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Select Committee on Electricity Prices
25/09/2012
Electricity price increases in Australia

DUNN, Ms Hannah, Media and Government Manager, Grid Australia

JIP, Mr Norman, Coordinator, Grid Australia

McINTYRE, Mr Peter Michaell, Chairman, Grid Australia

CHAIR: I welcome representatives from Grid Australia. Do any of you have an opening statement that you wish to make?

Mr McIntyre : Yes. Thank you for the opportunity to speak before the committee's public hearing today. Grid Australia represents the owners of all major electricity transmission networks in the National Electricity Market and in Western Australia. Its members include ElectraNet in South Australia, Powerlink Queensland, SP AusNet in Victoria, Transend Networks in Tasmania, TransGrid in New South Wales and Western Power in Western Australia. These transmission operators play an integral role in the electricity sector. The networks transport 99 per cent of Australia's electricity and form the backbone of our National Electricity Market.

With this level of engagement our members have a direct and substantial interest in energy policy matters and forums such as this inquiry. Transmission operators own and maintain infrastructure, including more than 47,000 kilometres of high-voltage transmission lines, the large towers that carry the lines, transformers, switchgear and underground cables. We provide the vital link between electricity generators and distribution businesses. Put simply, we are the electrical highways between power stations and retailers.

The integrity of the national grid relies on the services of the transmission operators. Unlike distribution networks though, strategic investment in transmission helps increase interstate electricity trade and generator competition, getting consumers the lowest cost and efficient generation and, in doing so, helping to reduce power price rises. However, our members have little direct engagement with typical household electricity consumers. Consumers engage with distribution operators, which provide and maintain the poles and wires to their homes and businesses, and the retailers issue them with the power bills. Although Grid Australia members are one step removed, we strongly support measures and initiatives to ease consumer costs as long as they do not compromise the security and reliability of Australia's energy supply.

While rare in Australia, transmission power failures can have very serious consequences; much more dramatic compared to failures in the lower voltage distribution network. A fault in one part of the transmission network can cascade to other areas, and even across states, potentially leading to widespread disruption and loss. You only have to look at recent examples overseas to realise what can happen. For example, in India this year power failures affected more than 600 million people. In the north-east of the USA in 2003 around 50 million people were left without power for significant periods of time—about 2 million of those people for up to two days. It is reported that that event contributed to the deaths of 11 people and an estimated cost of around US$6 billion. In Auckland in 1998 around 74,000 people in the CBD itself were left without power for five weeks as a result of transmission failures. Disasters like these can have enormous economic consequences for the community and cause social upheaval. To give you an idea, in an Australian context, if 100 megawatts of load was lost for just one day in Sydney, the economic loss for customers would be at least $100 million. Further, 100 megawatts is not an extreme example—it is equivalent to about one per cent of the average load in New South Wales. That is why investment in transmission network infrastructure is essential for consumers and the country, both for energy security in a real-time operational sense and for longer term national objectives.

I will now turn to the issue of costs. There are a number of well-recognised, industry-wide reasons that contribute to rises in electricity costs. These include: ageing infrastructure, which is the main driver; an increase in peak demand; and high reliability standards in distribution. The actual cost of transmission network costs to consumers is relatively low. Transmission infrastructure costs account for only about 10 per cent of a typical electricity bill for residential and small-business consumers. The rest of the bill is made up of distribution charges—around 41 per cent for what we call the poles and wires: the distribution business—retail about 20 per cent, generation about 20 per cent and the carbon price, which is quoted at about nine per cent. Unfortunately, most people, including the media, do not differentiate between transmission and distribution infrastructure costs in the wide debate around prices. Grid Australia members are currently spending at or below approved forecast expenditure needs for their current regulatory control periods. This is consistent with and responsive to demand in growth that is generally below forecast expectations. In some cases this is a result of deferred expenditure on identified projects. It is also worth noting that the Australian Energy Regulator—the AER—has found that transmission investment is forecast to plateau for transmission businesses this year. This is in contrast to the AER's prediction that distribution network costs will continue to rise.

