Allegations regarding the performance and management of Energex
An impetus for this inquiry was the allegation that a Queensland
distribution network business, Energex, manipulated its weighted average cost
of capital (WACC). As explained in the first interim report, the Australian
Energy Regulator (AER) determines, on a periodic basis, the maximum amount of
revenue a distribution or transmission network business can recover from its
customers. The WACC is one of the inputs to the calculation of a network
business's maximum allowed revenue. The AER is required to set a WACC that
would provide the business with a rate of return commensurate with the
efficient financing costs of a benchmark efficient entity with a similar degree
of risk, in respect to regulated services.
As part of the determination process, network businesses submit to the AER the
WACC they consider is required to meet this objective.
In addition, the committee also received evidence alleging that the same
state government-owned network business:
is not being managed in an efficient and prudent manner, with
unnecessary costs that result being passed on to consumers in the form of
higher electricity bills; and
had misled the AER, and others, about the necessity of certain
This chapter outlines these allegations and Energex's response to them.
This chapter also considers the powers available to the AER for obtaining
the information necessary for it to perform its regulatory functions, as well
as the penalties for providing the AER with false or misleading information.
Finally, the chapter considers the proposal outlined in the terms of reference for
the creation of a new agency to consider these types of allegations in the future.
Allegations about data manipulation at Energex
Claims of data manipulation regarding Energex's cost of debt were made
by Ms Cally Wilson, a former Energex employee turned whistleblower. Ms Wilson
was a treasury analyst at Energex between June 2012 and September 2014.
When she resigned from Energex, Ms Wilson took her concerns about various
practices to the Courier Mail, which published her allegations in a
series of articles. Ms Wilson subsequently wrote to the AER regarding her
concerns and appeared as a witness during this inquiry.
An incident at Energex that greatly concerned Ms Wilson was when she was
asked to find a cost of debt rate that would result in a higher WACC. The
following description of the task was provided:
What I was asked to do was to find a cost of debt rate that
would support management's target WACC of 8.23%. This is called reverse
engineering. I found a rate on Bloomberg that gave management the targeted
number they were after, however, it was an outlier from a US bank. At the time
I did think it was extremely odd that an outlier rate was used as normally
they are discarded.
Ms Wilson explained that she did not, at the time, realise the
implications of identifying a rate that would substantiate a higher WACC, as
'normally a company tries to reduce their WACC'. However, Ms Wilson claimed the
reasons for diverging from regular corporate finance theory become clearer when
it is understood that regulated electricity network companies are not 'reimbursed
on their actual cost of funding, but rather what the AER determined their cost
of funding to be'. Ms Wilson noted that as interest rates had fallen
dramatically, compared to the start of the regulatory period in 2010, this had
resulted in 'a big profit (and probably unexpected profit) for Energex'.
According to Ms Wilson, Energex management was concerned that the fall in
interest rates to historic lows would mean the next WACC approved by the AER
would be substantially lower than the 9.72 per cent that was in place for the
2010–15 regulatory control period.
To put it another way:
What they wanted to try to find was a WACC that was not going
to, as they called it, 'jump off a cliff'—so it was not too low and it was not
too high. I know they spent a lot of time actually figuring out what would
be a politically sensitive WACC to put in place.
Energex strongly rejected the allegations levelled against it by Ms
Wilson. In particular, Energex highlighted the various obligations imposed
on it that seek to ensure the information provided to the AER as part of a
regulatory proposal is fair and reasonable. In its submission, Energex stated:
Energex's Regulatory Proposal is required to identify the key
assumptions that underlie the capital and operating expenditure forecasts which
are included in it, and the directors of Energex must certify the
reasonableness of these assumptions. In order to enable the directors to make
this certification, Energex has established comprehensive governance arrangements
that require Energex management to certify the accuracy and reasonableness of
the information on which those forecasts are based. Energex, through its Board
and management, takes its regulatory obligations very seriously and has at all
times complied with all applicable regulatory requirements, including the
requirement for director certifications.
