That incentive was a system that rewarded the networks for spending as much as possible. The networks borrow money to build the new infrastructure, and the AER lets them pass on the estimated cost of repaying the loan (the “cost of capital”) to consumers. In 2009, the AER ruled that the NSW distribution networks could claim an astonishingly high cost of capital of 8.78% per annum, which it said was equal to the borrowing costs of a private company at that time. The catch is, NSW network companies don’t borrow from banks, says Mountain; they borrow from a triple A–rated state treasury at rates of around 4–5%.
The regulator’s rate already guaranteed enormous profits to the NSW distribution networks, but it wasn’t enough for them. So they appealed the decision at the Australian Competition Tribunal, enlisting the finest QCs and international experts to argue their case.
They could afford to. The states had slipped in a rule declaring that the costs of network appeals were to be counted as “running costs” and charged to customers through electricity bills.
Anyone who tried to speak up for consumers in this process was essentially locked out. Gerard Brody, an advocate from the Consumer Action Law Centre, says that when he tried to intervene in a 2010 network appeal, his senior counsel advised him to withdraw. If he lost, he was warned, he could be forced to pay the networks’ costs. But that wasn’t the only obstacle. “A lot of the information put to the tribunal by the electricity distributors was marked commercial-in-confidence, so we couldn’t effectively assess or challenge their claims,” says Brody.
In NSW, the networks won their appeal against the regulator, and were allowed to claim a 10.02% cost of capital. This was not a one-off return: for every billion dollars they borrowed to spend on infrastructure, the NSW networks were now able to charge their customers an extra $100 million every year (decreasing over time as the loan was paid off). “This was just pure profit coming from consumers’ hip pockets,” says Brody. “There’s no rational, economic reason for consumers paying that sort of money.”
The NSW distributors established a precedent for the other networks to follow. When networks from Victoria and Queensland submitted their proposals in the following years, their rates of return mirrored that granted to NSW. In this single decision, the appeals tribunal had added an extra $1.9 billion to the networks’ profits. All told, the networks won 22 of the 34 appeals they fought, and were awarded $3 billion more than the amount the regulator had deemed necessary.
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