Grid Australia does recognise the concern about rising electricity prices and welcomes the current debate to help bring some relief to consumers. Our members support the vision for a truly national and efficient energy market that can help to deliver cost-efficient and sustainable energy services to consumers. We believe that a stable regulatory environment is critical for investor certainty in the national electricity market and necessary for efficient infrastructure investment. The energy regime currently in place is the result of more than 15 years of sound policy development involving all Australian governments. The rules target efficient prices and sustainable investment. They largely get the balance right, but Grid Australia supports changes to the rules where it can be demonstrated that there is no threat to security of supply and that it does benefit consumers.

The regulatory arrangements are currently being examined in detail by multiple review processes, which are already well advanced. Grid Australia is actively contributing to those reviews. Grid Australia believes that, when completed, the reviews and their recommendations will provide the best platform for any well-considered and balanced policy changes. To that end, Grid Australia supports sound reforms that would deliver initiatives that improve consumer energy literacy, advocacy and engagement to create greater transparency across the whole electricity market sector. We also encourage effective demand-side participation initiatives that can provide a viable alternative to continually expanding the network to meet peak demand. This includes changes to pricing arrangements to drive the right signals to consumers which would support lower investment in the future. In addition to these reforms, Grid Australia members would like to see the Australian Energy Regulator strengthened to become a highly credible, independent body, so that it can make well-informed assessments that balance the needs of the sector and consumers. We believe this can be achieved through greater resources being allocated to the AER, better corporate knowledge and skills to ensure competency, and greater credibility within the investment community. Grid Australia also believes in the need to maintain a robust review process for the AER's decisions.

To conclude, we recognise that electricity operators are only part of the overall electricity supply framework. However, our members will continue to identify ways to help ease cost pressures for typical electricity consumers. Grid Australia members also support making the necessary investments to connect more renewable- and low-emission generators to the market to give consumers greater choice. Since 2008, Grid Australia has connected over 1,300 megawatts of wind farms to its networks. However, to achieve real and sustained improvement for customers, we believe that all parts of the supply chain need to be well coordinated through a stable and balanced regulatory system.

CHAIR: Thank you, Mr McIntyre. This morning we heard from a number of witnesses who made claims that incentives to over-invest existed in the system at the moment with respect to transmission and distribution businesses, and they pointed to some of the rules relating to the rate of return, allowances for capital expenditure and operational expenditure. I am wondering what you have to say about those claims.

Mr McIntyre : I know that those claims are regularly made. In fact, I believe that the regulatory regime at present provides incentives for businesses to defer capital expenditure rather than to over-invest. In fact, the transmission businesses have been actively seeking to defer investments. I give two examples here. Powerlink in Queensland had diverted construction of its first 500kV circuit by a period of four years. That is around $380 million to $420 million of expenditure. TransGrid in New South Wales has sought to defer projects. A major supply project to the west of Sydney was deferred for a year from 2009. We are currently building a project in Western Sydney which we have pushed back through contracting demand-side support for it, and we have also just recently reviewed two major transmission line projects in the far north of the state and on the mid-north coast. We are seeking to defer both of those projects for a number of years. I would suggest that the incentive regime encouraged commercially-focused businesses to not build capital expenditure, and the evidence points to that being a fact.

CHAIR: Was that Powerlink decision the result of an inquiry conducted by the Australian Energy Regulator?

Mr McIntyre : It was part of a process which is a very robust process that we go through every five years. It may be beneficial to explain to the committee how the investments are made for transmission and that they are under the rules: there is a very robust framework around that. Every five years every transmission service provider puts a package of works up to the regulator which is its best forecast of the costs it needs to incur. The regulator, the AER, does a robust review of that proposal—bearing in mind it is often some time out from the investment itself—and then allows some funding for the necessary works. In addition, the businesses have to conduct what is called a 'regulatory investment test for transmission', which is a public economic efficiency test. That is conducted, and that has the capacity for any market participant—distributor, customers, generators, the regulator or the Australian Energy Market Operator—to comment on those proposals. At the time we are making that investment decision, we need to demonstrate that it is in fact a sound and efficient decision. I think that there are various transparent arrangements and hurdles in place to ensure that the businesses only make prudent and efficient investments.

CHAIR: What incentives are there for distribution and transmission businesses to undertake demand-side participation and to reduce demand?