Both Energex and Ms Cally Wilson were in agreement that Ms Wilson was
not working on Energex's regulatory proposal. Energex's chief executive
officer, Mr Terence Effeney, stated that Ms Wilson was working on
Energex's corporate plan. Mr Effeney explained that Energex was examining
various scenarios for its corporate plan because 'the WACC has varied
enormously over the last period'. He stated:
Of course we are modelling, as a prudent organisation, a
whole range of scenarios about what the WACC outcomes might be, what the debt
parameters might be, what the equity outcomes would be. Of course we would
model all those things. A prudent business would do that. But that does not
mean that we are manipulating the regulatory outcome.
In her evidence to the committee, Ms Wilson readily acknowledged that
she was not working on the regulatory proposal. However, Ms Wilson suggested
that the executive in charge of her team who was interested in the WACC
'probably would have been talking to the strategy and regulation team as well';
that is, the team that prepares the AER submissions.
In any case, Ms Wilson observed that the corporate plan and statement of
corporate intent are for the Queensland government and reflect 'what Energex
believe at that point in time they can reasonably achieve'.
To put it another way, the corporate plan represents the key
performance indicators that Energex is signing up to.
Ms Wilson stated that she believed the corporate plan figure 'ended up being
8.13, so it was fairly similar to the rate that we were currently looking at'.
Energex explained that, each year, it provides its shareholding
ministers with a statement of corporate intent and corporate plan. Among other
things, the documents forecast future financial outcomes for the business. When
these documents were prepared in early 2013, it 'was necessary for Energex to
try and predict the WACC that would be determined by the AER for the next
Energex noted that market conditions have changed substantially since 2009,
when the AER last determined Energex's WACC:
In 2009, the global financial crisis was still creating
uncertainty and significantly impacting debt and equity markets. In contrast,
at the moment, the current market condition reflect a stable, low interest rate
environment and lower debt and equity market expectations. This positive change
in sentiment was almost certain to lead to a lower WACC for the
2015–20 regulatory period.
Energex maintained that the results of the modelling exercise did not
form part of the regulatory submission. That is, the work undertaken by Ms
Wilson did not affect the WACC determined by the AER, prices paid by consumers
or profits for Energex's shareholders.
Energex also emphasised that the AER ultimately determines the WACC, not the
regulated entity. Mr Effeney concluded that the suggestion:
...that we can somehow or other manipulate the outcomes from
the AER: there is no substance to that; there is no fact. And it has been
clearly set out in the submissions by the people who set the rules and
administer the rules that that is not something that can be done.
However, Ms Wilson noted that both Energex and Ergon Energy, the other
Queensland distributor, departed from the AER guidelines in their regulatory
submissions to justify their proposed WACC. Despite the statements by Energex
that the AER sets the revenue, Ms Wilson claimed the divergence from the
AER guidelines demonstrates that the network businesses seek to apply pressure
for a higher WACC.
Claims of inefficiencies and other concerning practices at Energex
Ms Cally Wilson's evidence also criticised the culture and certain
practices at Energex that she claimed directly result in customers paying more
for electricity. Ms Wilson also raised these concerns in a submission to
the AER on Energex's most recent regulatory proposal.
In Ms Wilson's evidence to the committee, three broad areas of concern
can be identified. The first concern is the level of staffing at Energex
and the expertise of Energex management. Ms Wilson described the staffing level
at Energex as 'excessive for its actual needs'. To provide some insight into
this, Ms Wilson recounted her observations of staff at Energex:
Walking around the building saw row upon row of employees
spending large amounts of their day engrossed in personal activities while the
inefficient dissemination of information means employees often spend large
parts of their days in unproductive meetings.
Employees are hired to do roles that became redundant in
commercial organisations a decade prior and any attempts to modernise,
streamline the workforce seem to be a very touchy subject due to labour
constraints. Treasury departments often look at work-place efficiencies but all
attempts by me to discuss cost-less technological changes that would affect a
personnel and cost reduction were quashed so Treasury wouldn't upset other
Ms Wilson further noted that Energex employees can only be made
meaning that Energex 'cannot get rid of people that probably need to be gotten
rid of, unfortunately'.
