In 2020, Zubin Meher-Homji completed a masters of research at Macquarie University that examined the cause of network price shocks in Australian electricity networks. Between 2010 and 2015, the network price of NSW and Queensland regulated networks almost doubled. Our literature review showed a schism in the depiction of the cause of the price shock. The ‘gold-plating’ narrative argued that state owned networks ‘gamed’ the regulatory system to increase prices and profits. In contrast, the ‘keep the lights on’ narrative contested that the price shock was a necessary correction after years of price suppression by regulators.

A clear gap in the literature was a quantitative basis to test the narratives. We developed a mechanistic model which used Ausgrid data (the network with the highest increase between 2010-2014) to fit data on prices between 1900 to 2050. Our modelling showed that while ‘gold-plating’ was the cause of higher prices, it was also clear that the magnitude of the price shock was caused by price suppression by regulators in the previous decades. Most relevantly, regulators in the 1990s had severely under-valued the true cost of Ausgrid’s network assets, and had kept replacement allowance well below sustainable levels. This set up a perfect storm for a steep increase in prices when there was a catch up in investment in 2010-15.

We argue that the literature has solely focused on gold-plating, and that ignoring the history of the past sets the sector up for a repeat of price shocks in the future. We show that some networks in South Australia, Victoria and Tasmania have highly depreciated asset base values relative to their replacement cost, and that the AER’s current regulatory practice has been to set unsustainable replacement allowances.