Australian regulator rejects Transgrid's bid to pass on $1 billion cost blowout to consumers

Australia's biggest transmission company has been slapped down by the regulator over attempts to pass on a billion-dollar bill to consumers for a bungled high-voltage power line.

The Australian Energy Regulator (AER) this morning rejected Transgrid's bid to recover a huge cost blowout on its part of Project Energy Connect, a $3.6 billion transmission line linking South Australia with New South Wales.

In a "preliminary position" published today, the watchdog said it was not satisfied with Transgrid's claims the blowout was unforeseeable, and failure to finish the project would imperil the grid.

The decision is a blow for Transgrid, which now faces the prospect of being unable to claw back much of the extra money it has had to spend to finish Project Energy Connect.

Consumer advocates have cheered the regulator's announcement, saying it sets an important precedent.

Craig Memery from the Justice and Equity Centre said the AER, in denying Transgrid, was drawing a line between legitimate claims and superficial ones.

In doing so, Mr Memery said the regulator was looking after consumers, who would have to pay for any approved extra spending through their bills for decades.

"At the end of the day, it is about whether companies pay for their mistakes," Mr Memery said.

"It's also about who carries what risk."

Events 'not unforeseeable'

Today's announcement by the AER comes after a six-month review of Transgrid's claims for the bailout.

Under Australia's energy laws, transmission companies are subject to regulation which guarantees their revenues — and the prices they can charge — under five-year deals.

But after trouble with Project Energy Connect, Transgrid wanted to reopen its deal that was locked in for the period between 2023 and 2028.

When the spending plan was first approved by the regulator, the project was expected to cost about $2.3 billion.

Of this, Transgrid's share amounted to almost $1.9 billion, with its South Australian counterpart ElectraNet given $457 million.

ElectraNet finished its part of the project in December 2023, on time and on budget.

Transgrid's share, however, is now estimated to cost more than $3 billion.

According to Transgrid, it could not have foreseen the failure of its contract with Clough and Spanish engineering giant Elecnor.

Transgrid said the project had been hit with a series of setbacks that were outside its control, from flooding to COVID-19 and extreme inflation.

It warned that unless Project Energy Connect was completed in good time, the security of the national electricity system would be jeopardised.

However, the regulator dismissed those claims.

The AER questioned whether the events leading up to the contract failure were truly outside Transgrid's control.

And it rebuffed suggestions the grid would be at risk without Project Energy Connect.

"Transgrid has not demonstrated that failing to deliver, or materially delaying, PEC would be likely to materially adversely affect the reliability or security of the relevant transmission system," the regulator noted in its reasons.

An energy 'litmus test'

Mr Memery said for too long Australia's energy regulations had seemed to serve poles-and-wires companies first and consumers second.

He said the AER had now shown that it was not a soft touch.

What is more, he said it was about time, given the pipeline of high-voltage power line projects that were under construction or in the planning stages.

Taken together, Mr Memery said the projects were worth tens of billions of dollars, and the transmission companies needed to be held accountable for their spending.

"This is a bit of a litmus test really for the whole regulatory regime," Mr Memery said.

"If the AER were to approve this request by Transgrid, it would open the door for a lot of claims that shift risk from businesses to people.

"It'll shift that risk from the businesses that are regulated to the people who are meant to be served by that regulation.

"And so, the AER's response really does start to put that back onto Transgrid, the business, to manage their own risks.

While the AER provisionally dismissed Transgrid's "reopener" claims, the regulator said the company could still apply to recover extra spending in its next revenue deal from 2028.

A spokesman for Transgrid said the company respected the independence of the regulator and would "carefully consider" its comments.

But the spokesman stressed today's announcement was not the final say by the AER on the matter and it did not "determine whether prudent and efficient project costs" may ultimately be recovered.

"Energy Connect is a nation-critical project that is already strengthening interconnection between states and will provide long-term benefits for consumers through improved energy sharing, increased access to renewable generation and lower wholesale electricity costs," the spokesman said.

"The paper recognises the substantial benefits the project is expected to deliver."