Ms Wilson concluded that the 'sheer wastage of people's time' as a result of
over-staffing at Energex is 'mind-boggling'.
Further, Energex's staff costs are, in Ms Wilson's view, 'astronomical'.
According to Ms Wilson, Energex staff received 'exceedingly generous
income and benefits compared to commercial standards for the same roles'. As an
example, Ms Wilson referred to a treasury officer at Energex employed on a
salary of $85,000 per annum despite not having a university degree or any
Ms Wilson also questioned the qualifications and competence of certain
executives. As an example, Ms Wilson remarked that during her time at Energex,
an individual who acted as the chief financial officer did not have
On the expertise of Energex executives more generally, Ms Wilson stated:
There are a lot of very nice people there, but I do not think
they are fully qualified to run a company of this size. There are no real risk
managers. There should be a lot more commercial expertise and people with real‑world
experience in this company, not just government experience. They have come up
through the ranks—they like the job and they have been sitting there for 15
years—but they have no training or educational qualifications in it.
The second area that Ms Wilson suggested required attention was the
treatment of capital and operating expenditure. Ms Wilson told the committee
that 'Energex had a culture where it was always better to overspend on your
Ms Wilson outlined several rumours that she had heard while employed at Energex
'of things that probably were operating expenditure were rolled up into capital
The third area where Ms Wilson considered inadequate procedures at
Energex were contributing to higher electricity bills for consumers relates to
the business's financial practices, particularly with respect to risk
management. Ms Wilson noted that appropriate risk management techniques and
skilled treasury and procurement teams can often provide savings that amount to
many millions of dollars. Ms Wilson stated that, although Energex's hedging
methodology would work well with a skilled team, she considered it was an area
of concern due to the mismanagement she witnessed while employed there.
The following example was provided of how the risk associated with capital
expenditure could be treated:
At Energex, the concept that they should be able to quantify
the values of commodities and foreign exchange used was disregarded with the
viewpoint that it wasn't feasible as they didn't know what contracts would be
taken up. This is in direct contradiction with other multi-nationals and large
corporations that undertake a detailed and quantified understanding of their
capital expenditure exposures in order to better mitigate the risk of price
Another example involved an occasion where Ms Wilson 'spent many hours
trying to explain to senior people within the procurement and finance
departments at Energex that just because a country is within Europe, does not
mean it uses the euro'. She explained:
On one multi-million dollar contract, Energex took a position
against the euro which it had no currency exposure to while not hedging against
its currency exposure to the Norwegian krone.
Ms Wilson also expressed concern that Energex employees faced potential
risks as a result of endorsements they supposedly had given for particular
transactions. Ms Wilson explained that, on at least one occasion,
financial analysis and commentary she had prepared for Energex's board that
argued a contract was not commercially beneficial to Energex was 'substituted
for wording that agreed with the financial viability of the procurement
Further, Ms Wilson stated that she found 'at least 50' documents with
her name on them that she had not approved. Ms Wilson reported that
management's response to her concerns about this was to 'agree that it was not
a very good thing to have happened and that they would try to ensure that it
did not happen again, but they could not guarantee it'.
Ms Wilson also suggested there were significant weaknesses in the
auditing arrangements for the treasury section at Energex. Ms Wilson explained:
Normally when you are in a treasury department you get
audited very, very regularly because the moneys are flowing through you,
because you are the one inputting stuff into the bank account. When I was at
Energex, when I went through all the books, there had only been one
internal audit done—and they did not understand what questions to ask—and there
wasn't even any external auditing done. When I was in previous companies, at
one company I remember being audited quarterly but most of the time we were
audited half-yearly. While I was at Energex, we never had one of the big four
audit the treasury section; they audited other sections but never the treasury
section, which I thought was very unusual.