Mr McIntyre : Once the AER provides an allowance for revenue to fund a return on and return of capital for a period—and if the business can underspend the capital allowance—the major incentive is that it gets to keep the benefit of that return on and return of capital if it can defer the expenditure. So there is a clear financial incentive on businesses to defer expenditure, and I know that businesses which represent Grid Australia, being commercially focused businesses, do pursue those incentives.

Senator CORMANN: Have any of your members ever had an investment proposal knocked back for inclusion in their regulatory asset base by the Australian Energy Regulator? To what extent have any proposals for investment not been allowed to be recouped through increased prices?

Mr McIntyre : I am not aware of that occurring.

Senator CORMANN: So you are not aware of any circumstance in which an investment proposal would have been knocked back for inclusion in its regulatory asset base by the AER?

Mr McIntyre : I am not aware, but I can take that on notice and confer with all our member businesses.

CHAIR: If I can interrupt there—sorry, Senator Cormann—could you have a look at Powerlink's expenditure proposal for the regulatory period of 2012-17? I understand that there was a group of companies who objected to Powerlink's proposal for expenditure over that period and the AER did investigate that and decided to cut Powerlink's revenue.

Senator CORMANN: With all due respect, that is not quite the question I asked. Given that we have tight time frames, I would like to stick to it.

CHAIR: Take that one on notice as well, then, and come back to us.

Senator CORMANN: To clarify what I am looking for: I want to know whether, after investigation—or whatever process is followed—any investment proposal from one of your members has ever been knocked back for inclusion in their regulatory asset base by the Australian Energy Regulator. Can you talk us through the kinds of processes used to ensure that investments by network companies are effective and efficient?

Mr McIntyre : There are certainly a range of public processes, as I touched on a moment ago. The first of those is the revenue proposal. Businesses will not make investments if they are uncommercial. They put up a proposal every five years for the revenues they believe they need to run their business, which includes funding investments and operating their networks. Those proposals are subject to extensive reviews done by the AER with consultants. There are also consumer representatives who make submissions on those proposals. Then there are public forums, draft decisions, final decisions and the like. That process is a very extensive and long review of the proposed works.

The second process I mentioned is that, before committing to any augmentation, the network companies, at the time of making the decision to actually invest, also need to demonstrate that the specific proposal they intend to implement—which may or may not be exactly the same as what was allowed in the revenue base, because circumstances may change over time—is the most efficient investment they can make. At that time, we will also test for demand side participation—whether there are people who can provide that service by, for example, contracting to take themselves off the network at times of high load. If that is a more efficient solution than building up the network, we will pursue those tests.

Also, every year the transmission companies publish an annual planning report. It sets out, in a forward-looking document, whereabouts on our network we believe constraints occur. Constraints are simply an incapacity of the network to transmit the power necessary through a part of the network. That document is published every year and includes a forward look at where those constraints are emerging on the network—effectively that represents a forward consultation with the market. The intention is to give other players the opportunity to participate by developing solutions through non-network options.

Every year, we also—at least in New South Wales and Queensland—hold public forums where we explain our annual planning report and what has changed since earlier years. We actively engage with market participants in that forum. So there is a range of information provision that the TNSPs do. I also point out that every year the Australian Energy Market Operator publishes energy and demand forecasts and puts out a national transmission development plan which also informs discussion about necessary investments.

Senator CORMANN: I am looking at a table which is published by the Australian Energy Regulator. It essentially shows that electricity prices in South Australia and Tasmania are quite a bit higher than in any of the other jurisdictions in the National Electricity Market. The estimated annual cost shown here is $2,492 in South Australia and $2,210 in Tasmania. In comparison, the cost is $1,540 in the ACT, $1,812 in Queensland and so on. Do you have an explanation for this significant difference and for why electricity is so much more expensive in South Australia and Tasmania than in the other jurisdictions which are part of the National Electricity Market?

Mr McIntyre : Transmission is on average 10 per cent of that cost across the national market. We do not have a view on the cost drivers beyond that and refer you to various works by the AER. The AEMC also did some work on the break-up of costs in retail prices.

Senator CORMANN: Do transmission costs increase or decrease depending on the energy source?

Mr McIntyre : Could you possibly rephrase the question for me?

