The Australian Energy Regulator (AER) has denied a request from Transgrid, the country’s largest transmission network operator, to pass on a multi-million dollar expense to consumers due to significant overruns related to a high-voltage power line project.

In a preliminary statement released today, the AER expressed dissatisfaction with Transgrid’s assertion that the cost overruns associated with Project Energy Connect—a $3.6 billion initiative aimed at connecting South Australia and New South Wales—were unforeseen. The regulator also indicated that failing to complete the project would not pose a threat to the overall grid stability.

This ruling presents a setback for Transgrid, which now confronts the challenge of recovering a substantial portion of the additional expenses incurred while completing Project Energy Connect. Consumer advocacy groups have welcomed the AER’s decision, viewing it as a critical move in protecting consumer interests.

Craig Memery from the Justice and Equity Centre commended the AER for distinguishing between valid claims and those that lack merit, emphasizing the regulator’s role in safeguarding consumers who would ultimately bear the costs of any approved excess spending over many years.

“Ultimately, this revolves around whether companies should be accountable for their errors,” Memery stated. “It also raises questions about the distribution of risk.” He argued that Transgrid’s misestimation of risk played a role in the situation.

The AER’s announcement follows a comprehensive six-month examination of Transgrid’s request for financial relief. Under Australian energy regulations, transmission companies operate within a framework that secures their revenue and pricing through five-year agreements.

In light of difficulties encountered during Project Energy Connect, Transgrid sought to renegotiate its current agreement valid from 2023 to 2028. Initially, the project was expected to cost approximately $2.3 billion, with Transgrid responsible for nearly $1.9 billion while ElectraNet, its South Australian counterpart, received $457 million. ElectraNet successfully completed its segment of the project on schedule and within budget in December 2023. In contrast, Transgrid’s costs have now ballooned to over $3 billion.

Transgrid attributed the project’s challenges to various unforeseen factors, including contract failures with Clough and Spanish firm Elecnor, along with external issues such as flooding, the COVID-19 pandemic, and rising inflation rates. The company warned of potential risks to the national electricity system if Project Energy Connect were not completed promptly. However, the AER rejected these claims, questioning the extent to which these events were indeed beyond Transgrid’s control. The regulator concluded that Transgrid failed to demonstrate that delays would significantly impact the reliability or security of the transmission system.

Memery remarked that Australia’s energy regulatory framework has historically favored transmission companies over consumer interests. He praised the AER for its firm stance, especially considering the numerous high-voltage power line projects currently underway or in planning stages, collectively worth tens of billions of dollars. He positioned the AER’s decision as a critical test for the regulatory framework, asserting that approval of Transgrid’s request could set a concerning precedent of shifting financial risks from businesses to consumers.

“The AER’s response effectively places the onus back on Transgrid to manage its own risks,” he added, noting that the company is accountable for failing to anticipate foreseeable events.

While the AER has provisionally dismissed Transgrid’s request for a financial adjustment, it has indicated that the company may still submit a claim for cost recovery in its next revenue agreement, set to begin in 2028. A representative from Transgrid acknowledged the regulator’s independence and stated that the company would carefully evaluate the AER’s comments. However, the spokesperson also emphasized that the decision does not represent a final verdict regarding whether the project’s costs can eventually be deemed prudent and efficient.

“Project Energy Connect is crucial for national infrastructure, enhancing interconnectivity between states and promising long-term advantages for consumers through better energy distribution, increased access to renewable sources, and reduced wholesale electricity prices,” the spokesperson noted. “The report acknowledges the significant benefits anticipated from the project.”