Finally, Ms Wilson expressed concern about the Energex board's ability
to assess the proposals put to it. Although she agreed that the board has a
fiduciary duty, Ms Wilson observed it would be difficult to fulfil this
duty if the board is being 'lied to'. Ms Wilson stated that she
'definitely saw evidence of people covering up things, so they did not go to
the board'. Ms Wilson considered the board was unlikely to know of any problems
with data or other concerning practices within the business, as Energex
management is very good at what Ms Wilson termed 'marketing'. Ms Wilson
If you do not understand the intricacies, it would be very,
very easy to be taken in, because it sounds right. It is only when you look at
it that it is not right.
Ms Wilson concluded that the problems at Energex were caused by 'a
culture that in effect has no accountability or transparency'. Ms Wilson called
on the AER to cut Energex's operating expenditure; Ms Wilson reasoned that by
doing so, Energex's management would be provided with an incentive 'to stop
sloppy, expensive habits that would not be tolerated in a commercial
Energex responded in detail to the issues about its operations that Ms
Wilson outlined. The following paragraphs outline Energex's response.
In response to the claim that Energex is over-staffed, Energex asserted
that, in the role Ms Wilson was employed in, it 'would be difficult for
any person to reasonably assess the Energex human resource requirements to
maintain a safe and reliable electricity network that meets our customers'
More specifically, Energex advised that a strategy was initiated in 2012 that
has resulted in Energex's workforce being reduced by 'more than 20 per cent'.
This strategy was implemented in response to reduced electricity demand and
capital works. Energex added that its 'staffing levels and expenditure are
also regularly externally benchmarked and assessed'.
Energex also refuted the claim that its management did not have the
necessary expertise to run the business. The following statement was provided:
Energex strongly rejects any allegation that its staff
members are not appropriately qualified or lack commerciality. Energex has
expert employees in a wide range of fields. Many have experience within
government and government owned corporations but many others have private
Energex is very proud of the Energex staff and their
commitment to the community of South East Queensland. Energex will continue to
drive efficiency and seek to deliver quality and cost effective outcomes for
The evidence given about the qualifications of the acting chief
financial officer was specifically addressed. In its response to Ms Wilson's
evidence on this matter, Energex wrote that it 'rejects the allegation that
there was an acting chief financial officer with no accounting qualifications'.
Following the departure of Energex's Chief Financial Officer
in 2013, Energex undertook a temporary restructure and the finance department
reported to an incumbent executive general manager with extensive experience in
the electricity industry.
At no stage did the individual hold the title Chief Financial
Officer and at all times Energex had an appropriate level of skill, expertise
and qualifications in its finance department with appropriate controls and
Energex added that it 'is not unusual that temporary restructures such
as this take place during recruitment processes'. Following an open recruitment
process, a chief financial officer, with accounting qualifications, was
appointed in 2014 on an ongoing basis.
Treatment of expenditure and
In addressing the whistleblower's concerns about the treatment of
capital and operating expenditure within Energex, the response from Energex
first questioned whether a treasury analyst in the financial accounting area of
the business could 'reasonably assess whether Energex has appropriately
allocated its expenditure between capital and operating expenses'.
Nevertheless, Energex also addressed the claims by outlining its policies.
Energex provided the following statement about the classification of its
Energex capitalises expenditure in compliance with its
Finance Policy Manual which complies with Australian Accounting Standards and
cost attribution principles as outlined by the AER. Energex's statutory and
regulatory accounts are subject to external audit each year. No evidence of
incorrect costings to capital has been found as part of these audits.
Energex performs periodic reviews of the outcome of the
application of its internal business rules to verify ongoing compliance with
its Finance Policy Manual, Australian Accounting Standards and cost allocation
principles approved by the AER. Most recently in 2014, Energex also engaged a
large accounting firm to perform an independent review of material items being
capitalised to ensure ongoing compliance with Australian Accounting Standards.
An explanation of Energex's capitalisation process and rules
and a copy of the capitalisation policy are furnished to the AER on an annual
basis under Energex's regulatory reporting obligations.