Senator CORMANN: I think it is a pretty straightforward question. To what extent do these transmission costs that you are talking about—the 10 per cent of overall costs—increase or decrease depending on the energy source from which the energy is being transmitted? For example, what if it is a renewable like wind or solar or whether it is coal fired or whatever it is.

Mr McIntyre : I understand your question now. Transmission is revenue capped. There is a fixed revenue recovered from customers. It does not vary with the amount of energy transported through.

Senator CORMANN: That is the cost charged, but what about the input cost?

Mr McIntyre : It does not vary with the type or source of generation. So the costs of transmission as a network monopoly are recovered principally through the distribution companies and through the end consumers, not from generators. Transmission will connect and transmit power from any source of generation. We are ambivalent by design to the technology that is used to feed into the network. We are an open-access arrangement.

Senator CORMANN: You are telling me that with your costs there is no difference in what energy source is put into the network?

Mr McIntyre : That is correct.

Senator CORMANN: Thank you.

Senator XENOPHON: I like the phrase 'ambivalent by design'.

Mr McIntyre : The intention is to be an open-access regime. It is intended that we do not discriminate on sources and that we let the market respond.

Senator CORMANN: But that is not the question that I asked, I have to say. You are describing your behaviour rather than the cost pressure that you are facing.

Mr McIntyre : For clarity: there is no cost difference. We have a network that will transmit power, and the source of that power does not make any difference to the cost from a transmission perspective. There may be different costs in the generation of that energy as fuel costs or their cost, but the transmission or transport cost is the same.

Senator XENOPHON: Without verballing Senator Cormann, because I think the issue he has raised is very interesting, whilst you are ambivalent by design in terms of overall efficiency, does it mean that if, for instance, a source of power is an intermittent source of power such as wind energy, that could affect the capital costs of transmission assets? I have my hobbyhorse of geothermal. If it is a renewable source that can replace baseload coal and run 24/7 then amortising those transmission costs would be quite different for an intermittent source of power, wouldn't it?

Mr McIntyre : I accept the fact that, when a new generator connects onto transmission, they ultimately fund the cost of the transmission upgrade to connect them. If they have lower output or are more intermittent, they need to pay for those costs against the lower energy base, and that is part of their business case. In fact, every generator who connects has to consider the location impacts, the fuel costs and the transmission costs of their connection and build a case to recover those costs for their investment.

Senator XENOPHON: Which means that, in the absence of any special incentives, geothermal is pretty much stuffed in this country unless you can hook it up to the grid in a way that is cost effective.

Mr McIntyre : I am not privy to the business case of geothermal but I would say that, if gas, wind and geothermal generators came to us and said, 'I'd like to connect to your network at this point for this amount of capacity,' the cost to them would be the same from a transmission perspective.

Senator XENOPHON: If geothermal is in the far north-east of South Australia—

Mr McIntyre : That is right. If they require us to build a lot more transmission to get them then the cost of transmission for them to get on to the network will be higher—in that case, yes.

Senator XENOPHON: Okay, it costs a lot more. But is technology improving in terms of DC and transmission lines? Have there been technology improvements over the last generation, such as in costs per kilometre of transmitting power? I hope you are reading Ms Dunn's note.

Mr McIntyre : She knows I am ageing and forget things. I have forgotten the question!

Senator XENOPHON: The question relates to the cost of transmission for geothermal and the fact it is much further from the grid, and whether there has been an improvement in DC technology.

Mr McIntyre : Technology certainly is improving over the years, and that is clear. Whenever we make any investment we will look at the cheapest way of connecting, whether that is AC or DC. Typically DC needs long, high-capacity links to become cost-effective, because the terminal equipment at each end is prohibitively expensive.

Senator XENOPHON: If there have been improvements or if technological advances are happening or are in the wings, please provide details, because that is relevant from my point of view.

Mr McIntyre : What we will do is provide the history of capital costs and technologies.

Senator XENOPHON: And whether there is further R&D in relation to that. In your submission in relation to what can be done to help limit higher prices, you refer to the Australian Energy Market Commission's current Transmission Frameworks Review, the limited merits review that I will refer to and the Productivity Commission's inquiry. You said:

The regulatory regime in place is the product of more than 15 years of sound policy development involving all of Australia's governments.

