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  • Writer's pictureFlow Australia

Call to curtail 'supernormal profits' in energy network

The regulator has rejected an accusation that electricity networks are generating "supernormal profits" off the use of poles and wires and stoking inflation.



Energy networks have been accused of inflating power bills by generating profits over and above levels that should be allowed by regulators.


A report by the independent Institute for Energy Economics and Financial Analysis (IEEFA) accuses electricity networks of "unearned supernormal profits" of $11 billion on top of "allowed" profits of $16 billion during the past nine years.


"The excessive supernormal profits were caused by weaknesses in the regulatory regime in favour of networks," the report says.


But the Australian Energy Regulator (AER) on Wednesday rejected the claim, saying consumers are getting "large benefits" under the rules.


"The ability of business to outperform the regulated rate of return is the incentive-based framework working as intended under the legislation," the regulator said. 


"The outperformance is not an indicator of 'supernormal profits', nor having a material impact on customer bills."


Under the framework governing Australia's electricity providers, networks are entitled to make a profit for shareholders, who include some state governments as well as local and foreign stakeholders.


Costs for poles and wires are passed on to customers via energy retailers as a big chunk of the power bill, to compensate for long-term investment and risks.


IEFFA consultant Simon Orme said the "supernormal profit" for 2022 alone was $2 billion, some $80 to $400 per customer depending on the network area, and 2.5 times the levels necessary to compensate shareholders for risk.


"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," Mr Orme said.


"The extra profits are reducing energy affordability and adding to economy-wide inflation."


The report found the profits do not reflect higher productivity, lower financing costs or innovation gains.


Without changes such as independent monitoring and new performance requirements for AER, excessive supernormal profits will continue for the foreseeable future, Mr Orme warned.


This means wealth from electricity customers will continue to be transferred to shareholders and revenue diverted away from investment in new transmission and storage capacity, the report said.


Energy networks say they are deeply aware of the cost of living pressures and want stable regulation to attract investment to connect cheaper renewable sources of power.


The institute's analysis used AER's profitability data from the 18 monopoly electricity networks in the national electricity market.


The regulator said IEEFA had inferred a bill impact to consumers but the regulatory framework rewards networks for improving productivity and service performance beyond benchmarks. 


"This ultimately provides benefits to customers in the form of lower prices and superior service levels," AER said.


Revenue per customer has declined by one-third (33 per cent) and capital expenditure per customer has declined by more than a third (36 per cent), AER data for 2014–22 shows.


Service performance levels have improved, with the number of outages decreasing by 19 per cent, and there was a general downward trend in the duration of outages, the regulator said.


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