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Is Queensland Government dividend policy forcing up electricity prices and taxation by stealth?

There has been widespread and deserving attention on Queensland’s high electricity prices over the last week. 

There are many reasons as to why electricity prices have more than doubled over the past decade.  The ACCC forum earlier this week examined some of these including generators gaming the system under NEM arrangements, renewable energy targets and gold plating the network.

One of the questions that also needs to be asked is whether the State Government’s decision to retain Government Owned Corporations (GOCs) in public ownership is contributing to rising electricity prices. 

On the positive side the State Government, due to its ownership, is in a position to instruct GOCs to do things like pass on savings from shifting funding of solar feed in tariffs to consolidated expenditure (rather than paid for by electricity bills) and to not appeal Australian Energy Regulator (AER) pricing determinations. 

However what has been largely overlooked as part of this debate is that the State Government receives annual dividends up to 100 per cent of after tax profits as well as extracting ‘one-off’ distributions from its energy GOCs.  So the question is ….. ‘Is Queensland Government dividend policy effectively taxation by stealth?’

The theory is as follows, instead of the State Government lifting taxes it can instead extract higher dividends from its GOCs particularly in the electricity supply industry by forcing them to in turn raise prices and consequently our power prices go up.  The linkage to the State Government is distanced and instead the blame is placed upon the GOCs.

I have provided below a graph of dividends paid by each of the GOCs in the electricity industry to the State Government from the last year of the Bligh Government all the way through to the current Palaszczuk Government.

The biggest money grab occurred from the 2014-15 financial year when Treasurer Curtis Pitt announced one-off distributions from GOCs as part of the Palaszczuk Government’s ‘Debt Reduction Action Plan’ released in the 2015-16 State Budget.  I have provided below sections directly out of each GOC annual report discussing their respective dividends to Government.

So is dividend policy driving up prices?  The answer is most definitely a ‘yes’, electricity prices are higher than they otherwise would be without dividend payments. In short dividends are factored into prices as they represent a cost of supply for the generation, network and distribution companies.

Firstly for CS Energy and Stanwell (the electricity generators) their combined dividends to the State Government impact the spot price.  Their dividends in 2014-15 and 2015-16 summed to $416 million largely as a result of a $150 million ‘one-off’ distribution paid by Stanwell in 2015-16.

The major cash cows in terms of dividends have been from the distribution companies (Energex and Ergon).  Across the last two financial years their collective dividends sum to $4.1 billion.  However and here’s the thing, their revenue is determined by the AER every five years.  These dividend payments have not and can not impact on electricity prices until the next revenue reset which commences 1 July 2020.  Energex and Ergon in 2020 will no doubt argue for considerably more revenue to offset the higher dividends that they have been forced to pay but this will not impact on electricity prices for another three years.  

Powerlink is slightly different ($1.5 billion in dividends in the last two financial years) in that recent dividend policy would have influenced their AER determination (effective 1 July 2017 – 30 June 2022) and accordingly current electricity prices.

​Energy GOC Dividends to Queensland Government ($millions)

So collectively current Palaszczuk Government dividend policy and the State Government’s 'Debt Reduction Action Plan' are leading to higher electricity prices but not to the extent where it is ‘taxation by stealth’.  Why?

Well it is important to point out that it is not unreasonable for the State Government to earn a return on its assets. Indeed this was the premise the Treasurer used when arguing against ‘Strong Choices’ and that we should not be disposing of income generating assets.  However what the public needs to understand that in doing so we may end up paying higher electricity bills as the State Government uses dividends as an alternative revenue raising option particularly across the longer term. 

If the State Government continues to run down GOCs with '100% of after tax profit dividends' and 'special one-off distributions' then this will inevitably give rise to taxation by stealth claims. Quite simply these are not sustainable and will inevitably bubble to the surface in the form of even higher electricity prices.

As an aside the 'one-off' distributions that occurred in the 2015-16 State Budget (for Energex, Ergon and Powerlink) and in the 2016-17 State Budget (for Stanwell) were essentially a massive shifting of debt from the State Government’s balance sheet to the GOCs, but that is a blog for another day.

We should keep an eye out for the 2016-17 dividends contained in the 2016-17 Annual Reports that will no doubt be tabled in Parliament, late on some Friday afternoon, later this year. Expect more of the same because the State Government is largely avoiding any scrutiny and push back on this questionable tactic. In summary the additional money the State Government is receiving from its income generating assets is earned as a result of our higher power bills.

Stanwell

Stanwell delivered a Net Profit after Tax of $161.6 million for the year (2014/15: $125.9 million). This strong result will enable the business to pay a total dividend to shareholders of $311.6 million (2014/15: $89.9 million) which includes a special dividend of $150.0 million. On 16 May 2016, the Board
of Stanwell recommended to shareholders a dividend amount equivalent to 100 per cent of Stanwell’s net profit after tax adjusted for asset impairment reversals resulting from the testing of asset carrying values.  For the 2015/16 financial year, Stanwell will also pay a special dividend of $150.0 million.

CS Energy

For the first time since 2009, CS Energy will pay a dividend to its owners.  CS Energy has provided for a dividend payment of $13.8 million, which reflects the positive underlying financial performance of the company.

Powerlink

The proposed 2015/16 final dividend ($218.3M) is based on 100% of the operating profit after income tax equivalent expense (2015: final dividend $155.986M being 100% of the profit after income tax equivalent expense and an additional distribution of $1,121M from retained earnings. The increase in the dividend for 2014/15 was made in response to a direction from the shareholding Ministers, dated 29 June 2015, under section 131(3)(b) of the Government Owned Corporations Act 1993 and was funded from borrowings to the extent necessary.)

Energex

Between 1 and 16 May each financial year, our Board has made a dividend recommendation to the shareholding Ministers in accordance with section 131 of the GOC Act. On 9 June 2016, the shareholding Ministers issued a direction to Energex under section 131 of the Government Owned Corporations Act 1993 to declare and pay a dividend for 2015/16 of $451 million.

Energex remains committed to maintaining a sustainable financial position consistent with shareholder expectations, while maintaining customer and regulatory obligations. In 2015/16 we returned a dividend to our shareholder on 29 June 2016, the Queensland Government of $451 million from current year profits. This payment was in addition to the payment of the dividend of $1,295 million following a declaration in the 2014/15 financial year.

Ergon

In June 2016, our shareholding Ministers issued a direction (p49) for Ergon Energy to declare and pay a dividend
of $476.3 million on 29 June 2016.  This was based on 100% of Ergon Energy’s forecast consolidated Net Profit After Tax.  Maintaining the dividend payments at this level supports the Queensland Government’s debt reduction plan. 

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