NSW electricity network operators have warned of heavy job losses along with declines to network reliability and safety if the savage cut to spending outlined by the Australian Energy Regulator is implemented.
On Thursday, the Australian Energy Regulator disclosed plans to cut power prices in NSW by 10 per cent in 2015-16 that will flow from a decision to impose heavy cuts of up to 35 per cent to the budgeted spending of the power companies as well as changing interest rate assumptions.
"The demand for electricity is falling ,which puts less strain on the networks and requires less investment to provide a reliable supply of energy," Paula Conboy, the newly installed chairwoman of the regulator said. "These draft determinations reduce the spending proposals to ensure that only prudent and efficient costs are recovered from consumers."
NSW energy distributors are the first to be assessed under the new review process, with South Australian and Queensland networks to follow.
The heavy cut outlined by the AER could result in as many as 4600 jobs being axed – 2400 from Ausgrid, 1500 from Essential Energy and another 700 from Endeavour Energy, Vince Graham, the head of Networks NSW warned.
"I can't cut 4600 jobs tomorrow and continue to safely operate the network," Mr Graham said. "I'm not fundamentally opposed to the direction the AER is proposing ... but we need to sensibly transition over time.
"Some aspects of the determination were predictable. What wasn't predictable was the new benchmarking tool which has not been discussed. That's where the regulatory shock has come in."
Actew-AGL head Michael Costello described the benchmarking as "highly questionable".
"The AER has primarily based its draft decision to cut operating costs on highly questionable statistical analysis," he said, arguing the use of the data to be "reckless and simply not fit" for the way it has been used.
Securities analysts said that since the ASX-listed network entities were more efficient than the government-owned entitles in NSW, there would be little direct impact from the decision for companies such as Spark Infrastructure and Duet.
"This has a massive implication" for the planned sale of the NSW government assets, Paul Johnston, analyst with RBC Capital Markets said. "A huge impact."
"It's a transfer from the taxpayer to the customer. It is only a draft decision but it will be reflected in lower asset prices."
The NSW government earlier this week outlined plans to spend $20 billion, which it hoped to raise from the sale of part of the equity in the power network next year, a figure that now seems wildly optimistic.
"Investors want a clear and robust framework," said John Bradley of the Energy Network Association. "The changes introduced in 2012 were aimed at removing volatility .... but such savage cuts to operating spending which don't appear to be defensible end up costing consumers more in the long run."
Underinvestment in one regulatory period resulted in catch-up investment in the following period, he said.
At its core, the AER found electricity distributors in NSW to be less efficient than companies in Victoria and South Australia, which prompted its decision to slash spending proposals by as much as 45 per cent.
It has also cut to 7.15 per cent the weighted average cost of capital for the four years to 2019-20, well below the 7.88 per cent sought by the power companies and significantly less than the 10.2 per cent received in the previous regulatory period, along with adopting a "trailing-average" approach to debt.
But the decision to use a spot interest rate figure for the start of the new pricing mechanism will also cause pain, because the NSW utilities already use a trailing average. As a result, with an interest rate "higher than the AER would allow, so debt would be under water," Mr Graham said.