The evidence given about the auditing arrangements for Energex's
treasury section was specifically addressed. Energex contended that the
evidence received by the committee about this was inaccurate. Energex advised
that external audits of 'the key activities of Energex's treasury team to
the extent that they impacted the financial outcomes of Energex' were conducted
in 2012, 2013 and 2014. Energex also noted the internal audit Ms Wilson
referred to, which Energex described as 'comprehensive'.
Another issue that Energex responded to was the evidence about its board
processes. Energex prefaced its comments on this matter by emphasising that the
Energex board 'takes its fiduciary and legal duties very seriously and complies
with its obligation to oversee and question management'. Further, Energex
stated that the board 'processes and sub‑committee structure are
Energex questioned the level of involvement that Ms Wilson had with
board processes and decision-making. Energex stated that the treasury analyst
is 'responsible for providing advice to the procurement department on risk
mitigation of treasury risks arising from foreign currency and commodity
prices'. The treasury analyst does not have a role in approving a transaction.
Accountability for the correctness and accuracy of the
relevant procurement board papers lay with the executive in charge of
procurement and the CEO, not Ms Wilson or the treasury department.
Regarding the claim that Energex's procurement department changed
sections of board documentation Ms Wilson had written, Energex advised that after
'an extensive investigation, no supporting evidence could be found for Ms
Further, Energex stated that the claims of mismanagement and fraud have been
'extensively investigated' by Energex, with both internal and external
investigators used. Energex reported that following these investigations, 'none
of the allegations were substantiated'.
Concern about the need for infrastructure investment
Another set of allegations made in evidence taken during this inquiry is
that network businesses have misled the AER in relation to the necessity for
proposed infrastructure. The Agriculture Industries Electricity Taskforce
provided the following projects it considered were examples of unnecessary expenditure:
Transgrid's proposal for a transmission line in the Manning
Valley in 2011;
AusNet Services' proposed terminal station augmentations at
Brunswick, Melbourne in 2012; and
power lines proposed by Energex in the Logan River valley.
The Logan River proposal involves the construction of a second 110
kilovolt sub-transmission power line from Loganlea to Jimboomba. The committee
received evidence from the Veto Energex Towers Organisation (VETO), a community
organisation formed in 2008 by Logan residents in response to Energex's
proposal. VETO advised that it, and Logan City Council, opposed the proposal
...it will turn the already fragile Logan River valley into a
power line easement, clear Logan koala habitat, directly impact 90 rural
residential landowners and destroy the amenity of the historic township of
VETO outlined at length the history of this project, including that its
cost has increased to $64.2 million from an initial amount of $26 million.
VETO argued that alternative proposals the community considered were more
acceptable were not adequately contemplated by Energex. According to VETO,
documents released under freedom of information reveal that Energex employees
were 'deliberately jacking up land acquisition costs' to weaken an alternative
proposal developed by the Logan City Council.
VETO concluded that Energex does not 'genuinely respect the needs of the
communities in which they expect to operate'.
Finally, VETO noted that the AER had expressed concerns about Energex's
compliance with the National Electricity Rules. Following complaints lodged by
the Logan City Council and VETO, the AER conducted a review of the regulatory
test used by Energex. The AER's review identified 'several compliance
issues', including that the Energex regulatory test consultation report 'did
not adequately contain details of the two alternative options proposed by
The AER reported that it would monitor future regulatory test processes
undertaken by Energex. However, VETO considered the AER's actions were
'inadequate'. In particular, VETO was disappointed that Energex was not
required to substantiate its proposal 'or assess any alternatives that could
have delivered lower cost outcomes for consumers and our community'.
Energex responded to the allegations made by VETO. In a letter to the
committee, Mr Effeney stated that Energex appreciates the proposed power line
project 'has been a long running and controversial development which has
brought about diverse views within the community'.
Mr Effeney also acknowledged there had 'been shortcomings in the public
consultation process surrounding the initiation of this project in 2008'. In
relation to the areas for improvement found by the AER, Mr Effeney wrote:
Energex has taken these recommendations seriously and fully
implemented each of them. We continue to strive for improvements in the way we
talk to, and work with, the community we service.