It may be sound policy development, but you have seen a limited merits review interim second report which was scathing of the way the rules operate. Does Grid Australia have a view on that? And do you see scope for significant reforms to deliver better outcomes in terms of efficiency—and, ultimately, for consumers?

Mr McIntyre : The thinking of the panel has some positive and some negative aspects. I believe it is absolutely essential that there be an effective form of merits review for the AER. The AER has not delivered a set of decisions over recent years that has been of the quality that businesses need to rely upon. Of the 34 AER decisions, 22 were overturned on the basis of factual or logical error, which is of concern. Business needs access to a review. We do support the panel's view that there should be better consumer engagement from the start of the process. It is clear that the current arrangement is daunting and probably too high a hurdle for people coming in at the last minute and trying to present an argument on a very legalistic basis.

Senator XENOPHON: Because I am concerned about time constraints, could you on notice provide any further details of the positives and negatives from Grid Australia's point of view and from Australia's point of view in respect of that. To me that is a key issue.

Mr McIntyre : We have that and can provide it.

Senator XENOPHON: The ABS dataset 8155 on industry performance indicates that operating profit before tax in the electricity industry increased from $5.4 billion in 2007-08 to $9 billion in 2010-11, which is an increase of some 67 per cent. In the same period electricity prices rose 47 per cent. For transmission companies, what proportion of that profit before tax is above or below the 67 per cent figure, or are my friends in the distribution networks getting the lion's share of that?

Mr McIntyre : I will take that on notice and come back to you.

Senator XENOPHON: As I said, there is a fair comparison. The final issue is: is augmentation an issue for distribution or for transmission? I get complaints from developers about augmentation in hooking up.

Mr McIntyre : What sort of augmentation?

Senator XENOPHON: In building a new shopping centre or a new housing development.

Mr McIntyre : That would be in the hands of distribution.

Senator XENOPHON: Thank you.

Senator McEWEN: Mr McIntyre, I was just a bit confused. You said earlier in your evidence that the AER has not actually knocked back any proposals ever and then you talked about 22 rejections.

Mr McIntyre : I did wish to clarify that, but we did not quite get there. The original question was about whether they have sought to not allow us to roll into our regulatory asset base any investment we have already made. The chair spoke earlier about the fact that the AER will review and lower the allowed capex as part of the revenue reset process. They are two different questions and two different things. The Australian Energy Regulator, at every regulatory decision I am aware of, has disallowed the capex from the original request and has sought to reduce the capex. I think at every decision it has made it has reduced the capex to what it believes is a level that it is more comfortable with.

Senator McEWEN: So effectively companies put in ambit claims?

Mr McIntyre : No. The rules require you to put a claim in and document in great detail why that claim is sound. The boards are actually required to sign off on the assumptions. But, when you get down to reviewing them, there are many assumptions. The AER typically will look at cost escalators and have a view about what the copper and steel price is and what index you choose and how you build it up and how you analyse it all. So there is not a definitive answer.

Senator McEWEN: Why can't the AER and the companies match? Why is there a discrepancy all the time?

Mr McIntyre : I think it is a very complex set of issues. For example, the AER recently reviewed Powerlink Queensland's transmission revenue determination and believed that the load forecast that drove their capex could have been too high. They had a second load forecast from the Australian Energy Market Operator, which was lower and different in some respects in the detail. They did not know how to resolve those two, so they sought a third load forecast. That third load forecast was different to the first two, because you are looking forward saying: 'What is happening with the economy? What is happening with development? What is happening with mining loads? What is happening with export and the Australian dollar and manufacturing and a whole bunch of things?' Whenever you do a forecast, that will drive different growth in the network, different loads being connected, different economic activity, and, for each of those different growths, there will be a different set of network developments you have to do to meet that load. So this was a forecast, and different forecasters, whether they be in Treasury or different economists, will have different views of where that actually sits. You get a natural diversity of possible futures. The AER have to pick what they think is a reasonable middle ground, if you like.

Senator McEWEN: Notwithstanding that process, you are still saying that the AER should be strengthened and have more skills?

Mr McIntyre : Absolutely.

Senator McEWEN: Why? You are saying that it gets it right, for example with the issue of power grid. But on the other hand you are saying it is not getting it right.

