On the day APA Group offered a mix of cash and equity, it said Oceannet was valued at $2.60 per share.
These bids provide a baseline for calculating the regulated asset basis multiplier: the ratio of investors’ valuations to the regulator’s valuations.
How much an investor is willing to pay for a share represents their expectation of future dividends (or profits) that those shares will return. How much the regulator allows a company to charge is based on what it sees as a fair return to shareholders.
From this information the regulated asset base multiplier can be calculated.
A multiple of 1 would mean that investors’ valuation would be equal to the regulator’s valuation. A number less than 1 would mean the regulator is setting prices too low. A number greater than 1 means it is setting prices too high.
Brookfield’s offering gives Oceannet a multiplier of 1.68, according to The Australian Financial Review. This suggests the Australian energy regulator is allowing Oceannet to charge a price 68% higher than Brookfield would be happy to accept. APA’s bid suggests an RAB multiplier even higher.
Of course, it’s not entirely that easy. Oceannet’s entire revenue does not come from regulated assets. This may slightly affect the evaluation of osnet. Assuming that AusNet’s unregulated businesses are as profitable as its larger regulated businesses, we estimate the RAB multiplier to be 1.54.
Spark Infrastructure Evaluation
Spark Infrastructure owns controlling interests in two Victorian electricity distributors (CityPower and PowerCore), TransGrid in NSW and SA Power Networks, the main distribution network in South Australia.
In August, Spark’s board approved a $5.2 billion acquisition offer from US private equity giant Kohlberg Kravis Roberts and the Ontario Teachers Superannuation Fund.
This offer gives the Spark a RAB multiplier of 1.5. This shows that Spark’s stake is charging 53% more than is needed to adequately compensate investors.
Read more: You’re Paying Too Much for Electricity, But Here’s What States Can Do About It
the missing transparency
The impact on customers will vary, but these calculations suggest that network services charges should be around two-thirds of the current level. This will reduce the domestic electricity bill by about 15% as compared to now.
I am not suggesting that the regulator should set prices in line with the RAB multiplier of 1. But prices should not be in favor of monopoly owners, as these takeover valuations suggest that they do.
The underlying issue here is not new. Official inquiries over the past decade – the Garnaut Climate Change Review update in 2011, a Senate inquiry into energy bills in 2012 and the Productivity Commission review of electricity network regulation in 2013 – have all concluded that energy regulation is highly erroneous in favor of investors. consumer.
The Australian energy regulator and the Australian Energy Markets Commission (which oversees all energy markets) have responded to these inquiries with new rules, guidelines, committees and procedures.
Yet the problem remains – and if these acquisitions are successful AusNet and Spark Infrastructure will almost certainly be removed. Then we will lose important information on the RAB multiples that allows an objective assessment of the regulator’s decisions.