However, Mr Effeney advised that Energex rejects 'the assertion that it
has in any way manipulated cost estimates'. The following statement was
The cost forecasts, including land cost, and other
assumptions which underpin this project have been subject to extensive public
consultations. Commencing with a Corridor Selection Report, followed by an
Initial Assessment Report, a Supplementary Initial Assessment Report and a
Final Initial Assessment Report issued in 2010.
The response noted that these reports are publicly available on a
website, as is a consultant's report that was commissioned by the Queensland
government. Energex claimed that its internal processes in this matter 'have
been extensively scrutinised and reviewed'.
Responses to the allegations from the AER and other interested parties
Ultimately, when a regulator is presented with information, it needs to
carefully assess that information and identify and act on any data
manipulation, claims of inefficient expenditure or evidence indicating a
contravention of the laws it administers.
The potential for regulated entities to attempt to mislead the regulator
is not a problem that is unique to the AER; the Economic Regulation Authority
(ERA), which performs tasks in Western Australia similar to the AER,
recognised the risk of data anomalies and manipulation. The ERA informed the
committee that, when exercising its regulatory functions:
...the ERA always undertakes its own research and analysis to
arrive at its determination of the efficient WACC. In undertaking this
research, the ERA is able to identify any anomalies in data presented by the
service provider and thereby to form its own view as to its credibility.
The ERA is aware of the potential for data manipulation. To
minimise the risk of this occurring, the ERA pays particular attention to
verifying original data sources and to replicating analysis. The ERA also forms
its own independent views on issues, rather than relying on the assertions of
service providers and their consultants.
It is also instructive to consider another statement made by the ERA on
this matter. The ERA noted that profit-maximising entities should be expected
to 'seek to legitimately present the best possible case for them' and warned
that this 'should be distinguished from deliberately misleading the regulator'.
The Energy Networks Association (ENA) told the committee it is 'not
aware of any evidence that any network has provided misleading information to
the AER in relation to any cost of capital or regulatory valuation issue'. The
ENA added that it would expect to be aware of any issue that had arisen given
its regular engagement with the AER.
The AER advised that it has raised Ms Wilson's claims with Energex.
The information received by the AER as a result of its discussions with
'will be taken into account, and reflected in', the AER's preliminary revenue
determination (which is discussed at paragraphs 2.54–2.55).
The AER added:
More generally, our analysis in examining the proposals is
aimed at ensuring that data is robust and resulting costs are efficient such
that consumers are paying no more than necessary for safe and reliable
The AER also responded to questions from the committee about Energex's
operating expenditure. The AER noted that there is 'considerable difference' in
operating expenditure across distribution businesses in the National
Electricity Market (NEM).
In 2013, Energex had the third highest operating expenditure (Figure 2.1),
which compares favourably to Energex's customer numbers.
On the other hand, as Figure 2.1 shows, Energex's operating costs have
increased significantly, rising from approximately $300 million in 2009 to
around $400 million in 2013.
Operating expenditure by distributor ($ millions, 2013)
AER, Answer to questions on notice 8, received 10 April 2015, p. 6
(chart edited to replace abbreviated names of network businesses with
The AER's information gathering powers and penalties for providing false or
In light of the various allegations regarding the information provided
to the AER, it is necessary to consider the regulator's powers to gain
information and the penalties for providing false or misleading information to
the regulator. This section examines the current powers and sanctions. The
evidence received about the need for a new Commonwealth agency to investigate
misconduct is also discussed.
Overview of information gathering
powers and penalties
In its submission, Energex highlighted the information gathering powers
that the AER has to conduct its regulatory functions. Under these statutory
the AER 'requires network businesses to collect and maintain information
in a manner approved by the AER and to submit it annually or as part of the
regulatory reset process'. Energex explained that the accuracy and the quality
of the information supplied to the AER is typically certified by its board
and/or the chief executive officer. Energex noted that section 28R of the
National Electricity Law (NEL) prohibits the provision of false or misleading
information to the AER in purported compliance with a requirement to provide
information to the AER.
