The profits ‘earned’ by Australia’s gas industry will make you wince
Business journalist Michael West and analyst Bruce Robertson expose the profound failure of government energy regulation and demonstrate how our loss, as consumers, matches the gains of the power companies.
Spiralling power bills have made energy poverty a grave issue in Australia. Indeed, the entire economy is hostage to rising energy costs. Yet there are a handful of big winners: multinationals, local power giants and an Asian tycoon. Incredibly, despite the doubling in electricity prices over the past seven years, and massive profits for the networks, the gas pipeline players have forged even richer returns at the expense of customers.
A month ago today, Li Ka-shing moved to bulk up his extensive suite of Australian energy assets when his Cheung Kong Infrastructure, whose registered office is in Bermuda, launched a $7.3 billion takeover bid for Duet Group.
Why would an Asian billionaire be so keen to invest in old-world Australian infrastructure assets like gas pipelines and electricity networks?
Here is a man who lives in Hong Kong and made his billions in China, Hong Kong and the growth-charged markets of Asia with their abundance of investment opportunities.
Li Ka-shing’s eye for a bottom line profit is so keen he even uprooted a large chunk of his global business empire in 2015 and shifted domicile from Hong Kong to the Cayman Islands, apparently deeming the 15% tax rate in Hong Kong too onerous.
Why go to Australia then — a low-growth economy with double the Hong Kong tax rate — to buy assets in a mature old industry?
The answer is plain: mega-profits. The tycoon’s gain is our loss; Australian gas and electricity customers, that is.
Successive Australian governments have gifted the energy distribution and transmission industries a return on investment which Asian billionaires dream about: stable, heady profits without peer in domestic markets and, indeed, internationally.
Just how peerless are these profits? Hugh Grant (no, not that Hugh Grant) lays them out here, detailing the returns for Powerlink, Queensland’s electricity transmission network, over 15 years:
“The analysis confirmed what the networks and their investors have known for many years — that Australia’s monopoly electricity networks are achieving many multiples of the returns being achieved by Australia’s best performing ASX 50 companies.”
“Over the past 15 years, the Queensland government’s equity investment in Powerlink has accrued returns of:
“23 times the returns achieved by the Australian construction sector (Lend Lease)
“15.5 times the returns achieved by the Australian telecommunications sector (Telstra)
“10.5 times the returns achieved by the Australian minerals and resources sector (BHP)
“10 times the returns achieved by the Australian banking sector (NAB)
“3.6 times the returns achieved by Australia’s most profitable supermarket (Woolworths)
“No ASX 50 stock came close to Powerlink’s returns.”
This demonstrates that consumers and businesses alike should have much lower power bills while investors in the electricity transmission and distribution industries could still enjoy solid returns.
In research that followed his Powerlink findings, the Scottish engineer found the returns made by both the electricity transmission and distribution sectors put even Australia’s banking oligopoly to shame.
If these outlandish returns for state electricity networks are not enough to make every power customer wince, the profits churned out by Australia’s gas transmission and distribution sectors are even more dazzling. We are talking about gas.
In July 2016, michaelwest.com.au, in conjunction with energy analyst and activist Bruce Robertson, unveiled the remarkable performance of APA Group, Australia’s largest gas pipeline owner:
“APA is one of the very best performers on the Australian Securities Exchange (ASX). Since floating in 2000, its shares have delivered investors a return of 1304 per cent. In share market vernacular, this is a ’13-bagger’, increasing in value 13 times its original investment in 15 years. A truly phenomenal run …”
The Australian Competition and Consumer Commission (ACCC) later confirmed how companies such as APA achieved such returns in its inquiry into the east coast gas market. Gas transmission pipelines are natural monopolies and in Australia we allow these monopolies to charge whatever they like. And they don’t hold back.
Lest readers suspect we cherry-picked data by merely showcasing the biggest, most dominant gas pipeline player in Australia, our thesis of excessive industry returns is mirrored by JP Morgan in a report written last month for the Council of Australian Governments (COAG).
“The analysis examined returns over a ten-year period and compared them directly with aggregated returns to regulated electricity asset owners and with the ASX 200. The results show that the total return on the pipeline business was double that of the average regulated electricity network operator.
“A difference is to be expected when comparing returns of regulated assets with that of an unregulated monopoly, and while the respective businesses will have different risk characteristics, that is not sufficient to explain the difference in returns.
“The analysis was commissioned to highlight that in a business environment where market power exists, higher than average returns are being generated.”
What a blot on government and its regulatory agencies it is that the returns generated by a tiny band of gas pipeline corporations are even higher than the supercharged returns of the electricity networks.
The states have utterly failed their consumers. They have allowed investors to drive up prices while energy poverty is inexorably on the rise. Every power consumer and every business in the country save the energy corporations themselves is manacled by monopolistic pricing.
It is clear that this gas pipeline profiteering can and should be reined in, without affecting the incentives in the industry to invest.
There is so much fat in the returns to trim if Australia’s manufacturing industry is to survive and households are to have access to gas at a reasonable price.
So what is government doing to rein in a rogue industry that unconscionably preys on its customers?
Not much. The ACCC authored a report on the east coast gas market last year, which outlined, in detail, the problems.
This was followed by the COAG report, which had four key recommendations for market reform:
Recommendation 1: That the disclosure and transparency of pipeline service pricing and contract terms and conditions be enhanced, including requiring the provision of information on the full range of pipeline services which are available or sought (not solely focused on forward haul services).
Recommendation 2: That a framework for binding arbitration, available to all open access pipelines in the event parties are unable to reach a commercial agreement, be introduced into the National Gas Law (NGL).
Recommendation 3: That the Gas Market Reform Group be tasked with developing a detailed design of the disclosure and transparency requirements and of the arbitration framework, after consultation with industry, other stakeholders, the ACCC, the Australian Energy Regulator (AER) and the Australian Energy Market Commission (AEMC), with recommendations to be considered by the COAG Energy Council in mid-2017.
Recommendation 4: That no change be made to the current coverage test at this stage. The appropriateness of amending the coverage test should be reviewed within five years after the arbitration framework is operational.
The recommendations are weak and will do little to restrain the rampant price-gouging in the gas pipeline industry. Perhaps the most disappointing aspect of the COAG report is its failure to focus on the effects of high gas prices on consumers, caused in part by excessive gas pipeline charges.
Rather, the entire report is preoccupied with what industry participants believe needs reforming. This is a report on gamekeeping, written for the poachers not the wildlife.
There is little hope of any significant increase in transparency in the gas industry until, as is the case in the US, full financial accounts are produced on a pipeline-by-pipeline basis, and made available to the public.
In any negotiation, the party with greater access to the relevant information has the upper hand and nowhere is this more true than in gas pipelines where, even if the COAG reforms are introduced, the pipeline companies would still keep their stranglehold on the relevant market information and therefore maintain their grip on pricing.
Further, the process to apply for a gas pipeline to be regulated is inefficient, expensive and overly legalistic. In Australia, very few pipelines are regulated — unlike the rest of the Western world. This is less of a market than a festival for unregulated monopolists.