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TransGrid's revenue expenditure slashed by the regulator

TransGrid's revenue expenditure slashed by the regulator

The Australian Energy Regulator has slashed NSW transmission company TransGrid's proposed capital expenditure for the next five years by 39 per cent but it won't be enough to counter big price increases for NSW households.

In the first determination by the regulator since the Turnbull government announced it was scrapping the limited merits review – which allows companies to challenge the decision of the regulator – TransGrid has been given preliminary approval to recover $3.9 billion from customers up until 2022-23.

The AER estimated this would add only 0.5 per cent to the average electricity bill in NSW and the ACT. But residents have already been hit with double-digit price increases from July 1.

AER chair Paula Conboy said TransGrid had not shown enough evidence the capital expenditure – which would ultimately be borne by consumers in the form of higher power prices – was justified.

"We have been mindful in making this decision of the need for TransGrid to invest in infrastructure in order to provide safe and secure supply to consumers. But in the contemporary high-priced environment, it is more important than ever that proposals are subject to thorough review," she said.

TransGrid, which had proposed a 42 per cent increase in capital expenditure to recoup $4.3 billion in revenue, said the decision to knock back their plan to replace ageing cables in Sydney would risk potential blackouts in Australia's largest city.

"We believe there is an unacceptable risk of blackouts to Sydney's CBD unless we reinforce supply," TransGrid chief executive Paul Italiano said.

$992 million cut

"We are committed to working closely with the AER to ensure this essential project proceeds in time. We simply cannot afford to wait until these ageing cables fail to take action."

But the AER trimmed 8.4 per cent, or $992 million, off TransGrid's proposed revenue recovery, saying it needed to be convinced of upgrade plans before it makes a final determination next April. TransGrid has until December to submit a revised regulatory proposal.

"We have not accepted TransGrid's proposed capex because we are not currently satisfied that all of TransGrid's forecast capex needs to proceed in the next period," the AER said.

"Our reduction includes TransGrid's proposed 'Powering Sydney's Future' project. Based on the information available, we consider that the project will not be needed until 2023."

The AER said it would consider five additional projects, valued between $543 million and $2.3 billion, once TransGrid submitted its response to the draft determination. But if any of these projects are approved it would result in an increase in customers bills higher than the 0.5 per cent cited in the draft determination.

TransGrid's role in the upgrade of the Snowy Hydro scheme – dubbed by the Prime Minister Malcolm Turnbull as "Snowy 2.0" – has also not been included in the five-year spending plan.

Cost implications

Ms Conboy warned this could also have cost implications for consumers. "This will guide our thinking as we consider future revenue proposals," she said.

The regulator said the transmission component makes up about 11 per cent of the bill for typical residential customers in NSW and the ACT. The other network charges, for distribution, account for about 40 per cent of an average bill.

TransGrid said its Powering Sydney's Future program was critical to ensuring reliable supply, saying the inner-city network supplied more than 500,000 customers. It said it had delayed the project for as long as possible, saying it needed to start building the new cables – to replace ones originally installed in the 1960s and 1970s – rather than wait until the next regulatory period after 2023.

The Turnbull government has proposed to scrap the Limited Merits Review would stop companies gaming the system that have cost consumers an additional $6.5 billion.

The bill to scrap the appeals process has not yet passed the Senate – having been sent to a committee by the ALP – and may not pass until later this year or early next year.

"As the government has made clear, it believes the decisions of the AER should stand and not be open to appeal through the Australian Competition Tribunal," Energy Minister Josh Frydenberg said.

TransGrid could still appeal the final AER decision in April, but if the bill is passed early next year it would be retrospective to August when the legislation was first introduced, according to the regulator.

Australian Financial Review

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