It is a criminal offence to contravene this provision, punishable by a maximum
penalty of $2000 for an individual and $10,000 for a body corporate.
Energex suggested that another protection against false or misleading
information being supplied to the AER is the public nature of the determination
process. Although network businesses such as Energex can seek confidentiality
over parts of documents, in Energex's view, the AER strictly applies the
confidentiality rules 'with the intention of providing the community and market
participants with the maximum possible information'. Energex acknowledged that
the 'greater scrutiny that can be applied where information is publicly
available also increases the weight that the AER is able to ascribe to such
The Department of Industry added that the Commonwealth Criminal Code
contains offences for providing false or misleading information or documents
that have general application to all Commonwealth entities. Specifically:
Section 137.1 of the Criminal Code makes it an offence to
give information to Commonwealth entities knowing it to be false or misleading
or omitting any matter or thing without which the information is misleading.
The penalty for contravention of this section by a person is imprisonment
for 12 months. By virtue of the operation of section 4B(3) of the Crimes
Act 1914 (Cth), a court may impose on a body corporate a penalty not
Finally, the AER may revoke a determination that is in place if it
considers the determination is affected by certain types of material errors or deficiencies.
One category of deficiencies that the AER may rely on for revoking a
determination is if the AER was provided with false or materially misleading
The need for a new Commonwealth
agency to investigate misconduct
The terms of reference for this inquiry asked the committee to consider
whether an independent Commonwealth authority should be established to
investigate anomalies identified in relation to price structuring or
allegations of price rorting by electricity companies.
There was little support for this proposal. The Electrical Trades Union
stated it would support 'the principle' that allegations of price rorting
should be investigated by an independent Commonwealth body with the required
powers and reach to investigate and prosecute.
However, other stakeholders that commented on this aspect of the inquiry's
terms of reference—including electricity businesses (both network and
retail), the Department of Industry and agricultural industry bodies—did not
support the creation of a new agency.
The AER's preliminary decision on Energex's revenue for 2015–2020
On 30 April 2015, the AER released its preliminary decision on Energex's
revenue for the 2015–16 to 2019–20 regulatory control period. The AER accepted
Energex's forecasted operating expenditure for this period, which results in an
average operating expenditure of around $347 million a year.
However, the AER decided on a significantly lower rate of return than that
proposed by Energex. In its October 2014 regulatory proposal, Energex
submitted that a rate of return of 7.75 per cent was required. The
AER agreed to a rate of return of only 5.85 per cent for 2015–16, to be updated
annually until the end of the regulatory control period in 2020.
Overall, the AER's preliminary decision is that Energex can recover
around $6.5 billion from consumers over the 2015–20 regulatory control
This is significantly lower than the over $8.3 billion sought by Energex in its
The committee has noted with concern the various allegations levelled
against Energex, a distribution network service provider that operates in
Queensland. The wide-ranging allegations went to the modelling of
Energex's cost of debt, various internal financial practices, Energex's
staffing levels, and unnecessary network investment undertaken by the business to
the detriment of electricity customers generally and local affected residents.
The majority of these allegations were put to the committee by a former
Energex employee. The committee appreciates that a whistleblower was
prepared to come forward and recount their experiences. There are many examples
in the public and private sectors where serious wrongdoing, malpractice or
other troubling practices only come to light because of whistleblowers.
The first allegation the committee will address is the evidence
regarding the modelling of the cost of debt. The committee's first interim
report discussed the perverse incentives currently enshrined in the process by
which the maximum allowable revenue for a network business is determined,
including how network businesses appear to 'game' the regulator.
The committee notes that, since the current framework was introduced, the
AER has never agreed to a WACC that network businesses have initially proposed.
Despite this, stakeholders are concerned that the network businesses benefit
from the current method for considering revenue proposals, as businesses can
'frame the discussion' by submitting detailed regulatory proposals containing
proposed revenues that are higher than what the regulator can accept.