Mr McIntyre : No, I do not think the AER gets everything wrong; I do not think it gets everything right. What is important that you have an AER that is competent. From the point of view of a business, if we are doing robust, well-developed proposals for our revenue proposals or investment tests, we are not concerned having a regulator who has enough competence to engage with you and have an intelligent discussion to understand the engineering to come to a sensible answer. What we are concerned about is a regulator that does not have the skills or capability and just gets it wrong. I will give you one example. It may not be the case now, but, at the time of the New South Wales transmission company TransGrid's last revenue reset, there was not a single engineer on the staff of the AER and yet they were regulating large engineering businesses and trying to make sense of large engineering proposals. The networks they actually regulate, in gas and electricity, are worth about $65 billion, so I think the industry expects them to have the knowledge of the industry, not only the economic and legal but also the engineering competence, and the ability to engage with businesses in a deep and constructive way to truly understand the businesses' needs and business cases. That is not a concern. The concern is when it does not have the resources or the skills or competence to properly engage and assess, because that becomes lotto.

Senator McEWEN: So a system that allowed greater accessibility to the process from other interested parties—for example, consumer advocates—would improve the process?

Mr McIntyre : I think it would be a welcome addition. I know others are looking at how they do that; this is not a simple process. But I think having some advocacy body would be a useful thing. I do not think it is useful for the AER to try to be an advocate for the consumer and an independent regulator at the same time. Wearing two hats puts it in a very difficult position. You are better to have it charged with the job of being impartial, independent and objective and have other parties represent different views to it.

Senator McEWEN: Your constituents—ElectraNet, Powerlink et cetera—come in different configurations, don't they? Some of them are state owned companies, some of them are fully privately owned and some are a mix of both.

Mr McIntyre : Correct.

Senator McEWEN: Do they behave any differently in the process?

Mr McIntyre : Not in any material way. The companies share the common regulatory arrangements. They share common incentive arrangements, and they share the fact that they are for-profit commercial transmission companies. They each have boards that pursue efficiency and dividends. I think when you benchmark internationally, which has been done for the last 15 years—with our transmission companies, at least—the cohort of Australian companies, as a group, benchmark very, very well internationally.

Senator McEWEN: All of them are about making profits for their shareholders, one way or another.

Mr McIntyre : I believe all commercial organisations should be about making profits for shareholders as one of their key objectives, yes.

Senator McEWEN: So those of them that are owned by state governments, if you like, are out to maximise the amount of money they can make out of electricity distribution, or transmission?

Mr McIntyre : I will talk to New South Wales, as I know well the objectives of the State Owned Corporations Act. It requires the corporation to give equal weight to a range of objectives. One of those objectives is commercial performance, and one of those objectives is to be as efficient as possible as any comparable business. There are also objectives around reliability, safety and the environment et cetera. So the objectives are clearly balanced upon a suite of things, of which commercial performance is one. But reliability, safety and impact upon the community environment is also an objective we have to give due weight to.

Senator EDWARDS: Just on that line of questioning, do you find that the private companies or the listed companies that own networks are more aggressive in their expansion regimes than the state owned enterprises?

Mr McIntyre : I am not privy to the past or recent plans of privately owned companies. There are two—ElectraNet in South Australia and SP AusNet—and I am not privy to their particular developments or strategy.

Senator EDWARDS: But you have knocked off the Australian Energy Regulator 22 times out of 34, I think it was.

Mr McIntyre : That would be network business in total, not necessarily transmission. It would be a far smaller subset of that number.

Senator EDWARDS: But you are now calling, through your submission, for increased resources and skills. When you say 'resources and skills', what skill is the Australian Energy Regulator missing?

Mr McIntyre : I did mention two briefly, and I will recap them. The first is experience working in a business. Most of them come from the ACCC and have fairly limited experience with real business.

Senator EDWARDS: So they do not understand the drivers of business?

Mr McIntyre : I think that is one good assumption. The second one is that I do not believe they have enough engineering capability. They are assessing the infrastructure development plans of major engineering businesses, major infrastructure providers. They are principally staffed by economists and a few lawyers and the like, and I think that is a significant shortcoming.