The AER must effectively disprove the business's original proposal by
determining an alternative WACC based on a hypothetical benchmark of an
efficient business. The regulator must do this while being inundated with
information and documents during the revenue determination process.
The evidence regarding the modelling of the cost of debt at Energex provides
a case study of some of these issues. The committee notes Energex's position
that the modelling exercise was not directly used in the regulatory proposal
lodged with the AER in October 2014. In any case, it is clear that the AER has
not accepted Energex's proposal. Energex's October 2014 regulatory proposal to
the AER used a figure of 7.75 per cent for its rate of return. The AER's April
2015 decision provides Energex with a significantly lower rate of return of 5.85
per cent for 2015–16, to be updated annually.
However, the Energex case study provides further evidence of the
apparent mindset of network business executives that the WACC must be as high
as possible, regardless of the circumstances. The use of an outlier to
establish a WACC for a corporate document, or for any other purpose, does not
appear to be a reasonable action. More significantly, the AER's preliminary
determination for Energex's rate of return was 190 basis points lower than
Energex's proposal. In light of this, it is difficult to see how Energex's
initial estimate was reasonable.
The evidence regarding various internal matters in Energex also concerned
the committee. The committee notes the evidence that Energex provided about the
reduction in its staffing levels since 2012. However, the committee is
concerned that one of the reasons put forward by Energex to dismiss the
whistleblower's concerns about over-staffing is that the whistleblower was
employed as a treasury analyst and had no involvement in the human resources
aspects of the business. While that is the case, employees, particularly
employees who have previously worked in other organisations, do not need
management or human resources responsibilities to observe, and be concerned
about, inefficiencies. Energex's evidence does not indicate it supports a
culture where employees are encouraged to identify and speak up about
inefficiencies and waste.
Similarly, the committee notes that Energex highlighted the
whistleblower's job description to suggest that an individual working in that
role would have a limited insight into other parts of the business, such as
regulatory issues. The committee was cognizant of the scope of the treasury
analyst's responsibilities when considering the evidence put forward. However,
the committee does not accept that an employee working in one area of the
business will not gain a detailed awareness of practices in other areas. Within
any organisation, information is shared with other employees and quickly spreads.
Of course, it is necessary to separate unfounded gossip from those claims that have
merit, but concerns should not be dismissed out of hand.
The committee has considered each claim on its merits, taking into
account Energex's response. However, the role of this committee is not to make
findings against particular individuals or organisations; rather, the committee
gathers and tests information for the purpose of formulating recommendations
for changes in policy, legislation or administration. Based on the evidence
before it, the committee considers there are lingering questions about various
practices within Energex. Accordingly, there is a case for a thorough external
audit of the performance of Energex's financial risk management practices, with
a focus on Energex's treasury section. A well‑resourced external
performance audit, as distinct from a financial audit, would enable the
operations of the business to be closely inspected and a wider range of Energex
employees interviewed. As Energex is a Queensland government-owned business, this
is a matter for the Queensland government to consider.
Finally, the terms of reference for this inquiry asked the committee to
consider whether a new Commonwealth body should be established to investigate
allegations of misconduct by electricity businesses. The committee does not
consider there is sufficient evidence to support this proposal. Clearly, the
regulator that determines the maximum revenue of network businesses—the AER—must
be provided with accurate and relevant information to ensure that optimal
decisions are made. However, it was not demonstrated that there were problems
with the existing arrangements that prohibit the provision of false and
misleading information to the AER. In the committee's opinion, the crux of the
matter is that the regulator needs to ensure it employs adequate scepticism
when assessing the information provided to it. Further, as discussed in the first
interim report, the regulator must also be resourced appropriately. The
committee emphasises the recommendations it made in the first interim report
regarding these matters.
The committee recommends that the Queensland Government request the
Queensland Auditor-General to conduct a performance audit of financial risk
management practices at Energex.
Senator Anne Urquhart
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