Senator EDWARDS: I had a late submission yesterday, so excuse my use of an iPad here. I believe they are here in the room today. It is from the Total Environment Centre. They say, 'Electricity price increases caused by network charges,' and this is their submission:

Transmission network companies are spending $7 billion and distribution companies $35 billion on network infrastructure over the 5 years 2010-2015. Network investment is projected to increase by $240 billion by 2030—all of it eventually paid for by consumers.

Their assertion is:

Overall demand is now falling, again due to … lower economic growth; energy efficiency measures; voluntary energy conservation in response to higher prices; milder weather; and the boom in rooftop PV systems.

And they say that, of the $46 billion invested in infrastructure, 'Half of it is infrastructure to meet increased peak demand,' and that, effectively, a '$1,500 air conditioner requires a $7,000 increase in infrastructure costs'. Do you agree with those comments?

Mr McIntyre : They are a very large range of comments and so I will make comments on one or two of them. I would suggest that they are a bit misguided. The networks test their investment at every decision point before making it, and they do not have a commitment to a long-term infrastructure development based upon projections some years ago. So every year we update our load forecasts and every year we update our intended capital or non-network projects to meet that forecast. In fact in the last year or two we have observed a softening of demand, with peak demand falling and energy consumption falling, and the companies are going through their plans to look at how they reduce capex and how they rework the numbers and the solutions to meet the demand. So I do not accept that someone's forecast at any point in time either binds a company or gives any incentive to build those things, but we are constantly updating our forecasts and investment strategies.

Senator EDWARDS: You are portrayed as the villains of the industry and that you are gold plating everything and profiteering from it. Is that a reasonable assertion?

Mr McIntyre : I would ask on what basis they make that assertion. At a transmission level, our network in this country is built consistent with the standards that apply in almost all First World countries. The reliability you get in Australia is consistent with what you would get and expect in Japan, England, America or any other First World country. I do not regard that as gold-plated at all. In fact, the regulatory regime requires us to demonstrate that each investment is efficient at the time we make it, so in essence I do not agree with that comment at all.

Senator McEWEN: I would like to follow on from that. You say that, Mr McIntyre, but, as Senator Xenophon pointed out before, there is data from the ABS that says that operating profits before tax in the electricity industry increased from $5.4 billion in 2007-08 to $9 billion in 2010-11. Are you saying that the companies you represent are not participating in that profit? Are they getting only an insignificant portion, or is it a large portion or what?

Mr McIntyre : I said I would take it on notice and come back with the actual data.

Senator McEWEN: You must have some idea.

Mr McIntyre : I am sorry, Senator. It is true that every transmission company that is a for-profit company will make profits and give a return to shareholders. In terms of the percentage, the question asked, I will come back and give you some correct data. I do not have it with me.

Senator XENOPHON: Please take this question in relation to gold plating on notice. I think one of the issues with respect to gold plating is that there is much more generation capacity for days of peak demand, and that has been an issue in terms of reliability and cost. But is it the case with transmission that the cost of providing a higher transmission capacity is not quite the same as a 25 per cent jump in, say, generation capacity? Can you give a comparison of that on notice?

Mr McIntyre : Either with notice or without notice, I think it is probably the same answer: a network is a meshed series of elements, and you would have to have enough capacity to move enough generation through it at any point in time. Not all generation and not every source of generation but enough generation to get to load at any point in time.

Senator XENOPHON: I know. Perhaps you could just take this on notice: in the cost of increasing generation capacity by 25 per cent there must be a certain cost involved in adding on to the network, so if you increase the transmission capacity by, say, 25 per cent is there the same proportionate increase in cost as there would be in the cost of increasing generation capacity?

Mr McIntyre : I do not think you can give an answer to that. It is possible you could increase generation capacity by 25 per cent and have no transmission increase if that generation is located at points where there is spare capacity in the network. If somebody wants to make a development and pay for a development that is, for example, remote or where there is limited capacity and you need to increase it, then that may drive costs. It really depends on where the generation connects and what sort of capacity there is at any point in the network. It is quite a complex answer. There is no simple answer.

Senator XENOPHON: On notice, if you could assume it is already at a convenient location and what the cost differentials might be—

Mr McIntyre : The answer would be that you would be looking less at the cost of transmission than the generation, but we will actually get some more data or a written view on that.

CHAIR: Thank you very much for attending today.